2016 Q1 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 April 3, 2016
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)
____________________________
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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 2N6 Canada
(Address of principal executive offices)
(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 x No o
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.
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Large accelerated filer | | x | | Accelerated filer | | o |
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Non-accelerated filer | | o (Do not check if a smaller reporting company) | | Smaller reporting company | | o |
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 30,303,303 shares of Common Stock, no par value, as of May 2, 2016.
MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 3, 2016
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PART I | | | Page |
Item 1 | | | |
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Item 2 | | | |
Item 3 | | | |
Item 4 | | | |
PART II | | | |
Item 1 | | | |
Item 1A | | | |
Item 2 | | | |
Item 3 | | | |
Item 4 | | | |
Item 5 | | | |
Item 6 | | | |
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" in our Annual Report on Form 10-K for the year ended January 3, 2016, 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:
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• | our ability to successfully implement our business strategy; |
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• | general economic, market and business conditions; |
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• | levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity; |
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• | our ability to manage our operations including integrating our recent acquisitions and companies or assets we acquire in the future; |
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• | 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 ABL Facility; |
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• | labor relations (i.e., disruptions, strikes or work stoppages), labor costs and availability of labor; |
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• | increases in the costs of raw materials or any shortage in supplies; |
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• | our ability to keep pace with technological developments; |
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• | the actions taken by, and the continued success of, certain key customers; |
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• | our ability to maintain relationships with certain customers; |
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• | new contractual commitments; |
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• | the ability to generate the benefits of our restructuring activities; |
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• | retention of key management personnel; |
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• | environmental and other government regulations; |
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• | our levels of indebtedness, including our obligations under our senior notes and our ABL Facility; |
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• | 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; and |
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• | our ability to repurchase our senior notes upon a change of control. |
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.
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)
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| | | | | | | |
| Three Months Ended |
| April 3, 2016 | | March 29, 2015 |
Net sales | $ | 489,305 |
| | $ | 434,465 |
|
Cost of goods sold | 391,060 |
| | 361,156 |
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Gross profit | 98,245 |
| | 73,309 |
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Selling, general and administration expenses | 64,898 |
| | 58,161 |
|
Restructuring costs | 19 |
| | 2,356 |
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Operating income (loss) | 33,328 |
| | 12,792 |
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Interest expense (income), net | 7,232 |
| | 11,753 |
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Loss on extinguishment of debt | — |
| | 28,046 |
|
Other expense (income), net | 786 |
| | (1,184 | ) |
Income (loss) from continuing operations before income tax expense (benefit) | 25,310 |
| | (25,823 | ) |
Income tax expense (benefit) | 6,210 |
| | 3,264 |
|
Income (loss) from continuing operations | 19,100 |
| | (29,087 | ) |
Income (loss) from discontinued operations, net of tax | (188 | ) | | (229 | ) |
Net income (loss) | 18,912 |
| | (29,316 | ) |
Less: net income (loss) attributable to non-controlling interest | 1,084 |
| | 1,736 |
|
Net income (loss) attributable to Masonite | $ | 17,828 |
| | $ | (31,052 | ) |
| | | |
Earnings (loss) per common share attributable to Masonite: | | | |
Basic | $ | 0.58 |
| | $ | (1.03 | ) |
Diluted | $ | 0.57 |
| | $ | (1.03 | ) |
| | | |
Earnings (loss) per common share from continuing operations attributable to Masonite: | | | |
Basic | $ | 0.59 |
| | $ | (1.02 | ) |
Diluted | $ | 0.57 |
| | $ | (1.02 | ) |
| | | |
Comprehensive income (loss): | | | |
Net income (loss) | $ | 18,912 |
| | $ | (29,316 | ) |
Other comprehensive income (loss): | | | |
Foreign exchange gain (loss) | 3,872 |
| | (35,140 | ) |
Amortization of actuarial net losses | 242 |
| | 220 |
|
Income tax benefit (expense) related to other comprehensive income (loss) | (96 | ) | | (87 | ) |
Other comprehensive income (loss), net of tax: | 4,018 |
| | (35,007 | ) |
Comprehensive income (loss) | 22,930 |
| | (64,323 | ) |
Less: comprehensive income (loss) attributable to non-controlling interest | 1,571 |
| | 1,051 |
|
Comprehensive income (loss) attributable to Masonite | $ | 21,359 |
| | $ | (65,374 | ) |
See accompanying notes to the condensed consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
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| | | | | | | |
ASSETS | April 3, 2016 | | January 3, 2016 |
Current assets: | | | |
Cash and cash equivalents | $ | 49,982 |
| | $ | 89,187 |
|
Restricted cash | 12,646 |
| | 12,645 |
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Accounts receivable, net | 266,010 |
| | 224,976 |
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Inventories, net | 219,251 |
| | 208,393 |
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Prepaid expenses | 22,683 |
| | 21,983 |
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Income taxes receivable | 3,372 |
| | 1,762 |
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Total current assets | 573,944 |
| | 558,946 |
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Property, plant and equipment, net | 539,175 |
| | 534,234 |
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Investment in equity investees | 19,239 |
| | 18,811 |
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Goodwill | 126,789 |
| | 128,170 |
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Intangible assets, net | 218,056 |
| | 225,932 |
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Long-term deferred income taxes | 11,950 |
| | 16,899 |
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Other assets, net | 17,327 |
| | 16,157 |
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Total assets | $ | 1,506,480 |
| | $ | 1,499,149 |
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| | | |
LIABILITIES AND EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 109,187 |
| | $ | 96,480 |
|
Accrued expenses | 120,839 |
| | 136,029 |
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Income taxes payable | 733 |
| | 9 |
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Total current liabilities | 230,759 |
| | 232,518 |
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Long-term debt | 469,032 |
| | 468,856 |
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Long-term deferred income taxes | 98,242 |
| | 98,682 |
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Other liabilities | 42,492 |
| | 43,527 |
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Total liabilities | 840,525 |
| | 843,583 |
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Commitments and Contingencies (Note 9) |
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Equity: | | | |
Share capital: unlimited shares authorized, no par value, 30,335,134 and 30,427,865 shares issued and outstanding as of April 3, 2016, and January 3, 2016, respectively | 661,599 |
| | 663,600 |
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Additional paid-in capital | 231,561 |
| | 231,363 |
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Accumulated deficit | (137,158 | ) | | (144,628 | ) |
Accumulated other comprehensive income (loss) | (104,417 | ) | | (107,948 | ) |
Total equity attributable to Masonite | 651,585 |
| | 642,387 |
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Equity attributable to non-controlling interests | 14,370 |
| | 13,179 |
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Total equity | 665,955 |
| | 655,566 |
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Total liabilities and equity | $ | 1,506,480 |
| | $ | 1,499,149 |
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See accompanying notes to the condensed consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 Non-controlling Interests | | Total Equity |
Balances as of December 28, 2014 | 30,015,321 |
| | $ | 657,292 |
| | $ | 225,918 |
| | $ | (97,517 | ) | | $ | (76,259 | ) | | $ | 709,434 |
| | $ | 26,065 |
| | $ | 735,499 |
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| | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | (47,111 | ) | | | | (47,111 | ) | | 4,462 |
| | (42,649 | ) |
Other comprehensive income (loss), net of tax | | | | | | | | | (31,689 | ) | | (31,689 | ) | | (1,100 | ) | | (32,789 | ) |
Dividends to non-controlling interests | | | | | | | | | | | — |
| | (5,797 | ) | | (5,797 | ) |
Deconsolidation of non-controlling interest | | | | | | | | | | | — |
| | (10,451 | ) | | (10,451 | ) |
Share based compensation expense | | | | | 13,236 |
| | | | | | 13,236 |
| | | | 13,236 |
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Common shares issued for delivery of share based awards | 399,198 |
| | 5,460 |
| | (5,460 | ) | | | | | | — |
| | | | — |
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Common shares withheld to cover income taxes payable due to delivery of share based awards | | | | | (2,114 | ) | | | | | | (2,114 | ) | | | | (2,114 | ) |
Common shares issued under employee stock purchase plan | 12,913 |
| | 846 |
| | (215 | ) | | | | | | 631 |
| | | | 631 |
|
Common shares issued for exercise of warrants | 433 |
| | 2 |
| | (2 | ) | | | | | | — |
| | | | — |
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Balances as of January 3, 2016 | 30,427,865 |
| | $ | 663,600 |
| | $ | 231,363 |
| | $ | (144,628 | ) | | $ | (107,948 | ) | | $ | 642,387 |
| | $ | 13,179 |
| | $ | 655,566 |
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| | | | | | | | | | | | | | | |
Net income (loss) | | | | | | | 17,828 |
| | | | 17,828 |
| | 1,084 |
| | 18,912 |
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Other comprehensive income (loss), net of tax | | | | | | | | | 3,531 |
| | 3,531 |
| | 487 |
| | 4,018 |
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Dividends to non-controlling interests | | | | | | | | | | | — |
| | (380 | ) | | (380 | ) |
Share based compensation expense | | | | | 3,728 |
| | | | | | 3,728 |
| | | | 3,728 |
|
Common shares issued for delivery of share based awards | 49,409 |
| | 1,906 |
| | (1,906 | ) | | | | | | — |
| | | | — |
|
Common shares withheld to cover income taxes payable due to delivery of share based awards | | | | | (278 | ) | | | | | | (278 | ) | | | | (278 | ) |
Common shares issued under employee stock purchase plan | 9,126 |
| | 506 |
| | (91 | ) | | | | | | 415 |
| | | | 415 |
|
Common shares issued for exercise of warrants | 108,274 |
| | 1,255 |
| | (1,255 | ) | | | | | | — |
| | | | — |
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Common shares repurchased and retired | (259,540 | ) | | (5,668 | ) | | | | (10,358 | ) | | | | (16,026 | ) | | | | (16,026 | ) |
Balances as of April 3, 2016 | 30,335,134 |
| | $ | 661,599 |
| | $ | 231,561 |
| | $ | (137,158 | ) | | $ | (104,417 | ) | | $ | 651,585 |
| | $ | 14,370 |
| | $ | 665,955 |
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See accompanying notes to the condensed consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited) |
| | | | | | | |
| Three Months Ended |
Cash flows from operating activities: | April 3, 2016 | | March 29, 2015 |
Net income (loss) | $ | 18,912 |
| | $ | (29,316 | ) |
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities: | | | |
Loss (income) from discontinued operations, net of tax | 188 |
| | 229 |
|
Loss on extinguishment of debt | — |
| | 28,046 |
|
Depreciation | 14,570 |
| | 15,306 |
|
Amortization | 6,464 |
| | 5,011 |
|
Share based compensation expense | 3,728 |
| | 2,379 |
|
Deferred income taxes | 4,368 |
| | 1,765 |
|
Unrealized foreign exchange loss (gain) | 1,428 |
| | (991 | ) |
Share of loss (income) from equity investees, net of tax | (428 | ) | | (165 | ) |
Dividend from equity investee | — |
| | 1,440 |
|
Pension and post-retirement expense (funding), net | (1,443 | ) | | (1,407 | ) |
Non-cash accruals and interest | 606 |
| | (6 | ) |
Loss (gain) on sale of property, plant and equipment | 132 |
| | (56 | ) |
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (41,718 | ) | | (8,312 | ) |
Inventories | (9,839 | ) | | (11,956 | ) |
Prepaid expenses | (365 | ) | | (2,950 | ) |
Accounts payable and accrued expenses | 7,258 |
| | (17,116 | ) |
Other assets and liabilities | (694 | ) | | (1,868 | ) |
Net cash flow provided by (used in) operating activities | 3,167 |
| | (19,967 | ) |
Cash flows from investing activities: | | | |
Proceeds from sale of property, plant and equipment | 57 |
| | 279 |
|
Additions to property, plant and equipment | (23,756 | ) | | (10,190 | ) |
Other investing activities | (584 | ) | | (830 | ) |
Net cash flow provided by (used in) investing activities | (24,283 | ) | | (10,741 | ) |
Cash flows from financing activities: | | | |
Proceeds from issuance of long-term debt | — |
| | 475,000 |
|
Repayments of long-term debt | (34 | ) | | (500,000 | ) |
Payments of long-term debt extinguishment costs | — |
| | (31,691 | ) |
Payment of debt issuance costs | — |
| | (6,863 | ) |
Minimum tax withholding on share based awards | (278 | ) | | (139 | ) |
Distributions to non-controlling interests | (380 | ) | | (500 | ) |
Repurchases of common stock | (16,026 | ) | | — |
|
Net cash flow provided by (used in) financing activities | (16,718 | ) | | (64,193 | ) |
Net foreign currency translation adjustment on cash | (1,371 | ) | | (7,035 | ) |
Increase (decrease) in cash and cash equivalents | (39,205 | ) | | (101,936 | ) |
Cash and cash equivalents, beginning of period | 89,187 |
| | 192,037 |
|
Cash and cash equivalents, at end of period | $ | 49,982 |
| | $ | 90,101 |
|
See accompanying notes to the condensed consolidated financial statements.
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 one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 65 manufacturing locations in 9 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.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2016, as filed with the SEC. There have been no changes in the significant accounting policies from those that were disclosed in the 2015 audited consolidated financial statements, other than as noted below.
Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods.
Changes in Accounting Standards and Policies
Adoption of Recent Accounting Pronouncements
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," which amends Accounting Standards Codification ("ASC") 805, "Business Combinations." This ASU eliminates the requirement to retrospectively account for measurement-period adjustments and instead recognize such adjustments in the reporting period in which the adjustments are determined. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years; early adoption is permitted and prospective application is required. The adoption of this standard did not have a material impact on the presentation of our financial statements.
In April 2015, the FASB issued ASU 2015-04, "Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets." This ASU provides a practical expedient option to entities that have defined benefit plans and have a fiscal year end that does not coincide with a calendar month end. This ASU allows an entity to elect to measure defined benefit plan assets and obligations using the calendar month-end that is closest to its fiscal year end. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years; early adoption is permitted and prospective application is required. The adoption of this standard did not have a material impact on the presentation of our financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis," which amended ASC 810, "Consolidation." This ASU modifies the evaluation of whether limited partnerships are variable interest entities ("VIEs") and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years; early adoption is permitted and either full retrospective or modified retrospective application is required at the entity's option. The adoption of this standard did not have a material impact on the presentation of our financial statements.
Other Recent Accounting Pronouncements not yet Adopted
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting”, which amends ASC 718 “Compensation - Stock Compensation”. This ASU simplifies several aspects of the accounting for employee share-based award transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the ASU, an entity recognizes all excess tax benefits and tax deficiencies resulting from the exercise or vesting of a share-based award to an employee. It also allows an entity to elect, as an accounting policy, either to continue to estimate forfeitures of share-based awards (as currently required) or to account for forfeitures when they occur. Additionally, the ASU modifies the current exception to liability classification of an award when an employer uses a net-settlement feature to withhold shares to meet the employer’s minimum statutory tax withholding requirement. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted and varying types of application are required for the different aspects of the standard. We are in the process of evaluating this guidance to determine the impact it will have on our financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will replace the existing guidance in ASC 840, "Leases." The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. We are in the process of evaluating this guidance to determine the impact it will have on our financial statements.
2. Acquisitions and Disposition
2015 Acquisitions
On October 1, 2015, we completed the acquisition of USA Wood Door, Inc. (“USA Wood Door”), based in Thorofare, New Jersey. We acquired 100% of the equity interests in USA Wood Door for consideration of approximately $13.7 million, net of cash acquired. USA Wood Door is a supplier of architectural and commercial wood doors in the Eastern United States providing door and hardware distributors with machining, resizing and value-added additions to both unfinished and prefinished doors in short lead times. The excess purchase price over the fair value of net assets acquired of $8.9 million was allocated to goodwill and relates to the Architectural segment. The goodwill principally represents the anticipated synergies to be gained from the integration into our existing Architectural door business. Under Section 338 of the Internal Revenue Code, the acquisition was treated as if it was an asset purchase. Generally, the tax basis of the assets will equal the fair market value at the time of the acquisition and the goodwill is deductible for tax purposes. The USA Wood Door acquisition acts as an extension of our distribution network in North America.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On August 5, 2015, we completed the acquisition of Hickman Industries Limited ("Hickman"), headquartered in Wolverhampton, England, for total consideration of $88.0 million, net of cash acquired. We acquired 100% of the equity interests in Hickman through the purchase of all of the outstanding shares of common stock at the acquisition date. Hickman is a leading supplier of doorkits (similar to fully finished prehung door units) and other millwork in the United Kingdom and their business of providing doorkit solutions to the homebuilder market in the United Kingdom is a natural extension of our existing business in the United Kingdom. The excess purchase price over the fair value of net assets acquired of $18.2 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into our existing United Kingdom business. This goodwill is not deductible for tax purposes and relates to the Europe segment. The Hickman acquisition complements strategies we are pursuing with our existing United Kingdom business.
On July 23, 2015, we completed the acquisition of Performance Doorset Solutions Limited ("PDS"), headquartered in Lancashire, England, for total consideration of $15.7 million, net of cash acquired. We acquired 100% of the equity interests in PDS through the purchase of all of the outstanding shares of common stock at the acquisition date. PDS is a leading supplier of custom doors and millwork in the United Kingdom that specializes in non-standard product specifications, manufacturing both wood and composite solutions. The excess purchase price over the fair value of net assets acquired of $3.1 million was allocated to goodwill. The goodwill principally represents the future expected value of the operations of the business. This goodwill is not deductible for tax purposes and relates to the Europe segment. The PDS acquisition complements our existing United Kingdom business.
The aggregate consideration paid for acquisitions during 2015 was as follows:
|
| | | | | | | | | | | | | | | |
(In thousands) | USA Wood Door | | Hickman | | PDS | | Total 2015 Acquisitions |
Accounts Receivable | $ | 2,235 |
| | $ | 20,870 |
| | $ | 3,000 |
| | $ | 26,105 |
|
Inventory | 1,677 |
| | 11,090 |
| | 1,438 |
| | 14,205 |
|
Property, plant and equipment | 2,600 |
| | 14,057 |
| | 5,684 |
| | 22,341 |
|
Goodwill | 8,921 |
| | 18,215 |
| | 3,145 |
| | 30,281 |
|
Intangible assets | — |
| | 55,634 |
| | 6,437 |
| | 62,071 |
|
Accounts payable and accrued expenses | (1,654 | ) | | (23,972 | ) | | (2,218 | ) | | (27,844 | ) |
Other assets and liabilities, net | (81 | ) | | (7,918 | ) | | (1,762 | ) | | (9,761 | ) |
Cash consideration, net of cash acquired | $ | 13,698 |
| | $ | 87,976 |
| | $ | 15,724 |
| | $ | 117,398 |
|
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 the 2015 acquisitions consist of customer relationships and are being amortized over the weighted average amortization period of 9.6 years and 9.7 years for the Hickman and PDS acquisitions, respectively. The intangible assets are not expected to have any residual value. The gross contractual value of acquired trade receivables was $1.7 million, $21.0 million and $2.6 million for the USA Wood Door, Hickman and PDS acquisitions, respectively.
The following schedule represents the amount of net sales and net income (loss) attributable to Masonite from the 2015 acquisitions which have been included in the condensed consolidated statements of comprehensive income (loss) for the periods indicated subsequent to the acquisition date.
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 3, 2016 |
(In thousands) | USA Wood Door | | National Hickman | | PDS | | Total 2015 Acquisitions |
Net sales | $ | 4,495 |
| | $ | 25,755 |
| | $ | 4,551 |
| | $ | 34,801 |
|
Net income (loss) attributable to Masonite | 498 |
| | 2,139 |
| | 150 |
| | 2,787 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Pro Forma Information
The following unaudited pro forma financial information represents the condensed consolidated financial information as if the acquisitions had been included in our condensed consolidated results beginning on the first day of the fiscal year prior to their respective acquisition dates. 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 property, plant and equipment and intangible assets had been applied on the first day of the fiscal year prior to the respective acquisitions, 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 our ownership and operation.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 29, 2015 |
(In thousands, except per share amounts) | Masonite | | 2015 Acquisitions | | Historical Sales to 2015 Acquisitions | | Pro Forma |
Net sales | $ | 434,465 |
| | $ | 36,613 |
| | $ | (4,238 | ) | | $ | 466,840 |
|
Net income (loss) attributable to Masonite | (31,052 | ) | | 1,766 |
| | (692 | ) | | (29,978 | ) |
| | | | | | | |
Basic earnings (loss) per common share | $ | (1.03 | ) | | | | | | $ | (1.00 | ) |
Diluted earnings (loss) per common share | $ | (1.03 | ) | | | | | | $ | (1.00 | ) |
Disposition and Deconsolidated Entity
Africa
On December 22, 2015, following a comprehensive assessment of Masonite (Africa) Limited (“MAL”), our South African subsidiary, the MAL Board of Directors approved a plan to enter into Business Rescue proceedings, the South African equivalent of bankruptcy proceedings in the United States, similar to a Chapter 11 reorganization. As a result of this plan, a Business Rescue Practitioner was appointed to manage the affairs of the business and we no longer maintain operational control over MAL. For this reason, we deconsolidated MAL effective December 22, 2015.
Subsequent to deconsolidation, we use the cost method to account for our equity investment in MAL, which has been reflected as $10.0 million in our condensed consolidated balance sheets as of April 3, 2016, and January 3, 2016, based on the estimated fair value of our portion of MAL’s net assets on the date of deconsolidation. The fair value of the investment in MAL was determined using a discounted future cash flows analysis based upon management's view of the most likely outcomes of the Business Rescue proceedings. The resulting valuation is net of future disposal costs and third party fees, and is subject to the volatility of the South African Rand. This valuation was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as established by the FASB's Fair Value Framework. The Level 3 unobservable inputs include an estimate of future cash flows for the business.
France
On July 31, 2015, we completed the sale of all of the capital stock of Premdor S.A.S., Masonite’s door business in France, to an investment fund managed by Perceva S.A.S., a Paris-based independent investment firm (the "Buyer"). Pursuant to a stock purchase agreement dated July 16, 2015, the Buyer acquired all of Masonite’s door manufacturing and distribution business in France for nominal consideration. Premdor S.A.S. generated $2.1 million of losses from continuing operations before income tax expense (benefit) during the three months ended March 29, 2015.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
3. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows as of the dates indicated:
|
| | | | | | | | | | | | | | | |
(In thousands) | North American Residential | | Europe | | Architectural | | Total |
December 28, 2014 | $ | 2,891 |
| | $ | 19,008 |
| | $ | 77,300 |
| | $ | 99,199 |
|
Goodwill from 2015 acquisitions | — |
| | 21,360 |
| | 8,921 |
| | 30,281 |
|
Foreign exchange fluctuations | (56 | ) | | (1,062 | ) | | (192 | ) | | (1,310 | ) |
January 3, 2016 | 2,835 |
| | 39,306 |
| | 86,029 |
| | 128,170 |
|
Foreign exchange fluctuations | 16 |
| | (1,545 | ) | | 148 |
| | (1,381 | ) |
April 3, 2016 | $ | 2,851 |
| | $ | 37,761 |
| | $ | 86,177 |
| | $ | 126,789 |
|
The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:
|
| | | | | | | | | | | | | | | |
| April 3, 2016 |
(In thousands) | Cost | | Accumulated Amortization | | Translation Adjustment | | Net Book Value |
Definite life intangible assets: | | | | | | | |
Customer relationships | $ | 155,927 |
| | $ | (52,406 | ) | | $ | (8,027 | ) | | $ | 95,494 |
|
Patents | 29,967 |
| | (17,740 | ) | | (774 | ) | | 11,453 |
|
Software | 30,090 |
| | (24,075 | ) | | (179 | ) | | 5,836 |
|
Other | 12,280 |
| | (8,230 | ) | | (1,654 | ) | | 2,396 |
|
| 228,264 |
| | (102,451 | ) | | (10,634 | ) | | 115,179 |
|
Indefinite life intangible assets: | | | | | | | |
Trademarks and tradenames | 111,538 |
| | — |
| | (8,661 | ) | | 102,877 |
|
Total intangible assets | $ | 339,802 |
| | $ | (102,451 | ) | | $ | (19,295 | ) | | $ | 218,056 |
|
|
| | | | | | | | | | | | | | | |
| January 3, 2016 |
(In thousands) | Cost | | Accumulated Amortization | | Translation Adjustment | | Net Book Value |
Definite life intangible assets: | | | | | | | |
Customer relationships | $ | 155,927 |
| | $ | (48,025 | ) | | $ | (5,648 | ) | | $ | 102,254 |
|
Patents | 29,643 |
| | (17,168 | ) | | (885 | ) | | 11,590 |
|
Software | 29,830 |
| | (23,187 | ) | | (208 | ) | | 6,435 |
|
Other | 12,280 |
| | (7,853 | ) | | (1,567 | ) | | 2,860 |
|
| 227,680 |
| | (96,233 | ) | | (8,308 | ) | | 123,139 |
|
Indefinite life intangible assets: | | | | | | | |
Trademarks and tradenames | 111,538 |
| | — |
| | (8,745 | ) | | 102,793 |
|
Total intangible assets | $ | 339,218 |
| | $ | (96,233 | ) | | $ | (17,053 | ) | | $ | 225,932 |
|
Amortization of intangible assets was $6.2 million and $4.7 million for the three months ended April 3, 2016, and March 29, 2015, respectively. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The estimated future amortization of intangible assets with definite lives as of April 3, 2016, is as follows:
|
| | | |
(In thousands) | |
Fiscal year: | |
2016 (remaining nine months) | $ | 17,819 |
|
2017 | 21,312 |
|
2018 | 16,243 |
|
2019 | 15,091 |
|
2020 | 12,716 |
|
4. Accounts Receivable
Our customers consist mainly of wholesale distributors, dealers, homebuilders and retail home centers. Our ten largest customers accounted for 55.6% and 54.1% of total accounts receivable as of April 3, 2016, and January 3, 2016, respectively. Our two largest customers, The Home Depot, Inc. and Lowe's Companies, Inc., individually accounted for more than 10% of the consolidated gross accounts receivable balance as of April 3, 2016, and January 3, 2016. No other individual customers accounted for greater than 10% of consolidated gross accounts receivable balance at either April 3, 2016, or January 3, 2016. The allowance for doubtful accounts balance was $2.4 million and $3.1 million as of April 3, 2016, and January 3, 2016, respectively.
We maintain accounts receivable sales programs with third parties (the "AR Sales Programs"). Under the AR Sales Programs, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to third parties who assume the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under these programs 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 Programs 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 under the AR Sales Programs were not material for any of the periods presented and were recorded in selling, general and administration expense within the condensed consolidated statements of comprehensive income (loss).
5. Inventories
The amounts of inventory on hand were as follows as of the dates indicated:
|
| | | | | | | |
(In thousands) | April 3, 2016 | | January 3, 2016 |
Raw materials | $ | 150,775 |
| | $ | 145,856 |
|
Finished goods | 74,999 |
| | 69,045 |
|
Provision for obsolete or aged inventory | (6,523 | ) | | (6,508 | ) |
Inventories, net | $ | 219,251 |
| | $ | 208,393 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Property, Plant and Equipment
The carrying amounts of our property, plant and equipment and accumulated depreciation were as follows as of the dates indicated:
|
| | | | | | | |
(In thousands) | April 3, 2016 | | January 3, 2016 |
Land | $ | 25,496 |
| | $ | 25,316 |
|
Buildings | 160,670 |
| | 155,709 |
|
Machinery and equipment | 563,625 |
| | 551,264 |
|
Property, plant and equipment, gross | 749,791 |
| | 732,289 |
|
Accumulated depreciation | (210,616 | ) | | (198,055 | ) |
Property, plant and equipment, net | $ | 539,175 |
| | $ | 534,234 |
|
Total depreciation expense was $14.6 million and $15.3 million in the three months ended April 3, 2016, and March 29, 2015, 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) | April 3, 2016 | | January 3, 2016 |
5.625% senior unsecured notes due 2023 | $ | 475,000 |
| | $ | 475,000 |
|
Debt issuance costs for 2023 Notes | (6,022 | ) | | (6,232 | ) |
Capital lease obligations and other long-term debt | 54 |
| | 88 |
|
Total long-term debt | $ | 469,032 |
| | $ | 468,856 |
|
Interest expense related to our consolidated indebtedness under senior unsecured notes was $7.0 million and $11.2 million for the three months ended April 3, 2016, and March 29, 2015, respectively.
5.625% Senior Notes due 2023
On March 23, 2015, we issued $475.0 million aggregate principal senior unsecured notes (the "2023 Notes"). The 2023 Notes were issued in a private placement 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 2023 Notes were issued without registration rights and are not listed on any securities exchange. The 2023 Notes were issued at par and bear interest at 5.625% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due March 15, 2023. We received net proceeds of $467.9 million after deducting $7.1 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 2023 Notes using the effective interest method. The net proceeds from the 2023 Notes, together with available cash balances, were used to redeem $500.0 million aggregate principal prior senior unsecured notes due 2021 (the "2021 Notes") and to pay related premiums, fees and expenses. Under the terms of the indenture governing the 2021 Notes, we paid the applicable premium, as described in the indenture, of $31.7 million. Additionally, the unamortized premium of $11.5 million and unamortized debt issuance costs of $7.8 million relating to the 2021 Notes were written off in conjunction with their extinguishment. The resulting loss on extinguishment of debt was $28.0 million and is recorded as part of income (loss) from continuing operations before income tax expense (benefit) in the condensed consolidated statements of comprehensive income (loss). Additionally, the cash payment of interest accrued to, but not including, the redemption date was accelerated to the redemption date.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We may redeem the 2023 Notes, in whole or in part, at any time prior to March 15, 2018, 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 March 15, 2018, 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, as described in the indenture, plus 50 basis points, over (b) the principal amount of such note on such redemption date. We may also redeem the 2023 Notes, in whole or in part, at any time on or after March 15, 2018, at the applicable redemption prices specified under the indenture governing the 2023 Notes, plus accrued and unpaid interest, if any, to the date of redemption. If we experience certain changes of control or consummate certain asset sales and do not reinvest the net proceeds, we must offer to repurchase all of the 2023 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 2023 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries.
The indenture governing the 2023 Notes contains restrictive covenants that, among other things, limit our ability and the ability of our 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 our restricted subsidiaries to pay dividends or make other distributions to the parent 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 2023 Notes. In addition, if in the future the 2023 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 2023 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of April 3, 2016, and January 3, 2016, we were in compliance with all covenants under the indenture governing the 2023 Notes.
ABL Facility
On April 9, 2015, we and certain of our subsidiaries amended and restated our asset-based revolving credit facility (the "ABL Facility") in order to extend the maturity date of the ABL Facility and amend certain other provisions. The amended and restated ABL Facility increased the revolving commitments to $150.0 million from $125.0 million and extended the final maturity date to April 9, 2020, from May 17, 2016. The borrowing base is calculated based on a percentage of the value of selected U.S. and Canadian accounts receivable and inventory, less certain ineligible amounts.
Obligations under the ABL Facility are secured by a first priority security interest in substantially all of the current assets of Masonite and our subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries.
Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the Base Rate, Canadian Prime Rate or Canadian Base Rate (each as defined in the Amended and Restated Credit Agreement) plus a margin ranging from 0.25% to 0.75% per annum, or (ii) the Eurodollar Base Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.75% per annum.
In addition to paying interest on any outstanding principal under the ABL Facility a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties and covenants by us that, among other things, and subject to certain exceptions, restrict Masonite's ability and the ability of our subsidiaries to: (i) pay dividends
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge and (vi) create liens.
The Amended and Restated Credit Agreement amended the ABL Facility to, among other things, (i) permit us to incur unlimited unsecured debt as long as such debt does not contain covenants or default provisions that are more restrictive than those contained in the ABL Facility, (ii) permit us to incur debt as long as the pro forma secured leverage ratio is less than 4.5 to 1.0, and (iii) add certain additional exceptions and exemptions under the restricted payment, investment and indebtedness covenants (including increasing the amount of certain debt permitted to be incurred under an existing exception). As of April 3, 2016, and January 3, 2016, we were in compliance with all covenants under the credit agreement governing the ABL Facility. As of April 3, 2016, and January 3, 2016, there were no amounts outstanding under the ABL Facility.
8. Share Based Compensation Plans
Share-based compensation expense was $3.7 million and $2.4 million for the three months ended April 3, 2016, and March 29, 2015, respectively. As of April 3, 2016, the total remaining unrecognized compensation expense related to share based compensation amounted to $21.6 million, which will be amortized over the weighted average remaining requisite service period of 2.5 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 our 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, we 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 our common equity (3,554,811 shares) 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, we were required to issue equity instruments to directors 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. No awards have been granted under the 2009 Plan since May 30, 2012, and no future awards will be granted under the 2009 Plan; however, all outstanding awards under the 2009 Plan will continue to be governed by their existing terms. 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, which was amended on June 21, 2013, by our Board of Directors and further amended on May 12, 2015, by approval of our shareholders (as amended and restated, the "2012 Plan"). 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 built on employee stock ownership. The 2012 Plan permits us to offer eligible directors, employees and consultants cash and share-based incentives, including stock options, stock appreciation rights, restricted stock, other share-based awards (including restricted stock units) and cash-based awards. The 2012 Plan is effective for ten years from the date of its adoption. Awards granted under the 2012 Plan are at the discretion of the Human Resources and Compensation Committee of the Board of Directors. The Human Resources and Compensation Committee may grant any award under the 2012 Plan in the form of a performance award. The 2012 Plan may be amended, suspended or terminated by the Board at any time; provided, that any amendment, suspension or termination which impairs the rights of a participant is subject to such participant's consent and; provided further, that certain material amendments are subject to shareholder approval. The aggregate number of common shares that can be issued with respect to equity awards under the 2012 Plan cannot exceed 2,000,000 shares plus the number of shares subject to existing grants under the 2009 Plan that may expire or be forfeited or cancelled. As of April 3, 2016, there were 1,547,967 shares of common stock available for future issuance under the 2012 Plan.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Deferred Compensation Plan
We offer to certain of our employees and directors a Deferred Compensation Plan ("DCP"). The DCP is an unfunded non-qualified deferred compensation plan that permits those certain employees and directors to defer a portion of their compensation to a future time. Eligible employees may elect to defer a portion of their base salary, bonus and/or restricted stock units and eligible directors may defer a portion of their director fees or restricted stock units. All contributions to the DCP on behalf of the participant are fully vested (other than restricted stock unit deferrals which remain subject to the vesting terms of the applicable equity incentive plan) and placed into a grantor trust, commonly referred to as a "rabbi trust." Although we are permitted to make matching contributions under the terms of the DCP, we have not elected to do so. The DCP invests the contributions in diversified securities from a selection of investments and the participants choose their investments and may periodically reallocate the assets in their respective accounts. Participants are entitled to receive the benefits in their accounts upon separation of service or upon a specified date, with benefits payable as a single lump sum or in annual installments. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
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 (loss). The liability relating to deferred compensation represents our obligation to distribute funds to the participants in the future and is included in other liabilities in the condensed consolidated balance sheets. As of April 3, 2016, the liability and asset relating to deferred compensation had a fair value of $2.8 million and $2.7 million, respectively. Any unfunded gain or loss relating to changes in the fair value of the deferred compensation liability is recognized in selling, general and administration expense in the condensed consolidated statements of comprehensive income (loss). As of April 3, 2016, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs") to certain employees under both the 2009 Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of three years, have a life of ten years and settle in common shares. It is assumed that all time-based SARs will vest.
The total fair value of SARs vested was $0.4 million in the three months ended March 29, 2015. No SARs vested during the three months ended April 3, 2016.
|
| | | | | | | | | | | | |
Three months ended April 3, 2016 | Stock Appreciation Rights | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Exercise Price | | Average Remaining Contractual Life (Years) |
Outstanding, beginning of period | 891,147 |
| | $ | 36,681 |
| | $ | 20.07 |
| | 4.9 |
Granted | 121,805 |
| |
| | 58.37 |
| | |
Exercised | (24,443 | ) | | 1,122 |
| | 15.35 |
| | |
Cancelled | (2,400 | ) | | | | 32.68 |
| | |
Outstanding, end of period | 986,109 |
| | $ | 40,908 |
| | $ | 24.89 |
| | 5.4 |
| | | | | | | |
Exercisable, end of period | 679,384 |
| | $ | 33,765 |
| | $ | 16.67 |
| | 4.0 |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
| | | | | | | | | | | | |
Three months ended March 29, 2015 | Stock Appreciation Rights | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Exercise Price | | Average Remaining Contractual Life (Years) |
Outstanding, beginning of period | 1,231,468 |
| | $ | 48,516 |
| | $ | 19.59 |
| | 5.9 |
Exercised | (141,772 | ) | | 6,546 |
| | 16.73 |
| | |
Cancelled | (800 | ) | | | | 32.68 |
| | |
Outstanding, end of period | 1,088,896 |
| | $ | 51,253 |
| | $ | 19.97 |
| | 5.7 |
| | | | | | | |
Exercisable, end of period | 852,059 |
| | $ | 42,831 |
| | $ | 16.73 |
| | 5.0 |
The value of SARs granted in the three months ended April 3, 2016, as determined using the Black-Scholes Merton valuation model, was $2.0 million and 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 public industry peers’ common shares amongst other considerations. The expected term is calculated using the simplified method, due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:
|
| | | |
| 2016 Grants |
SAR value (model conclusion) | $ | 16.78 |
|
Risk-free rate | 1.6 | % |
Expected dividend yield | 0.0 | % |
Expected volatility | 26.2 | % |
Expected term (years) | 6.0 |
|
Restricted Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under both the 2009 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 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 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
| | | | | | | | | | | | | |
| Three Months Ended |
| April 3, 2016 | | March 29, 2015 |
| Total Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value | | Total Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value |
Outstanding, beginning of period | 526,930 |
| | $ | 49.31 |
| | 543,373 |
| | $ | 34.56 |
|
Granted | 172,251 |
| | 57.51 |
| | 177,862 |
| | 61.24 |
|
Delivered | (31,120 | ) | | | | (18,852 | ) | | |
Withheld to cover (1) | (4,745 | ) | | | | (2,303 | ) | | |
Cancelled | (3,440 | ) | | | | (1,445 | ) | | |
Outstanding, end of period | 659,876 |
| | $ | 50.94 |
| | 698,635 |
| | $ | 37.43 |
|
____________(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 participant’s election. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
Approximately one-half of the RSUs granted during the three months ended April 3, 2016, vest at specified future dates with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs granted in the three months ended April 3, 2016, was $9.9 million and is being recognized over the weighted average requisite service period of 2.3 years. During the three months ended April 3, 2016, there were 35,865 RSUs vested at a fair value of $2.1 million.
Warrants
On June 9, 2009, we issued 5,833,335 warrants, representing the right to purchase our common shares for $55.31 per share, subsequently adjusted to $50.77 per share for the $4.54 per share return of capital in 2011. Of these, 3,333,334 had an expiration date of June 9, 2014 (the "2014 Warrants"), and 2,500,001 are scheduled to expire on June 9, 2016 (the "2016 Warrants"). During the six months prior to their respective expiration dates, the warrants provide the holders with a cashless exercise option. We have accounted for these warrants as equity instruments. Future exercises will increase the amount of common shares outstanding and reduce additional paid-in capital.
There were no 2014 Warrants outstanding during any period presented. Activity relating to the 2016 Warrants was as follows for the period presented:
|
| | | | | |
| Three Months Ended |
| April 3, 2016 | | March 29, 2015 |
Outstanding, beginning of period | 2,497,971 |
| | 2,500,001 |
|
Exercised | (1,076,387 | ) | | — |
|
Outstanding, end of period | 1,421,584 |
| | 2,500,001 |
|
| | | |
Common shares issued | 108,274 |
| | — |
|
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, we recognize 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 our 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: | |
2016 (remaining nine months) | $ | 14,638 |
|
2017 | 18,180 |
|
2018 | 17,041 |
|
2019 | 15,658 |
|
2020 | 13,354 |
|
Thereafter | 77,363 |
|
Total future minimum lease payments | $ | 156,234 |
|
Total rent expense, including non-cancelable operating leases and month-to-month leases, was $6.4 million and $5.7 million for the three months ended April 3, 2016, and March 29, 2015, respectively.
We have provided customary indemnifications to our landlords under certain property lease agreements for claims by third parties in connection with their use of the premises. We also have provided routine indemnifications against adverse effects related to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, we have recourse against other parties to mitigate the risk of loss from these indemnifications. Historically, we have not made any significant payments relating to such indemnifications.
From time to time, we are 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 our condensed consolidated financial statements, results of operations or liquidity.
10. Restructuring Costs
Restructuring costs were not material in the three months ended April 3, 2016. The following table summarizes the restructuring charges recorded for the periods indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| March 29, 2015 |
(In thousands) | North American Residential | | Europe | | Corporate & Other | | Total |
2015 Plan | $ | — |
| | $ | 1,687 |
| | $ | 624 |
| | $ | 2,311 |
|
2013 Plan | 4 |
| | 41 |
| | — |
| | 45 |
|
Total Restructuring Costs | $ | 4 |
| | $ | 1,728 |
| | $ | 624 |
| | $ | 2,356 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Cumulative Amount Incurred Through |
| April 3, 2016 |
(In thousands) | North American Residential | | Europe | | Corporate & Other | | Total |
2015 Plan | $ | — |
| | $ | 2,337 |
| | $ | 3,166 |
| | $ | 5,503 |
|
2014 Plan | — |
| | — |
| | 9,503 |
| | 9,503 |
|
2013 Plan | 3,025 |
| | 2,733 |
| | 2,157 |
| | 7,915 |
|
2012 and Prior Plans | 2,378 |
| | 12,695 |
| | 3,609 |
| | 18,682 |
|
Total Restructuring Costs | $ | 5,403 |
| | $ | 17,765 |
| | $ | 18,435 |
| | $ | 41,603 |
|
During 2015, we began implementing a multi-year plan to reorganize and consolidate certain aspects of our global head office (the "2015 Plan"). The 2015 Plan includes the creation of a new shared services function and the rationalization of certain of our European facilities, including related headcount reductions. The 2015 Plan was implemented in response to the need for more effective business processes enabled by the planned implementation of our new enterprise resource planning system as well as ongoing weak market conditions in Africa and Europe outside of the United Kingdom. Costs associated with the 2015 Plan include severance and closure charges and are substantially completed. As of April 3, 2016, we do not expect to incur any material future charges relating to the 2015 Plan.
On August 20, 2014, the Board of Directors of Masonite Israel Ltd. ("Israel"), one of our wholly-owned subsidiaries, decided to voluntarily seek a Stay of Proceedings from the Israeli courts in an attempt to restructure the business (the "2014 Plan"). The court filing was made on August 21, 2014, and the court appointed a trustee to oversee the operation of the business and to attempt to restructure it. The action to seek court protection followed a comprehensive evaluation of the alternatives for the business, including an organized sale process that was ultimately unsuccessful. We determined that the subsidiary should be deconsolidated at that time, as it had become subject to the control of a court. We have had and will continue to have no continuing involvement with Israel subsequent to August 21, 2014, and Israel will not be considered a related party. As of April 3, 2016, pending the ultimate resolution of the Stay of Proceedings, we do not anticipate any material future charges related to the 2014 Plan.
During 2013, we began implementing plans to rationalize certain of our facilities, including related headcount reductions, in Canada due to synergy opportunities related to recent acquisitions in the residential interior wood door markets. We have also rationalized certain of our operations, including related headcount reductions, in Ireland, South Africa and Israel in order to respond to declines in demand in international markets. Additionally, the decision was made to discontinue sales into the Polish market subsequent to the decision to cease manufacturing operations in 2012 (collectively, the "2013 Plan"). Costs associated with the 2013 Plan include severance and closure charges, including impairment of certain property, plant and equipment, and are substantially completed. As of April 3, 2016, we do not expect to incur any material future charges for the 2013 Plan.
Prior years’ restructuring costs relate to the closure of certain of our U.S. manufacturing facilities due to the start-up of our highly automated interior door slab assembly plant in Denmark, South Carolina, synergy opportunities related to acquisitions in the architectural interior wood door market and footprint optimization efforts resulting from declines in demand in specific markets, primarily in Europe. In response to the decline in demand, we reviewed the required levels of production and reduced the workforce and plant capacity accordingly, resulting in severance and closure charges. These actions were taken in order to rationalize capacity with existing and forecasted market demand conditions. The restructuring plans initiated in 2012 and prior years (the "2012 and Prior Plans") are substantially completed, although cash payments are expected to continue through 2019, primarily related to lease payments at closed facilities. As of April 3, 2016, we do not expect to incur any future charges for the 2012 and Prior Plans.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The changes in the accrual for restructuring by activity were as follows for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | January 3, 2016 | | Severance | | Closure Costs | | Cash Payments | | April 3, 2016 |
2015 Plan | $ | 774 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 276 |
| | $ | 517 |
|
2014 Plan | 442 |
| | — |
| | — |
| | 13 |
| | 429 |
|
2013 Plan | 316 |
| | — |
| | — |
| | 192 |
| | 124 |
|
2012 and Prior Plans | 858 |
| | — |
| | — |
| | 187 |
| | 671 |
|
Total | $ | 2,390 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 668 |
| | $ | 1,741 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | December 28, 2014 | | Severance | | Closure Costs | | Cash Payments | | March 29, 2015 |
2015 Plan | $ | — |
| | $ | 1,536 |
| | $ | 775 |
| | $ | 998 |
| | $ | 1,313 |
|
2014 Plan | 839 |
| | — |
| | — |
| | 223 |
| | 616 |
|
2013 Plan | 341 |
| | — |
| | 45 |
| | 65 |
| | 321 |
|
2012 and Prior Plans | 1,153 |
| | — |
| | — |
| | 297 |
| | 856 |
|
Total | $ | 2,333 |
| | $ | 1,536 |
| | $ | 820 |
| | $ | 1,583 |
| | $ | 3,106 |
|
11. Income Taxes
Income tax expense (benefit) for income taxes consists of the following:
|
| | | | | | | |
| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
Current | $ | 1,842 |
| | $ | 1,499 |
|
Deferred | 4,368 |
| | 1,765 |
|
Income tax expense (benefit) | $ | 6,210 |
| | $ | 3,264 |
|
The effective tax rate differs from the Canadian statutory rate of 26.6% primarily due to changes in our valuation allowances, tax exempt income, and mix of earnings in foreign jurisdictions which are subject to tax rates that differ from the Canadian statutory rate.
We currently have 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. We have determined that a valuation allowance of $44.1 million and $40.9 million was required for our deferred income tax assets as of April 3, 2016, and January 3, 2016, 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, Chile, India, Mexico and Luxembourg. We expect to maintain valuation allowances on deferred tax assets arising in these jurisdictions until a sustained level of income is reached.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated:
|
| | | | | | | |
| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
Transactions involving cash: | | | |
Interest paid | $ | 13,487 |
| | $ | 19,906 |
|
Interest received | 70 |
| | 167 |
|
Income taxes paid | 2,737 |
| | 1,507 |
|
Income tax refunds | 62 |
| | 9 |
|
Non-cash transactions: | | | |
Property, plant and equipment additions in accounts payable | 4,118 |
| | 2,264 |
|
13. Segment Information
During the first quarter of 2016, we changed our reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the deconsolidation of Africa and other internal reporting changes. All prior period information was recast to reflect this change. Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The North American Residential reportable segment is the aggregation of the Wholesale and Retail operating segments. The Europe reportable segment is the aggregation of the United Kingdom, Central Eastern Europe and France (prior to disposal) operating segments. The Architectural reportable segment consists solely of the Architectural operating segment. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment, including the historical results of our Africa operating segment. Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. 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. Beginning with the third quarter of 2015, we revised our calculation of Adjusted EBITDA to separately exclude loss (gain) on disposal of subsidiaries. The revision to this definition had no impact on our reported Adjusted EBITDA for the three months ended March 29, 2015. Adjusted EBITDA (as revised) is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• registration and listing fees;
• restructuring costs;
• 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);
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
• 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 2023 Notes and the credit agreement governing the ABL Facility. Adjusted EBITDA is used to evaluate and compare the 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. Certain information with respect to segments is as follows for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended April 3, 2016 |
(In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
Net sales | $ | 330,616 |
| | $ | 80,607 |
| | $ | 76,309 |
| | $ | 6,473 |
| | $ | 494,005 |
|
Intersegment sales | (1,887 | ) | | (16 | ) | | (2,797 | ) | | — |
| | (4,700 | ) |
Net sales to external customers | $ | 328,729 |
| | $ | 80,591 |
| | $ | 73,512 |
| | $ | 6,473 |
| | $ | 489,305 |
|
| | | | | | | | | |
Adjusted EBITDA | $ | 51,375 |
| | $ | 10,118 |
| | $ | 4,431 |
| | $ | (7,683 | ) | | $ | 58,241 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Three Months Ended March 29, 2015 |
(In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
Net sales | $ | 274,641 |
| | $ | 75,103 |
| | $ | 69,390 |
| | $ | 19,248 |
| | $ | 438,382 |
|
Intersegment sales | (1,373 | ) | | (78 | ) | | (2,466 | ) | | — |
| | (3,917 | ) |
Net sales to external customers | $ | 273,268 |
| | $ | 75,025 |
| | $ | 66,924 |
| | $ | 19,248 |
| | $ | 434,465 |
|
| | | | | | | | | |
Adjusted EBITDA | $ | 29,347 |
| | $ | 6,569 |
| | $ | 4,030 |
| | $ | (2,158 | ) | | $ | 37,788 |
|
A reconciliation of our consolidated Adjusted EBITDA to net income (loss) attributable to Masonite is set forth as follows for the periods indicated:
|
| | | | | | | |
| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
Adjusted EBITDA | $ | 58,241 |
| | $ | 37,788 |
|
Less (plus): | | | |
Depreciation | 14,570 |
| | 15,306 |
|
Amortization | 6,464 |
| | 5,011 |
|
Share based compensation expense | 3,728 |
| | 2,379 |
|
Loss (gain) on disposal of property, plant and equipment | 132 |
| | (56 | ) |
Restructuring costs | 19 |
| | 2,356 |
|
Interest expense (income), net | 7,232 |
| | 11,753 |
|
Loss on extinguishment of debt | — |
| | 28,046 |
|
Other expense (income), net | 786 |
| | (1,184 | ) |
Income tax expense (benefit) | 6,210 |
| | 3,264 |
|
Loss (income) from discontinued operations, net of tax | 188 |
| | 229 |
|
Net income (loss) attributable to non-controlling interest | 1,084 |
| | 1,736 |
|
Net income (loss) attributable to Masonite | $ | 17,828 |
| | $ | (31,052 | ) |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
14. 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 estimated fair value of the 2023 Notes as of April 3, 2016 and January 3, 2016, was $490.4 million and $484.3 million, respectively, compared to a carrying value of $469.0 million and $468.8 million, respectively. This estimate is based on market quotes and calculations based on current market rates available to us 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 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.
15. 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, SARs and warrants outstanding during the period.
|
| | | | | | | |
(In thousands, except share and per share information) | Three Months Ended |
April 3, 2016 | | March 29, 2015 |
Net income (loss) attributable to Masonite | $ | 17,828 |
| | $ | (31,052 | ) |
Income (loss) from discontinued operations, net of tax | (188 | ) | | (229 | ) |
Income (loss) from continuing operations attributable to Masonite | $ | 18,016 |
| | $ | (30,823 | ) |
| | | |
Shares used in computing basic earnings per share | 30,494,976 |
| | 30,056,085 |
|
Effect of dilutive securities: | | | |
Incremental shares issuable under share compensation plans and warrants | 876,980 |
| | — |
|
Shares used in computing diluted earnings per share | 31,371,956 |
| | 30,056,085 |
|
| | | |
Basic earnings (loss) per common share attributable to Masonite: | | | |
Continuing operations attributable to Masonite | $ | 0.59 |
| | $ | (1.02 | ) |
Discontinued operations attributable to Masonite, net of tax | (0.01 | ) | | (0.01 | ) |
Total Basic earnings per common share attributable to Masonite | $ | 0.58 |
| | $ | (1.03 | ) |
| | | |
Diluted earnings (loss) per common share attributable to Masonite: | | | |
Continuing operations attributable to Masonite | $ | 0.57 |
| | $ | (1.02 | ) |
Discontinued operations attributable to Masonite, net of tax | — |
| | (0.01 | ) |
Total Diluted earnings per common share attributable to Masonite | $ | 0.57 |
| | $ | (1.03 | ) |
| | | |
Incremental shares issuable from anti-dilutive instruments excluded from diluted earnings per common share: | | | |
Warrants | — |
| | 2,500,001 |
|
Stock appreciation rights | — |
| | 489,427 |
|
Restricted stock units | — |
| | 472,556 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs and warrants 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. For the three months ended March 29, 2015, no potential common shares relating to our equity awards were included in the computation of diluted loss per share, as their effect would have been anti-dilutive given our net loss position in that period.
16. Other Comprehensive Income and Accumulated Other Comprehensive Income
A rollforward of the components of accumulated other comprehensive income (loss) is as follows for the periods indicated:
|
| | | | | | | |
| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
Accumulated foreign exchange gains (losses), beginning of period | $ | (90,111 | ) | | $ | (57,473 | ) |
Foreign exchange gain (loss) | 3,872 |
| | (35,140 | ) |
Less: foreign exchange gain (loss) attributable to non-controlling interest | 487 |
| | (685 | ) |
Accumulated foreign exchange gains (losses), end of period | (86,726 | ) | | (91,928 | ) |
| | | |
Accumulated pension and other post-retirement adjustments, beginning of period | (17,837 | ) | | (18,786 | ) |
Amortization of actuarial net losses | 242 |
| | 220 |
|
Income tax benefit (expense) on amortization of actuarial net losses | (96 | ) | | (87 | ) |
Accumulated pension and other post-retirement adjustments | (17,691 | ) | | (18,653 | ) |
| | | |
Accumulated other comprehensive income (loss) | $ | (104,417 | ) | | $ | (110,581 | ) |
| | | |
Other comprehensive income (loss), net of tax: | $ | 4,018 |
| | $ | (35,007 | ) |
Less: other comprehensive income (loss) attributable to non-controlling interest | 487 |
| | (685 | ) |
Other comprehensive income (loss) attributable to Masonite | $ | 3,531 |
| | $ | (34,322 | ) |
Actuarial net losses are reclassified out of accumulated other comprehensive income (loss) into cost of goods sold in the condensed consolidated statements of comprehensive income (loss).
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
17. Variable Interest Entity
As of April 3, 2016, and January 3, 2016, we held an interest in one variable interest entity ("VIE"), Magna Foremost Sdn Bhd, which is located in Kuala Lumpur, Malaysia. The VIE is integrated into our supply chain and manufactures door facings. We are the primary beneficiary of the VIE via the terms of the existing operating principles with the VIE. As primary beneficiary via the operating principles, we receive a disproportionate amount of earnings on sales to third parties in relation to our voting interest, and as a result, receive a majority of the VIE’s residual returns. Sales to third parties did not have a material impact on our condensed consolidated financial statements. We also have the power to direct activities of the VIE that most significantly impact the entity’s economic performance. As its primary beneficiary, we have consolidated the results of the VIE. Our net cumulative investment in the VIE was comprised of the following as of the dates indicated:
|
| | | | | | | |
(In thousands) | April 3, 2016 | | January 3, 2016 |
Current assets | $ | 11,386 |
| | $ | 9,987 |
|
Property, plant and equipment, net | 15,108 |
| | 15,638 |
|
Long-term deferred income taxes | 10,073 |
| | 9,121 |
|
Other assets, net | 2,268 |
| | 2,270 |
|
Current liabilities | (3,584 | ) | | (5,133 | ) |
Other long-term liabilities | (3,249 | ) | | (2,944 | ) |
Non-controlling interest | (5,227 | ) | | (4,981 | ) |
Net assets of the VIE consolidated by Masonite | $ | 26,775 |
| | $ | 23,958 |
|
Current assets include $5.2 million and $2.1 million of cash and cash equivalents as of April 3, 2016, and January 3, 2016, respectively. Assets recognized as a result of consolidating this VIE do not represent additional assets that could be used to satisfy claims against our general assets. Furthermore, liabilities recognized as a result of consolidating these entities do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIE.
18. Subsequent Event
South Africa
On May 5, 2016, the business rescue practitioner that was appointed to oversee the affairs of MAL proposed a business rescue plan that would result in the sale of the business. The transaction that has been proposed as part of the plan is expected to be completed in the third quarter of 2016 and is subject to various customary closing conditions, including creditor and shareholder approval of the plan, competition commission clearance, and other regulatory approvals.
MASONITE INTERNATIONAL CORPORATION
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 April 3, 2016, and March 29, 2015. In this MD&A, "Masonite," "we," "us," "our" and the "Company" refer to Masonite International Corporation and its subsidiaries.
This discussion should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended January 3, 2016. 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. Certain prior year amounts have been reclassified to conform to the current basis of presentation.
Overview
We are a leading global designer, manufacturer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order to better serve our customers and create sustainable competitive advantages, we focus on developing innovative products, advanced manufacturing capabilities and technology-driven sales and service solutions.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems
We operate 65 manufacturing and distribution facilities in 9 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 and homebuilders; (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 Dorfab facilities provide value-added fabrication and logistical services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. In the three months ended April 3, 2016, we generated net sales of $328.7 million or 67.2%, $80.6 million or 16.5% and $73.5 million or 15.0% in our North American Residential, Europe and Architectural segments, respectively. See "Components of Results of Operations - Segment Information" below for a description of our reportable segment change.
MASONITE INTERNATIONAL CORPORATION
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 United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
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• | the strength of the economy; |
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• | the amount and type of residential and commercial construction; |
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• | housing sales and home values; |
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• | the age of existing home stock, home vacancy rates and foreclosures; |
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• | commercial building occupancy rates; |
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• | increases in the cost of raw materials or any shortage in supplies; |
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• | the availability and cost of credit; |
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• | employment rates and consumer confidence; and |
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• | 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. In fiscal year 2015, our top ten customers together accounted for approximately 39% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 16% of our net sales. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.
Organizational Restructuring
During 2015, we began implementing a multi-year plan to reorganize and consolidate certain aspects of our global head office (the "2015 Plan"). The 2015 Plan includes the creation of a new shared services function and the rationalization of certain of our European facilities, including related headcount reductions. The 2015 Plan was implemented in response to the need for more effective business processes enabled by the planned implementation of our new enterprise resource planning system as well as ongoing weak market conditions in Africa and Europe outside of the United Kingdom. Costs associated with the 2015 Plan include severance and closure charges and are substantially completed. As of April 3, 2016, we do not expect to incur any material future charges relating to the 2015 Plan. Once completed, the 2015 Plan is estimated to increase our annual earnings and cash flows by approximately $6 million.
MASONITE INTERNATIONAL CORPORATION
Foreign Exchange Rate Fluctuation
Our financial results may be adversely affected by fluctuating exchange rates. In the three months ended April 3, 2016, and March 29, 2015, approximately 33% and 39% of our net sales were generated outside of the United States, respectively. In addition, a significant percentage of our costs during the same period were not denominated in U.S. dollars. For example, for most of our manufacturing and distribution facilities, the prices for a significant portion of our raw materials are quoted in the domestic currency of the country where the facility is located or other currencies that are not U.S. dollars. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country or allow our competitors to sell their products at lower prices in that country. Unrealized exchange gains and losses arising from the translation of the financial statements of our non-U.S. functional currency operations are accumulated in the cumulative translation adjustments account in accumulated other comprehensive income (loss).
Inflation
An increase in inflation could have a significant impact on the cost of our raw material inputs. Increased prices for raw materials or finished goods used in our products and/or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, margins and net sales, particularly if we are not able to pass these incurred costs on to our customers. In addition, interest rates normally increase during periods of rising inflation. Historically, as interest rates increase, demand for new homes and home improvement products decreases. An environment of gradual interest rate increases may, however, signify an improving economy or increasing real estate values, which in turn may stimulate increased home buying activity.
Seasonality
Our business is moderately seasonal and our net sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity.
Acquisitions, Disposition and Deconsolidated Entity
We are pursuing a strategic initiative of optimizing our global business portfolio. As part of this strategy, in the last several years we have pursued strategic acquisitions targeting companies who produce components for our existing operations, manufacture niche products and provide value-added services. Additionally, we target companies with strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. We also continuously analyze our operations to determine which businesses, market channels and products create the most value for our customers and acceptable returns for our shareholders.
Acquisitions
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• | USA Wood Door: On October 1, 2015, we completed the acquisition of USA Wood Door, Inc. ("USA Wood Door"), based in Thorofare, New Jersey. We acquired 100% of the equity interests in USA Wood Door for consideration of approximately $13.7 million, net of cash acquired. USA Wood Door is a supplier of architectural and commercial wood doors in the Eastern United States providing door and hardware distributors with machined, re-sized and value-added additions to both unfinished and prefinished doors in short lead times. |
MASONITE INTERNATIONAL CORPORATION
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• | Hickman: On August 5, 2015, we completed the acquisition of Hickman Industries Limited ("Hickman"), a leading supplier of doorkits (similar to fully finished prehung door units) and other millwork in the United Kingdom. We acquired 100% of the equity interests in Hickman for consideration of $88.0 million, net of cash acquired. Hickman is headquartered in Wolverhampton, England, and their leadership in providing doorkit solutions to the homebuilder market in the United Kingdom is a natural extension of our existing business in the United Kingdom. Hickman’s deployment of automation and product line leadership complements the strategies we are pursuing with our business. |
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• | PDS: On July 23, 2015, we completed the acquisition of Performance Doorset Solutions ("PDS"), a leading supplier of custom doors and millwork in the United Kingdom that specializes in non-standard product specifications, manufacturing both wood and composite solutions. We acquired 100% of the equity interests in PDS for consideration of $15.7 million, net of cash acquired. PDS is based in Lancashire, United Kingdom, and is a producer of high quality niche product lines that complement our existing United Kingdom business. |
Disposition and Deconsolidated Entity
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• | South Africa: On December 22, 2015, following a comprehensive assessment of Masonite (Africa) Limited ("MAL"), our South African subsidiary, the MAL Board of Directors approved a plan to enter into Business Rescue proceedings, the South African equivalent of bankruptcy proceedings in the United States, similar to a Chapter 11 reorganization. As a result of this plan, a Business Rescue Practitioner was appointed to manage the affairs of the business and we no longer maintain operational control over MAL. For this reason, we deconsolidated MAL effective December 22, 2015. On May 5, 2016, the business rescue practitioner that was appointed to oversee the affairs of MAL proposed a business rescue plan that would result in the sale of the business. The transaction that has been proposed as part of the plan is expected to be completed in the third quarter of 2016 and is subject to various customary closing conditions, including creditor and shareholder approval of the plan, competition commission clearance, and other regulatory approvals. |
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• | France: On July 31, 2015, we completed the sale of all of the capital stock of Premdor, S.A.S. Masonite’s door business in France, to an investment fund managed by Perceva S.A.S., a Paris-based independent investment firm (the "Buyer"). Pursuant to a stock purchase agreement dated July 16, 2015, the Buyer acquired all of Masonite's door manufacturing and distribution business in France for nominal consideration. |
Components of Results of Operations
There have been no material changes to the information provided in the section entitled "Components of Results of Operations" in our Annual Report on Form 10-K for the year ended January 3, 2016, other than as described below.
Segment Information
During the first quarter of 2016, we changed our reportable segments to align with changes in how we manage our business, review operating performance and allocate resources as a result of the deconsolidation of Africa and other internal reporting changes. All prior period information was recast to reflect this change. Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The North American Residential reportable segment is the aggregation of the Wholesale and Retail operating segments. The Europe reportable segment is the aggregation of the United Kingdom, Central Eastern Europe and France (prior to disposal) operating segments. The Architectural reportable segment consists solely of the Architectural operating segment. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment, including the historical results of our Africa operating segment. Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. 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. The discussion of segment results herein is based on the new reportable segments.
MASONITE INTERNATIONAL CORPORATION
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. Beginning with the third quarter of 2015, we revised our calculation of Adjusted EBITDA to separately exclude loss (gain) on disposal of subsidiaries. The revision to this definition had no impact on our reported Adjusted EBITDA for the three months ended March 29, 2015. Adjusted EBITDA (as revised) is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• registration and listing fees;
• restructuring costs;
• 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);
• 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 2023 Notes and the credit agreement governing the ABL Facility. Adjusted EBITDA is used to evaluate and compare the 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.
We believe that Adjusted EBITDA, from an operations standpoint, provides an appropriate way to measure and assess segment performance. Our management team has established the practice of reviewing the performance of each segment based on the measures of net sales and Adjusted EBITDA. We believe that Adjusted EBITDA is useful to users of the condensed consolidated financial statements because it provides the same information that we use internally to evaluate and compare the performance of the segments and it is one of the primary measures used to determine employee incentive compensation.
MASONITE INTERNATIONAL CORPORATION
Results of Operations |
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| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
Net sales | $ | 489,305 |
| | $ | 434,465 |
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Cost of goods sold | 391,060 |
| | 361,156 |
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Gross profit | 98,245 |
| | 73,309 |
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Gross profit as a % of net sales | 20.1 | % | | 16.9 | % |
Selling, general and administration expenses | 64,898 |
| | 58,161 |
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Selling, general and administration expenses as a % of net sales | 13.3 | % | | 13.4 | % |
Restructuring costs | 19 |
| | 2,356 |
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Operating income (loss) | 33,328 |
| | 12,792 |
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Interest expense (income), net | 7,232 |
| | 11,753 |
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Loss on extinguishment of debt | — |
| | 28,046 |
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Other expense (income), net | 786 |
| | (1,184 | ) |
Income (loss) from continuing operations before income tax expense (benefit) | 25,310 |
| | (25,823 | ) |
Income tax expense (benefit) | 6,210 |
| | 3,264 |
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Income (loss) from continuing operations | 19,100 |
| | (29,087 | ) |
Income (loss) from discontinued operations, net of tax | (188 | ) | | (229 | ) |
Net income (loss) | 18,912 |
| | (29,316 | ) |
Less: net income (loss) attributable to non-controlling interest | 1,084 |
| | 1,736 |
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Net income (loss) attributable to Masonite | $ | 17,828 |
| | $ | (31,052 | ) |
Three Months Ended April 3, 2016, Compared with Three Months Ended March 29, 2015
Net Sales
Net sales in the three months ended April 3, 2016, were $489.3 million, a increase of $54.8 million or 12.6% from $434.5 million in the three months ended March 29, 2015. Net sales in the first quarter of 2016 were negatively impacted by $12.9 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $67.7 million or 15.6% due to changes in volume, average unit price and sales of other products. Higher volume increased net sales in the first quarter of 2016 by $44.5 million or 10.2% compared to the 2015 period. Average unit price increased net sales in in the first quarter of 2016 by $20.2 million or 4.6% compared to the 2015 period. Net sales of other products to external customers were $3.0 million higher in the first quarter of 2016 compared to the 2015 period.
MASONITE INTERNATIONAL CORPORATION
Net Sales and Percentage of Net Sales by Principal Geographic Region
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| Three Months Ended |
(In thousands) | April 3, 2016 | | March 29, 2015 |
North American Residential | $ | 330,616 |
| | $ | 274,641 |
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North American Residential intersegment | (1,887 | ) | | (1,373 | ) |
North American Residential net sales to external customers | $ | 328,729 |
| | $ | 273,268 |
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Percentage of consolidated net sales | 67.2 | % | | 62.9 | % |
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Europe | $ | 80,607 |
| | $ | 75,103 |
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Europe intersegment | (16 | ) | | (78 | ) |
Europe net sales to external customers | $ | 80,591 |
| | $ | 75,025 |
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