2017 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 2, 2017
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
____________________________
masonitelogoa18.jpg
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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o (Do not check if a smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
Emerging growth company
 
o
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No 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 29,544,506 shares of Common Stock, no par value, as of August 7, 2017.


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MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
July 2, 2017

 
 
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
 


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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 1, 2017, 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, including foreign exchange rate fluctuation and inflation;
•
levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity;
•
the United Kingdom's formal trigger of the two year process for its exit from the European Union, and related negotiations;
•
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;
•
the ability to generate the benefits of our restructuring activities;
•
retention of key management personnel;
•
environmental and other government regulations; and
•
limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and our ABL Facility.

We caution you that the foregoing list of important factors is not exclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.


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PART I – FINANCIAL INFORMATION


Item 1. Unaudited Financial Statements

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 2,
2017
 
July 3,
2016
 
July 2,
2017
 
July 3,
2016
Net sales
$
519,741

 
$
513,985

 
$
1,006,922

 
$
1,003,290

Cost of goods sold
412,415

 
402,881

 
804,039

 
793,941

Gross profit
107,326

 
111,104

 
202,883

 
209,349

Selling, general and administration expenses
63,604

 
68,961

 
128,449

 
133,859

Restructuring costs, net
(700
)
 
(103
)
 
(407
)
 
(84
)
Loss (gain) on disposal of subsidiaries
212

 
(1,431
)
 
212

 
(1,431
)
Operating income (loss)
44,210

 
43,677

 
74,629

 
77,005

Interest expense (income), net
7,112

 
6,933

 
14,136

 
14,165

Other expense (income), net
(22
)
 
(801
)
 
(271
)
 
(15
)
Income (loss) from continuing operations before income tax expense (benefit)
37,120

 
37,545

 
60,764

 
62,855

Income tax expense (benefit)
8,932

 
2,855

 
7,253

 
9,065

Income (loss) from continuing operations
28,188

 
34,690

 
53,511

 
53,790

Income (loss) from discontinued operations, net of tax
(134
)
 
(184
)
 
(379
)
 
(372
)
Net income (loss)
28,054

 
34,506

 
53,132

 
53,418

Less: net income (loss) attributable to non-controlling interest
1,170

 
1,151

 
2,683

 
2,235

Net income (loss) attributable to Masonite
$
26,884

 
$
33,355

 
$
50,449

 
$
51,183

 
 
 
 
 
 
 
 
Earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
0.90

 
$
1.09

 
$
1.69

 
$
1.68

Diluted
$
0.89

 
$
1.06

 
$
1.66

 
$
1.64

 
 
 
 
 
 
 
 
Earnings (loss) per common share from continuing operations attributable to Masonite:
 
 
 
 
 
 
 
Basic
$
0.91

 
$
1.10

 
$
1.70

 
$
1.69

Diluted
$
0.89

 
$
1.07

 
$
1.67

 
$
1.65

 
 
 
 
 
 
 
 
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
28,054

 
$
34,506

 
$
53,132

 
$
53,418

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
16,751

 
(13,917
)
 
22,481

 
(10,045
)
Amortization of actuarial net losses
292

 
242

 
584

 
484

Income tax benefit (expense) related to other comprehensive income (loss)
(55
)
 
(95
)
 
(812
)
 
(191
)
Other comprehensive income (loss), net of tax:
16,988

 
(13,770
)
 
22,253

 
(9,752
)
Comprehensive income (loss)
45,042

 
20,736

 
75,385

 
43,666

Less: comprehensive income (loss) attributable to non-controlling interest
1,447

 
1,394

 
3,064

 
2,965

Comprehensive income (loss) attributable to Masonite
$
43,595

 
$
19,342

 
$
72,321

 
$
40,701


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 2,
2017
 
January 1,
2017
Current assets:
 
 
 
Cash and cash equivalents
$
41,647

 
$
71,714

Restricted cash
11,895

 
12,196

Accounts receivable, net
295,179

 
242,197

Inventories, net
250,562

 
225,940

Prepaid expenses
26,053

 
24,291

Income taxes receivable
2,875

 
2,399

Total current assets
628,211

 
578,737

Property, plant and equipment, net
552,727

 
542,088

Investment in equity investees
10,131

 
9,302

Goodwill
130,979

 
129,286

Intangible assets, net
185,014

 
190,154

Long-term deferred income taxes
9,194

 
9,478

Other assets, net
21,761

 
16,816

Total assets
$
1,538,017

 
$
1,475,861

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
116,064

 
$
96,178

Accrued expenses
130,719

 
133,799

Income taxes payable
824

 
1,201

Total current liabilities
247,607

 
231,178

Long-term debt
476,736

 
470,745

Long-term deferred income taxes
77,608

 
70,423

Other liabilities
39,684

 
43,739

Total liabilities
841,635

 
816,085

Commitments and Contingencies (Note 9)


 


Equity:
 
 
 
Share capital: unlimited shares authorized, no par value, 29,591,624 and 29,774,784 shares issued and outstanding as of July 2, 2017, and January 1, 2017, respectively
650,415

 
650,007

Additional paid-in capital
223,831

 
234,926

Accumulated deficit
(65,551
)
 
(89,063
)
Accumulated other comprehensive income (loss)
(127,114
)
 
(148,986
)
Total equity attributable to Masonite
681,581

 
646,884

Equity attributable to non-controlling interests
14,801

 
12,892

Total equity
696,382

 
659,776

Total liabilities and equity
$
1,538,017

 
$
1,475,861


See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
 
 
Common Shares Outstanding
 
Share Capital
 
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 January 3, 2016
 
30,427,865

 
$
663,600

 
$
231,363

 
$
(114,468
)
 
$
(107,948
)
 
$
672,547

 
$
13,179

 
$
685,726

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
98,622

 
 
 
98,622

 
5,520

 
104,142

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
(41,038
)
 
(41,038
)
 
225

 
(40,813
)
Dividends to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
—

 
(6,032
)
 
(6,032
)
Share based compensation expense
 
 
 
 
 
18,790

 
 
 
 
 
18,790

 
 
 
18,790

Common shares issued for delivery of share based awards
 
366,556

 
7,901

 
(7,901
)
 
 
 
 
 
—

 
 
 
—

Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(4,210
)
 
 
 
 
 
(4,210
)
 
 
 
(4,210
)
Common shares issued under employee stock purchase plan
 
17,469

 
1,090

 
(202
)
 
 
 
 
 
888

 
 
 
888

Common shares issued for exercise of warrants
 
630,951

 
13,401

 
(2,914
)
 
 
 
 
 
10,487

 
 
 
10,487

Common shares repurchased and retired
 
(1,668,057
)
 
(35,985
)
 
 
 
(73,217
)
 
 
 
(109,202
)
 
 
 
(109,202
)
Balances as of January 1, 2017
 
29,774,784

 
$
650,007

 
$
234,926

 
$
(89,063
)
 
$
(148,986
)
 
$
646,884

 
$
12,892

 
$
659,776

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
50,449

 
 
 
50,449

 
2,683

 
53,132

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
21,872

 
21,872

 
381

 
22,253

Dividends to non-controlling interests
 
 
 
 
 
 
 
 
 
 
 
—

 
(1,155
)
 
(1,155
)
Share based compensation expense
 
 
 
 
 
5,954

 
 
 
 
 
5,954

 
 
 
5,954

Common shares issued for delivery of share based awards
 
306,403

 
10,734

 
(10,734
)
 
 
 
 
 
—

 
 
 
—

Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(6,167
)
 
 
 
 
 
(6,167
)
 
 
 
(6,167
)
Common shares issued under employee stock purchase plan
 
9,352

 
623

 
(148
)
 
 
 
 
 
475

 
 
 
475

Common shares repurchased and retired
 
(498,915
)
 
(10,949
)
 
 
 
(26,937
)
 
 
 
(37,886
)
 
 
 
(37,886
)
Balances as of July 2, 2017
 
29,591,624

 
$
650,415

 
$
223,831

 
$
(65,551
)
 
$
(127,114
)
 
$
681,581

 
$
14,801

 
$
696,382


See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
 
Six Months Ended
Cash flows from operating activities:
July 2,
2017
 
July 3,
2016
Net income (loss)
$
53,132

 
$
53,418

Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
 
 
 
Loss (income) from discontinued operations, net of tax
379

 
372

Loss (gain) on disposal of subsidiaries
212

 
(1,431
)
Depreciation
29,301

 
29,383

Amortization
11,566

 
12,982

Share based compensation expense
5,954

 
8,510

Deferred income taxes
5,652

 
4,173

Unrealized foreign exchange loss (gain)
776

 
1,225

Share of loss (income) from equity investees, net of tax
(829
)
 
(852
)
Pension and post-retirement expense (funding), net
(3,120
)
 
(2,885
)
Non-cash accruals and interest
644

 
1,725

Loss (gain) on sale of property, plant and equipment
141

 
392

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(47,988
)
 
(51,542
)
Inventories
(19,497
)
 
(25,215
)
Prepaid expenses
(685
)
 
(1,507
)
Accounts payable and accrued expenses
17,965

 
28,445

Other assets and liabilities
(5,661
)
 
(147
)
Net cash flow provided by (used in) operating activities
47,942

 
57,046

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
802

 
163

Additions to property, plant and equipment
(35,497
)
 
(38,077
)
Cash used in acquisitions, net of cash acquired
—

 
(599
)
Restricted cash
301

 
449

Other investing activities
(1,952
)
 
(1,230
)
Net cash flow provided by (used in) investing activities
(36,346
)
 
(39,294
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
746

 
390

Repayments of long-term debt
(239
)
 
(374
)
Proceeds from borrowings on revolving credit facilities
5,000

 
—

Tax withholding on share based awards
(6,167
)
 
(4,057
)
Distributions to non-controlling interests
(1,155
)
 
(380
)
Proceeds from exercise of common stock warrants
—

 
10,487

Repurchases of common shares
(37,886
)
 
(46,600
)
Net cash flow provided by (used in) financing activities
(39,701
)
 
(40,534
)
Net foreign currency translation adjustment on cash
(1,962
)
 
(4,035
)
Increase (decrease) in cash and cash equivalents
(30,067
)
 
(26,817
)
Cash and cash equivalents, beginning of period
71,714

 
89,187

Cash and cash equivalents, at end of period
$
41,647

 
$
62,370


See accompanying notes to the condensed consolidated financial statements.

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



1. Business Overview and Significant Accounting Policies

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 8 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 1, 2017, as filed with the SEC. 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
There have been no changes in the significant accounting policies from those that were disclosed in the fiscal year 2016 audited consolidated financial statements, other than as noted below.
Adoption of Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Simplifying the Measurement of Inventory," which amended ASC 330, "Inventory." This ASU requires the measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted. The adoption of this standard did not have a material impact on the presentation of our financial statements.


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Table of Contents

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


Other Recent Accounting Pronouncements not yet Adopted

In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which amends ASC 715, “Retirement Benefits”. This ASU requires disaggregation of the service cost component from the other components of net benefit cost. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted and retrospective application is required. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.

In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which amends ASC 350 "Intangibles - Goodwill and Other". This ASU simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based upon the amount of a reporting unit's carrying value in excess of its fair value; thus, eliminating what is currently known as "Step 2" under the current guidance. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods; early adoption is permitted and prospective application is required. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date," and the guidance will now be effective for annual and interim periods beginning on or after December 15, 2017. While we are still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our contracts with customers, we do not currently expect the adoption of the new standard to have a material impact on consolidated net income (loss) attributable to Masonite, cash flows or our consolidated balance sheets. We plan to adopt this standard using the retrospective method and adoption will be effective as of January 1, 2018.

2. Dispositions

Hungary

On June 28, 2017, we completed the liquidation of our legal entity in Hungary. As a result, we recognized $0.2 million of cumulative translation adjustment in loss (gain) on disposal of subsidiaries from accumulated other comprehensive income during the three months ended July 2, 2017.

Romania

On April 22, 2016, we completed the liquidation of our legal entity in Romania. As a result, we recognized $(1.4) million of 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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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
January 1, 2017
$
2,843

 
$
32,410

 
$
94,033

 
$
129,286

Foreign exchange fluctuations
12

 
1,569

 
112

 
1,693

July 2, 2017
$
2,855

 
$
33,979

 
$
94,145

 
$
130,979


The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:
 
July 2, 2017
(In thousands)
 Cost
 
Accumulated Amortization
 
Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
155,927

 
$
(72,048
)
 
$
(13,149
)
 
$
70,730

Patents
31,543

 
(20,621
)
 
(813
)
 
10,109

Software
32,330

 
(28,938
)
 
(206
)
 
3,186

Other
15,246

 
(10,490
)
 
(1,818
)
 
2,938

 
235,046

 
(132,097
)
 
(15,986
)
 
86,963

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
108,572

 
—

 
(10,521
)
 
98,051

Total intangible assets
$
343,618

 
$
(132,097
)
 
$
(26,507
)
 
$
185,014

 
January 1, 2017
(In thousands)
 Cost
 
 Accumulated Amortization
 
 Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
155,927

 
$
(64,762
)
 
$
(15,261
)
 
$
75,904

Patents
30,698

 
(19,451
)
 
(971
)
 
10,276

Software
31,222

 
(26,865
)
 
(234
)
 
4,123

Other
12,280

 
(9,147
)
 
(1,883
)
 
1,250

 
230,127

 
(120,225
)
 
(18,349
)
 
91,553

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
111,538

 
—

 
(12,937
)
 
98,601

Total intangible assets
$
341,665

 
$
(120,225
)
 
$
(31,286
)
 
$
190,154


Amortization of intangible assets was $6.0 million and $11.9 million for the three and six months ended July 2, 2017, respectively, and was $6.3 million and $12.5 million for the three and six months ended July 3, 2016, respectively. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).


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


The estimated future amortization of intangible assets with definite lives as of July 2, 2017, is as follows:
(In thousands)
 
Fiscal year:
 
2017 (remaining six months)
$
11,862

2018
17,285

2019
15,069

2020
12,296

2021
9,479


4. Accounts Receivable

Our customers consist mainly of wholesale distributors, dealers, homebuilders and retail home centers. Our ten largest customers accounted for 58.9% and 57.3% of total accounts receivable as of July 2, 2017, and January 1, 2017, respectively. Our two largest customers, The Home Depot, Inc. and Lowe's Companies, Inc., each accounted for more than 10% of the consolidated gross accounts receivable balance as of July 2, 2017, and January 1, 2017. No other individual customers accounted for greater than 10% of consolidated gross accounts receivable balance at either July 2, 2017, or January 1, 2017. The allowance for doubtful accounts balance was $1.4 million and $1.0 million as of July 2, 2017, and January 1, 2017, respectively.

We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party that assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the condensed consolidated balance sheets and are 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 Program 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 2,
2017
 
January 1,
2017
Raw materials
$
182,457

 
$
165,896

Finished goods
75,441

 
65,791

Provision for obsolete or aged inventory
(7,336
)
 
(5,747
)
Inventories, net
$
250,562

 
$
225,940



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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)
July 2,
2017
 
January 1,
2017
Land
$
25,481

 
$
24,562

Buildings
170,355

 
163,802

Machinery and equipment
632,698

 
595,929

Property, plant and equipment, gross
828,534

 
784,293

Accumulated depreciation
(275,807
)
 
(242,205
)
Property, plant and equipment, net
$
552,727

 
$
542,088


Total depreciation expense was $15.3 million and $29.3 million in the three and six months ended July 2, 2017, and $14.8 million and $29.4 million in the three and six months ended July 3, 2016, 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)
July 2,
2017
 
January 1,
2017
5.625% senior unsecured notes due 2023
$
475,000

 
$
475,000

Debt issuance costs for 2023 Notes
(4,974
)
 
(5,393
)
Revolving credit facilities
5,000

 
—

Capital lease obligations
555

 
768

Other long-term debt
1,155

 
370

Total long-term debt
$
476,736

 
$
470,745


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 2, 2017, respectively, and $6.9 million and $13.9 million for the three and six months ended July 3, 2016, 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 of prior 8.25% senior unsecured notes due 2021 and to pay related premiums, fees and expenses.
    
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. 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,

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(Unaudited)


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.    

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 2, 2017, and January 1, 2017, 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 entered into a $150.0 million asset-based revolving credit facility (the "ABL Facility") maturing on April 9, 2020. 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 secured 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 2, 2017, and January 1, 2017, we were in compliance with all covenants under the credit agreement governing the ABL Facility. As of July 2, 2017, there was $5.0 million outstanding under the ABL Facility. As of January 1, 2017 there was no outstanding balance under the ABL Facility.


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


8. Share Based Compensation Plans
    
Share based compensation expense was $3.5 million and $6.0 million for the three and six months ended July 2, 2017, respectively, and $4.8 million and $8.5 million for the three and six months ended July 3, 2016, respectively. As of July 2, 2017, the total remaining unrecognized compensation expense related to share based compensation amounted to $19.7 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 Plans

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, 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 2, 2017, there were 963,442 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 2, 2017, the liability and asset relating to deferred compensation had a fair value of $4.9 million and $5.0 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 July 2, 2017, 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.

The total fair value of SARs vested was $0.4 million during the six months ended July 2, 2017. No SARs vested during the six months ended and July 3, 2016.
Six Months Ended July 2, 2017
Stock Appreciation Rights
 
Aggregate Intrinsic Value (in thousands)
 
 Weighted Average Exercise Price
 
 Average Remaining Contractual Life (Years)
Outstanding, beginning of period
790,290

 
$
32,659

 
$
24.47

 
4.6
Granted
59,265

 

 
77.00

 
 
Exercised
(191,593
)
 
11,453

 
18.93

 
 
Forfeited
(10,357
)
 
 
 
64.32

 
 
Outstanding, end of period
647,605

 
$
29,365

 
$
30.29

 
4.6
 
 
 
 
 
 
 
 
Exercisable, end of period
545,422

 
$
28,573

 
$
23.11

 
3.9
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

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


The value of SARs granted in the six months ended ended July 2, 2017, as determined using the Black-Scholes Merton valuation model, was $1.3 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:
 
2017 Grants
 
2016 Grants
SAR value (model conclusion)
$
22.65

 
$
16.78

Risk-free rate
2.0
%
 
1.6
%
Expected dividend yield
0.0
%
 
0.0
%
Expected volatility
25.8
%
 
26.2
%
Expected term (years)
6.0

 
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 2, 2017
 
July 3, 2016
 
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
501,926

 
$
58.51

 
526,930

 
$
49.31

Granted
227,992

 
70.62

 
283,772

 
45.74

Delivered
(186,312
)
 
 
 
(228,090
)
 
 
Withheld to cover (1)
(54,638
)
 
 
 
(59,374
)
 
 
Forfeited
(31,726
)
 
 
 
(6,659
)
 
 
Outstanding, end of period
457,242

 
$
65.68

 
516,579

 
$
58.53

____________
(1) A portion of the vested RSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.

Approximately one-third of the RSUs granted during the six months ended July 2, 2017, 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 2, 2017, was $16.1 million and is being recognized over the weighted average requisite service period of 2.7 years. During the six months ended July 2, 2017, there were 240,950 RSUs vested at a fair value of $13.5 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 had an expiration date of June 9,

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(Unaudited)


2016 (the "2016 Warrants"). During the six months prior to their respective expiration dates, the warrants provided the holders with a cashless exercise option. There was no activity related to warrants during the six months ended July 2, 2017, and there were no warrants outstanding as of either July 2, 2017, or January 1, 2017. During the six months ended July 3, 2016, holders of the 2016 Warrants paid $10.5 million to exercise 2,496,493 warrants and we issued 631,023 new common shares to the holders. During the same period, 1,478 warrants were forfeited by the holders upon their expiration. We have accounted for these warrants as equity instruments.

9. Commitments and Contingencies

Leases

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:
 
2017 (remaining six months)
$
11,409

2018
21,787

2019
20,482

2020
17,743

2021
13,684

Thereafter
73,781

Total future minimum lease payments
$
158,886


Total rent expense, including non-cancelable operating leases and month-to-month leases, was $7.2 million and $14.3 million for the three and six months ended July 2, 2017, respectively, and $6.8 million and $13.2 million for the three and six months ended July 3, 2016, 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.

Legal Proceedings

In November 2015, Derrick Byrd, a former hourly employee in California, filed a putative class action lawsuit against us in California Superior Court alleging violations of California wage and hour laws with respect to meal periods and rest breaks and other technical wage and hour issues. In January 2016, we removed the lawsuit to the United States District Court for the Central District of California and on February 25, 2016, the court dismissed the complaint in its entirety. On March 18, 2016, the plaintiff filed an amended complaint, which we moved to dismiss, and we moved to strike several of the plaintiff’s causes of action. On July 7, 2016, the court dismissed several of the plaintiff’s causes of action and gave the plaintiff leave to amend. On July 29, 2016, the plaintiff filed a second amended complaint containing a narrower version of nine of the eleven original claims. We answered this amended complaint on August 12, 2016, and amended our answer on September 14, 2016. On November 28, 2016, the plaintiff filed a third amended complaint to add an additional individual as a plaintiff. On December 19, 2016, we answered this amended complaint. The plaintiffs

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(Unaudited)


continued to allege violations with respect to overtime pay, meal periods, rest breaks, minimum wage, timely pay, wage statement detail and reimbursement of business expenses and sought damages, penalties, attorney’s fees and an award under the California Private Attorney General Act (“PAGA”). On August 2, 2017, the parties entered into a Joint Stipulation of Class Action and PAGA Settlement and Release (the “Settlement”). In entering into the Settlement, we denied all claims made in the lawsuit and denied any wrongdoing. The Settlement is subject to both preliminary and final court approval, which is expected to occur prior to the end of 2017. Pursuant to the Settlement, payment of the settlement amount would occur after final court approval. The amount we have agreed to pay as part of the Settlement has not had and is not expected to have a material impact on our financial condition or operating results.
    
In addition, from time to time, we are involved in various claims, legal actions and government audits. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material effect on our financial condition, results of operations or cash flows.

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 July 2, 2017
(In thousands)
Europe
 
Architectural
 
Corporate & Other
 
Total
2016 Plans
$
—

 
503

 
$
—

 
$
503

2015 Plan
(96
)
 
—

 
24

 
(72
)
2014 Plan
—

 
—

 
(1,131
)
 
(1,131
)
Total Restructuring Costs
$
(96
)
 
503

 
$
(1,107
)
 
$
(700
)
 
Six Months Ended July 2, 2017
(In thousands)
Europe
 
Architectural
 
Corporate & Other
 
Total
2016 Plans
$
—

 
774

 
$
—

 
$
774

2015 Plan
(96
)
 
—

 
46

 
(50
)
2014 Plan
—

 
—

 
(1,131
)
 
(1,131
)
Total Restructuring Costs
$
(96
)
 
774

 
$
(1,085
)
 
$
(407
)
 
Cumulative Amount Incurred Through July 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
2016 Plan
$
—

 
$
—

 
$
2,087

 
$
—

 
$
2,087

2015 Plan
—

 
2,239

 
—

 
3,327

 
5,566

2014 Plan
—

 
—

 
—

 
8,372

 
8,372

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

 
$
17,667

 
$
2,087

 
$
17,465

 
$
42,622


During 2016, we began implementing a plan (the "2016 Plan") to close one manufacturing facility in the Architectural segment, which includes the reduction of approximately 140 positions. The 2016 Plan is expected to improve our cost structure and enhance operational efficiencies, and is expected to be completed by the end of the third quarter of 2017. Costs associated with the 2016 Plan include closure costs and severance. As of July 2, 2017, we expect to incur approximately $1 million of additional charges related to the 2016 Plan.


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(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. On June 28, 2017 the Stay of Proceedings was finalized, which resulted in a settlement payment to us as creditor in the amount of $1.1 million, which was recorded as a reduction to restructuring costs. As of July 2, 2017, we do not expect to incur any material future charges relating to the 2014 Plan.
Our restructuring plans initiated in 2015 and prior years are described in detail in our Annual Report on Form 10-K for the year ended January 1, 2017. Costs associated with the 2015, 2013 and 2012 and Prior Plans include severance and closure charges and are substantially completed. The 2013 Plan also included impairment of certain property, plant and equipment. 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 2, 2017, we do not expect to incur any material future charges relating to the 2015 Plan, the 2013 Plan or the 2012 and Prior Plans.

The changes in the accrual for restructuring by activity were as follows for the periods indicated:
(In thousands)
January 1,
2017
 
Severance
 
Closure Costs
 
Cash Payments
 
July 2,
2017
2016 Plan
$
1,300

 
$
271

 
$
503

 
$
1,173

 
$
901

2015 Plan
282

 
46

 
(96
)
 
86

 
146

2014 Plan
426

 
—

 
(1,131
)
 
(1,119
)
 
414

2012 and Prior Plans
465

 
—

 
—

 
95

 
370

Total
$
2,473

 
$
317

 
$
(724
)
 
$
235

 
$
1,831

(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


11. Income Taxes

The effective tax rate differs from the Canadian statutory rate of 26.5% 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. In addition, we recognized $0.1 million and $5.1 million of income tax benefit due to the exercise and delivery of share-based awards during the three and six months ended July 2, 2017 and $6.2 million during the three and six months ended July 3, 2016.


16

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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:
 
Six Months Ended
(In thousands)
July 2, 2017
 
July 3, 2016
Transactions involving cash:
 
 
 
Interest paid
$
13,901

 
$
13,493

Interest received
135

 
137

Income taxes paid
5,061

 
4,918

Income tax refunds
41

 
402

Non-cash transactions:
 
 
 
Property, plant and equipment additions in accounts payable
4,203

 
2,848


13. Segment Information

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 and Central Eastern Europe 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. 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. Adjusted EBITDA 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.


17

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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 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
368,869

 
$
75,626

 
$
77,837

 
$
4,513

 
$
526,845

Intersegment sales
(990
)
 
(1,791
)
 
(4,323
)
 
—

 
(7,104
)
Net sales to external customers
$
367,879

 
$
73,835

 
$
73,514

 
$
4,513

 
$
519,741

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
54,606

 
$
8,937

 
$
7,495

 
$
(2,501
)
 
$
68,537

(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)
Six Months Ended July 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
707,998

 
$
146,453

 
$
153,756

 
$
11,854

 
$
1,020,061

Intersegment sales
(2,077
)
 
(2,647
)
 
(8,415
)
 
—

 
(13,139
)
Net sales to external customers
$
705,921

 
$
143,806

 
$
145,341

 
$
11,854

 
$
1,006,922

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
99,543

 
$
16,611

 
$
12,709

 
$
(7,467
)
 
$
121,396

(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




18

Table of Contents

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


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
 
Six Months Ended
(In thousands)
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Adjusted EBITDA
$
68,537

 
$
68,516

 
$
121,396

 
$
126,757

Less (plus):
 
 
 
 
 
 
 
Depreciation
15,277

 
14,813

 
29,301

 
29,383

Amortization
5,596

 
6,518

 
11,566

 
12,982

Share based compensation expense
3,527

 
4,782

 
5,954

 
8,510

Loss (gain) on disposal of property, plant and equipment
415

 
260

 
141

 
392

Restructuring costs
(700
)
 
(103
)
 
(407
)
 
(84
)
Loss (gain) on disposal of subsidiaries
212

 
(1,431
)
 
212

 
(1,431
)
Interest expense (income), net
7,112

 
6,933

 
14,136

 
14,165

Other expense (income), net
(22
)
 
(801
)
 
(271
)
 
(15
)
Income tax expense (benefit)
8,932

 
2,855

 
7,253

 
9,065

Loss (income) from discontinued operations, net of tax
134

 
184

 
379

 
372

Net income (loss) attributable to non-controlling interest
1,170

 
1,151

 
2,683

 
2,235

Net income (loss) attributable to Masonite
$
26,884

 
$
33,355

 
$
50,449

 
$
51,183


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 July 2, 2017, and January 1, 2017, was $491.0 million and $485.4 million, respectively, compared to a carrying value of $470.0 million and $469.6 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.


19

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


15. Earnings Per Share

Basic earnings per share ("EPS") is calculated by dividing earnings attributable to Masonite by the weighted-average number of 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
 
Six Months Ended
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Net income (loss) attributable to Masonite
$
26,884

 
$
33,355

 
$
50,449

 
$
51,183

Less: income (loss) from discontinued operations, net of tax
(134
)
 
(184
)
 
(379
)
 
(372
)
Income (loss) from continuing operations attributable to Masonite
$
27,018

 
$
33,539

 
$
50,828

 
$
51,555

 
 
 
 
 
 
 
 
Shares used in computing basic earnings per share
29,789,955

 
30,577,589

 
29,825,527

 
30,536,282

Effect of dilutive securities:
 
 
 
 
 
 
 
Incremental shares issuable under share compensation plans and warrants
568,283

 
754,075

 
609,057

 
737,480

Shares used in computing diluted earnings per share
30,358,238

 
31,331,664

 
30,434,584

 
31,273,762

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Continuing operations attributable to Masonite
$
0.91

 
$
1.10

 
$
1.70

 
$
1.69

Discontinued operations attributable to Masonite, net of tax
(0.01
)
 
(0.01
)
 
(0.01
)
 
(0.01
)
Total Basic earnings per common share attributable to Masonite
$
0.90

 
$
1.09

 
$
1.69

 
$
1.68

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share attributable to Masonite:
 
 
 
 
 
 
 
Continuing operations attributable to Masonite
$
0.89

 
$
1.07

 
$
1.67

 
$
1.65

Discontinued operations attributable to Masonite, net of tax
—

 
(0.01
)
 
(0.01
)
 
(0.01
)
Total Diluted earnings per common share attributable to Masonite
$
0.89

 
$
1.06

 
$
1.66

 
$
1.64

 
 
 
 
 
 
 
 
Anti-dilutive instruments excluded from diluted earnings per common share:
 
 
 
 
 
 
 
Stock appreciation rights
55,955

 
—

 
55,955

 
—

    
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 and six months ended July 2, 2017, common shares issuable for stock appreciation rights which have a higher strike price than our weighted average market price have been excluded from the computation of diluted loss per share, as their effect would have been anti-dilutive.


20

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


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
 
Six Months Ended
(In thousands)
July 2, 2017
 
July 3, 2016
 
July 2, 2017
 
July 3, 2016
Accumulated foreign currency translation gains (losses), beginning of period
$
(122,450
)
 
$
(86,726
)
 
$
(127,433
)
 
$
(90,111
)
Foreign currency translation gain (loss)
16,539

 
(12,486
)
 
22,269

 
(8,614
)
Income tax benefit (expense) on foreign currency translation gain (loss)
59

 
—

 
(584
)
 
—

Cumulative translation adjustment recognized upon deconsolidation of subsidiary
212

 
(1,431
)
 
212

 
(1,431
)
Less: foreign currency translation gain (loss) attributable to non-controlling interest
277

 
243

 
381

 
730

Accumulated foreign currency translation gains (losses), end of period
(105,917
)
 
(100,886
)
 
(105,917
)
 
(100,886
)
 
 
 
 
 
 
 
 
Accumulated pension and other post-retirement adjustments, beginning of period
(21,375
)
 
(17,691
)
 
(21,553
)
 
(17,837
)
Amortization of actuarial net losses
292

 
242

 
584

 
484

Income tax benefit (expense) on amortization of actuarial net losses
(114
)
 
(95
)
 
(228
)
 
(191
)
Accumulated pension and other post-retirement adjustments
(21,197
)
 
(17,544
)
 
(21,197
)
 
(17,544
)
 
 
 


 
 
 


Accumulated other comprehensive income (loss)
$
(127,114
)
 
$
(118,430
)
 
$
(127,114
)
 
$
(118,430
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
$
16,988

 
$
(13,770
)
 
$
22,253

 
$
(9,752
)
Less: other comprehensive income (loss) attributable to non-controlling interest
277

 
243

 
381

 
730