2016 Q2 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 July 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)
____________________________
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.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
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 30,581,543 shares of Common Stock, no par value, as of August 8, 2016.


MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
July 3, 2016

 
 
PART I
 
 
Page
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
Item 3
 
Item 4
 
PART II
 
 
 
Item 1
 
Item 1A
 
Item 2
 
Item 3
 
Item 4
 
Item 5
 
Item 6
 


2

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "might," "will," "should," "estimate," "project," "plan," "anticipate," "expect," "intend," "outlook," "believe" and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" 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:

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


3

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 3,
2016
 
June 28,
2015
 
July 3,
2016
 
June 28,
2015
Net sales
$
513,985

 
$
476,428

 
$
1,003,290

 
$
910,893

Cost of goods sold
402,881

 
381,394

 
793,941

 
742,550

Gross profit
111,104

 
95,034

 
209,349

 
168,343

Selling, general and administration expenses
68,961

 
58,818

 
133,859

 
116,979

Restructuring costs
(103
)
 
988

 
(84
)
 
3,344

Loss (gain) on disposal of subsidiaries
(1,431
)
 
—

 
(1,431
)
 
—

Operating income (loss)
43,677

 
35,228

 
77,005

 
48,020

Interest expense (income), net
6,933

 
6,787

 
14,165

 
18,540

Loss on extinguishment of debt
—

 
—

 
—

 
28,046

Other expense (income), net
(801
)
 
(635
)
 
(15
)
 
(1,819
)
Income (loss) from continuing operations before income tax expense (benefit)
37,545

 
29,076

 
62,855

 
3,253

Income tax expense (benefit)
2,855

 
15,013

 
9,065

 
18,277

Income (loss) from continuing operations
34,690

 
14,063

 
53,790

 
(15,024
)
Income (loss) from discontinued operations, net of tax
(184
)
 
(240
)
 
(372
)
 
(469
)
Net income (loss)
34,506

 
13,823

 
53,418

 
(15,493
)
Less: net income (loss) attributable to non-controlling interest
1,151

 
381

 
2,235

 
2,117

Net income (loss) attributable to Masonite
$
33,355

 
$
13,442

 
$
51,183

 
$
(17,610
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
1.09

 
$
0.44

 
$
1.68

 
$
(0.58
)
Diluted
$
1.06

 
$
0.42

 
$
1.64

 
$
(0.58
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
1.10

 
$
0.45

 
$
1.69

 
$
(0.57
)
Diluted
$
1.07

 
$
0.43

 
$
1.65

 
$
(0.57
)
 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
34,506

 
$
13,823

 
$
53,418

 
$
(15,493
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign exchange gain (loss)
(13,917
)
 
9,204

 
(10,045
)
 
(25,936
)
Amortization of actuarial net losses
242

 
220

 
484

 
440

Income tax benefit (expense) related to other comprehensive income (loss)
(95
)
 
(87
)
 
(191
)
 
(174
)
Other comprehensive income (loss), net of tax:
(13,770
)
 
9,337

 
(9,752
)
 
(25,670
)
Comprehensive income (loss)
20,736

 
23,160

 
43,666

 
(41,163
)
Less: comprehensive income (loss) attributable to non-controlling interest
1,394

 
496

 
2,965

 
1,547

Comprehensive income (loss) attributable to Masonite
$
19,342

 
$
22,664

 
$
40,701

 
$
(42,710
)

See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
ASSETS
July 3,
2016
 
January 3,
2016
Current assets:
 
 
 
Cash and cash equivalents
$
62,370

 
$
89,187

Restricted cash
12,196

 
12,645

Accounts receivable, net
273,144

 
224,976

Inventories, net
233,937

 
208,393

Prepaid expenses
23,553

 
21,983

Income taxes receivable
2,797

 
1,762

Total current assets
607,997

 
558,946

Property, plant and equipment, net
534,436

 
534,234

Investment in equity investees
19,663

 
18,811

Goodwill
124,596

 
128,170

Intangible assets, net
207,260

 
225,932

Long-term deferred income taxes
11,047

 
16,899

Other assets, net
17,522

 
16,157

Total assets
$
1,522,521

 
$
1,499,149

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
113,581

 
$
96,480

Accrued expenses
130,973

 
136,029

Income taxes payable
1,460

 
9

Total current liabilities
246,014

 
232,518

Long-term debt
470,984

 
468,856

Long-term deferred income taxes
62,018

 
98,682

Other liabilities
41,521

 
43,527

Total liabilities
820,537

 
843,583

Commitments and Contingencies (Note 9)


 


Equity:
 
 
 
Share capital: unlimited shares authorized, no par value, 31,110,327 and 30,427,865 shares issued and 30,687,350 and 30,427,865 outstanding as of July 3, 2016, and January 3, 2016, respectively
678,411

 
663,600

Additional paid-in capital
225,544

 
231,363

Accumulated deficit
(70,816
)
 
(144,628
)
Accumulated other comprehensive income (loss)
(118,430
)
 
(107,948
)
Common shares held in treasury: 422,977 shares as of July 3, 2016
(28,489
)
 
—

Total equity attributable to Masonite
686,220

 
642,387

Equity attributable to non-controlling interests
15,764

 
13,179

Total equity
701,984

 
655,566

Total liabilities and equity
$
1,522,521

 
$
1,499,149


See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
 
 
Common Shares Outstanding
 
Share Capital
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Common Shares Held in Treasury
 
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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Common shares issued for delivery of share based awards
 
399,198

 
5,460

 
(5,460
)
 
 
 
 
 
 
 
—

 
 
 
—

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
)
 
 
 
 
 
 
 
—

 
 
 
—

Balances as of January 3, 2016
 
30,427,865

 
$
663,600

 
$
231,363

 
$
(144,628
)
 
$
(107,948
)
 
$
—

 
$
642,387

 
$
13,179

 
$
655,566

Cumulative effect of new accounting principle
 


 


 


 
34,376

 


 


 
34,376

 


 
34,376

Balances as of January 3, 2016, as adjusted
 
30,427,865

 
$
663,600

 
$
231,363

 
$
(110,252
)
 
$
(107,948
)
 
$
—

 
$
676,763

 
$
13,179

 
$
689,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
51,183

 
 
 
 
 
51,183

 
2,235

 
53,418

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
(10,482
)
 
 
 
(10,482
)
 
730

 
(9,752
)
Dividends to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
(380
)
 
(380
)
Share based compensation expense
 
 
 
 
 
8,510

 
 
 
 
 
 
 
8,510

 
 
 
8,510

Common shares issued for delivery of share based awards
 
334,353

 
7,267

 
(7,267
)
 
 
 
 
 
 
 
—

 
 
 
—

Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(4,057
)
 
 
 
 
 
 
 
(4,057
)
 
 
 
(4,057
)
Common shares issued under employee stock purchase plan
 
9,126

 
507

 
(91
)
 
 
 
 
 
 
 
416

 
 
 
416

Common shares issued for exercise of warrants
 
630,904

 
13,401

 
(2,914
)
 
 
 
 
 
 
 
10,487

 
 
 
10,487

Common shares repurchased
 
(422,977
)
 
 
 
 
 
 
 
 
 
(28,489
)
 
(28,489
)
 
 
 
(28,489
)
Common shares repurchased and retired
 
(291,921
)
 
(6,364
)
 
 
 
(11,747
)
 
 
 
 
 
(18,111
)
 
 
 
(18,111
)
Balances as of July 3, 2016
 
30,687,350

 
$
678,411

 
$
225,544

 
$
(70,816
)
 
$
(118,430
)
 
$
(28,489
)
 
$
686,220

 
$
15,764

 
$
701,984


See accompanying notes to the condensed consolidated financial statements.

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Table of Contents

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
 
Six Months Ended
Cash flows from operating activities:
July 3,
2016
 
June 28,
2015
Net income (loss)
$
53,418

 
$
(15,493
)
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
 
 
 
Loss (income) from discontinued operations, net of tax
372

 
469

Loss (gain) on disposal of subsidiaries
(1,431
)
 
—

Loss on extinguishment of debt
—

 
28,046

Depreciation
29,383

 
29,716

Amortization
12,982

 
9,986

Share based compensation expense
8,510

 
5,485

Deferred income taxes
4,173

 
14,540

Unrealized foreign exchange loss (gain)
1,225

 
(1,220
)
Share of loss (income) from equity investees, net of tax
(852
)
 
(595
)
Dividend from equity investee
—

 
1,440

Pension and post-retirement expense (funding), net
(2,885
)
 
(2,778
)
Non-cash accruals and interest
1,725

 
658

Loss (gain) on sale of property, plant and equipment
392

 
294

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(51,542
)
 
(9,276
)
Inventories
(25,215
)
 
(25,636
)
Prepaid expenses
(1,507
)
 
(6,281
)
Accounts payable and accrued expenses
28,445

 
13,062

Other assets and liabilities
(147
)
 
(2,220
)
Net cash flow provided by (used in) operating activities
57,046

 
40,197

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
163

 
324

Additions to property, plant and equipment
(38,077
)
 
(17,918
)
Cash used in acquisitions, net of cash acquired
(599
)
 
—

Restricted cash
449

 
(3,866
)
Other investing activities
(1,230
)
 
(1,376
)
Net cash flow provided by (used in) investing activities
(39,294
)
 
(22,836
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
390

 
475,000

Repayments of long-term debt
(374
)
 
(500,000
)
Payments of long-term debt extinguishment costs
—

 
(31,691
)
Payment of debt issuance costs
—

 
(7,159
)
Tax withholding on share based awards
(4,057
)
 
(609
)
Distributions to non-controlling interests
(380
)
 
(1,614
)
Proceeds from exercise of common stock warrants
10,487

 
—

Repurchases of common shares
(46,600
)
 
—

Net cash flow provided by (used in) financing activities
(40,534
)
 
(66,073
)
Net foreign currency translation adjustment on cash
(4,035
)
 
(7,020
)
Increase (decrease) in cash and cash equivalents
(26,817
)
 
(55,732
)
Cash and cash equivalents, beginning of period
89,187

 
192,037

Cash and cash equivalents, at end of period
$
62,370

 
$
136,305


See accompanying notes to the condensed consolidated financial statements.

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Table of Contents
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 64 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 fiscal year 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- and 26-week periods are referred to as three- and six-month periods, respectively.

Changes in Accounting Standards and Policies
Adoption of Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 was previously 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 have adopted this guidance as of April 4, 2016. The aspect of the standard dealing with excess tax benefits and tax deficiencies was adopted using the modified-retrospective method, and resulted in an increase to previously-presented retained earnings of $34.4 million as of January 3, 2016. It also resulted in a $6.2 million income tax benefit recorded in the three months ended July 3, 2016; there was no impact on previously-

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Table of Contents

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


presented income tax expense (benefit) for the three months ended April 3, 2016. As a result of the adoption of this standard, we have elected to account for forfeitures when they occur. The forfeitures aspect of the standard and the tax withholding aspect of the standard have each been adopted using a modified retrospective approach and had no impact on any previously-presented amounts. All other aspects of the standard were adopted using a retrospective approach and had no impact on any previously-presented amounts.

In September 2015, the FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," which amends 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.
    
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 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 Dispositions

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.


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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 July 3, 2016
(In thousands)
USA Wood Door
 
Hickman
 
PDS
 
Total 2015 Acquisitions
Net sales
$
4,877

 
$
27,585

 
$
4,416

 
$
36,878

Net income (loss) attributable to Masonite
1,088

 
1,171

 
(210
)
 
2,049



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


 
Six Months Ended July 3, 2016
(In thousands)
USA Wood Door
 
Hickman
 
PDS
 
Total 2015 Acquisitions
Net sales
$
9,372

 
$
53,340

 
$
8,967

 
$
71,679

Net income (loss) attributable to Masonite
1,586

 
3,310

 
(60
)
 
4,836


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 June 28, 2015
(In thousands, except per share amounts)
Masonite
 
2015 Acquisitions
 
Historical Sales to 2015 Acquisitions
 
Pro Forma
Net sales
$
476,428

 
$
36,925

 
$
(5,139
)
 
$
508,214

Net income (loss) attributable to Masonite
13,442

 
1,719

 
(931
)
 
14,230

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
0.44

 
 
 
 
 
$
0.47

Diluted earnings (loss) per common share
$
0.42

 
 
 
 
 
$
0.45

 
Six Months Ended June 28, 2015
(In thousands, except per share amounts)
Masonite
 
2015 Acquisitions
 
Historical Sales to 2015 Acquisitions
 
Pro Forma
Net sales
$
910,893

 
$
73,538

 
$
(9,377
)
 
$
975,054

Net income (loss) attributable to Masonite
(17,610
)
 
3,485

 
(1,623
)
 
(15,748
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
$
(0.58
)
 
 
 
 
 
$
(0.52
)
Diluted earnings (loss) per common share
$
(0.58
)
 
 
 
 
 
$
(0.52
)

Dispositions

Romania

On April 22, 2016, we completed the liquidation of our legal entity in Romania. As a result, we recognized a $1.4 million cumulative translation adjustment in loss (gain) on disposal of subsidiaries from accumulated other comprehensive income during the three months ended July 3, 2016.


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(Unaudited)


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. During the second quarter of 2016, the Business Rescue Practitioner proposed a business rescue plan that would result in the sale of the business.

Subsequent to deconsolidation, we have used 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 July 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 $1.1 million and $3.2 million of losses from continuing operations before income tax expense (benefit) during the three and six months ended June 28, 2015, respectively.

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

Measurement period adjustment
—

 
—

 
599

 
599

Foreign exchange fluctuations
24

 
(4,420
)
 
223

 
(4,173
)
July 3, 2016
$
2,859

 
$
34,886

 
$
86,851

 
$
124,596


During the three months ended July 3, 2016, we recorded a $0.6 million increase in goodwill as a measurement period adjustment relating to the USA Wood Door acquisition, due to finalization of certain income tax-related items.

    

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


The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:
 
July 3, 2016
(In thousands)
 Cost
 
Accumulated Amortization
 
Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
155,927

 
$
(56,780
)
 
$
(11,623
)
 
$
87,524

Patents
30,344

 
(18,337
)
 
(815
)
 
11,192

Software
30,359

 
(24,991
)
 
(180
)
 
5,188

Other
12,280

 
(8,609
)
 
(1,770
)
 
1,901

 
228,910

 
(108,717
)
 
(14,388
)
 
105,805

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
111,538

 
—

 
(10,083
)
 
101,455

Total intangible assets
$
340,448

 
$
(108,717
)
 
$
(24,471
)
 
$
207,260

 
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 $6.3 million and $12.5 million and for the three and six months ended July 3, 2016, respectively, and was $4.7 million and $9.4 million for the three and six months ended June 28, 2015, respectively. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).
    
The estimated future amortization of intangible assets with definite lives as of July 3, 2016, is as follows:
(In thousands)
 
Fiscal year:
 
2016 (remaining six months)
$
11,188

2017
20,968

2018
15,789

2019
14,694

2020
12,333



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(Unaudited)


4. Accounts Receivable

Our customers consist mainly of wholesale distributors, dealers, homebuilders and retail home centers. Our ten largest customers accounted for 59.6% and 54.1% of total accounts receivable as of July 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 July 3, 2016, and January 3, 2016. No other individual customers accounted for greater than 10% of consolidated gross accounts receivable balance at either July 3, 2016, or January 3, 2016. The allowance for doubtful accounts balance was $1.6 million and $3.1 million as of July 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)
July 3,
2016
 
January 3,
2016
Raw materials
$
167,059

 
$
145,856

Finished goods
72,833

 
69,045

Provision for obsolete or aged inventory
(5,955
)
 
(6,508
)
Inventories, net
$
233,937

 
$
208,393


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)
July 3,
2016
 
January 3,
2016
Land
$
25,306

 
$
25,316

Buildings
163,161

 
155,709

Machinery and equipment
570,216

 
551,264

Property, plant and equipment, gross
758,683

 
732,289

Accumulated depreciation
(224,247
)
 
(198,055
)
Property, plant and equipment, net
$
534,436

 
$
534,234


Total depreciation expense was $14.8 million and $29.4 million in the three and six months ended July 3, 2016, respectively, and $14.4 million and $29.7 million in the three and six months ended June 28, 2015, respectively. Depreciation expense is included primarily within cost of goods sold in the condensed consolidated statements of comprehensive income (loss).


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(Unaudited)


On June 6, 2014, an explosion occurred in the power plant of our Estcourt mill in South Africa which reduced the site’s ability to generate steam and heat the kilns which, in turn, required the production lines to cease operating for several weeks. We were insured against property loss and business interruption, and we recognized partial payments of $1.2 million in business interruption insurance proceeds during the three and six months ended June 28, 2015 . These proceeds were recorded as a reduction to selling, general and administration expense in the condensed consolidated statements of comprehensive income (loss).

7. Long-Term Debt
(In thousands)
July 3,
2016
 
January 3,
2016
5.625% senior unsecured notes due 2023
$
475,000

 
$
475,000

Debt issuance costs for 2023 Notes
(5,813
)
 
(6,232
)
Capital lease obligations
1,407

 
88

Other long-term debt
390

 
—

Total long-term debt
$
470,984

 
$
468,856


Interest expense related to our consolidated indebtedness under senior unsecured notes was $6.9 million and $13.9 million for the three and six months ended July 3, 2016, respectively, and $6.7 million and $17.8 million for the three and six months ended June 28, 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.    
    
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.

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(Unaudited)


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 July 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 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 July 3, 2016, and January 3, 2016, we were in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.


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(Unaudited)


8. Share Based Compensation Plans
    
Share based compensation expense was $4.8 million and $8.5 million for the three and six months ended July 3, 2016, respectively, and $3.1 million and $5.5 million for the three and six months ended June 28, 2015, respectively. As of July 3, 2016, the total remaining unrecognized compensation expense related to share based compensation amounted to $20.2 million, which will be amortized over the weighted average remaining requisite service period of 1.9 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 and restated by our Board of Directors on February 23, 2015, and approved by our shareholders on May 12, 2015 (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 July 3, 2016, there were 1,516,247 shares of common stock available for future issuance under the 2012 Plan.

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

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(Unaudited)


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 July 3, 2016, the liability and asset relating to deferred compensation each had a fair value of $3.0 million. 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 July 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. We recognize forfeitures of SARs in the period in which they occur.

No SARs vested during the six months ended July 3, 2016. The total fair value of SARs vested was $0.4 million in the six months ended June 28, 2015.
Six Months Ended July 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
(134,910
)
 
7,293

 
14.12

 
 
Forfeited
(2,400
)
 
 
 
26.33

 
 
Outstanding, end of period
875,642

 
$
36,008

 
$
26.28

 
5.4
 
 
 
 
 
 
 
 
Exercisable, end of period
568,917

 
$
28,550

 
$
17.22

 
3.9
Six Months Ended June 28, 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
Granted
—

 
 
 
—

 
 
Exercised
(308,770
)
 
15,205

 
16.82

 
 
Forfeited
(4,584
)
 
 
 
32.26

 
 
Outstanding, end of period
918,114

 
$
46,400

 
$
20.26

 
5.5
 
 
 
 
 
 
 
 
Exercisable, end of period
697,577

 
$
37,727

 
$
16.72

 
4.8

18

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



The value of SARs granted in the six months ended July 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. We recognize forfeitures of RSUs in the period in which they occur.
 
Six Months Ended
 
July 3, 2016
 
June 28, 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
283,772

 
45.74

 
192,653

 
61.38

Delivered
(228,090
)
 
 
 
(70,557
)
 
 
Withheld to cover (1)
(59,374
)
 
 
 
(9,128
)
 
 
Forfeited
(6,659
)
 
 
 
(49,482
)
 
 
Outstanding, end of period
516,579

 
$
58.53

 
606,859

 
$
42.75

____________
(1) A portion of the vested RSUs delivered were net share settled to cover 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-third of the RSUs granted during the six months ended July 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 six months ended July 3, 2016, was $13.0 million and is being recognized over the weighted average requisite service period of 2.6 years. During the six months ended July 3, 2016, there were 287,464 RSUs vested at a fair value of $8.4 million.


19

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


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 had an expiration date of June 9, 2016 (the "2016 Warrants"). During the six months prior to their respective expiration dates, the warrants provided the holders with a cashless exercise option. We have accounted for these warrants as equity instruments.
    
There were no 2014 Warrants outstanding during any period presented. Activity relating to the 2016 Warrants was as follows for the periods presented:
 
Six Months Ended
 
July 3, 2016
 
June 28, 2015
Outstanding, beginning of period
2,497,971

 
2,500,001

Exercised
(2,496,493
)
 
—

Forfeited
(1,478
)
 
—

Outstanding, end of period
—

 
2,500,001

 
 
 
 
Cash received for exercise (in thousands)
$
10,487

 
$
—

Common shares issued
631,023

 
—


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 six months)
$
10,072

2017
19,487

2018
18,064

2019
16,587

2020
14,383

Thereafter
84,433

Total future minimum lease payments
$
163,026


Total rent expense, including non-cancelable operating leases and month-to-month leases, was $6.8 million and $13.2 million for the three and six months ended July 3, 2016, respectively, and $6.0 million and $11.7 million for the three and six months ended June 28, 2015, respectively.


20

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


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 or six months ended July 3, 2016. The following table summarizes the restructuring charges recorded for the periods indicated:
 
Three Months Ended June 28, 2015
(In thousands)
North American Residential
 
Europe
 
Corporate & Other
 
Total
2015 Plan
$
—

 
$
415

 
$
519

 
$
934

2013 Plan
2

 
52

 
—

 
54

Total Restructuring Costs
$
2

 
$
467

 
$
519

 
$
988


 
Six Months Ended June 28, 2015
(In thousands)
North American Residential
 
Europe
 
Corporate & Other
 
Total
2015 Plan
$
—

 
$
2,102

 
$
1,143

 
$
3,245

2013 Plan
6

 
93

 
—

 
99

Total Restructuring Costs
$
6

 
$
2,195

 
$
1,143

 
$
3,344


 
Cumulative Amount Incurred Through July 3, 2016
(In thousands)
North American Residential
 
Europe
 
Corporate & Other
 
Total
2015 Plan
$
—

 
$
2,337

 
$
3,063

 
$
5,400

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

 
$
18,332

 
$
41,500


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 July 3, 2016, we do not expect to incur any material future charges relating to the 2015 Plan.


21

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


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 July 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 July 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 July 3, 2016, we do not expect to incur any future charges for the 2012 and Prior Plans.
    
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
 
July 3,
2016
2015 Plan
$
774

 
$
(111
)
 
$
27

 
$
449

 
$
241

2014 Plan
442

 
—

 
—

 
16

 
426

2013 Plan
316

 
—

 
—

 
316

 
—

2012 and Prior Plans
858

 
—

 
—

 
286

 
572

Total
$
2,390

 
$
(111
)
 
$
27

 
$
1,067

 
$
1,239

(In thousands)
December 28,
2014
 
Severance
 
Closure Costs
 
Cash Payments
 
June 28,
2015
2015 Plan
$
—

 
$
1,911

 
$
1,334

 
$
2,485

 
$
760

2014 Plan
839

 
—

 
—

 
319

 
520

2013 Plan
341

 
—

 
99

 
118

 
322

2012 and Prior Plans
1,153

 
—

 
—

 
326

 
827

Total
$
2,333

 
$
1,911

 
$
1,433

 
$
3,248

 
$
2,429



22

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


11. Income Taxes

Income tax expense (benefit) for income taxes consists of the following:
 
Three Months Ended
 
Six Months Ended
(In thousands)
July 3, 2016
 
June 28, 2015
 
July 3, 2016
 
June 28, 2015
Current
$
3,050

 
$
2,238

 
$
4,892

 
$
3,737

Deferred
(195
)
 
12,775

 
4,173

 
14,540

Income tax expense (benefit)
$
2,855

 
$
15,013

 
$
9,065

 
$
18,277


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 $43.7 million and $40.9 million was required for our deferred tax assets as of July 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.

12. Supplemental Cash Flow Information

Certain cash and non-cash transactions were as follows for the periods indicated:
 
Six Months Ended
(In thousands)
July 3, 2016
 
June 28, 2015
Transactions involving cash:
 
 
 
Interest paid
$
13,493

 
$
19,951

Interest received
137

 
340

Income taxes paid
4,918

 
3,538

Income tax refunds
402

 
9

Non-cash transactions:
 
 
 
Property, plant and equipment additions in accounts payable
2,848

 
3,864



23

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


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 or six months ended June 28, 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.


24

Table of Contents

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


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 July 3, 2016
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
349,929

 
$
83,559

 
$
81,592

 
$
5,951

 
$
521,031

Intersegment sales
(1,756
)
 
(1,344
)
 
(3,946
)
 
—

 
(7,046
)
Net sales to external customers
$
348,173

 
$
82,215

 
$
77,646

 
$
5,951

 
$
513,985

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
55,666

 
$
12,839

 
$
7,672

 
$
(7,661
)
 
$
68,516

(In thousands)
Three Months Ended June 28, 2015
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
305,826

 
$
77,074

 
$
78,488

 
$
18,450

 
$
479,838

Intersegment sales
(933
)
 
—

 
(2,477
)
 
—

 
(3,410
)
Net sales to external customers
$
304,893

 
$
77,074

 
$
76,011

 
$
18,450

 
$
476,428

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
46,713

 
$
8,053

 
$
8,185

 
$
(3,894
)
 
$
59,057

(In thousands)
Six Months Ended July 3, 2016
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
680,545

 
$
164,166

 
$
157,901

 
$
12,424

 
$
1,015,036

Intersegment sales
(3,643
)
 
(1,360
)
 
(6,743
)
 
—

 
(11,746
)
Net sales to external customers
$
676,902

 
$
162,806

 
$
151,158

 
$
12,424

 
$
1,003,290

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
107,041

 
$
22,957

 
$
12,103

 
$
(15,344
)
 
$
126,757

(In thousands)
Six Months Ended June 28, 2015
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
580,467

 
$
152,177

 
$
147,878

 
$
37,698

 
$
918,220

Intersegment sales
(2,306
)
 
(78
)
 
(4,943
)
 
—

 
(7,327
)
Net sales to external customers
$
578,161

 
$
152,099

 
$
142,935

 
$
37,698

 
$
910,893