☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-11796
____________________________
Masonite International Corporation
(Exact name of registrant as specified in its charter)
____________________________
British Columbia, Canada
98-0377314
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2771 Rutherford Road
Concord, OntarioL4K 2N6Canada
(Address of principal executive offices)
(800) 895-2723
(Registrant's telephone number, including area code)
____________________________
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (no par value)
DOOR
New York Stock Exchange
(Title of class)
(Trading symbol)
(Name of exchange on which registered)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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☑ 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
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
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 ☑
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 24,502,967 shares of Common Stock, no par value, as of October 30, 2020.
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," "could," "will," "would," "should," "expect," "believes," "outlook," "predict," "forecast," "objective," "remain," "anticipate," "estimate," "potential," "continue," "plan," "project," "targeting," 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 29, 2019, 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:
•downward trends in our end markets and in economic conditions;
•scale and scope of the current coronavirus ("COVID-19") pandemic and its impact on our operations, customer demand and supply chain;
•reduced levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity due to increases in mortgage rates, changes in mortgage interest deductions and related tax changes and reduced availability of financing;
•competition;
•the continued success of, and our ability to maintain relationships with, certain key customers in light of price increases and customer concentration and consolidation;
•tariffs and evolving trade policy and friction between the United States and other countries, including China, and the impact of anti-dumping and countervailing trade cases;
•increases in prices of raw materials and fuel;
•increases in labor costs, the availability of labor or labor relations (i.e., disruptions, strikes or work stoppages);
•our ability to manage our operations including anticipating demand for our products, managing disruptions in our operations, managing manufacturing realignments (including related restructuring charges), managing customer credit risk and successful integration of acquisitions;
•the continuous operation of our information technology and enterprise resource planning systems and management of potential cyber security threats and attacks;
•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 asset-based revolving credit facility ("ABL Facility");
•political, economic and other risks that arise from operating a multinational business;
•uncertainty relating to the United Kingdom's exit from the European Union;
•fluctuating exchange and interest rates;
•our ability to innovate and keep pace with technological developments;
•product liability claims and product recalls;
•retention of key management personnel;
•limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and our ABL Facility; and
•environmental and other government regulations, including the United States Foreign Corrupt Practices Act ("FCPA"), and any changes in such regulations.
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.
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
ASSETS
September 27, 2020
December 29, 2019
Current assets:
Cash and cash equivalents
$
300,797
$
166,964
Restricted cash
10,560
10,644
Accounts receivable, net
321,504
276,208
Inventories, net
243,150
242,230
Prepaid expenses
29,965
33,190
Income taxes receivable
2,360
4,819
Total current assets
908,336
734,055
Property, plant and equipment, net
609,490
625,585
Operating lease right-of-use assets
127,506
121,367
Investment in equity investees
13,797
16,100
Goodwill
131,827
184,192
Intangible assets, net
167,631
184,532
Deferred income taxes
19,455
25,945
Other assets
49,034
44,808
Total assets
$
2,027,076
$
1,936,584
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
95,231
$
84,912
Accrued expenses
235,006
180,405
Income taxes payable
11,795
2,350
Total current liabilities
342,032
267,667
Long-term debt
791,882
790,984
Long-term operating lease liabilities
118,354
110,497
Deferred income taxes
74,389
83,465
Other liabilities
54,917
47,109
Total liabilities
1,381,574
1,299,722
Commitments and Contingencies (Note 7)
Equity:
Share capital: unlimited shares authorized, no par value, 24,502,967 and 24,869,921 shares issued and outstanding as of September 27, 2020, and December 29, 2019, respectively
554,673
558,514
Additional paid-in capital
219,307
216,584
Accumulated earnings (deficit)
28
(20,047)
Accumulated other comprehensive loss
(139,468)
(130,169)
Total equity attributable to Masonite
634,540
624,882
Equity attributable to non-controlling interests
10,962
11,980
Total equity
645,502
636,862
Total liabilities and equity
$
2,027,076
$
1,936,584
See accompanying notes to the condensed consolidated financial statements.
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 62 manufacturing and distribution facilities in eight countries and sells doors to customers throughout the world with our largest markets being 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 29, 2019, 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-week periods are referred to as three-month periods. Our 2020 fiscal year, which ends on January 3, 2021, will contain 53 weeks of operating results, with the additional week occurring in the fourth quarter.
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 2019 audited consolidated financial statements, other than as noted below.
Adoption of Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)”, which replaced the incurred loss methodology for recognizing credit losses with a current expected credit losses model. This standard applied to most financial assets, including trade receivables. Our prior accounts receivable policy is described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. We adopted the new guidance using a modified retrospective approach as of December 30, 2019, the beginning of fiscal year 2020, and the adoption did not have a material impact on our financial statements and no adjustment was necessary to retained earnings on December 30, 2019.
The adoption of the standard resulted in a change in accounting policy for accounts receivable. Our new accounting policy for accounts receivable is presented below.
Accounts Receivable
We record accounts receivable as our products are received by our customers. Our customers are primarily retailers, distributors and contractors. We record an allowance for credit losses at the time that accounts receivable are initially recorded based on our historical write-off experience and the current economic environment as well as our
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
expectations of future economic conditions. We reassess the allowance at each reporting date. When it becomes apparent, based on age or customer circumstances, that such amounts will not be collected, they are charged to the allowance. Payments subsequently received are credited to the credit loss expense account included within selling, general and administration expenses in the consolidated statements of comprehensive income (loss). Generally, we do not require collateral for our accounts receivable.
Other Recent Accounting Pronouncements not yet Adopted
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.
In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans," which amended ASC 715, "Compensation—Retirement Benefits." This standard is applicable for employers that sponsor defined benefit pension or other postretirement plans, and eliminates disclosures no longer considered cost beneficial, clarifies specific disclosure requirements for entities that provide aggregate disclosures for two or more plans and adds requirements for explanations for significant gains and losses related to changes in benefit obligations. The guidance will be effective for annual periods ending after December 15, 2020; 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.
2. Acquisitions and Divestitures
Acquisitions
On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for the acquisition are not presented as they were not material for any period presented.
On August 29, 2019, we completed the acquisition of TOPDOORS, s.r.o. ("Top Doors") based in the Czech Republic for cash consideration of $1.8 million, net of cash acquired. Top Doors is a specialist manufacturer of door frames. The $1.1 million excess purchase price over the fair value of net assets acquired was allocated to goodwill in our Europe segment. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for Top Doors are not presented as they were not material for any period presented.
Divestitures
During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries. The total charge consists of $2.3 million relating to the recognition of cumulative translation adjustment out of accumulated other comprehensive loss and $0.2 million relating to the write-off of net assets and other professional fees.
On December 13, 2019, we completed the sale of all of the capital stock of Window Widgets Limited ("WW") for consideration of $1.2 million, net of cash disposed. We have had no continuing involvement with WW subsequent to the sale. The divestiture of this business resulted in a loss on disposal of subsidiaries of $9.7 million, which was recognized in the fourth quarter of 2019 in the Europe segment. The total charge consists of $8.3 million relating to the write-off of the assets sold and other professional fees and $1.4 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
On March 21, 2019, we completed the sale of all of the capital stock of Performance Doorset Solutions Limited ("PDS") for nominal consideration. We have had no continuing involvement with PDS subsequent to the sale, and the purchasers are not considered to be a related party. The divestiture of this business resulted in a loss on disposal of subsidiaries of $4.6 million, which was recognized in the first quarter of 2019 in the Europe segment. The total charge
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
consists of $3.6 million relating to the write-off of the net assets sold and other professional fees and $1.0 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
3. Accounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our ten largest customers accounted for 55.9% and 44.9% of total accounts receivable as of September 27, 2020, and December 29, 2019, respectively. Our largest customer, The Home Depot, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of September 27, 2020, and December 29, 2019. The allowance for doubtful accounts balance was $2.4 million and $1.8 million as of September 27, 2020, and December 29, 2019, 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 who 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, if any, 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 27, 2020
December 29, 2019
Raw materials
$
175,610
$
179,155
Finished goods
74,490
70,211
Provision for obsolete or aged inventory
(6,950)
(7,136)
Inventories, net
$
243,150
$
242,230
5. Accrued Expenses
The details of our accrued expenses were as follows as of the dates indicated:
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
6. Long-Term Debt
(In thousands)
September 27, 2020
December 29, 2019
5.375% senior unsecured notes due 2028
$
500,000
$
500,000
5.750% senior unsecured notes due 2026
300,000
300,000
Debt issuance costs
(9,018)
(9,985)
Other long-term debt
900
969
Total long-term debt
$
791,882
$
790,984
Interest expense related to our consolidated indebtedness under senior unsecured notes was $11.4 million and $34.1 million for the three and nine months ended September 27, 2020, respectively, and $12.0 million and $34.8 million for the three and nine months ended September 29, 2019, respectively.
5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes bear interest at 5.375%, payable in cash semiannually in arrears on February 1 and August 1 of each year and are due February 1, 2028. The 2028 Notes were issued at par. The net proceeds from issuance of the 2028 Notes, together with available cash balances, were used to redeem the remaining $500.0 million aggregate principal amount of similar senior unsecured notes, including the payment of related premiums, fees and expenses.
Information concerning obligations under the 2028 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the indenture governing the 2028 Notes.
5.750% Senior Notes due 2026
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"). The 2026 Notes bear interest at 5.750% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due September 15, 2026. The 2026 Notes were issued at par.
Information concerning obligations under the 2026 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the indenture governing the 2026 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the United States, Canadian or United Kingdom Base Rate (each as defined in the credit agreement relating to the ABL Facility, the "Amended and Restated Credit Agreement") plus a margin ranging from 0.25% to 0.50% per annum, or (ii) the Adjusted LIBO Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.50% 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 by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $205.6 million under our ABL Facility and there were no amounts outstanding as of September 27, 2020.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7. Commitments and Contingencies
The following discussion describes material developments in previously disclosed legal proceedings that occurred since December 29, 2019. Refer to Note 10. Commitments and Contingencies in the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 29, 2019, for a full description of the previously disclosed legal proceedings.
Class Action Proceedings - United States
With respect to the putative antitrust class action cases pending in the Eastern District of Virginia, on August 31, 2020, the Company, and its co-defendant JELD-WEN, Inc., entered into a settlement agreement with the named plaintiffs representing a class of direct purchasers of interior molded and pre-hung doors included in In re: Interior Molded Doors Direct Purchaser Antitrust Litigation, a consolidated antitrust class action pending in the United States District Court for the Eastern District of Virginia (the “Court”). As part of the direct purchaser settlement, each defendant has agreed to make a payment of $28.0 million to the named plaintiffs and the settlement class in exchange for a full release of claims through the date of preliminary Court approval. Also, on September 4, 2020, the Company and its co-defendant, JELD-WEN, Inc., entered into a settlement agreement with the named plaintiffs representing a class of indirect purchasers of interior molded and pre-hung doors included in In re: Interior Molded Doors Indirect Purchaser Antitrust Litigation. As part of the indirect purchaser settlement, each defendant has agreed to make a payment of $9.75 million to the named plaintiffs and the settlement class in exchange for a full release of claims through the date of execution of the settlement agreement. Both settlements received preliminary Court approval on October 8, 2020, and are subject to final Court approval and other conditions set forth in the respective settlement agreements. In the settlement agreements the Company denied any wrongdoing. During the three months ended September 27, 2020, we recorded a legal reserve of $37.75 million in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).
Class Action Proceedings - Canada
In addition, on May 19, 2020, an intended class proceeding was commenced in the Province of Québec, Canada naming as defendants Masonite Corporation, Corporation Internationale Masonite, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The intended class proceeding seeks damages, punitive damages, and other relief. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing involving interior molded doors. This proceeding is at a very early stage and has not been certified. We have not recognized an expense related to damages in connection with this matter because, although an adverse outcome is reasonably possible, the amount or range of any potential loss cannot be reasonably estimated.
Also, on October 2, 2020, an intended class proceeding was commenced in the Federal Court of Canada naming as defendants Masonite International Corporation, Masonite Corporation, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The intended class proceeding seeks damages, punitive damages, and other relief. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing involving interior molded doors. This proceeding is at a very early stage and has not been certified. We have not recognized an expense related to damages in connection with this matter because, although an adverse outcome is reasonably possible, the amount or range of any potential loss cannot be reasonably estimated.
While we intend to defend against these claims vigorously, there can be no assurance that the ultimate resolution of this litigation will not have a material, adverse effect on our consolidated financial condition or results of operations.
General
In addition to the above, from time to time, we are involved in various claims and legal actions. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
8. Share Based Compensation Plans
Share based compensation expense was $6.3 million and $13.5 million for the three and nine months ended September 27, 2020, respectively, and $3.7 million and $8.5 million for the three and nine months ended September 29, 2019, respectively. As of September 27, 2020, the total remaining unrecognized compensation expense related to share based compensation amounted to $18.7 million, which will be amortized over the weighted average remaining requisite service period of 1.6 years.
Equity Incentive Plans
Our equity incentive plans under the 2009 Plan and the 2012 Plan are described in detail and defined in our Annual Report on Form 10-K for the year ended December 29, 2019. 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 canceled. As of September 27, 2020, there were 728,990 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, which is further described in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, the liability and asset relating to deferred compensation had a fair value of $6.4 million and $6.2 million, respectively. As of September 27, 2020, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs") to certain employees under both the 2009 Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of three years, have a life of ten years and settle in common shares. It is assumed that all time-based SARs will vest. We recognize forfeitures of SARs in the period in which they occur.
The total fair value of SARs vested was $1.0 million during the nine months ended September 27, 2020.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The value of SARs granted is determined using the Black-Scholes-Merton valuation model, and the corresponding expense is recognized over the average requisite service period of 2.0 years for all periods presented. Expected volatility is based upon the historical volatility of our 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:
2020 Grants
SAR value (model conclusion)
$
20.56
Risk-free rate
1.2
%
Expected dividend yield
0.0
%
Expected volatility
22.6
%
Expected term (years)
6.0
Restricted Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under both the 2009 Plan and the 2012 Plan. The RSUs confer the right to receive shares of our common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant and is recognized over the requisite service period. The RSUs vest over a maximum of three years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be delivered once the blackout restriction has been lifted. It is assumed that all time-based RSUs will vest. We recognize forfeitures of RSUs in the period in which they occur.
Nine Months Ended
September 27, 2020
Total Restricted Stock Units Outstanding
Weighted Average Grant Date Fair Value
Outstanding, beginning of period
523,207
$
59.58
Granted
211,000
79.00
Performance adjustment (1)
(59,936)
67.50
Delivered
(110,561)
Withheld to cover (2)
(15,620)
Forfeited
(53,544)
Outstanding, end of period
494,546
$
67.42
____________
(1) Performance-based RSUs are presented as outstanding, granted and forfeited in the table above assuming targets are met and the awards pay out at 100%. These awards are settled with payouts ranging from zero to 200% of the target award value depending on achievement. The performance adjustment represents the difference in shares ultimately awarded due to performance attainment above or below target.
(2) 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 two-thirds of the RSUs granted during the nine months ended September 27, 2020, 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 expense for RSUs granted during the nine months ended September 27,
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
2020, is being recognized over the weighted average requisite service period of 2.2 years. 126,181 RSUs vested during the nine months ended September 27, 2020, at a fair value of $7.6 million.
9. Restructuring Costs
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and will continue through 2020. Additionally, the plan was determined to be a triggering event requiring a test of the carrying value of the definite-lived assets relating to the divestitures, as further described in Note 10. As of September 27, 2020, we expect to incur approximately $3 million to $4 million of additional charges related to the 2019 Plan.
During the fourth quarter of 2018, we began implementing a plan to reorganize and consolidate certain aspects of our United Kingdom head office function and optimize our portfolio by divesting non-core assets to enable more effective and consistent business processes in the Europe segment. In addition, in the North American Residential segment we announced a new facility that will optimize and expand capacity through increased automation, which resulted in the closure of one existing facility and related headcount reductions beginning in the second quarter of 2019 (collectively, the "2018 Plan"). Costs associated with the 2018 Plan include severance, retention and closure charges and continued throughout 2019. As of September 27, 2020, we do not expect to incur any material future charges related to the 2018 Plan.
The following tables summarize the restructuring charges recorded for the periods indicated:
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Nine Months Ended September 29, 2019
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
2019 Plan
$
3,755
$
336
$
518
$
403
$
5,012
2018 Plan
1,199
884
—
—
2,083
Total Restructuring Costs
$
4,954
$
1,220
$
518
$
403
$
7,095
Cumulative Amount Incurred Through September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
2019 Plan
$
8,581
$
359
$
1,536
$
1,501
$
11,977
2018 Plan
2,132
2,275
—
—
4,407
Total Restructuring Costs
$
10,713
$
2,634
$
1,536
$
1,501
$
16,384
The changes in the accrual for restructuring by activity were as follows for the periods indicated:
(In thousands)
December 29, 2019
Severance
Closure Costs
Cash Payments
September 27, 2020
2019 Plan
$
1,535
$
1,073
$
3,524
$
(5,475)
$
657
2018 Plan
—
151
236
(387)
—
Total
$
1,535
$
1,224
$
3,760
$
(5,862)
$
657
(In thousands)
December 30, 2018
Severance
Closure Costs
Cash Payments
September 29, 2019
2019 Plan
$
—
$
3,393
$
1,619
$
(4,185)
$
827
2018 Plan
596
1,798
285
(2,653)
26
Other
58
—
—
(58)
—
Total
$
654
$
5,191
$
1,904
$
(6,896)
$
853
10. Asset Impairment
During the three months ended September 27, 2020, we determined the continued decreased demand in the Architectural door market due to the impact of COVID-19 in the current year, along with the uncertainty of the duration and intensity of the pandemic on the Architectural door market for future periods were indicators that goodwill impairment was present in the Architectural reporting unit. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis and market approach, which utilizes Level 3 fair value inputs, and resulted in a goodwill impairment charge of $51.5 million. The charge represents the amount by which the carrying value of the Architectural reporting unit exceeded its fair value and reduced the goodwill balance in the Architectural reporting unit from $111.0 million to $59.5 million.
During the nine months ended September 29, 2019, we recognized asset impairment charges of $13.8 million related to two asset groups in the North American Residential segment, as a result of announced plant closures under the 2019 Plan. This amount was determined based upon the excess of the asset groups' carrying values of property, plant and equipment and operating lease right-of-use assets over the respective fair values of such assets, determined using a discounted cash flows approach for each asset group. Each of these valuations was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as established by the FASB's Fair Value Framework. The Level 3
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
unobservable inputs include an estimate of future cash flows and the salvage value for each of the asset groups. The fair value of the asset groups was determined to be $9.4 million, compared to a book value of $23.2 million, with the difference representing the asset impairment charges recorded in the condensed consolidated statements of comprehensive income (loss).
11. Income Taxes
The effective tax rate differs from the Canadian statutory rate of 26.7% primarily due to nondeductible goodwill impairment charges related to prior stock acquisitions within the Architectural reporting unit, mix of earnings in foreign jurisdictions that are subject to tax rates which differ from the Canadian statutory rate and changes in our valuation allowances. In addition, we recognized $0.1 million and $0.9 million of income tax benefit due to the exercise and delivery of share-based awards during the three and nine months ended September 27, 2020, respectively, compared to $0.1 million of income tax benefit due to the exercise and delivery of share-based awards during the three and nine months ended September 29, 2019.
For the nine months ended September 27, 2020, we have calculated the provision for income taxes by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period.
12. 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 and SARs outstanding during the period.
(In thousands, except share and per share information)
Three Months Ended
Nine Months Ended
September 27, 2020
September 29, 2019
September 27, 2020
September 29, 2019
Net income (loss) attributable to Masonite
$
(21,766)
$
14,969
$
42,116
$
43,000
Shares used in computing basic earnings per share
24,495,760
24,944,126
24,607,926
25,215,034
Effect of dilutive securities:
Incremental shares issuable under share compensation plans
—
299,554
332,339
306,663
Shares used in computing diluted earnings per share
24,495,760
25,243,680
24,940,265
25,521,697
Basic earnings (loss) per common share attributable to Masonite
$
(0.89)
$
0.60
$
1.71
$
1.71
Diluted earnings (loss) per common share attributable to Masonite
$
(0.89)
$
0.59
$
1.69
$
1.68
Anti-dilutive instruments excluded from diluted earnings per common share
417,309
283,966
137,822
295,879
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs 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.
13. Segment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment. In addition to similar economic
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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);
• other items;
• loss (income) from discontinued operations, net of tax; and
• net income (loss) attributable to non-controlling interest.
The definition of Adjusted EBITDA was updated in the third quarter of 2020 to exclude other items as these charges are not part of our underlying business performance. This change had no impact to Adjusted EBITDA for the three and nine months ended September 29, 2019. This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indentures governing the 2028 Notes and 2026 Notes and the credit agreement governing the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
Certain information with respect to segments is as follows for the periods indicated:
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A reconciliation of our net income attributable to Masonite to consolidated Adjusted EBITDA is set forth as follows for the periods indicated:
Three Months Ended
Nine Months Ended
(In thousands)
September 27, 2020
September 29, 2019
September 27, 2020
September 29, 2019
Net income (loss) attributable to Masonite
$
(21,766)
$
14,969
$
42,116
$
43,000
Plus:
Depreciation
17,881
16,359
50,742
52,845
Amortization
5,519
7,054
17,900
21,980
Share based compensation expense
6,299
3,695
13,509
8,468
Loss (gain) on disposal of property, plant and equipment
(416)
705
3,629
4,940
Restructuring costs
1,895
1,994
4,984
7,095
Asset impairment
51,515
—
51,515
13,767
Loss on disposal of subsidiaries
—
—
2,091
4,605
Interest expense, net
11,805
11,909
34,911
34,393
Loss on extinguishment of debt
—
14,523
—
14,523
Other expense (income), net
(1,953)
(824)
(3,350)
(2,410)
Income tax expense
(804)
4,334
23,522
14,685
Other items (1)
37,750
—
37,750
—
Net income attributable to non-controlling interest
1,275
1,126
3,090
3,165
Adjusted EBITDA
$
109,000
$
75,844
$
282,409
$
221,056
__________
(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the previously disclosed settlement of U.S. class action litigation in the three and nine months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss). Refer to Note 7. Commitments and Contingencies for additional information.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
14. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)
A rollforward of the components of accumulated other comprehensive loss is as follows for the periods indicated:
Three Months Ended
Nine Months Ended
(In thousands)
September 27, 2020
September 29, 2019
September 27, 2020
September 29, 2019
Accumulated foreign currency translation losses, beginning of period
$
(136,969)
$
(121,440)
$
(113,336)
$
(129,930)
Foreign currency translation gain (loss)
14,137
(12,733)
(12,072)
(4,921)
Income tax benefit (expense) on foreign currency translation gain
19
(10)
(8)
15
Cumulative translation adjustment recognized upon deconsolidation of subsidiary
—
—
2,254
1,001
Less: foreign currency translation gain (loss) attributable to non-controlling interest
206
(122)
(143)
226
Accumulated foreign currency translation losses, end of period
(123,019)
(134,061)
(123,019)
(134,061)
Accumulated pension and other post-retirement adjustments, beginning of period
(16,578)
(22,392)
(16,833)
(22,989)
Amortization of actuarial net losses
173
404
518
1,211
Income tax expense on amortization of actuarial net losses
(44)
(104)
(134)
(314)
Accumulated pension and other post-retirement adjustments
(16,449)
(22,092)
(16,449)
(22,092)
Accumulated other comprehensive loss
$
(139,468)
$
(156,153)
$
(139,468)
$
(156,153)
Other comprehensive income (loss), net of tax
$
14,285
$
(12,443)
$
(9,442)
$
(3,008)
Less: other comprehensive income (loss) attributable to non-controlling interest
206
(122)
(143)
226
Other comprehensive income (loss) attributable to Masonite
$
14,079
$
(12,321)
$
(9,299)
$
(3,234)
Cumulative translation adjustments are reclassified out of accumulated other comprehensive loss into loss on disposal of subsidiaries in the condensed consolidated statements of comprehensive income (loss). Actuarial net losses are reclassified out of accumulated other comprehensive loss into cost of goods sold in the condensed consolidated statements of comprehensive income (loss).
Foreign currency translation gains as a result of translating our foreign assets and liabilities into U.S. dollars during the three months ended September 27, 2020, were $14.1 million, primarily driven by the strengthening of the Pound Sterling, the Canadian Dollar and the Euro in comparison to the U.S. Dollar during the period. During the nine months ended September 27, 2020, foreign currency translation losses were $12.1 million, primarily driven by the weakening of the Pound Sterling, the Canadian Dollar and the Mexican Peso, partially offset by strengthening of the Euro in comparison to the U.S. Dollar during the period.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
15. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated:
Nine Months Ended
(In thousands)
September 27, 2020
September 29, 2019
Transactions involving cash:
Interest paid
$
45,147
$
44,230
Interest received
956
2,058
Income taxes paid
14,756
10,731
Income tax refunds
791
69
Cash paid for operating lease liabilities
20,986
19,636
Cash paid for finance lease liabilities
957
—
Non-cash transactions from operating activities:
Right-of-use assets acquired under operating leases
27,884
49,932
The following reconciles total cash, cash equivalents and restricted cash as of the dates indicated:
September 27, 2020
December 29, 2019
Cash and cash equivalents
$
300,797
$
166,964
Restricted cash
10,560
10,644
Total cash, cash equivalents and restricted cash
$
311,357
$
177,608
Property, plant and equipment additions in accounts payable were $3.5 million and $6.3 million as of September 27, 2020, and December 29, 2019, respectively.
16. 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 values and carrying values of our long-term debt instruments were as follows for the periods indicated:
September 27, 2020
December 29, 2019
(In thousands)
Fair Value
Carrying Value
Fair Value
Carrying Value
5.375% senior unsecured notes due 2028
$
531,353
$
494,207
$
529,105
$
493,648
5.750% senior unsecured notes due 2026
$
313,320
$
296,775
$
318,846
$
296,367
These estimates are based on market quotes and calculations based on current market rates available to us and are 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the three and nine months ended September 27, 2020, and September 29, 2019. In this MD&A, "Masonite," "we," "us," "our" and the "Company" refer to Masonite International Corporation and its subsidiaries.
This discussion should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended December 29, 2019. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements," "Item 1A. Risk Factors" elsewhere in this Quarterly Report on Form 10-Q and the Company's Quarterly Report on Form 10-Q for the first quarter of 2020. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties.
Overview
We are a leading global designer, manufacturer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order to better serve our customers and create sustainable competitive advantages, we focus on developing innovative products, advanced manufacturing capabilities and technology-driven sales and service solutions.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems.
We operate 62 manufacturing and distribution facilities in eight countries in North America, South America, Europe and Asia, which are strategically located to serve our customers through multiple distribution channels. These distribution channels include: (i) direct distribution to retail home center customers and homebuilders; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous door fabrication facilities provide value-added fabrication and logistical services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. In the nine months ended September 27, 2020, we generated net sales of $1,185.6 million or 72.4%, $174.9 million or 10.7% and $263.6 million or 16.1% in our North American Residential, Europe and Architectural segments, respectively.
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in December 2019, and in March 2020 was declared a pandemic by the World Health Organization. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted our business globally. Our first priority with regard to the COVID-19 pandemic is to do everything we can to ensure the safety, health and welfare of our employees, customers, suppliers and others with whom we partner in our business activities. Through the use of appropriate risk mitigation and safety practices at our facilities, we are endeavoring to maintain operations to continue supplying the industry during this uncertain time, recognizing the important role our customers and our products play in construction related to providing residential shelter and health care services.
During 2020, a number of countries, provinces, states and municipalities issued orders temporarily requiring persons who were not engaged in essential activities and businesses to remain at home. Additionally, some jurisdictions without stay-at-home orders required non-essential businesses to close. As a result, some of our facilities were temporarily shut down due to the impact of these government orders. For example, our United Kingdom facilities closed on March 27, 2020, and did not reopen until May 2020. Additionally, local or regional hotspots of the pandemic resulted in other locations being temporarily idled due to the impacts of COVID-19. We estimate that nearly one-half of our base volume decline in the second quarter of 2020 was due to the closure of our manufacturing facilities as a result of COVID-19 in the United Kingdom and Ireland.
During the third quarter, production levels began to stabilize at many of our manufacturing facilities, but local or regional hotspots of the pandemic continued to result in pockets of absenteeism resulting in reduced production and one location being temporarily idled. While the direct financial impact of COVID-19 was much lower than what we experienced in the second quarter, the pandemic had and continues to have varying impacts on our reportable segments. For example, the impact of COVID-19 on demand in the Architectural door market in the current year and expected impacts to future periods contributed to an impairment of that reporting unit’s goodwill. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. These impacts include, but are not limited to, the duration, spread, severity and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our employees, operations, customers, suppliers and supply chain, the remedial actions and stimulus measures adopted by federal, state and local governments and the extent to which normal economic and operating conditions can resume.
Product Demand
There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
•the strength of the economy;
•employment rates and consumer confidence;
•the amount and type of residential and commercial construction;
•housing sales and home values;
•the age of existing home stock, home vacancy rates and foreclosures;
•non-residential building occupancy rates;
•increases in the cost of raw materials or wages or any shortage in supplies or labor;
•the availability and cost of credit; and
•demographic factors such as immigration and migration of the population and trends in household formation.
The building products industry is highly competitive and we therefore face pressure on sales prices of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. In fiscal year 2019, our top ten customers together accounted for approximately 43% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 17% of our net sales. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.
Organizational Restructuring
Over the past several years, we have engaged in a series of restructuring programs related to exiting certain geographies and non-core businesses, consolidating certain internal support functions and engaging in other actions designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and lease termination costs. Management continues to evaluate our business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and will continue through 2020. Additionally, the plan was determined to be a triggering event requiring a test of the carrying value of the definite-lived assets relating to the divestitures, as further described in Note 9. As of September 27, 2020, we expect to incur approximately $3 million to $4 million of additional charges related to the 2019 Plan. Once fully implemented, the actions taken as part of the 2019 Plan are expected to increase our annual earnings and cash flows by approximately $17 million to $21 million.
During the fourth quarter of 2018, we began implementing a plan to reorganize and consolidate certain aspects of our United Kingdom head office function and optimize our portfolio by divesting non-core assets to enable more effective and consistent business processes in the Europe segment. In addition, in the North American Residential segment we announced a new facility that will optimize and expand capacity through increased automation, which resulted in the closure of one existing facility and related headcount reductions beginning in the second quarter of 2019 (collectively, the "2018 Plan"). Costs associated with the 2018 Plan include severance, retention and closure charges and continued throughout 2019. Additionally, the plan to divest non-core assets was determined to be a triggering event requiring a test of the carrying value of the definite-lived assets relating to the divestitures, as further described in Note 9. The actions taken as part of the 2018 Plan are expected to increase our annual earnings and cash flows by approximately $6 million.
An increase in inflation could have a significant impact on the cost of our raw material inputs. Wage inflation, increased prices for raw materials or finished goods used in our products, tariffs and/or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, margins and net sales, particularly if we are not able to pass these incurred costs on to our customers.Additionally, anti-dumping and countervailing duty trade cases, such as the January 8, 2020, Coalition of American Millwork Producers anti-dumping and countervailing duty petitions against Wood Mouldings and Millwork Products from Brazil and China, is expected to impact our business and results of operations.
Seasonality
Our business is moderately seasonal and our net sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity.
Acquisitions and Divestitures
We are pursuing a strategic initiative of optimizing our global business portfolio. As part of this strategy, in the last several years we have pursued strategic acquisitions targeting companies who produce components for our existing operations, manufacture niche products and provide value-added services. Additionally, we target companies with strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. We also continuously analyze our operations to determine which businesses, market channels and products create the most value for our customers and acceptable returns for our shareholders.
Acquisitions
•On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million.
•On August 29, 2019, we completed the acquisition of TOPDOORS, s.r.o. ("Top Doors") based in the Czech Republic for cash consideration of $1.8 million, net of cash acquired, following a post-closing adjustment. Top Doors is a specialist manufacturer of door frames.
Divestitures
•During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries.
•On December 13, 2019, we completed the sale of all the capital stock of Window Widgets Limited ("WW"), a leading United Kingdom provider of high quality window systems, for consideration of $1.2 million, net of cash disposed.
•On March 21, 2019, we completed the sale of all of the capital stock of Performance Doorset Solutions Limited ("PDS"), a leading supplier of custom doors and millwork in the United Kingdom, for nominal consideration. The divestiture of this business resulted in a loss on deconsolidation of $4.6 million, which was recognized during the first quarter of 2019 in the Europe segment.
Selling, general and administration expenses as a % of net sales
20.1
%
14.0
%
16.6
%
14.2
%
Restructuring costs
1,895
1,994
4,984
7,095
Asset impairment
51,515
—
51,515
13,767
Loss on disposal of subsidiaries
—
—
2,091
4,605
Operating income (loss)
(11,443)
46,037
100,289
107,356
Interest expense, net
11,805
11,909
34,911
34,393
Loss on extinguishment of debt
—
14,523
—
14,523
Other expense (income), net
(1,953)
(824)
(3,350)
(2,410)
Income (loss) before income tax expense
(21,295)
20,429
68,728
60,850
Income tax expense (benefit)
(804)
4,334
23,522
14,685
Net income (loss)
(20,491)
16,095
45,206
46,165
Less: net income attributable to non-controlling interests
1,275
1,126
3,090
3,165
Net income (loss) attributable to Masonite
$
(21,766)
$
14,969
$
42,116
$
43,000
Three Months Ended September 27, 2020, Compared with Three Months Ended September 29, 2019
Net Sales
Net sales in the three months ended September 27, 2020, were $587.7 million, an increase of $35.5 million or 6.4% from $552.2 million in the three months ended September 29, 2019. Net sales in the third quarter of 2020 were positively impacted by $1.0 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $34.5 million or 6.2% due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Average unit price increased net sales in the third quarter of 2020 by $51.2 million or 9.3% compared to the 2019 period. Net sales of components and other products to external customers increased $2.3 million or 0.4% in the third quarter of 2020 compared to the 2019 period. Lower volumes excluding the incremental impact of acquisitions and divestitures ("base volume") decreased net sales by $14.6 million or 2.6% in the third quarter of 2020 compared to the 2019 period. Our 2019 divestiture, net of acquisition, decreased net sales by $4.4 million or 0.8% in the third quarter of 2020.
Net Sales and Percentage of Net Sales by Reportable Segment
Three Months Ended September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Sales
$
421,186
$
75,192
$
92,021
$
6,100
$
594,499
Intersegment sales
(654)
(910)
(5,283)
—
(6,847)
Net sales to external customers
$
420,532
$
74,282
$
86,738
$
6,100
$
587,652
Percentage of consolidated external net sales
71.6
%
12.6
%
14.8
%
Three Months Ended September 29, 2019
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Sales
$
374,612
$
76,308
$
100,707
$
5,814
$
557,441
Intersegment sales
(701)
(343)
(4,205)
—
(5,249)
Net sales to external customers
$
373,911
$
75,965
$
96,502
$
5,814
$
552,192
Percentage of consolidated external net sales
67.7
%
13.8
%
17.5
%
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the three months ended September 27, 2020, were $420.5 million, an increase of $46.6 million or 12.5% from $373.9 million in the three months ended September 29, 2019. Net sales in the third quarter of 2020 were negatively impacted by $2.2 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $48.8 million or 13.1% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the third quarter of 2020 by $46.7 million or 12.5% compared to the 2019 period primarily as a result of our previously communicated price increases that became effective on February 3, 2020. Higher base volume increased net sales in the third quarter of 2020 by $0.8 million or 0.2% compared to the 2019 period. Net sales of components and other products to external customers were $1.3 million higher in the third quarter of 2020 compared to the 2019 period.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended September 27, 2020, were $74.3 million, a decrease of $1.7 million or 2.2% from $76.0 million in the three months ended September 29, 2019. Net sales in the third quarter of 2020 were positively impacted by $3.3 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $5.0 million or 6.6% due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Net sales in the third quarter of 2020 were reduced by $4.4 million or 5.8% due to the net impact of the divestiture of a non-core business in 2019, partially offset by incremental sales from the Top Doors acquisition. Lower base volume decreased net sales by $1.9 million or 2.5% in the third quarter of 2020 compared to the 2019 period. Net sales of components and other products to external customers were $0.9 million higher in the third quarter of 2020 compared to the 2019 period. Average unit price increased net sales in the third quarter of 2020 by $0.4 million or 0.5% compared to the 2019 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended September 27, 2020, were $86.7 million, a decrease of $9.8 million or 10.2% from $96.5 million in the three months ended September 29, 2019. Net sales in the third quarter of 2020 were negatively impacted by $0.1 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $9.7 million or 10.1% due to changes in volume, average unit price and sales of components and other products. Lower base volume
decreased net sales in the third quarter of 2020 by $13.7 million or 14.2% compared to the 2019 period primarily as a result of COVID-19. Net sales of components and other products to external customers were $0.1 million lower in the third quarter of 2020 compared to the 2019 period. Average unit price increased net sales in the third quarter of 2020 by $4.1 million or 4.2% compared to the 2019 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 72.7% and 77.3% for the three months ended September 27, 2020, and September 29, 2019, respectively. Material cost of sales, direct labor costs, overhead and distribution costs as a percentage of net sales decreased by 3.2%, 1.1%, 0.2% and 0.1% respectively, compared to the 2019 period. Depreciation as a percentage of sales in the third quarter of 2020 was flat as a percentage of sales compared to the third quarter of 2019. The decrease in material cost of sales as a percentage of net sales was driven by higher average unit prices and material cost savings projects that more than offset investments in quality and commodity inflation. Direct labor as a percentage of net sales decreased due to prior year restructuring actions, partially offset by manufacturing wage inflation. The decrease in overhead as a percentage of net sales was driven by higher average unit prices, partially offset by wage inflation and increased plant maintenance.
Selling, General and Administration Expenses
In the three months ended September 27, 2020, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 20.1%, as compared to 14.0% in the three months ended September 29, 2019, an increase of 610 basis points.
SG&A expenses in the three months ended September 27, 2020, were $118.4 million, an increase of $40.8 million from $77.6 million in the three months ended September 29, 2019. The overall increase was driven by a $37.8 million legal reserve related to the previously disclosed settlement of U.S. class action litigation, a $6.4 million increase in personnel costs primarily due to incentive compensation and resource investments to support growth, unfavorable foreign exchange impacts of $0.5 million and a net $0.7 million increase in non-cash items in SG&A expenses, including share based compensation, loss (gain) on disposal of property, plant and equipment, deferred compensation and depreciation and amortization. These increases were partially offset by a $2.4 million decrease in travel expense and a $0.5 million decrease in advertising expense as a result of COVID-19, as well as a $1.3 million decrease in professional and other fees and incremental SG&A savings from our 2019 divestitures (net of acquisition) of $0.4 million.
Restructuring Costs
Restructuring costs in the three months ended September 27, 2020, and September 29, 2019, were $1.9 million and $2.0 million, respectively. Restructuring costs in the current year related primarily to the 2019 Plan. Restructuring costs in the prior year period related to the 2019 and 2018 Plans.
Asset Impairment
Asset impairment charges in the three months ended September 27, 2020, were $51.5 million, and represent a goodwill impairment charge recorded in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information. There were no asset impairment charges in the three months ended September 29, 2019.
Loss on Disposal of Subsidiaries
There was no loss on disposal of subsidiaries in the three months ended September 27, 2020, and September 29, 2019.
Interest Expense, Net
Interest expense, net, in the three months ended September 27, 2020, was $11.8 million, compared to $11.9 million in the three months ended September 29, 2019, remaining relatively flat as compared to the 2019 period.
There was no loss on extinguishment of debt in the three months ended September 27, 2020. Loss on extinguishment of debt was $14.5 million in the three months ended September 29, 2019. Loss on extinguishment of debt in the prior year was related to the redemption of our senior unsecured notes due 2023.
Other Expense (Income), Net
Other expense (income), net, in the three months ended September 27, 2020, was $2.0 million of income, compared to $0.8 million of income in the three months ended September 29, 2019. The change in other expense (income), net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust and a decrease in pension expense.
Income Tax Expense
Income tax benefit in the three months ended September 27, 2020, was $0.8 million, compared to $4.3 million of income tax expense in the three months ended September 29, 2019. The decrease in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate. We recognized discrete items resulting in$1.2 million of income tax expense in the three months ended September 27, 2020, compared to $0.8 million of income tax benefit recorded in the three months ended September 29, 2019. The discrete income tax expense for the period is primarily attributable to a change in tax rate applied to certain deferred tax assets and liabilities.
Segment Information
Three Months Ended September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Adjusted EBITDA
$
97,492
$
15,021
$
11,126
$
(14,639)
$
109,000
Adjusted EBITDA as a percentage of segment net sales
23.2
%
20.2
%
12.8
%
18.5
%
Three Months Ended September 29, 2019
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Adjusted EBITDA
$
61,549
$
10,645
$
13,920
$
(10,270)
$
75,844
Adjusted EBITDA as a percentage of segment net sales
The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:
Three Months Ended September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Net income (loss) attributable to Masonite
$
85,889
$
9,655
$
(45,074)
$
(72,236)
$
(21,766)
Plus:
Depreciation
8,868
2,437
3,088
3,488
17,881
Amortization
508
3,354
1,268
389
5,519
Share based compensation expense
—
—
—
6,299
6,299
Loss (gain) on disposal of property, plant and equipment
(391)
(317)
247
45
(416)
Restructuring costs
1,746
—
82
67
1,895
Asset impairment
—
—
51,515
—
51,515
Interest expense, net
—
—
—
11,805
11,805
Other expense (income), net
—
(108)
—
(1,845)
(1,953)
Income tax expense
—
—
—
(804)
(804)
Other items (1)
—
—
—
37,750
37,750
Net income attributable to non-controlling interest
872
—
—
403
1,275
Adjusted EBITDA
$
97,492
$
15,021
$
11,126
$
(14,639)
$
109,000
____________
(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the previously disclosed settlement of U.S. class action litigation in the three months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss). Refer to Note 7. Commitments and Contingencies, in Item 1 of this Quarterly Report for additional information.
Three Months Ended September 29, 2019
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Net income (loss) attributable to Masonite
$
49,525
$
3,794
$
9,263
$
(47,613)
$
14,969
Plus:
Depreciation
8,582
2,916
2,566
2,295
16,359
Amortization
377
3,494
2,059
1,124
7,054
Share based compensation expense
—
—
—
3,695
3,695
Loss on disposal of property, plant and equipment
646
57
—
2
705
Restructuring costs
1,761
257
32
(56)
1,994
Interest expense, net
—
—
—
11,909
11,909
Loss on extinguishment of debt
—
—
—
14,523
14,523
Other expense (income), net
(86)
127
—
(865)
(824)
Income tax expense
—
—
—
4,334
4,334
Net income attributable to non-controlling interest
Adjusted EBITDA in our North American Residential segment increased $35.9 million, or 58.4%, to $97.5 million in the three months ended September 27, 2020, from $61.5 million in the three months ended September 29, 2019. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $16.3 million and $14.0 million, in the third quarter of 2020 and 2019, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation.
Adjusted EBITDA in our Europe segment increased $4.4 million, or 41.1%, to $15.0 million in the three months ended September 27, 2020, from $10.6 million in the three months ended September 29, 2019. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $0.3 million in both the third quarter of 2020 and 2019. The allocations generally consist of certain costs of human resources, legal, finance and information technology.
Adjusted EBITDA in our Architectural segment decreased $2.8 million, or 20.1%, to $11.1 million in the three months ended September 27, 2020, from $13.9 million in the three months ended September 29, 2019. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.7 million in both the third quarter of 2020 and 2019. The allocations generally consist of certain costs of human resources, legal, finance, information technology and research and development.
Nine Months Ended September 27, 2020, Compared with Nine Months Ended September 29, 2019
Net Sales
Net sales in the nine months ended September 27, 2020, were $1,638.5 million, a decrease of $6.9 million or 0.4% from $1,645.4 million in the nine months ended September 29, 2019. Net sales in the first nine months of 2020 were negatively impacted by $6.1 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have decreased by $0.8 million and were flat due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Lower base volumes decreased net sales by $91.9 million or 5.6% in the first nine months of 2020 compared to the same period in 2019. Our 2019 divestitures, net of acquisition, decreased net sales by $16.0 million or 1.0% in the first nine months of 2020. Net sales of components and other products to external customers were $4.5 million lower in the first nine months of 2020 compared to the same period in 2019. Average unit price increased net sales in the first nine months of 2020 by $111.6 million or 6.8% compared to the same period in 2019.
Net Sales and Percentage of Net Sales by Reportable Segment
Net sales to external customers from facilities in the North American Residential segment in the nine months ended September 27, 2020, were $1,185.6 million, an increase of $78.4 million or 7.1% from $1,107.2 million in the nine months ended September 29, 2019. Net sales in the first nine months of 2020 were negatively impacted by $6.6 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $85.0 million or 7.7% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the first nine months of 2020 by $94.9 million or 8.6% compared to the 2019 period primarily as a result of our previously communicated price increases that became effective on February 3, 2020. Net sales of components and other products to external customers were $0.8 million higher in the first nine months of 2020 compared to the same period in 2019. Lower base volume decreased net sales by $10.7 million or 1.0% in the first nine months of 2020 compared to the same period in 2019.
Europe
Net sales to external customers from facilities in the Europe segment in the nine months ended September 27, 2020, were $174.9 million, a decrease of $66.3 million or 27.5% from $241.2 million in the nine months ended September 29, 2019. Net sales in 2020 were positively impacted by $1.1 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $67.4 million or 27.9% due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Lower base volume, primarily due to our manufacturing facilities being closed approximately half of the second quarter and other impacts as a result of COVID-19, decreased net sales in the first nine months of 2020 by $52.6 million or 21.8% compared to the same period in 2019. Net sales in the first nine months of 2020 were reduced by $16.0 million or 6.6% due to the net impact of divestitures and an acquisition, including the divestitures of three non-core businesses in 2019, partially offset by incremental sales from the Top Doors acquisition. Average unit price increased net sales in the first nine months of 2020 by $1.0 million or 0.4% compared to the same period in 2019. Net sales of components and other products to external customers were $0.2 million higher in the first nine months of 2020 compared to the same period in 2019.
Architectural
Net sales to external customers from facilities in the Architectural segment in the nine months ended September 27, 2020, were $263.6 million, a decrease of $15.7 million or 5.6% from $279.3 million in the nine months ended September 29, 2019. Net sales in 2020 were negatively impacted by $0.5 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $15.2 million or 5.4% due to changes in volume, average unit price and sales of components and other products. Lower base volume decreased net sales in the first nine months of 2020 by $29.0 million or 10.4% compared to the 2019 period primarily as a result of COVID-19. Net sales of components and other products to external customers decreased net sales by $1.9 million or 0.7% in the first nine months of 2020 compared to the same period in 2019. Average unit price increased net sales in the first nine months of 2020 by $15.7 million or 5.6% compared to the 2019 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 73.7% and 77.7% for the nine months ended September 27, 2020, and September 29, 2019, respectively. Material cost of sales, direct labor and distribution costs as a percentage of net sales in the first nine months of 2020 decreased by 3.4%, 0.7% and 0.1%, respectively. Partially offsetting these decreases, overhead as a percentage of net sales increased by 0.2% compared to the 2019 period. Depreciation in the first nine months of 2020 was flat as a percentage of sales compared to the first nine months of 2019. The decrease in material cost of sales as a percentage of net sales was driven by higher average unit prices and material cost savings projects that more than offset commodity inflation, an increase in tariffs and investments in quality. Direct labor as a percentage of net sales decreased due to prior year restructuring actions, partially offset by manufacturing wage inflation. Overhead as a percentage of net sales was negatively impacted by decreased volumes, wage inflation and increased plant maintenance, partially offset by higher average unit prices as compared to the 2019 period.
In the nine months ended September 27, 2020, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 16.6% compared to 14.2% the nine months ended September 29, 2019, an increase of 240 basis points.
SG&A expenses in the nine months ended September 27, 2020, were $272.1 million, an increase of $38.3 million from $233.8 million in the nine months ended September 29, 2019. The overall increase was driven by $37.8 million legal reserve related to the previously disclosed settlement of U.S. class action litigation, a $9.0 million increase in personnel costs primarily due to incentive compensation and resource investments to support growth, a $3.3 million increase in professional and other fees including legal costs associated with the previously disclosed litigation and unfavorable foreign exchange impacts of $0.1 million. These increases were partially offset by a $6.2 million reduction in travel expense and a $2.8 million decrease in advertising expense as a result of COVID-19, as well as a $1.6 million decrease in non-cash items including depreciation and amortization, deferred compensation, loss on disposal of property, plant and equipment and share based compensation and $1.3 million of incremental SG&A savings from our 2019 divestitures (net of acquisition).
Restructuring Costs
Restructuring costs in the nine months ended September 27, 2020, were $5.0 million, compared to $7.1 million in the nine months ended September 29, 2019.
Asset Impairment
Asset impairment charges in the nine months ended September 27, 2020, were $51.5 million, and represent a goodwill impairment charge recorded in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information. Asset impairment charges in the nine months ended September 29, 2019, were $13.8 million. Asset impairment charges in 2019 resulted from actions associated with the 2019 Plan.
Loss on Disposal of Subsidiaries
Loss on disposal of subsidiaries in the nine months ended September 27, 2020, was $2.1 million, compared to $4.6 million in the nine months ended September 29, 2019. The current year loss arose as a result of the liquidation of our legal entity in India and is comprised of the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss of $2.3 million and $0.2 million relating to the write-off of net assets and other professional fees. The loss in the prior year was related to the sale of PDS for nominal consideration during the first nine months of 2019. The total charge consisted of $3.6 million relating to the write-off of the net assets sold and other professional fees and $1.0 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
Interest Expense, Net
Interest expense, net, in the nine months ended September 27, 2020, was $34.9 million, compared to $34.4 million in the nine months ended September 29, 2019, remaining relatively flat as compared to the 2019 period.
Loss on Extinguishment of Debt
There was no loss on extinguishment of debt in the nine months ended September 27, 2020. Loss on extinguishment of debt was $14.5 million in the nine months ended September 29, 2019. Loss on extinguishment of debt in the prior year was related to the redemption of our senior unsecured notes due 2023.
Other Expense (Income), Net
Other expense (income), net, in the nine months ended September 27, 2020, was $3.4 million of income, compared to $2.4 million of income in the nine months ended September 29, 2019. The change in other expense (income), net is primarily due to a decrease in pension expense and an increase in other miscellaneous non-operating income net of expenses, partially offset by a change in our portion of the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting and a change in the fair value of plan assets in the deferred compensation rabbi trust.
Our income tax expense in the nine months ended September 27, 2020, was $23.5 million, compared to $14.7 million of income tax expense in the nine months ended September 29, 2019. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate, as well as a decrease in discrete income tax benefits. We recognized discrete items resulting in income tax expense of $1.1 million the nine months ended September 27, 2020, compared to $1.3 million of income tax benefit recorded in the nine months ended September 29, 2019. The discrete income tax expense for the period is primarily attributable to a change in tax rate applied to certain deferred tax assets and liabilities.
Segment Information
Nine Months Ended September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Adjusted EBITDA
$
260,319
$
23,782
$
33,208
$
(34,900)
$
282,409
Adjusted EBITDA as a percentage of segment net sales
22.0
%
13.6
%
12.6
%
17.2
%
Nine Months Ended September 29, 2019
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Adjusted EBITDA
$
178,571
$
34,050
$
34,312
$
(25,877)
$
221,056
Adjusted EBITDA as a percentage of segment net sales
The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:
Nine Months Ended September 27, 2020
(In thousands)
North American Residential
Europe
Architectural
Corporate & Other
Total
Net income (loss) attributable to Masonite
$
224,541
$
6,762
$
(35,511)
$
(153,676)
$
42,116
Plus:
Depreciation
26,961
7,261
8,687
7,833
50,742
Amortization
1,615
10,186
4,940
1,159
17,900
Share based compensation expense
—
—
—
13,509
13,509
Loss (gain) on disposal of property, plant and equipment
1,319
(307)
2,547
70
3,629
Restructuring costs
3,509
(37)
1,030
482
4,984
Asset impairment
—
—
51,515
—
51,515
Loss on disposal of subsidiaries
—
—
—
2,091
2,091
Interest expense, net
—
—
—
34,911
34,911
Other expense (income), net
—
(83)
—
(3,267)
(3,350)
Income tax expense
—
—
—
23,522
23,522
Other items (1)
—
—
—
37,750
37,750
Net income attributable to non-controlling interest
2,374
—
—
716
3,090
Adjusted EBITDA
$
260,319
$
23,782
$
33,208
$
(34,900)
$
282,409
____________
(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the previously disclosed settlement of U.S. class action litigation in the nine months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss). Refer to Note 7. Commitments and Contingencies, in Item 1 of this Quarterly Report for additional information.
Net income attributable to non-controlling interest
2,414
—
—
751
3,165
Adjusted EBITDA
$
178,571
$
34,050
$
34,312
$
(25,877)
$
221,056
Adjusted EBITDA in our North American Residential segment increased $81.7 million, or 45.8%, to $260.3 million in the nine months ended September 27, 2020, from $178.6 million in the nine months ended September 29, 2019. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $48.8 million and $41.9 million in the first nine months of 2020 and 2019, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation.
Adjusted EBITDA in our Europe segment decreased $10.3 million, or 30.2%, to $23.8 million in the nine months ended September 27, 2020, from $34.1 million in the nine months ended September 29, 2019. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $0.8 million in the first nine months of 2020 and 2019. The allocations generally consist of certain costs of human resources, legal, finance and information technology.
Adjusted EBITDA in our Architectural segment decreased $1.1 million, or 3.2%, to $33.2 million in the nine months ended September 27, 2020, from $34.3 million in the nine months ended September 29, 2019. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $8.1 million and $8.0 million in the first nine months of 2020 and 2019, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology and research and development.
Liquidity and Capital Resources
Our liquidity needs for operations vary throughout the year. Our principal sources of liquidity are cash flows from operating activities, the borrowings under our ABL Facility and an accounts receivable sales program with a third party ("AR Sales Program") and our existing cash balance. Our anticipated uses of cash in the near term include working capital needs, capital expenditures for critical maintenance, safety and regulatory projects, and share repurchases. On a continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.
Due to the highly uncertain nature and duration of the COVID-19 pandemic and its impact on our customers, suppliers and employees, we are unable to fully estimate the extent of the impact it may have on our future financial condition and liquidity. We anticipate capital expenditures in fiscal year 2020 will be approximately $60 million to $70 million as compared to our original estimate of $70 million to $75 million as previously disclosed under "Key Factors
Affecting Our Results of Operations" in our Annual Report on Form 10-K for the year ended December 29, 2019. We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of September 27, 2020, we had $300.8 million of cash and cash equivalents, availability under our ABL Facility of $205.6 million and availability under our AR Sales Program of $15.4 million.
Cash Flows
Cash provided by operating activities was $219.3 million during the nine months ended September 27, 2020, compared to $138.4 million in the nine months ended September 29, 2019. This $80.9 million increase in cash provided by operating activities was due to changes in net working capital, a $23.4 million increase in other assets and liabilities and a $17.7 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first nine months of 2020 compared to the same period in 2019.
Cash used in investing activities was $44.5 million during the nine months ended September 27, 2020, compared to $59.1 million in the nine months ended September 29, 2019. This $14.6 million decrease in cash used in investing activities was driven by a $9.7 million decrease in cash additions to property, plant and equipment and a net decrease in other investing outflows of $4.9 million driven by proceeds from sale of property, plant and equipment in the first nine months of 2020 compared to the same period in 2019.
Cash used in financing activities was $41.5 million during the nine months ended September 27, 2020, compared to $84.1 million during the nine months ended September 29, 2019. This $42.5 million decrease in cash used in financing activities was driven by a $23.6 million decrease in cash used for repurchases of common shares and a $20.8 million decrease in cash used for debt-related transactions, partially offset by a $1.3 million increase in cash used for tax withholding on share based awards and a $0.6 million increase in distributions to non-controlling interests in the first nine months of 2020 compared to the same period in 2019.
Share Repurchases
We currently have in place a $600.0 million share repurchase authorization, stemming from three separate authorizations by our Board of Directors. During the nine months ended September 27, 2020, we repurchased and retired 567,271 of our common shares in the open market at an aggregate cost of $34.8 million as part of the share repurchase programs, prior to temporarily suspending our repurchase program on March 18, 2020. During the third quarter, the temporary suspension was removed. We did not repurchase any of our common shares in the open market during the three months ended September 27, 2020. During the nine months ended September 29, 2019, we repurchased 1,148,815 of our common shares in the open market at an aggregate cost of $58.4 million. As of September 27, 2020, there was $109.3 million available for repurchase in accordance with the share repurchase programs.
Other Liquidity Matters
Our cash and cash equivalents balance includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of September 27, 2020, we do not believe adverse tax consequences exist that restrict our use of cash or cash equivalents in a material manner.
We also routinely monitor the changes in the financial condition of our customers and the potential impact on our results of operations. There has not been a change in the financial condition of any customer that has had a material adverse effect on our results of operations in the first nine months of 2020. However, in light of COVID-19, it is possible there could be an impact on our results of operations in a future period and this impact could be material.
Accounts Receivable 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 who 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, if any, 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).
5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as of September 27, 2020. The 2028 Notes bear interest at 5.375% per annum. The net proceeds from issuance of the 2028 Notes, together with available cash balances, were used to redeem the remaining $500.0 million aggregate principal amount of similar senior unsecured notes, including the payment of related premiums, fees and expenses. The 2028 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the indenture governing the 2028 Notes.
5.750% Senior Notes due 2026
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"), all of which were outstanding as of March 29, 2020. The 2026 Notes bear interest at 5.750% per annum. The 2026 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the indenture governing the 2026 Notes.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. Borrowings under the ABL Facility bear interest at a rate which is described in more detail in Note 6. The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended December 29, 2019. As of September 27, 2020, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $205.6 million under our ABL Facility and there were no amounts outstanding as of September 27, 2020.
Supplemental Guarantor Financial Information
Our obligations under the 2028 Notes and 2026 Notes and the ABL Facility are fully and unconditionally guaranteed, jointly and severally, by certain of our directly or indirectly wholly-owned subsidiaries. The following unaudited supplemental financial information for our non-guarantor subsidiaries is presented:
Our non-guarantor subsidiaries generated external net sales of $522.4 million and $491.9 million for the three months ended September 27, 2020, and September 29, 2019, respectively, and $1.5 billion for both the nine months ended September 27, 2020, and September 29, 2019. Our non-guarantor subsidiaries generated Adjusted EBITDA of $94.0 million and $65.0 million for the three months ended September 27, 2020, and September 29, 2019, respectively, and $238.7 million and $189.8 million for the nine months ended September 27, 2020, and September 29, 2019, respectively. Our non-guarantor subsidiaries had total assets of $2.1 billion and $2.0 billion as of September 27, 2020, and December 29, 2019, respectively, and total liabilities of $925.8 million and $834.5 million as of September 27, 2020, and December 29, 2019, respectively.
Changes in Accounting Standards and Policies
Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended December 29, 2019. We believe there have been no material changes to the information provided therein.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
The information required with respect to this item can be found in Note 7. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1. Such information should be read in conjunction with the information contained under Part I, Item 3 "Legal Proceedings" included in our Annual Report on Form 10-K for the year ended December 29, 2019.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report on Form 10-K filed for the year ended December 29, 2019, as supplemented by Part II. Item 1A "Risk Factors" in our Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of Our Equity Securities.
During the three months ended September 27, 2020, we did not repurchase any of our common shares in the open market.
We currently have in place a $600.0 million share repurchase authorization, stemming from three separate authorizations by our Board of Directors. The share repurchase programs have no specified end date and the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. During the first quarter of 2020, we implemented several actions to reduce our spending and more closely manage cash during this uncertain period relating to the COVID-19 pandemic, including temporarily suspending our share repurchase programs. The temporary suspension was lifted during the third quarter. As of September 27, 2020, $109.3 million was available for repurchase in accordance with the share repurchase programs.
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) the Registrant's Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 27, 2020, and September 29, 2019; (ii) the Registrant's Condensed Consolidated Balance Sheets as of September 27, 2020, and December 29, 2019; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three and nine months ended September 27, 2020, and September 29, 2019; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows for the nine months ended September 27, 2020, and September 29, 2019; and (v) the notes to the Registrant's Condensed Consolidated Financial Statements
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
*
Filed or furnished herewith.
#
Denotes management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MASONITE INTERNATIONAL CORPORATION
(Registrant)
Date:
November 3, 2020
By
/s/ Russell T. Tiejema
Russell T. Tiejema
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
