Edgar Filing: MASONITE INTERNATIONAL CORP

2018 Q3 Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

¨ 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 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	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 26,520,558 shares of Common Stock, no par value, as of November 2, 2018.

MASONITE INTERNATIONAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2018




PART I		Page
Item 1	Unaudited Financial Statements
	Condensed Consolidated Statements of Comprehensive Income (Loss)	1
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Changes in Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to the Condensed Consolidated Financial Statements	5
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4	Controls and Procedures	44
PART II
Item 1	Legal Proceedings	45
Item 1A	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3	Defaults Upon Senior Securities	46
Item 4	Mine Safety Disclosures	46
Item 5	Other Information	46
Item 6	Exhibits	46

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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 December 31, 2017, subsequent reports on Form 10-Q, and elsewhere in this Quarterly Report.

The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:


•	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 wages or any shortage in supplies or labor;


•	our ability to keep pace with technological developments;


•	cyber security threats and attacks;


•	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						Nine Months Ended
	September 30, 2018			October 1, 2017			September 30, 2018			October 1, 2017
Net sales	$	557,148		$	517,503		$	1,641,753		$	1,524,425
Cost of goods sold	446,306			413,517			1,301,808			1,217,556
Gross profit	110,842			103,986			339,945			306,869
Selling, general and administration expenses	64,530			59,063			204,592			188,043
Restructuring costs, net	—			1,393			—			986
Loss (gain) on disposal of subsidiaries	—			—			—			212
Operating income (loss)	46,312			43,530			135,353			117,628
Interest expense (income), net	10,151			7,213			27,981			21,349
Loss on extinguishment of debt	5,414			—			5,414			—
Other expense (income), net	(1,105		)	(451		)	(2,347		)	(1,253		)
Income (loss) from continuing operations before income tax expense (benefit)	31,852			36,768			104,305			97,532
Income tax expense (benefit)	6,151			5,989			20,746			13,242
Income (loss) from continuing operations	25,701			30,779			83,559			84,290
Income (loss) from discontinued operations, net of tax	(157		)	(139		)	(538		)	(518		)
Net income (loss)	25,544			30,640			83,021			83,772
Less: net income (loss) attributable to non-controlling interest	748			1,162			2,658			3,845
Net income (loss) attributable to Masonite	$	24,796		$	29,478		$	80,363		$	79,927

Earnings (loss) per common share attributable to Masonite:
Basic	$	0.90		$	1.01		$	2.90		$	2.70
Diluted	$	0.89		$	1.00		$	2.85		$	2.65

Earnings (loss) per common share from continuing operations attributable to Masonite:
Basic	$	0.91		$	1.02		$	2.91		$	2.72
Diluted	$	0.89		$	1.00		$	2.87		$	2.67

Comprehensive income (loss):
Net income (loss)	$	25,544		$	30,640		$	83,021		$	83,772
Other comprehensive income (loss):
Foreign currency translation gain (loss)	2,484			13,652			(23,187		)	36,133
Amortization of actuarial net losses	300			292			899			876
Income tax benefit (expense) related to other comprehensive income (loss)	(63		)	427			(263		)	(385		)
Other comprehensive income (loss), net of tax:	2,721			14,371			(22,551		)	36,624
Comprehensive income (loss)	28,265			45,011			60,470			120,396
Less: comprehensive income (loss) attributable to non-controlling interest	990			1,521			2,288			4,585
Comprehensive income (loss) attributable to Masonite	$	27,275		$	43,490		$	58,182		$	115,811

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars, except share amounts)

(Unaudited)



ASSETS	September 30, 2018			December 31, 2017
Current assets:
Cash and cash equivalents	$	192,843		$	176,669
Restricted cash	10,485			11,895
Accounts receivable, net	301,599			269,235
Inventories, net	249,742			234,042
Prepaid expenses	30,193			27,665
Income taxes receivable	1,994			2,364
Total current assets	786,856			721,870
Property, plant and equipment, net	594,281			573,559
Investment in equity investees	12,782			11,310
Goodwill	178,862			138,449
Intangible assets, net	222,657			182,484
Long-term deferred income taxes	28,079			29,899
Other assets, net	27,974			22,687
Total assets	$	1,851,491		$	1,680,258

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	103,454		$	94,497
Accrued expenses	133,482			126,759
Income taxes payable	4,248			869
Total current liabilities	241,184			222,125
Long-term debt	796,388			625,657
Long-term deferred income taxes	80,006			60,820
Other liabilities	30,227			35,754
Total liabilities	1,147,805			944,356
Commitments and Contingencies (Note 9)
Equity:
Share capital: unlimited shares authorized, no par value, 27,135,071 and 28,369,877 shares issued and outstanding as of September 30, 2018, and December 31, 2017, respectively	603,965			624,403
Additional paid-in capital	220,032			226,528
Retained earnings (accumulated deficit)	139			(18,150		)
Accumulated other comprehensive income (loss)	(132,333		)	(110,152		)
Total equity attributable to Masonite	691,803			722,629
Equity attributable to non-controlling interests	11,883			13,273
Total equity	703,686			735,902
Total liabilities and equity	$	1,851,491		$	1,680,258

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			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Equity Attributable to Masonite			Equity Attributable to Non-controlling Interests			Total Equity
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)									151,739						151,739			5,242			156,981
Other comprehensive income (loss), net of tax												38,834			38,834			752			39,586
Dividends to non-controlling interests															—			(5,613		)	(5,613		)
Share based compensation expense						11,644									11,644						11,644
Common shares issued for delivery of share based awards	372,826		12,290			(12,290		)							—						—
Common shares withheld to cover income taxes payable due to delivery of share based awards						(7,466		)							(7,466		)				(7,466		)
Common shares issued under employee stock purchase plan	16,368		1,168			(286		)							882						882
Common shares repurchased and retired	(1,794,101	)	(39,062		)				(80,826		)				(119,888		)				(119,888		)
Balances as of December 31, 2017	28,369,877		$	624,403		$	226,528		$	(18,150	)	$	(110,152	)	$	722,629		$	13,273		$	735,902

Net income (loss)									80,363						80,363			2,658			83,021
Other comprehensive income (loss), net of tax												(22,181		)	(22,181		)	(370		)	(22,551		)
Dividends to non-controlling interests															—			(3,678		)	(3,678		)
Share based compensation expense						8,243									8,243						8,243
Common shares issued for delivery of share based awards	215,910		11,043			(11,043		)							—						—
Common shares withheld to cover income taxes payable due to delivery of share based awards						(3,594		)							(3,594		)				(3,594		)
Common shares issued under employee stock purchase plan	13,984		949			(102		)							847						847
Common shares repurchased and retired	(1,464,700	)	(32,430		)				(62,074		)				(94,504		)				(94,504		)
Balances as of September 30, 2018	27,135,071		$	603,965		$	220,032		$	139		$	(132,333	)	$	691,803		$	11,883		$	703,686

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

(Unaudited)



	Nine Months Ended
Cash flows from operating activities:	September 30, 2018			October 1, 2017
Net income (loss)	$	83,021		$	83,772
Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
Loss (income) from discontinued operations, net of tax	538			518
Loss (gain) on disposal of subsidiaries	—			212
Loss on extinguishment of debt	5,414			—
Depreciation	43,340			43,475
Amortization	20,951			17,782
Share based compensation expense	8,243			8,694
Deferred income taxes	9,985			8,359
Unrealized foreign exchange loss (gain)	(699		)	1,083
Share of loss (income) from equity investees, net of tax	(1,472		)	(1,293		)
Pension and post-retirement expense (funding), net	(5,976		)	(5,743		)
Non-cash accruals and interest	605			1,161
Loss (gain) on sale of property, plant and equipment	2,574			1,529
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(25,780		)	(39,532		)
Inventories	(7,480		)	(18,399		)
Prepaid expenses	(2,411		)	(1,745		)
Accounts payable and accrued expenses	12,240			2,993
Other assets and liabilities	(2,642		)	(4,761		)
Net cash flow provided by (used in) operating activities	140,451			98,105
Cash flows from investing activities:
Additions to property, plant and equipment	(51,259		)	(52,340		)
Cash used in acquisitions, net of cash acquired	(135,276		)	—
Proceeds from sale of property, plant and equipment	1,404			962
Other investing activities	(2,862		)	(2,793		)
Net cash flow provided by (used in) investing activities	(187,993		)	(54,171		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	300,000			155,246
Repayments of long-term debt	(125,279		)	(332		)
Payment of debt extinguishment costs	(5,250		)	—
Payment of debt issuance costs	(4,344		)	—
Tax withholding on share based awards	(3,594		)	(6,167		)
Distributions to non-controlling interests	(3,678		)	(2,955		)
Repurchases of common shares	(94,504		)	(109,866		)
Net cash flow provided by (used in) financing activities	63,351			35,926
Net foreign currency translation adjustment on cash	(1,045		)	(844		)
Increase (decrease) in cash, cash equivalents and restricted cash	14,764			79,016
Cash, cash equivalents and restricted cash, beginning of period	188,564			83,910
Cash, cash equivalents and restricted cash, at end of period	$	203,328		$	162,926

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 67 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 December 31, 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 39-week periods are referred to as three- and nine-month periods, respectively. Certain prior year amounts have been reclassified to conform to the current basis of presentation, related to Accounting Standards Updates ("ASU") 2017-07 and 2016-18, as described below.

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 2017 audited consolidated financial statements, other than as noted below.

Adoption of Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which amended Accounting Standards Codification ("ASC") 715, “Retirement Benefits”. This ASU required 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 was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years; early adoption was permitted and retrospective application was required. We have utilized the practical expedient allowing the use of the prior years' disclosed service cost and other cost as the basis for our retrospective changes in presentation. The adoption of this standard changed the presentation of the other components of net benefit cost in our condensed consolidated statements of comprehensive income (loss), requiring the reclassification of a $0.3 million and $0.8 million benefit related to other components of net benefit cost out of previously-presented selling, general and administration expense and into previously presented other expense (income), net, for the three and nine months ended October 1, 2017, respectively. The effect of this reclassification reduced previously-presented operating income by this amount for the same periods. The total benefit which will be reclassified for the years ended December 31, 2017, and January 1, 2017, will be $1.1 million and $0.5 million, respectively.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

In November 2016, the FASB issued ASU 2016-18, "Restricted Cash Flows", which amended ASC 230 "Statement of Cash Flows". This ASU clarified how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This ASU was effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods; early adoption was permitted and retrospective application was required. The adoption of this standard changed the presentation of restricted cash in our condensed consolidated statements of cash flows, which is now being summed with cash and cash equivalents, and had the effect of a $0.3 million increase to previously-presented cash flow used in investing activities for the nine months ended October 1, 2017.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which created ASC 606, "Revenue from Contracts with Customers," and largely superseded the existing guidance of ASC 605, "Revenue Recognition." This standard outlined a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseded 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 would now be effective for annual and interim periods beginning on or after December 15, 2017. We have adopted the guidance of ASC 606 as of January 1, 2018, using the modified retrospective method and have applied the standard to only those contracts which were not completed as of the transition date. The adoption of this standard did not have any material impact on revenues in the three months ended April 1, 2018. Prior period amounts were not adjusted and have continued to be reported in accordance with our historic accounting under Topic 605. While we considered an adjustment to opening retained earnings as prescribed by the modified retrospective method, there was no material adjustment ultimately required. Furthermore, there was no material difference between the prior period amounts as reported under ASC 605 and such amounts as would have been reported under ASC 606. Information about the nature, amount and timing of our revenues from contracts with customers is disclosed in Note 10. Revenues. Our accounting policy for revenue recognition is set forth below.

Revenue Recognition

Revenue from the sale of products is recognized when control of the promised goods is transferred to our customers based on the agreed-upon shipping terms, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Volume rebates, expected returns, discounts and other incentives to customers are considered variable consideration and we estimate these amounts based on the expected amount to be provided to customers and reduce the revenues we recognize accordingly. Sales taxes and value added taxes assessed by governmental entities are excluded from the measurement of consideration expected to be received. Shipping and handling costs incurred after a customer has taken possession of our goods are treated as a fulfillment cost and are not considered a separate performance obligation. Shipping and other transportation costs charged to customers are recorded in both revenues and cost of goods sold in the condensed consolidated statements of comprehensive income (loss).

Other Recent Accounting Pronouncements not yet Adopted

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”. This ASU amends the definition of a hosting arrangement and requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 “Intangibles–Goodwill and Other–Internal-Use Software” to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods; early adoption is permitted and either retrospective or prospective application is required for all implementation costs incurred after the date of adoption. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will replace the existing guidance in ASC 840, "Leases." This standard was supplemented by ASUs 2018-10 and 2018-11 in July 2018. The updated standards aim 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. The transition option in ASU 2018-11 allows entities to not apply the new leases standard in the comparative periods they present in their financial statements in the year of adoption. These ASUs are effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted. We are currently implementing a new lease system in connection with the adoption of ASU 2016-02. We are progressing with implementation and continuing to evaluate the impact on our consolidated financial statements and disclosures. We currently anticipate that the primary impact upon adoption will be a material adjustment to our consolidated balance sheets from the recognition, on a discounted basis, of our expected future payments for our operating leases, resulting in the recognition of right to use assets and lease obligations. Our current minimum undiscounted lease commitments under non-cancelable operating leases are disclosed in Note 9. Commitments and Contingencies.

2. Acquisitions and Disposition

2018 Acquisitions

On June 1, 2018, we completed the acquisition of the operating assets of the wood door companies of AADG, Inc., including the brands Graham Manufacturing Corporation and The Maiman Company (collectively, "Graham & Maiman"). We acquired the operating assets of Graham & Maiman for cash consideration of $39.0 million. Graham & Maiman are based in Mason City, Iowa, and Springfield, Missouri. Graham & Maiman provide the non-residential construction industry with a full range of architectural premium and custom grade flush wood doors, architectural stile and rail wood doors, thermal-fused flush wood doors and wood door frames. The excess purchase price over the fair value of net assets acquired of $11.0 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into our existing Architectural business and the goodwill is deductible for tax purposes.

On January 29, 2018, we completed the acquisition of DW3 Products Holdings Limited (“DW3”), a leading UK provider of high quality premium door solutions and window systems, supplying products under brand names such as Solidor, Residor, Nicedor and Residence. We acquired 100% of the equity interests in DW3 for cash consideration of $96.3 million, net of cash acquired. DW3 is based in Stoke-on-Trent and Gloucester, England, and their online quick ship capabilities and product portfolio both complement and expand the strategies we are pursuing with our business. The excess purchase price over the fair value of net assets acquired of $33.6 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 fair value of assets acquired and liabilities assumed in the Graham & Maiman and DW3 acquisitions are as follows:



(In thousands)	Graham & Maiman			DW3			Total 2018 Acquisitions
Accounts receivable	$	—		$	8,590		$	8,590
Inventory	6,090			5,059			11,149
Property, plant and equipment	19,557			8,196			27,753
Goodwill	10,996			33,623			44,619
Intangible assets	2,750			62,873			65,623
Accounts payable and accrued expenses	(426		)	(10,418		)	(10,844		)
Deferred income taxes	—			(11,546		)	(11,546		)
Other assets and liabilities, net	—			(68		)	(68		)
Cash consideration, net of cash acquired	$	38,967		$	96,309		$	135,276

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(Unaudited)

The gross contractual value of acquired trade receivables was $9.1 million for the DW3 acquisition. 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. The intangible assets acquired are not expected to have any residual value. During the three months ended September 30, 2018, we completed the final customary working capital adjustment for the Graham & Maiman acquisition, which resulted in an immaterial difference in the purchase price allocation when compared to the previously-presented preliminary purchase price allocation. Additionally, we finalized the DW3 purchase price allocation during the nine months ended September 30, 2018.

Intangible assets acquired from the 2018 Acquisitions consist of the following:



(In thousands)	Graham & Maiman		Expected Useful Life (Years)	DW3		Expected Useful Life (Years)
Customer relationships	$	2,400	10.0	$	49,554	10.0
Trademarks and trade names	350		1.5	11,785		10.0
Patents	—			1,420		10.0
Other	—			114		3.0
Total intangible assets acquired	$	2,750		$	62,873

The following schedule represents the amounts of net sales and net income (loss) attributable to Masonite from the 2018 Acquisitions which have been included in the consolidated statements of comprehensive income (loss) for the periods indicated subsequent to the acquisition date.



	Three Months Ended September 30, 2018
(In thousands)	Graham & Maiman		DW3		Total 2018 Acquisitions
Net sales	$	18,336	$	18,470	$	36,806
Net income (loss) attributable to Masonite	845		1,433		2,278



	Nine Months Ended September 30, 2018
(In thousands)	Graham & Maiman		DW3		Total 2018 Acquisitions
Net sales	$	24,602	$	48,019	$	72,621
Net income (loss) attributable to Masonite	1,147		3,526		4,673

2017 Acquisition

On October 2, 2017, we completed the acquisition of A&F Wood Products, Inc. (“A&F”), through the purchase of 100% of the equity interests in A&F and certain assets of affiliates of A&F for cash consideration of $13.8 million, net of cash acquired. A&F is based in Howell, Michigan, and is a wholesaler and fabricator of architectural and commercial doors in the Midwest United States. The excess purchase price over the fair value of net assets acquired of $5.9 million was allocated to goodwill. The goodwill principally represents anticipated synergies from A&F's integration into our existing Architectural door business. This goodwill is not deductible for tax purposes and relates to the Architectural segment. A&F generated external net sales of $4.4 million and $11.7 million for the three and nine months ended September 30, 2018, respectively. Additional information relating to the A&F acquisition is described in our Annual Report on Form 10-K for the year ended December 31, 2017.

Pro Forma Information

The following unaudited pro forma financial information represents the consolidated financial information as if the acquisitions had been included in our 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

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(Unaudited)

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 October 1, 2017
(In thousands, except per share amounts)	Masonite		Graham & Maiman		DW3		A&F		Historical Sales to 2018 and 2017 Acquisitions			Pro Forma
Net sales	$	517,503	$	16,178	$	15,064	$	4,292	$	(1,105	)	$	551,932
Net income (loss) attributable to Masonite	29,478		186		787		735		(76		)	31,110

Basic earnings (loss) per common share	$	1.01										$	1.07
Diluted earnings (loss) per common share	1.00											1.05



	Nine Months Ended September 30, 2018
(In thousands, except per share amounts)	Masonite		Graham & Maiman		DW3		Historical Sales to 2018 Acquisitions			Pro Forma
Net sales	$	1,641,753	$	26,887	$	4,918	$	(651	)	$	1,672,907
Net income (loss) attributable to Masonite	80,363		89		81		(60		)	80,473

Basic earnings (loss) per common share	$	2.90								$	2.90
Diluted earnings (loss) per common share	2.85									2.85



	Nine Months Ended October 1, 2017
(In thousands, except per share amounts)	Masonite		Graham & Maiman		DW3		A&F		Historical Sales to 2018 and 2017 Acquisitions			Pro Forma
Net sales	$	1,524,425	$	50,617	$	41,494	$	11,104	$	(4,361	)	$	1,623,279
Net income (loss) attributable to Masonite	79,927		241		1,229		1,299		(244		)	82,452

Basic earnings (loss) per common share	$	2.70										$	2.79
Diluted earnings (loss) per common share	2.65											2.74

Disposition

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 nine months ended October 1, 2017.

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3. Accounts Receivable

Our customers consist mainly of wholesale distributors, dealers, homebuilders and retail home centers. Our ten largest customers accounted for 53.3% and 56.2% of total accounts receivable as of September 30, 2018, and December 31, 2017, respectively. Our largest customer, The Home Depot, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of September 30, 2018, and December 31, 2017. Our second largest customer, Lowe's Co. Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of December 31, 2017. The allowance for doubtful accounts balance was $2.1 million and $1.8 million as of September 30, 2018, and December 31, 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).

4. Inventories

The amounts of inventory on hand were as follows as of the dates indicated:



(In thousands)	September 30, 2018			December 31, 2017
Raw materials	$	179,625		$	172,960
Finished goods	78,148			68,851
Provision for obsolete or aged inventory	(8,031		)	(7,769		)
Inventories, net	$	249,742		$	234,042

5. 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)	September 30, 2018			December 31, 2017
Land	$	29,146		$	26,790
Buildings	179,542			176,077
Machinery and equipment	704,177			661,026
Property, plant and equipment, gross	912,865			863,893
Accumulated depreciation	(318,584		)	(290,334		)
Property, plant and equipment, net	$	594,281		$	573,559

Total depreciation expense was $15.7 million and $43.3 million in the three and nine months ended September 30, 2018, respectively, and $14.2 million and $43.5 million in the three and nine months ended October 1, 2017, respectively. Depreciation expense is included primarily within cost of goods sold in the condensed consolidated statements of comprehensive income (loss).

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6. 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 31, 2017	$	2,867		$	35,431		$	100,151		$	138,449
Goodwill from 2018 acquisitions	—			33,623			10,996			44,619
Foreign exchange fluctuations	(12		)	(4,084		)	(110		)	(4,206		)
September 30, 2018	$	2,855		$	64,970		$	111,037		$	178,862

The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:



	September 30, 2018
(In thousands)	Cost		Accumulated Amortization			Translation Adjustment			Net Book Value
Definite life intangible assets:
Customer relationships	$	212,282	$	(94,852	)	$	(16,776	)	$	100,654
Patents	34,068		(23,330		)	(908		)	9,830
Software	35,784		(32,379		)	(197		)	3,208
Trademarks and tradenames	15,155		(3,513		)	(943		)	10,699
Other	12,340		(10,594		)	(1,665		)	81
Total definite life intangible assets	309,629		(164,668		)	(20,489		)	124,472
Indefinite life intangible assets:
Trademarks and tradenames	108,572		—			(10,387		)	98,185
Total intangible assets	$	418,201	$	(164,668	)	$	(30,876	)	$	222,657



	December 31, 2017
(In thousands)	Cost		Accumulated Amortization			Translation Adjustment			Net Book Value
Definite life intangible assets:
Customer relationships	$	160,327	$	(79,628	)	$	(11,338	)	$	69,361
Patents	31,999		(21,768		)	(686		)	9,545
Software	33,574		(31,183		)	(190		)	2,201
Other	15,246		(11,836		)	(1,781		)	1,629
Total definite life intangible assets	241,146		(144,415		)	(13,995		)	82,736
Indefinite life intangible assets:
Trademarks and tradenames	108,572		—			(8,824		)	99,748
Total intangible assets	$	349,718	$	(144,415	)	$	(22,819	)	$	182,484

Amortization of intangible assets was $7.0 million and $20.3 million for the three and nine months ended September 30, 2018, respectively, and $6.0 million and $17.9 million for the three and nine months ended October 1, 2017, respectively. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).

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(Unaudited)

The estimated future amortization of intangible assets with definite lives as of September 30, 2018, is as follows:



(In thousands)
Fiscal year:
2018 (remaining three months)	$	6,487
2019	25,511
2020	20,124
2021	16,902
2022	13,434

7. Accrued Expenses

The details of our accrued expenses were as follows as of the dates indicated:



(In thousands)	September 30, 2018		December 31, 2017
Accrued payroll	$	43,556	$	38,296
Accrued rebates	39,884		34,488
Accrued interest	3,277		10,688
Other accruals	46,765		43,287
Total accrued expenses	$	133,482	$	126,759