MASONITE INTERNATIONAL CORPORATION
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
months ended March 29, 2020 , and March 31, 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" and "Item 1A. Risk Factors" 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 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 63 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 three months ended
March 29, 2020 , we generated net sales of $383.9 million or 69.6%, $70.7 million
or 12.8% and $91.2 million or 16.5% in our North American Residential, Europe
and Architectural segments, respectively.
Key Factors Affecting Our Results of Operations
COVID-19
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
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MASONITE INTERNATIONAL CORPORATION 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. A number of countries, provinces, states, and municipalities have issued orders temporarily requiring persons who were not engaged in essential activities and businesses to remain at home. Other jurisdictions without stay-at-home orders have required non-essential businesses to close. In certain jurisdictions, residential and commercial construction have been designated as an essential business activity. Some of our facilities were temporarily shut down and some remain shut down resulting from the impact of these government orders. For example, ourUnited Kingdom facilities have been closed sinceMarch 27, 2020 and other locations could be temporarily idled due to the impacts of COVID-19. Where possible, we have instructed employees to work from home and currently, most customer interaction including order entry and receivables are being effectively handled remotely. Where remote work is not possible, we have taken steps to restrict visitor access to facilities, adjust break times and create additional break areas to help reduce employee density, manage shift schedules to reduce employee contact during shift changes to facilitate proper social distancing and eliminated overtime in many locations, all of which have resulted in decreased production levels. Further, we have modified employee policies related to attendance and the availability of paid and unpaid time off and attendance is voluntary at locations where our operations are exempt from applicable stay-at-home orders and continue to operate. While we believe we have a strong balance sheet and solid capital structure, we are taking steps to manage our cash flow. During the first quarter, we took several actions to reduce our spending and more closely manage cash during this uncertain period, including prioritizing capital spending for critical maintenance, safety and regulatory projects, placing restrictions on travel and temporarily suspending our share repurchase program and discretionary pension contributions. Although we are aggressively managing our response to the recent COVID-19 pandemic, given the fluid nature of the situation, its impact on our full year fiscal 2020 results and beyond is uncertain. We believe that the most significant elements of uncertainty are the intensity and duration of the impact on construction, renovation and consumer spending, tightening of consumer credit requirements, as well as the ability of our sales channels, supply chain, manufacturing and distribution to continue to operate with minimal disruption for the remainder of fiscal 2020. We believe that COVID-19 will have a material adverse impact on our revenue growth, overall profitability and cash flows in the near term and may lead to higher than normal inventory levels, higher sales-related reserves, potential impairment of goodwill and other long-lived assets, a volatile effective tax rate driven by changes in the mix of earnings across our jurisdictions and an impact on the effectiveness our internal controls over financial reporting. While COVID-19 did not begin to affect our financial results until late in the first quarter of 2020, its impact on our results in the first quarter of 2020 is not indicative of its impact on our results for the remainder of 2020, as evidenced by the decline in our net sales and results of operations in the month of April. As a result, we have taken further actions in April such as the deferral of merit and the implementation of temporary reductions in base pay for all salaried personnel inCanada andthe United States not directly involved in plant operations and in cash retainers for our Board of Directors to manage cash flow and reduce spending. OnMarch 27, 2020 ,President Trump signed intoU.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families and businesses affected by the COVID-19 pandemic and generally supporting theU.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to the tax depreciation methods for qualified improvement property. We are analyzing the different aspects of the CARES Act and other similar governmental programs to determine whether any specific provisions may impact us. While we may determine to apply for such programs, there is no guarantee that we will meet any eligibility requirements to participate in such programs, or even if we are able to participate, that such programs will provide meaningful benefit to our business. 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. 20 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION 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. 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. In the fourth quarter of 2019, we communicated price increases that became effective onFebruary 3, 2020 , to our North American Residential customers that, for certain products, were significantly greater than our typical annual increases. We also communicated our intent to incrementally invest$100 million over the next five years in the areas of service and quality improvements, product innovation and end user marketing. While we believe that these initiatives are necessary in order to increase the profile of, and demand for, our products and that they will benefit both us and our customers, we cannot predict whether our efforts will ultimately be successful or how our customers will react to these initiatives which could have a material impact on our results of operations for future periods. 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. 21 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
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 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. As of March 29, 2020 , we expect to incur approximately $5 million to $6
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 .
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
•Top Doors: 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
•Window Widgets: 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.
•PDS: 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.
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MASONITE INTERNATIONAL CORPORATION
Results of Operations
Three Months Ended
(In thousands) March 29, 2020 March 31, 2019
Net sales $ 551,228 $ 530,311
Cost of goods sold 416,947 418,207
Gross profit 134,281 112,104
Gross profit as a % of net sales 24.4 % 21.1 %
Selling, general and administration expenses 80,333 78,100
Selling, general and administration expenses as a % of net sales 14.6 %
14.7 %
Restructuring costs 1,941 3,740
Asset impairment - 10,625
Loss on disposal of subsidiaries - 4,605
Operating income 52,007 15,034
Interest expense, net 11,282 11,127
Other expense (income), net 49 (1,130)
Income before income tax expense 40,676 5,037
Income tax expense 9,639 58
Net income 31,037 4,979
Less: net income attributable to non-controlling interests 1,152 1,190
Net income attributable to Masonite $
29,885
Three Months EndedMarch 29, 2020 , Compared with Three Months EndedMarch 31, 2019 Net Sales Net sales in the three months endedMarch 29, 2020 , were$551.2 million , an increase of$20.9 million or 3.9% from$530.3 million in the three months endedMarch 31, 2019 . Net sales in the first quarter of 2020 were negatively impacted by$2.1 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by$23.0 million . Average unit price increased net sales in the first quarter of 2020 by$20.9 million or 3.9% compared to the 2019 period. Higher volumes excluding the incremental impact of acquisitions and divestitures ("base volume") increased net sales by$9.4 million or 1.8% in the first quarter of 2020 compared to the 2019 period. Our 2019 divestitures, net of acquisition, decreased sales by$7.3 million or 1.4% in the first quarter of 2020. Net sales of components and other products to external customers were flat in the first quarter of 2020 compared to the 2019 period.Net Sales and Percentage ofNet Sales by Reportable Segment Three Months
Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Sales $ 384,445 $ 71,156 $ 94,555 $ 5,427 $ 555,583
Intersegment sales (588) (430) (3,337) - (4,355)
Net sales to external customers $ 383,857 $ 70,726 $ 91,218 $ 5,427 $ 551,228
Percentage of consolidated
external net sales 69.6 % 12.8 % 16.5 %
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MASONITE INTERNATIONAL CORPORATION
Three Months Ended March 31, 2019
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Sales $ 354,802 $ 84,739 $ 88,353 $ 6,728 $ 534,622
Intersegment sales (1,077) (472) (2,762) - (4,311)
Net sales to external customers $ 353,725 $ 84,267 $ 85,591 $ 6,728 $ 530,311
Percentage of consolidated
external net sales 66.7 % 15.9 % 16.1 %
North American Residential
Net sales to external customers from facilities in the North American
Residential segment in the three months ended March 29, 2020 , were $383.9
million , an increase of $30.2 million or 8.5% from $353.7 million in the three
months ended March 31, 2019 . Net sales in the first quarter of 2020 were
negatively impacted by $0.7 million as a result of foreign exchange rate
fluctuations. Excluding this exchange rate impact, net sales would have
increased by $30.9 million or 8.7% due to changes in volume, average unit price
and sales of components and other products. Higher base volume increased net
sales in the first quarter of 2020 by $18.2 million or 5.1% compared to the 2019
period, primarily due to strong end market demand. Average unit price increased
net sales in the first quarter of 2020 by $12.3 million or 3.5% 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 $0.4 million higher in the first 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 March 29, 2020 , were $70.7 million , a decrease of $13.6
million or 16.1% from $84.3 million in the three months ended March 31, 2019 .
Net sales in the first quarter of 2020 were negatively impacted by $1.3 million
as a result of foreign exchange fluctuations. Excluding this exchange rate
impact, net sales would have decreased by $12.3 million or 14.6% due to changes
in volume, average unit price and sales of components and other products. Net
sales in the first quarter of 2020 were reduced by $7.3 million or 8.7% due to
the net impact of divestitures and an acquisition, including lost sales due to
the divestitures of three non-core businesses in 2019, partially offset by
incremental sales from the Top Doors acquisition. Lower base volume decreased
net sales by $7.0 million or 8.3% in the first quarter of 2020 compared to the
2019 period partially due to share declines in the builder channel and all of
our United Kingdom manufacturing facilities closing the last week of the quarter
as a result of COVID-19. Net sales of components and other products to external
customers were $0.3 million lower in the first quarter of 2020 compared to the
2019 period. Average unit price increased net sales in the first quarter of 2020
by $2.3 million or 2.7% compared to the 2019 period.
Architectural
Net sales to external customers from facilities in the Architectural segment in
the three months ended March 29, 2020 , were $91.2 million , an increase of $5.6
million or 6.5% from $85.6 million in the three months ended March 31, 2019 . Net
sales in the first 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 increased by $5.7 million or 6.7%. Average unit price
increased net sales in the first quarter of 2020 by $6.3 million or 7.4%
compared to the 2019 period primarily due to delivery of projects at higher
prices along with improved mix. Net sales of components and other products to
external customers were $0.7 million higher in the first quarter of 2020
compared to the 2019 period. Lower base volume decreased net sales in the first
quarter of 2020 by $1.3 million or 1.5% compared to the 2019 period primarily
due to our focus on more complex projects involving lower volumes but a
higher-value mix of products.
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MASONITE INTERNATIONAL CORPORATION
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 75.6% and 78.9% for the
three months ended March 29, 2020 , and March 31, 2019 , respectively. Material
cost of sales, direct labor costs and overhead as a percentage of net sales
decreased by 2.8%, 0.4% and 0.2%, respectively, compared to the 2019 period.
Partly offsetting these decreases, distribution costs in the first quarter of
2020 increased by 0.1% as a percentage of sales compared to the first quarter of
2019. Depreciation as a percentage of sales remained flat as compared to the
2019 period. The decrease in material cost of sales as a percentage of net sales
was driven by higher average unit prices and net deflation as a result of
material cost savings projects that more than offset commodity inflation and an
increase in tariffs. Direct labor as a percentage of net sales decreased due to
factory productivity initiatives. Overhead as a percentage of net sales
decreased due to increased volumes.
Selling, General and Administration Expenses
In the three months ended March 29, 2020 , selling, general and administration
("SG&A") expenses, as a percentage of net sales, were 14.6%, as compared to
14.7% in the three months ended March 31, 2019 , a decrease of 10 basis points.
SG&A expenses in the three months ended March 29, 2020 , were $80.3 million , an
increase of $2.2 million from $78.1 million in the three months ended March 31,
2019 . The overall increase was driven by an increase in personnel costs of $3.5
million , primarily due to resource investments to support growth, costs related
to employee benefits and incentive compensation, along with a $3.4 million
increase in legal costs related to a previously disclosed lawsuit. These
increases were partially offset by a net $3.8 million decrease in non-cash items
in SG&A expenses, including depreciation and amortization, loss on disposal of
property, plant and equipment, deferred compensation, and share based
compensation, incremental SG&A savings from our 2019 divestitures (net of
acquisition) of $0.7 million and favorable foreign exchange impacts of $0.2
million .
Restructuring Costs
Restructuring costs in the three months ended March 29, 2020 , and March 31,
2019 , were $1.9 million and $3.7 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
There were no asset impairment charges in the three months ended March 29, 2020 .
Asset impairment charges in the three months ended March 31, 2019 , were $10.6
million and resulted from actions associated with the 2019 Plan.
Loss on Disposal of Subsidiaries
There was no loss on disposal of subsidiaries in the three months ended March
29, 2020 . Loss on disposal of subsidiaries in the three months ended March 31,
2019 , was $4.6 million . The loss in the prior year related to the sale of PDS
for nominal consideration during the first quarter 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 three months ended March 29, 2020 , was $11.3
million , compared to $11.1 million in the three months ended March 31, 2019 ,
remaining relatively flat as compared to the 2019 period.
Other Expense (Income), Net
Other expense (income), net, in the three months ended March 29, 2020 , was
minimal as compared to $1.1 million of income in the three months ended March
31, 2019 , primarily due to a change in the fair value of plan assets in the
deferred compensation rabbi trust.
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MASONITE INTERNATIONAL CORPORATION
Income Tax Expense
Our income tax expense in the three months ended March 29, 2020 , was $9.6
million , compared to $0.1 million of income tax expense in the three months
ended March 31, 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 benefit of $0.4 million in the
three months ended March 29, 2020 , compared to $1.0 million of income tax
benefit recorded in the three months ended March 31, 2019 .
Segment Information
Three
Months Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 71,696 $ 9,679 $ 10,582 $ (10,440) $ 81,517
Adjusted EBITDA as a percentage
of segment net sales 18.7 % 13.7 % 11.6 % 14.8 %
Three Months Ended March 31, 2019
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Adjusted EBITDA $ 53,621 $ 9,997 $ 7,614 $ (5,753) $ 65,479
Adjusted EBITDA as a percentage
of segment net sales 15.2 % 11.9 % 8.9 % 12.3 %
The following reconciles net income (loss) attributable to Masonite to Adjusted
EBITDA:
Three Months Ended March 29, 2020
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 58,811 $ 3,483 $ 4,580 $ (36,989) $ 29,885
Plus:
Depreciation 9,364 2,457 2,822 1,375 16,018
Amortization 595 3,562 1,922 380 6,459
Share based compensation expense - - - 3,470 3,470
Loss on disposal of property,
plant and equipment 1,204 3 396 19 1,622
Restructuring costs 849 (37) 862 267 1,941
Interest expense, net - - - 11,282 11,282
Other expense (income), net - 211 - (162) 49
Income tax expense - - - 9,639 9,639
Net income attributable to
non-controlling interest 873 - - 279 1,152
Adjusted EBITDA $ 71,696 $ 9,679 $ 10,582 $ (10,440) $ 81,517
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MASONITE INTERNATIONAL CORPORATION
Three
Months Ended
North American Corporate &
(In thousands) Residential Europe Architectural Other Total
Net income (loss) attributable to
Masonite $ 30,261 $ (4,147) $ 2,079 $ (24,404) $ 3,789
Plus:
Depreciation 9,079 2,382 2,741 4,083 18,285
Amortization 449 3,965 2,093 1,090 7,597
Share based compensation expense - - - 2,680 2,680
Loss on disposal of property,
plant and equipment 341 2,469 97 6 2,913
Restructuring costs 1,880 862 604 394 3,740
Asset impairment 10,625 - - - 10,625
Loss on disposal of subsidiaries - 4,605 - - 4,605
Interest expense, net - - - 11,127 11,127
Other expense (income), net - (139) - (991) (1,130)
Income tax expense - - - 58 58
Net income attributable to
non-controlling interest 986 - - 204 1,190
Adjusted EBITDA $ 53,621 $ 9,997 $ 7,614 $ (5,753) $ 65,479
Adjusted EBITDA in our North American Residential segment increased $18.1
million , or 33.8%, to $71.7 million in the three months ended March 29, 2020 ,
from $53.6 million in the three months ended March 31, 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 first 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 decreased $0.3 million , or 3.0%, to $9.7
million in the three months ended March 29, 2020 , from $10.0 million in the
three months ended March 31, 2019 . Adjusted EBITDA in the Europe segment
included corporate allocations of shared costs of $0.3 million in both the first
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 increased $3.0 million , or 39.5%,
to $10.6 million in the three months ended March 29, 2020 , from $7.6 million in
the three months ended March 31, 2019 . Adjusted EBITDA in the Architectural
segment also included corporate allocations of shared costs of $2.7 million , in
both the first quarter of 2020 and 2019. 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.
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MASONITE INTERNATIONAL CORPORATION Due to the rapidly evolving and highly uncertain nature and duration of the COVID-10 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. Accordingly, we have taken actions to reduce spending and manage cash flow, such as reducing our capital spend below the anticipated amount of$70 million to$75 million , as previously noted in Key Factors Affecting Our Results of Operations. 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 ofMarch 29, 2020 , we had$114.4 million of cash and cash equivalents, availability under our ABL Facility of$185.3 million and availability under our AR Sales Program of$14.8 million . Cash Flows Cash provided by operating activities was$6.0 million during the three months endedMarch 29, 2020 , compared to$18.5 million in the three months endedMarch 31, 2019 . This$12.5 million decrease in cash provided by operating activities was due to changes in net working capital in the first three months of 2020 compared with the same period in 2019, partially offset by a$17.4 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items. Cash used in investing activities was$17.8 million during the three months endedMarch 29, 2020 , compared to$21.2 million in the three months endedMarch 31, 2019 . This$3.4 million decrease in cash used in investing activities was driven by a$3.2 million decrease in cash additions to property, plant and equipment and a net decrease in other investing outflows of$0.2 million in the first three months of 2020 compared to the same period in 2019. Cash used in financing activities was$37.0 million during the three months endedMarch 29, 2020 , compared to$34.3 million during the three months endedMarch 31, 2019 . This$2.7 million increase in cash used in financing activities was driven by a$1.6 million increase in cash used for repurchases of common shares, a$0.7 million increase in distributions to non-controlling interests and an increase in other financing outflows of$0.4 million in the first three 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 three months endedMarch 29, 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 onMarch 18, 2020 . During the three months endedMarch 31, 2019 , we repurchased 646,102 of our common shares in the open market at an aggregate cost of$33.2 million . As ofMarch 29, 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 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 ofMarch 29, 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 a customer that has had a material adverse effect on our results of operations in the first quarter 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 28 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION 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. 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 ofMarch 29, 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 endedDecember 29, 2019 . As ofMarch 29, 2020 , we were in compliance with all covenants under the indenture governing the 2028 Notes. 5.750% Senior Notes due 2026 OnAugust 27, 2018 , we issued$300.0 million aggregate principal senior unsecured notes (the "2026 Notes"), all of which were outstanding as ofMarch 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 endedDecember 29, 2019 . As ofMarch 29, 2020 , we were in compliance with all covenants under the indenture governing the 2026 Notes. ABL Facility OnJanuary 31, 2019 , we and certain of our subsidiaries entered into a$250.0 million asset-based revolving credit facility (the "ABL Facility") maturing onJanuary 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 endedDecember 29, 2019 . As ofMarch 29, 2020 , we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of$185.3 million under our ABL Facility and there were no amounts outstanding as ofMarch 29, 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$491.9 million and$472.9 million for the three months endedMarch 29, 2020 , andMarch 31, 2019 , respectively. Our non-guarantor subsidiaries generated Adjusted EBITDA of$68.4 million and$57.1 million for the three months endedMarch 29, 2020 , andMarch 31, 2019 , respectively. Our non-guarantor subsidiaries had total assets of$1.9 billion and$2.0 billion and total liabilities of$816.0 million and$834.5 million as ofMarch 29, 2020 , andDecember 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 endedDecember 29, 2019 . We believe there have been no material changes to the information provided therein. 29 --------------------------------------------------------------------------------
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MASONITE INTERNATIONAL CORPORATION
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