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 October 2, 2022 , and October 3, 2021 . In this MD&A,
"Masonite," "we," "us," "our" and the "Company" refer to Masonite International
Corporation and its subsidiaries.
This discussion should be read in conjunction with (i) the unaudited condensed
consolidated financial statements and related notes included elsewhere in this
Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial
statements, including the accompanying notes and MD&A, which are included in our
Annual Report on Form 10-K for the year ended January 2, 2022 (the "Annual
Report"). The following discussion should also be read in conjunction with the
disclosure under "Special Note Regarding Forward Looking Statements" elsewhere
in this Quarterly Report on Form 10-Q. Our actual results could differ
materially from the forward-looking statements as a result of these risks and
uncertainties.
Overview
We are a leading global designer, manufacturer, marketer 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. Through innovative door
solutions, a better door buying experience for our customers and partners
and advanced manufacturing and service delivery, we deliver a commitment of
Doors That Do MoreTM.
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 59 manufacturing and distribution facilities in seven 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; (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
October 2, 2022 , we generated net sales of $1,755.8 million or 79.2%, $220.0
million or 9.9% and $224.3 million or 10.1% in our North American Residential,
Europe and Architectural segments, respectively.
During the third quarter, we continued to be negatively impacted by rising
energy and fuel costs, partly attributable to the war between Russia and
Ukraine . In addition, production challenges in some of our facilities impacted
our ability to service customers, particularly in our Architectural segment.
Base volumes decreased in our North American Residential segment due to new
housing weakness and wholesale inventory destocking with the residential repair,
renovation and remodeling channel remaining resilient, while consumer sentiment,
inflationary pressures and strengthening of the U.S. dollar impacted our Europe
segment. The extent to which labor and logistics constraints, supply chain
disruptions, rising energy and fuel costs, consumer sentiment, interest rates
and global inflation impact our business, results of operations and financial
condition will depend on future developments, which are highly uncertain and
cannot be predicted.
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MASONITE INTERNATIONAL CORPORATION
Key Factors Affecting Our Results of Operations
Product Demand
There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes inUnited 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; •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; •employment rates and consumer confidence; and •demographic factors such as immigration and migration of the population and trends in household formation.
Product Pricing and Mix
The building products industry is highly competitive, and we therefore face pressure on sales prices of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. 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
performance that includes the reorganization of our specialty door manufacturing
capacity in our Architectural reportable segment. The reorganization
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MASONITE INTERNATIONAL CORPORATION of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the reorganization of these facilities, which resulted in the closure of an existing specialty door assembly facility and related headcount reductions beginning in the second quarter of 2021 (collectively, the "2021 Plan"). Costs associated with the 2021 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2021 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations. InNovember 2020 , 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 primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2020 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations. InFebruary 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 involved 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 continued through 2020. The actions taken as part of the 2019 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations.
Inflation
In 2021 and the first nine months of 2022, we realized higher costs across the various materials we purchase as a result of macroeconomic factors as well as increased logistics costs, wages, anti-dumping and countervailing duties and energy and fuel costs. Additionally, rising interest rates may impact the ability of end consumers to purchase our products. We expect the macroeconomic pressures on wood, resins and other certain key product categories and supply chain costs will continue at least through the remainder of fiscal year 2022. Our profitability, margins and net sales could be adversely affected if we are not able to pass these costs on to our customers or otherwise mitigate the impact of these inflationary pressures.
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. On a continual basis, we evaluate and consider strategic
acquisitions, divestitures and joint ventures to create shareholder value and
enhance financial performance.
OnNovember 2, 2022 , the Company entered into a definitive agreement to acquire the holding company ofEndura Products ("Endura"), for approximately$375.0 million in cash, subject to customary closing adjustments and regulatory approval. Endura is a leading innovator and manufacturer of high-performance door frames and door system components. The transaction is currently expected to be completed near the end of 2022, subject to satisfaction of customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. The transaction will be funded with a combination of cash on hand, borrowings under the ABL Facility and an expected new term loan. OnJune 14, 2021 , we completed the sale of all of the capital stock of our Czech business ("Czech") for consideration of$7.0 million , net of cash disposed. The divestiture of this business resulted in a loss on sale of subsidiaries of$8.6 million , which was recognized during the second quarter of 2021 in theEurope segment. 21 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
Results of Operations
Three Months Ended Nine Months Ended
(In thousands) October 2, 2022 October 3, 2021 October 2, 2022 October 3, 2021
Net sales $ 727,626 $
652,208
Cost of goods sold
560,442 498,103 1,684,799 1,483,870 Gross profit 167,184 154,105 530,918 477,085 Gross profit as a % of net sales 23.0 % 23.6 % 24.0 % 24.3 % Selling, general and administration expenses 82,690 76,632 256,266 242,774 Selling, general and administration expenses as a % of net sales 11.4 % 11.7 % 11.6 % 12.4 % Restructuring (benefit) costs (141) 1,311 (221) 5,146 Asset impairment - - - 10,374 Loss on disposal of subsidiaries - - - 8,590 Operating income 84,635 76,162 274,873 210,201 Interest expense, net 10,266 11,349 31,098 35,213 Loss on extinguishment of debt - 13,583 - 13,583 Other (income) expense, net 211 (1,471) (1,604) (4,400) Income before income tax expense 74,158 52,701 245,379 165,805 Income tax expense 16,376 13,854 59,502 42,713 Net income 57,782 38,847 185,877 123,092 Less: net income attributable to non-controlling interests 745 1,156 2,743 3,374
Net income attributable to Masonite
Three Months Ended
2021
Net Sales Net sales in the three months endedOctober 2, 2022 , were$727.6 million , an increase of$75.4 million or 11.6% from$652.2 million in the three months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the third quarter of 2022 by$15.0 million . Excluding this exchange rate impact, net sales would have increased by$90.4 million or 13.9% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the third quarter of 2022 by$136.0 million or 20.9% compared to the 2021 period. Lower volumes excluding the incremental impact of acquisitions or divestitures ("base volume") decreased net sales by$39.5 million or 6.1% in the third quarter of 2022 compared to the 2021 period. Net sales of components to external customers decreased$6.1 million or 0.9% in the third quarter of 2022 compared to the 2021 period.
Three
Months Ended
North American Corporate & (In thousands) Residential Europe Architectural Other Total Sales$ 579,908 $ 66,109 $ 82,388 $ 4,625 $ 733,030 Intersegment sales (468) (391) (4,545) - (5,404) Net sales to external customers$ 579,440 $ 65,718 $ 77,843 $ 4,625 $ 727,626 Percentage of consolidated external net sales 79.6 % 9.0 % 10.7 % 22
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Three
Months Ended
North American Corporate & (In thousands) Residential Europe Architectural Other Total Sales$ 489,156 $ 86,280 $ 79,526 $ 4,030 $ 658,992 Intersegment sales (636) (1,882) (4,266) - (6,784) Net sales to external customers$ 488,520 $ 84,398 $ 75,260 $ 4,030 $ 652,208 Percentage of consolidated external net sales 74.9 % 12.9 % 11.5 % North American Residential Net sales to external customers from facilities in the North American Residential segment in the three months endedOctober 2, 2022 , were$579.4 million , an increase of$90.9 million or 18.6% from$488.5 million in the three months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the third quarter of 2022 by$3.4 million . Excluding this exchange rate impact, net sales would have increased by$94.3 million or 19.3% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the third quarter of 2022 by$112.5 million or 23.0% compared to the 2021 period. Lower base volume decreased net sales in the third quarter of 2022 by$15.7 million or 3.2% compared to the 2021 period due to new housing weakness and wholesale inventory destocking with residential repair, renovation and remodeling remaining resilient. Net sales of components to external customers were$2.5 million lower in the third quarter of 2022 compared to the 2021 period.
Net sales to external customers from facilities in theEurope segment in the three months endedOctober 2, 2022 , were$65.7 million , a decrease of$18.7 million or 22.2% from$84.4 million in the three months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the third quarter of 2022 by$11.2 million . Excluding this exchange rate impact, net sales would have decreased by$7.5 million or 8.9% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales by$18.0 million or 21.3% in the third quarter of 2022 compared to the 2021 period due to demand softness driven by weakening consumer confidence in theUnited Kingdom , which we believe is affecting major purchase decisions. Net sales of components to external customers were$0.8 million lower in the third quarter of 2022 compared to the 2021 period. Average unit price increased net sales in the third quarter of 2022 by$11.3 million or 13.4% compared to the 2021 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the three months endedOctober 2, 2022 , were$77.8 million , an increase of$2.5 million or 3.3% from$75.3 million in the three months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the third quarter of 2022 by$0.4 million . Excluding this exchange rate impact, net sales would have increased by$2.9 million or 3.9% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the third quarter of 2022 by$10.0 million or 13.3% compared to the 2021 period. Lower base volume decreased net sales in the third quarter of 2022 by$5.8 million or 7.7% compared to the 2021 period resulting from production challenges. Net sales of components to external customers were$1.3 million lower in the third quarter of 2022 compared to the 2021 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 77.0% and 76.4% for the three months endedOctober 2, 2022 , andOctober 3, 2021 , respectively. Material cost of sales and overhead as a percentage of net sales increased by 1.8% and 0.4%, respectively, compared to the 2021 period. Distribution, direct labor and depreciation as a percentage of net sales decreased by 0.9%, 0.6% and 0.1%, respectively, compared to the third quarter of 2021. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in inbound logistics costs, partially offset by higher average unit prices and material cost savings projects. Overhead as a percentage of net sales increased due to wage inflation, higher factory costs and increased plant maintenance as compared to the 2021 period, partially offset by higher average unit prices. Distribution as a percentage of net sales decreased due to higher average unit prices, partially offset by increased outbound logistics and personnel costs. Direct labor as a percentage of 23 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
net sales decreased due to higher average unit prices, partially offset by
manufacturing wage and benefit inflation. The decrease in depreciation as a
percentage of net sales was driven by higher average unit prices as compared to
the 2021 period.
Selling, General and Administration Expenses
In the three months ended
(“SG&A”) expenses, as a percentage of net sales, were 11.4%, as compared to
11.7% in the three months ended
SG&A expenses in the three months endedOctober 2, 2022 , were$82.7 million , an increase of$6.1 million from$76.6 million in the three months endedOctober 3, 2021 . The overall increase was driven by a$3.2 million increase in professional and other fees to support growth; a$2.8 million increase in personnel costs primarily driven by increased incentive compensation, wage and benefit inflation and resource investments to support growth; and a$1.6 million increase in travel expense to support customer activities and growth. These increases were partially offset by favorable foreign exchange impacts of$1.5 million .
Restructuring (Benefit) Costs
Restructuring (benefit) costs in the three months endedOctober 2, 2022 , were minimal, compared to$1.3 million in the three months endedOctober 3, 2021 . Restructuring costs in the prior year period related primarily to the 2021 and 2020 Plans. Asset Impairment
There were no asset impairment charges in the three months ended
2022
Loss on Disposal of Subsidiaries
There was no loss on disposal of subsidiaries in the three months ended
Interest Expense, Net
Interest expense, net, in the three months endedOctober 2, 2022 , was$10.3 million , compared to$11.3 million in the three months endedOctober 3, 2021 . The decrease in interest expense, net is primarily due to the refinancing of our senior notes in 2021.
Loss on Extinguishment of Debt
There was no loss on extinguishment of debt in the three months endedOctober 2, 2022 . Loss on extinguishment of debt in the three months endedOctober 3, 2021 , was$13.6 million , and resulted from the redemption of our senior unsecured notes due 2026. This charge represents the difference between the redemption price of our senior unsecured notes due 2026 of$310.8 million and the net carrying amount of such notes of$297.2 million .
Other (Income) Expense, Net
Other (income) expense, net includes profits and losses related to our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting, unrealized gains and losses on foreign currency remeasurements, pension settlement charges and other miscellaneous non-operating expenses. Other (income) expense, net, in the three months endedOctober 2, 2022 , was$0.2 million of expense, compared to$1.5 million of income in the three months endedOctober 3, 2021 . The change in other (income) expense, net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust, unrealized gains and losses on foreign currency remeasurements and the absence of pension expense, 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. 24
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Income Tax Expense
Income tax expense in the three months ended October 2, 2022 , was $16.4 million ,
compared to $13.9 million in the three months ended October 3, 2021 . 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.
Segment Information
Three Months
Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 115,092 $ 3,898 $ (219) $ (6,849) $ 111,922
Adjusted EBITDA as a percentage
of segment net sales 19.9 % 5.9 % (0.3) % 15.4 %
Three Months Ended October 3, 2021
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 91,482 $ 16,680
Adjusted EBITDA as a percentage
of segment net sales
18.7 % 19.8 % 1.4 % 16.1 %
The following reconciles net income (loss) attributable to Masonite to Adjusted
EBITDA:
Three Months Ended October 2, 2022
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 103,589 $ (1,116) $ (3,486) $ (41,950) $ 57,037
Plus:
Depreciation 10,443 2,127 2,959 1,932 17,461
Amortization 442 2,985 278 551 4,256
Share based compensation expense - - - 5,556 5,556
Loss (gain) on disposal of
property, plant and equipment 136 - 7 12 155
Restructuring (benefit) costs (178) - 23 14 (141)
Interest expense, net - - - 10,266 10,266
Other (income) expense, net - (98) - 309 211
Income tax expense - - - 16,376 16,376
Net income attributable to
non-controlling interest 660 - - 85 745
Adjusted EBITDA $ 115,092 $ 3,898 $ (219) $ (6,849) $ 111,922
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Three
Months Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 79,262 $ 10,989 $ (4,428) $ (48,132) $ 37,691
Plus:
Depreciation 9,364 2,371 2,665 2,965 17,365
Amortization 372 3,561 993 497 5,423
Share based compensation expense - - - 2,336 2,336
Loss (gain) on disposal of
property, plant and equipment 1,738 (82) 496 12 2,164
Restructuring (benefit) costs (36) - 1,314 33 1,311
Interest expense, net - - - 11,349 11,349
Loss on extinguishment of debt - - - 13,583 13,583
Other (income) expense, net - (159) - (1,312) (1,471)
Income tax expense - - - 13,854 13,854
Net income attributable to
non-controlling interest 782 - - 374 1,156
Adjusted EBITDA $ 91,482 $ 16,680 $ 1,040 $ (4,441) $ 104,761
Adjusted EBITDA in our North American Residential segment was $115.1 million in
the three months ended October 2, 2022 , an increase of $23.6 million , or 25.8%,
from $91.5 million in the three months ended October 3, 2021 . Adjusted EBITDA in
the North American Residential segment included corporate allocations of shared
costs of $21.9 million and $19.3 million in the third quarter of 2022 and 2021,
respectively. The allocations generally consist of certain costs of human
resources, legal, finance, information technology, research and development,
marketing and share based compensation.
Adjusted EBITDA in our Europe segment was $3.9 million in the three months ended
October 2, 2022 , a decrease of $12.8 million , or 76.6%, from $16.7 million in
the three months ended October 3, 2021 . Adjusted EBITDA in the Europe segment
included corporate allocations of shared costs of $1.7 million and $1.0 million
in the third quarter of 2022 and 2021, respectively. The allocations generally
consist of certain costs of human resources, legal, finance, information
technology, marketing and share based compensation.
Adjusted EBITDA in our Architectural segment was a loss of $0.2 million in the
three months ended October 2, 2022 , a decrease of $1.2 million , or 121.1%, from
$1.0 million of earnings in the three months ended October 3, 2021 . Adjusted
EBITDA in the Architectural segment also included corporate allocations of
shared costs of $2.9 million and $2.8 million in the third quarter of 2022 and
2021, respectively. The allocations generally consist of certain costs of human
resources, legal, finance, information technology, research and development,
marketing and share based compensation.
Nine Months Ended
2021
Net Sales Net sales in the nine months endedOctober 2, 2022 , were$2,215.7 million , an increase of$254.7 million or 13.0% from$1,961.0 million in the nine months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2022 by$30.8 million . Excluding this exchange rate impact, net sales would have increased by$285.5 million or 14.6% due to changes in volume, average unit price, impact of divestitures and sales of components. Average unit price increased net sales in the first nine months of 2022 by$363.3 million or 18.5% compared to the same period in 2021. Lower base volume decreased net sales by$56.0 million or 2.9% in the first nine months of 2022 compared to the same period in 2021. The 2021 divestiture of our Czech business decreased net sales by$11.7 million or 0.6% in the first nine months of 2022 as compared to the same period in 2021. Net sales of 26 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
components to external customers decreased
nine months of 2022 compared to the same period in 2021.
Nine
Months Ended
North American Corporate & (In thousands) Residential Europe Architectural Other Total Sales$ 1,757,820 $ 222,120 $ 236,941 $ 15,641 $ 2,232,522 Intersegment sales (2,040) (2,081) (12,684) - (16,805)
Net sales to external customers
224,257$ 15,641 $ 2,215,717 Percentage of consolidated external net sales 79.2 % 9.9 % 10.1 % Nine Months Ended October 3, 2021 North American Corporate & (In thousands) Residential Europe Architectural Other Total Sales$ 1,460,358 $ 266,665 $ 235,834 $ 15,761 $ 1,978,618 Intersegment sales (1,985) (5,918) (9,760) - (17,663)
Net sales to external customers
226,074$ 15,761 $ 1,960,955 Percentage of consolidated external net sales 74.4 % 13.3 % 11.5 % North American Residential Net sales to external customers from facilities in the North American Residential segment in the nine months endedOctober 2, 2022 , were$1,755.8 million , an increase of$297.4 million or 20.4% from$1,458.4 million in the nine months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2022 by$7.4 million . Excluding this exchange rate impact, net sales would have increased by$304.8 million or 20.9% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in the first nine months of 2022 by$294.2 million or 20.2% compared to the 2021 period. Higher base volume increased net sales by$12.8 million or 0.9% in the first nine months of 2022 compared to the same period in 2021. Net sales of components to external customers were$2.2 million lower in the first nine months of 2022 compared to the same period in 2021. Europe Net sales to external customers from facilities in theEurope segment in the nine months endedOctober 2, 2022 , were$220.0 million , a decrease of$40.7 million or 15.6% from$260.7 million in the nine months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2022 by$22.5 million . Excluding this exchange rate impact, net sales would have decreased by$18.2 million or 7.0% due to changes in volume, average unit price, divestitures and sales of components. Lower base volume decreased net sales in the first nine months of 2022 by$45.8 million or 17.6% compared to the same period in 2021, due to demand softness driven by weakening consumer confidence in theUnited Kingdom , which we believe is affecting major purchase decisions. The 2021 divestiture of our Czech business decreased net sales by$11.7 million or 4.5% in the first nine months of 2022. Average unit price increased net sales in the first nine months of 2022 by$39.3 million or 15.1% compared to the 2021 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in the nine months endedOctober 2, 2022 , were$224.3 million , a decrease of$1.8 million or 0.8% from$226.1 million in the nine months endedOctober 3, 2021 . Foreign exchange rate fluctuations negatively impacted net sales in the first nine months of 2022 by$0.7 million . Excluding this exchange rate impact, net sales would have decreased by$1.1 million or 0.5% due to changes in volume, average unit price and sales of components. Lower base volume decreased net sales in the first nine months of 2022 by$23.0 million or 10.2% compared to the 2021 period resulting from production challenges due to material availability. 27 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION Net sales of components to external customers were$4.4 million lower in the first nine months of 2022 compared to the same period in 2021. Average unit price increased net sales in the first nine months of 2022 by$26.3 million or 11.6% compared to the 2021 period.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 76.0% and 75.7% for the nine months endedOctober 2, 2022 , andOctober 3, 2021 , respectively. Material cost of sales as a percentage of net sales increased by 2.0%, compared to the 2021 period. Direct labor, distribution, overhead and depreciation as a percentage of net sales decreased by 0.7%, 0.4%, 0.3% and 0.3%, respectively, compared to the 2021 period. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in logistics costs, partially offset by higher average unit prices and material cost savings projects. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by manufacturing wage and benefit inflation and startup costs. Overhead as a percentage of net sales decreased due to higher average unit prices, partially offset by wage inflation, increased plant maintenance and increased investment in the business as compared to the 2021 period. The decrease in depreciation in the first nine months of 2022 was driven by higher average unit prices as compared to the first nine months of 2021. Distribution as a percentage of net sales decreased due to higher average unit prices, partially offset by increased outbound logistics and personnel costs.
Selling, General and Administration Expenses
In the nine months endedOctober 2, 2022 , selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 11.6% compared to 12.4% the nine months endedOctober 3, 2021 , a decrease of 80 basis points. SG&A expenses in the nine months endedOctober 2, 2022 , were$256.3 million , an increase of$13.5 million from$242.8 million in the nine months endedOctober 3, 2021 . The overall increase was driven by a$10.8 million increase in personnel costs primarily driven by increased incentive compensation, wage and benefit inflation and resource investments to support growth; a$4.8 million increase in travel expense as business activities fully returned to pre-pandemic levels; and a$4.6 million increase in professional and other fees to support growth. These increases were partially offset by favorable foreign exchange impacts of$3.1 million ; a$2.6 million decrease in non-cash items including deferred compensation, (gain) loss on disposal of property, plant and equipment, depreciation and amortization, and share based compensation; and incremental SG&A savings from our 2021 divestiture of$1.0 million .
Restructuring (Benefit) Costs
Restructuring (benefit) costs in the nine months endedOctober 2, 2022 , were minimal, compared to$5.1 million in the nine months endedOctober 3, 2021 . Restructuring costs in the prior year period related primarily to the 2021 and 2020 Plans. Asset Impairment There were no asset impairment charges in the nine months endedOctober 2, 2022 , compared to$10.4 million . in the nine months endedOctober 3, 2021 . Asset impairment in the prior year period resulted from actions associated with the 2021 and 2020 Plans in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information.
Loss on Disposal of Subsidiaries
There was no loss on disposal of subsidiaries in the nine months endedOctober 2, 2022 , compared to$8.6 million in the nine months endedOctober 3, 2021 . The prior year loss arose as a result of the sale of our Czech business and is comprised of$5.1 million relating to the write-off of net assets sold and other professional fees and$3.5 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 endedOctober 2, 2022 , was$31.1 million , compared to$35.2 million in the nine months endedOctober 3, 2021 . The decrease in interest expense, net is primarily due to the refinancing of our senior notes in 2021. 28 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
Loss on Extinguishment of Debt
There was no loss on extinguishment of debt in the nine months endedOctober 2, 2022 . Loss on extinguishment of debt in the nine months endedOctober 3, 2021 , was$13.6 million , and resulted from the redemption of our senior unsecured notes due 2026. This charge represents the difference between the redemption price of our senior unsecured notes due 2026 of$310.8 million and the net carrying amount of such notes of$297.2 million .
Other (Income) Expense, Net
Other (income) expense, net, in the nine months endedOctober 2, 2022 , was$1.6 million , compared to$4.4 million in the nine months endedOctober 3, 2021 . The change in other (income) expense, net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust, unrealized gains and losses on foreign currency remeasurements and an increase in pension expense, 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.
Income Tax Expense
Income tax expense in the nine months endedOctober 2, 2022 , was$59.5 million , compared to$42.7 million in the nine months endedOctober 3, 2021 . 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.
Segment Information
Nine Months
Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 367,733 $ 24,307 $ (3,039) $ (34,202) $ 354,799
Adjusted EBITDA as a percentage
of segment net sales 20.9 % 11.0 % (1.4) % 16.0 %
Nine Months Ended October 3, 2021
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 286,009 $ 50,019 $ 3,514 $ (22,192) $ 317,350
Adjusted EBITDA as a
percentage of segment net
sales 19.6 % 19.2 % 1.6 % 16.2 %
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MASONITE INTERNATIONAL CORPORATION
The following reconciles net income (loss) attributable to Masonite to Adjusted
EBITDA:
Nine Months Ended October 2, 2022
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 333,233 $ 8,062 $ (9,354) $ (148,807) $ 183,134
Plus:
Depreciation 30,394 6,640 8,602 6,341 51,977
Amortization 1,528 9,314 679 1,643 13,164
Share based compensation expense - - - 16,251 16,251
Loss (gain) on disposal of
property, plant and equipment 1,873 (13) (3,037) (68) (1,245)
Restructuring (benefit) costs (359) - 71 67 (221)
Interest expense, net - - - 31,098 31,098
Other (income) expense, net (792) 304 - (1,116) (1,604)
Income tax expense - - - 59,502 59,502
Net income attributable to
non-controlling interest 1,856 - - 887 2,743
Adjusted EBITDA $ 367,733 $ 24,307 $ (3,039) $ (34,202) $ 354,799
Nine
Months Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 252,471 $ 23,851 $ (22,867) $ (133,737) $ 119,718
Plus:
Depreciation 28,035 7,462 7,936 9,443 52,876
Amortization 1,284 10,704 3,282 1,479 16,749
Share based compensation expense - - - 11,460 11,460
Loss (gain) on disposal of
property, plant and equipment 1,862 (70) 645 (483) 1,954
Restructuring (benefit) costs (45) - 4,868 323 5,146
Asset impairment - - 9,645 729 10,374
Loss on disposal of subsidiaries - 8,590 - - 8,590
Interest expense, net - - - 35,213 35,213
Loss on extinguishment of debt - - - 13,583 13,583
Other (income) expense, net - (518) 5 (3,887) (4,400)
Income tax expense - - - 42,713 42,713
Net income attributable to
non-controlling interest 2,402 - - 972 3,374
Adjusted EBITDA $ 286,009 $ 50,019 $ 3,514 $ (22,192) $ 317,350
Adjusted EBITDA in our North American Residential segment was $367.7 million in
the nine months ended October 2, 2022 , an increase of $81.7 million , or 28.6%,
from $286.0 million in the nine months ended October 3, 2021 . Adjusted EBITDA in
the North American Residential segment included corporate allocations of shared
costs of $66.1 million and $57.7 million in the first nine months of 2022 and
2021, respectively. The allocations generally consist of certain costs of human
resources, legal, finance, information technology, research and development,
marketing and share based compensation.
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MASONITE INTERNATIONAL CORPORATION Adjusted EBITDA in ourEurope segment was$24.3 million in the nine months endedOctober 2, 2022 , a decrease of$25.7 million , or 51.4%, from$50.0 million in the nine months endedOctober 3, 2021 . Adjusted EBITDA in theEurope segment included corporate allocations of shared costs of$5.1 million and$3.0 million in the first nine months of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, marketing and share based compensation. Adjusted EBITDA in our Architectural segment was a loss of$3.0 million in the nine months endedOctober 2, 2022 , a decrease of$6.6 million , or 186.5%, from$3.5 million of earnings in the nine months endedOctober 3, 2021 . Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of$8.6 million and$8.4 million in the first nine months of 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
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"), as well as 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. With respect to our pending acquisition of Endura
Products ("the Endura Transaction") for approximately $375.0 million in cash,
subject to customary closing adjustments and regulatory approval, we expect that
the transaction will be funded with a combination of cash on hand, borrowings
under our ABL Facility and a new term loan that we expect to enter into during
the fourth quarter of 2022. There can be no assurances that the contemplated
term loan will be completed on the terms currently contemplated or at all.
We believe that our cash balance on hand, future cash generated from operations,
the use of our AR Sales Program, our ABL Facility (including the additional
indebtedness incurred in connection with the Endura Transaction), and ability to
access the capital markets will provide adequate liquidity for the foreseeable
future. As of October 2, 2022 , we had $250.7 million of cash and cash
equivalents, availability under our ABL Facility of $250.0 million and
availability under our AR Sales Program of $3.2 million .
Cash Flows
Cash provided by operating activities was$82.9 million during the nine months endedOctober 2, 2022 , compared to$100.0 million in the nine months endedOctober 3, 2021 . This$17.1 million decrease in cash provided by operating activities was due to a$29.8 million increase in cash used for working capital and other assets and liabilities, partially offset by a$12.8 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first nine months of 2022 compared to the same period in 2021. Cash used in investing activities was$61.5 million during the nine months endedOctober 2, 2022 , compared to$38.2 million in the nine months endedOctober 3, 2021 . This$23.3 million increase in cash used in investing activities was driven by a$19.2 million increase in cash additions to property, plant and equipment, the absence of$6.8 million of net proceeds from divestitures and acquisitions and a$0.3 million increase in cash used for other investing activities, partially offset by a$3.0 million increase in proceeds from the sale of property, plant and equipment in the first nine months of 2022 compared to the same period in 2021. Cash used in financing activities was$145.8 million during the nine months endedOctober 2, 2022 , compared to$31.8 million during the nine months endedOctober 3, 2021 . This$114.0 million increase in cash used in financing activities was driven by a$58.6 million decrease in cash provided by debt-related transactions and a$56.9 million increase in cash used for repurchases of common shares, partially offset by a$1.5 million decrease in cash used for tax withholding on share based awards in the first nine months of 2022 compared to the same period in 2021.
Share Repurchases
The Company’s Board of Directors has approved five share repurchase
authorizations, the most recent being an incremental
repurchase program approved on
announced that its Board of Directors authorized it to enter into an accelerated
share repurchase (“ASR”) transaction as
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MASONITE INTERNATIONAL CORPORATION part of the new share repurchase program. The Company entered into an ASR transaction during the first quarter of 2022 with a third-party financial institution for the repurchase of$100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid$100.0 million to the financial institution using cash on hand and received an initial delivery of 848,087 common shares on the same day. The final delivery of 319,678 common shares occurred in the second quarter. The$100.0 million ASR transaction was therefore completed in the second quarter with a total delivery of 1,167,765 common shares at a volume-weighted average price ("VWAP") per share minus an agreed upon discount totaling$85.63 per share. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery. During the nine months endedOctober 2, 2022 , we repurchased 1,556,008 of our common shares in the open market at an aggregate cost of$140.0 million as part of the share repurchase programs and ASR. During the nine months endedOctober 3, 2021 , we repurchased and retired 737,843 of our common shares in the open market at an aggregate cost of$83.1 million . As ofOctober 2, 2022 , there was$256.4 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 outsideCanada , 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 inCanada . However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings toCanada , 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 ofOctober 2, 2022 , 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. However, if economic conditions were to deteriorate, 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 expenses within the condensed consolidated statements of income and comprehensive income.
3.50% Senior Notes due 2030
OnJuly 26, 2021 , we issued$375.0 million aggregate principal senior unsecured notes (the "2030 Notes"), all of which was outstanding as ofOctober 2, 2022 . The 2030 Notes bear interest at 3.50% per annum. The 2030 Notes were issued under an indenture which contains limited covenants that are described in detail in our Annual Report. As ofOctober 2, 2022 , we were in compliance with all covenants under the indenture governing the 2030 Notes.
5.375% Senior Notes due 2028
OnJuly 25, 2019 , we issued$500.0 million aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as ofOctober 2, 2022 . The 2028 Notes bear interest at 5.375% per annum. The 2028 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report. As ofOctober 2, 2022 , we were in compliance with all covenants under the indenture governing the 2028 Notes. 32 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
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. As of
October 2, 2022 , we were in compliance with all covenants under the credit
agreement governing the ABL Facility. We had availability of $250.0 million
under our ABL Facility and there were no amounts outstanding as of October 2,
2022 .
In connection with the Endura Transaction, on October 28, 2022 , the Company
entered into an amendment (the "ABL Amendment") to our ABL Facility, which,
among other things, (i) increased the revolving credit commitments available
thereunder by $100.0 million (subject to certain specified sublimits available
thereunder) to an aggregate of $350.0 million and (ii) replaced the LIBOR-based
interest rate applicable to borrowing in U.S. dollars with an interest rate
based on the sum of (x) a secured overnight financing rate published by an
administrator of such rate plus (y) 10 basis points. The terms of the ABL
Facility remained otherwise unchanged. As of November 7, 2022 , we had
availability of $350.0 million under our ABL Facility and there were no amounts
outstanding.
Supplemental Guarantor Financial Information
Our obligations under the 2030 Notes, 2028 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$645.8 million and$2.0 billion for the three and nine months endedOctober 2, 2022 , respectively, and$583.7 million and$1.7 billion for the three and nine months endedOctober 3, 2021 , respectively. Our non-guarantor subsidiaries generated Adjusted EBITDA of$90.4 million and$291.4 million for the three and nine months endedOctober 2, 2022 , respectively, and$94.1 million and$264.5 million for the three and nine months endedOctober 3, 2021 , respectively. Our non-guarantor subsidiaries had total assets of$2.4 billion and$2.3 billion as ofOctober 2, 2022 , andJanuary 2, 2022 , respectively, and total liabilities of$966.0 million and$980.6 million as ofOctober 2, 2022 , andJanuary 2, 2022 , 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.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance withU.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. Please refer to "Critical Accounting Policies and Estimates" described in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report, from which there have been no material changes.
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