UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________ x(Amendment No. 1)
____________________________
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172023
or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-11796
____________________________
Masonite International Corporation
(Exact name of registrant as specified in its charter)
____________________________
| | | | | | | | |
| | |
British Columbia, Canada | | 98-0377314 |
| (State or other jurisdiction of incorporation or organization) | | 98-0377314
(I.R.S. Employer Identification No.) |
2771 Rutherford Road
Concord, Ontario L4K 2N6 Canada
(Address of principal executive offices, zip code)
(800) 895-2723
(Registrant’s telephone number, including area code)
____________________________
Securities Registered Pursuant to Section 12(b) of the Act:
|
| | | | | | | |
| Common Stock (no par value) | DOOR | New York Stock Exchange |
| (Title of class) | (Trading symbol) | (Name of exchange on which registered) |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x☒ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Large accelerated filer | | ☒ | | x | Accelerated filer | | o☐ |
| Non-accelerated filer | | ☐ | | o (Do not check if a smaller reporting company)
| Smaller reporting company | | o☐ |
| | | | Emerging growth company | | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant has filed a report on and attestation to management's assessment of the effectiveness of its internal control financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of July 2, 2017,2023, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the shares of voting common stock held by non-affiliates of the registrant, computed by reference to the closing sales price of such shares on the New York Stock Exchange on July 2, 2017,2023, was $2.2 billion.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court. Yes x☒ No o☐
The registrant had outstanding 28,113,872 21,978,219 shares of Common Stock, no par value, as of February 22, 2018.April 24, 2024.
Auditor Name: Ernst & Young LLP Auditor Location: Tampa, FL Auditors Firm ID: 42
DOCUMENTS INCORPORATED BY REFERENCE
PortionsNone
EXPLANATORY NOTE
Masonite International Corporation (the "Company"), a corporation incorporated under the laws of British Columbia, is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the registrant’s definitive Proxy Statement for its 2017 Annual General Meeting of Shareholders scheduled to be held on May 10, 2018, to beyear ended December 31, 2023, originally filed with the Securities and Exchange Commission (the “SEC”), on February 29, 2024 (the “Original Form 10-K”) solely to:
•amend Part III, Items 10, 11, 12 13 and 14 of the Original Form 10-K to include the information required by and not later than 120 days after December 31, 2017, are incorporatedincluded in such Items;
•remove the reference on the cover of the Original Form 10-K to the incorporation by reference of certain information from either a proxy statement or an amendment on Form 10-K into Part III Items 10-14 of the Original Form 10-K; and
•file new certifications of our principal executive officer and principal financial officer as exhibits to this Annual Report onAmendment under Item 15 of Part IV hereof pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, and to Section 302 of the Sarbanes-Oxley Act of 2002.
Except as explicitly set forth herein, this Amendment does not otherwise change, modify or update the disclosures in, or exhibits to, the Original Form 10-K.
MASONITE INTERNATIONAL CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
December 31, 2017
|
| | | |
| | | Page No. |
PART I | | | |
Item 1 | | | |
Item 1A | | | |
Item 1B | | | |
Item 2 | | | |
Item 3 | | | |
Item 4 | | | |
PART II | | | |
Item 5 | | | |
Item 6 | | | |
Item 7 | | | |
Item 7A | | | |
Item 8 | | | |
Item 9 | | | |
Item 9A | | | |
Item 9B | | | |
PART III | | | |
Item 10 | | | |
Item 11 | | | |
Item 12 | | | |
Item 13 | | | |
Item 14 | | | |
PART IV | | | |
Item 15 | | | |
Item 16 | | | |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "might," "will," "should," "estimate," "project," "plan," "anticipate," "expect," "intend," "outlook," "believe" and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" and elsewhere in this Annual Report.
The following list represents some, but not necessarily all, of the factors that could cause actual results to differ from historical results or those anticipated or predicted by these forward-looking statements:
our ability to successfully implement our business strategy;
general economic, market and business conditions;
levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity;
the United Kingdom's formal trigger of the two year process for its exit from the European Union, and related negotiations;
competition;
our ability to manage our operations including integrating our recent acquisitions and companies or assets we acquire in the future;
our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations, and to meet our debt service obligations, including our obligations under our senior notes and our ABL Facility;
labor relations (i.e., disruptions, strikes or work stoppages), labor costs and availability of labor;
increases in the costs of raw materials or wages or any shortage in supplies or labor;
our ability to keep pace with technological developments;
the actions taken by, and the continued success of, certain key customers;
our ability to maintain relationships with certain customers;
the ability to generate the benefits of our restructuring activities;
retention of key management personnel;
environmental and other government regulations; and
limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and our ABL Facility.
We caution you that the foregoing list of important factors is not exclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Annual Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
PART I
Unless we state otherwise or the context otherwise requires, in this Annual ReportAmendment, all references to "Masonite", "we", "us", "our" and the "Company" refer to Masonite International Corporation and its subsidiaries.
Item 1. Business
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 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. Today, we believe we hold either the number one or two market positions in the seven product categories we target in North America: interior molded residential doors; interior stile and rail residential doors; exterior fiberglass residential doors; exterior steel residential doors; interior architectural wood doors; wood veneers and molded door facings; and door core.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale and retail distribution channels. Our broad portfolio of brands, including Masonite®,Marshfield®, Premdor®, Mohawk®, Megantic®, Algoma®, Birchwood Best®, Door-StopTM, Harring DoorsTM, Performance Doorset SolutionsTM and National HickmanTM are among the most recognized in the door industry and are associated with innovation, quality and value. In the year ended December 31, 2017, we sold approximately 35 million doors to approximately 7,000 customers in 65 countries. Our fiscal year 2017 net sales by segment and global net sales of doors by end market are set forth below: |
| | |
Net Sales
by Segment - 2017 | | Global Net Sales of Doors
by End Market - 2017 |
| | |
See Note 15 to our consolidated financial statements for additional information about our segments.
Over the past several years, we have invested in advanced technologies to increase the automation of our manufacturing processes, increase quality and shorten lead times and introduced targeted e-commerce and other marketing initiatives to improve our sales and marketing efforts and customer experience. In addition, we implemented a disciplined acquisition strategy that solidified our presence in the United Kingdom's interior and exterior residential door markets, the North American residential molded and stile and rail interior door markets and created leadership positions in the attractive North American commercial and architectural interior wood door, door core and wood veneer markets.
We operate 64 manufacturing and distribution facilities in 8 countries in North America, Europe, South America and Asia, which are strategically located to serve our customers. We are one of the few vertically integrated door manufacturers in the world and one of only two in the North American residential molded interior door industry as well as the only vertically integrated door manufacturer in the North American architectural interior wood door industry. Our vertical integration extends to all steps of the production process from initial design, development and production
of steel press plates to produce interior molded and exterior fiberglass door facings to the manufacturing of door components, such as door cores, wood veneers and molded facings, to door slab assembly. We also offer incremental value by pre-machining doors for hardware, hanging doors in frames with glass and hardware and pre-finishing doors with paint or stain. We believe that our vertical integration and automation enhance our ability to develop new and proprietary products, provide greater value and improved customer service and create high barriers to entry. We also believe vertical integration enhances our ability to cut costs, although our cost structure is subject to certain factors beyond our control, such as global commodity shocks.
Competitive Strengths
We believe the following competitive strengths differentiate us from other building product companies and position us for significant growth as part of a multi-year, multi stage recovery in our end markets.
Leading Market Positions in Targeted End Markets
Within the North American door market, we believe we hold either the number one or two market position in the seven product categories we target. We are one of the largest manufacturers of doors and door components in the world, selling approximately 35 million residential and architectural interior and exterior doors in 2017; approximately 23 million of which were sold in the United States, our largest market. We believe our scale and leadership positions support our commitment to invest in advanced manufacturing and e-commerce initiatives and develop innovative new products, to effectively service regional and national customers and to offer broad product lines across our markets, while reducing our materials and unit production costs.
Extensive Portfolio with Strong Brand Recognition
Our broad portfolio of brands is among the most recognized in the door industry and is associated with superior design, innovation, reliability and quality. Builder Magazine recognized the Masonite® brand as one of the leading door brands in the United States in 2017 in the following categories: Brand Familiarity, Brand Used in Past Two Years and Brand Used the Most.
Long-Term Customer Relationships and Well-Established Multi-Channel Distribution
As a result of our longstanding commitment to customer service and product innovation, we have well-established relationships within the wholesale and retail channels. All of our top 20 customers have purchased doors from us for at least 10 years, although we generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase our products. In addition, our manufacturing and distribution facilities are strategically located to best serve our customers. We believe that our long-term relationships with leading retailers, wholesale distributors, major homebuilders, contractors and architects will enable us to continue to increase our market penetration in the residential and architectural construction markets.
Leading Technological Innovation Within the Door Industry
We believe we are a leader in technological innovation in the design of doors and door components and in the complex processes required to manufacture high quality products quickly and consistently. We intend to continue developing new and innovative products at our 145 thousand square foot innovation center in West Chicago, Illinois, while improving critical processes in the manufacturing and selling of our products. Our future success will depend on our ability to develop and introduce new or improved products, to continue to improve our manufacturing and product service processes, and to protect our rights to the technologies used in our products. We have also created proprietary web-based sales and marketing tools, including MAX Masonite Xpress Configurator® for our residential and DoorbuilderTM for our architectural customer networks, to improve selection and order processes, reduce order entry errors, create more accurate quotes, improve communication and facilitate a better customer experience. As of December 31, 2017, we had 238 design patents and design patent applications and 176 utility patents and patent applications in the United States, and 195 foreign design patents and patent applications and 252 foreign utility patents and patent applications.
Vertically Integrated Operations Across the Production Process
We are one of the few vertically integrated door manufacturers in the world. In North America, we are one of only two vertically integrated manufacturers of molded interior residential doors and the only vertically integrated manufacturer of non-residential interior wood doors. Our vertical integration extends across the production process, which we believe enhances our ability to develop products and respond quickly to changing consumer preferences, provides greater value and better service for our customers, and potentially lowers our costs. We leverage our assets through our vertically integrated operations in a manner that is difficult to replicate without significant capital investment.
Experienced Management Team with Extensive Experience and a Successful Track Record
We are managed by results-driven executives with a proven track record of successfully managing multiple brands, winning new business, reducing costs and identifying, executing and integrating strategic acquisitions. Several members of our management team previously worked at Fortune 500 companies, including Honeywell International Inc. (formerly AlliedSignal Inc.), General Motors Company and Newell Rubbermaid Inc., where they utilized advanced technologies to improve cost structures and create competitive advantages.
Growth Strategy
Our vision is to be the premier provider of doors and door components for the global door industry. We are committed to executing the following balanced and complementary strategies to continue to further strengthen our leadership positions, create value for our customers, enhance our portfolio of leading brands and achieve our top and bottom line growth objectives.
Develop Innovative, Market-Leading Products
We intend to continue developing new and innovative products to grow our sales and enhance our returns. We plan to capitalize on the anticipated growth in door demand and evolving style trends by continuing to introduce new, value-added products that build upon our comprehensive portfolio of door styles, designs, textures, components, options, applications, and materials. We have consistently demonstrated the ability to develop products that are differentiated by compelling design features and recognized for their reliability and quality. For example, we recently introduced our Heritage Series exterior fiberglass doors to complement our Heritage interior doors, with a combination of crisp, clean lines inspired by classic craftsman architecture coupled with the proven reliability of fiberglass. We also recently added additional glass sizes and new fir textured offerings to our Vista Grande line of exterior doors that integrate glass into the door in a seamless assembly, giving a wider view through the door and clean, modern design lines. Within our interior line, we recently introduced our Barn Door Hardware kits to provide contemporary style to interior openings.
As more consumers are requesting products that are factory finished, we continue to develop and invest in factory finished products tailored to the needs of our residential and architectural markets. We are also focused on managing our product complexity through programs to consolidate products and components without compromising customer value, in addition to selectively canceling products that are no longer on trend or that are replaced by new offerings.
Expand our Presence in Attractive Markets to Accelerate Growth and Improve Margins
We plan to continue to focus our operations on attractive new market and channel opportunities. For example, we believe we can expand our leading position in the North American architectural wood door market by focusing on strategic sectors within this market, such as education, health care and hospitality. By expanding our market presence and achieving greater economies of scale, we intend to capitalize on the ongoing recovery in the U.S. non-residential construction market. Additionally, we believe we can expand our market growth in the architectural wood door market through the introduction of products with high design and performance attributes. We are also focused on expanding our business in the residential new construction market and with professional repair, renovation and remodeling contractors, both domestically and internationally.
We are also increasing our focus on multi-location in-home remodeling distributors and contractors. This channel is expected to grow with a shift in certain demographics from a "Do it Yourself" to a "Do it For You" offering. Using enhanced marketing, training and e-commerce tools, our teams plan to target specific multi-location remodeling distributors and contractors and attempt to increase our overall presence in the important repair, renovation and remodeling business.
Leverage Our Marketing, Sales and Customer Service Activities to Further Drive Sales
We intend to continue to pursue additional growth opportunities by leveraging our extensive sales, marketing and customer service efforts in innovative ways. In 2017, we re-launched the Masonite brand with a goal to change the conversation around doors through the compilation and sharing of design trend knowledge. This represents an investment in the success of our customers to drive higher consideration of doors in the homebuilding and renovation process, allowing us to unlock the door’s full potential to be a defining element in the home. We have also developed several proprietary web-based tools for our customers, including MAX Masonite Xpress Configurator®, MC2 and MConnectTM, to enhance communication and information flow with our customers in our wholesale dealer network by providing a more customized buying experience, customer leads and quoting capabilities and simplifying the procurement process. We also intend to capture additional share in the attractive professional repair, renovation and remodeling markets by helping professional contractors produce customized marketing materials to assist them in their sales efforts. In addition, we plan to continue developing effective marketing initiatives to expand our business with professional dealers and homebuilders.
Continue to Pursue Operational Excellence
As part of our commitment to continuous improvement, we have launched initiatives to make our operations lean and efficient. We utilize a Lean Six Sigma Continuous Improvement program, and more recently, we have expanded our commitment by adopting a complete lean operating philosophy known as MVantage. During 2017, we strategically focused on key manufacturing sites in an effort to improve quality, service and delivery performance. In 2018, we intend to focus on three tenets: plant transformation, process improvement and training. We believe that our commitment to MVantage will not only assist Masonite in its efforts to set the industry benchmark for innovation, quality, delivery, service and support but also help improve safety, productivity and financial performance.
Pursue Strategic Acquisitions to Create Leadership Positions
We intend to continue our disciplined approach to identifying, executing and integrating strategic acquisitions while maintaining a strong balance sheet, although we expect competition for the best candidates. We target 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. For example, since 2011 we have made 14 strategic acquisitions to create leadership positions in (i) the attractive North American architectural wood door and door core market through the acquisitions of Porta Industries, Inc. (“Marshfield”), Algoma Holding Company (“Algoma”), Les Portes Baillargeon, Inc. (“Baillargeon”), Harring Doors Corporation ("Harring"), USA Wood Door, Inc. ("USA Wood Door"), FyreWerks Inc. ("FyreWerks") and A&F Wood Products, Inc. ("A&F Wood Products"), (ii) the North American interior stile and rail residential door market through the acquisitions of Portes Lemieux Inc. (“Lemieux”) and the assets of a door manufacturing operation located in Chile (the "Chile" acquisition) for servicing the North American market, (iii) the production and sale of wood veneers with the acquisition of Birchwood Lumber & Veneer Co., Inc. (“Birchwood”) and (iv) various markets in the United Kingdom with the acquisitions of Door-Stop International Limited ("Door-Stop"), Performance Doorset Solutions Limited ("PDS"), Hickman Industries Limited ("Hickman") and DW3 Products Holdings Limited ("DW3").
Product Lines
Residential Doors
We sell an extensive range of interior and exterior doors in a wide array of designs, materials and sizes. While substantially all interior doors are made with wood and related materials such as hardboard (including wood composite molded and flat door facings), the use of wood in exterior doors in North America and Europe has declined over the last two decades as a result of the increased penetration of steel and fiberglass doors. Our exterior doors are made primarily of steel or fiberglass. Our residential doors are molded panel, flush, stile and rail, routed medium-density fiberboard (“MDF”), steel or fiberglass.
Molded panel doors are interior doors available either with a hollow or solid core and are made by assembling two molded door skin panels around a wood or MDF frame. Molded panel doors are routinely used for closets, bedrooms, bathrooms and hallways. Our molded panel product line is subdivided into several distinct product groups: our original Molded Panel series is a combination of classic styling, durable construction and variety of design preferred by our customers when price sensitivity is a critical component in the product selection; the four doors within our Anniversary Collection® embody themed, period and architectural style specific designs; the West EndTM Collection strengthens our tradition of design innovation by introducing the clean and simple aesthetics found in modern linear designs to the molded panel interior door category; and the Heritage® Series, which features recessed, flat panels and sharp, Shaker-style profiles which speak to a clean, modern aesthetic while retaining comfortable familiarity found in today’s interiors. All of our molded panel doors can be upgraded with our proprietary, wheat straw based Safe ‘N Sound® door core or our environmentally friendly EmeraldTM door construction which enables home owners, builders and architects to meet specific product requirements and “green” specifications to attain LEED certification for a building or dwelling.
Flush interior doors are available either with a hollow or solid core and are made by assembling two facings of plywood, MDF, composite wood or hardboard over a wood or MDF frame. These doors can either have a wood veneer surface suitable for paint or staining or a composite wood surface suitable for paint. Our flush doors range from base residential flush doors consisting of unfinished composite wood to the ultra high-end exotic wood veneer doors.
Stile and rail doors are made from wood or MDF with individual vertical stiles, horizontal rails and panels, which have been cut, milled, veneered and assembled from lumber such as clear pine, knotty pine, oak and cherry. Within our stile and rail line, glass panels can be inserted to create what is commonly referred to as a French door and we have over 50 glass designs for use in making French doors. Where horizontal slats are inserted between the stiles and rails, the resulting door is referred to as a louver door. For interior purposes, stile and rail doors are primarily used for hallways, room dividers, closets and bathrooms. For exterior purposes, these doors are used as entry doors with decorative glass inserts (known as lites) often inserted into these doors.
Routed MDF doors are produced by using a computer controlled router carver to machine a single piece of double refined MDF. Our routed MDF door category is comprised of two distinct product lines known as the Bolection® and CymaTM door. The offering of designs in this category is extensive, as the manufacturing of routed MDF doors is based on a routing program where the milling machine selectively removes material to reveal the final design.
Steel doors are exterior doors made by assembling two interlocking steel facings (paneled or flat) or attaching two steel facings to a wood or steel frame and injecting the core with polyurethane insulation. With our functional Utility Steel series, the design centric High Definition family and the prefinished Sta-Tru® HD, we offer customers the freedom to select the right combination of design, protection and compliance required for essentially any paint grade exterior door application. In addition, our product offering is significantly increased through our variety of compatible clear or decorative glass designs.
Fiberglass doors are considered premier exterior doors and are made by assembling two fiberglass door facings to a wood frame or composite material and injecting the core with polyurethane insulation. Led by the Barrington® door, our fiberglass door lines offer innovative designs, construction and finishes. The Barrington® family of doors is specifically designed to replicate the construction, look and feel of a real wood door. The Door-StopTM branded fiberglass doors are manufactured into prehung door sets and shipped to our customers with industry-leading lead times. We believe that our patented panel designs, sophisticated wood grain texturing and multiple application-specific construction processes will help our Barrington® and Belleville® fiberglass lines retain a distinct role in the exterior product category in the future.
Architectural Doors
Architectural doors are typically highly specified products designed, constructed and tested to ensure regulatory compliance and that certification requirements such as FSC and LEED certifications are met. We offer an extensive line of architectural interior doors meeting custom market requirements and ranging from the entry level molded panel doors to the high end custom designed flush wood doors with exotic veneer inlay designs. Our architectural doors are molded panel, flush, stile and rail or routed MDF and can be offered with varying levels of fire and sound rating as well as radiation shielding. Our architectural flush doors can also be produced with a laminate veneer facing. High pressure laminates are used when durability and aesthetics are the customer’s main concern, while low pressure laminates are utilized when consistency in surface color, texture and value are equal requirements.
Components
In addition to residential and architectural doors, we also sell several door components to the building materials industry. Within the residential new construction market, we provide interior door facings, agri-fiber and particleboard door cores, MDF and wood cut-stock components to multiple manufacturers. Within the architectural building construction market, we are a leading component supplier of various critical door components and the largest wood veneer door skin supplier. Additionally, we are one of the leading providers of mineral and particleboard door cores to the North American architectural door market.
Molded door facings are thin sheets of molded hardboard produced by grinding or defibrating wood chips, adding resin and other ingredients, creating a thick fibrous mat composed of dry wood fibers and pressing the mat between two steel press plates to form a molded sheet, the surface of which may be smooth or may contain a wood grain pattern. Following pressing, molded door facings are trimmed, painted and shipped to door manufacturing plants where they are mounted on frames to produce molded doors.
Door framing materials, commonly referred to as cut stock, are wood or MDF components that constitute the frame on which interior and exterior door facings are attached. Door cores are pressed fiber mats of refined wood chips or agri-fiber used in the construction of solid core doors. For doors that must achieve a fire rating higher than 45 minutes, the door core consists of an inert mineral core or inorganic intumescent compounds.
Sales and Marketing
Our sales and marketing efforts are focused around several key initiatives designed to drive organic growth, influence the mix sold and strengthen our customer relationships.
Multi-Level/Segment Distribution Strategy
We market our products through and to wholesale distributors, retail stores, independent and pro dealers, builders, remodelers, architects, door and hardware distributors and general contractors.
In the residential market, we deploy an "All Products" cross merchandising strategy, which provides certain of our retail and wholesale customers with access to our entire product range. Our "All Products" customers benefit from consolidating their purchases, leveraging our branding, marketing and selling strategies and improving their ability to influence the mix of products sold to generate greater value. We service our big box retail customers directly from our own door fabrication facilities which provide value added services and logistics, including store direct delivery of doors and entry systems and a full complement of in-store merchandising, displays and field service. Our wholesale residential channel customers are managed by our own sales professionals who focus on down channel initiatives designed to ensure our products are "pulled" through our North American wholesale distribution network.
Our architectural building construction customers are serviced by a separate and distinct sales team providing architects, door and hardware distributors, general contractors and project owners a wide variety of technical specifications, specific brand differentiation, compliance and regulatory approvals, product application advice and multisegment specialization work across North America. Additionally, our sales team is supported by marketing strategies aimed to drive product specification throughout our value chains via distributors, architects and end users.
Service Innovation
We leverage our marketing, sales and customer service activities to ensure our products are strategically pulled through our multiple distribution channels rather than deploying a more common, tactical "push" strategy like some of our competitors. Our marketing approach is designed to increase the value of each and every door opening we fill with our doors and entry systems, regardless of the channel being used to access our products.
Our proprietary web based tools accessible on our website also provide our customers with a direct link to our information systems to allow for accelerated and easier access to a wide variety of information and selling aids designed to increase customer satisfaction. Within our North American Residential business, our web-based tools include MConnect®, an online service allowing our customers access to several other E-Commerce tools designed to enhance the manufacturer-customer relationship. Once connected to our system, customers have access to MAX®, Masonite’s Xpress Configurator®, a web based tool created to design customized door systems and influence the mix, improve selection and ordering processes, reduce order entry and quoting errors, and improve overall communication throughout the channel; MC2, our self-service, custom literature tool; the Product Corner, a section advising customers of the
features and benefits of our newest products; Market Intelligence Section, which provides some of the latest economic statistics influencing our industry; the Treasure Chest, which is a collection of discontinued glass products providing customers with promotional based pricing on obsolete products; and Order Tracker, which allows customers to follow their purchase orders through the production process and confirm delivery dates. MConnect®, in conjunction with our website, improves transaction execution, enhances communication and information flow with our customers and their dealers providing a more customized buying experience. In Europe, our Door-Stop International website is a fully functional configuration and order platform that supports our entry door customers in the United Kingdom. The dynamic integration of Door-Stop's ERP and its website ensure that the products customers see, configure and order are in stock, which ensures that we are able to deliver on our promise of dependability. In our Architectural business, we have constructed a dedicated ordering platform for our distribution customers through our USA Wood Door website, which affords customers the ability to configure and purchase prefinished and machined wood doors through the streamlined Door Builder utility. Architectural distributors are able to make, retain and track quotes all within the USA Wood Door application.
Customers
During fiscal year 2017, we sold our products worldwide to approximately 7,000 customers. We have developed strong relationships with these customers through our "All Products" cross merchandising strategy. Our vertical integration facilitates our "All Products" strategy with our door fabrication facilities in particular providing value-added fabrication and logistical services to our customers, including store delivery of pre-hung interior and exterior doors to our customers in North America. All of our top 20 customers have purchased doors from us for at least 10 years.
Although we have a large number of customers worldwide, our largest customer, The Home Depot, accounted for approximately 18% of our total net sales in fiscal year 2017. Due to the depth and breadth of the relationship with this customer, which operates in multiple North American geographic regions and which sells a variety of our products, our management believes that this relationship is likely to continue.
Distribution
Residential doors are primarily sold through wholesale and retail distribution channels.
Wholesale. In the wholesale channel, door manufacturers sell their products to homebuilders, contractors, lumber yards, dealers and building products retailers in two-steps or one step. Two-step distributors typically purchase doors from manufacturers in bulk and customize them by installing windows, or "lites", and pre-hanging them. One-step distributors sell doors directly to homebuilders and remodeling contractors who install the doors.
Retail. The retail channel generally targets consumers and smaller remodeling contractors who purchase doors through retail home centers and smaller specialty retailers. Retail home centers offer large, warehouse size retail space with large selections, while specialty retailers are niche players that focus on certain styles and types of doors.
Architectural doors are primarily sold through specialized one-step wholesale distribution channels where distributors sell to contractors and installers.
Research and Development
We believe we are a leader in technological innovation and development of doors, door components and door entry systems and the manufacturing processes involved in making such products. We believe that research and development is a competitive advantage for us, and we intend to capitalize on our leadership in this area through the development of more new and innovative products. Our research and development and engineering capabilities enable us to develop and implement product and manufacturing process improvements that enhance the manufacturing efficiency of our products, improve quality and reduce costs.
As an integrated manufacturer, we believe that we are well positioned to take advantage of the growing global demand for a variety of molded door facing designs. We have an internal capability to create new molded door facing designs and manufacture our own molds for use in our own facilities. We believe this provides us with the ability to develop proprietary designs that enjoy a strong identity in the marketplace; more flexibility in meeting customer demand; quicker reaction time in the production of new designs or design changes; and greater responsiveness to customer needs. This capability also enables us to develop and implement product and process improvements with respect to the production of molded door facings and doors which enhance production efficiency and reduce costs.
In the past few years, our research and development activities have had a significant focus on process and material improvements in our products. These improvements have led to reductions in manufacturing costs and improvements in product quality. We have also directed our design innovation to address the growing need for safety and security, sound dampening and fire resistant products in the architectural wood door market.
Manufacturing Process
Our Manufacturing operations consist of three major manufacturing processes: (1) component manufacturing, (2) door slab assembly and (3) value-added ready to install door fabrication.
We have a leading position in the manufacturing of door components, including internal framing components (stile and rails), glass inserts (lites), door core, interior door facings (molded and veneer) and exterior door facings. The manufacturing of interior molded door facings is the most complex of these processes requiring a significant investment in large scale wood fiber processing equipment. Interior molded door facings are produced by combining fine wood particles, synthetic resins and other additives under heat and pressure in large multi-opening automated presses utilizing Masonite proprietary steel plates. The facings are then primed, cut and inspected in a second highly automated continuous operation prior to being packed for shipping to our door assembly plants. We operate five interior molded door facing plants around the world, two in North America and one in each of South America, Europe and Asia. Our sole United States based plant in Laurel, Mississippi, is one of the largest door facing plants in the world and we believe one of the most technologically advanced in the industry.
Interior residential hollow and solid core door manufacturing is an assembly operation that is primarily accomplished in the United States through the use of semi-skilled manual labor. The construction process for a standard flush or molded interior door is based on assembly of door facings and various internal framing and support components, followed by the doors being trimmed to their final specifications.
The assembly process varies by type of door, from a relatively simple process for flush and molded doors, where the door facings are glued to a wood frame, to more complex processes where many pieces of solid and engineered wood are converted to louver or stile and rail door slabs. Architectural interior doors require another level of customization and sophistication employing the use of solid cores with varying degrees of sound dampening and fire retarding attributes, furniture quality wood veneer facings, as well as secondary machining operations to incorporate more sophisticated commercial hardware, openers and locks. Additionally, architectural doors are typically pre-finished prior to sale.
The manufacturing of steel and fiberglass exterior door slabs is a semi-automated process that entails combining laminated wood or rot free composite framing components between two door facings and then injecting the resulting hollow core structure with insulating polyurethane expanding foam core materials. We invested in fiberglass manufacturing technology, including the vertical integration of our own fiberglass sheet molding compound plant at our Laurel, Mississippi, facility in 2006. In 2008, we consolidated fiberglass slab manufacturing from multiple locations throughout North America into a single highly automated facility in Dickson, Tennessee, significantly improving the reliability and quality of these products while simultaneously lowering cost and reducing lead times.
Short set-up times, proper production scheduling and coordinated material movement are essential to achieve a flexible process capable of producing a wide range of door types, sizes, materials and styles. We make use of our vertically integrated and flexible manufacturing operations together with scalable logistics primarily through the use of common carriers to fill customers’ orders and to minimize our investment in finished goods inventory.
Finally, interior flush and molded, stile and rail, louver and exterior door slabs manufactured at our door assembly plants are either sold directly to our customers or transferred to our door fabrication facilities where value added services are performed. These value added services include machining doors for hinges and locksets, installing the door slabs into ready to install frames, installing hardware, adding glass inserts and side lites, painting and staining, packaging and logistical services to our customers.
Raw Materials
While Masonite is vertically integrated, we require a regular supply of raw materials, such as wood chips, some cut stock components, various composites, steel, glass, paint, stain and primer as well as petroleum-based products such as binders, resins and plastic injection frames to manufacture and assemble our products. Our materials cost accounts for approximately 53% of the total cost of the finished product. In certain instances, we depend on a single or limited number of suppliers for these supplies. Wood chips, logs, resins, binders and other additives utilized in the manufacturing of interior molded facings, exterior fiberglass door facings and door cores are purchased from global, regional and local suppliers taking into consideration the relative freight cost of these materials. Internal framing components, MDF, cut stock and internal door cores are manufactured internally at our facilities and supplemented from suppliers located throughout the world. We utilize a network of suppliers based in North America, Europe, South America and Asia to purchase other components including steel coils for the stamping of steel door facings, MDF, plywood and hardboard facings, door jambs and frames and glass frames and inserts.
Safety
We believe that safety is as important to our success as productivity and quality. We also believe that incidents can be prevented through proper management, employee involvement, standardized operations and equipment and attention to detail. Safety programs and training are provided throughout the company to ensure employees and managers have effective tools to help identify and address both unsafe conditions and at-risk behaviors.
Through a sustained commitment to improve our safety performance, we have been successful in reducing the number of injuries sustained by our employees over the long term. In 2017 we experienced a total incident rate, or the annual number of injuries per 100 full time equivalent employees, of 1.5 compared to 1.7 in 2016.
Environmental and Other Regulatory Matters
We strive to minimize any adverse environmental impact our operations might have to our employees, the general public and the communities of which we are a part. We are subject to extensive environmental laws and regulations. The geographic breadth of our facilities subjects us to environmental laws, regulations and guidelines in a number of jurisdictions, including, among others, the United States, Canada, Mexico, the United Kingdom, the Republic of Ireland, the Czech Republic, Chile and Malaysia. Such laws, regulations and guidelines relate to, among other things, the discharge of contaminants into water and air and onto land, the storage and handling of certain regulated materials used in the manufacturing process, waste minimization, the disposal of wastes and the remediation of contaminated sites. Many of our products are also subject to various regulations such as building and construction codes, product safety regulations, health and safety laws and regulations and mandates related to energy efficiency.
Our efforts to ensure environmental compliance include the review of our operations on an ongoing basis utilizing in-house staff and on a selective basis by specialized environmental consultants. The Environmental, Health and Safety team participates in industry groups to monitor developing regulatory actions and actively develop comments on specific issues. Furthermore, for our prospective acquisition targets, environmental assessments are conducted as part of our due diligence review process. Based on recent experience and current projections, environmental protection requirements and liabilities are not expected to have a material effect on our business, capital expenditures, operations or financial position.
In addition to the various environmental laws and regulations, our operations are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety, consumer protection, trade, labor and employment, tax, and others. We believe we are in compliance in all material respects with existing applicable laws and regulations affecting our operations.
Intellectual Property
In North America, our doors are marketed primarily under the Masonite®brand. Other North American brands include: Premdor®, Belleville®, Barrington®, Oakcraft®, Sta-Tru® HD, AvantGuard®, Flagstaff®, Hollister®, Sierra®, Specialty®, Fast-Frame®, Safe ’N Sound®, Palazzo Series®, Heritage®, Bellagio®, Capri®, Treviso®, Cheyenne®, Glenview®, Riverside®, Saddlebrook®, West EndTM, Mohawk®, Megantic®, Marshfield®, Birchwood Best®, Algoma®, NovodorTM, ArtisanTM, Artisan SFTM, RhinoDoor®, WeldrockTM, SuperstileTM, UnicolTM, Lemieux®, Harring DoorsTM and FyreWerks®. In Europe, doors are marketed under the Masonite®, Premdor®, CrosbyTM, Door-StopTM, Performance Doorset SolutionsTM and National HickmanTM brands. We consider the use of trademarks and trade names to be important in the development of product awareness, and for differentiating products from competitors and between customers.
We protect the intellectual property that we develop through, among other things, filing for patents in the United States and various foreign countries. In the United States, we currently have 238 design patents and design patent applications and 176 utility patents and patent applications. We currently have 195 foreign design patents and patent applications and 252 foreign utility patents and patent applications. Our U.S. utility patents are generally applicable for 20 years from the earliest filing date, our U.S. design patents for 15 years and our U.S. registered trademarks and trade names are generally applicable for 10 years and are renewable. Our foreign patents and trademarks have terms as set by the particular country, although trademarks generally are renewable.
Competition
The North American door industry is highly competitive and includes a number of global and local participants. In the North American residential interior door market, the primary participants are Masonite and JELD-WEN, which are the only vertically integrated manufacturers of molded door facings. There are also a number of smaller competitors in the residential interior door market that primarily source door facings from third party suppliers. In the North American residential exterior door market, the primary participants are Masonite, JELD-WEN, Plastpro, Therma-Tru, Feather River and Novatech. In the North American non-residential building construction door market, the primary participants are Masonite, VT Industries, Graham Wood Doors and Eggers Industries. Our primary market in Europe is the United Kingdom. The United Kingdom door industry is similarly competitive, including a number of global and local participants. The primary participants in the United Kingdom are our subsidiary Premdor, JELD-WEN, Vicaima and Distinction Doors. Competition in these markets is primarily based on product quality, design characteristics, brand awareness, service ability, distribution capabilities and value. We also face competition in the other countries in which we operate. In Europe, South America and Asia, we face significant competition from a number of regionally based competitors and importers.
A large portion of our products are sold through large home centers and other large retailers. The consolidation of our customers and our reliance on fewer larger customers has increased the competitive pressures as some of our largest customers, such as The Home Depot, perform periodic product line reviews to assess their product offerings and suppliers.
We are one of the largest manufacturers of molded door facings in the world. The rest of the industry consists of one other large, integrated door manufacturer and a number of smaller regional manufacturers. Competition in the molded door facing business is based on quality, price, product design, logistics and customer service. We produce molded door facings to meet our own requirements and outside of North America we serve as an important supplier to the door industry at large. We manufacture molded door facings at our facilities in Mississippi, Ireland, Chile, Canada and Malaysia.
Employees
As of December 31, 2017, we employed approximately 10,000 employees and contract personnel. This includes approximately 2,400 unionized employees, approximately 70% of whom are located in North America with the remainder in various foreign locations. Nine of our North American facilities have individual collective bargaining agreements, which are negotiated locally and the terms of which vary by location.
History and Reporting Status
Masonite was founded in 1925 in Laurel, Mississippi, by William H. Mason, to utilize vastly available quantities of sawmill waste to manufacture a usable end product. Masonite was acquired by Premdor from International Paper Company in August 2001.
Prior to 2005, Masonite was a public company with shares of our predecessor’s common stock listed on both the New York and Toronto Stock Exchanges. In March 2005, we were acquired by an affiliate of Kohlberg Kravis Roberts & Co. L.P.
On March 16, 2009, Masonite International Corporation and several affiliated companies, voluntarily filed to reorganize under the Company's Creditors Arrangement Act (the "CCAA") in Canada in the Ontario Superior Court of Justice. Additionally, Masonite International Corporation and Masonite Inc. (the former parent of the Company) and all of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware. On June 9, 2009, we emerged from reorganization proceedings under the CCAA in Canada and under Chapter 11 of the U.S. Bankruptcy Code in the United States.
Effective July 4, 2011, pursuant to an amalgamation under the Business Corporations Act (British Columbia), Masonite Inc. amalgamated with Masonite International Corporation to form an amalgamated corporation named Masonite Inc., which then changed its name to Masonite International Corporation.
On September 9, 2013, our shares commenced listing on the New York Stock Exchange under the symbol "DOOR" and we became subject to periodic reporting requirements under the United States federal securities laws. We are currently not a reporting issuer, or the equivalent, in any province or territory of Canada and our shares are not listed on any recognized Canadian stock exchange.
Our United States executive offices are located at One Tampa City Center, 201 North Franklin Street, Suite 300, Tampa, Florida 33602 and our Canadian executive offices are located at 2771 Rutherford Road, Concord, Ontario L4K 2N6 Canada.
Available Information
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available through our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our website is www.masonite.com. Information on our website does not constitute part of this Annual Report on Form 10-K.
Item 1A. Risk Factors
You should carefully consider the following factors in addition to the other information set forth in this Annual Report before investing in our common shares. The risks and uncertainties described below are not the only ones facing us. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common shares could fall, and you may lose all or part of your investment.
Risks Related to Our Business
Downward trends in our end markets or in economic conditions could negatively impact our business and financial performance.
Our business may be adversely impacted by changes in United States, Canadian, European, Asian, South American or global economic conditions, including inflation, deflation, interest rates, availability and cost of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Volatility in the financial markets in the regions in which we operate and the deterioration of national and global economic conditions have in the past and could in the future materially adversely impact our operations, financial results and liquidity.
Trends in our primary end markets (residential new construction, repair, renovation and remodeling and non-residential building construction) directly impact our financial performance because they are directly correlated to the demand for doors and door components. 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 non-residential 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.
In the United States, the housing market crisis had a negative impact on residential housing construction and related product suppliers. In addition, the current housing recovery is characterized by new construction levels still well below historical levels, and at times including an increased number of multi-family new construction starts, which generally use fewer of our products and generate less net sales at a lower margin than typical single family homes.
In many of the non-North American markets in which we manufacture and sell our products, economic conditions deteriorated as various countries suffered from the after effects of the global financial downturn that began in the United States in 2006. Certain of our non-North American markets were acutely affected by the housing downturn and future downturns could cause excess capacity in housing and building products, including doors and door products, which may make it difficult for us to raise prices. Due in part to both market and operating conditions, we exited certain markets in the past several years, including the Ukraine, Turkey, Romania, Hungary, Poland, Israel, France and South Africa.
Our relatively narrow focus within the building products industry amplifies the risks inherent in a prolonged global market downturn. The impact of this weakness on our net sales, net income and margins will be determined by many factors, including industry capacity, industry pricing, and our ability to implement our business plan.
Increases in mortgage rates, changes in mortgage interest deductions and the reduced availability of financing for the purchase of new homes and home construction and improvements could have a material adverse impact on our sales and profitability.
In general, demand for new homes and home improvement products may be adversely affected by increases in mortgage rates and the reduced availability of consumer financing. Mortgage rates remain near historic lows but have recently increased and will likely increase in the future. If mortgage rates increase and, consequently, the ability of prospective buyers to finance purchases of new homes or home improvement products is adversely affected, our business, financial condition and results of operations may be materially and adversely affected.
Members of Congress and government officials have from time to time suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on borrower income, type of loan or principal amount. The recently enacted Tax Cuts and Jobs Act in the United States placed a cap on the amount of mortgage debt on which interest can be deducted and also made interest on home equity debt non-deductible. These changes and future changes in policies set to encourage home ownership and improvement, such as changes to the tax rules allowing for deductions of mortgage interest, may adversely impact demand for our products and have a material adverse impact on us.
Our performance may also depend upon consumers having the ability to finance the purchase of new homes and other buildings and repair and remodeling projects with credit from third-parties. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures. Adverse developments affecting any of these factors could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. The most recent economic downturn, including declining home and other building values, increased home foreclosures and tightening of credit standards by lending institutions, have negatively impacted the home and other building new construction and repair and remodeling sectors. If these credit market trends were to continue or worsen, our net sales and net income may be adversely affected.
We operate in a competitive business environment. If we are unable to compete successfully, we could lose customers and our sales could decline.
The building products industry is highly competitive. Some of our principal competitors may have greater financial, marketing and distribution resources than we do and may be less leveraged than we are, providing them with more flexibility to respond to new technology or shifting consumer demand. Accordingly, these competitors may be better able to withstand changes in conditions within the industry in which we operate and may have significantly greater operating and financial flexibility than we do. Also, certain of our competitors may have excess production capacity, which may lead to pressure to decrease prices in order for us to remain competitive and may limit our ability to raise prices even in markets where economic and market conditions have improved. For these and other reasons, these competitors could take a greater share of sales and cause us to lose business from our customers or hurt our margins.
As a result of this competitive environment, we face pressure on the sales prices of our products. Because of these pricing pressures, we may in the future experience limited growth and reductions in our profit margins, sales or cash flows, and may be unable to pass on future raw material price, labor cost and other input cost increases to our customers which would also reduce profit margins.
Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may be negatively affected if our key customers reduce the amount of products they purchase from us.
Our customers consist mainly of wholesalers, retail home centers and contractors. Our top ten customers together accounted for approximately 44% of our net sales in fiscal year 2017, while our largest customer, The Home Depot, accounted for approximately 18% of our net sales in fiscal year 2017. We expect that a small number of customers will continue to account for a substantial portion of our net sales for the foreseeable future. However, 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. For example, many of our largest customers, including The Home Depot, perform periodic line reviews to assess their product offerings, which have, on past occasions, led to loss of business and pricing pressures. 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 most significant customers. Moreover, if any of these customers fails to remain competitive in the respective markets or encounters financial or operational problems, our net sales and profitability may decline. We generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase products from us. Therefore, we could lose a significant customer with little or no notice. The loss of, or a significant adverse change in, our relationships with The Home Depot or any other major customer could cause a material decrease in our net sales.
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. The loss of, or a reduction in orders from, any significant customers, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer, could have a material adverse effect on us. Also, we have no operational or financial control over these customers and have limited influence over how they conduct their businesses.
Consolidation of our customers and their increasing size could adversely affect our results of operations.
In many of the countries in which we operate, an increasingly large number of building products are sold through large retail home centers and other large retailers. In addition, we have experienced consolidation of distributors in our wholesale distribution channel and among businesses operating in different geographic regions resulting in more customers operating nationally and internationally. If the consolidation of our customers and distributors were to continue, leading to the further increase of their size and purchasing power, we may be challenged to continue to provide consistently high customer service levels for increasing sales volumes, while still offering a broad portfolio of innovative products and on-time and complete deliveries. If we fail to provide high levels of service, broad product offerings, competitive prices and timely and complete deliveries, we could lose a substantial amount of our customer base and our profitability, margins and net sales could decrease. We have also experienced the consolidation of our wholesale distributors by our competitors, such as JELD-WEN's acquisition of Miliken Millwork, Inc. in 2017. Consolidation of our customers could also result in the loss of a customer or a substantial portion of a customer's business.
If we are unable to accurately predict future demand preferences for our products, our business and results of operations could be materially affected.
A key element to our continued success is the ability to maintain accurate forecasting of future demand preferences for our products. Our business in general is subject to changing consumer and industry trends, demands and preferences. Changes to consumer shopping habits and potential trends towards "online" purchases could also impact our ability to compete as we currently sell our products mainly through our distribution channel. Our continued success depends largely on the introduction and acceptance by our customers of new product lines and improvements to existing product lines that respond to such 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, and could materially adversely affect us. In addition, we are subject to the risk that new products could be introduced that would replace or reduce demand for our products. Furthermore, new proprietary designs and/or changes in manufacturing technologies may render our products obsolete or we may not be able to manufacture products or designs at prices that would be competitive in the marketplace. We may not have sufficient resources to make necessary investments or we may be unable to make the investments or acquire the intellectual property rights necessary to develop new products or improve our existing products.
Our business is seasonal which may affect our net sales, cash flows from operations and results of operations.
Our business is moderately seasonal and our 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. The impact of these types of events on our business may adversely impact our sales, cash flows from operations and results of operations. Also, we cannot predict the effects on our business that may result from global climate change, including potential new related laws or regulations. If sales were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted. Moreover, our facilities are vulnerable to severe weather conditions.
A disruption in our operations could materially affect our operating results.
We operate facilities worldwide. Many of our facilities are located in areas that are vulnerable to hurricanes, earthquakes and other natural disasters. In the event that a hurricane, earthquake, natural disaster, fire or other catastrophic event were to interrupt our operations for any extended period of time, particularly at one or more of our door facing facilities or architectural door plants, such as when Marshfield experienced an autoclave explosion in July 2011, prior to our acquisition, it could delay shipment of merchandise to our customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations. Closure of one of our door facing facilities, which are our most capital intensive and least replaceable production facilities, could have a substantial negative effect on our earnings.
In addition, our operations may be interrupted by terrorist attacks or other acts of violence or war. These attacks may directly impact our suppliers’ or customers’ physical facilities. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect our operating results. The United States has entered into, and may enter into, additional armed conflicts which could have a further impact on our sales and our ability to deliver product to our customers in the United States and elsewhere. Political and economic instability in some regions of the world, including the current instabilities in the Middle East and North Korea, may also negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They could also result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results.
Manufacturing realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, as well as reduce our flexibility to respond quickly to improved market conditions.
We continually review our manufacturing operations and sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs have in the past and could in the future result in a decrease in our short-term earnings until the expected cost reductions are achieved. We also cannot assure you we will achieve all
of our cost savings. Such programs may include the consolidation, integration and upgrading of facilities, functions, systems and procedures. The success of these efforts will depend in part on market conditions, and such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.
In connection with our manufacturing realignment and cost savings programs, we have closed or consolidated a substantial portion of our global operations and reduced our personnel, which may reduce our flexibility to respond quickly to improved market conditions. For example, in 2017 we closed our Algoma, Wisconsin, facility in order to improve our cost structure, expand operational efficiencies and align our plant optimization portfolio. As a result, a failure to anticipate a sharp increase in levels of residential new construction, residential repair, renovation and remodeling and non-residential building construction activity could result in operational difficulties, adversely impacting our ability to provide our products to our customers. This may result in the loss of business to our competitors in the event they are better able to forecast or respond to market demand. There can be no assurance that we will be able to accurately forecast the level of market demand or react in a timely manner to such changes, which may have a material adverse effect on our business, financial condition and results of operations.
We are subject to the credit risk of our customers.
We provide credit to our customers in the normal course of business. We generally do not require collateral in extending such credit. An increase in the exposure, coupled with material instances of default, could have a material adverse effect on our business, financial condition, results of operations and cash flow.
Increased prices for raw materials or finished goods used in our products or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, margins and net sales.
Our profitability is affected by the prices of raw materials and finished goods used in the manufacture of our products. These prices have fluctuated and may continue to fluctuate based on a number of factors beyond our control, including world oil prices, changes in supply and demand, general economic or environmental conditions, labor costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. The commodities we use may undergo major price fluctuations and there is no certainty that we will be able to pass these costs through to our customers. Significant increases in the prices of raw materials or finished goods are more difficult to pass through to customers in a short period of time and may negatively impact our short-term profitability, margins and net sales. In the current competitive environment, opportunities to pass on these cost increases to our customers may be limited.
We require a regular supply of raw materials, such as wood, wood composites, cut stock, steel, glass, core material, paint, stain and primer as well as petroleum-based products such as binders, resins and frames. In certain instances, we depend on a single or limited number of suppliers for these supplies. We typically do not have long-term contracts with our suppliers. If we are not able to accurately forecast our supply needs, the limited number of suppliers may make it difficult to obtain additional raw materials to respond to shifting or increased demand. Our dependency upon regular deliveries from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Furthermore, because our products and the components of some of our products are subject to regulation, such alternative suppliers, even if available, may not be substituted until regulatory approvals for such substitution are received, thereby delaying our ability to respond to supply changes. Moreover, some of our raw materials, especially those that are petroleum or chemical based, interact with other raw materials used in the manufacture of our products and therefore significant lead time may be required to procure a compatible substitute. Substitute materials may also not be of the same quality as our original materials.
If any of our suppliers were unable to deliver materials to us for an extended period of time (including as a result of delays in land or sea shipping), or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer. In the future, we may not be able to find acceptable supply alternatives, and any such alternatives could result in increased costs for us. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business.
Furthermore, raw material prices could increase, and supply could decrease, if other industries compete with us for such materials. For example, we are highly dependent upon our supply of wood chips used for the production of our door facings and wood composite materials. Failure to obtain significant supply may disrupt our operations and even if we are able to obtain sufficient supply, we may not be able to pass increased supply costs on to our customers in the form of price increases, thereby resulting in reduced margins and profits.
A rapid and prolonged increase in fuel prices may significantly increase our costs and have an adverse impact on our results of operations.
Fuel prices have been volatile and are significantly influenced by international, political and economic circumstances. While fuel prices have fallen from historical highs over the last several years, they have more recently risen and lower fuel prices may not be permanent. If fuel prices were to rise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our shipping costs, adversely affecting our results of operations. In addition, competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products.
We rely on the continuous operation of our information technology and enterprise resource planning systems.
Our information technology systems allow us to accurately maintain books and records, record transactions, provide information to management and prepare our consolidated financial statements. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. Our operations depend on our network of information technology systems, which are vulnerable to damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, cybersecurity vulnerabilities (such as threats and attacks), computer viruses, natural disasters or other disasters Any damage to our information technology systems could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition and results of operations. Periodically, these systems need to be expanded, updated or upgraded as our business needs change. For example, we are in the process of implementing a new enterprise resource planning system in our architectural business. We may not be able to successfully implement changes in our information technology systems without experiencing difficulties, which could require significant financial and human resources and impact our ability to efficiently service our customers. Moreover, our recent technological initiatives and increasing dependence on technology may exacerbate this risk.
Potential cyber threats and attacks could disrupt our information security systems and cause damage to our business and our reputation.
Information security threats, which pose a risk to the security of our network of systems and the confidentiality and integrity of our data, are increasing in frequency and sophistication, We have established policies, processes and multiple layers of defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our network of systems. Should damage to our network of systems occur, it could lead to the compromise of confidential information, manipulation and destruction of data and product specifications, production downtimes, disruption in the availability of financial data, or misrepresentation of information via digital media. While we have not experienced any material breaches in information security, the occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, financial loss, project delay claims and increased costs and operational consequences of implementing further data protection systems.
Increases in labor costs, potential labor disputes and work stoppages at our facilities or the facilities of our suppliers could materially adversely affect our financial performance.
Our financial performance is affected by the availability of qualified personnel and the cost of labor. We have approximately 10,000 employees worldwide, including approximately 2,400 unionized workers. Employees represented by these unions are subject to collective bargaining agreements that are subject to periodic negotiation and renewal, including our agreements with employees and their respective work councils in Chile, Mexico and the United Kingdom, which are subject to annual negotiation. If we are unable to enter into new, satisfactory labor agreements with our unionized employees upon expiration of their agreements, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to customers on a timely basis. If our workers were to engage in strikes, a work stoppage or other slowdowns, we could also experience disruptions of our operations. Such disruptions could result in a loss of business and an increase in our operating expenses, which could reduce our net sales and profit margins. In addition, our non-unionized labor force may become subject to labor union organizing efforts, such as the attempt to organize our Northumberland facility in 2015, which could cause us to incur additional labor costs and increase the related risks that we now face.
We believe many of our direct and indirect suppliers and customers also have unionized workforces. Strikes, work stoppages or slowdowns experienced by these suppliers and customers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. Any interruption in the production or delivery of these components could reduce sales, increase costs and have a material adverse effect on us.
Our pension obligations are currently underfunded. We may have to make significant cash payments to our pension plans, which would reduce the cash available for our business.
As of December 31, 2017, our accumulated benefit obligations under our United States and United Kingdom defined benefit pension plans exceeded the fair value of plan assets by $12.2 million and $5.7 million, respectively. During the years ended December 31, 2017, January 1, 2017 and January 3, 2016, we contributed $5.0 million, $5.0 million and $5.2 million, respectively, to the United States pension plan and $1.0 million, $0.8 million and $0.9 million, respectively, to the United Kingdom pension plan. Additional contributions will be required in future years. We currently anticipate making $5.0 million and $0.7 million of contributions to our United States and United Kingdom pension plans, respectively, in 2018. If the performance of the assets in our pension plans does not meet our expectations or other actuarial assumptions are modified, our contributions to our pension plans could be materially higher than we expect, which would reduce the cash available for our businesses. In addition, our United States pension plans are subject to Title IV of the United States Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the Pension Benefit Guaranty Corporation, or the PBGC, generally has the authority to terminate an underfunded pension plan if the possible long-run loss to the PBGC with respect to the plan may reasonably be expected to increase substantially if the plan is not terminated. In the event our pension plans are terminated for any reason while the plans are underfunded, we may incur a liability to the PBGC which could be equal to the entire amount of the underfunding.
Our recent acquisitions and any future acquisitions, if available, could be difficult to integrate and could adversely affect our operating results.
In the past several years we completed several strategic acquisitions of door and door component manufacturers in North America and the United Kingdom. Historically, we have made acquisitions to vertically integrate and expand our operations, such as our acquisitions of DW3 in 2018; A&F Wood Products in 2017; FyreWerks in 2016; USA Wood Door, Hickman and PDS in 2015; Harring and Door-Stop in 2014; the assets of a door manufacturing operation located in Chile in 2013; Lemieux, Algoma, and Baillargeon in 2012; and Birchwood and Marshfield in 2011. From time to time, we have evaluated and we continue to evaluate possible acquisition transactions on an on-going basis. Our acquisitions may not be accretive. At any time we may be engaged in discussions or negotiations with respect to possible acquisitions or may have entered into non-binding letters of intent. As part of our strategy, we expect to continue to pursue complementary acquisitions and investments and may expand into product lines or businesses with which we have little or no operating experience. For example, future acquisitions may involve building product categories other than doors. We may also engage in further vertical integration. However, we may face competition for attractive targets and we may not be able to source appropriate acquisition targets at prices acceptable to us, or at all. In addition, in order to pursue our acquisition strategy, we will need significant liquidity, which, as a result of the other factors described herein, may not be available on terms favorable to us, or at all.
Our recent and any future acquisitions involve a number of risks, including:
our inability to integrate the acquired business;
our inability to manage acquired businesses or control integration and other costs relating to acquisitions;
our lack of experience with a particular business should we invest in a new product line;
diversion of management attention;
our failure to achieve projected synergies or cost savings;
impairment of goodwill affecting our reported net income;
our inability to retain the management or other key employees of the acquired business;
our inability to establish uniform standards, controls, procedures and policies;
our inability to retain customers of our acquired companies;
risks associated with the internal controls of acquired companies;
exposure to legal claims for activities of the acquired business prior to the acquisition;
our due diligence procedures could fail to detect material issues related to the acquired business;
unforeseen management and operational difficulties, particularly if we acquire assets or businesses in new foreign jurisdictions where we have little or no operational experience;
damage to our reputation as a result of performance or customer satisfaction problems relating to an acquired businesses;
the performance of any acquired business could be lower than we anticipated; and
our inability to enforce indemnifications and non-compete agreements.
The integration of any future acquisition into our business will likely require substantial time, effort, attention and dedication of management resources and may distract our management in unpredictable ways from our ordinary operations. The integration may also result in consolidation of certain existing operations. If we cannot successfully execute on our investments on a timely basis, we may be unable to generate sufficient net sales to offset acquisition, integration or expansion costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including cost savings and synergies, may not be achieved. If we are not able to effectively manage recent or future acquisitions or realize their anticipated benefits, it may harm our results of operations.
We are exposed to political, economic and other risks that arise from operating a multinational business.
We have operations in the United States, Canada, Europe and, to a lesser extent, other foreign jurisdictions. In the year ended December 31, 2017, approximately 66% of our net sales were in the United States, 16% in Canada and 12% in the United Kingdom. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to political, economic and other risks that are inherent in operating in numerous countries.
These risks include:
the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
trade protection measures and import or export licensing requirements;
tax rates in foreign countries and the imposition of withholding requirements on foreign earnings;
the imposition of tariffs or other restrictions;
difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
required compliance with a variety of foreign laws and regulations; and
changes in general economic and political conditions in countries where we operate.
Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.
The United Kingdom's formal trigger of the two year process for its exit from the European Union, and related negotiations
In June 2016, voters in the United Kingdom voted for a non-binding referendum in favor of the United Kingdom exiting the European Union. The United Kingdom formally initiated the withdrawal process on March 29, 2017, and the terms of any withdrawal are subject to a negotiation period that could last until March 29, 2019. The eventual exit of the United Kingdom from the European Union and negotiations leading up to that exit could adversely affect European and worldwide economic and market conditions. As a result, there has been, and may continue to be, instability in global financial and foreign exchange markets, including volatility in the value of the Pound Sterling and the Euro. Uncertainty about global or regional economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and declines in income or asset values, which could have a material negative effect on the European housing market, particularly in the United Kingdom, and demand for our products in the foreseeable future.
Fluctuating exchange and interest rates could adversely affect our financial results.
Our financial results may be adversely affected by fluctuating exchange rates. Net sales generated outside of the United States were approximately 34% for the year ended December 31, 2017. In addition, a significant percentage of our costs during the same period were not denominated in U.S. dollars. For example, for most of our manufacturing facilities, the prices for a significant portion of our raw materials are quoted in the domestic currency of the country where the facility is located or other currencies that are not U.S. dollars. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. For example, we are subject to currency exchange rate risk to the extent that some of our costs will be denominated in currencies other than those in which we earn revenues. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country and may result in the loss of business to our competitors that sell their products at lower prices in that country.
Moreover, as our current indebtedness is denominated in a currency that is different from the currencies in which we derive a significant portion of our net sales, we are also exposed to currency exchange rate risk with respect to those financial obligations. When the outstanding indebtedness is repaid, we may be subject to taxes on any corresponding foreign currency gain.
Borrowings under our current ABL Facility are incurred at variable rates of interest, which exposes us to interest rate fluctuation risk. If interest rates increase, the payments we are required to make on any variable rate indebtedness will increase.
We may fail to continue to innovate, face claims that we infringe third party intellectual property rights, or be unable to protect our intellectual property from infringement by others except by incurring substantial costs as a result of litigation or other proceedings relating to patent or trademark rights, any of which could cause our net sales or profitability to decline.
Our continued success depends on our ability to develop and introduce new or improved products, to improve our manufacturing and product service processes, and to protect our rights to the technologies used in our products. If we fail to do so, or if existing or future competitors achieve greater success than we do in these areas, our results of operations and our profitability may decline.
We rely on a combination of United States, Canadian and, to a lesser extent, European patent, trademark, copyright and trade secret laws as well as licenses, nondisclosure, confidentiality and other contractual restrictions to protect certain aspects of our business. We have registered trademarks, copyrights and our patent and trademark applications may not be allowed by the applicable governmental authorities to issue as patents or register as trademarks at all, or in a form that will be advantageous to us. In addition, we have selectively pursued patent and trademark protection, and in some instances we may not have registered important patent and trademark rights in these and other countries. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The failure to obtain worldwide patent and trademark protection may result in other companies copying and marketing products based upon our technologies or under our brand or trade names outside the jurisdictions in which we are protected. This could impede our growth in existing regions and into new regions, create confusion among consumers and result in a greater supply of similar products that could erode prices for our protected products.
Our success depends in part on our ability to protect our patents, trademarks, copyrights, trade secrets and licensed intellectual property from unauthorized use by others. We cannot be sure that the patents we have obtained, or other protections such as confidentiality, trade secrets and copyrights, will be adequate to prevent imitation of our products by others. If we are unable to protect our products through the enforcement of intellectual property rights, our ability to compete based on our current advantages may be harmed. If we fail to prevent substantial unauthorized use of our trade secrets, we risk the loss of those intellectual property rights and whatever competitive advantage they embody.
Although we are not aware that any of our products or intellectual property rights materially infringe upon the proprietary rights of third parties, third parties may accuse us of infringing or misappropriating their patents, trademarks, copyrights or trade secrets. Third parties may also challenge our trademark rights and branding practices in the future. We may be required to institute or defend litigation to defend ourselves from such accusations or to enforce our patent, trademark and copyright rights from unauthorized use by others, which, regardless of the outcome, could result in substantial costs and diversion of resources and could negatively affect our competitive position, sales, profitability and reputation. If we lose a patent infringement suit, we may be liable for money damages and be enjoined from selling the infringing product unless we can obtain a license or are able to redesign our product to avoid infringement. A license may not be available at all or on terms acceptable to us, and we may not be able to redesign our products to avoid any infringement, which could negatively affect our profitability. In addition, our patents, trademarks and other proprietary rights may be subject to various attacks claiming they are invalid or unenforceable. These attacks might invalidate, render unenforceable or otherwise limit the scope of the protection that our patents and trademarks afford. If we lose the use of a product name, our efforts spent building that brand may be lost and we will have to rebuild a brand for that product, which we may or may not be able to do. Even if we prevail in a patent infringement suit, there is no assurance that third parties will not be able to design around our patents, which could harm our competitive position.
If we are unable to replace our expiring patents, our ability to compete both domestically and internationally will be harmed. In addition, our products face the risk of obsolescence, which, if realized, could have a material adverse effect on our business.
We depend on our door manufacturing intellectual property and products to generate revenue. Some of our patents will begin to expire in the next several years. While we will continue to work to add to our patent portfolio to protect the intellectual property of our products, we believe it is possible that new competitors will emerge in door manufacturing. We do not know whether we will be able to develop additional proprietary designs, processes or products. If any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. Moreover, as our patents expire, competitors may utilize the information found in such patents to commercialize their own products. While we seek to offset the losses relating to important expiring patents by securing additional patents on commercially desirable improvements, and new products, designs and processes, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effect of the expiring patents.
Further, we face the risk that third parties will succeed in developing or marketing products that would render our products obsolete or noncompetitive. New, less expensive methods could be developed that replace or reduce the demand for our products or may cause our customers to delay or defer purchasing our products. Accordingly, our success depends in part upon our ability to respond quickly to market changes through the development and introduction of new products. The relative speed with which we can develop products, complete regulatory clearance or approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. Any delays could result in a loss of market acceptance and market share. We cannot provide assurance that our new product development efforts will result in any commercially successful products.
We may be the subject of product liability claims or product recalls, we may not accurately estimate costs related to such claims or recalls, and we may not have sufficient insurance coverage available to cover potential liabilities.
Our products are used and have been used in a wide variety of residential and architectural applications. We face an inherent business risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are alleged to be defective or that the use of our products is alleged to have resulted in harm to others or to property. Because we manufacture a significant portion of our products based on the specific requirements of our customers, failure to provide our customers the products and services they specify could result in product-related claims and reduced or cancelled orders and delays in the collection of accounts receivable. We may in the future incur liability if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline materially. In addition, it may be necessary for us to recall defective products, which would also result in adverse publicity, as well as resulting in costs connected to the recall and loss of net sales. We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims that may arise or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or that exceeds our established reserves could materially and adversely impact our financial condition and results of operations.
In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs of warranty or breach of contract claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them.
The loss of certain members of our management may have an adverse effect on our operating results.
Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills and know-how that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our financial condition and results of operations may be negatively affected. Moreover, the pool of qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.
Lack of transparency, threat of fraud, public sector corruption and other forms of criminal activity involving government officials increases risk for potential liability under anti-bribery or anti-fraud legislation, including the United States Foreign Corrupt Practices Act.
We operate facilities in 8 countries and sell our products in 65 countries around the world. As a result of these international operations, we may enter from time to time into negotiations and contractual arrangements with parties affiliated with foreign governments and their officials. In connection with these activities, we are subject to the United States Foreign Corrupt Practices Act ("FCPA"), the United Kingdom Bribery Act and other anti-bribery laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by United States and other business entities for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind and requires the maintenance of internal controls to prevent such payments. In particular, we may be held liable for actions taken by our local partners and agents in foreign countries where we operate, even though such parties are not always subject to our control. As part of our Masonite Values Operating Guide we have established FCPA and other anti-bribery policies and procedures and offer several channels for raising concerns in an effort to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. Any determination that we have violated the FCPA or other anti-bribery laws (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our results of operations and financial condition.
As we continue to expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside of North America and our financial condition and results of operations. In addition, any acquisition of businesses with operations outside of North America may exacerbate this risk.
Environmental requirements and other government regulation may impose significant environmental and legal compliance costs and liabilities on us.
Our operations are subject to numerous Canadian (federal, provincial and local), United States (federal, state and local), European (European Union, national and local) and other laws and regulations relating to pollution and the protection of human health and the environment, including, without limitation, those governing emissions to air, discharges to water, storage, treatment and disposal of waste, releases of contaminants or hazardous or toxic substances, remediation of contaminated sites and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. Despite our efforts to comply with environmental requirements, we are at risk of being subject to civil, administrative or criminal enforcement actions, of being held liable, of being subject to an order or of incurring costs, fines or penalties for, among other things, releases of contaminants or hazardous or toxic substances occurring on or emanating from currently or formerly owned or operated properties or any associated offsite disposal location, or for contamination discovered at any of our properties from activities conducted by us or by previous occupants. Although, with the exception of costs incurred relating to compliance with Maximum Achievable Control Technology requirements (as described below), we have not incurred significant costs for environmental matters in prior years, future expenditures required to comply with any changes in environmental requirements are anticipated to be undertaken as part of our ongoing capital investment program, which is primarily designed to improve the efficiency of our various manufacturing processes. The amount of any resulting liabilities, costs, fines or penalties may be material.
In addition, the requirements of such laws and enforcement policies have generally become more stringent over time. Changes in environmental laws and regulations or in their enforcement or the discovery of previously unknown or unanticipated contamination or non-compliance with environmental laws or regulations relating to our properties or operations could result in significant environmental liabilities or costs which could adversely affect our business. In addition, we might incur increased operating and maintenance costs and capital expenditures and other costs to comply with increasingly stringent air emission control laws or other future requirements (such as, in the United States, those relating to compliance with Maximum Achievable Control Technology requirements under the Clean Air Act, for which we made capital expenditures totaling approximately $49 million from 2008 through 2010), which may decrease our cash flow. Also, discovery of currently unknown or unanticipated conditions could require responses that would result in significant liabilities and costs. Accordingly, we are unable to predict the ultimate costs of compliance with or liability under environmental laws, which may be larger than current projections.
Changes in government regulation may have a material effect on our results of operations.
Our manufacturing facilities and components of our products are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety. Liability under these laws involves inherent uncertainties. Changes in such laws and regulations or in their enforcement could significantly increase our costs of operations which could adversely affect our business. Violations of health and safety laws are subject to civil, and, in some cases, criminal sanctions. As a result of these uncertainties, we may incur unexpected interruptions to operations, fines, penalties or other reductions in income which could adversely impact our business, financial condition and results of operations.
Further, in order for our products to obtain the energy efficient “ENERGYSTAR” label, they must meet certain requirements set by the Environmental Protection Agency, or the EPA. Changes in the energy efficiency requirements established by the EPA for the ENERGYSTAR label could increase our costs, and, if there is a lapse in our ability to label our products as such or we are not able to comply with the new standards at all, negatively affect our net sales and results of operations.
Moreover, many of our products are regulated by building codes and require specific fire, penetration or wind resistance characteristics. A change in the building codes could have a material impact on the manufacturing cost for these products, which we may not be able to pass on to our customers.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Act and related regulations implemented by the Securities and Exchange Commission, or the SEC, and the stock exchanges are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers.
To service our consolidated indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our estimated annual payment obligation for 2018 with respect to our consolidated indebtedness is $35.2 million of interest payments. When we draw funds under the ABL Facility, we incur additional interest expense. Our ability to pay interest on and principal of the senior notes and our ability to satisfy our other debt obligations will principally depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.
If we do not generate sufficient cash flow from operations to satisfy our consolidated debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt instruments, including the ABL Facility and the indenture governing the senior notes, may restrict us from adopting some of these alternatives. If we are unable
to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms, it would have an adverse effect, which could be material, on our business, financial condition and results of operations.
Under such circumstances, we may be unable to comply with the provisions of our debt instruments, including the financial covenants in the ABL Facility. If we are unable to satisfy such covenants or other provisions at any future time, we would need to seek an amendment or waiver of such financial covenants or other provisions. The lenders under the ABL Facility may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to obtain any such waiver or amendment, our inability to meet the financial covenants or other provisions of the ABL Facility would constitute an event of default thereunder, which would permit the lenders to accelerate repayment of borrowings under the ABL Facility, which in turn would constitute an event of the default under the indenture governing the senior notes, permitting the holders of the senior notes to accelerate payment thereon. Our assets and/or cash flow, and/or that of our subsidiaries, may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, and the secured lenders under the ABL Facility could proceed against the collateral securing that indebtedness. Such events would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of the senior notes.
The terms of the ABL Facility and the indenture governing the senior notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.
The credit agreement governing the ABL Facility and the indenture governing the senior notes contain, and the terms of any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The indenture governing the senior notes and the credit agreements governing the ABL Facility include covenants that, among other things, restrict our and our subsidiaries’ ability to:
incur additional indebtedness and issue disqualified or preferred stock;
make restricted payments;
sell assets;
create restrictions on the ability of their restricted subsidiaries to pay dividends or distributions;
create or incur liens;
enter into sale and lease-back transactions;
merge or consolidate with other entities; and
enter into transactions with affiliates.
The operating and financial restrictions and covenants in the debt agreements we will enter into in connection with this offering and the ABL Facility and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Risks Related to Ownership of Our Common Shares
Our share price may change significantly and you could lose all or part of your investment as a result.
The trading price of our common shares could fluctuate due to a number of factors such as those listed in “Risks Related to Our Business” and the following, some of which are beyond our control:
quarterly variations in our results of operations;
results of operations that vary from the expectations of securities analysts and investors;
results of operations that vary from those of our competitors;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
announcements by third parties of significant claims or proceedings against us;
future sales of our common shares; and
general domestic and international economic conditions.
Furthermore, the stock market has experienced extreme volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common shares, regardless of our actual operating performance.
In the past, following periods of market volatility, shareholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.
The availability of shares for sale in the future could reduce the market price of our common shares.
In the future, we may issue securities to raise cash for acquisitions or otherwise. We may also acquire interests in other companies by using a combination of cash and our common shares or just our common shares. We may also issue securities convertible into our common shares. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common shares.
In addition, sales of a substantial amount of our common shares in the public market, or the perception that these sales may occur, could reduce the market price of our common shares. This could also impair our ability to raise additional capital through the sale of our securities.
A small number of our shareholders could be able to significantly influence our business and affairs, limiting your ability to influence corporate matters.
As of December 31, 2017, shareholders owning 5% or more of our outstanding common shares reported their significant ownership positions in their Schedule 13G filings. As a result of their holdings, these shareholders may be able to significantly influence the outcome of any matters requiring approval by our shareholders, including the election of directors, mergers and takeover offers, regardless of whether others believe that approval of those matters is in our best interests.
United States civil liabilities may not be enforceable against us.
We exist under the laws of the Province of British Columbia, Canada. As a result, it may be difficult for investors to effect service of process within the United States upon us and those experts, or to enforce outside the United States judgments obtained in United States courts, in any action, including actions predicated upon the civil liability provisions of United States securities laws. Additionally, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon United States securities laws. In particular, there is uncertainty as to the enforceability in Canada by a court in original actions, or in actions to enforce judgments of United States courts, of the civil liabilities predicated upon the United States securities laws. Based on the foregoing, there can be no assurance that United States investors will be able to enforce against us or certain experts named herein who are residents of countries other than the United States any judgments obtained in United States courts in civil and commercial matters, including judgments under the United States federal securities laws. In addition, there is doubt as to whether a court in the Province of British Columbia would impose civil liability on us, our directors, officers or certain experts named herein in an original action predicated solely upon the federal securities laws of the United States brought in a court of competent jurisdiction in the Province of British Columbia against us or such directors, officers or experts, respectively.
Canadian laws differ from the laws in effect in the United States and may afford less protection to holders of our securities.
We are a company that exists under the laws of the Province of British Columbia, Canada and are subject to the Business Corporations Act (British Columbia) and certain other applicable securities laws as a Canadian issuer (nonreporting issuer), which laws may differ from those governing a company formed under the laws of a United States jurisdiction. The provisions under the Business Corporations Act (British Columbia) and other relevant laws may affect the rights of shareholders differently than those of a company governed by the laws of a United States jurisdiction, and may, together with our amended and restated articles of amalgamation, or the Articles, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance.
If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, our share price and trading volume could decline.
The trading market for our common shares relies in part on the research and reports that securities and industry research analysts publish about us, our industry, our competitors and our business. We do not have any control over these analysts. Our share price and trading volumes could decline if one or more securities or industry analysts downgrade our common shares, issue unfavorable commentary about us, our industry or business, cease to cover our Company or fail to regularly publish reports about us, our industry or our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our United States executive headquarters are located in Tampa, Florida, and consist of approximately 80,000 square feet of leased office space at two sites. Our Canadian executive offices are located in a single leased site in Concord, Ontario. As of December 31, 2017, we owned and leased the following number of properties, by reportable segment: |
| | | | | | | | | | | |
| | Manufacturing | | Warehouse | | Support | | Total |
| Owned properties: | | | | | | | |
| North American Residential | 23 |
| | 7 |
| | — |
| | 30 |
|
| Europe | 7 |
| | — |
| | 2 |
| | 9 |
|
| Architectural | 6 |
| | — |
| | — |
| | 6 |
|
| Corporate & Other | — |
| | — |
| | 1 |
| | 1 |
|
| Total owned properties | 36 |
| | 7 |
| | 3 |
| | 46 |
|
| | | | | | | | |
| Leased properties: | | | | | | | |
| North American Residential | 16 |
| | 14 |
| | 2 |
| | 32 |
|
| Europe | 5 |
| | 7 |
| | 1 |
| | 13 |
|
| Architectural | 6 |
| | 6 |
| | 1 |
| | 13 |
|
| Corporate & Other | 1 |
| | — |
| | 4 |
| | 5 |
|
| Total leased properties | 28 |
| | 27 |
| | 8 |
| | 63 |
|
| Total owned and leased properties | 64 |
| | 34 |
| | 11 |
| | 109 |
|
Our properties in the North American Residential and Architectural segments are distributed across 24 states in the United States and four provinces in Canada, as well as one manufacturing facility and one support facility in Mexico and four manufacturing facilities in Chile. Our properties in the Europe segment are distributed across the United Kingdom, as well as one manufacturing facility in each of Ireland and the Czech Republic. Our properties in the Corporate and Other category include one manufacturing facility in Malaysia and six support facilities in the United States. As of December 31, 2017, total floor space at our manufacturing facilities was 12.0 million square feet, including 3.2 million square feet in our five molded door facings facilities. In addition to the properties outlined above, we own one idle manufacturing facility in Canada, we lease one idle manufacturing facility in the United Kingdom and we own two parcels of land: 17,000 acres of forestland in Costa Rica and 48 acres of undeveloped land in California.
We believe that our facilities are suitable to our respective businesses and have production capacity adequate to support our current level of production to meet our customers’ demand. Additional investments in manufacturing facilities are made as appropriate to balance our capacity with our customers’ demand.
Item 3. Legal Proceedings
The information required with respect to this item can be found under "Commitments and Contingencies" in Note 9 to the consolidated financial statements in this Annual Report and is incorporated by reference into this Item 3.
Item 4. Mine Safety Disclosures
Not applicable.
Executive Officers of the Registrant
Information about the Company's executive officers is incorporated herein by reference from Part III, Item 10 hereof.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares have been listed on the New York Stock Exchange (“NYSE”) under the symbol “DOOR” since September 9, 2013. Prior to that time, there was no public market for our common shares, although our common shares were quoted on the OTC Grey Market under the symbol “MASWF” from June 2009 until our listing on the NYSE. The following table sets forth the high and low sales prices per share of our common stock as reported on the NYSE for the periods indicated: |
| | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
| | High | | Low | | High | | Low |
| First quarter | $ | 81.95 |
| | $ | 63.70 |
| | $ | 66.61 |
| | $ | 45.14 |
|
| Second quarter | 85.30 |
| | 71.45 |
| | 72.11 |
| | 61.22 |
|
| Third quarter | 79.90 |
| | 50.40 |
| | 72.75 |
| | 61.56 |
|
| Fourth quarter | 75.95 |
| | 62.45 |
| | 68.55 |
| | 55.60 |
|
Holders
As of February 27, 2018, we had three record holders of our common shares, including Cede & Co., the nominee of the Depository Trust Corporation.
Dividends
We do not intend to pay any cash dividends on our common shares for the foreseeable future and instead may retain earnings, if any, for future operations and expansion, share repurchases or debt repayment, among other things. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, liquidity requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our ABL Facility and in the indenture governing our senior notes. Future agreements may also limit our ability to pay dividends. See Note 8 to our audited consolidated financial statements contained elsewhere in this Annual Report for restrictions on our ability to pay dividends.
Stock Performance Graph
The following graph depicts the total return to shareholders from September 9, 2013, the date our common shares became listed on the NYSE, through December 31, 2017, relative to the performance of the Standard & Poor's 500 Index and the Standard & Poor's 1500 Building Products Index. The graph assumes an investment of $100 in our common stock and each index on September 9, 2013, and the reinvestment of dividends paid since that date. The stock performance shown in the graph is not necessarily indicative of future price performance.
Comparison of Cumulative Total Stockholder Return
Masonite International Corporation, Standard & Poor's 500 Index and
Standard & Poor's 1500 Building Products Index
(Performance Results through December 31, 2017)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 9, 2013 | | December 29, 2013 | | December 28, 2014 | | January 3, 2016 | | January 1, 2017 | | December 31, 2017 |
| Masonite International Corporation | $ | 100.00 |
| | $ | 114.49 |
| | $ | 117.57 |
| | $ | 118.32 |
| | $ | 127.15 |
| | $ | 143.29 |
|
| Standard & Poor's 500 Index | 100.00 |
| | 113.98 |
| | 129.58 |
| | 124.85 |
| | 149.88 |
| | 179.20 |
|
| Standard & Poor's 1500 Building Products Index | 100.00 |
| | 124.93 |
| | 136.49 |
| | 148.91 |
| | 182.34 |
| | 209.99 |
|
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
On December 12, 2017, and October 2, 2017, we issued to two former non-executive employees 534 and 2,089 common shares, respectively, for cash consideration to be paid over time of $37,565 and $140,341, respectively. The shares were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.
Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended December 31, 2017, we repurchased 139,473 of our common shares in the open market. |
| | | | | | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
| October 2, 2017, through October 29, 2017 | — |
| | $ | — |
| | — |
| | $ | 130,930,781 |
|
| October 30, 2017, through November 26, 2017 | — |
| | — |
| | — |
| | 130,930,781 |
|
| November 27, 2017, through December 31, 2017 | 139,473 |
| | 71.86 |
| | 139,473 |
| | 120,908,784 |
|
| Total | 139,473 |
| | $ | 71.86 |
| | 139,473 |
| | |
We currently have in place a $350 million share repurchase authorization, stemming from two separate authorizations by our Board of Directors. On February 23, 2016, our Board of Directors authorized a share repurchase program whereby we may repurchase up to $150 million worth of our outstanding common shares and on February 22, 2017, our Board of Directors authorized an additional $200 million (collectively, the “share repurchase programs”). The share repurchase programs have no specified end date. While the share repurchase programs may take two years to complete, the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. Any repurchases under the share repurchase programs may be made in the open market, in privately negotiated transactions or otherwise, subject to market conditions, applicable legal requirements and other relevant factors. The share repurchase programs do not obligate us to acquire any particular amount of common shares, and they may be suspended or terminated at any time at our discretion. Repurchases under the share repurchase programs are permitted to be made under one or more Rule 10b5-1 plans, which would permit shares to be repurchased when we might otherwise be precluded from doing so under applicable insider trading laws. As of December 31, 2017, $120.9 million was available for repurchase in accordance with the share repurchase programs.
Item 6. Selected Financial Data
The following table sets forth selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of December 31, 2017, and January 1, 2017, and for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, have been derived from the audited consolidated financial statements included elsewhere in this Annual Report. The selected historical consolidated financial data as of January 3, 2016, December 28, 2014, and December 29, 2013, and for the years ended December 28, 2014, and December 29, 2013, have been derived from the audited consolidated financial statements not included in this Annual Report.
This historical data includes, in the opinion of management, all adjustments necessary for a fair presentation of the operating results and financial condition of the Company for such periods and as of such dates. The results of operations for any period are not necessarily indicative of the results of future operations. During the periods included below, we have completed several acquisitions and dispositions. The results of these acquired entities are included in our consolidated statements of comprehensive income (loss) for the periods subsequent to their respective acquisition dates. The results of these disposed entities are included in our consolidated statements of comprehensive income (loss) for the periods up to their respective disposal dates. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| (In thousands of U.S. dollars, except for share and per share amounts) | December 31,
2017 | | January 1,
2017 | | January 3,
2016 | | December 28,
2014 | | December 29,
2013 |
| Operating Results: | | | | | | | | | |
| Net sales | $ | 2,032,925 |
| | $ | 1,973,964 |
| | $ | 1,871,965 |
| | $ | 1,837,700 |
| | $ | 1,731,143 |
|
| Gross profit | 406,983 |
| | 409,645 |
| | 350,850 |
| | 265,399 |
| | 225,507 |
|
| Income (loss) from continuing operations | 157,564 |
| | 104,894 |
| | (41,741 | ) | | (33,488 | ) | | (8,362 | ) |
| Net income (loss) | 156,981 |
| | 104,142 |
| | (42,649 | ) | | (34,118 | ) | | (8,960 | ) |
| Net income (loss) attributable to Masonite | 151,739 |
| | 98,622 |
| | (47,111 | ) | | (37,340 | ) | | (11,010 | ) |
| Income (loss) from continuing operations attributable to Masonite shareholders per common share (basic) | 5.20 |
| | 3.27 |
| | (1.53 | ) | | (1.24 | ) | | (0.37 | ) |
| Income (loss) from continuing operations attributable to Masonite shareholders per common share (diluted) | 5.11 |
| | 3.19 |
| | (1.53 | ) | | (1.24 | ) | | (0.37 | ) |
| Net income (loss) attributable to Masonite shareholders per common share (basic) | 5.18 |
| | 3.25 |
| | (1.56 | ) | | (1.26 | ) | | (0.39 | ) |
| Net income (loss) attributable to Masonite shareholders per common share (diluted) | 5.09 |
| | 3.17 |
| | (1.56 | ) | | (1.26 | ) | | (0.39 | ) |
| Cash Flow Data: | | | | | | | | | |
| Capital expenditures | 73,782 |
| | 82,287 |
| | 51,065 |
| | 50,147 |
| | 45,971 |
|
| Balance Sheet Data: | | | | | | | | | |
Working capital (1) | 499,745 |
| | 347,559 |
| | 326,428 |
| | 455,335 |
| | 377,312 |
|
| Total assets | 1,680,258 |
| | 1,475,861 |
| | 1,499,149 |
| | 1,616,146 |
| | 1,566,345 |
|
| Total debt | 625,657 |
| | 470,745 |
| | 468,856 |
| | 503,785 |
| | 370,383 |
|
| Total equity | 735,902 |
| | 659,776 |
| | 655,566 |
| | 735,499 |
| | 825,562 |
|
____________
(1) Working capital is defined as current assets less current liabilities and includes cash restricted by letters of credit.
MASONITE INTERNATIONAL CORPORATION
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the years ended December 31, 2017, January 1, 2017, and January 3, 2016. 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 the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" and Part I, Item 1A, "Risk Factors", elsewhere in this Annual Report on Form 10-K. 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 non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order Reference 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"2023" refers 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 64 manufacturing and distribution facilities in 8 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 currently organized and managed principally by end market: North American Residential, Europe and Architectural. In thefiscal year 2023 ended December 31, 2017, we generated net sales of $1,428.9 million or 70.3%, $291.9 million or 14.4% and $288.5 million or 14.2% in our North American Residential, Europe and Architectural segments, respectively. See "Components of Results of Operations - Segment Information" below for a description of our reportable segments.
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 in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives2023. "Common Shares" refer to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural buildingMasonite International Corporation common shares.
MASONITE INTERNATIONAL CORPORATION
INDEX TO THE AMENDMENT
December 31, 2023
| | | | | | | | | | | |
| | | Page No. |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| PART III | | | |
| Item 10 | | | |
| Item 11 | | | |
| Item 12 | | | |
| Item 13 | | | |
| Item 14 | | | |
| | | |
| PART IV | | | |
| Item 15 | | | |
| | | |
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
Information regarding the executive officers of the Company is set forth at the beginning of Part III - Item 10 of the Original Form 10-K.
Directors
The names of the members of the Company’s Board of Directors (the “Board”), their respective ages, their positions with the Company and other biographical information as of April 15, 2024, are set forth below. All directors serve for a term ending at the next annual general meeting of shareholders and until his or her successor has been duly elected and qualified or until his or her earlier resignation or removal.
| | | | | | | | | | | | | | |
| HOWARD C. HECKES | | ROBERT J. BYRNE |
| | | | |
| Director Since 2019 | | | Director Since 2009 |
Age 59 | | Age 62 |
| President and Chief Executive Officer | | Chairman of the Board of Masonite |
| |
| Other Current Public Directorships: | | Other Current Public Directorships: |
■The AZEK Company | | ■NextEra Energy Partners, L.P. |
| | |
| Mr. Heckes has served as President and Chief Executive Officer ("CEO") of Masonite and as a director of Masonite since June 2019. Mr. Heckes joined Masonite from Energy Management Collaborative where he served as Chief Executive Officer since 2017. From 2008 to 2017, Mr. Heckes served in a variety of operations roles at Valspar Corporation, now a subsidiary of The Sherwin-Williams Company, most recently overseeing Valspar's industrial coatings portfolio. Prior to joining Valspar, Mr. Heckes held various leadership roles at Newell Rubbermaid (NASDAQ: NWL), including President of Sanford Brands and President of Graco Children's Products. Mr. Heckes currently serves as a director of The AZEK Company (NYSE: AZEK). | | Mr. Byrne has served as a director of Masonite since June 2009 and has been Chairman of the Board of Masonite since July 2010. Mr. Byrne has served as the Executive Chairman of Source2, Inc., which specializes in assisting clients with high volume recruiting since January 2019. Mr. Byrne was the founder and served as the President of Power Pro-Tech Services, Inc., which specializes in the installation, maintenance, and repair of emergency power and solar photovoltaic power systems, from 2002 until it was sold in 2017. Power Pro-Tech was Mr. Byrne’s fourth start-up. His other entrepreneurial ventures have been in telecommunications, private equity and educational software. From 1999 to 2001, Mr. Byrne was Executive Vice President and Chief Financial Officer of EPIK Communications, a start-up telecommunications company which merged with Progress Telecom in 2001 and was subsequently acquired by Level3 Communications. Having begun his career in investment banking, Mr. Byrne served as Partner at Advent International, a global private equity firm, from 1997 to 1999 and immediately prior to that, from 1993 to 1997, served as a director of Orion Capital Partners. Mr. Byrne serves as a director of NextEra Energy Partners, L.P. (NYSE: NEP). He rejoined the NEP board in December 2018 after having previously served as a director from July 2014 through April 2017. |
|
|
|
|
|
|
|
| JODY L. BILNEY | |
| | |
| Director Since 2014 | |
Age 61 | |
| Masonite Board Committees: | |
■Sustainability and Governance (Chair) | |
| Other Current Public Directorships: | |
■Alignment Healthcare, Inc. ■Chuy’s Holdings, Inc., ■Cracker Barrel Old Country Store | |
|
| | | |
| Ms. Bilney has served as a director of Masonite since January 2014. Ms. Bilney served as the Chief Consumer Officer of Humana, Inc. (NYSE: HUM), a health insurance provider specializing in care delivery and health plan administration, from April 2013 until her retirement in March 2020. Prior to Humana, Ms. Bilney served as executive vice president and chief brand officer for Bloomin’ Brands, Inc. (NASDAQ: BLMN), where she headed various departments including brand and business strategy, marketing, corporate communications and business development. Prior to Bloomin’ Brands, she held senior executive positions at Charles Schwab (NYSE: SCHW) and Verizon (NYSE: VZ), where she led consumer-focused brand-transformation initiatives. Ms. Bilney is currently a member of the board of directors of Chuy’s Holdings, Inc. (NASDAQ: CHUY), an operator of value-driven, full-service restaurants (since May 2021); Alignment Healthcare, Inc. (NASDAQ: ALHC), a provider of customized health care in the U.S. (since January 2022), Cracker Barrel Old Country Store (NASDAQ: CBRL) (since September 2022), and several private companies. | | | |
| | |
| |
| | |
| | |
| | |
| |
|
|
|
|
|
| | |
| | | | | | | | | | | | | | |
| PETER R. DACHOWSKI | | DAPHNE E. JONES |
| | | | |
| Director Since 2013 | | | Director Since 2018 |
Age 75 | | Age 67 |
| Masonite Board Committees: | | Masonite Board Committees: |
■Audit ■Human Resources and Compensation | | ■Sustainability and Governance |
| Other Current Public Directorships: ■AMN Healthcare Services Inc. ■Barnes Group Inc. |
| Other Current Public Directorships: | |
■N/A | |
| | | | |
| Mr. Dachowski has served as a director of Masonite since July 2013. Mr. Dachowski spent 35 years with both CertainTeed Corporation, a North American manufacturer of exterior and interior residential and commercial building envelope construction products, and its parent company Saint-Gobain, most recently serving as CertainTeed’s Chairman and CEO from 2004 to 2011. Prior to rejoining CertainTeed, he served as President of Saint-Gobain’s worldwide insulation business and as a member of Saint-Gobain’s Global Corporate Management Committee from 1996 to 2011. He was employed by The Boston Consulting Group as a Consultant and Engagement Manager from 1973 to 1976 after beginning his career as a Financial Analyst with the Treasury Department of Exxon Corporation in 1971. Mr. Dachowski is currently an advisor to various private equity firms on potential investments in the building materials industry. | | Ms. Jones has served as a director of Masonite since February 2018. Ms. Jones is the Founder of The Board Curators, LLC, established in July 2021, and is also the Founder of Destiny Transformations Group, LLC, established in April 2018. Ms. Jones served as the Senior Vice President - Digital/Future of Work for GE Healthcare, the healthcare business of GE, from May 2017 to October 2017. Prior to that, she served as the Senior Vice President - Chief Information Officer for GE Healthcare Diagnostic Imaging and Services since August 2014. Prior to joining GE Healthcare, Ms. Jones was the Senior Vice President, Chief Information Officer for Hospira, Inc., a provider of pharmaceuticals and infusion technologies, from October 2009 through June 2014. Previously she served as Chief Information Officer at Johnson & Johnson from 2006 to 2009 and served in various information technology roles with Johnson & Johnson from 1997 through 2006. Ms. Jones began her career in sales and systems engineering at IBM. Ms. Jones currently serves as a director of AMN Healthcare Services Inc. (NYSE: AMN) and Barnes Group Inc. (NYSE: B). Ms. Jones previously served on the board of the Thurgood Marshall College Fund, a not-for-profit organization and the nation’s largest organization exclusively representing the Black College community and is the author of Win When They Say You Won’t. |
|
|
|
|
|
|
|
|
| | |
| JONATHAN F. FOSTER | |
| | |
| Director Since 2009 | |
Age 63 | |
| Masonite Board Committees: | |
■Audit (Chair) | |
| Other Current Public Directorships: | |
■Lear Corporation ■Berry Global, Inc. ■Five Point Holdings, LLC | | |
| | |
| | | |
| Mr. Foster has served as a director of Masonite since June 2009. Mr. Foster is the founder and a Managing Director of Current Capital Partners LLC, a mergers and acquisitions advisory, corporate management services and private equity investing firm. Previously, from 2007 until 2008, Mr. Foster served as a Managing Director and Co-Head of Diversified Industrials and Services at Wachovia Securities. From 2005 until 2007, he served as Executive Vice President Finance and Business Development of Revolution LLC. From 2002 until 2004, Mr. Foster was a Managing Director of The Cypress Group, a private equity investment firm and from 2001 until 2002 he served as a Senior Managing Director of Bear Stearns & Co. From 1999 until 2000, Mr. Foster served as the Executive Vice President, Chief Operating Officer and Chief Financial Officer of ToysRUs.com, Inc. Previously, Mr. Foster was with Lazard for over ten years in various positions, including as a Managing Director. Mr. Foster currently serves as a director of Lear Corporation (NYSE: LEA), Berry Global, Inc (NYSE: BERY), and Five Point Holdings, LLC (NYSE: FPH) and was formerly a director of Sabine Oil & Gas from 2015 to 2016 and Chemtura Corporation from 2009 to 2017 and several private companies. | | | |
| | |
| |
| | |
| | |
| | |
| |
|
|
|
|
|
|
| | | | | | | | | | | | | | |
| BARRY A. RUFFALO | | JAY I. STEINFELD |
| | | | |
| Director Since 2021 | | | Director Since 2020 |
Age 54 | | Age 70 |
| Masonite Board Committees: | | Masonite Board Committees: |
■Human Resources and Compensation | | ■Audit |
| Other Current Public Directorships: | | Other Current Public Directorships: |
■N/A | | ■N/A |
| | |
| Mr. Ruffalo has served as a director of the Company since July 2021. Mr. Ruffalo previously served as President and Chief Executive Officer and as a director of Astec Industries, Inc. (NASDAQ: ASTE) from August 2019 through January 2023. Prior to joining Astec Industries, Inc. he was employed by Valmont Industries (NYSE: VMI), a publicly-traded global producer of highly-engineered fabricated metal products, where he had served from 2015 to 2016 as Executive Vice President, Operational Excellence, from 2016 to 2017 as Group President - Energy & Mining, during 2017 as Group President - North America Structures/Energy/Mining, and from 2018 to July 2019 as Group President of Global Engineered Support Structures. Preceding his career at Valmont Industries, from 2013 to 2015, Mr. Ruffalo served terms as President of the Irrigation and of the Infrastructure divisions of Lindsay Corporation (NYSE: LNN), a publicly-traded global leader in proprietary water management and road infrastructure products and services. | | Mr. Steinfeld has served as a director of Masonite since November 2020. Prior to joining our Board, Mr. Steinfeld served as CEO of Global Custom Commerce (Blinds.com) ("GCC") from the time he founded the company in 1996 until he left the company in 2020. Mr. Steinfeld transformed GCC into the world's number one online window coverings retailer which was acquired by The Home Depot (NYSE: HD) in 2014. After the acquisition, Mr. Steinfeld remained CEO of GCC and served on The Home Depot Online Leadership Team from 2015 until he left the company. Mr. Steinfeld serves as Entrepreneur-in-Residence at Rice University’s Jesse H. Jones Graduate School of Business, serves on the Advisory Council at the University of Texas’s Herb Kelleher Entrepreneurship Center, and is the author of the Wall Street Journal Best Seller, Lead from the Core. Mr. Steinfeld began his career as a certified public accountant. |
|
|
|
|
|
|
|
|
|
| | |
| FRANCIS M. SCRICCO | |
| | |
| Director Since 2009 | |
Age 73 | |
| Masonite Board Committees: | |
■Human Resources and Compensation (Chair) | |
| Other Current Public Directorships: | |
■Visteon Corporation | | |
| | | | |
| Mr. Scricco has served as a director of Masonite since June 2009. Prior to joining our Board, Mr. Scricco was with Avaya, Inc., a global business communications provider, where he served as Senior Vice President, Global Services from March 2004 to February 2007 and subsequently as Senior Vice President, Manufacturing, Logistics and Procurement until his retirement in October 2008. Prior to joining Avaya, Inc., he was employed by Arrow Electronics (NYSE: ARW) as its COO from 1997 to 2000 and then as its President and CEO from 2000 to 2002. Mr. Scricco’s first operating role was as a General Manager for General Electric. He began his career with The Boston Consulting Group in 1973. Mr. Scricco is currently Chairman of the Board of Visteon Corporation (NASDAQ: VC), a global automotive supplier and was a director of Tembec, Inc., an integrated forest products company, from 2008 to 2017. | | | |
| | |
| |
| | |
| | |
| | |
| |
|
|
|
|
|
|
DIRECTOR QUALIFICATIONS
The Board seeks to ensure that it is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board to satisfy its oversight responsibilities effectively. Consistent with the Company’s Sustainability and Governance Committee charter, in identifying candidates for membership on the Board, the Sustainability and Governance Committee takes into account all factors it considers appropriate, which may directly impactinclude strength of character, mature judgment, career specialization, relevant technical skills, diversity and the extent to which the candidate would fill a present need on the Board. We believe that the backgrounds and qualifications of our financial performance. Accordingly,directors, considered as a group, should provide a composite mix of experience, knowledge and abilities that will allow our Board to fulfill its responsibilities. Consistent with its charter, the followingSustainability and Governance Committee considers diversity of experience as well as diversity in gender and whether an individual represents an underrepresented minority or class as factors mayit considers in conducting its assessment of director nominees, along with such other factors as it deems appropriate given the then current needs of the Board and the Company, to maintain a balance of knowledge, experience, and capability.
When determining whether our directors have the experience, qualifications, attributes and skills, taken as a direct impactwhole, to enable our Board to satisfy its oversight responsibilities effectively in light of our business and structure, our Board considers primarily on our businesslonger-tenured directors’ contributions to our success in recent years, the specific expertise that the more recently elected directors have and are expected to continue to contribute, and on the information discussed in the countriesbiographies set forth under Part III, Item 10., “Directors, Executive Officers and regionsCorporate Governance—Directors” above. With respect to Ms. Bilney, the Board considered her extensive marketing and branding experience with highly successful companies such as Humana, Inc. With respect to Mr. Byrne, our Board considered in which our products are sold:
the strength of the economy;
the amountparticular his financial, investment banking and type of residentialtransactional experience and commercial construction;
housing saleshis proven entrepreneurial and home values;
the age of existing home stock, home vacancy rates and foreclosures;
non-residential building occupancy rates;
increasesoperational skills in the cost of raw materials or wages or any shortageindustrial services industry. With respect to Mr. Dachowski, our Board considered in supplies or labor;
the availabilityparticular his extensive financial 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.
Additionally, the United Kingdom's formal trigger of the two year process for its exit from the European Union, and related negotiations, has created uncertainty in European demand, particularly in the United Kingdom, which could have a material adverse effect on the demand for our products in the foreseeable future.
Product Pricing and Mix
The building products industry is highly competitive and we therefore face pressure on sales prices ofexperience. With respect to Mr. Foster, 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 resultBoard considered in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. In fiscal year 2017, our top ten customers together accounted for approximately 44% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 18% of our net sales in fiscal year 2017. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually orparticular his experience 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 winsChief Financial Officer and losses. In addition, as a resultmember 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 initiated,audit committee and in the future we may initiate, restructuring plans designed to eliminate excess capacity in order to align our manufacturing capabilities with reductions in demand,board of directors of public companies, as well as his financial, investment banking and transactional experience. With respect to streamlineMs. Jones, our organizational structureBoard considered her extensive experience with information technology, digital and repositioncyber-security matters. With respect to Mr. Heckes, our Board considered in particular his current role as our Chief Executive Officer and his extensive management expertise. With respect to Mr. Ruffalo, our Board considered his extensive experience with manufacturing companies and his experience as a Chief Executive Officer of a public company. With respect to Mr. Scricco, our Board considered in particular his extensive management experience, including as Chief Executive Officer of an electronics distribution business, his public-company board experience, his strategy consulting experience, and his familiarity with product marketing, distribution channels and branding. With respect to Mr. Steinfeld, the Board considered his entrepreneurial, e-commerce, and digital experience.
AUDIT COMMITTEE
The Audit Committee currently consists of Jonathan F. Foster (Chair), Peter R. Dachowski and Jay I. Steinfeld. The Audit Committee met nine times in 2023. Each member of our Audit Committee is independent under applicable NYSE listing standards and meets the heightened standards for improved long-term profitability.
During 2016, we began implementing a planindependence required by U.S. securities law, including Rule 10A-3 of the Securities Exchange Act of 1934 (the "2016 Plan"“Exchange Act”) to close one manufacturing facility in. Each member is financially literate under applicable NYSE listing standards and our Board has determined that each of Mr. Foster and Mr. Dachowski is qualified as an audit committee financial expert within the Architectural segment, which included the reductionmeaning of approximately 140 positions.applicable SEC regulations. The 2016 Plan was implemented to improve our cost structureAudit Committee oversees and enhance operational efficiencies. Costs associated with the 2016 Plan include closure costsevaluates and, severance and the 2016 Plan is substantially completed. As of December 31, 2017, we do not expect to incur any future charges relatingwhere necessary or advisable, makes recommendations as to the 2016 Plan. The actions taken as part of the 2016 Plan are expected to increase our annual earningsquality and cash flows by approximately $4 million.
During 2015, we began implementing a multi-year plan to reorganize and consolidate certain aspects of our global head office (the "2015 Plan"). The 2015 Plan includes the creation of a new shared services function and the rationalization of certain of our European facilities, including related headcount reductions. The 2015 Plan was implemented in response to the need for more effective business processes enabled by the planned implementation of our
MASONITE INTERNATIONAL CORPORATION
new enterprise resource planning system in our architectural business as well as ongoing weak market conditions in Africa and Europe outside of the United Kingdom. Costs associated with the 2015 Plan included severance and closure charges and are substantially completed. As of December 31, 2017, we do not expect to incur any material future charges for the 2015 Plan. Once fully implemented, the actions taken as part of the 2015 Plan are estimated to increase our annual earnings and cash flows by approximately $6 million.
Foreign Exchange Rate Fluctuation
Our financial results may be adversely affected by fluctuating exchange rates. In the years ended December 31, 2017, January 1, 2017, and January 3, 2016 approximately 34%, 35% and 36% of our net sales were generated outside of the United States, respectively. In addition, a significant percentage of our costs during the same period were not denominated in U.S. dollars. For example, for most of our manufacturing and distribution facilities, the prices for a significant portion of our raw materials are quoted in the domestic currency of the country where the facility is located or other currencies that are not U.S. dollars. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country or allow our competitors to sell their products at lower prices in that country. Unrealized exchange gains and losses arising from the translationintegrity of the financial statements of the Company, the internal control and financial reporting systems of the Company, the compliance by the Company with legal and regulatory requirements in respect of financial disclosure, the qualification, independence and performance of the Company’s independent registered public accounting firm and the performance of the Company’s internal audit functions. In addition, the Audit Committee is directly responsible for the appointment, compensation, retention, termination and oversight of the work of the independent registered public accounting firm (including oversight of the resolution of any disagreements between management and the independent registered public accounting firm regarding financial reporting) for the purpose of preparing audit reports or performing other audit, review or attest services for the Company, subject to any applicable approvals required from our non-U.S. functional currency operations are accumulatedBoard or our shareholders.
CORPORATE GOVERNANCE GUIDELINES AND CODE OF ETHICS
Our Board has adopted Corporate Governance Guidelines that reflect the principles by which we operate. From time to time, the Sustainability and Governance Committee and the Board review and revise our Corporate Governance Guidelines in response to evolving best practices as appropriate.
We have also adopted a Values Guide/Code of Conduct (the “Code of Conduct”), which applies to all of our directors, officers and employees. We have posted and intend to continue to post any amendments to or waivers from our Code of Conduct on the cumulative translation adjustments account in accumulatedCorporate Governance documents page on our website to the extent applicable to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, and any other comprehensive income (loss). Net gains from currency translation adjustmentsofficer who may function as a resultChief Accounting Officer or a director.
Each standing committee of translatingthe Board is governed by a charter adopted by the Board.
Our Corporate Governance Guidelines, the Code of Conduct, and each of the Audit, Human Resources and Compensation and Sustainability and Governance Committees charters and other information are available at our foreign assetswebsite, www.masonite.com, and liabilities into U.S. dollarssuch information is available in print to any shareholder without charge, upon request to Masonite International Corporation, 1242 East 5th Avenue, Tampa, FL 33605, Attention: Corporate Secretary, or by calling (800) 895-2723.
PROCESS FOR SHAREHOLDERS TO RECOMMEND DIRECTOR NOMINEES
Pursuant to its charter, the Sustainability and Governance Committee will evaluate candidates for nomination to the Board, including those recommended by shareholders, on a substantially similar basis as it considers other nominees, as described above. Shareholders wishing to propose a candidate for consideration may do so by submitting the proposed candidate’s name, age, business address and residential address, principal occupation or employment, and certain other information required by our Articles, to the attention of our Corporate Secretary in accordance with our Articles and the Business Corporations Act (British Columbia) (“BCBCA”). Please note that our Articles require that timely notice be provided by any shareholder who proposes director nominations for consideration at a shareholders’ meeting, in addition to other requirements. All recommendations for
nomination received by the Corporate Secretary that satisfy the requirements of our Articles and the BCBCA relating to such director nominations will be presented to the Sustainability and Governance Committee for its consideration.
DELINQUENT SECTION 16(a) REPORTS
Section 16(a) of the Exchange Act, as amended, requires directors, executive officers and beneficial owners of more than ten percent (10%) of our Common Shares to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Shares. Based solely on our review of electronic filings with the SEC of such reports and written representations from our executive officers and directors that no Form 5 is required. The Company did not timely file the following Statements of Changes in Beneficial Ownership: the Form 4, filed by Christopher O. Ball, with the filings of Masonite on October 13, 2023, and the Form 4, filed by Alexander A. Legall, with the filings of Masonite, on October 11, 2023. To Masonite’s knowledge, based solely on a review of the copies of such reports furnished to Masonite and written representations that no other reports were required, during the year ended December 31, 2017,2023, all other Section 16(a) filing requirements applicable to its officers, directors, and greater than ten percent beneficial owners were $39.0 million, which were primarily drivencomplied with.
Item 11. Executive Compensation
Director Compensation
During 2023, the annual non-employee director compensation program was structured as follows:
• Annual cash retainer: $100,000 ($170,000 for the Non-Executive Chairman of the Board)
• Annual equity retainer: $110,000 ($160,000 for the Non-Executive Chairman of the Board)
• Additional annual cash retainer for Sustainability and Governance Committee Chair: $17,500
• Additional annual cash retainer for Audit Committee Chair: $20,000
• Additional annual cash retainer for the Human Resources and Compensation Committee Chair: $17,500
• No meeting fees (Board or Committee)
All cash retainers are payable in equal installments at the beginning of each fiscal quarter. As indicated above, our non-employee directors other than the Non-Executive Chairman of the Board also receive an annual equity retainer of restricted stock units where the number of restricted stock units granted is determined by dividing $110,000 by the weakeningfair market value of a Common Share on the grant date. The number of restricted stock units granted to the Non-Executive Chairman of the U.S. dollar againstBoard is determined by dividing $160,000 by the fair market value of a Common Share on the grant date. These grants are made annually immediately after a director is elected or re-elected as the case may be, to our Board and will vest on the first anniversary of the grant date, subject to the director’s continued service on the Board through the vesting date.
All directors are reimbursed for reasonable costs and expenses incurred in attending meetings of our Board and its committees.
DIRECTOR COMPENSATION FOR 2023
Consistent with the compensation programs discussed above, the table below summarizes the 2023 compensation of all of our directors other than Mr. Heckes, who is a NEO. The compensation for Mr. Heckes is discussed under the section titled “Compensation Discussion and Analysis” and related tables.
| | | | | | | | | | | |
| Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($)(2) | Total ($) |
| Robert J. Byrne, Chairman | 170,000 | 160,000 | 330,000 |
| Jody L. Bilney | 117,500 | 110,000 | 227,500 |
| Peter R. Dachowski | 100,000 | 110,000 | 210,000 |
| Jonathan F. Foster | 120,000 | 110,000 | 230,000 |
| Daphne E. Jones | 100,000 | 110,000 | 210,000 |
William S. Oesterle(3) | 36,264 | — | 36,264 |
| Barry A. Ruffalo | 100,000 | 110,000 | 210,000 |
| Francis M. Scricco | 117,500 | 110,000 | 227,500 |
| Jay I. Steinfeld | 100,000 | 110,000 | 210,000 |
(1) This column includes the annual cash retainers described above. Mr. Byrne received an additional $70,000 for serving as non-executive Chairman of the Board. Mr. Foster received $20,000 for serving as chair of the Audit Committee. Ms. Bilney received $17,500 for serving as the chair of the Sustainability and Governance Committee. Mr. Scricco received $17,500 for serving as the chair of the Human Resources and Compensation Committee.
(2) On May 11, 2023, each non-employee director elected to the Board other than Mr. Byrne was awarded 1,121 restricted stock units and Mr. Byrne was awarded 1,655 restricted stock units under the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan (the “2012 Plan”). The amounts reported in this column reflect the aggregate grant date fair value of the restricted stock units computed in accordance with Accounting Standards Codification Topic 718 “Stock Compensation,” as issued by the Financial Accounting Standards Board. The assumptions made when calculating the amounts are found in Note 12 to our Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. As of December 31, 2023, the non-employee directors held the following outstanding restricted stock units: Mr. Byrne –1,655; Ms. Bilney – 1,121; Mr. Dachowski – 1,121; Mr. Foster – 1,121; Ms. Jones – 1,121; Mr. Ruffalo – 1,121; Mr. Scricco – 1,121; and Mr. Steinfeld – 1,121.
(3) Mr. Oesterle did not stand for reelection at the 2023 annual meeting of shareholders.
Compensation Discussion and Analysis
INTRODUCTION
This Compensation Discussion and Analysis (“CD&A”) describes our compensation philosophy and objectives, summarizes our executive compensation program and practices and explains the Human Resources and Compensation Committee (hereafter referred to as the Compensation Committee) process for setting compensation with respect to our Named Executive Officers (“NEOs”) listed below for fiscal 2023.
2023 NAMED EXECUTIVE OFFICERS
| | | | | | | | | | | | | | |
| Name | Title |
| Howard C. Heckes | President and Chief Executive Officer |
| Russell T. Tiejema | Executive Vice President and Chief Financial Officer |
| Christopher O. Ball | President, Global Residential |
| Randal A. White | Senior Vice President, Global Operations and Supply Chain |
| Robert A. Paxton | Senior Vice President, Human Resources |
EXECUTIVE SUMMARY
Summary of Executive Compensation Program Attributes
Our executive compensation program is overseen by the Compensation Committee, which has primary oversight for the design and implementation of our executive compensation program. Our executive compensation program is based on a “pay for performance” philosophy with objectives that are designed to attract, engage and retain high-caliber talent, reward performance and align the interests of our executives, including our NEOs, with the interests of our shareholders. We execute on our philosophy and objectives by providing our NEOs with competitive base salaries, annual cash incentive bonus opportunities, and grants of a combination of performance-based and time-based equity awards, severance and change in control benefits, and other employee benefits. The Compensation Committee administers our annual cash incentive bonus plan (“MIP”) and our long-term incentive plan (“LTIP”).
Summary of Fixed and At-Risk Pay Elements
To focus our NEOs on delivering results, both in the short- and long-term, a significant amount of our NEO’s target total direct compensation mix is weighted towards at-risk compensation. Our executive compensation program is comprised of the following fixed and at-risk pay elements as illustrated below.
| | | | | | | | | | | | | | | | | | | | |
| Element * | | Purpose | | 2023 Summary |
| | | | | | |
| Base Salary | | FIXED | | Fixed cash compensation that recognizes the level of responsibilities, contributions towards Company financial and operational goals, individual performance and experience, internal pay equity, the economic and business environment, and other relevant considerations, including maintaining target direct compensation near the peer group median. | | 2023 average base salary increase was 6.2% for our NEOs. |
| | | | | | |
Annual Cash Incentive Bonus
(MIP) | | AT RISK | | Performance-based cash compensation that rewards the achievement of Company-wide and/or segment-specific financial and operational goals for our NEOs.
The MIP (both Corporate and Segment-specific) is subject to an individual performance multiplier.
A discretionary pool of up to 5% of the target MIP bonus pool is available to be used by the CEO for recognition of excellent performance by bonus plan participants, including our NEOs. | | 2023 MIP - Corporate performance metrics for Messrs. Heckes, Tiejema, White and Paxton were: •MIP Adjusted EBITDA (50%) •Global Core Working Capital (25%) •Balanced Scorecard (25%)
2023 MIP - Segment-specific performance metrics for Mr. Ball were: •Segment MIP Adjusted EBITDA (50%) •Global Core Working Capital (25%) •Balanced Scorecard (25%) |
| | | | | |
| Long-Term Incentive (LTIP) | | | Equity-based compensation that is tied to achievement of long-term financial and operational goals over a three-year performance period and aligns our NEOs with the interests of our shareholders. •30% - Time-Vesting Restricted Stock Units (“RSUs”) •60% - Performance-Vesting Restricted Stock Units (“PSUs”) •10% - Stock Appreciation Rights (“SARs”)
| | 2023-2025 LTIP - PSU performance metrics based on a three-year target were: •Net Sales (50%) •Relative Total Shareholder Return (50%)
|
* Additional elements of NEO compensation are described below. See - “Elements of Our Executive Compensation Program”.
2023 Target Compensation Mix
Our executive compensation program provides for a mix of at-risk and fixed compensation elements and our Compensation Committee strives to achieve an appropriate balance between these two types of compensation, as well as an appropriate mix of cash and equity-based compensation. The Compensation Committee strives to provide pay opportunities that align within a competitive range, generally defined as +/- 15% of the median of the market for executive talent, as determined using both our peer group and general industry market survey data, and considers competitive compensation practices and other relevant factors such as experience, contribution, internal equity, and performance in setting each NEO’s target total direct compensation. The target mix of compensation elements is designed to reward individual and team performance and enterprise value growth. We place relatively greater emphasis towards at-risk compensation, through our performance-based MIP and through grants of PSUs and SARs under our LTIP plan, to align the interests of our executive officers with the interest of our shareholders and motivate them to drive shareholder value. The LTIP is also designed to provide retention incentives for our executive officers through the granting of RSUs near the commencement of each performance period that are subject to a vesting period. We look to the experience and judgment of the Compensation Committee to determine what it believes to be the appropriate target compensation mix for each NEO.
The charts below illustrate the target total direct compensation for 2023 for our CEO and the average of the other major currencies in which we transact.four NEOs.
Inflation
An increase in inflation could have a significant impact on the cost
Summary of our raw material inputs. Wage inflation, increased prices for raw materials or finished goods used in our products and/or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, marginsKey Compensation and net sales, particularly if we are not able to pass these incurred costs on to our customers. In addition, interest rates normally increase during periods of rising inflation. Historically, as interest rates increase, demand for new homes and home improvement products decreases. An environment of gradual interest rate increases may, however, signify an improving economy or increasing real estate values, which in turn may stimulate increased home buying activity.Governance Practices
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 Dispositions
We are pursuing a strategic initiative of optimizing our global business portfolio. As part of thisour compensation philosophy, we have adopted a number of compensation and governance practices to help ensure a balanced and transparent executive compensation structure, including:
| | | | | | | | | | | | | | |
| What We Do: | | | What We Don’t Do: |
| ☑ | Performance metrics align pay with Company financial performance | | ⊗ | No hedging, pledging or short sales of Common Shares |
| ☑ | Significant portion of executive compensation tied to financial metrics | | ⊗ | No guaranteed salary increases or bonuses |
| ☑ | Objective performance goals for short- and long-term incentives | | ⊗ | No cash component to our long-term incentive awards |
| ☑ | Significant stock ownership guidelines and holding requirements | | ⊗ | No tax gross-up payments |
| ☑ | All long-term compensation is equity based | | ⊗ | No “single trigger” equity award vesting upon change in control |
| ☑ | Caps on short- and long-term incentive awards | | ⊗ | No excessive or extraordinary perquisites |
| ☑ | Executive “clawback” policy for incentive compensation | | | |
| ☑ | Additional “clawback” provisions in our cash / equity incentive plans | | | |
| ☑ | Engagement of an independent compensation consultant | | | |
EXECUTIVE COMPENSATION PHILOSOPHY AND OBJECTIVES
The Compensation Committee has designed an executive compensation program that reflects a “pay for performance” philosophy with the objective to attract, engage and retain high-caliber talent, and reward performance tied to the achievement of financial and operational goals. The Compensation Committee has aligned our program with our business strategy which is focused on long-term revenue and earnings growth along with sustained long-term shareholder value by providing our NEOs with long-term incentives tied to growth and value creation to align the interests of our NEOs with the interests of our shareholders. Our program includes a balance of short- and long-term award opportunities, provided in cash or equity with portions of fixed and variable pay elements, to discourage excessive risk taking. In making NEO compensation decisions, the Compensation Committee considers a
variety of items, including but not limited to the nature and scope of all elements of the NEO’s total compensation, the NEO’s responsibilities and effectiveness in support of our key strategic, financial and operating goals, as well as market data and other information received from its independent compensation consultant (but does not assign any specific weighting to any of the items considered).
To guide our Compensation Committee in making executive compensation decisions and to achieve our “pay for performance” philosophy, our executive compensation program is designed to achieve the following key objectives:
| | | | | | | | | | | | | | |
| COMPETITIVE PAY | | PAY FOR PERFORMANCE | | ALIGNMENT WITH
SHAREHOLDER INTERESTS |
| We offer a total compensation program comprised of a fixed base salary and variable annual and long-term incentive compensation, severance and change in control benefits designed to attract, engage, retain and motivate talented executives. We offer competitive pay opportunities that align within a median range (generally, +/- 15%) of both our peer group and general industry and manufacturing industry survey data. | | We designed our MIP and our LTIP with a large portion of our pay mix in favor of at-risk compensation tied to financial and operating performance. Our NEO’s compensation is dependent upon the achievement of pre-established financial and operating goals. Pay outcomes are higher when performance exceeds target goals and pay outcomes are lower when target goals are not met, with the potential of a zero payout. | | To align the interests of our NEOs with those of our shareholders, we provide a significant portion of our NEOs total compensation in the form of equity-based compensation, including PSUs tied to three-year performance goals and SARs that only have value if the share price appreciates. |
Role of the Compensation Committee
The Compensation Committee consults with the Board in determining the compensation package of our CEO and has ultimate responsibility for determining the compensation for all our NEOs. The Compensation Committee makes compensation decisions for our NEOs after reviewing our performance for the preceding fiscal year, our short- and long-term strategies, and current economic and market conditions, and carefully evaluating each NEO’s performance during the preceding fiscal year against established organizational goals, leadership qualities, operational performance, business responsibilities, tenure, current compensation arrangements and long-term potential to enhance enterprise value. The Compensation Committee takes a holistic view in its assessment of executive compensation arrangements, taking into consideration the foregoing factors and shareholder considerations, not necessarily relying on any one factor exclusively in determining compensation for our NEOs. In making compensation decisions, the Compensation Committee receives advice from Frederic W. Cook & Co., Inc. (“FW Cook”) and input from our CEO and other executive officers, as further discussed below, as well as input from management that is informed by our shareholder engagement efforts.
Role of the Compensation Consultant
Our independent compensation consultant, FW Cook, is engaged by, and reports directly to, the Compensation Committee. FW Cook provides our Compensation Committee with input and guidance on all components of our executive compensation program. Except for services provided to the Compensation Committee related to executive compensation and non-employee director compensation, FW Cook did not provide any significant services to the Company during fiscal 2023, other than providing a market compensation report for vice president roles to management at the end of 2023, a summary of which was shared with the Compensation Committee. The Compensation Committee has evaluated whether any work performed by FW Cook raised any conflict of interest and determined there were no conflicts of interest during fiscal 2023.
Role of the CEO and Other Executive Officers
Our CEO reviews the base salaries of our NEOs (other than himself) on an annual basis and, if applicable, recommends base salary adjustments to the Compensation Committee, based on each NEO’s performance and responsibilities. The CEO confers with our Senior Vice President of Human Resources (“SVP of HR”) and together they consider applicable market data provided by FW Cook and provide input regarding the target percentage for the MIP and the dollar value target for the LTIP for each NEO. Additionally, our Executive Vice President and Chief Financial Officer (“CFO”) provides input to our CEO and the Compensation Committee with respect to the financial performance aspects of our MIP and LTIP to assist with designing an appropriate structure and financial goals. Although our CEO regularly attends meetings of the Compensation Committee, he recuses himself from those portions of the meetings related to his compensation. The Compensation Committee, in consultation with our Board, is exclusively responsible for determining any base salary changes and for making any other compensation decisions with respect to our CEO.
Compensation Benchmarking Study
In October 2022, upon request from the Compensation Committee, FW Cook conducted an updated benchmarking study of our executive compensation program based on our peer group, as well as other market information from third-party surveys. The Compensation Committee seeks, when setting executive compensation, to target total direct compensation within the competitive range of market median for our CEO and for all other NEO's as a group, with the intention that a significant portion of each NEO's total compensation package will continue to be focused on rewarding both short- and long-term performance through a combination of at-risk cash and equity incentive awards. When designing the 2023 compensation program, the Compensation Committee considered, among other factors, the results of the benchmarking study, in addition to individual performance levels, experience and responsibilities of our NEOs (none of these factors were individually weighted).
Peer Group Review
Consistent with the Compensation Committee’s objective of designing an executive compensation program that remains competitive and attracts, engages and retains high-caliber talent. The Compensation Committee, working with its independent compensation consultant, reviews annually, our peer group used to benchmark executive compensation. In selecting our peer group for 2023 executive compensation benchmarking, the Compensation Committee considered factors such as:
•operational fit reflecting companies in the last several yearsbuilding products industry and subject to similar economic opportunities and pressures as well as similar business and performance characteristics;
•financial scope reflecting companies of similar size and scale (with size for purposes of peer group development generally defined as 1/3 to 3 times Masonite’s revenue and market cap), in addition to relevant secondary measures such as total assets and net income;
•competitor companies with whom Masonite competes for executive talent and that operate in similar economic markets,
•public companies listed on major U.S. stock exchanges and subject to U.S. disclosure rules, and
•additional considerations such as cross-referenced peer groups.
The Compensation Committee approved the following list of companies as an appropriate peer group for benchmarking executive compensation, and making compensation decisions for 2023. There were no changes to the peer group from the prior year (other than the removal of Cornerstone Building Brands which was acquired in July 2022).
| | | | | | | | |
| Advanced Drainage Systems, Inc. | Gibraltar Industries, Inc. | PGT Innovations, Inc. |
| American Woodmark Corporation | Griffon Corp. | Quanex Building Products Corporation |
| Apogee Enterprises, Inc. | JELD-WEN Holdings, Inc. | Simpson Manufacturing Co., Inc. |
| Armstrong World Industries, Inc. | Lennox International Inc. | A.O. Smith Corporation |
| Fortune Brands Innovations, Inc. | Louisiana-Pacific Corp. | UFP Industries, Inc. |
SAY-ON-PAY VOTE
At the 2023 annual meeting of shareholders, we have pursued strategic acquisitions targeting companies who produce componentsheld our annual advisory vote on executive compensation. Approximately 83% of the votes cast for the “say on pay” proposal were in favor of the 2022 compensation for our existing operations, manufacture niche productsNEOs. Each year, the Compensation Committee considers the outcome of the shareholder advisory vote on executive compensation when making future decisions relating to the compensation of our NEOs and provide value-added services.our executive compensation program and policies.
SHAREHOLDER ENGAGEMENT AND FEEDBACK
As part of our on-going dialogue with our shareholders regarding governance, ESG, DEI and executive compensation topics, management offered shareholder engagement meetings with the stewardship offices of our top shareholders during our spring and fall engagement sessions. The Compensation Committee considers both the general and specific feedback received from our shareholders, and with the guidance of our independent compensation consultant and management, incorporates that feedback into our compensation program design. In 2023, the Compensation Committee made certain modifications to our compensation program design and related governance as a direct result of these engagement meetings, including to address investor feedback regarding (a) the use of a cash flow metric in our MIP program design, (b) expanded disclosure practices, specifically regarding our MIP and the related balanced scorecard metrics; (c) PSU performance goals for the 2023-2025 LTIP performance period by moving to a relative total shareholder return (“Relative TSR”) goal and (d) certain components of our stock ownership guidelines which were updated in July 2023.
ELEMENTS OF OUR EXECUTIVE COMPENSATION PROGRAM
For 2023, our executive compensation program consisted of the following elements:
•Base salary;
•Annual cash incentive bonus under our MIP;
•Long-term equity incentive awards under our LTIP;
•Severance and change in control benefits; and
•Other benefits and perquisites.
In making NEO compensation decisions, the Compensation Committee considers a variety of factors, including but not limited to the nature and scope of all elements of the NEO’s total compensation, the NEO’s responsibilities and effectiveness in support of the Company’s key strategic, financial and operational goals, as well as market data and other information received from its compensation consultant (but does not assign any specific weighting to any one factor). Additionally, wethe Compensation Committee reviews all the elements of compensation for our NEOs to assist the Compensation Committee in making compensation decisions including base salary, MIP cash bonus 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 mostLTIP award value for the prior year and the anticipated award value for the current year, and the value of other compensation including perquisites. The Compensation Committee’s final compensation determination in relation to each element of compensation is independent of all other elements of compensation, other than to the extent that awards under the MIP are calculated by using a percentage of base salary as the target award value.
Base Salary
Base salary is primarily designed to provide our customersNEOs with a fixed amount of income that is competitive in relation to the responsibilities of each NEO’s position. When determining base salaries for each NEO, the Compensation Committee considers the NEO’s qualifications, experience, the scope of their responsibilities, individual performance and acceptable returnscontributions towards overall Company success. Base salaries for NEOs are reviewed annually and are individually determined. In February 2023, the Compensation Committee approved base salary merit adjustments for each NEO after considering prevailing market practices for executive merit adjustments and the results of the 2022 benchmarking study. The merit adjustments, which were effective February 27, 2023, reflected the Compensation Committee’s desire to enhance our ability to retain and reward our NEOs for their performance.
The following table sets forth the 2022 year-end base salary, 2023 year-end base salary and the percentage increases for each NEO:
| | | | | | | | | | | |
| Name | 2022 Base Salary | 2023 Base Salary | % Increase |
| Howard C. Heckes | $915,000 | $985,000 | 7.7% |
| Russell T. Tiejema | $550,000 | $580,000 | 5.5% |
| Christopher O. Ball | $550,000 | $575,000 | 4.5% |
| Randal A. White | $470,000 | $500,000 | 6.4% |
| Robert A. Paxton | $445,000 | $475,000 | 6.7% |
Annual Cash Incentive Bonus
Our executive compensation program for our shareholders.
MASONITE INTERNATIONAL CORPORATION
Acquisitions
DW3: On January 29, 2018, we completed the acquisition of DW3 Products Holdings Limited (“DW3”), a leading UK provider of high quality premium door solutions and window systems, supplying productsexecutive officers includes an annual cash incentive bonus under brand names such as Solidor, Residor, Nicedor and Residence. We acquired 100% of the equity interests in DW3 for consideration of approximately $96 million, net of cash acquired. DW3 is based in Stoke-on-Trent and Gloucester, England, and their products and service model are a natural addition to our existing UK business. DW3’s online quick ship capabilities and product portfolio both complement and expand the strategies we are pursuing with our business.
A&F: On October 2, 2017 we completed the acquisition of A&F Wood Products, Inc. (“A&F”), through the purchase of 100% of the equity interests in A&F and certain assets of affiliates of A&F for consideration of $13.8 million, net of cash acquired. A&F is based in Howell, Michigan, andMIP. The MIP is a wholesaler and fabricator of architectural and commercial doors in the Midwest United States.
FyreWerks: On November 3, 2016 we completed the acquisition of FyreWerks, Inc. (“FyreWerks”), based in Westminster, Colorado. We acquired 100% of the equity interests in FyreWerks for consideration of $8.0 million, net ofshort-term incentive plan that provides executive officers including our NEOs with a cash acquired. FyreWerks manufactures certified fire door core and frame components for use with architectural stile and rail wood panel doors and door frames. The FyreWerks acquisition complements our existing Architectural components business.
USA Wood Door: On October 1, 2015, we completed the acquisition of USA Wood Door, Inc. (“USA Wood Door”), based in Thorofare, New Jersey. We acquired 100% of the equity interests in USA Wood Door for consideration of $13.7 million, net of cash acquired. USA Wood Door is a supplier of architectural and commercial wood doors in the Eastern United States providing door and hardware distributors with machined, re-sized and value-added additions to both unfinished and prefinished doors in short lead times.
Hickman: On August 5, 2015, we completed the acquisition of Hickman Industries Limited (“Hickman”), a leading supplier of doorkits (similar to fully finished prehung door units) and other millwork in the United Kingdom. We acquired 100% of the equity interests in Hickman for consideration of $88.0 million, net of cash acquired. Hickman is headquartered in Wolverhampton, England, and their leadership in providing doorkit solutions to the homebuilder market in the United Kingdom is a natural extension of our existing business in the United Kingdom. Hickman’s deployment of automation and product line leadership complements the strategies we are pursuing with our business.
PDS: On July 23, 2015, we completed the acquisition of Performance Doorset Solutions (“PDS”), a leading supplier of custom doors and millwork in the United Kingdom that specializes in non-standard product specifications, manufacturing both wood and composite solutions. We acquired 100% of the equity interests in PDS for consideration of $15.7 million, net of cash acquired. PDS is based in Lancashire, United Kingdom, and is a producer of high quality niche product lines that complement our existing United Kingdom business.
Dispositions
South Africa: On December 22, 2015, following a comprehensive assessment of Masonite (Africa) Limited (“MAL”), our South African subsidiary, the MAL Board of Directors approved a plan to enter into Business Rescue proceedings, the South African equivalent of bankruptcy proceedings in the United States, similar to a Chapter 11 reorganization. As a result of this plan, a Business Rescue Practitioner was appointed to manage the affairs of the business and we no longer maintained operational control over MAL. For this reason, we deconsolidated MAL effective December 22, 2015.
Subsequent to deconsolidation, we used the cost method to account for our equity investment in MAL, which was reflected as $10.0 million in our consolidated balance sheets as of January 1, 2017,bonus award based on the estimated fairachievement of predetermined annual performance goals. The Compensation Committee, in administering the MIP, establishes performance goals, target amounts and award opportunities near the beginning of the performance period for our NEOs. The target award is based on a percentage of the executive officer’s base salary (exclusive of any other compensation or benefits) and is payable in cash upon the achievement of a threshold performance level and capped by a maximum performance level.
After the end of the performance period, the Compensation Committee certifies the extent to which the performance goals have been achieved and determines the amount of the award that is payable. No annual cash incentive bonus is paid with respect to an applicable metric if the performance calculation for that metric is below the threshold established for that metric. No additional annual cash incentive bonus is paid beyond the established maximum performance level with respect to each applicable metric.
2023 MIP Design and Performance Goals
The Compensation Committee seeks recommendations from management on the design and structure of the MIP and performance goals (and the applicable targets for achievement of each such performance goal at threshold, target and maximum levels of performance) for our executive officers, including our NEOs, as well as any proposed revisions to the terms of the MIP for that fiscal year. The Compensation Committee, prior to determining the MIP design for the next fiscal year, considers the recommendations and input from FW Cook regarding current incentive plan design trends, our CEO’s recommendations, and feedback from our shareholder engagement discussions. Our CEO has no involvement in the determination of an NEO’s actual MIP payout each year, including his own, other than the assignment of an Individual Performance Multiplier for each of his direct reports, which includes the other NEOs.
For 2023, the Compensation Committee determined that the design of the 2023 MIP would include three performance goals based on the following financial and operating metrics, with an individual weighting assigned to each performance goal as a percentage of the applicable target bonus for both the Corporate and the North American Residential Segment (“NA Residential”) MIP participants.
| | | | | | | | |
| MIP Performance Goals | Weighting | Rationale for Use |
| 1) MIP Adjusted EBITDA | 50% | •Selected to focus our NEOs on growing Segment and total Company profitability and overall Company performance. |
| 2) Global Core Working Capital Improvement | 25% | •Selected to focus our NEOs on improving our liquidity and operational efficiency and performance. •Selected to align with feedback received from our shareholder engagement discussions to consider using a cash flow-based measure in our MIP design. |
| 3) Balanced Scorecard | 25% | •Selected to focus on improving financial, operational and ESG performance in selected focus areas, including: ◦Acquisition integration synergies ◦Mix improvement, shifting to higher value products ◦Improving safety at our manufacturing operations ◦Expanding workforce diversity
|
The Balanced Scorecard performance goal for our Corporate MIP participants (Messrs. Heckes, Tiejema, White and Paxton) was based on a metric related to the acquisition integration synergies and payout was determined based on synergies realized. The Balanced Scorecard performance goals for our NA Residential MIP participants (Mr. Ball) were based on metrics related to shifting the mix of product sales to higher value products and channel expansion and payout was determined based on improvements in mix as a percentage of revenue set forth in the table below.
In addition, the MIP includes an Individual Performance Multiplier (“IPM”) for participants, including our NEOs, to drive a performance culture. The IPM is a multiplier of 0.75x to 1.25x, tied to individual performance objectives and results. The IPM is calculated after the Company’s financial results and the corresponding baseline MIP payout levels have been calculated. The Compensation Committee will consider recommendations made by the CEO related to each NEOs individual performance and achievement, and will decide the appropriate IPM, if any, for the CEO. The CEO can recommend that the Compensation Committee reallocate funds away from any CEO direct report with an IPM under 1.0x to the remaining pool of CEO direct reports. In addition, the Compensation Committee makes available a CEO pool of up to 5% of all MIP participants' target amounts to be used by the CEO to make additional award payments to key performers throughout the Company.
Corporate MIP Structure and Payout
The table below describes the financial threshold, target, and maximum levels selected for the Corporate MIP financial measure performance goals.
| | | | | | | | | | | |
| Corporate MIP Performance Goals | Threshold | Target | Maximum |
| Corporate MIP Adjusted EBITDA | $400 million | $430 million | $460 million |
Global Core Working Capital Improvement (1) | 1.5% | 2.5% | 3.5% |
Based on actual performance against the applicable pre-established Corporate MIP performance goals and after the Compensation Committee’s careful review and consideration of the balanced scorecard achievement on the selected focus areas described above, the actual results for each Corporate MIP performance goal, the Compensation Committee’s determination of the level of achievement of the balanced scorecard achievement, and the plan payout percentages for each such performance goal are set forth below.
| | | | | | | | | | | | | | |
| Corporate MIP Actual Results and Payout | Weighting | Actual Results | Plan Payout (2) | Weighted Payout |
| Corporate MIP Adjusted EBITDA | 50% | $410.9 million | 68.2% | 34.1% |
Global Core Working Capital Improvement (1) | 25% | 4.35% | 200% | 50% |
Corporate Balanced Scorecard (3) | 25% | 300% | 300% | 75% |
Corporate MIP Total Earned Payout (4) | 159.1% |
(1) The Plan Payout Results of each MIP performance metric was interpolated (using a straight-line interpolation method) between the target and maximum payout levels.
(2) The 2023 baseline level of Global Core Working Capital was 24.5% as a percentage of Net Sales.
(3) The payout result was in recognition of extraordinary achievement by management of the pre-established goals.
(4) The actual earned payout row excludes the application of the IPM for each participant.
NA Residential MIP Structure and Payout
The table below describes the financial threshold, target, and maximum levels selected for the NA Residential MIP financial measure performance goals.
| | | | | | | | | | | |
| NA Residential MIP Performance Goals | Threshold | Target | Maximum |
| Segment MIP Adjusted EBITDA | $420 million | $450 million | $500 million |
Global Core Working Capital Improvement (2) | 1.5% | 2.5% | 3.5% |
Based on actual performance against the applicable pre-established NA Residential MIP performance goals and the Compensation Committee’s careful review and consideration of the balanced scorecard achievement of the selected focus areas described above, the actual results for each NA Residential MIP performance goal, the Compensation Committee’s determination of the level of achievement of the balanced scorecard achievement, and the plan payout percentages for each such performance goal are set forth below.
| | | | | | | | | | | | | | |
| NA Residential MIP Actual Results and Payout | Weighting | Actual Results | Plan Payout (1) | Weighted Payout |
| Segment MIP Adjusted EBITDA | 50% | $434.9 | 74.7% | 37.4% |
Global Core Working Capital Improvement (2) | 25% | 4.35% | 200% | 50% |
| Corporate Balanced Scorecard | 25% | 30% | 30% | 7.5% |
NA Residential MIP Total Earned Payout (3) | 94.9% |
(1) The Plan Payout Results of each MIP performance metric was interpolated (using a straight-line interpolation method) between the target and maximum payout levels.
(2) The 2023 baseline level of Global Core Working Capital was 24.5% as a percentage of Net Sales.
(3) The actual earned payout row excludes the application of the IPM for each participant.
When determining the actual 2023 annual incentive award payable to each NEO, the Compensation Committee considers both business and individual performance. The graphic below illustrates the calculation method of the 2023 MIP award for our NEOs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Base Salary | x | NEOs MIP Target Award (% of Base Salary) | x | Final MIP Payout % of Target (Separately for Corporate or NA Residential) | x | Individual Performance Multiplier | = | 2023 Actual MIP Bonus Award | |
Applying the above-described calculation, the annual cash incentive bonuses paid to each NEO eligible to participate in the 2023 MIP were as follows:
| | | | | | | | | | | | | | | | | | | | |
Name | 2022 MIP Target Award
(% of Base Salary) | 2023 MIP Target Award (% of Base Salary) | MIP Target Award Opportunity | Final MIP Payout % of Target (1) | Individual Performance Multiplier (2) | 2023 Actual MIP Bonus Award |
| Howard C. Heckes | 120% | 120% | $1,182,000 | 159.1% | 1.0 | $1,880,562 |
| Russell T. Tiejema | 75% | 75% | $435,000 | 159.1% | 1.0 | $692,085 |
| Christopher O. Ball | 75% | 75% | $431,250 | 94.9% | 1.10 | $450,182 |
| Randal A. White | 60% | 65% | $325,000 | 159.1% | 1.0 | $517,075 |
| Robert A. Paxton | 60% | 60% | $285,000 | 159.1% | 1.05 | $476,107 |
(1) The Overall Plan Payout percentage is inclusive of the IPM as set forth above.
(2) IPMs are determined based on a thorough review by the CEO of each NEO's quantitative and qualitative impact on Company business and strategic goals.
For purposes of the 2023 Annual Cash Incentive Bonus, “MIP Adjusted EBITDA” and “Global Core Working Capital Improvement” are defined in the “MIP and LTIP Definitions and Reconciliation” section below.
Long-Term Equity Incentive Awards
The Compensation Committee believes in the importance of providing a significant portion of MAL’s net assets on the date of deconsolidation. During September 2016, we received $15.1 million as final pre-tax proceeds from the sale of our equity interest in MAL. Upon receipt of these proceeds, our equity interest in MAL was eliminated and we accordingly reduced the value of our cost investment in MAL to zero and recorded a gain on disposal of subsidiaries of $5.1 million.
MASONITE INTERNATIONAL CORPORATION
France: On July 31, 2015, we completed the sale of all of the capital stock of Premdor, S.A.S., Masonite’s door business in France, to a Paris-based independent investment firm (the "Buyer"). Pursuant to a stock purchase agreement dated July 16, 2015, the Buyer acquired all of Masonite's door manufacturing and distribution business in France for nominal consideration.
Components of Results of Operations
Net Sales
Net sales are derived from the sale of products to our customers. We recognize sales of our products when an agreement with the customercompensation in the form of equity, the majority of which is earned based on the level of achievement of predetermined financial and operating goals over the long-term. These equity awards are designed to further align the interests of our executives with those of our shareholders, reward executives for value creation, maintain the competitiveness of our total compensation packages, foster stock ownership, and promote retention. The PSU component of the LTIP is designed to tie a salessignificant portion of our NEOs’ total direct compensation to the achievement of our long-term financial and operating performance goals over a three-year period and serves as a balance to the MIP, which measures our performance over a one-year period.
Each year, our NEOs receive equity award opportunity delivered in three forms, as described below:
| | | | | | | | | | | | | | | | | | | | |
| Type of Award | | Percent of Award Value | | LTIP Principal Plan Design |
| | | | | | |
| RSUs | | TIME-BASED | | 30% | | RSUs are granted for each LTIP plan year and vest over three years, with 33% vesting on the first anniversary of the date of grant, 33% on the second anniversary and 34% on the third anniversary. The Compensation Committee believes that awarding RSUs aligns the interests of our NEOs with the interests of our shareholders and encourage NEO’s to build stock ownership in Common Shares and facilitates compliance with our stock ownership guidelines. |
| | | | | | |
| PSUs | | PERFORMANCE-BASED | | 60% | | PSUs are granted for each LTIP plan year and performance metrics are adopted by the Compensation Committee at the beginning of the three-year performance period. PSUs vest on the third anniversary of the date of grant and PSUs payout in Common Shares based achievement of the three-year performance metrics. The Compensation Committee believes that awarding PSUs aligns the interests of our NEOs with the interests of our shareholders by driving performance over the long-term and facilitates compliance with our stock ownership guidelines. |
| | | | | |
| SARs | | | 10% | | SARs are granted for each LTIP plan year and vest over three years, with 33% vesting on the first anniversary of the date of grant, 33% on the second anniversary and 34% on the third anniversary and expire 10 years after grant. Upon exercise, the SARs are settled in unrestricted Common Shares having an aggregate fair market value equal to the positive difference between the fair market value of a Common Share on the exercise date and the exercise price of the SAR multiplied by the number of Common Shares for which the SAR is exercised. The Compensation Committee believes that granting SARs encourages actions to increase our Common Share price and help build stock ownership in Common Shares. |
Summary of Our Concurrent LTIPs in Cycle for plan years 2021-2025
The following table summarizes the principal design elements of our annual LTIPs grants (with 3-year performance periods) that have either recently vested or are currently in cycle from plan years 2021-2025.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant | | 2021-2023 LTIP | | 2022-2024 LTIP | | 2022-2024 (1) | | 2023-2025 LTIP |
| | | | | | | | |
| Award Opportunity | | 30% RSUs 60% PSUs 10% SARs | | 30% RSUs 60% PSUs 10% SARs | | 100% PSUs | | 30% RSUs 60% PSUs 10% SARs |
| | | | | | | | |
| PSU Performance Goals | | 50% LTIP Adjusted EBITDA Margin(2) 50% ROIC(2) | | 50% Net Sales(2) 50% ROIC(2) | | LTIP Adjusted EBITDA | | 50% Net Sales 50% Relative TSR |
| | | |
| | | | | | | | |
| Threshold - Maximum Payout | | 50% - 200% | | 50% - 200% | | 34% - 100% | | 50% - 200% |
| | | | | | | | |
Payout Date (3) | | February 2024 | | February 2025 | | August 2025 | | February 2026 |
| | | | | | | |
(1) These awards represent the special one-time 2022 Performance-Based Out Performance Award approved by the Compensation Committee on August 3, 2022.
(2) Performance goals were calculated based on a year-over-year improvement.
(3) If the NEO is not employed by the Company on the payout date, the awards are forfeited except in the case of death, disability or retirement in which case any outstanding RSUs, PSUs and SARs will be reduced on a pro rata basis as provided in the 2021 Plan.
2023-2025 LTIP Grants and Metrics
After taking into consideration the results of the October 2022 benchmarking study, in addition to individual performance levels and responsibilities and providing an appropriate long-term retention incentive for our NEOs (with no single factor considered more important than any other factor in the decision-making process), the Compensation Committee approved the following the LTIP award opportunity, and the target equity award values for the 2023 LTIP. Each of our NEOs were granted awards set forth below using the closing price of our Common Shares on February 27, 2023.
| | | | | | | | | | | | | | |
| Name | RSUs (1) | PSUs (1) (at Target) | SARs (2) | 2023 Target Equity Award Value (3) |
| Howard C. Heckes | $1,245,000 | $2,490,000 | $415,000 | $4,150,000 |
| Russell T. Tiejema | $300,000 | $600,000 | $100,000 | $1,000,000 |
| Christopher O. Ball | $270,000 | $540,000 | $90,000 | $900,000 |
| Randal A. White | $165,000 | $330,000 | $55,000 | $550,000 |
| Robert A. Paxton | $180,000 | $360,000 | $60,000 | $600,000 |
(1) The number of RSUs and PSUs granted were based on the closing price of our Common Shares on February 27, 2023.
(2) The number of SARs granted was determined using the Black-Scholes model which calculates the current economic value of a SAR using assumptions that include the exercise price, the term of the award, a risk-free rate of interest, dividend yield, and market volatility as of market close on February 27, 2023.
(3) Each of the awards described above are subject to accelerated vesting under certain circumstances as described below in the “Potential Payments on Termination or Change in Control” section.
The Compensation Committee selected Absolute Net Sales and Relative TSR compared to the companies in our compensation peer group for the PSU performance metrics for the 2023-2025 LTIP performance period. The Compensation Committee believes Absolute Net Sales and Relative TSR are the most appropriate metrics for measuring financial performance under the LTIP as they encourage management to focus on actions to improve the long-term financial health and performance of the Company, with a focus on value creation for our investors. With respect to Absolute Net Sales, weighted at 50% of the total PSUs granted, the Compensation Committee selected this performance metric to incentivize growth of the organization through expanded market share and introduction of new products. With respect to Relative TSR, weighted at 50% of the total PSUs granted, the Compensation Committee selected this metric to incentivize management and to align the interests of management with our shareholders through the incorporation of feedback received from our shareholder engagement discussions. The Compensation Committee believes that the targets related to performance metrics will be challenging and will require substantial effort to achieve.
| | | | | | | | | | | |
| 2023-2025 LTIP
PSU Performance Goals | Weighting | |
| Absolute Net Sales | 50% | |
| Relative TSR to Peer Group | 50% | |
The PSUs that are weighted 50% of the Absolute Net Sales performance metric for the 2023-2025 performance period will vest on the third anniversary of the date of grant based on the level of Absolute Net Sales achieved in 2025.
The PSUs that are weighted 50% of the TSR metric for the 2023-2025 performance period will vest on the third anniversary of the date of grant based on the level of Relative TSR achieved during the three-year performance period. The beginning and end of the Relative TSR measurement periods for both
the Company and our compensation peer group will be based on the 20 consecutive trading days’ average closing share price. The value basis of the granted PSUs at target was the closing price of the Common Shares on February 27, 2023. At the end of the three-year performance period, and after calculating the final Relative TSR results the following percent of PSUs will vest as set forth below.
| | | | | | | | | | | |
| Relative TSR to Peer Group | Percent of PSUs Vesting | |
| Below 25th percentile | 0% | |
| 25th to 49th percentile | 50% | |
| 50th to 74th percentile | 100% | |
| At or above 75th percentile | 200% | |
Straight-line interpolation will be used to determine the number of PSUs that will vest if the Net Sales level of achievement is between threshold and target or between target and maximum, or in the case of the number of PSUs that will vest based on Relative TSR, between the specified percentiles. Any outstanding PSUs that do not vest once the applicable level of performance has been determined will be automatically forfeited.
For purposes of the 2023-2025 PSU grant, “Net Sales” and “Relative Total Shareholder Return” are defined in the “MIP and LTIP Definitions and Reconciliation” section below.
2021-2023 LTIP Results and Payouts
For the 2021-2023 LTIP, our NEOs received an LTIP award opportunity consisting of RSUs, PSUs and SARs, with a payout of PSUs based on the performance goals set in February 2021 for the 2021-2023 performance period (hereafter referred to as the “2021 PSUs”). The Compensation Committee selected LTIP Adjusted EBITDA Margin year-over-year improvement and Return on Invested Capital (“ROIC”) year-over-year improvement, both weighted at 50% for the 2021 LTIP performance goals as set forth below.
| | | | | | | | | | | | | | |
2021-2023 LTIP
PSU Performance Goals | Weighting | Threshold
(50% Payout) | Target
(100% Payout) | Maximum
(200% Payout) |
LTIP Adjusted EBITDA Margin (1) | 50% | 40 bps | 70 bps | 100 bps |
Return on Invested Capital (1) | 50% | 50 bps | 100 bps | 150 bps |
LTIP Adjusted EBITDA Margin performance was calculated based on the annual improvement (expressed in basis points) in LTIP Adjusted EBITDA Margin achieved during each year of the 2021-2023 performance period, with a baseline number being set each year using the year-end results of the prior year. Return on Invested Capital performance was calculated based on the annual improvement (expressed in basis points) achieved during each year of the 2021-2023 performance period, with a baseline number being set each year using the year-end results of the prior year. For both metrics, at the end of the performance period, the final results were calculated using the arithmetic average of the three one-year performance periods. Straight-line interpolation was used to determine the number of 2021 PSUs that are eligible to vest if the level of achievement is between threshold and target or between target and maximum.
On February 26, 2024, the Compensation Committee determined a payout of 66.7% of the target number of 2021 PSUs awarded was earned by each NEO based on the achievement levels of the 2021 PSU performance goals set forth in the table below.
The table below sets forth the 2021 PSU performance achievement by year:
| | | | | | | | | | | |
| Performance Year | LTIP Adjusted EBITDA Margin Improvement (Percentage Attainment)(1) | ROIC Improvement (Percentage Attainment)(1) | Percentage Achievement |
| Fiscal Year 2021 | 33 basis points (0%) | 232 basis points (200%) | 100% |
| Fiscal Year 2022 | 44 basis points (0%) | 356 basis points (200%) | 100% |
| Fiscal Year 2023 | (90) basis points (0%) | (1420) basis points (0%) | 0% |
| Earned 2021-2023 LTIP Payout | 66.7% |
(1) Performance goals were calculated on a year-over-year improvement calculated in basis points. For further information related to the calculation of ROIC, refer to "MIP and LTIP Definitions and Reconciliation."
Severance and Change in Control Benefits
As part of our of executive compensation program we provide certain severance and change in control benefits to our NEOs. Each NEO is entitled to receive severance benefits under the terms of the NEOs employment agreement upon either termination by the Company without cause or a resignation by the NEO for good reason. We provide these severance benefits in order to provide an overall compensation package that is competitive with that offered by other companies with whom we compete for executive talent. Additionally, such severance benefits allow our executives to focus on our objectives and the interests of our shareholders without concern for their employment security in the event of a termination.
The severance benefits provided upon a qualifying termination of an NEO’s employment in connection with a change in control are higher than severance benefits provided under other qualifying termination events, which is consistent with market practice. The Compensation Committee approved these enhanced change in control severance benefits because it considers maintaining a stable and effective management team to be an important factor to protecting and enhancing the best interests of the Company and its shareholders. To that end, the Compensation Committee recognizes that the possibility of a change in control may exist from time to time, and that this possibility, and the uncertainty and questions it may raise among management, could result in the departure or distraction of management to the detriment of the Company and its shareholders. Accordingly, the enhanced severance benefits have been put in place to encourage the sales price is fixedattention, dedication and continuity of members of our management team to their assigned duties without the distraction that may arise from the possibility or determinable, collection is reasonably assuredoccurrence of a change in control and concern for their employment security in the customer has taken ownershipevent of a termination.
Other Benefits and assumes riskPerquisites
As part of loss. Certain customersour executive compensation program we provide the following benefits to our NEOs, which are the same benefits available to all our full-time U.S.-based employees:
•medical, dental and vision insurance;
•401(k) retirement savings plan and employee stock purchase plan;
•short- and long-term disability, life insurance, accidental death and dismemberment insurance;
•health, limited purpose health and dependent care flexible spending accounts and/or a health care saving account; and
•various voluntary supplemental insurance products.
Additionally, we provide our executives with more comprehensive physical examinations. Also, upon the hiring of a new executive, we may provide such executive with certain relocation benefits. Each of our NEOs and certain other executives are eligible to participate in various incentivea non-qualified deferred compensation plan which permits the NEO to defer base salary and/or bonuses. Finally, each NEO is provided a reimbursement benefit of up to $10,000 per calendar year (without tax gross-up) for financial planning, tax planning, and rebate programs considered as a reductiontax preparation services. See Footnote (6) to the “Summary Compensation Table” for information related to this benefit.
We believe these benefits and perquisites are reasonable and consistent with those offered by companies with which we compete for employees, including our NEOs.
STOCK OWNERSHIP GUIDELINES
We have stock ownership guidelines that require each of our NEOs and all executive officers to own meaningful equity stakes in Common Shares to further align their long-term economic interests with those of our shareholders. Our stock ownership guidelines were modified in July 2023. In furtherance of our commitment to sound governance, our executive officers, including our NEOs are required to hold Common Shares valued at the following multiple:
| | | | | |
| Position | Ownership Requirement |
| CEO | 5x annual base salary |
| Executive Officers (other than CEO) | 3x annual base salary |
| Independent Directors | 5x annual base cash retainer |
Our directors and executive officers must meet our stock ownership requirements within five-years. Until the required level of ownership is achieved, each executive must retain at least 50% percent of the salesnumber of Common Shares acquired through RSUs, PSUs and SARs (net of shares withheld or sold to pay any applicable exercise price and to satisfy any applicable tax withholding). After the five-year compliance period has passed, executive officers who have not attained the stock ownership requirement are prohibited from selling Common Shares. Once an executive meets the required ownership level, the executive may sell and/or otherwise trade Common Shares in an amount equal to the excess of the stock ownership requirements. Compliance with these guidelines will generally be measured twice per fiscal year on the last trading day of January and June. All vested and unvested RSUs, earned PSUs and exercised SARs will count as shareholdings for purposes of these guidelines.
The Compensation Committee annually reviews the compliance of our products. Accordingly, net salesexecutive officers with these stock ownership guidelines. The Compensation Committee has determined that all NEOs are reported netin compliance with these guidelines and have either achieved the required level of stock ownership or are within the five-year compliance period associated with their start date as an executive officer, as of the January 31, 2024 measurement date.
CLAWBACK POLICIES
Executive Clawback
Effective October 2023, The Compensation Committee adopted a standalone clawback policy that is compliant with the requirements of the Dodd-Frank Act, Rule 10D-1 of the Exchange Act and NYSE Rule 303A.14. This policy provides that, upon the occurrence of an accounting restatement of the Company’s financial statements to correct an error, the Compensation Committee must recoup incentive-based compensation that was erroneously granted, earned or vested to our current and former “officers” (as defined under Rule 16a-1 of the Exchange Act) based wholly or in part upon the attainment of any financial reporting measure, subject to limited exceptions.
MIP and LTIP Clawback
Both the MIP and the LTIP award agreements under the 2021 Plan provide that if an employee engages in (i) certain conduct during a plan year which is injurious to the Company or its reputation, (ii) illegal acts, theft, fraud, intentional misconduct or gross negligence related to the employee’s position with the Company or (iii) fraud, gross negligence, or intentional or willful misconduct that contributes to the Company’s financial or operational results that are used to determine the extent to which any MIP award is payable and was misstated (regardless of whether the Company is required to prepare an accounting restatement) that is discovered during or within three years after the relevant plan year, the employee will forfeit his or her right to any MIP or LTIP award for that plan year and will be required to return to the Company any amounts relating to previously paid MIP or LTIP awards for such plan year. The plan administrator of the MIP and LTIP is responsible for determining whether a recoverable event has occurred based on relevant facts and circumstances. The compensation recovery will be in addition to any other remedies available to the Company for any such behavior.
Additionally, the LTIP award agreements under the 2021 Plan provide that if we determine that a participant has materially violated any of the participant’s covenants regarding confidentiality, non-disclosure of confidential information and, during the applicable period of time following such participant’s termination of employment as specified in such award agreement, non-competition and non-solicitation of employees, then the following will result:
•any outstanding awards, whether vested or unvested, will immediately be terminated and forfeited for no consideration;
•if Common Shares have already been distributed to the participant but the participant no longer holds some or all of such incentives and rebates. Additionally, shipping and other transportation costs chargedshares, the participant must repay us, in cash, an amount equal to customers are recordedthe sum of (i) the total amount of any cash previously paid to the participant in net sales in the consolidated statements of comprehensive income (loss).
Cost of Goods Sold
Our cost of goods sold is comprisedrespect of the costaward and (ii) the total amount of any value received by the participant upon any sale of the Common Shares; and
•if Common Shares have been distributed to manufacture productsthe participant and the participant continues to hold some or all of the shares, the participant will transfer such shares to the Company for our customersno consideration.
ACCOUNTING AND TAX IMPLICATIONS
As a general matter, the Compensation Committee takes into account the various tax and includesaccounting implications of compensation. When determining amounts of equity grants to executives and employees, the costCompensation Committee also takes into consideration the accounting treatment of materials, direct labor, overhead, distributionsuch grants.
We account for stock-based compensation in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 Compensation—Stock Compensation, which requires us to recognize compensation expense for share-based payments. The Compensation Committee considers FASB ASC Topic 718 in determining the amounts of long-term incentive grants to executives and depreciation associated with assets usedemployees.
MIP AND LTIP DEFINITIONS AND RECONCILIATION
The definitions for each of the financial performance goals for purposes of the 2023 MIP and LTIP awards, as applicable, are as follows:
“Adjusted EBITDA” is defined as net income (loss) attributable to manufacture products. Research and development costs are primarily included within cost of goods sold. We incur significant fixed and variable overhead at our global component locations that manufacture interior molded door facings. Our overall average production capacity utilization at these locations was approximately 77%, 77%, and 68% for the years ended December 31, 2017, January 1, 2017, and January 3, 2016.
Selling, General and Administration Expenses
Selling, general and administration expenses primarily include the costs for our sales organization and support staff at various plants and corporate offices. These costs include personnel costs for payroll, related benefits and stockMasonite adjusted to exclude depreciation; amortization; share based compensation expense; professional fees including legal, accounting and consulting fees; depreciation and amortization of our non-manufacturing equipment and assets; travel and entertainment expenses; director, officer and other insurance policies; environmental, health and safety costs; advertising expenses and rent and utilities related to administrative office facilities. Certain charges that are also incurred less frequently and are included in selling, general and administration costs include gain or loss (gain) on disposal of property, plant and equipmentequipment; registration and bad debt expense.
Restructuring Costs
Restructuring costs include all salary-related severance benefits that are accrued and expensed when alisting fees; restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable. In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization. Upon termination of a contract we record liabilities and expenses pursuant to the terms of the relevant agreement. For non-contractual restructuring activities, liabilities and expenses are measured and recorded at fair value in the period in which they are incurred.
Asset Impairment
Asset impairment includes charges that are taken when impairment testing indicates that the carrying values of our long-lived assets orcosts; asset groups exceed their respective fair values. Definite-lived assets are evaluated for impairment when events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Indefinite-lived intangible assets and goodwill are tested annually for impairment on the last day of fiscal November, or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable. An impairment loss is recognized when the carrying value of the asset or asset group being tested exceeds its fair value, except in the case of goodwill, which is tested based on the fair value of the reporting unit where the goodwill is recorded.
MASONITE INTERNATIONAL CORPORATION
Loss (Gain) on Disposal of Subsidiaries
Loss (gain) on disposal of subsidiaries represents the difference between proceeds received upon disposition and the book value of a subsidiary which has been divested and was excluded from treatment as a discontinued operation. Also included inimpairment; loss (gain) on disposal of subsidiaries is recognition of the cumulative translation adjustment out of accumulated other comprehensive income (loss).
Interest Expense, Net
Interest expense, net relates primarily to our consolidated senior unsecured indebtedness. Subsequent to March 23, 2015,subsidiaries; interest expense net relates to our $625.0 million aggregate principal amount of 5.625% senior unsecured notes due March 15, 2023 (the "2023 Notes"). Prior to March 23, 2015, interest expense related to our $500.0 million aggregate principal amount of 8.25% senior unsecured notes due April 15, 2021, which were redeemed on March 23, 2015, concurrent with the issuance of the 2023 Notes. Debt issuance costs incurred in connection with the 2023 Notes were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over their respective terms. The most recent issuance of our 2023 Notes resulted in a premium that is amortized to interest expense over the term of the 2023 Notes. Additionally, we pay interest on any outstanding principal under our ABL Facility and we are required to pay a commitment fee for unutilized commitments under the ABL Facility, both of which are recorded in interest expense as incurred.
Loss on Extinguishment of Debt
Loss(income), net; loss on extinguishment of debt represents the difference between the reacquisition pricedebt; other (income) expense, net; income tax expense (benefit); other items; loss (income) from discontinued operations, net of debttax; and the net carrying amountincome (loss) attributable to non-controlling interest. A reconciliation of the extinguished debt. The net carrying amount includes the principal, unamortized premium and unamortized debt issuance costs.
Other Expense (Income),Adjusted EBITDA to Net
Other expense (income), net includes profits and losses related income (loss) attributable to Masonite is included on page 91 of our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting, unrealized gains and lossesAnnual Report on foreign currency remeasurements, pension settlement charges and other miscellaneous non-operating expenses.
Income Tax Expense (Benefit)
Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognizedForm 10-K for the deferred tax consequences attributable to differences betweenfiscal year ended December 31, 2023.
“Global Core Working Capital Improvement” is defined as the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax ratesyear-over-year Semiannual Average Core Working Capital as a percentage of Semiannual Average Net Sales. “Semiannual Average Core Working Capital” is recognized in income in the period that includes the date of enactment. A valuation allowance is recorded to reduce deferred tax assets to an amount that is anticipated to be realized ondefined as a more likely than not basis. Our combined effective income tax rate is primarily the weightedsemiannual average of federal, stateour accounts receivable and provincial rates in various countries where we have operations, includinginventory balances minus the United States, Canada, the United Kingdom and Ireland. Our income tax rate is also affected by estimatessemiannual average of our ability to realize tax assets and changes in tax laws.
On December 22, 2017, Congress passedaccounts payable balance. “Semiannual Average Net Sales” is defined as the Tax Cuts and Jobs Act ("Tax Reform"). Among other items, Tax Reform reduces the federal corporate tax rate to 21% effective January 1, 2018. This has caused our net deferred tax liabilities in the U.S. to be revalued.
Segment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The North American Residential reportable segment is the aggregation of the Wholesale and Retail operating segments. The Europe reportable segment is the aggregation of the United Kingdom, Central Eastern Europe and France (prior to disposal) operating segments. The Architectural reportable segment consists solely of the Architectural operating segment. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment, including the historical resultssemiannual closing average of our Africa operating segment (prior to deconsolidation). Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics we also consider theNet Sales.
MASONITE INTERNATIONAL CORPORATION
following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our management reviews net sales and“LTIP Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA EBITDA” is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
depreciation;
amortization;
share based compensation expense;
loss (gain) on disposal of property, plant and equipment;
registration and listing fees;
restructuring costs;
asset impairment;
loss (gain) on disposal of subsidiaries;
interest expense (income), net;
loss on extinguishment of debt;
other expense (income), net;
income tax expense (benefit);
other items; loss (income) from discontinued operations, net of tax; and
net income (loss) attributable to non-controlling interest.
This definition of
“LTIP Adjusted EBITDA differs from the definitions ofMargin” is defined as MIP Adjusted EBITDA containeddivided by Net Sales.
“MIP Adjusted EBITDA” is defined as Adjusted EBITDA, as adjusted for any acquisitions or divestitures in the indenture governingcurrent year using the 2023 Notesmethodology established by the Compensation Committee, plus transaction costs (including fees and the credit agreement governing the ABL Facility. Adjusted EBITDA is usedexpenses) incurred related to evaluateacquisitions or divestitures, plus transaction costs (including fees and compare the performance of the segments and it is one of the primary measures usedexpenses) associated with debt or equity offerings, plus costs, expenses or adjustments related to determine employee incentive compensation. Intersegment transfers are negotiated on an arm’s length basis, using market prices.
We believe that Adjusted EBITDA, from an operations standpoint, provides an appropriate way to measure and assess segment performance. Our management team has established the practice of reviewing the performance of each segment based on the measures of net sales and Adjusted EBITDA. We believe that Adjusted EBITDA is useful to users of the consolidated financial statements because it provides the same information that we use internally to evaluate and compare the performance of the segments and it is one of the primary measures used to determine employee incentive compensation.
MASONITE INTERNATIONAL CORPORATION
|
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Net sales | $ | 2,032,925 |
| | $ | 1,973,964 |
| | $ | 1,871,965 |
|
| Cost of goods sold | 1,625,942 |
| | 1,564,319 |
| | 1,521,115 |
|
| Gross profit | 406,983 |
| | 409,645 |
| | 350,850 |
|
| Gross profit as a % of net sales | 20.0 | % | | 20.8 | % | | 18.7 | % |
| Selling, general and administration expenses | 246,855 |
| | 260,364 |
| | 244,145 |
|
| Selling, general and administration expenses as a % of net sales | 12.1 | % | | 13.2 | % | | 13.0 | % |
| Restructuring costs, net | 850 |
| | 1,445 |
| | 5,678 |
|
| Asset impairment | — |
| | 1,511 |
| | 9,439 |
|
| Loss (gain) on disposal of subsidiaries | 212 |
| | (6,575 | ) | | 59,984 |
|
| Operating income (loss) | 159,066 |
| | 152,900 |
| | 31,604 |
|
| Interest expense (income), net | 30,153 |
| | 28,178 |
| | 32,884 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 28,046 |
|
| Other expense (income), net | (1,091 | ) | | (1,959 | ) | | (1,757 | ) |
| Income (loss) from continuing operations before income tax expense (benefit) | 130,004 |
| | 126,681 |
| | (27,569 | ) |
| Income tax expense (benefit) | (27,560 | ) | | 21,787 |
| | 14,172 |
|
| Income (loss) from continuing operations | 157,564 |
| | 104,894 |
| | (41,741 | ) |
| Income (loss) from discontinued operations, net of tax | (583 | ) | | (752 | ) | | (908 | ) |
| Net income (loss) | 156,981 |
| | 104,142 |
| | (42,649 | ) |
| Less: net income (loss) attributable to non-controlling interest | 5,242 |
| | 5,520 |
| | 4,462 |
|
| Net income (loss) attributable to Masonite | $ | 151,739 |
| | $ | 98,622 |
| | $ | (47,111 | ) |
Year Ended December 31, 2017, Compared with Year Ended January 1, 2017
Net Sales
Net salesnon-budgeted Board initiatives undertaken in the current year, ended December 31, 2017, were $2,032.9 million, an increase of $58.9 millionplus conversion costs for new retail business wins, plus or 3.0% from $1,974.0 million inminus any changes to generally accepted accounting principles and other adjustments approved by the year ended January 1, 2017. Net sales in 2017 were negatively impacted by $6.6 million as a resultCompensation Committee or our Board, and plus or minus the impact of foreign exchange rate fluctuations. Excluding this exchange rate impact,fluctuations versus plan.
“Net Sales” is defined as net sales would have increased(as determined in accordance with generally accepted accounting principles), including net sales from any acquisitions or divestitures in the current year using the methodology established by $65.5 millionthe Compensation Committee, plus or 3.3% dueminus any changes to changes in volume, average unit price and sales of componentsgenerally accepted accounting principles and other products. Average unit price in 2017 increased net salesadjustments approved by $47.4 millionthe Compensation Committee, and plus or 2.4% compared to 2016. Higher volume in 2017 increased net sales by $21.9 million or 1.1% compared to 2016. Partially offsetting these increases were decreased net sales of components and other products to external customers, which were $3.8 million lower in 2017 compared to 2016. The change in volume includesminus the incremental impacts of acquisitions and dispositions.
MASONITE INTERNATIONAL CORPORATION
Net Sales and Percentage of Net Sales by Reportable Segment |
| | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 |
| North American Residential | $ | 1,433,268 |
| | $ | 1,357,228 |
|
| North American Residential intersegment | (4,338 | ) | | (5,926 | ) |
| North American Residential net sales to external customers | 1,428,930 |
| | 1,351,302 |
|
| Percentage of consolidated net sales | 70.3 | % | | 68.5 | % |
| | | | |
| Europe | 295,862 |
| | 305,710 |
|
| Europe intersegment | (3,936 | ) | | (4,543 | ) |
| Europe net sales to external customers | 291,926 |
| | 301,167 |
|
| Percentage of consolidated net sales | 14.4 | % | | 15.3 | % |
| | | | |
| Architectural | 307,237 |
| | 312,241 |
|
| Architectural intersegment | (18,773 | ) | | (14,353 | ) |
| Architectural net sales to external customers | 288,464 |
| | 297,888 |
|
| Percentage of consolidated net sales | 14.2 | % | | 15.1 | % |
| | | | |
| Corporate & Other net sales to external customers | 23,605 |
| | 23,607 |
|
| | | | |
| Net sales to external customers | $ | 2,032,925 |
| | $ | 1,973,964 |
|
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the year ended December 31, 2017, were $1,428.9 million, an increase of $77.6 million or 5.7% from $1,351.3 million in the year ended January 1, 2017. Net sales in 2017 were positively impacted by $5.0 million as a resultimpact of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $72.6 million or 5.4% due to changes in volume, average unit price and sales of components and other products. Higher volume in 2017 increased net sales by $44.0 million or 3.3% compared to 2016. Average unit price increased net sales in 2017 by $30.5 million or 2.3% compared to 2016. Partially offsetting these increases were decreased net sales of components and other products to external customers, which were $1.9 million lower in 2017 compared to 2016.fluctuations versus plan.
Europe
“Return on Invested Capital” Return on Invested Capital" means Net sales to external customers from facilities in the Europe segment in the year ended December 31, 2017, were $291.9 million,Operating Profit after Tax (assuming a decrease of $9.3 million or 3.1% from $301.2 million in the year ended January 1, 2017. Net sales in 2017 were negatively impacted by $12.1 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have increased by $2.8 million or 0.9% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in 2017 by $5.6 million or 1.9% compared to 2016. Higher volume in 2017 increased net sales by $0.3 million or 0.1% compared to 2016. Partially offsetting these increases were decreased net sales of components and other products to external customers, which were $3.1 million lower in 2017 compared to 2016.
Architectural
Net sales to external customers from facilities in the Architectural segment in the year ended December 31, 2017, were $288.5 million, a decrease of $9.4 million or 3.2% from $297.9 million in the year ended January 1, 2017. Net sales in 2017 were positively impacted by $0.6 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $10.0 million or 3.4% due to changes in volume, average unit price and sales of components and other products. Lower volume decreased net sales in 2017 by $23.2 million or 7.8%
MASONITE INTERNATIONAL CORPORATION
compared to 2016. Partially offsetting this decrease, average unit price increased net sales in 2017 by $11.3 million or 3.8% compared to 2016. Net sales of components and other products to external customers were $1.9 million higher in 2017 compared to 2016. The change in volume includes the incremental impact of acquisitions and dispositions.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 80.0% and 79.2% for the years ended December 31, 2017, and January 1, 2017, respectively. Distribution, overhead and direct labor as a percentage of sales increased by 0.9%25% tax rate), 0.6% and 0.2%, respectively, over the 2016 period. The distribution increase was due to inflationary pressures, shipping inefficiencies related to maintaining customer service levels and costs to complete the ramp-up of new retail business. The overhead and direct labor increases were driven by operational inefficiencies and wage inflation, partly offset by headcount reductions. Material cost of sales and depreciation as a percentage of net sales in 2017 decreased 0.8% and 0.1%, respectively, over the 2016 period. The decrease in material cost of sales was driven by favorable average unit prices partially offset by a combination of inflation and inbound freight increases.
Selling, General and Administration Expenses
In the year ended December 31, 2017, selling, general and administration expenses, as a percentage of net sales, were 12.1% compared to 13.2% in the year ended January 1, 2017, a decrease of 110 basis points.
Selling, general and administration expenses in the year ended December 31, 2017, were $246.9 million, a decrease of $13.5 million from $260.4 million in the year ended January 1, 2017. The decrease included a $6.3 million reduction of non-cash items in SG&A expenses, including share based compensation, depreciation and amortization, deferred compensation and lossexcluding restructuring charges, loss/gain on sale of fixed assets. The overall decrease was also driven by a $12.2 million decrease in personnel costs, primarily due to a reduction in our incentive pay accrual, and favorable foreign exchange impacts of $1.4 million. These decreases were partially offset by a $3.6 million increase in marketing costs relating to our re-branding, a net incremental increase of $0.5 million due to acquisitions and other increases of $2.3 million.
Restructuring Costs
Restructuring costs in the year ended December 31, 2017, were $0.9 million, compared to $1.4 million in the year ended January 1, 2017. Restructuring costs in 2017 related to the final severance and closure costs for the 2016 plan, partly offset by the receipt of $1.1 million as final settlement in the Stay of Proceedings in Israel as part of the 2014 Plan and other reductions to the 2014 Plan accrual. Restructuring costs in 2016 primarily related to the severance costs incurred during the implementation of the 2016 Plan.
Asset Impairment
Asset impairment charges were $1.5 million in the year ended January 1, 2017. There were no asset impairment charges in the year ended December 31, 2017. Asset impairment charges in 2016 resulted from restructuring actions associated with the 2016 Plan.
Loss (Gain) on Disposal of Subsidiaries
Loss on disposal of subsidiaries was $0.2 million in the year ended December 31, 2017, compared to the gain on disposal of subsidiaries of $6.6 million in the year ended January 1, 2017. The current year loss arose as a result of the liquidation of our legal entity in Hungary. The gain in 2016 arose as a result of the sale of our equity interest in MAL and the liquidation of our legal entity in Romania. The current year loss and the prior year gain related to Hungary and Romania are comprised of the recognition of the cumulative translation adjustment out of accumulated other comprehensive income (loss). The prior year gain relating to MAL represents the excess of pre-tax cash received upon closing of the sale over the book value of the investment.
Interest Expense, Net
Interest expense, net, in the year ended December 31, 2017, was $30.2 million, compared to $28.2 million in the year ended January 1, 2017. This increase primarily relates to the issuance of $150.0 million aggregate principal amount of additional 2023 Senior Notes on September 27, 2017.
MASONITE INTERNATIONAL CORPORATION
Other Expense (Income), Net
Other expense (income), net, in the year ended December 31, 2017, was $(1.1) million, compared to $(2.0) million in the year ended January 1, 2017. The change in other expense (income), net, is primarily due to unrealized gains and losses on foreign currency remeasurements. Also contributing to the change were our portion of dividends and the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting and other miscellaneous non-operating expenses.
Income Tax Expense (Benefit)
Our income tax (benefit) in the year ended December 31, 2017, was $(27.6) million, a change of $49.3 million from $21.8 million of income tax expense in the year ended January 1, 2017. The increase in income tax benefit is primarily attributable to recognition of $24.1 million of deferred tax assets in Canada through reversal of valuation allowances, a $27.2 million increase in income tax benefit associated with the change in enacted tax rate applied to existing U.S. deferred tax assets and liabilities due to U.S. Tax Reform, the mix of income or losses within the tax jurisdictions with various tax rates in which we operate and losses in tax jurisdictions with existing valuation allowances as of December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 200,179 |
| | $ | 33,564 |
| | $ | 30,050 |
| | $ | (8,225 | ) | | $ | 255,568 |
|
| Adjusted EBITDA as a percentage of segment net sales | 14.0 | % | | 11.5 | % | | 10.4 | % | | | | 12.6 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 212,619 |
| | $ | 38,795 |
| | $ | 25,160 |
| | $ | (24,061 | ) | | $ | 252,513 |
|
| Adjusted EBITDA as a percentage of segment net sales | 15.7 | % | | 12.9 | % | | 8.4 | % | | | | 12.8 | % |
MASONITE INTERNATIONAL CORPORATION
The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite: |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 200,179 |
| | $ | 33,564 |
| | $ | 30,050 |
| | $ | (8,225 | ) | | $ | 255,568 |
|
| Less (plus): | | | | | | | | | |
| Depreciation | 29,798 |
| | 9,588 |
| | 9,032 |
| | 9,110 |
| | 57,528 |
|
| Amortization | 3,369 |
| | 7,867 |
| | 8,742 |
| | 4,397 |
| | 24,375 |
|
| Share based compensation expense | — |
| | — |
| | — |
| | 11,644 |
| | 11,644 |
|
| Loss (gain) on disposal of property, plant and equipment | 770 |
| | 293 |
| | 328 |
| | 502 |
| | 1,893 |
|
| Restructuring costs | — |
| | (27 | ) | | 2,394 |
| | (1,517 | ) | | 850 |
|
| Loss (gain) on disposal of subsidiaries | — |
| | 212 |
| | — |
| | — |
| | 212 |
|
| Interest expense (income), net | — |
| | — |
| | — |
| | 30,153 |
| | 30,153 |
|
| Other expense (income), net | — |
| | (24 | ) | | — |
| | (1,067 | ) | | (1,091 | ) |
| Income tax expense (benefit) | — |
| | — |
| | — |
| | (27,560 | ) | | (27,560 | ) |
| Loss (income) from discontinued operations, net of tax | — |
| | — |
| | — |
| | 583 |
| | 583 |
|
| Net income (loss) attributable to non-controlling interest | 3,519 |
| | — |
| | — |
| | 1,723 |
| | 5,242 |
|
| Net income (loss) attributable to Masonite | $ | 162,723 |
| | $ | 15,655 |
| | $ | 9,554 |
| | $ | (36,193 | ) | | $ | 151,739 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 212,619 |
| | $ | 38,795 |
| | $ | 25,160 |
| | $ | (24,061 | ) | | $ | 252,513 |
|
| Less (plus): | | | | | | | | | |
| Depreciation | 31,159 |
| | 8,480 |
| | 9,622 |
| | 8,343 |
| | 57,604 |
|
| Amortization | 4,383 |
| | 9,069 |
| | 7,999 |
| | 3,276 |
| | 24,727 |
|
| Share based compensation expense | — |
| | — |
| | — |
| | 18,790 |
| | 18,790 |
|
| Loss (gain) on disposal of property, plant and equipment | 1,094 |
| | 564 |
| | 484 |
| | (31 | ) | | 2,111 |
|
| Restructuring costs | — |
| | 19 |
| | 1,313 |
| | 113 |
| | 1,445 |
|
| Asset impairment | — |
| | — |
| | 1,511 |
| | — |
| | 1,511 |
|
| Loss (gain) on disposal of subsidiaries | — |
| | (1,431 | ) | | — |
| | (5,144 | ) | | (6,575 | ) |
| Interest expense (income), net | — |
| | — |
| | — |
| | 28,178 |
| | 28,178 |
|
| Other expense (income), net | — |
| | 557 |
| | — |
| | (2,516 | ) | | (1,959 | ) |
| Income tax expense (benefit) | — |
| | — |
| | — |
| | 21,787 |
| | 21,787 |
|
| Loss (income) from discontinued operations, net of tax | — |
| | — |
| | — |
| | 752 |
| | 752 |
|
| Net income (loss) attributable to non-controlling interest | 3,389 |
| | — |
| | — |
| | 2,131 |
| | 5,520 |
|
| Net income (loss) attributable to Masonite | $ | 172,594 |
| | $ | 21,537 |
| | $ | 4,231 |
| | $ | (99,740 | ) | | $ | 98,622 |
|
MASONITE INTERNATIONAL CORPORATION
Adjusted EBITDA in our North American Residential segment decreased $12.4 million, or 5.8%, to $200.2 million in the year ended December 31, 2017, from $212.6 million in the year ended January 1, 2017. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $54.7 million and $50.7 million in 2017 and 2016, 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 $5.2 million, or 13.4%, to $33.6 million in the year ended December 31, 2017, from $38.8 million in the year ended January 1, 2017.
Adjusted EBITDA in our Architectural segment increased $4.9 million or 19.4% to $30.1 million in the year ended December 31, 2017, from $25.2 million in the year ended January 1, 2017. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $8.9 million and $7.8 million in 2017 and 2016, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology.
Year Ended January 1, 2017, Compared with Year Ended January 3, 2016
Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods and the 52- or 53-week periods are referred to as years. Our 2015 fiscal year, which ended on January 3, 2016, contained 53 weeks of operating results, with the additional week occurring in the fourth quarter.
Net Sales
Net sales in the year ended January 1, 2017, were $1,974.0 million, an increase of $102.0 million or 5.4% from $1,872.0 million in the year ended January 3, 2016. Net sales in 2016 were negatively impacted by $47.4 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $149.4 million or 8.0% due to changes in volume, average unit price and sales of components and other products. Higher volume in 2016 increased net sales by $99.2 million or 5.3% compared to 2015. Average unit price in 2016 increased net sales by $48.8 million or 2.6% compared to 2015. Also contributing to this increase were higher net sales of components and other products to external customers, which were $1.4 million higher in 2016 compared to 2015. The change in volume includes the incremental impacts of acquisitions and dispositions.
MASONITE INTERNATIONAL CORPORATION
Net Sales and Percentage of Net Sales by Reportable Segment |
| | | | | | | |
| | Year Ended |
| (In thousands) | January 1, 2017 | | January 3, 2016 |
| North American Residential | $ | 1,357,228 |
| | $ | 1,197,330 |
|
| North American Residential intersegment | (5,926 | ) | | (4,106 | ) |
| North American Residential net sales to external customers | 1,351,302 |
| | 1,193,224 |
|
| Percentage of consolidated net sales | 68.5 | % | | 63.7 | % |
| | | | |
| Europe | 305,710 |
| | 312,560 |
|
| Europe intersegment | (4,543 | ) | | (719 | ) |
| Europe net sales to external customers | 301,167 |
| | 311,841 |
|
| Percentage of consolidated net sales | 15.3 | % | | 16.7 | % |
| | | | |
| Architectural | 312,241 |
| | 302,129 |
|
| Architectural intersegment | (14,353 | ) | | (10,310 | ) |
| Architectural net sales to external customers | 297,888 |
| | 291,819 |
|
| Percentage of consolidated net sales | 15.1 | % | | 15.6 | % |
| | | | |
| Corporate & Other net sales to external customers | 23,607 |
| | 75,081 |
|
| | | | |
| Net sales to external customers | $ | 1,973,964 |
| | $ | 1,871,965 |
|
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the year ended January 1, 2017, were $1,351.3 million, an increase of $158.1 million or 13.3% from $1,193.2 million in the year ended January 3, 2016. Net sales in 2016 were negatively impacted by $17.8 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $175.9 million or 14.7% due to changes in volume, average unit price and sales of components and other products. Higher volume in 2016 increased net sales by $160.4 million or 13.4% compared to 2015. Average unit price increased net sales in 2016 by $14.2 million or 1.2% compared to 2015. Also contributing to this increase were higher net sales of components and other products to external customers, which were $1.3 million higher in 2016 compared to 2015.
Europe
Net sales to external customers from facilities in the Europe segment in the year ended January 1, 2017, were $301.2 million, a decrease of $10.6 million or 3.4% from $311.8 million in the year ended January 3, 2016. Net sales in 2016 were negatively impacted by $28.0 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have increased by $17.4 million or 5.6% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in 2016 by $24.2 million or 7.8% compared to 2015. Partially offsetting this increase were lower volume in 2016, which decreased net sales by $4.8 million or 1.5%, and net sales of components and other products to external customers, which were $2.0 million lower in 2016 compared to 2015. The change in volume includes the incremental impacts of acquisitions and dispositions.
MASONITE INTERNATIONAL CORPORATION
Architectural
Net sales to external customers from facilities in the Architectural segment in the year ended January 1, 2017, were $297.9 million, an increase of $6.1 million or 2.1% from $291.8 million in the year ended January 3, 2016. Net sales in 2016 were negatively impacted by $1.3 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have increased by $7.4 million or 2.5% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in 2016 by $10.4 million or 3.6% compared to 2015. Net sales of components and other products to external customers were $2.4 million higher in 2016 compared to 2015. Lower volume decreased net sales in 2016 by $5.4 million or 1.9%.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 79.2% and 81.3% for the year ended January 1, 2017, and January 3, 2016, respectively. The primary reasons for the decrease in cost of goods sold as a percentage of net sales were the favorable impact of average unit price on our net sales, our increased operating leverage and our continued cost control efforts. Material cost of sales, overhead and depreciation as a percentage of net sales in 2016 decreased 1.5%, 0.7%, 0.3%, respectively, over the 2015 period. Direct labor and distribution as a percentage of sales increased by 0.3% and 0.1%, respectively, over the 2015 period.
Selling, General and Administration Expenses
In the year ended January 1, 2017, selling, general and administration expenses, as a percentage of net sales, were 13.2% compared to 13.0% in the year ended January 3, 2016, an increase of 20 basis points.
Selling, general and administration expenses in the year ended January 1, 2017, were $260.4 million, an increase of $16.3 million from $244.1 million in the year ended January 3, 2016. The increase included $6.7 million of non-cash items in SG&A expenses, including share based compensation, depreciation and amortization, deferred compensation and loss on sale of fixed assets. The increase was also driven by an $8.3 million increase in personnel costs due to a combination of wage inflation and investments in additional personnel, a $3.9 million increase in professional fees, primarily related to IT and digital initiatives, a $1.2 million increase in marketing costs, a $0.8 million increase in travel expenses and other increases of $0.8 million. These increases were partially offset by favorable foreign exchange impacts of $5.0 million and a net incremental decrease of $0.4 million due to acquisitions and dispositions.
Restructuring Costs
Restructuring costs in the year ended January 1, 2017, were $1.4 million, compared to $5.7 million in the year ended January 3, 2016. Restructuring costs in 2016 were related primarily to expenses incurred as part of the 2016 Plan. Costs incurred in 2015 were related primarily to the 2015 Plan.
Asset Impairment
Asset impairment charges were $1.5 million in the year ended January 1, 2017, compared to $9.4 million in the year ended January 3, 2016. Asset impairment charges in 2016 resulted from restructuring actions associated with the 2016 Plan. Asset impairment charges in 2015 resulted from the sale of Premdor S.A.S., Masonite's door business in France, which was determined to be a triggering event requiring a test of the indefinite-lived trade name assets of the Europe segment. This charge represents the excess of the carrying value over the fair value as determined using the relief of royalty discounted cash flows method.
Loss (Gain) on Disposal of Subsidiaries
Gain on disposal of subsidiaries was $6.6 million in the year ended January 1, 2017, compared to the loss on disposal of subsidiaries of $60.0 million in the year ended January 3, 2016. The gain in 2016 arose as a result of the sale of our equity interest in MAL and the liquidation of our legal entity in Romania. The gain relating to MAL represents the excess of pre-tax cash received upon closing of the sale over the book value of the investment, and the gain relating to Romania is comprised of the recognition of the cumulative translation adjustment out of accumulated other comprehensive income (loss). The charge in 2015 arose as a result of the deconsolidation of MAL and the disposition of Premdor S.A.S., our door business in France.
MASONITE INTERNATIONAL CORPORATION
Interest Expense, Net
Interest expense, net, in the year ended January 1, 2017, was $28.2 million, compared to $32.9 million in the year ended January 3, 2016. This decrease primarily relates to the refinancing of $500.0 million of 8.25% senior unsecured notes for $475.0 million of 5.625% senior unsecured notes issued on March 23, 2015.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was zero in the year ended January 1, 2017, compared to $28.0 million in the year ended January 3, 2016. The charge in 2015 represents the difference between the redemption price of our senior unsecured notes due 2021 of $531.7 million and the net carrying amount of such notes of $503.7 million. In addition to the $500.0 million of principal, the redemption price included a make-whole premium of $31.7 million and the net carrying amount included unamortized premiums of $11.5 million, partially offset by unamortized debt issuance costs of $7.8 million.
Other Expense (Income), Net
Other expense (income), net, in the year ended January 1, 2017, was $(2.0) million, compared to $(1.8) million in the year ended January 3, 2016. The change in other expense (income), net, is primarily due to unrealized gains and losses on foreign currency remeasurements. Also contributing to the change were our portion of dividends and the net gains and losses related to our non-majority owned unconsolidated subsidiary that are recognized under the equity method of accounting and other miscellaneous non-operating expenses.
Income Tax Expense (Benefit)
Our income tax expense in the year ended January 1, 2017, was $21.8 million, an increase of $7.6 million from $14.2 million of income tax expense in the year ended January 3, 2016. The increase in income tax expense (benefit) is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate and losses in tax jurisdictions with existing valuation allowances.
Segment Information |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 212,619 |
| | $ | 38,795 |
| | $ | 25,160 |
| | $ | (24,061 | ) | | $ | 252,513 |
|
| Adjusted EBITDA as a percentage of segment net sales | 15.7 | % | | 12.9 | % | | 8.4 | % | | | | 12.8 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 3, 2016 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 165,560 |
| | $ | 30,468 |
| | $ | 23,281 |
| | $ | (15,112 | ) | | $ | 204,197 |
|
| Adjusted EBITDA as a percentage of segment net sales | 13.9 | % | | 9.8 | % | | 8.0 | % | | | | 10.9 | % |
MASONITE INTERNATIONAL CORPORATION
The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite: |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 212,619 |
| | $ | 38,795 |
| | $ | 25,160 |
| | $ | (24,061 | ) | | $ | 252,513 |
|
| Less (plus): | | | | | | | | | |
| Depreciation | 31,159 |
| | 8,480 |
| | 9,622 |
| | 8,343 |
| | 57,604 |
|
| Amortization | 4,383 |
| | 9,069 |
| | 7,999 |
| | 3,276 |
| | 24,727 |
|
| Share based compensation expense | — |
| | — |
| | — |
| | 18,790 |
| | 18,790 |
|
| Loss (gain) on disposal of property, plant and equipment | 1,094 |
| | 564 |
| | 484 |
| | (31 | ) | | 2,111 |
|
| Restructuring costs | — |
| | 19 |
| | 1,313 |
| | 113 |
| | 1,445 |
|
| Asset impairment | — |
| | — |
| | 1,511 |
| | — |
| | 1,511 |
|
| Loss (gain) on disposal of subsidiaries | — |
| | (1,431 | ) | | — |
| | (5,144 | ) | | (6,575 | ) |
| Interest expense (income), net | — |
| | — |
| | — |
| | 28,178 |
| | 28,178 |
|
| Other expense (income), net | — |
| | 557 |
| | — |
| | (2,516 | ) | | (1,959 | ) |
| Income tax expense (benefit) | — |
| | — |
| | — |
| | 21,787 |
| | 21,787 |
|
| Loss (income) from discontinued operations, net of tax | — |
| | — |
| | — |
| | 752 |
| | 752 |
|
| Net income (loss) attributable to non-controlling interest | 3,389 |
| | — |
| | — |
| | 2,131 |
| | 5,520 |
|
| Net income (loss) attributable to Masonite | $ | 172,594 |
| | $ | 21,537 |
| | $ | 4,231 |
| | $ | (99,740 | ) | | $ | 98,622 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended January 3, 2016 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Adjusted EBITDA | $ | 165,560 |
| | $ | 30,468 |
| | $ | 23,281 |
| | $ | (15,112 | ) | | $ | 204,197 |
|
| Less (plus): | | | | | | | | | |
| Depreciation | 31,456 |
| | 8,105 |
| | 8,223 |
| | 11,376 |
| | 59,160 |
|
| Amortization | 4,954 |
| | 6,860 |
| | 8,428 |
| | 3,483 |
| | 23,725 |
|
| Share based compensation expense | — |
| | — |
| | — |
| | 13,236 |
| | 13,236 |
|
| Loss (gain) on disposal of property, plant and equipment | 796 |
| | 325 |
| | 548 |
| | (298 | ) | | 1,371 |
|
| Restructuring costs | 10 |
| | 2,501 |
| | — |
| | 3,167 |
| | 5,678 |
|
| Asset impairment | — |
| | 9,439 |
| | — |
| | — |
| | 9,439 |
|
| Loss (gain) on disposal of subsidiaries | — |
| | 29,721 |
| | — |
| | 30,263 |
| | 59,984 |
|
| Interest expense (income), net | — |
| | — |
| | — |
| | 32,884 |
| | 32,884 |
|
| Loss on extinguishment of debt | — |
| | — |
| | — |
| | 28,046 |
| | 28,046 |
|
| Other expense (income), net | (50 | ) | | 1,087 |
| | — |
| | (2,794 | ) | | (1,757 | ) |
| Income tax expense (benefit) | — |
| | — |
| | — |
| | 14,172 |
| | 14,172 |
|
| Loss (income) from discontinued operations, net of tax | — |
| | — |
| | — |
| | 908 |
| | 908 |
|
| Net income (loss) attributable to non-controlling interest | 3,323 |
| | — |
| | — |
| | 1,139 |
| | 4,462 |
|
| Net income (loss) attributable to Masonite | $ | 125,071 |
| | $ | (27,570 | ) | | $ | 6,082 |
| | $ | (150,694 | ) | | $ | (47,111 | ) |
MASONITE INTERNATIONAL CORPORATION
Adjusted EBITDA in our North American Residential segment increased $47.0 million, or 28.4%, to $212.6 million in the year ended January 1, 2017, from $165.6 million in the year ended January 3, 2016. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $50.7 million and $44.7 million in 2016 and 2015, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation.
Adjusted EBITDA in our Europe segment increased $8.3 million, or 27.2%, to $38.8 million in the year ended January 1, 2017, from $30.5 million in the year ended January 3, 2016. Adjusted EBITDA in the Europe segment included an incremental comparative benefit of $0.1 million from the disposal of France in 2015.
Adjusted EBITDA in our Architectural segment increased $1.9 million to $25.2 million in the year ended January 1, 2017, from $23.3 million in the year ended January 3, 2016. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $7.8 million and $6.5 million in 2016 and 2015, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology.
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 accounts receivable sales programs ("AR Sales Programs") and our existing cash balance. Our anticipated uses of cash in the near term include working capital needs, capital expenditures and share repurchases. As of December 31, 2017, we do not have any material commitments for capital expenditures. We anticipate capital expenditures in fiscal year 2018 to be approximately $75 million to $80 million. On a continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.
We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Programs, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of December 31, 2017, we had $176.7 million of cash and cash equivalents, availability under our ABL Facility of $135.9 million and availability under our AR Sales Programs of $26.2 million.
Cash Flows
Year Ended December 31, 2017, Compared with Year Ended January 1, 2017
Cash provided by operating activities was $173.5 million during the year ended December 31, 2017, a nominal decrease compared to $174.0 million during the year ended January 1, 2017.
Cash used in investing activities was $89.8 million during the year ended December 31, 2017, compared to $76.5 million cash used during the year ended January 1, 2017. This $13.3 million increase in cash used in investing activities was driven by an increase of $5.2 million in cash used in acquisitions (net of cash acquired), a decrease of $15.1 million of cash proceeds from disposal of subsidiaries and other increases in investing outflows of $1.5 million. These increases to investing cash outflows were partially offsetpension settlement charges, divided by an $8.5 million decrease in cash additions to property, plant and equipment.
Cash provided in financing activities was $21.2 million during the year ended December 31, 2017, compared to $109.6 million of cash used in financing activities during the year ended January 1, 2017. This $130.8 million net increase in financing inflows was driven by $153.9 million in net cash proceeds from the 2017 issuance of the 2023 Notes and other financing net inflows of $1.4 million. These net inflows were partially offset by a $10.7 million increase in outflows for the repurchase of shares of our common stock in 2017 compared to 2016, a $10.5 million prior year inflow from the exercise of warrants to purchase our common shares and a $3.3 million increase in tax withholding on share based awards.
Year Ended January 1, 2017, Compared with Year Ended January 3, 2016
Cash provided by operating activities was $174.0 million during the year ended January 1, 2017, compared to $161.0 million during the year ended January 3, 2016. This $13.0 million increase in cash provided by operating activities was primarily due to a $55.6 million increase in our net income (loss) attributable to Masonite,Total Assets less Total Non-Debt Liabilities, as adjusted for non-cash and non-operating items, partially offset by an increase in net working capital in 2016 comparedany changes to 2015.
MASONITE INTERNATIONAL CORPORATION
Cash used in investing activities was $76.5 million during the year ended January 1, 2017, compared to $180.2 million cash used during the year ended January 3, 2016. This $103.7 million decrease in cash used in investing activities was driven by a decrease of $108.8 million in cash used in acquisitions (net of cash acquired) and an increase of $27.0 million of cash proceeds from disposal of subsidiaries (net of cash disposed). These decreases to investing cash outflows were partially offset by $31.2 million of higher additions to property, plant and equipment, due to investments to support additional volume, and other increases in investing outflows of $0.9 million.
Cash used in financing activities was $109.6 million during the year ended January 1, 2017, compared to $72.0 million cash used during the year ended January 3, 2016. This $37.6 million increase in financing outflows was driven by $109.2 million of cash outflow for the repurchase of shares of our common stock in 2016, partially offset by $3.0 million of year over year other outflows. These current year cash outflows were offset by $10.5 million of proceeds from the exercise of warrants to purchase our common shares, as well as the prior year net cash use of $64.1 million related to the issuance of the 2023 Notes and repurchase of the 2021 Notes (as described below).
Share Repurchases
We currently have in place a $350 million share repurchase authorization, stemming from two separate authorizations by our Board of Directors. On February 23, 2016, our Board of Directors authorized a share repurchase program whereby we may repurchase up to $150 million worth of our outstanding common shares and on February 22, 2017, our Board of Directors authorized an additional $200 million (collectively, the “share repurchase programs”). The share repurchase programs have no specified end date. While the share repurchase programs may take two years to complete, the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. Any repurchases under the share repurchase programs may be made in the open market, in privately negotiated transactions or otherwise, subject to market conditions, applicable legal requirements and other relevant factors. The share repurchase programs do not obligate us to acquire any particular amount of common shares, and they may be suspended or terminated at any time at our discretion. Repurchases under the share repurchase programs are permitted to be made under one or more Rule 10b5-1 plans, which would permit shares to be repurchased when we might otherwise be precluded from doing so under applicable insider trading laws. During the year ended December 31, 2017, we repurchased and retired 1,794,101 of our common shares in the open market at an aggregate cost of $119.9 million as part of the share repurchase programs. During the year ended January 1, 2017, we repurchased 1,668,057 of our common shares in the open market at an aggregate cost of $109.2 million. As of December 31, 2017, $120.9 million was available for repurchase in accordance with the share repurchase programs.
Other Liquidity Matters
Our cash and cash equivalents balance includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of December 31, 2017, 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. However, if economic conditions were to deteriorate, it is possible that there could be an impact on our results of operations in a future period and this impact could be material.
MASONITE INTERNATIONAL CORPORATION
Accounts Receivable Sales Programs
We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the consolidated balance sheets and are included in cash flows from operating activities in the consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expense within the consolidated statements of comprehensive income (loss).
Senior Notes
On September 27, 2017, and March 23, 2015, we issued $150.0 million and $475.0 million aggregate principal senior unsecured notes, respectively (the "2023 Notes"). The 2023 Notes were issued in two private placements for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to buyers outside the United States pursuant to Regulation S under the Securities Act. The 2023 Notes were issued without registration rights and are not listed on any securities exchange. The 2023 Notes bear interest at 5.625% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due March 15, 2023. The 2023 Notes were issued at 104.0% and par in 2017 and 2015, respectively, and the resulting premium of $6.0 million is being amortized to interest expense over the term of the 2023 Notes using the effective interest method. We received net proceeds of $153.9 million and $467.9 million, respectively, after deducting $2.1 million and $7.1 million of debt issuance costs in 2017 and 2015, respectively. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2023 Notes using the effective interest method. The net proceeds from the 2017 issuance of the 2023 Notes were for general corporate purposes. The net proceeds from the 2015 issuance of the 2023 Notes, together with available cash balances, were used to redeem $500.0 million aggregate principal of prior 8.25% senior unsecured notes due 2021 and to pay related premiums, fees and expenses.
Obligations under the 2023 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries. We may redeem the 2023 Notes under certain circumstances specified therein. The indenture governing the 2023 Notes contains restrictive covenants that, among other things, limit our ability and our subsidiaries’ ability to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2023 Notes. In addition, if in the future the 2023 Notes have an investment grade rating from at least two nationally recognized statistical rating organizations, certain of these covenants will be replaced with a less restrictive covenant. The indenture governing the 2023 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of December 31, 2017, we were in compliance with all covenants under the indenture governing the 2023 Notes.
ABL Facility
On April 9, 2015, we and certain of our subsidiaries entered into a $150.0 million asset-based revolving credit facility (the "ABL Facility") maturing on April 9, 2020. The borrowing base is calculated based on a percentage of the value of selected U.S. and Canadian accounts receivable and inventory, less certain ineligible amounts. Obligations under the ABL Facility are secured by a first priority security interest in substantially all of the current assets of Masonite and our subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by certain of our directly or indirectly wholly-owned subsidiaries. Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the Base Rate, Canadian Prime Rate or Canadian Base Rate (each as defined in the Amended and Restated Credit Agreement) plus a margin ranging from 0.25% to 0.75% per annum, or (ii) the Eurodollar Base Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.75% per annum. In addition to paying interest on any outstanding principal under
MASONITE INTERNATIONAL CORPORATION
the ABL Facility a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties and covenants by us that, among other things, and subject to certain exceptions, restrict Masonite's ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge and (vi) create liens. The Amended and Restated Credit Agreement amended the ABL Facility to, among other things, (i) permit us to incur unlimited unsecured debt as long as such debt does not contain covenants or default provisions that are more restrictive than those contained in the ABL Facility, (ii) permit us to incur debt as long as the pro forma secured leverage ratio is less than 4.5 to 1.0, and (iii) add certain additional exceptions and exemptions under the restricted payment, investment and indebtedness covenants (including increasing the amount of certain debt permitted to be incurred under an existing exception). As of December 31, 2017, and January 1, 2017, we were in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.
Supplemental Guarantor Financial Information
Our obligations under the 2023 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 $1.8 billion in the year ended December 31, 2017 and $1.6 billion in each of the years ended January 1, 2017, and January 3, 2016. Our non-guarantor subsidiaries generated Adjusted EBITDA of $209.2 million, $204.5 million and $166.6 million for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. Our non-guarantor subsidiaries had total assets of $1.6 billion and $1.3 billion as of December 31, 2017, and January 1, 2017; and total liabilities of $693.8 million and $771.2 million as of December 31, 2017, and January 1, 2017, respectively.
Contractual Obligations
The following table presents our contractual obligations over the periods indicated as of December 31, 2017: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended |
| (In thousands) | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total |
| Long-term debt maturities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 625,000 |
| | $ | 625,000 |
|
| Scheduled interest payments | 35,156 |
| | 35,156 |
| | 35,156 |
| | 35,156 |
| | 35,156 |
| | 17,578 |
| | 193,358 |
|
| Operating leases | 23,177 |
| | 21,336 |
| | 18,447 |
| | 13,806 |
| | 9,906 |
| | 62,855 |
| | 149,527 |
|
| Pension contributions | 5,669 |
| | 926 |
| | 972 |
| | 1,021 |
| | 1,071 |
| | 5,872 |
| | 15,531 |
|
Total (1) | $ | 64,002 |
| | $ | 57,418 |
| | $ | 54,575 |
| | $ | 49,983 |
| | $ | 46,133 |
| | $ | 711,305 |
| | $ | 983,416 |
|
____________(1) As of December 31, 2017, we have $5.3 million recorded as a long-term liability for uncertain tax positions. We are not able to reasonably estimate the timing of payments, or the amount by which our liability for these uncertain tax positions will increase or decrease over time, and accordingly, this liability has been excluded from the above table.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
MASONITE INTERNATIONAL CORPORATION
Critical Accounting Policies and Estimates
Our significant accounting policies are fully disclosed in our annual consolidated financial statements included elsewhere in this Annual Report. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Business Acquisition Accounting
We use the acquisition method of accounting for all business acquisitions. We allocate the purchase price of our business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total cost of the acquisitions and the sum of the fair values of the acquired tangible and intangible assets less liabilities is recorded as goodwill.
Goodwill
We evaluate all business combinations for intangible assets that should be recognized and reported apart from goodwill. Goodwill is not amortized but instead is tested annually for impairment on the last day of fiscal November, or more frequently if events or changes in circumstances indicate the carrying amount may not be recoverable. The test for impairment is performed at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Possible impairment in goodwill is first analyzed using qualitative factors such as macroeconomic and market conditions, changing costs and actual and projected performance, amongst others, to determine whether it is more likely than not that the book value of the reporting unit exceeds its fair value. If it is determined more likely than not that the book value exceeds fair value, a quantitative analysis is performed to test for impairment. When quantitative steps are determined necessary, the fair values of the reporting units are estimated through the use of discounted cash flow analyses and market multiples. If the carrying amount exceeds fair value, then goodwill is impaired. Any impairment in goodwill is measured by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and comparing the notional goodwill from the fair value allocation to the carrying value of the goodwill. We performed a quantitative impairment test during the fourth quarter of 2017 and determined that goodwill was not impaired.
Intangible Assets
Intangible assets with definite lives include customer relationships, non-compete agreements, patents, supply agreements, certain acquired trademarks and system software development. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the fair value of the asset, determined using discounted cash flows when quoted market prices are not readily available. Indefinite-lived intangible assets are tested for impairment annually on the last day of fiscal November, or more frequently if events or circumstances indicated that the carrying value may exceed the fair value. The inputs utilized to derive projected cash flows are subject to significant judgments and uncertainties. As such, the realized cash flows could differ significantly from those estimated. We performed a quantitative impairment test during the fourth quarter of 2017 and determined that indefinite-lived intangible assets were not impaired.
Long-lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimates of asset’s useful lives and undiscounted future cash flows based on market participant assumptions. If the undiscounted expected future cash flows are less than the carrying amount of the asset and the carrying amount of the asset exceeds its fair value, an impairment loss is recognized.
Income Taxes
As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date.
MASONITE INTERNATIONAL CORPORATION
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at enacted rates. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax assets would be a credit to income in the period such determination was made. The consolidated financial statements include increases in the valuation allowances as a result of uncertainty regarding our ability to realize certain deferred tax assets in the future.
Our accounting for deferred tax consequences represents our best estimate of future events that can be appropriately reflected in the accounting estimates. Changes in existing tax laws, regulations, rates and future operating results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are also subject to change as a result in changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.
Although we believe the measurement of liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcomes of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability is reversed and a tax benefit is recognized in the period in which such determination is made. Conversely, additional tax charges are recorded in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be. If additional taxes are assessed as a result of an audit or litigation, there could be a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Inventory
We value inventories at the lower of cost or replacement cost for raw materials, and the lower of cost or net realizable value for finished goods, with expense estimates made for obsolescence or unsaleable inventory. In determining net realizable value, we consider such factors as yield, turnover and aging, expected future demand and market conditions, as well as past experience. A change in the underlying assumptions related to these factors could affect the valuation of inventory and have a corresponding effect on cost of goods sold. Historically, actual results have not significantly deviated from those determined using these estimates.
Share Based Compensation Plan
We have a share based compensation plan, which governs the issuance of common shares to employees as compensation through various grants of share instruments. We apply the fair value method of accounting using the Black-Scholes-Merton option pricing model to determine the compensation expense for stock appreciation rights. The compensation expense for the Restricted Stock Units awarded is based on the fair value of the restricted stock units at the date of grant. Additionally, the compensation expense for certain performance based awards is determined using the Monte Carlo simulation method. Compensation expense is recorded in the consolidated statements of comprehensive income (loss) and is recognized over the requisite service period. The determination of obligations and compensation expense requires the use of several mathematical and judgmental factors, including stock price, expected volatility, the anticipated life of the award, estimated risk free rate and the number of shares or share options expected to vest. Any difference in the number of shares or share options that actually vest can affect future compensation expense. Other assumptions are not revised after the original estimate.
Variable Interest Entity
The accounting method used for our investments is dependent upon the influence we have over the investee. We consolidate subsidiaries when we are able to exert control over the financial and operating policies of the investee, which generally occurs if we own a 50% or greater voting interest.
MASONITE INTERNATIONAL CORPORATION
Pursuant to ASC 810, “Consolidation”, for certain investments where the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may be consolidated if we are considered the primary beneficiary of the VIE. The primary beneficiary of a VIE is the party that has the power to direct the activities of the VIE which most significantly impact the VIE’s economic performance and that has the obligation to absorb losses of the VIE which could potentially be significant to the VIE.
Significant judgment is required in the determination of whether we are the primary beneficiary of a VIE. Estimates and assumptions made in such analyses include, but are not limited to, the market price of input costs, the market price for finished products, market demand conditions within various regions and the probability of certain other outcomes.
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 Consolidated Financial Statements in this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are generally contracted with a diversified group of investment grade counterparties to reduce exposure to nonperformance on such instruments. We held no such material derivative financial instruments as of December 31, 2017, or January 1, 2017.
We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
Foreign Exchange Rate Risk
We have foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which we operate. When deemed appropriate, we enter into various derivative financial instruments to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments, and certain anticipated foreign currency transactions. We held no such material derivative financial instruments as of December 31, 2017, or January 1, 2017.
Interest Rate Risk
We are subject to market risk from exposure to changes in interest rates with respect to borrowings under our ABL Facility to the extent it is drawn on and due to our other financing, investing and cash management activities. As of December 31, 2017, or January 1, 2017, there were no outstanding borrowings under our ABL Facility.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain commodity products. We believe that volatile prices for commodities have impacted our net sales and results of operations. We maintain strategies to mitigate the impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing and other actions, which typically offset only a portion of the adverse impact. Inflation and deflation related to our purchases of certain commodity products could have an adverse impact on our operating results in the future.
Item 8. Financial Statements and Supplementary Data
|
| | |
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Report of Independent Registered Certified Public Accounting Firm
To the Shareholders and the Board of Directors of Masonite International Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Masonite International Corporation and subsidiaries (the Company) as of December 31, 2017, and the related consolidated statement of comprehensive income (loss), consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017, and the results of its operations and its cash flows for the year ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.practices, acquisition or divestitures using the methodology established by the Compensation Committee, FX adjustments to prior year rates and other adjustments as approved by the Compensation Committee.
We also have audited,
“Relative Total Shareholder Return” is defined as the Total Shareholder Return for Masonite during the relevant performance period measured as a comparative percentile to the all companies in accordance with the standardspeer group. “Total Shareholder Return” is the share price appreciation of any particular company’s publicly traded common stock plus dividends accrued, as measured during the applicable performance period. This is calculated by taking the average of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting asclosing stock price of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provided a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Tampa, Florida
February 27, 2018
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Masonite International Corporation
Tampa, Florida
We have audited the accompanying consolidated balance sheet of Masonite International Corporation and subsidiaries (the "Company") as of January 1, 2017, and the related consolidated statements of comprehensive income (loss), changes in equity, and cash flows for each of the two years in the period ended January 1, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but notspecified company for the purposelast 20 trading days of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Masonite International Corporation and subsidiaries as of January 1, 2017, and the results of their operations and their cash flows for each of the two years in the period ended January 1, 2017, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 1, 2017
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts) |
| | | | | | | | | | | |
| | Year Ended |
| | December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
| Net sales | $ | 2,032,925 |
| | $ | 1,973,964 |
| | $ | 1,871,965 |
|
| Cost of goods sold | 1,625,942 |
| | 1,564,319 |
| | 1,521,115 |
|
| Gross profit | 406,983 |
| | 409,645 |
| | 350,850 |
|
| Selling, general and administration expenses | 246,855 |
| | 260,364 |
| | 244,145 |
|
| Restructuring costs, net | 850 |
| | 1,445 |
| | 5,678 |
|
| Asset impairment | — |
| | 1,511 |
| | 9,439 |
|
| Loss (gain) on disposal of subsidiaries | 212 |
| | (6,575 | ) | | 59,984 |
|
| Operating income (loss) | 159,066 |
| | 152,900 |
| | 31,604 |
|
| Interest expense (income), net | 30,153 |
| | 28,178 |
| | 32,884 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 28,046 |
|
| Other expense (income), net | (1,091 | ) | | (1,959 | ) | | (1,757 | ) |
| Income (loss) from continuing operations before income tax expense (benefit) | 130,004 |
| | 126,681 |
| | (27,569 | ) |
| Income tax expense (benefit) | (27,560 | ) | | 21,787 |
| | 14,172 |
|
| Income (loss) from continuing operations | 157,564 |
| | 104,894 |
| | (41,741 | ) |
| Income (loss) from discontinued operations, net of tax | (583 | ) | | (752 | ) | | (908 | ) |
| Net income (loss) | 156,981 |
| | 104,142 |
| | (42,649 | ) |
| Less: net income (loss) attributable to non-controlling interest | 5,242 |
| | 5,520 |
| | 4,462 |
|
| Net income (loss) attributable to Masonite | $ | 151,739 |
| | $ | 98,622 |
| | $ | (47,111 | ) |
| | | | | | |
| Earnings (loss) per common share attributable to Masonite: | | | | | |
| Basic | $ | 5.18 |
| | $ | 3.25 |
| | $ | (1.56 | ) |
| Diluted | $ | 5.09 |
| | $ | 3.17 |
| | $ | (1.56 | ) |
| | | | | | |
| Earnings (loss) per common share from continuing operations attributable to Masonite: | | | | | |
| Basic | $ | 5.20 |
| | $ | 3.27 |
| | $ | (1.53 | ) |
| Diluted | $ | 5.11 |
| | $ | 3.19 |
| | $ | (1.53 | ) |
| | | | | | |
| Comprehensive income (loss): | | | | | |
| Net income (loss) | $ | 156,981 |
| | $ | 104,142 |
| | $ | (42,649 | ) |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation gain (loss) | 38,970 |
| | (37,097 | ) | | (34,637 | ) |
| Pension and other post-retirement adjustment | 529 |
| | (5,941 | ) | | (1,826 | ) |
| Amortization of actuarial net losses | 1,113 |
| | 1,070 |
| | 889 |
|
| Pension settlement charges | — |
| | — |
| | 2,400 |
|
| Income tax benefit (expense) related to other comprehensive income (loss) | (1,026 | ) | | 1,155 |
| | 385 |
|
| Other comprehensive income (loss), net of tax: | 39,586 |
| | (40,813 | ) | | (32,789 | ) |
| Comprehensive income (loss) | 196,567 |
| | 63,329 |
| | (75,438 | ) |
| Less: comprehensive income (loss) attributable to non-controlling interest | 5,994 |
| | 5,745 |
| | 3,362 |
|
| Comprehensive income (loss) attributable to Masonite | $ | 190,573 |
| | $ | 57,584 |
| | $ | (78,800 | ) |
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
|
| | | | | | | |
| ASSETS | December 31,
2017 | | January 1,
2017 |
| Current assets: | | | |
| Cash and cash equivalents | $ | 176,669 |
| | $ | 71,714 |
|
| Restricted cash | 11,895 |
| | 12,196 |
|
| Accounts receivable, net | 269,235 |
| | 242,197 |
|
| Inventories, net | 234,042 |
| | 225,940 |
|
| Prepaid expenses | 27,665 |
| | 24,291 |
|
| Income taxes receivable | 2,364 |
| | 2,399 |
|
| Total current assets | 721,870 |
| | 578,737 |
|
| Property, plant and equipment, net | 573,559 |
| | 542,088 |
|
| Investment in equity investees | 11,310 |
| | 9,302 |
|
| Goodwill | 138,449 |
| | 129,286 |
|
| Intangible assets, net | 182,484 |
| | 190,154 |
|
| Long-term deferred income taxes | 29,899 |
| | 9,478 |
|
| Other assets, net | 22,687 |
| | 16,816 |
|
| Total assets | $ | 1,680,258 |
| | $ | 1,475,861 |
|
| | | | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 94,497 |
| | $ | 96,178 |
|
| Accrued expenses | 126,759 |
| | 133,799 |
|
| Income taxes payable | 869 |
| | 1,201 |
|
| Total current liabilities | 222,125 |
| | 231,178 |
|
| Long-term debt | 625,657 |
| | 470,745 |
|
| Long-term deferred income taxes | 60,820 |
| | 70,423 |
|
| Other liabilities | 35,754 |
| | 43,739 |
|
| Total liabilities | 944,356 |
| | 816,085 |
|
| Commitments and Contingencies (Note 9) |
|
| |
|
|
| Equity: | | |
|
|
| Share capital: unlimited shares authorized, no par value, 28,369,877 and 29,774,784 shares issued and outstanding as of December 31, 2017, and January 1, 2017, respectively | 624,403 |
| | 650,007 |
|
| Additional paid-in capital | 226,528 |
| | 234,926 |
|
| Accumulated deficit | (18,150 | ) | | (89,063 | ) |
| Accumulated other comprehensive income (loss) | (110,152 | ) | | (148,986 | ) |
| Total equity attributable to Masonite | 722,629 |
| | 646,884 |
|
| Equity attributable to non-controlling interests | 13,273 |
| | 12,892 |
|
| Total equity | 735,902 |
| | 659,776 |
|
| Total liabilities and equity | $ | 1,680,258 |
| | $ | 1,475,861 |
|
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares Outstanding | | Share Capital | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Equity Attributable to Masonite | | Equity Attributable to Non-controlling Interests | | Total Equity |
| Balances as of December 28, 2014 | 30,015,321 |
| | $ | 657,292 |
| | $ | 225,918 |
| | $ | (97,517 | ) | | $ | (76,259 | ) | | $ | 709,434 |
| | $ | 26,065 |
| | $ | 735,499 |
|
| | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | (47,111 | ) | | | | (47,111 | ) | | 4,462 |
| | (42,649 | ) |
| Other comprehensive income (loss), net of tax | | | | | | | | | (31,689 | ) | | (31,689 | ) | | (1,100 | ) | | (32,789 | ) |
| Dividends to non-controlling interests | | | | | | | | | | | — |
| | (5,797 | ) | | (5,797 | ) |
| Deconsolidation of non-controlling interest | | | | | | | | | | | — |
| | (10,451 | ) | | (10,451 | ) |
| Share based compensation expense | | | | | 13,236 |
| | | | | | 13,236 |
| | | | 13,236 |
|
| Common shares issued for delivery of share based awards | 399,198 |
| | 5,460 |
| | (5,460 | ) | | | | | | — |
| | | | — |
|
| Common shares withheld to cover income taxes payable due to delivery of share based awards |
|
| |
|
| | (2,114 | ) | | | | | | (2,114 | ) | | | | (2,114 | ) |
| Common shares issued under employee stock purchase plan | 12,913 |
| | 846 |
| | (215 | ) | | | | | | 631 |
| | | | 631 |
|
| Common shares issued for exercise of warrants | 433 |
| | 2 |
| | (2 | ) | | | | | | — |
| | | | — |
|
| Balances as of January 3, 2016 | 30,427,865 |
| | $ | 663,600 |
| | $ | 231,363 |
| | $ | (144,628 | ) | | $ | (107,948 | ) | | $ | 642,387 |
| | $ | 13,179 |
| | $ | 655,566 |
|
| Cumulative effect of new accounting principle | | | | | | | 30,160 |
| | | | 30,160 |
| | | | 30,160 |
|
| Balances as of January 3, 2016, as adjusted | 30,427,865 |
| | $ | 663,600 |
| | $ | 231,363 |
| | $ | (114,468 | ) | | $ | (107,948 | ) | | $ | 672,547 |
| | $ | 13,179 |
| | $ | 685,726 |
|
| | | | | | | | | |
|
| |
|
| |
|
| |
|
|
| Net income (loss) | | | | | | | 98,622 |
| | | | 98,622 |
| | 5,520 |
| | 104,142 |
|
| Other comprehensive income (loss), net of tax | | | | |
|
| | | | (41,038 | ) | | (41,038 | ) | | 225 |
| | (40,813 | ) |
| Dividends to non-controlling interests |
|
| |
|
| |
|
| | | | | | — |
| | (6,032 | ) | | (6,032 | ) |
| Share based compensation expense |
|
| |
|
| | 18,790 |
| | | | | | 18,790 |
| | | | 18,790 |
|
| Common shares issued for delivery of share based awards | 366,556 |
| | 7,901 |
| | (7,901 | ) | | | | | | — |
| | | | — |
|
| Common shares withheld to cover income taxes payable due to delivery of share based awards |
|
| |
|
| | (4,210 | ) | | | | | | (4,210 | ) | | | | (4,210 | ) |
| Common shares issued under employee stock purchase plan | 17,469 |
| | 1,090 |
| | (202 | ) | |
|
| |
|
| | 888 |
| |
|
| | 888 |
|
| Common shares issued for exercise of warrants | 630,951 |
| | 13,401 |
| | (2,914 | ) | |
|
| | | | 10,487 |
| | | | 10,487 |
|
| Common shares repurchased and retired | (1,668,057 | ) | | (35,985 | ) | |
|
| | (73,217 | ) | |
|
| | (109,202 | ) | |
|
| | (109,202 | ) |
| Balances as of January 1, 2017 | 29,774,784 |
| | $ | 650,007 |
| | $ | 234,926 |
| | $ | (89,063 | ) | | $ | (148,986 | ) | | $ | 646,884 |
| | $ | 12,892 |
| | $ | 659,776 |
|
| | | | | | | | | | | | | | | | |
| Net income (loss) | | | | | | | 151,739 |
| | | | 151,739 |
| | 5,242 |
| | 156,981 |
|
| Other comprehensive income (loss), net of tax | | | | | | | | | 38,834 |
| | 38,834 |
| | 752 |
| | 39,586 |
|
| Dividends to non-controlling interests | | | | | | | | | | | — |
| | (5,613 | ) | | (5,613 | ) |
| Share based compensation expense | | | | | 11,644 |
| | | | | | 11,644 |
| | | | 11,644 |
|
| Common shares issued for delivery of share based awards | 372,826 |
| | 12,290 |
| | (12,290 | ) | | | | | | — |
| | | | — |
|
| Common shares withheld to cover income taxes payable due to delivery of share based awards | | | | | (7,466 | ) | | | | | | (7,466 | ) | | | | (7,466 | ) |
| Common shares issued under employee stock purchase plan | 16,368 |
| | 1,168 |
| | (286 | ) | | | | | | 882 |
| | | | 882 |
|
| Common shares repurchased and retired | (1,794,101 | ) | | (39,062 | ) | | | | (80,826 | ) | | | | (119,888 | ) | | | | (119,888 | ) |
| Balances as of December 31, 2017 | 28,369,877 |
| | $ | 624,403 |
| | $ | 226,528 |
| | $ | (18,150 | ) | | $ | (110,152 | ) | | $ | 722,629 |
| | $ | 13,273 |
| | $ | 735,902 |
|
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
|
| | | | | | | | | | | |
| | Year Ended |
| Cash flows from operating activities: | December 31,
2017 | | January 1,
2017 | | January 3,
2016 |
| Net income (loss) | $ | 156,981 |
| | $ | 104,142 |
| | $ | (42,649 | ) |
| Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities: | | | | | |
| Loss (income) from discontinued operations, net of tax | 583 |
| | 752 |
| | 908 |
|
| Loss (gain) on disposal of subsidiaries | 212 |
| | (6,575 | ) | | 59,984 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 28,046 |
|
| Depreciation | 57,528 |
| | 57,604 |
| | 59,160 |
|
| Amortization | 24,375 |
| | 24,727 |
| | 23,725 |
|
| Share based compensation expense | 11,644 |
| | 18,790 |
| | 13,236 |
|
| Deferred income taxes | (34,230 | ) | | 12,918 |
| | 9,097 |
|
| Unrealized foreign exchange loss (gain) | 1,496 |
| | 829 |
| | (3,238 | ) |
| Share of loss (income) from equity investees, net of tax | (2,008 | ) | | (2,183 | ) | | (1,473 | ) |
| Dividend from equity investee | — |
| | 1,733 |
| | 1,440 |
|
| Pension and post-retirement expense (funding), net | (6,806 | ) | | (6,276 | ) | | (3,727 | ) |
| Non-cash accruals and interest | 1,226 |
| | 2,612 |
| | 1,587 |
|
| Loss (gain) on sale of property, plant and equipment | 1,893 |
| | 2,111 |
| | 1,371 |
|
| Asset impairment | — |
| | 1,511 |
| | 9,439 |
|
| Changes in assets and liabilities, net of acquisitions: | | | | | |
| Accounts receivable | (15,926 | ) | | (29,514 | ) | | 27,150 |
|
| Inventories | 692 |
| | (23,022 | ) | | (2,071 | ) |
| Prepaid expenses | (2,026 | ) | | (2,102 | ) | | (5,424 | ) |
| Accounts payable and accrued expenses | (15,809 | ) | | 16,560 |
| | (8,246 | ) |
| Other assets and liabilities | (6,344 | ) | | (587 | ) | | (7,304 | ) |
| Net cash flow provided by (used in) operating activities | 173,481 |
| | 174,030 |
| | 161,011 |
|
| Cash flows from investing activities: | | | | | |
| Proceeds from sale of property, plant and equipment | 1,114 |
| | 1,268 |
| | 1,316 |
|
| Additions to property, plant and equipment | (73,782 | ) | | (82,287 | ) | | (51,065 | ) |
| Cash used in acquisitions, net of cash acquired | (13,813 | ) | | (8,551 | ) | | (117,398 | ) |
| Cash proceeds from sale of subsidiaries, net of cash disposed | — |
| | 15,103 |
| | (11,851 | ) |
| Restricted cash | 301 |
| | 449 |
| | 539 |
|
| Other investing activities | (3,653 | ) | | (2,449 | ) | | (1,765 | ) |
| Net cash flow provided by (used in) investing activities | (89,833 | ) | | (76,467 | ) | | (180,224 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of long-term debt | 156,746 |
| | 390 |
| | 475,000 |
|
| Repayments of long-term debt | (422 | ) | | (1,071 | ) | | (500,038 | ) |
| Payments of long-term debt extinguishment costs | — |
| | — |
| | (31,691 | ) |
| Payment of debt issuance costs | (2,141 | ) | | — |
| | (7,393 | ) |
| Proceeds from borrowings on revolving credit facilities | — |
| | — |
| | 17,000 |
|
| Repayments of borrowings on revolving credit facilities | — |
| | — |
| | (17,000 | ) |
| Tax withholding on share based awards | (7,466 | ) | | (4,210 | ) | | (2,114 | ) |
| Distributions to non-controlling interests | (5,613 | ) | | (6,032 | ) | | (5,797 | ) |
| Proceeds from exercise of common stock warrants | — |
| | 10,487 |
| | — |
|
| Repurchases of common shares | (119,888 | ) | | (109,202 | ) | | — |
|
| Net cash flow provided by (used in) financing activities | 21,216 |
| | (109,638 | ) | | (72,033 | ) |
| Net foreign currency translation adjustment on cash | 91 |
| | (5,398 | ) | | (11,604 | ) |
| Increase (decrease) in cash and cash equivalents | 104,955 |
| | (17,473 | ) | | (102,850 | ) |
| Cash and cash equivalents, beginning of period | 71,714 |
| | 89,187 |
| | 192,037 |
|
| Cash and cash equivalents, at end of period | $ | 176,669 |
| | $ | 71,714 |
| | $ | 89,187 |
|
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Business Overview and Significant Accounting Policies
Unless we state otherwise or the context otherwise requires, references to “Masonite,” “we,” “our,” “us” and the “Company” in these notes to the consolidated financial statements refer to Masonite International Corporation and its subsidiaries.
Description of Business
Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 64 manufacturing locations in 8 countries and sells doors to customers throughout the world, including the United States, Canada and the United Kingdom.
Basis of Presentation
We prepare these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These consolidated financial statements include the accounts of Masonite International Corporation, a company incorporated under the laws of British Columbia, and its subsidiaries, as of December 31, 2017, and January 1, 2017, and for the years ended December 31, 2017, January 1, 2017 and January 3, 2016.
Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods and the 52- or 53-week periods are referred to as years. Our 2015 fiscal year, which ended on January 3, 2016, contained 53 weeks of operating results, with the additional week occurring in the fourth quarter.
Changes in Accounting Standards and Policies
Adoption of Recent Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-11, "Simplifying the Measurement of Inventory," which amended ASC 330, "Inventory." This ASU requires the measurement of inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years; early adoption is permitted. The adoption of this standard did not have a material impact on the presentation of our financial statements.
Other Recent Accounting Pronouncements not yet Adopted
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which amends ASC 715, “Retirement Benefits”. This ASU requires disaggregation of the service cost component from the other components of net benefit cost. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years; early adoption is permitted and retrospective application is required. This new guidance will change the presentation of the other components of net benefit cost in our consolidated statements of comprehensive income (loss), which are quantified in Note 16, and will be applied retrospectively beginning in the first quarter of 2018.
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which amends ASC 350 "Intangibles - Goodwill and Other". This ASU simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based upon the amount of a reporting unit's carrying value in excess of its fair value; thus, eliminating what is currently known as "Step 2" under the current guidance. This ASU is effective for annual periods beginning after December 15, 2019, and interim periods within those annual periods; early adoption is permitted and prospective application is required. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2016, the FASB issued ASU 2016-18, "Restricted Cash Flows", which amends ASC 230 "Statement of Cash Flows". This ASU clarifies how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods; early adoption is permitted and retrospective application is required. This new guidance will change the presentation of restricted cash in our consolidated statements of cash flows and will be applied retrospectively beginning in the first quarter of 2018.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)", which will replace the existing guidance in ASC 840, "Leases." The updated standard aims to increase transparency and comparability among organizations by requiring lessees to recognize lease assets and lease liabilities on the balance sheet and requiring disclosure of key information about leasing arrangements. This ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods; early adoption is permitted and modified retrospective application is required. While we are currently assessing the impact that ASU 2016-02 will have on our consolidated financial statements, we anticipate that the primary impact upon adoption will be to our consolidated balance sheets from the recognition, on a discounted basis, of our minimum commitments under non-cancelable operating leases, resulting in the recognition of right to use assets and lease obligations. Our current minimum undiscounted lease commitments under non-cancelable operating leases are disclosed in Note 9.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which created ASC 606 and largely supersedes the existing guidance of ASC 605, including industry specific guidance. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date," and the guidance will now be effective for annual and interim periods beginning on or after December 15, 2017. While we are still finalizing the evaluation of our contracts with our customers and the effect of adoption on our consolidated financial statements, we do not currently expect the adoption of the new standard to have a material impact on consolidated net income (loss) attributable to Masonite, cash flows or our consolidated balance sheets. We intend to adopt this standard using the modified retrospective method due to the lack of material impact of the adoption. We plan to apply the standard to only those contracts which were not completed as of the transition date and adoption will be effective as of January 1, 2018.
Summary of Significant Accounting Policies
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Masonite and our subsidiaries and the accounts of any variable interest entities for which we are the primary beneficiary. Intercompany accounts and transactions have been eliminated upon consolidation. The results of subsidiaries acquired during the periods presented are consolidated from their respective dates of acquisition using the acquisition method. Subsidiaries are prospectively deconsolidated as of the date when we no longer have effective control of the entity.
(b) Translation of consolidated financial statements into U.S. dollars:
These consolidated financial statements are expressed in U.S. dollars. The accounts of the majority of our self-sustaining foreign operations are maintained in functional currencies other than the U.S. dollar. Assets and liabilities for these subsidiaries have been translated into U.S. dollars at the exchange rates prevailing at the end of the applicable performance period and results of operations atminus the average exchange ratesof the closing stock price for the period. Unrealized exchange gains and losses arising from the translationfirst 20 trading days of the financial statementsapplicable performance period, plus any dividends paid during the performance period, divided by the average of our non-U.S. functional currency operations are accumulatedthe closing price for the first 20 trading days in the cumulative translation adjustments account in accumulated other comprehensive income (loss). For our foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency-denominated accounts are remeasured into U.S. dollars. Unrealized exchange gainsperformance period.
Human Resources and losses arising from remeasurements of foreign currency-denominated assets and liabilities are included within other expense (income), net, in the consolidated statements of comprehensive incomeCompensation Committee Report
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(loss). Gains and losses arising from international intercompany transactions that are of a long-term investment nature are reported in the same manner as translation gains and losses. Realized exchange gains and losses are included in net income (loss) for the periods presented.
(c) Cash and cash equivalents:
Cash includes cash equivalents which are short-term highly liquid investments with original maturities of three months or less.
(d) Restricted cash:
Restricted cash includes cash we have placed as collateral for letters of credit.
(e) Accounts receivable:
We record accounts receivable as our products are received by our customers. Our customers are primarily retailers, distributors and contractors. We record an allowance for doubtful accounts for known collectability issues, as such issues relate to specific transactions or customer balances. When it becomes apparent, based on age or customer circumstances, that such amounts will not be collected, they are expensed as bad debt and payments subsequently received are credited to the bad debt expense account, included within selling, general and administration expense in the consolidated statements of comprehensive income (loss). Generally, we do not require collateral for our accounts receivable.
(f) Inventories:
Raw materials are valued at the lower of cost or market value, where market value is determined using replacement cost. Finished goods are valued at the lower of cost or net realizable value. Cost is determined on a first in, first out basis. In determining the net realizable value, we consider factors such as yield, turnover, expected future demand and past experience.
The cost of inventories includes all costs of purchase, costs of conversionHuman Resources and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include costs directly related to the units of production, such as direct labor. They also include a systematic allocation of fixed and variable production overheads that are incurred in converting raw materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardlessCompensation Committee of the volume of production, such as depreciationBoard has reviewed and maintenance of factory buildingsdiscussed this CD&A with management. Based on this review and equipment,discussion, the Human Resources and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor.
To determine the cost of inventory, we allocate fixed expenses to the cost of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production are not increased due to abnormally low production. Those excess costs are recognized as a current period expense. When a production facility is completely shut down temporarily, it is considered idle, and all related expenses are charged to cost of goods sold.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(g) Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is recorded based on the carrying values of buildings, machinery and equipment using the straight-line method over the estimated useful lives set forth as follows: |
| |
| Useful Life (Years) |
Buildings | 20 - 40 |
Machinery and equipment | |
Tooling | 10 - 25 |
Machinery and equipment | 5 - 25 |
Molds and dies | 12 - 25 |
Office equipment, fixtures and fittings | 3 - 12 |
Information technology systems | 5 - 15 |
Improvements and major maintenance that extend the life of an asset are capitalized; other repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed, their carrying values and accumulated depreciation are removed from the accounts.
Property, plant and equipment are tested for impairment when events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. An impairment loss is recognized when the carrying amount of an asset or asset group being tested for recoverability exceeds the sum of the undiscounted cash flows expected from its use and disposal. Impairments are measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value, as determined using a discounted cash flows approach when quoted market prices are not available.
(h) Goodwill:
We use the acquisition method of accounting for all business combinations. We evaluate all business combinations for intangible assets that should be recognized apart from goodwill. Goodwill adjustments are recorded for the effect on goodwill of changes to net assets acquired during the measurement period (up to one year from the date of acquisition) for new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
Goodwill is not amortized, but instead is tested annually for impairment on the last day of fiscal November, or more frequently if events or changes in circumstances indicate the carrying amount may not be recoverable. The test for impairment is performed at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Possible impairment in goodwill is first analyzed using qualitative factors such as macroeconomic and market conditions, changing costs and actual and projected performance, amongst others, to determine whether it is more likely than not that the book value of the reporting unit exceeds its fair value. If it is determined more likely than not that the book value exceeds fair value, a quantitative analysis is performed to test for impairment. When quantitative steps are determined necessary, the fair values of the reporting units are estimated through the use of discounted cash flow analysis and market multiples. If the carrying amount exceeds fair value, then goodwill is impaired. Any impairment in goodwill is measured by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and comparing the notional goodwill from the fair value allocation to the carrying value of the goodwill. There were no impairment charges recorded against goodwill in any period presented.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(i) Intangible assets:
Intangible assets with definite lives include customer relationships, non-compete agreements, patents, system software development, supply agreements and acquired trademarks and tradenames. Definite lived intangible assets are amortized over their estimated useful lives. Information pertaining to the estimated useful lives of intangible assets is as follows: |
| |
| Estimated Useful Life |
Customer relationships | Over expected relationship period, not exceeding 10 years |
Non-compete agreements | Straight-line over life of the agreement |
Patents | Over expected useful life, not exceeding 17 years |
System software development | Over expected useful life, not exceeding 5 years |
Supply agreements | Straight-line over life of the agreement |
Acquired trademarks and tradenames | Straight-line over expected useful life |
Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the fair value of the asset. Fair value is measured using discounted cash flows.
Indefinite lived intangible assets are not amortized, but instead are tested for impairment annually on the last day of fiscal November, or more frequently if events or circumstances indicate the carrying value may exceed the fair value.
(j) Income taxes:
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the date of enactment. A valuation allowance is recorded to reduce deferred tax assets to an amount that is anticipated to be realized on a more likely than not basis.
We account for uncertain taxes in accordance with ASC 740, “Income Taxes”. The initial benefit recognition model follows a two-step approach. First we evaluate if the tax position is more likely than not of being sustained if audited based solely on the technical merits of the position. Second, we measure the appropriate amount of benefit to recognize. This is calculated as the largest amount of tax benefit thatCompensation Committee has a greater than 50% likelihood of ultimately being realized upon settlement. Subsequently at each reporting date, the largest amount that has a greater than 50% likelihood of ultimately being realized, based on information available at that date, will be measured and recognized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of comprehensive income (loss). Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
(k) Employee future benefits:
We maintain defined benefit pension plans. Earnings are charged with the cost of benefits earned by employees as services are rendered. The cost reflects management’s best estimates of the pension plans’ expected investment yields, wage and salary escalation, mortality of members, terminations and the ages at which members will retire. Changes in these assumptions could impact future pension expense. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation or fair value of plan assets at the beginning of the year is amortized over the average remaining service lives of the members.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets are valued at fair value for the purpose of calculating the expected return on plan assets. Past service costs arising from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment.
When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. Curtailment gains are offset against unrecognized losses and any excess gains and all curtailment losses are recorded in the period in which the curtailment occurs.
(l) Restructuring costs:
All salary-related severance benefits are accrued and expensed when a plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable, which is generally when the decision to terminate the employee is made by management of sufficient authority. A liability and expense are recorded for termination benefits based on their fair value when it is probable that employees will be entitled to the benefits, and the amount can be reasonably estimated. This occurs when management approves and commits us to the obligation, management’s termination plan specifically identifies all significant actions to be taken, actions required to fulfill management’s plan are expected to begin as soon as possible and significant changes to the plan are not likely. All salary-related non-contractual benefits are accrued and expensed at fair value at the communication date.
In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization. A liability and expense are recorded for contractual exit activities when we terminate the contract within the provisions of the agreement, generally by way of written notice to the counterparty. For non-contractual exit activities, a liability and expense are measured at fair value in the period in which the liability is incurred.
Restructuring-related costs are presented separately in the consolidated statements of comprehensive income (loss) whereas non-restructuring severance benefits are charged to cost of goods sold or selling, general and administration expense depending on the nature of the job responsibilities.
(m) Financial instruments:
We have applied a framework consistent with ASC 820, “Fair Value Measurement and Disclosure”, and have disclosed all financial assets and liabilities measured at fair value and non-financial assets and liabilities measured at fair value on a non-recurring basis (at least annually).
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. These estimates, although based on the relevant market information about the financial instrument, are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(n) Share based compensation expense:
We have a share based compensation plan, which is described in detail in Note 10. We apply the fair value method of accounting using comprehensive valuation models, including the Black-Scholes-Merton option pricing model, to determine the compensation expense.
(o) Revenue recognition:
Revenue from the sale of products is recognized when an agreement with the customer in the form of a sales order is in place, the sales price is fixed or determinable, collection is reasonably assured and the customer has taken ownership and assumes risk of loss. Volume rebates and incentives to customers are considered as a reduction of the
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
sales price of our products. Accordingly, revenue is reported net of such rebates and incentives. Shipping and other transportation costs charged to buyers are recorded in both revenues and cost of goods sold in the consolidated statements of comprehensive income (loss).
(p) Product warranties:
We warrant certain qualitative attributes of our door products. We have recorded provisions for estimated warranty and related costs based on historical experience and periodically adjust these provisions to reflect actual experience. The rollforward of our warranty provision is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Balance at beginning of period | $ | 2,717 |
| | $ | 3,318 |
| | $ | 3,555 |
|
| Additions charged to expense | 5,715 |
| | 3,219 |
| | 3,113 |
|
| Deductions | (6,243 | ) | | (3,820 | ) | | (3,350 | ) |
| Balance at end of period | $ | 2,189 |
| | $ | 2,717 |
| | $ | 3,318 |
|
(q) Vendor rebates:
We account for cash consideration received from a vendor as a reduction of cost of goods sold and inventory, in the consolidated statements of comprehensive income (loss) and consolidated balance sheets, respectively. The cash consideration received represents agreed-upon vendor rebates that are earned in the normal course of operations.
(r) Advertising costs:
We recognize advertising costs as they are incurred. Advertising costs incurred primarily relate to tradeshows and are included within selling, general and administration expense in the consolidated statements of comprehensive income (loss). Advertising costs were $12.9 million, $9.3 million and $8.7 million in the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
(s) Research and development costs:
We recognize research and development costs as they are incurred. Research and development costs incurred primarily relate to the development of new products and the improvement of manufacturing processes, and are primarily included within cost of goods sold in the consolidated statements of comprehensive income (loss). These costs exclude the significant investments in other areas such as advanced automation and e-commerce. Research and development costs were $7.5 million, $6.7 million and $6.4 million in the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
(t) Insurance losses and proceeds:
All involuntary conversions of property, plant and equipment are recorded as losses within loss (gain) on disposal of property, plant and equipment, which is included within selling, general and administration expense in the consolidated statements of comprehensive income (loss) and as reductions to property, plant and equipment in the consolidated balance sheets. Any subsequent proceeds received for insured losses of property, plant and equipment are also recorded as gains within loss (gain) in disposal of property, plant and equipment, and are classified as cash flows from investing activities in the consolidated statements of cash flows in the period in which the cash is received. Proceeds received for business interruption recoveries are recorded as a reduction to selling, general and administration expense in the consolidated statements of comprehensive income (loss) and are classified as cash flows from operating activities in the consolidated statements of cash flows in the period in which an acknowledgment from the insurance carrier of settlement or partial settlement of a non-refundable nature has been presented to us.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(u) Discontinued operations:
We account for discontinued operations by segregating assets, liabilities and earnings (net of tax) in the consolidated balance sheets and consolidated statements of comprehensive income (loss), respectively. Operations are classified as discontinued when the operations and cash flows of the component has been or will be eliminated as a result of a disposal transaction and represents a strategic shift that has or will have a major impact on our operations and financial results.
(v) Equity investments:
We account for investments in affiliates of between 20% and 50% ownership, over which we have significant influence, using the equity method. We record our share of earnings of the affiliate within other expense (income) in the consolidated statements of comprehensive income (loss) and dividends as a reduction of the investment in the affiliate in the consolidated balance sheets when declared.
(w) Segment Reporting:
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The North American Residential reportable segment is the aggregation of the Wholesale and Retail operating segments. The Europe reportable segment is the aggregation of the United Kingdom, Central Eastern Europe and France (prior to disposal) operating segments. The Architectural reportable segment consists solely of the Architectural operating segment. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment, including the historical results of our Africa operating segment (prior to deconsolidation). Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presentedrecommended to the Board of Directors and investors.
(x) Use of estimates:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting periods. During 2017, there were no material changes in the methods or policies used to establish estimates and assumptions. Matters subject to significant estimation and judgment include the valuation of the allowance for doubtful accounts; the realizable values of inventories; the valuation of acquired tangible assets and liabilities; the determination of the fair value of financial instruments; the determination of the fair value of goodwill and intangible assets and the useful lives of intangible assets and long-lived assets, as well as the determination of impairment thereon; the determination of obligations under employee future benefit plans; the determination of the valuation of share based awards; and the recoverability of deferred tax assets and uncertain tax positions. Actual results may differ significantly from our estimates.
2. Acquisitions and Dispositions
2017 Acquisition
On October 2, 2017 we completed the acquisition of A&F Wood Products, Inc. (“A&F”), through the purchase of 100% of the equity interests in A&F and certain assets of affiliates of A&F for consideration of $13.8 million, net of cash acquired. A&F is based in Howell, Michigan, and is a wholesaler and fabricator of architectural and commercial doors in the Midwest United States. The excess purchase price over the fair value of net assets acquired of $5.9 million was allocated to goodwill. The goodwill principally represents anticipated synergies from A&F's integration into our existing Architectural door business. This goodwill is not deductible for tax purposes and relates to the Architectural segment.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aggregate consideration paid for acquisitions during 2017 was as follows: |
| | | |
| (In thousands) | A&F |
| Accounts receivable | $ | 2,169 |
|
| Inventory | 1,230 |
|
| Property, plant and equipment | 2,716 |
|
| Goodwill | 5,895 |
|
| Intangible assets | 4,400 |
|
| Accounts payable and accrued expenses | (694 | ) |
| Other assets and liabilities, net | (1,903 | ) |
| Cash consideration, net of cash acquired | $ | 13,813 |
|
The fair values of intangible assets acquired are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. Intangible assets acquired from A&F consist of customer relationships and are being amortized over the weighted average amortization period of 10.0 years. The intangible assets are not expected to have any residual value. The gross contractual value of acquired trade receivables was $2.2 million for the A&F acquisition.
The following schedule represents the amounts of net sales and net income (loss) attributable to Masonite from the A&F acquisition which have beenthat this CD&A be included in the consolidated statements of comprehensive income (loss) for the periods indicated subsequent to the acquisition date.Company’s 2023 Annual Report on Form 10-K. |
| | | |
| | Year Ended December 31, 2017 |
| (In thousands) |
| Net sales | $ | 3,883 |
|
| Net income (loss) attributable to Masonite | 825 |
|
2016 Acquisition
On November 3, 2016 we completed the acquisition of FyreWerks, Inc. (“FyreWerks”), based in Westminster, Colorado. We acquired 100% of the equity interests in FyreWerks for consideration of $8.0 million, net of cash acquired. FyreWerks manufacturers certified fire door and frame cores for use with architectural stile and rail wood panel doors and door frames. The excess purchase price over the fair value of net assets acquired of $7.3 million was allocated to goodwill in our Architectural segment. The goodwill principally represents anticipated synergies from FyreWerks' integration into our existing Architectural door business. Under Section 338 of the Internal Revenue Code, the acquisition was treated as if it was an asset purchase. Generally, the tax basis of the assets will equal the fair market value at the time of the acquisition and the goodwill is deductible for tax purposes. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for FyreWerks are not presented as they were not material for any period presented.
2015 Acquisitions
On October 1, 2015, we completed the acquisition of USA Wood Door, Inc. (“USA Wood Door”), based in Thorofare, New Jersey. We acquired 100% of the equity interests in USA Wood Door for consideration of $13.7 million, net of cash acquired. USA Wood Door is a supplier of architectural and commercial wood doors in the Eastern United States providing door and hardware distributors with machining, resizing and value-added additions to both unfinished and prefinished doors in short lead times. The excess purchase price over the fair value of net assets acquired of $8.9 million was allocated to goodwill in our Architectural segment. The goodwill principally represents the anticipated synergies to be gained from the integration into our existing North America door business. Under Section 338 of the Internal Revenue Code, the acquisition was treated as if it was an asset purchase. Generally, the tax basis of the assets will equal the fair market value at the time of the acquisition and the goodwill is deductible for tax purposes. The USA Wood Door acquisition acts as an extension of our distribution network in North America.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 5, 2015, we completed the acquisition of Hickman Industries Limited (“Hickman”), headquartered in Wolverhampton, England, for total consideration of $88.0 million, net of cash acquired. We acquired 100% of the equity interests in Hickman through the purchase of all of the outstanding shares of common stock at the acquisition date. Hickman is a leading supplier of doorkits (similar to fully finished prehung door units) and other millwork in the United Kingdom and their business of providing doorkit solutions to the homebuilder market in the United Kingdom is a natural extension of our existing business in the United Kingdom. The excess purchase price over the fair value of net assets acquired of $18.2 million was allocated to goodwill. The goodwill principally represents anticipated synergies to be gained from the integration into our existing United Kingdom business. This goodwill is not deductible for tax purposes and relates to the Europe segment. The Hickman acquisition complements strategies we are pursuing with our existing United Kingdom business.
On July 23, 2015, we completed the acquisition of Performance Doorset Solutions Limited (“PDS”), headquartered in Lancashire, England, for total consideration of $15.7 million, net of cash acquired. We acquired 100% of the equity interests in PDS through the purchase of all of the outstanding shares of common stock at the acquisition date. PDS is a leading supplier of custom doors and millwork in the United Kingdom that specializes in non-standard product specifications, manufacturing both wood and composite solutions. The excess purchase price over the fair value of net assets acquired of $3.1 million was allocated to goodwill. The goodwill principally represents the future expected value of the operations of the business. This goodwill is not deductible for tax purposes and relates to the Europe segment. The PDS acquisition complements our existing United Kingdom business.
The aggregate consideration paid for acquisitions during 2015 was as follows: |
| | | | | | | | | | | | | | | |
| (In thousands) | USA Wood Door | | Hickman | | PDS | | Total 2015 Acquisitions |
| Accounts Receivable | $ | 2,235 |
| | $ | 20,870 |
| | $ | 3,000 |
| | $ | 26,105 |
|
| Inventory | 1,677 |
| | 11,090 |
| | 1,438 |
| | 14,205 |
|
| Property, plant and equipment | 2,600 |
| | 14,057 |
| | 5,684 |
| | 22,341 |
|
| Goodwill | 8,921 |
| | 18,215 |
| | 3,145 |
| | 30,281 |
|
| Intangible assets | — |
| | 55,634 |
| | 6,437 |
| | 62,071 |
|
| Accounts payable and accrued expenses | (1,654 | ) | | (23,972 | ) | | (2,218 | ) | | (27,844 | ) |
| Other assets and liabilities, net | (81 | ) | | (7,918 | ) | | (1,762 | ) | | (9,761 | ) |
| Cash consideration, net of cash acquired | $ | 13,698 |
| | $ | 87,976 |
| | $ | 15,724 |
| | $ | 117,398 |
|
The fair values of intangible assets acquired are based on management’s estimates and assumptions including variations of the income approach, the cost approach and the market approach. Intangible assets acquired from the 2015 acquisitions consist of customer relationships and are being amortized over the weighted average amortization period of 9.6 years and 9.7 years for the Hickman and PDS acquisitions, respectively. The intangible assets are not expected to have any residual value. The gross contractual value of acquired trade receivables was $1.7 million, $21.0 million and $2.6 million for the USA Wood Door, Hickman and PDS acquisitions, respectively.
The following schedule represents the amounts of net sales and net income (loss) attributable to Masonite from the 2015 acquisitions which have been included in the consolidated statements of comprehensive income (loss) for the periods indicated subsequent to the acquisition date. |
| | | | | | | | | | | | | | | |
| | Year Ended January 3, 2016 |
| (In thousands) | USA Wood Door | | Hickman | | PDS | | Total 2015 Acquisitions |
| Net sales | $ | 4,790 |
| | $ | 46,657 |
| | $ | 7,059 |
| | $ | 58,506 |
|
| Net income (loss) attributable to Masonite | 367 |
| | 813 |
| | (251 | ) | | 929 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro Forma Information
The following unaudited pro forma financial information represents the consolidated financial information as if the acquisitions had been included in our consolidated results beginning on the first day of the fiscal year prior to their respective acquisition dates. Pro forma information relating to the FyreWerks acquisition has been excluded as it is not materially different from amounts reported. The pro forma results have been calculated after adjusting the results of the acquired entities to remove intercompany transactions and transaction costs incurred and to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied on the first day of the fiscal year prior to the respective acquisitions, together with the consequential tax effects. The pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the acquisitions; the costs to combine the companies' operations; or the costs necessary to achieve these costs savings, operating synergies and revenue enhancements. The pro forma results do not necessarily reflect the actual results of operations of the combined companies' under our ownership and operation. |
| | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In thousands, except per share amounts) | Masonite | | A&F Acquisition | | Pro Forma |
| Net sales | $ | 2,032,925 |
| | $ | 11,104 |
| | $ | 2,044,029 |
|
| Net income (loss) attributable to Masonite | 151,739 |
| | 1,299 |
| | 153,038 |
|
| | | | | | |
| Basic earnings (loss) per common share | $ | 5.18 |
| | | | $ | 5.22 |
|
| Diluted earnings (loss) per common share | 5.09 |
| | | | 5.13 |
|
|
| | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands, except per share amounts) | Masonite | | A&F Acquisition | | Pro Forma |
| Net sales | $ | 1,973,964 |
| | $ | 13,861 |
| | $ | 1,987,825 |
|
| Net income (loss) attributable to Masonite | 98,622 |
| | 999 |
| | 99,621 |
|
| | | | | | |
| Basic earnings (loss) per common share | $ | 3.25 |
| | | | $ | 3.28 |
|
| Diluted earnings (loss) per common share | 3.17 |
| | | | 3.20 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended January 3, 2016 |
| (In thousands, except per share amounts) | Masonite | | 2015 Acquisitions | | Historical Sales to 2015 Acquisitions | | Pro Forma |
| Net sales | $ | 1,871,965 |
| | $ | 89,013 |
| | $ | (11,625 | ) | | $ | 1,949,353 |
|
| Net income (loss) attributable to Masonite | (47,111 | ) | | 5,109 |
| | (1,951 | ) | | (43,953 | ) |
| | | | | | | | |
| Basic earnings (loss) per common share | $ | (1.56 | ) | | | | | | $ | (1.45 | ) |
| Diluted earnings (loss) per common share | (1.56 | ) | | | | | | (1.45 | ) |
Dispositions
Hungary
On June 28, 2017, we completed the liquidation of our legal entity in Hungary. As a result, we recognized $0.2 million of cumulative translation adjustment in loss (gain) on disposal of subsidiaries from accumulated other comprehensive income during the year ended December 31, 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Africa
On December 22, 2015, following a comprehensive assessment of Masonite (Africa) Limited (“MAL”), our South African subsidiary, the MAL Board of Directors approved a plan to enter into Business Rescue proceedings, the South African equivalent of bankruptcy proceedings in the United States, similar to a Chapter 11 reorganization. As a result of this plan, a Business Rescue Practitioner was appointed to manage the affairs of the business and we no longer maintained operational control over MAL. For this reason, we deconsolidated MAL effective December 22, 2015.
Subsequent to deconsolidation, we used the cost method to account for our equity investment in MAL, which was reflected as $10.0 million in our consolidated balance sheets as of January 3, 2016, based on the estimated fair value of our portion of MAL’s net assets on the date of deconsolidation. During September 2016, we received $15.1 million as final pre-tax proceeds from the sale of our equity interest in MAL. Upon receipt of these proceeds, our equity interest in MAL was eliminated and we accordingly reduced the value of our cost investment in MAL to zero and recorded a gain on disposal of subsidiaries of $5.1 million.
Romania
On April 22, 2016, we completed the liquidation of our legal entity in Romania. As a result, we recognized a $1.4 million cumulative translation adjustment in loss (gain) on disposal of subsidiaries from accumulated other comprehensive income during the year ended December 31, 2017.
France
On July 31, 2015, we completed the sale of all of the capital stock of Premdor S.A.S., Masonite’s door business in France, to a Paris-based independent investment firm (the “Buyer”). Pursuant to a stock purchase agreement dated July 16, 2015, the Buyer acquired all of Masonite’s door manufacturing and distribution business in France for nominal consideration. The disposition of this business resulted in a loss on disposal of $29.7 million, which was recognized during the third quarter of 2015 in the Europe segment and is included in loss (gain) on disposal of subsidiaries in the consolidated statements of comprehensive income (loss). The loss on disposal is comprised of the carrying value of the net assets disposed of $25.3 million and the recognition of $4.4 million of cumulative translation adjustment into net income. Additionally, the sale of Premdor S.A.S. was determined to be a triggering event requiring a test of the indefinite-lived intangible trade name assets of the Europe segment, resulting in an impairment charge of $9.4 million. This charge represents the excess of the carrying value over the fair value as determined using the relief of royalty discounted cash flows method. This valuation was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as establishedSubmitted by the FASB's Fair Value Framework. The Level 3 unobservable inputs include an estimate of future revenues for the asset group. This impairment charge was partially offset by income tax benefits of $3.2 million.
Premdor S.A.S. generated $13.4 million of losses from continuing operations before income tax expense (benefit) during the year ended January 3, 2016. All Premdor S.A.S. figures exclude amounts recognized for loss on deconsolidation.
3. Accounts Receivable
Our customers consist mainly of wholesale distributors, dealers, and retail home centers. Our ten largest customers accounted for 56.2% and 57.3% of total accounts receivable as of December 31, 2017, and January 1, 2017, respectively. Our largest two customers, The Home Depot, Inc. and Lowe's Co. Inc., each accounted for more than 10% of the consolidated gross accounts receivable balance as of December 31, 2017, and January 1, 2017. No other individual customer accounted for greater than 10% of the consolidated gross accounts receivable balance at either December 31, 2017, or January 1, 2017.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The changes in the allowance for doubtful accounts were as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Balance at beginning of period | $ | 1,010 |
| | $ | 3,125 |
| | $ | 2,616 |
|
| Additions charged to expense | 793 |
| | 103 |
| | 2,083 |
|
| Deductions | (18 | ) | | (2,218 | ) | | (1,574 | ) |
| Balance at end of period | $ | 1,785 |
| | $ | 1,010 |
| | $ | 3,125 |
|
We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the consolidated balance sheets and are included in cash flows from operating activities in the consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expense within the consolidated statements of comprehensive income (loss).
4. Inventories
The amounts of inventory on hand were as follows as of the dates indicated: |
| | | | | | | |
| (In thousands) | December 31,
2017 | | January 1,
2017 |
| Raw materials | $ | 172,960 |
| | $ | 165,896 |
|
| Finished goods | 68,851 |
| | 65,791 |
|
| Provision for obsolete or aged inventory | (7,769 | ) | | (5,747 | ) |
| Inventories, net | $ | 234,042 |
| | $ | 225,940 |
|
We carry an inventory provision which is the result of obsolete or aged inventory. The rollforward of our inventory provision is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Balance at beginning of period | $ | 5,747 |
| | $ | 6,508 |
| | $ | 6,548 |
|
| Additions charged to expense | 3,283 |
| | 1,724 |
| | 2,713 |
|
| Deductions | (1,261 | ) | | (2,485 | ) | | (2,753 | ) |
| Balance at end of period | $ | 7,769 |
| | $ | 5,747 |
| | $ | 6,508 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Property, Plant and Equipment
The carrying amounts of our property, plant and equipment and accumulated depreciation were as follows as of the dates indicated: |
| | | | | | | |
| (In thousands) | December 31,
2017 | | January 1,
2017 |
| Land | $ | 26,790 |
| | $ | 24,562 |
|
| Buildings | 176,077 |
| | 163,802 |
|
| Machinery and equipment | 661,026 |
| | 595,929 |
|
| Property, plant and equipment, gross | 863,893 |
| | 784,293 |
|
| Accumulated depreciation | (290,334 | ) | | (242,205 | ) |
| Property, plant and equipment, net | $ | 573,559 |
| | $ | 542,088 |
|
Total depreciation expense was $57.5 million, $57.6 million, and $59.2 million for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. Depreciation expense is included primarily within cost of goods sold in the consolidated statements of comprehensive income (loss).
6. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows as of the dates indicated: |
| | | | | | | | | | | | | | | |
| (In thousands) | North American Residential | | Europe | | Architectural | | Total |
| January 3, 2016 | $ | 2,835 |
| | $ | 39,306 |
| | $ | 86,029 |
| | $ | 128,170 |
|
| Goodwill from 2016 acquisitions | — |
| | — |
| | 7,331 |
| | 7,331 |
|
| Measurement period adjustment | — |
| | — |
| | 599 |
| | 599 |
|
| Foreign exchange fluctuations | 8 |
| | (6,896 | ) | | 74 |
| | (6,814 | ) |
| January 1, 2017 | 2,843 |
| | 32,410 |
| | 94,033 |
| | 129,286 |
|
| Goodwill from 2017 acquisitions | — |
| | — |
| | 5,895 |
| | 5,895 |
|
| Foreign exchange fluctuations | 24 |
| | 3,021 |
| | 223 |
| | 3,268 |
|
| December 31, 2017 | $ | 2,867 |
| | $ | 35,431 |
| | $ | 100,151 |
| | $ | 138,449 |
|
We performed a quantitative impairment test of each of our reporting units during the fourth quarter of 2017 and determined that goodwill was not impaired. During 2016 we recorded a $0.6 million increase in goodwill as a measurement period adjustment relating to the USA Wood Door acquisition, due to finalization of certain income tax-related items.
Changes in the net book value of intangible assets were as follows for the periods indicated: |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Customer Relationships | | Patents | | Software | | Other | | Trademarks and Tradenames | | Total |
| January 1, 2017 | $ | 75,904 |
| | $ | 10,276 |
| | $ | 4,123 |
| | $ | 1,250 |
| | $ | 98,601 |
| | $ | 190,154 |
|
| Acquisitions | 4,400 |
| | — |
| | — |
| | — |
| | — |
| | 4,400 |
|
| Additions (write-offs) | — |
| | 1,301 |
| | 2,352 |
| | — |
| | — |
| | 3,653 |
|
| Reclassifications | — |
| | — |
| | — |
| | 2,966 |
| | (2,966 | ) | | — |
|
| Amortization | (14,866 | ) | | (2,317 | ) | | (4,318 | ) | | (2,689 | ) | | — |
| | (24,190 | ) |
| Translation adjustment | 3,923 |
| | 285 |
| | 44 |
| | 102 |
| | 4,113 |
| | 8,467 |
|
| December 31, 2017 | $ | 69,361 |
| | $ | 9,545 |
| | $ | 2,201 |
| | $ | 1,629 |
| | $ | 99,748 |
| | $ | 182,484 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Customer Relationships | | Patents | | Software | | Other | | Trademarks and Tradenames | | Total |
| January 3, 2016 | $ | 102,254 |
| | $ | 11,590 |
| | $ | 6,435 |
| | $ | 2,860 |
| | $ | 102,793 |
| | $ | 225,932 |
|
| Additions (write-offs) | — |
| | 1,055 |
| | 1,392 |
| | — |
| | — |
| | 2,447 |
|
| Amortization | (16,737 | ) | | (2,283 | ) | | (3,678 | ) | | (1,294 | ) | | — |
| | (23,992 | ) |
| Translation adjustment | (9,613 | ) | | (86 | ) | | (26 | ) | | (316 | ) | | (4,192 | ) | | (14,233 | ) |
| January 1, 2017 | $ | 75,904 |
| | $ | 10,276 |
| | $ | 4,123 |
| | $ | 1,250 |
| | $ | 98,601 |
| | $ | 190,154 |
|
The cost and accumulated amortization values of our intangible assets were as follows for the periods indicated: |
| | | | | | | | | | | | | | | |
| | December 31, 2017 |
| (In thousands) | Cost | | Accumulated Amortization | | Translation Adjustment | | Net Book Value |
| Definite life intangible assets: | | | | | | | |
| Customer relationships | $ | 160,327 |
| | $ | (79,628 | ) | | $ | (11,338 | ) | | $ | 69,361 |
|
| Patents | 31,999 |
| | (21,768 | ) | | (686 | ) | | 9,545 |
|
| Software | 33,574 |
| | (31,183 | ) | | (190 | ) | | 2,201 |
|
| Other | 15,246 |
| | (11,836 | ) | | (1,781 | ) | | 1,629 |
|
| | 241,146 |
| | (144,415 | ) | | (13,995 | ) | | 82,736 |
|
| Indefinite life intangible assets: | | | | | | | |
| Trademarks and tradenames | 108,572 |
| | — |
| | (8,824 | ) | | 99,748 |
|
| Total intangible assets | $ | 349,718 |
| | $ | (144,415 | ) | | $ | (22,819 | ) | | $ | 182,484 |
|
|
| | | | | | | | | | | | | | | |
| | January 1, 2017 |
| (In thousands) | Cost | | Accumulated Amortization | | Translation Adjustment | | Net Book Value |
| Definite life intangible assets: | | | | | | | |
| Customer relationships | $ | 155,927 |
| | $ | (64,762 | ) | | $ | (15,261 | ) | | $ | 75,904 |
|
| Patents | 30,698 |
| | (19,451 | ) | | (971 | ) | | 10,276 |
|
| Software | 31,222 |
| | (26,865 | ) | | (234 | ) | | 4,123 |
|
| Other | 12,280 |
| | (9,147 | ) | | (1,883 | ) | | 1,250 |
|
| | 230,127 |
| | (120,225 | ) | | (18,349 | ) | | 91,553 |
|
| Indefinite life intangible assets: | | | | | | | |
| Trademarks and tradenames | 111,538 |
| | — |
| | (12,937 | ) | | 98,601 |
|
| Total intangible assets | $ | 341,665 |
| | $ | (120,225 | ) | | $ | (31,286 | ) | | $ | 190,154 |
|
Amortization of intangible assets was $24.2 million, $24.0 million and $22.2 million for the years ended December 31, 2017, January 1, 2017, and January 3, 2016 respectively. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of comprehensive income (loss).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated future amortization of intangible assets with definite lives as of December 31, 2017, is as follows: |
| | | |
| (In thousands) | |
| Fiscal year: | |
| 2018 | $ | 19,294 |
|
| 2019 | 17,087 |
|
| 2020 | 13,648 |
|
| 2021 | 10,740 |
|
| 2022 | 7,541 |
|
7. Accrued Expenses
The details of our accrued expenses were as follows as of the dates indicated: |
| | | | | | | |
| (In thousands) | December 31,
2017 | | January 1,
2017 |
| Accrued payroll | $ | 38,296 |
| | $ | 49,032 |
|
| Accrued rebates | 34,488 |
| | 30,620 |
|
| Accrued interest | 10,688 |
| | 8,335 |
|
| Other accruals | 43,287 |
| | 45,812 |
|
| Total accrued expenses | $ | 126,759 |
| | $ | 133,799 |
|
8. Long-Term Debt
|
| | | | | | | |
| (In thousands) | December 31,
2017 | | January 1,
2017 |
| 5.625% senior unsecured notes due 2023 | $ | 625,000 |
| | $ | 475,000 |
|
| Unamortized premium on 2023 Notes | 5,714 |
| | — |
|
| Debt issuance costs for 2023 Notes | (6,635 | ) | | (5,393 | ) |
| Capital lease obligations | 378 |
| | 768 |
|
| Other long-term debt | 1,200 |
| | 370 |
|
| Total long-term debt | $ | 625,657 |
| | $ | 470,745 |
|
Interest expense related to our consolidated indebtedness under senior unsecured notes was $29.7 million, $27.8 million, and $32.0 million for years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
5.625% Senior Notes due 2023
On September 27, 2017, and March 23, 2015, we issued $150.0 million and $475.0 million aggregate principal senior unsecured notes, respectively (the “2023 Notes”). The 2023 Notes were issued in two private placements for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and to buyers outside the United States pursuant to Regulation S under the Securities Act. The 2023 Notes were issued without registration rights and are not listed on any securities exchange. The 2023 Notes bear interest at 5.625% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due March 15, 2023. The 2023 Notes were issued at 104.0% and par in 2017 and 2015, respectively, and the resulting premium of $6.0 million is being amortized to interest expense over the term of the 2023 Notes using the effective interest method. We received net proceeds of $153.9 million and $467.9 million, respectively, after deducting $2.1 million and $7.1 million of debt issuance costs in 2017 and 2015, respectively. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2023 Notes using the effective interest method. The net proceeds from the 2017 issuance of the 2023 Notes are for general corporate
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
purposes. The net proceeds from the 2015 issuance of the 2023 Notes, together with available cash balances, were used to redeem the $500.0 million aggregate principal of 8.25% senior unsecured notes due 2021 (the "2021 Notes") and to pay related premiums, fees and expenses.
In conjunction with the closing of the 2023 Notes offering, the 2021 Notes were fully redeemed and considered extinguished as of March 23, 2015. Under the terms of the indenture governing the 2021 Notes, we paid the applicable premium, as described in the indenture, of $31.7 million. Additionally, the unamortized premium of $11.5 million and unamortized debt issuance costs of $7.8 million relating to the 2021 Notes were written off in conjunction with the extinguishment of the 2021 Notes. The resulting loss on extinguishment of debt was $28.0 million and is recorded as part of income (loss) from continuing operations before income tax expense (benefit) in the consolidated statements of comprehensive income (loss). Additionally, the cash payment of interest accrued to, but not including, the redemption date was accelerated to the redemption date.
We may redeem the 2023 Notes, in whole or in part, at any time prior to March 15, 2018, at a price equal to 100% of the principal amount plus the applicable premium, plus accrued and unpaid interest, if any, to the date of redemption. The applicable premium means, with respect to a note at any date of redemption, the greater of (i) 1.00% of the then-outstanding principal amount of such note and (ii) the excess of (a) the present value at such date of redemption of (1) the redemption price of such note at March 15, 2018, plus (2) all remaining required interest payments due on such note through such date (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate, as described in the indenture, plus 50 basis points, over (b) the principal amount of such note on such redemption date. We may also redeem the 2023 Notes, in whole or in part, at any time on or after March 15, 2018, at the applicable redemption prices specified under the indenture governing the 2023 Notes, plus accrued and unpaid interest, if any, to the date of redemption. If we experience certain changes of control or consummate certain asset sales and do not reinvest the net proceeds, we must offer to repurchase all of the 2023 Notes at a purchase price of 101.00% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.
Obligations under the 2023 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries.
The indenture governing the 2023 Notes contains restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to the parent company, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2023 Notes. In addition, if in the future the 2023 Notes have an investment grade rating from at least two nationally recognized statistical rating organizations, certain of these covenants will be replaced with a less restrictive covenant.
The indenture governing the 2023 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of December 31, 2017, we were in compliance with all covenants under the indenture governing the 2023 Notes.
ABL Facility
On April 9, 2015, we and certain of our subsidiaries entered into a $150.0 million asset-based revolving credit facility (the "ABL Facility") maturing on April 9, 2020. The borrowing base is calculated based on a percentage of the value of selected U.S. and Canadian accounts receivable and inventory, less certain ineligible amounts. Obligations under the ABL Facility are secured by a first priority security interest in substantially all of the current assets of Masonite and our subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by certain of our directly or indirectly wholly-owned subsidiaries. Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the Base Rate, Canadian Prime Rate or Canadian Base Rate (each as defined in the Amended and Restated Credit Agreement) plus a margin ranging from 0.25% to 0.75% per annum, or (ii) the Eurodollar Base Rate or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.75% per annum. In addition to paying interest on any outstanding principal under the ABL Facility a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The ABL Facility contains various customary representations, warranties and covenants by us that, among other things, and subject to certain exceptions, restrict Masonite's ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge and (vi) create liens. The Amended and Restated Credit Agreement amended the ABL Facility to, among other things, (i) permit us to incur unlimited unsecured debt as long as such debt does not contain covenants or default provisions that are more restrictive than those contained in the ABL Facility, (ii) permit us to incur debt as long as the pro forma secured leverage ratio is less than 4.5 to 1.0, and (iii) add certain additional exceptions and exemptions under the restricted payment, investment and indebtedness covenants (including increasing the amount of certain debt permitted to be incurred under an existing exception). As of December 31, 2017, and January 1, 2017, we were in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.
9. Commitments and Contingencies
Leases
For lease agreements that provide for escalating rent payments or rent-free occupancy periods, we recognize rent expense on a straight line basis over the non-cancelable lease term and any option renewal period where failure to exercise such option would result in an economic penalty in such amount that renewal appears, at the inception of the lease, to be reasonably assured. The lease term commences on the date when all conditions precedent to our obligation to pay rent are satisfied. The leases contain provisions for renewal ranging from zero to three options of generally five years each. Minimum payments, for the following future periods, under non-cancelable operating leases and service agreements with initial or remaining terms of one year or more consist of the following: |
| | | |
| (In thousands) | |
| Fiscal year: | |
| 2018 | $ | 23,177 |
|
| 2019 | 21,336 |
|
| 2020 | 18,447 |
|
| 2021 | 13,806 |
|
| 2022 | 9,906 |
|
| Thereafter | 62,855 |
|
| Total future minimum lease payments | $ | 149,527 |
|
Total rent expense, including non-cancelable operating leases and month-to-month leases, was $28.8 million, $26.3 million, and $24.0 million for years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively.
We have provided customary indemnifications to our landlords under certain property lease agreements for claims by third parties in connection with their use of the premises. We also have provided routine indemnifications against adverse effects related to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, we have recourse against other parties to mitigate the risk of loss from these indemnifications. Historically, we have not made any significant payments relating to such indemnifications.
Legal Proceedings
On January 12, 2018, Desmond Mathis, a current employee at our location in Greenville, Texas, filed suit against us in the U.S. District Court for the Northern District of Texas (Dallas Division). He asserts that we violated the Fair Labor Standards Act ("FLSA") in regard to overtime pay. The case was brought as a collective action under the FLSA. The potential claimants in the collective action are alleged to be national in scope. Plaintiff claims that we paid only one half time instead of time and a half for certain instances of overtime work. Plaintiff also claims that we did not properly include bonus money in computing a proper overtime rate. Our responsive pleading is due on March 2, 2018. While we intend to defend the lawsuit vigorously, there can be no assurance that the ultimate resolution of this lawsuit will not have a material, adverse effect on our consolidated financial condition or results of operations.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2015, Derrick Byrd, a former hourly employee in California, filed a putative class action lawsuit against us in California Superior Court alleging violations of California wage and hour laws with respect to meal periods and rest breaks and other technical wage and hour issues. In January 2016, we removed the lawsuit to the United States District Court for the Central District of California and on February 25, 2016, the court dismissed the complaint in its entirety. On March 18, 2016, the plaintiff filed an amended complaint, which we moved to dismiss, and we moved to strike several of the plaintiff’s causes of action. On July 7, 2016, the court dismissed several of the plaintiff’s causes of action and gave the plaintiff leave to amend. On July 29, 2016, the plaintiff filed a second amended complaint containing a narrower version of nine of the eleven original claims. We answered this amended complaint on August 12, 2016, and amended our answer on September 14, 2016. On November 28, 2016, the plaintiff filed a third amended complaint to add an additional individual as a plaintiff. On December 19, 2016, we answered this amended complaint. The plaintiffs continued to allege violations with respect to overtime pay, meal periods, rest breaks, minimum wage, timely pay, wage statement detail and reimbursement of business expenses and sought damages, penalties, attorney’s fees and an award under the California Private Attorney General Act (“PAGA”). On August 2, 2017, the parties entered into a Joint Stipulation of Class Action and PAGA Settlement and Release (the “Settlement”), which was amended on October 26, 2017. In entering into the Settlement, we denied all claims made in the lawsuit and denied any wrongdoing. On December 11, 2017 the court preliminary approved the Settlement. The Settlement is subject to final court approval and the court has scheduled the final approval hearing for March 5, 2018. Pursuant to the Settlement, payment of the settlement amount would occur after final court approval. The amount we have agreed to pay as part of the Settlement has not had and is not expected to have a material impact on our financial condition or operating results.
In addition, from time to time, we are involved in various claims and legal actions. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
10. Share Based Compensation Plans
Share-based compensation expense was $11.6 million, $18.8 million, and $13.2 million for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. As of December 31, 2017, the total remaining unrecognized compensation expense related to share based compensation amounted to $12.6 million, which will be amortized over the weighted average remaining requisite service period of 1.4 years. Share based compensation expense is recognized using a graded-method approach, or to a lesser extent a cliff-vesting approach, depending on the terms of the individual award and is classified within selling, general and administration expenses in the consolidated statements of comprehensive income (loss). All share based awards are settled through issuance of new shares of our common stock. The share based award agreements contain restrictions on sale or transfer other than in limited circumstances. All other transfers would cause the share based awards to become null and void.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting", which amended ASC 718 "Compensation - Stock Compensation". This ASU simplified several aspects of the accounting for employee share-based award transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. Under the ASU, an entity recognizes all excess tax benefits and shortfalls resulting from the exercise or vesting of a share-based award to an employee. It also allowed an entity to elect, as an accounting policy, either to continue to estimate forfeitures of share-based awards (as was previously required) or to account for forfeitures when they occur. Additionally, the ASU modified the prior exception to liability classification of an award when an employer used a net-settlement feature to withhold shares to meet the employer’s minimum statutory tax withholding requirement. We adopted this guidance during the year ended January 1, 2017. The aspect of the standard dealing with excess tax benefits and tax deficiencies was adopted using the modified-retrospective method, and resulted in an increase to previously-presented retained earnings of $30.2 million as of January 3, 2016. As a result of the adoption of this standard, we elected to account for forfeitures when they occur. The forfeitures aspect of the standard and the tax withholding aspect of the standard were adopted using a modified retrospective approach and had no impact on any previously-presented amounts. All other aspects of the standard were adopted using a retrospective approach and had no impact on any previously-presented amounts.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Equity Incentive Plan
Prior to July 9, 2012, we had a management equity incentive plan (the "2009 Plan"). The 2009 Plan required granting by June 9, 2012, equity instruments which upon exercise would result in management (excluding directors) owning 9.55% of our common equity (3,554,811 shares) on a fully diluted basis, after giving consideration to the potential exercise of warrants and the equity instruments granted to directors. Under the 2009 Plan, we were required to issue equity instruments to directors that represented 0.90% (335,004 shares) of the common equity on a fully diluted basis. The requirement for issuance to employees was satisfied in June 2012, and the requirement for issuance to directors was satisfied in July 2009. No awards have been granted under the 2009 Plan since May 30, 2012, and no future awards will be granted under the 2009 Plan; however, all outstanding awards under the 2009 Plan will continue to be governed by their existing terms. Aside from shares issuable for outstanding awards, there are no further shares of common stock available for future issuance under the 2009 Plan.
On July 12, 2012, the Board of Directors adopted the Masonite International Corporation 2012 Equity Incentive Plan, which was amended on June 21, 2013, by our Board of Directors, further amended and restated by our Board of Directors on February 23, 2015, and approved by our shareholders on May 12, 2015 (as amended and restated, the "2012 Plan"). The 2012 Plan was adopted because the Board believes awards granted will help to attract, motivate and retain employees and non-employee directors, align employee and stockholder interests and encourage a performance-based culture built on employee stock ownership. The 2012 Plan permits us to offer eligible directors, employees and consultants cash and share-based incentives, including stock options, stock appreciation rights, restricted stock, other share-based awards (including restricted stock units) and cash-based awards. The 2012 Plan is effective for ten years from the date of its adoption. Awards granted under the 2012 Plan are at the discretion of the Human Resources and Compensation Committee of the BoardCompany’s Board.
Francis M. Scricco (Chair)
Peter R. Dachowski
Barry A. Ruffalo
Executive Compensation Tables
SUMMARY COMPENSATION TABLE
The following table summarizes the total compensation earned by each of Directors. The Human Resourcesour NEOs for services provided to us during the fiscal years ended 2023, 2022, and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary ($)(1) | Bonus
($)(2) | Stock Awards ($)(3) | Option Awards ($)(4) | Non-Equity Incentive Plan Compensation ($)(5) | All Other Compensation ($)(6) | Total ($) |
| Howard C. Heckes | 2023 | 971,539 | 886,500 | 3,734,910 | 414,995 | 994,062 | 33,836 | 7,035,842 |
| President and Chief Executive Officer | 2022 | 910,192 | 263,520 | 5,559,937 | 339,987 | 791,658 | 32,120 | 7,897,414 |
| 2021 | 890,000 | 240,300 | 2,924,912 | 324,993 | 495,552 | 21,460 | 4,897,217 |
| Russell T. Tiejema | 2023 | 574,231 | 326,250 | 899,956 | 99,997 | 365,835 | 25,649 | 2,291,918 |
| Executive Vice President and Chief Financial Officer | 2022 | 545,192 | 99,000 | 2,309,930 | 89,976 | 297,413 | 21,156 | 3,362,667 |
| 2021 | 520,192 | 88,594 | 708,750 | 78,749 | 182,700 | 20,097 | 1,599,082 |
| Christopher O. Ball | 2023 | 570,192 | 73,485 | 809,987 | 89,981 | 376,697 | 23,452 | 1,943,794 |
| President, Global Residential | 2022 | 550,000 | 122,327 | 1,742,398 | 82,497 | 497,475 | 67,983 | 3,062,680 |
| 2021 | 158,634 | 50,000 | 245,754 | — | — | 3,200 | 457,588 |
| Randal A. White | 2023 | 494,231 | 243,750 | 494,962 | 54,974 | 273,325 | 25,222 | 1,586,464 |
| Senior Vice President, Global Operations and Supply Chain | 2022 | 466,154 | 67,680 | 1,494,910 | 54,998 | 203,322 | 17,215 | 2,304,279 |
| 2021 | 447,116 | 60,750 | 445,472 | 49,485 | 125,280 | 16,213 | 1,144,316 |
| Robert A. Paxton | 2023 | 469,231 | 236,422 | 539,903 | 59,998 | 239,685 | 25,356 | 1,570,595 |
| Senior Vice President, Human Resources | 2022 | 441,154 | 76,909 | 1,494,910 | 54,998 | 192,507 | 21,377 | 2,281,855 |
| 2021 | 421,154 | 57,375 | 420,598 | 46,732 | 118,320 | 15,548 | 1,079,727 |
(1) Amounts in this column represent the salary payments made to each NEO during the fiscal year. Salary increases were effective for our NEOs starting February 27, 2023. See section titled “Compensation Discussion and Analysis—Elements of Our Executive Compensation Program—Base Salary.”
(2) Amounts in this column reflect the Balanced Scorecard and Individual Performance Multiplier portions of each NEO's annual bonus with respect to fiscal 2023, which amounts are payable at the discretion of the Compensation Committee mayof the Board. Individual Performance Multipliers were calculated at 1.00 (i.e., 100%), except for Messrs. Ball and Paxton, who received an Individual Performance Multiplier of 1.10 (i.e., 110%) and 1.05 (i.e., 105%), respectively.
(3) Amounts in this column reflect the aggregate grant any award underdate fair market value of restricted stock units granted during the 2012 Planapplicable fiscal year in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the formvaluation of athe restricted stock units granted in 2023, please see Note 12 "Share Based Compensation Plans" in the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The amounts shown also include the grant date fair market value of performance-vested restricted stock units granted in 2023, based on the probable outcome of the related performance award. The 2012 Plan may be amended, suspended or terminated by the Boardconditions at any time; provided, that any amendment, suspension or termination which impairs the rightstarget levels, calculated in accordance with FASB ASC Topic 718. Each grant of a participantperformance-vesting restricted stock units is subject to such participant's consent and; provided further,achievement of the applicable performance conditions as described under the headings above entitled "Compensation Discussion and Analysis—Elements of Our Executive Compensation Program—Long-Term Equity Incentive Awards—2023-2025 LTIP Grants and Metrics." The grant date fair market value per unit of the time-based restricted stock units are as follows: $88.99 for the annual long-term incentive grants made on February 27, 2023 to each of Messrs. Heckes (13,990 units), Tiejema (3,371 units), Ball (3,034 units), White (1,854 units), and Paxton (2,022 units). The grant date fair market value of the performance-vesting restricted stock units granted on February 27, 2023, based on the maximum level of performance, is as follows: Mr. Heckes $2,489,940 (27,980 units); Mr. Tiejema $599,571 (6,742 units); Mr. Ball $539,991 (6,068 units); Mr. White $329,975 (3,708 units); and Mr. Paxton $359,965 (4,045 units).
(4) Amounts in this column reflect the aggregate grant date fair value of SARs granted during the applicable fiscal year in accordance with FASB ASC Topic 718. For discussion of the assumptions made in the valuation of SARs granted in 2023, please see Note 12 "Share Based Compensation Plans" in the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The grant date fair market value per SAR of the SARs granted on February 27, 2023 is $32.6254.
(5) Amounts shown in this column represent an amount equal to the annual performance-based cash bonuses that certain material amendmentswere earned under the MIP for 2023, less the portion of the bonus represented by the Balanced Scorecard and Individual Performance Multiplier, which portion are subjectincluded in the Bonus column. See "Compensation Discussion and Analysis—Elements of Our Executive Compensation Program—Annual Cash Incentive Bonus" for a description of the bonuses for fiscal year 2023.
(6) The following table represents the amounts in the “All Other Compensation” column for 2023 for each NEO.
| | | | | | | | | | | | | | | | | | | | |
| Name | 401(k) Contribution ($) | Group Term Life Insurance ($) | Executive Physicals ($) | Tax Preparation/ Financial Planning ($) | Other Expenses ($) | Total All Other Compensation ($) |
| Howard C. Heckes | 16,500 | 3,612 | 3,425 | 10,000 | 299 | 33,836 |
| Russell T. Tiejema | 16,500 | 3,612 | 3,379 | — | 2,158 | 25,649 |
| Christopher O. Ball | 16,500 | 1,260 | 4,152 | 1,000 | 540 | 23,452 |
| Randal A. White | 16,500 | 1,908 | 6,783 | — | — | 25,222 |
| Robert A. Paxton | 16,500 | 1,806 | — | 7,050 | — | 25,356 |
GRANTS OF PLAN BASED AWARDS FOR 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Estimated Future Payouts Under Non-Equity Incentive Plan Awards
(1) | Estimated Future Payouts Under Equity Incentive Plan Awards
(2) | All Other Stock Awards Number of Shares or Units
(#)(3) | All Other Option Awards Number of Securities Underlying Options (#)(4) | Exercise Price of Option Awards
($/Sh) | Grant Date Fair Value of Stock and Option Awards ($)(5) |
| Name | Grant Date | Threshold ($) | Target
($) | Maximum ($) | Threshold ($) | Target
($) | Maximum ($) |
| Howard C. Heckes | | | | | | | | | | | |
| MIP | | 591,000 | 1,182,000 | 2,659,500 | — | — | — | — | — | — | — |
| PSUs | 02/27/23 | — | — | — | 13,990 | 27,980 | 55,960 | — | — | — | 2,489,940 |
| RSUs | 02/27/23 | — | — | — | — | — | — | 13,990 | — | — | 1,244,970 |
| SARs | 02/27/23 | — | — | — | — | — | — | — | 12,720 | 88.99 | 414,995 |
| Russell T. Tiejema | | | | | | | | | | | |
| MIP | | 217,500 | 435,000 | 978,750 | — | — | — | — | — | — | — |
| PSUs | 02/27/23 | — | — | — | 3,371 | 6,742 | 13,484 | — | — | — | 599,971 |
| RSUs | 02/27/23 | — | — | — | — | — | — | 3,371 | — | — | 299,985 |
| SARs | 02/27/23 | — | — | — | — | — | — | — | 3,065 | 88.99 | 99,997 |
| Christopher O. Ball | | | | | | | | | | | |
| MIP | | 215,625 | 431,250 | 970,313 | — | — | — | — | — | — | — |
| PSUs | 02/27/23 | — | — | — | 3,034 | 6,068 | 12,136 | — | — | — | 539,991 |
| RSUs | 02/27/23 | — | — | — | — | — | — | 3,034 | — | — | 269,996 |
| SARs | 02/27/23 | — | — | — | — | — | — | — | 2,758 | 88.99 | 89,981 |
| Randal A. White | | | | | | | | | | | |
| MIP | | 162,500 | 325,000 | 731,250 | — | — | — | — | — | — | — |
| PSUs | 02/27/23 | — | — | — | 1,854 | 3,708 | 7,416 | — | — | — | 329,975 |
| RSUs | 02/27/23 | — | — | — | — | — | — | 1,854 | — | — | 164,987 |
| SARs | 02/27/23 | — | — | — | — | — | — | | 1,685 | 88.99 | 54,974 |
| Robert A. Paxton | | | | | | | | | | | |
| MIP | | 142,500 | 285,000 | 641,250 | — | — | — | — | — | — | — |
| PSUs | 02/27/23 | — | — | — | 2,023 | 4,045 | 8,090 | — | — | — | 359,965 |
| RSUs | 02/27/23 | — | — | — | — | — | — | 2,022 | — | — | 179,938 |
| SARs | 02/27/23 | — | — | — | — | — | — | — | 1,839 | 88.99 | 59,998 |
(1) The amounts set forth in the “Threshold,” “Target” and “Maximum” columns above indicate the respective amounts for each of the NEOs under our 2023 MIP (determined without regard to shareholder approval.the Balanced Scorecard and Individual Performance Multiplier portions of the 2023 MIP, which are discretionary). The aggregateactual payouts were approved by the Compensation Committee on February 26, 2024, and the portions of the payout that are net of the Balanced Scorecard and Individual Performance Multiplier portions of the 2023 MIP are included in the “Non-Equity Incentive Plan Compensation" column on the Summary Compensation Table. The amounts shown in the “Target” column reflect a bonus target of 120% of base salary for Mr. Heckes, 75% of base salary for each of Messrs. Tiejema, and Ball, 65% of base salary for Mr. White, and 60% of base salary for Mr. Paxton. For a more complete description of the 2023 MIP, including discussion of the actual payouts thereunder, see the heading above entitled “Compensation Discussion and Analysis—Elements of Our Executive Compensation Program—Annual Cash Incentive Bonus.”
(2) With respect to the performance-vesting restricted stock units granted to each NEO on February 27, 2023 the amounts set forth in the “Threshold,” “Target” and “Maximum” columns above correspond to the number of common sharesCommon Shares that canwould be earned by each such NEO upon achievement of the applicable Net Sales and Total Shareholder Return (TSR) performance goals based on performance over the three-year period as measured against defined levels of threshold, target and maximum performance. Subject to achievement of the applicable performance goals, the performance-vesting restricted stock units are scheduled to vest on the third anniversary of the date of grant. See “Compensation Discussion and Analysis—Elements of Our Executive Compensation Program—Long-Term Equity Incentive Awards—2023-2025 LTIP Grants and Metrics” for a description of these performance-vesting restricted stock units and the applicable performance measures.
(3) The time-vesting restricted stock units granted on February 27, 2023 to each NEO are scheduled to vest over three years, with 33% vesting on the first anniversary of the date of grant, 33% on the second anniversary and 34% on the third anniversary.
(4) The time-vesting SARs granted on February 27, 2023, to each NEO are scheduled to vest over three years, with 33% vesting on the first anniversary of the date of grant, 33% on the second anniversary and 34% on the third anniversary. The grants were issued with respect to equity awards underan exercise price of $88.99 per share. Proceeds upon the 2012 Plan cannot exceed 2,000,000 shares plusexercise of the SARs will equal the market value of our stock at the time of exercise less the exercise price times the number of shares exercised. Upon exercise, the SARs are settled in unrestricted Common Shares having an aggregate fair market value equal to the positive difference between the fair market value of a Common Share on the exercise date and the exercise price of the SAR multiplied by the number of Common Shares for which the SAR is exercised.
(5) Amounts in this column reflect the grant date fair value of the restricted stock units and SARs granted to each NEO in 2023 in accordance with FASB ASC Topic 718. For a discussion of the assumptions made in the valuation of such awards, please see Note 12 “Share Based Compensation Plans” in the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The amounts shown include the grant date fair value of performance-vesting restricted stock units granted in 2023, based on the probable outcome of the related performance conditions at target levels, calculated in accordance with FASB ASC Topic 718.
2023 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table provides information about outstanding equity-based incentive compensation awards for the NEOs as of the end of 2023. The vesting schedule for each award is described in the footnotes to this table. The market value of unvested RSUs and unearned PSUs is based on the closing price of our Common Shares of $84.66 on December 29, 2023, the last trading day of fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SARs Awards | Stock Awards |
| Name | Number of Securities Underlying Unexercised SARs (# Exercisable) | Number of Securities Underlying Unexercised SARs (# Unexercisable) (1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned SARs (#) | SAR Exercise Price ($) | SAR Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market Value of Shares or Units of Stock That Have Not Vested ($) |
| Howard C. Heckes | | | | | | | | | |
| 56,645 | — | — | 57 | 6/3/2029 | 24,782 (2) | 2,098,044 | — | — |
| 11,857 | — | — | 87 | 2/25/2030 | — | — | 12,078 (3) | 1,022,523 |
| 7,637 | 3,935 | — | 108 | 2/22/2031 | — | — | 23,022 (4) | 1,949,043 |
| 4,230 | 8,591 | — | 89 | 2/23/2032 | — | — | 28,309 (5) | 2,396,640 |
| — | 12,720 | — | 89 | 2/27/2033 | — | — | 27,980 (6) | 2,368,787 |
| Russell T. Tiejema | | | | | | | | | |
| 4,855 | — | — | 77 | 2/27/2027 | 6,159 (7) | 521,421 | — | — |
| 6,595 | — | — | 65 | 2/27/2028 | — | — | — | — |
| 8,020 | — | — | 58 | 2/25/2029 | — | — | — | — |
| 3,487 | — | — | 87 | 2/25/2030 | — | — | 2,926 (3) | 247,715 |
| 1,850 | 954 | — | 108 | 2/22/2031 | — | — | 6,094 (4) | 515,918 |
| 1,119 | 2,274 | — | 89 | 2/23/2032 | — | — | 16,985 (5) | 1,437,950 |
| — | 3,065 | — | 89 | 2/27/2033 | — | — | 6,742 (6) | 570,778 |
| Christopher O. Ball | | | | | | | | | |
| 1,026 | 2,085 | — | 89 | 2/23/2032 | 5,611 (8) | 475,027 | — | — |
| — | 2,758 | — | 89 | 2/27/2033 | — | — | 5,586 (4) | 472,911 |
| — | — | — | — | — | — | — | 11,323 (5) | 958,605 |
| — | — | — | — | — | — | — | 6,068 (6) | 513,717 |
| Randal A. White | | | | | | | | | |
| 1,784 | — | — | 58 | 2/25/2029 | 3,571 (9) | 302,321 | — | — |
| 1,355 | — | — | 87 | 2/25/2030 | — | — | 1,839 (3) | 155,690 |
| 1,162 | 600 | — | 108 | 2/22/2031 | — | — | 3,724 (4) | 315,274 |
| 684 | 1,390 | — | 89 | 2/23/2032 | — | — | 11,323 (5) | 958,605 |
| — | 1,685 | — | 89 | 2/27/2033 | — | — | 3,708 (6) | 313,919 |
| Robert A. Paxton | | | | | | | | | |
| 1,668 | — | — | 58 | 2/25/2029 | 3,713 (10) | 314,343 | — | — |
| 1,883 | — | — | 87 | 2/25/2030 | — | — | 1,736 (3) | 146,970 |
| 1,098 | 566 | — | 108 | 2/22/2031 | — | — | 3,724 (4) | 315,274 |
| 684 | 1,390 | — | 89 | 2/23/2032 | — | — | 11,323 (5) | 958,605 |
| — | 1,839 | — | 89 | 2/27/2033 | — | — | 4,045 (6) | 342,450 |
(1) Represents the unvested portion of the number of SARs granted. SARs vest over a three-year period at 33% on year from grant date, 33% two years from grant date, and 34% three years from the grant date. For each grant of SARs, the grant date is the date that is 10 years prior to the SAR expiration date for such grant.
(2) Represents the unvested portion in the aggregate of (i) 9,054 restricted stock units granted to Mr. Heckes on February 22, 2021, which vests thirty-three percent (33%) on February 22, 2022, thirty-three percent (33%) on February 22, 2023 and thirty-four percent (34%) on February 22, 2024, (ii) 11,511 restricted stock units granted to Mr. Heckes on February 23, 2022, which vests thirty-three percent (33%) on February 23, 2023, thirty-three percent (33%) on February 23, 2024 and thirty-four percent (34%) on February 23, 2025, and (iii) 13,990 restricted stock units granted to Mr. Heckes on February 27, 2023, which vests thirty-three percent (33%) on February 27, 2024, thirty-three percent (33%) on February 27, 2025, and thirty-four (34%) on February 27, 2025.
(3) Represents the unvested performance-vesting restricted stock units granted in February 2021. Shares were earned based on the Company’s achievement of the applicable improvements in Adjusted EBITDA Margin and Return on Assets during the 3-year performance period ending with the 2023 fiscal year and vested on February 22, 2024. On February 26, 2024, the Compensation Committee approved the Company’s performance results at 66.7% achievement of target results (the units being shown in this table representing the final number of vesting shares). See “Compensation Discussion and Analysis – Elements of Our Executive Compensation Program – Long-Term Equity Incentive Awards – 2021 Performance Vesting Restricted Stock Awards” for additional detail.
(4) Represents the unvested performance-vesting restricted stock units granted to each NEO in February 2022 which are scheduled to vest on February 23, 2025, subject to existing grants underachievement of the 2009 planapplicable Net Sales and Return on Invested Capital improvement metrics over the 3-year performance period ending with the 2023 fiscal year. Amounts shown represent the number of shares that would be earned by each of the NEOs at the target levels of performance. The maximum number of shares that may expirebe earned by each NEO are as follows: Mr. Heckes, 46,044; Mr. Tiejema, 12,188; Mr. Ball, 11,172; Mr. White, 7,448; and Mr. Paxton, 7,448.
(5) Represents the unvested performance-vesting restricted stock units granted to each NEO in August 2022 which are scheduled to vest on August 3, 2025, subject to achievement of the applicable Adjusted EBITDA Margin metric at the end of the 2022 fiscal year and at the end of either the 2023 or 2024 fiscal years. Amounts shown
represent the number of shares that would be forfeited or cancelled. Asearned by each of the NEOs at the target level of performance. The maximum number of shares that may be earned by each NEO are as follows: Mr. Heckes, 28,309; Mr. Tiejema, 16,985; and 11,323 each for Messrs. Ball, White, and Paxton.
(6) Represents the unvested performance-vesting restricted stock units granted to each NEO in February 2023 which are scheduled to vest on February 27, 2026, subject to achievement of the applicable Net Sales and Total Shareholder Return metrics over the 3-year performance period ending with the 2025 fiscal year. Amounts shown represent the number of shares that would be earned by each of the NEOs at the target levels of performance. The maximum number of shares that may be earned by each NEO are as follows: Mr. Heckes, 55,960; Mr. Tiejema, 13,484; Mr. Ball, 12,136; Mr. White, 7,416; and Mr. Paxton, 8,090.
(7) Represents the unvested portion in the aggregate of (i) 2,194 restricted stock units granted to Mr. Tiejema on February 22, 2021, which vests thirty-three percent (33%) on February 22, 2022, thirty-three percent (33%) on February 22, 2023, and thirty-four percent (34%) on February 22, 2024, (ii) 3,047 restricted stock units granted to Mr. Tiejema on February 23, 2022, which vests thirty-three percent (33%) on February 23, 2023, thirty-three percent (33%) on February 23, 2024, and thirty-four percent (34%) on February 23, 2025, and (iii) 3,371 restricted stock units granted to Mr. Tiejema on February 27, 2023, which vests thirty-three percent (33%) on February 27, 2024, thirty-three percent (33%) on February 27, 2025, and thirty-four percent (34%) on February 27, 2026.
(8) Represents the unvested portion in the aggregate of (i) 2,073 restricted stock units granted to Mr. Ball September 6, 2021, which vests thirty-three percent (33%) on September 6, 2022, thirty-three percent (33%) on September 6, 2023, and thirty-four percent (34%) on September 6, 2024; (ii) 2,793 restricted stock units granted to Mr. Ball on February 23, 2022, which vests thirty-three percent (33%) on February 23, 2023, thirty-three percent (33%) on February 23, 2024, and thirty-four percent (34%) on February 23, 2025; and (iii) 3,034 restricted stock units granted to Mr. Ball on February 27, 2023, which vests thirty-three percent (33%) on February 27, 2024, thirty-three percent (33%) on February 27, 2025, and thirty-four percent (34%) which vests on February 27, 2026.
(9) Represents the unvested portion in the aggregate of (i) 1,379 restricted stock units granted to Mr. White on February 22, 2021, which vests thirty-three percent (33%) on February 22, 2022, thirty-three percent (33%) on February 22, 2023, and thirty-four percent (34%) on February 22, 2024; (ii) 1,862 restricted stock units granted to Mr. White on February 23, 2022, which vests thirty-three percent (33%) on February 23, 2023, thirty-three percent (33%) on February 23, 2024, and thirty-four percent (34%) on February 23, 2025; and (iii) 1,854 restricted stock units granted to Mr. White on February 27, 2023, which vests thirty-three percent (33%) on February 27, 2024, thirty-three percent (33%) on February 27, 2025, and thirty-four percent (34%) on February 27, 2026.
(10) Represents the unvested portion in the aggregate of (i) 1,302 restricted stock units granted to Mr. Paxton on February 22, 2021, which vests thirty-three percent (33%) on February 22, 2022, thirty-three percent (33%) on February 22, 2023, and thirty-four percent (34%) on February 22, 2024; (ii) 1,862 restricted stock units granted to Mr. Paxton on February 23, 2022, which vests thirty-three percent (33%) on February 23, 2023, thirty-three percent (33%) on February 23, 2024, and thirty-four percent (34%) on February 23, 2025; and 2,022 restricted stock units granted to Mr. Paxton on February 27, 2023, which vests thirty-three percent (33%) on February 27, 2024, thirty-three percent (33%) on February 27, 2025, and thirty-four percent (34%) on February 27, 2026.
SAR EXERCISES AND STOCK VESTED FOR 2023
The following table provides information regarding the amounts received by our NEOs upon the vesting of RSUs and the exercise of SARs during the year ended December 31, 2017, there were 1,042,221 shares2023.
| | | | | | | | | | | | | | | | | |
| SARs AWARDS | | STOCK AWARDS |
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) |
| Howard C. Heckes | — | — | | 33,162 | 2,889,981 |
| Russell T. Tiejema | — | — | | 9,486 | 827,135 |
| Christopher O. Ball | — | — | | 1,605 | 147,145 |
| Randal A. White | — | — | | 5,567 | 485,309 |
| Robert A. Paxton | — | — | | 5,233 | 456,167 |
(1) No NEOs exercised SARs during 2023.
(2) Value realized on vesting of commonrestricted stock available for future issuance underunits is calculated by multiplying the 2012 Plan.
Deferred Compensation Plan
We offer to certainnumber of restricted stock units that vested by the per share price of our employees and directors aCommon Shares on the applicable vesting date.
NONQUALIFIED DEFERRED COMPENSATION FOR 2023
The Masonite International Corporation Deferred Compensation Plan ("DCP"(“Deferred Compensation Plan”). The DCP is an unfunded non-qualifiednonqualified deferred compensation plan that permits those certain key employees and directors to defer a portion of their compensation to a future time. Eligible employees may elect to defer a portion of their base salary, annual cash incentive bonus and/or restricted stock unitsRSUs and eligible directors may defer a portion of their director fees or restricted stock units.under the Deferred Compensation Plan. All contributions to the DCPDeferred Compensation Plan on behalf of the participant are fully vested (other than restricted stock unitRSU deferrals which remain subject to the vesting terms of the applicable equity incentive plan) and are placed into a grantor trust, commonly referred to as a "rabbi“rabbi trust."” Although we are permitted to make matching contributions under the terms of the DCP,Deferred Compensation Plan, we have not elected to do so. The DCPDeferred Compensation Plan invests the deferred base salary and annual cash incentive bonus contributions in diversified securities from a selection of investments andchosen by the participants choose their investments andwho may periodically reallocate the assets in their respective accounts. Participants are entitled to receive the benefits in their accounts upon separation of service or upon a specified date, with benefits payable as a single lump sum or in annual installments. All plan investments are categorized as having Level 1 valuation inputs as established byIn the FASB’s Fair Value Framework.
Assetsevent of a change in control, each participant’s account will be distributed in the form of a single lump-sum payment on the second anniversary of the rabbi trust,change in control, unless such participant elects, during the 12-month period beginning on the change in control, to receive a single lump-sum payment or installments commencing on either (i) any specified date that is at least 5 years after the second anniversary of the change in control or (ii) the seventh anniversary of the change in control. In 2023, none of our NEOs other than Company stock, are recorded at fair valueMr. Heckes elected to defer their compensation under the Deferred Compensation Plan. Additionally, none of our NEOs other than Mr. Heckes have earnings, withdrawals or an aggregate balance under the Deferred Compensation Plan.
The table below provides information of contributions, earnings and included in other assets in the consolidated balance sheets. These assets in the rabbi trust are classified as trading securities and changes in their fair values are recorded in other income (loss) in the consolidated statements of comprehensive income (loss). The liability relating tobalances for our NEOs under our nonqualified deferred compensation represents our obligationplan.
| | | | | | | | | | | | | | |
| Name | Executive Contributions in 2023 ($)(1) | Aggregate Earnings in 2023 ($)(2) | Aggregate Withdrawals/Distributions
in 2023 ($) | Aggregate Balance at December 31, 2023 ($)(4) |
| Howard C. Heckes | 485,769 | 50,059 | — | 535,828 |
(1) Represents the amount Mr. Heckes elected to distribute funds todefer in 2023 under the participants in the futureDeferred Compensation Plan and is included in other liabilitiesMr. Heckes’ fiscal 2023 compensation in "the Summary Compensation Table” as described above.
(2) Represents the consolidated balance sheets. As of December 31, 2017,gross earnings during fiscal 2023.
(3) Represents the liability and asset relatingnet amounts credited to deferred compensation had a fair value of $5.5 million and $5.6 million, respectively. As of January 1, 2017,Mr. Heckes under the liability and asset relating to deferred compensation each had a fair value of $3.3 million. Any unfunded gain or loss relating to changes in the fair value of the deferred compensation liability is recognized in selling, general and administration expense in the consolidated statements of comprehensive income (loss).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2017, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs") to certain employees under both the 2009Deferred Compensation Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of four years, have a life of ten years and settle in common shares. It is assumed that all time-based SARs will vest.
The total fair value of SARs vested was $0.4 million, $2.4 million, and $0.6 million, in the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. |
| | | | | | | | | | | | |
Twelve months ended December 31, 2017 | Stock Appreciation Rights | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Exercise Price | | Average Remaining Contractual Life (Years) |
| Outstanding, beginning of period | 790,290 |
| | $ | 32,659 |
| | $ | 24.47 |
| | 4.6 |
| Granted | 59,265 |
| | | | 77.00 |
| | |
| Exercised | (281,444 | ) | | 16,378 |
| | 17.96 |
| | |
| Forfeited | (30,181 | ) | | | | 54.28 |
| | |
| Outstanding, end of period | 537,930 |
| | $ | 23,263 |
| | $ | 32.00 |
| | 4.5 |
| | | | | | | | |
| Exercisable, end of period | 443,998 |
| | $ | 22,588 |
| | $ | 24.28 |
| | 3.7 |
|
| | | | | | | | | | | | |
| Twelve months ended January 1, 2017 | Stock Appreciation Rights | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Exercise Price | | Average Remaining Contractual Life (Years) |
| Outstanding, beginning of period | 891,147 |
| | $ | 36,681 |
| | $ | 20.07 |
| | 4.9 |
| Granted | 121,805 |
| | | | 58.37 |
| | |
| Exercised | (176,416 | ) | | 8,954 |
| | 17.09 |
| | |
| Forfeited | (46,246 | ) | | | | 57.47 |
| | |
| Outstanding, end of period | 790,290 |
| | $ | 32,659 |
| | $ | 24.47 |
| | 4.6 |
| | | | | | | | |
| Exercisable, end of period | 712,331 |
| | $ | 32,080 |
| | $ | 20.77 |
| | 4.1 |
|
| | | | | | | | | | | | |
| Twelve months ended January 3, 2016 | Stock Appreciation Rights | | Aggregate Intrinsic Value (in thousands) | | Weighted Average Exercise Price | | Average Remaining Contractual Life (Years) |
| Outstanding, beginning of period | 1,231,468 |
| | $ | 48,516 |
| | $ | 19.59 |
| | 5.9 |
| Exercised | (326,933 | ) | | 15,943 |
| | 17.15 |
| | |
| Forfeited | (13,388 | ) | | | | 47.64 |
| | |
| Outstanding, end of period | 891,147 |
| | $ | 36,681 |
| | $ | 20.07 |
| | 4.9 |
| | | | | | | | |
| Exercisable, end of period | 703,827 |
| | $ | 31,395 |
| | $ | 16.62 |
| | 4.2 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The value of SARs granted in the year ended December 31, 2017, as determined using the Black-Scholes Merton valuation model, was $1.3 million and is expected to be recognized over the average requisite service period of 2.0 years. Expected volatility is based upon the historical volatility of our public industry peers’ common shares amongst other considerations. The expected term is calculated using the simplified method, due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated: |
| | | | | | | |
| | 2017 Grants | | 2016 Grants |
| SAR value (model conclusion) | $ | 22.65 |
| | $ | 16.78 |
|
| Risk-free rate | 2.0 | % | | 1.6 | % |
| Expected dividend yield | 0.0 | % | | 0.0 | % |
| Expected volatility | 25.8 | % | | 26.2 | % |
| Expected term (years) | 6.0 |
| | 6.0 |
|
Restricted Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under both the 2009 Plan and the 2012 Plan. The RSUs confer the right to receive shares of our common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant and is recognized over the requisite service period. The RSUs vest over a maximum of three years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be delivered once the blackout restriction has been lifted. It is assumed that all time-based RSUs will vest. |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| | Total Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value | | Total Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value | | Total Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value |
| Outstanding, beginning of period | 501,926 |
| | $ | 58.51 |
| | 526,930 |
| | $ | 49.31 |
| | 543,373 |
| | $ | 34.56 |
|
| Granted | 242,047 |
| | 70.67 |
| | 288,683 |
| | 46.05 |
| | 257,775 |
| | 61.56 |
|
| Delivered | (197,255 | ) | | | | (234,791 | ) | | | | (157,356 | ) | | |
Withheld to cover (1) | (58,739 | ) | | | | (61,894 | ) | | | | (32,123 | ) | | |
| Forfeited | (70,381 | ) | | | | (17,002 | ) | | | | (84,739 | ) | | |
| Outstanding, end of period | 417,598 |
| | $ | 66.14 |
| | 501,926 |
| | $ | 58.51 |
| | 526,930 |
| | $ | 49.31 |
|
____________(1) A portion of the vested RSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
Approximately one-thirdperformance of the RSUs granted duringsecurities in which the year ended December 31, 2017, vest at specified future dates with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs grantedaccount was invested, as more fully described in the year ended December 31, 2017, was $17.1 millionnarrative disclosure below. These amounts do not represent above-market earnings/losses, and is being recognized over the weighted average requisite service period of 2.7 years. During the year ended December 31, 2017, there were 255,994 RSUs vested at a fair value of $14.4 million.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Warrants
On June 9, 2009, we issued 5,833,335 warrants, representing the right to purchase our common shares for $55.31 per share, subsequently adjusted to $50.77 per share for the $4.54 per share return of capital in 2011. Of these, 3,333,334 had an expiration date of June 9, 2014 (the "2014 Warrants"), and 2,500,001 had an expiration date of June 9, 2016 (the "2016 Warrants"). During the six months prior to their respective expiration dates, the warrants provided the holders with a cashless exercise option. There was no activity related to warrants during the year ended December 31, 2017. During the twelve months ended January 1, 2017, holders of the 2016 Warrants paid $10.5 million to exercise 2,496,493 warrants and we issued 630,951 new common shares to the holders. During the same period, 1,478 warrants were forfeited by the holders upon their expiration. We have accounted for these warrants as equity instruments. As of both December 31, 2017, and January 1, 2017, all outstanding warrants to purchase our common shares were either exercised or forfeited.
11. Restructuring Costs
The following table summarizes the restructuring charges recorded for the periods indicated: |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| (In thousands) | Europe | | Architectural | | Corporate & Other | | Total |
| 2016 Plan | $ | — |
| | 2,394 |
| | — |
| | $ | 2,394 |
|
| 2015 Plan | — |
| | — |
| | (7 | ) | | (7 | ) |
| 2014 Plan | — |
| | — |
| | (1,510 | ) | | (1,510 | ) |
| 2012 and Prior Plans | (27 | ) | | — |
| | — |
| | (27 | ) |
| Total Restructuring Costs | $ | (27 | ) | | $ | 2,394 |
| | $ | (1,517 | ) | | $ | 850 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended January 1, 2017 |
| (In thousands) | Europe | | Architectural | | Corporate & Other | | Total |
| 2016 Plan | $ | — |
| | 1,313 |
| | — |
| | $ | 1,313 |
|
| 2015 Plan | 19 |
| | — |
| | 113 |
| | 132 |
|
| Total Restructuring Costs | $ | 19 |
| | $ | 1,313 |
| | $ | 113 |
| | $ | 1,445 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended January 3, 2016 |
| (In thousands) | North American Residential | | Europe | | Corporate & Other | | Total |
| 2015 Plan | $ | — |
| | $ | 2,316 |
| | $ | 3,168 |
| | $ | 5,484 |
|
| 2013 Plan | 9 |
| | 144 |
| | — |
| | 153 |
|
| 2012 and Prior Plans | — |
| | 41 |
| | — |
| | 41 |
|
| Total Restructuring Costs | $ | 9 |
| | $ | 2,501 |
| | $ | 3,168 |
| | $ | 5,678 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | |
| | Cumulative Amount Incurred Through |
| | December 31, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| 2016 Plan | $ | — |
| | $ | — |
| | $ | 3,707 |
| | $ | — |
| | $ | 3,707 |
|
| 2015 Plan | — |
| | 2,335 |
| | — |
| | 3,274 |
| | 5,609 |
|
| 2014 Plan | — |
| | — |
| | — |
| | 7,993 |
| | 7,993 |
|
| 2013 Plan | 3,025 |
| | 2,733 |
| | — |
| | 2,157 |
| | 7,915 |
|
| 2012 and Prior Plans | 2,378 |
| | 12,668 |
| | — |
| | 3,609 |
| | 18,655 |
|
| Total Restructuring Costs | $ | 5,403 |
| | $ | 17,736 |
| | $ | 3,707 |
| | $ | 17,033 |
| | $ | 43,879 |
|
During 2016, we began implementing a plan (the "2016 Plan") to close one manufacturing facilitythus are not reported in the Architectural segment, which included the reduction of approximately 140 positions. The 2016 Plan was implemented to improve our cost structure and enhance operational efficiencies. Costs associated with the 2016 Plan include closure costs and severance and the 2016 Plan is substantially completed. As of December 31, 2017, we do not expect to incur any future charges relating to the 2016 Plan.“Summary Compensation Table” as described above.
During 2015, we began implementing a multi-year plan to reorganize and consolidate certain aspects of our global head office (the "2015 Plan"). The 2015 Plan includes the creation of a new shared services function and the rationalization of certain of our European facilities, including related headcount reductions. The 2015 Plan was implemented in response to the need for more effective business processes enabled by the planned implementation of our new enterprise resource planning system in our architectural business as well as ongoing weak market conditions in Africa and Europe outside of the United Kingdom. Costs associated with the 2015 Plan included severance and closure charges and are substantially completed. As of December 31, 2017, we do not expect to incur any material future charges for the 2015 Plan.
On August 20, 2014, the Board of Directors of Masonite Israel Ltd. (“Israel”), one of our wholly-owned subsidiaries, decided to voluntarily seek a Stay of Proceedings from the Israeli courts in an attempt to restructure the business (the “2014 Plan”). The court filing was made on August 21, 2014, and the court appointed a trustee to oversee the operation of the business. On June 28, 2017 the Stay of Proceedings was finalized, which resulted in a settlement payment to us as creditor in(4) Represents the amount of $1.1 million, which was recorded as a reduction to restructuring costs. AsMr. Heckes' account balance under the Deferred Compensation Plan at the end of December 31, 2017, we do not expect to incur any future charges relating to the 2014 Plan.2023.
During 2013, we began implementing plans to rationalize certain
EMPLOYMENT AGREEMENTS; POTENTIAL PAYMENTS ON TERMINATION OR CHANGE IN CONTROL
Summary of our facilities, including related headcount reductions, in Canada due to synergy opportunities related to recent acquisitions in the residential interior wood door markets. We have also rationalized certain of our operations, including related headcount reductions, in Ireland, South Africa and Israel in order to respond to declines in demand in international markets. Additionally, the decision was made to discontinue sales into the Polish market subsequent to the decision to cease manufacturing operations in 2012 (collectively, the "2013 Plan"). Costs associated with the 2013 Plan include severance and closure charges, including impairment of certain property, plant and equipment, and are substantially completed. As of December 31, 2017, we do not expect to incur any future charges for the 2013 Plan.Employment Agreements
Prior years’ restructuring costs relate to the closure of certain of our U.S. manufacturing facilities due to the start-up of our highly automated interior door slab assembly plant in Denmark, South Carolina, synergy opportunities related to acquisitions in the architectural interior wood door market and footprint optimization efforts resulting from declines in demand in specific markets, primarily in Europe. In response to the decline in demand, we reviewed the required levels of production and reduced the workforce and plant capacity accordingly, resulting in severance and closure charges. These actions were taken in order to rationalize capacity with existing and forecasted market demand conditions. The restructuring plans initiated in 2012 and prior years (the "2012 and Prior Plans") are substantially completed, although cash payments are expected to continue through 2019, primarily related to lease payments at closed facilities. As of December 31, 2017, we do not expect to incur any material future charges for the 2012 and Prior Plans.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The changes in the accrual for restructuring by activity were as follows for the periods indicated: |
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | January 1, 2017 | | Severance | | Closure Costs | | Cash Payments | | December 31, 2017 |
| 2016 Plan | $ | 1,300 |
| | $ | 116 |
| | $ | 2,278 |
| | $ | 3,604 |
| | $ | 90 |
|
| 2015 Plan | 282 |
| | (7 | ) | | — |
| | 275 |
| | — |
|
| 2014 Plan | 426 |
| | — |
| | (1,510 | ) | | (1,084 | ) | | — |
|
| 2012 and Prior Plans | 465 |
| | — |
| | (27 | ) | | 244 |
| | 194 |
|
| Total | $ | 2,473 |
| | $ | 109 |
| | $ | 741 |
| | $ | 3,039 |
| | $ | 284 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | January 3, 2016 | | Severance | | Closure Costs | | Cash Payments | | January 1, 2017 |
| 2016 Plan | $ | — |
| | $ | 1,313 |
| | $ | — |
| | $ | 13 |
| | $ | 1,300 |
|
| 2015 Plan | 774 |
| | 107 |
| | 25 |
| | 624 |
| | 282 |
|
| 2014 Plan | 442 |
| | — |
| | — |
| | 16 |
| | 426 |
|
| 2013 Plan | 316 |
| | — |
| | — |
| | 316 |
| | — |
|
| 2012 and Prior Plans | 858 |
| | — |
| | — |
| | 393 |
| | 465 |
|
| Total | $ | 2,390 |
| | $ | 1,420 |
| | $ | 25 |
| | $ | 1,362 |
| | $ | 2,473 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | December 28, 2014 | | Severance | | Closure Costs | | Cash Payments | | January 3, 2016 |
| 2015 Plan | $ | — |
| | $ | 2,519 |
| | $ | 2,965 |
| | $ | 4,710 |
| | $ | 774 |
|
| 2014 Plan | 839 |
| | — |
| | — |
| | 397 |
| | 442 |
|
| 2013 Plan | 341 |
| | — |
| | 153 |
| | 178 |
| | 316 |
|
| 2012 and Prior Plans | 1,153 |
| | — |
| | 41 |
| | 336 |
| | 858 |
|
| Total | $ | 2,333 |
| | $ | 2,519 |
| | $ | 3,159 |
| | $ | 5,621 |
| | $ | 2,390 |
|
12. Asset Impairment
During the year ended January 1, 2017, we recognized asset impairment charges of $1.5 million related to one asset group in the Architectural segment, as a result of the 2016 Plan. The resulting non-cash impairment charge for the asset group was determined based upon the excess of the asset group's carrying value of property, plant and equipment over the fair value of such assets, determined using a discounted cash flows approach. This valuation was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as established by the FASB's Fair Value Framework. The Level 3 unobservable inputs include an estimate of future cash flows for the asset group and a salvage value for the asset group. The fair value of the asset group was determined to be $0.6 million, compared to a book value of $2.1 million, with the difference representing the asset impairment charge recorded in the consolidated statements of comprehensive income (loss).
During the year ended January 3, 2016, we recognized asset impairment charges of $9.4 million, related to the disposition of Premdor S.A.S., as described in Note 2.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Income Taxes
For financial reporting purposes, income before income taxes includes the following components: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Income (loss) from continuing operations before income tax expense (benefit): | | | | | |
| Canada | $ | 25,617 |
| | $ | 25,982 |
| | $ | (97,626 | ) |
| Foreign | 104,387 |
| | 100,699 |
| | 70,057 |
|
| Total income (loss) from continuing operations before income tax expense (benefit): | $ | 130,004 |
| | $ | 126,681 |
| | $ | (27,569 | ) |
Income tax expense (benefit) for income taxes consists of the following: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Current income tax expense (benefit): | | | | | |
| Canada | $ | 7,293 |
| | $ | 6,740 |
| | $ | 5,541 |
|
| Foreign | (623 | ) | | 2,129 |
| | (466 | ) |
| Total current income tax expense (benefit): | 6,670 |
| | 8,869 |
| | 5,075 |
|
| | | | | | |
| Deferred income tax expense (benefit): | | | | | |
| Canada | (22,287 | ) | | 3,045 |
| | 2,063 |
|
| Foreign | (11,943 | ) | | 9,873 |
| | 7,034 |
|
| Total deferred income tax expense (benefit): | (34,230 | ) | | 12,918 |
| | 9,097 |
|
| Income tax expense (benefit) | $ | (27,560 | ) | | $ | 21,787 |
| | $ | 14,172 |
|
On December 22, 2017, Congress passed31, 2021, the Tax CutsCompany entered into new employment agreements with each of Messrs. Heckes, Tiejema, Ball, White, and Jobs Act ("Tax Reform"). Among other items, Tax Reform reducesPaxton. These employment agreements superseded and replaced the federal corporate tax rate to 21% effective January 1, 2018. As a result, this has caused our net deferred tax liabilities in the U.S. to be revalued. We performed an analysis to determine the impact of the revaluation of the deferred tax assets and liabilities and have recorded a net income tax benefit of $27.2 million primarily associated with the revaluation of these deferred tax items.
In accordance with SAB 118, we have reflected the income tax effects of the aspects of Tax Reform for which the accounting under ASC 740 is complete. Our provision for income taxes does include estimates around the timing of certain deductions. To the extent those estimates change, there could be effects to income tax expense due to the change in the tax rate. We would expect to be complete with this analysis upon filing of our tax return in 2018.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Canadian statutory rate is 26.5%, 26.6% and 26.6% for the years ended December 31, 2017, January 1, 2017, and January 3, 2016, respectively. A summary of the differences between expected income tax expense (benefit) calculated at the Canadian statutory rate and the reported consolidated income tax expense (benefit) follows: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Income tax expense (benefit) computed at statutory income tax rate | $ | 34,477 |
| | $ | 33,710 |
| | $ | (7,325 | ) |
| Foreign rate differential | 2,772 |
| | 6,125 |
| | (637 | ) |
| Permanent differences | 1,527 |
| | 1,159 |
| | 1,166 |
|
| Deconsolidation and disposition | (160 | ) | | (2,027 | ) | | 15,354 |
|
| Income attributable to a permanent establishment | 347 |
| | 637 |
| | 1,436 |
|
| Change in valuation allowance | (27,603 | ) | | (586 | ) | | 18,906 |
|
| Tax exempt income | (6,469 | ) | | (9,411 | ) | | (9,855 | ) |
| Share based compensation | (7,583 | ) | | (6,080 | ) | | (1,542 | ) |
| Income tax credits | (1,833 | ) | | (2,389 | ) | | (2,026 | ) |
| Foreign exchange gains (losses) | 770 |
| | (277 | ) | | (2,020 | ) |
| Unrecognized tax benefits | (116 | ) | | 2,232 |
| | (142 | ) |
| Functional currency adjustments | (283 | ) | | (157 | ) | | 1,240 |
|
| Change in tax rate | 1,209 |
| | (1,130 | ) | | 16 |
|
| Change in tax rate due to U.S. reform | (27,138 | ) | | — |
| | — |
|
| Impact of Canadian tax legislation | — |
| | — |
| | (293 | ) |
| Withholding taxes | 1,943 |
| | — |
| | — |
|
| Other | 580 |
| | (19 | ) | | (106 | ) |
| Income tax expense (benefit) | $ | (27,560 | ) | | $ | 21,787 |
| | $ | 14,172 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets arise from available net operating losses and deductions. Our ability to use those net operating losses is dependent upon our results of operations in the tax jurisdictions in which such losses or deductions arose. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below: |
| | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 |
| Deferred tax assets: | | | |
| Non-capital loss carryforwards | $ | 34,605 |
| | $ | 52,051 |
|
| Capital loss carryforwards | 13,498 |
| | 13,748 |
|
| Deferred interest expense | 8,671 |
| | 10,563 |
|
| Pension and post-retirement liability | 4,493 |
| | 9,457 |
|
| Accruals and reserves currently not deductible for tax purposes | 14,954 |
| | 20,909 |
|
| Share based compensation | 6,137 |
| | 10,805 |
|
| Other | 7,588 |
| | 7,525 |
|
| Total deferred tax assets | 89,946 |
| | 125,058 |
|
| Valuation allowance | (13,912 | ) | | (36,800 | ) |
| Total deferred tax assets, net of valuation allowance | 76,034 |
| | 88,258 |
|
| Deferred tax liabilities: | | | |
| Plant and equipment | (60,571 | ) | | (88,241 | ) |
| Intangibles | (30,578 | ) | | (41,222 | ) |
| Basis difference in subsidiaries | (6,558 | ) | | (8,824 | ) |
| Unrealized foreign exchange loss (gain) | (6,753 | ) | | (7,944 | ) |
| Other | (2,495 | ) | | (2,972 | ) |
| Total deferred tax liabilities | (106,955 | ) | | (149,203 | ) |
| Net deferred tax asset (liability) | $ | (30,921 | ) | | $ | (60,945 | ) |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
As of December 31, 2017, our deferred tax assets in Canada were primarily the result of non-capital losses, capital losses and tax credit carryforwards. For the year ended December 31, 2017, we recorded a net valuation allowance release of $24.1 million on the basis of management’s reassessment of the amount of our deferred tax assets that are more likely than not to be realized. A valuation allowance of $8.0 million and $30.9 million was recorded against our Canada gross deferred tax asset balance for the years ended December 31, 2017, and January 1, 2017, respectively.
As of each reporting date, management considers new evidence, both positive and negative, that could affect our view of the future realization of deferred tax assets. As of December 31, 2017, due in part to cumulative pretax income in the current year in the Canada federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $24.1 million are realizable. Therefore, the valuation allowance was reduced accordingly.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2017 and January 1, 2017, a valuation allowance of $13.9 million and $36.8 million, respectively, has been established to reduce the deferred tax assets to an amount that is more likely than not to be realized. We have established valuation allowances on certain deferred tax assets resulting from net operating loss carryforwards and other assets in Luxembourg, Mexico and the United Kingdom. Additionally, we have established valuations allowances on capital loss carryforwards in Canada. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
The following is a rollforward of the valuation allowance for deferred tax assets: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Balance at beginning of period | $ | 36,800 |
| | $ | 40,857 |
| | $ | 35,766 |
|
| Additions charged to expense and other | 5,566 |
| | 2,433 |
| | 27,877 |
|
| Deductions | (28,454 | ) | | (6,490 | ) | | (22,786 | ) |
| Balance at end of period | $ | 13,912 |
| | $ | 36,800 |
| | $ | 40,857 |
|
The losses carried forward for tax purposes are available to reduce future income taxes by $134.2 million. We can apply these losses against future taxable income as follows: |
| | | | | | | | | | | | | | | |
| (In thousands) | Canada | | United States | | Other Foreign | | Total |
| 2018-2025 | $ | — |
| | $ | — |
| | $ | 4,201 |
| | $ | 4,201 |
|
| 2026-2045 | 50,441 |
| | 32,577 |
| | 965 |
| | 83,983 |
|
| Indefinitely | — |
| | — |
| | 46,010 |
| | 46,010 |
|
| Total tax losses carried forward | $ | 50,441 |
| | $ | 32,577 |
| | $ | 51,176 |
| | $ | 134,194 |
|
We believe that it is more likely than not that the benefit from certain net operating loss carryforwards will not be realized. In recognition of this risk, we have provided valuation allowances of $4.4 million on these gross net operating loss carryforwards. If or when recognized, the tax benefit related to any reversal of the valuation allowance on deferred tax assets as of December 31, 2017, will be accounted for as a reduction of income tax expense.
We have outside basis differences, including undistributed earnings in our foreign subsidiaries. For those subsidiaries in which we are considered to be indefinitely reinvested, no provision for Canadian income or local country withholding taxes has been recorded. Upon reversal of the outside basis difference and/or repatriation of those earnings, in the form of dividends or otherwise, we may be subject to both Canadian income taxes and withholding taxes payable to the various foreign countries. For those subsidiaries where the earnings are not considered indefinitely reinvested, taxes have been provided as required. The determination of the unrecorded deferred tax liability for temporary differences related to investments in foreign subsidiaries that are considered to be indefinitely reinvested is not considered practical.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of December 31, 2017, and January 1, 2017, our unrecognized tax benefits were $8.6 million and $9.0 million, respectively, excluding interest and penalties. Included in the balance of unrecognized tax benefits as of December 31, 2017 and January 1, 2017, are $5.9 million and $2.7 million, respectively, of tax benefits that, if recognized, would favorably impact the effective tax rate. The unrecognized tax benefits are recorded in other long-term liabilities and as a reduction to related long-term deferred income taxes in the consolidated balance sheets. The changes to our unrecognized tax benefits were as follows: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Unrecognized tax benefit at beginning of period | $ | 9,004 |
| | $ | 3,382 |
| | $ | 3,693 |
|
| Gross increases in tax positions in current period | 1,208 |
| | 5,950 |
| | — |
|
| Gross decreases in tax positions in prior period | (464 | ) | | (335 | ) | | (172 | ) |
| Gross increases in tax positions in prior period | 1,336 |
| | 271 |
| | — |
|
| Lapse of statute of limitations | (17 | ) | | (264 | ) | | (139 | ) |
| Decrease due to change in tax rate | (2,507 | ) | | — |
| | — |
|
| Unrecognized tax benefit at end of period | $ | 8,560 |
| | $ | 9,004 |
| | $ | 3,382 |
|
We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. During the years ended December 31, 2017, January 1, 2017, and January 3, 2016, we recorded accrued interest of $0.4 million, $0.5 million and $0.5 million, respectively. Additionally, we have recognized a liability for penalties of $0.4 million, $0.5 million and $0.6 million, and interest of $3.2 million, $5.5 million and $5.0 million, respectively.
We estimate that the amount of unrecognized tax benefits will not significantly increase or decrease within the 12 months following the reporting date.
We are subject to taxation in Canada, the United States and other foreign jurisdictions. As of December 31, 2017, our tax years for 2013 and 2012 are subject to Canadian income tax examinations. We are no longer subject to Federal tax examinations in the United States for years prior to 2014 (except to the extent of loss carryforwards in 2012 and prior years). However, we are subject to United States state and local income tax examinations for years prior to 2013.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing earnings attributable to Masonite by the weighted average number of our common shares outstanding during the period. Diluted EPS is calculated by dividing earnings attributable to Masonite by the weighted average number of common shares plus the incremental number of shares issuable from non-vested and vested RSUs, SARs and warrants outstanding during the period. |
| | | | | | | | | | | |
| (In thousands, except share and per share information) | Year Ended |
| December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Net income (loss) attributable to Masonite | $ | 151,739 |
| | $ | 98,622 |
| | $ | (47,111 | ) |
| Less: income (loss) from discontinued operations, net of tax | (583 | ) | | (752 | ) | | (908 | ) |
| Income (loss) from continuing operations attributable to Masonite | $ | 152,322 |
| | $ | 99,374 |
| | $ | (46,203 | ) |
| | | | | | |
| Shares used in computing basic earnings per share | 29,298,236 |
| | 30,359,193 |
| | 30,266,747 |
|
| Effect of dilutive securities: | | | | | |
| Incremental shares issuable under share compensation plans and warrants | 516,423 |
| | 741,883 |
| | — |
|
| Shares used in computing diluted earnings per share | 29,814,659 |
| | 31,101,076 |
| | 30,266,747 |
|
| | | | | | |
| Basic earnings (loss) per common share attributable to Masonite: | | | | | |
| Continuing operations attributable to Masonite | $ | 5.20 |
| | $ | 3.27 |
| | $ | (1.53 | ) |
| Discontinued operations attributable to Masonite, net of tax | (0.02 | ) | | (0.02 | ) | | (0.03 | ) |
| Total Basic earnings per common share attributable to Masonite | $ | 5.18 |
| | $ | 3.25 |
| | $ | (1.56 | ) |
| | | | | | |
| Diluted earnings (loss) per common share attributable to Masonite: | | | | | |
| Continuing operations attributable to Masonite | $ | 5.11 |
| | $ | 3.19 |
| | $ | (1.53 | ) |
| Discontinued operations attributable to Masonite, net of tax | (0.02 | ) | | (0.02 | ) | | (0.03 | ) |
| Total Diluted earnings per common share attributable to Masonite | $ | 5.09 |
| | $ | 3.17 |
| | $ | (1.56 | ) |
| | | | | | |
| Anti-dilutive instruments excluded from diluted earnings per common share: | | | | | |
| Warrants | — |
| | — |
| | 2,497,971 |
|
| Stock appreciation rights | 51,129 |
| | — |
| | 408,682 |
|
| Restricted stock units | — |
| | — |
| | 336,673 |
|
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs and warrants and the conversion of all RSUs. The dilutive effect of such equity awards is calculated based on the weighted average share price for each fiscal period using the treasury stock method. For the year ended January 3, 2016, no potential common shares relating to our equity awards were included in the computation of diluted loss per share, as their effect would have been anti-dilutive given our net loss position for the period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Segment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The North American Residential reportable segment is the aggregation of the Wholesale and Retail operating segments. The Europe reportable segment is the aggregation of the United Kingdom, Central Eastern Europe and France (prior to disposal) operating segments. The Architectural reportable segment consists solely of the Architectural operating segment. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments which were not aggregated into any reportable segment, including the historical results of our Africa operating segment. Operating segments are aggregated into reportable segments only if they exhibit similar economic characteristics. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• registration and listing fees;
• restructuring costs;
• asset impairment;
• loss (gain) on disposal of subsidiaries;
• interest expense (income), net;
• loss on extinguishment of debt;
• other expense (income), net;
• income tax expense (benefit);
• loss (income) from discontinued operations, net of tax; and
• net income (loss) attributable to non-controlling interest.
This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indenture governing the 2023 Notes and the credit agreement governing the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment transfers are negotiated on an arm’s length basis, using market prices.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Certain information with respect to reportable segments is as follows for the periods indicated: |
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended December 31, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Sales | $ | 1,433,268 |
| | $ | 295,862 |
| | $ | 307,237 |
| | $ | 23,605 |
| | $ | 2,059,972 |
|
| Intersegment sales | (4,338 | ) | | (3,936 | ) | | (18,773 | ) | | — |
| | (27,047 | ) |
| Net sales to external customers | $ | 1,428,930 |
| | $ | 291,926 |
| | $ | 288,464 |
| | $ | 23,605 |
| | $ | 2,032,925 |
|
| | | | | | | | | | |
| Adjusted EBITDA | $ | 200,179 |
| | $ | 33,564 |
| | $ | 30,050 |
| | $ | (8,225 | ) | | $ | 255,568 |
|
| Depreciation and amortization | 33,167 |
| | 17,455 |
| | 17,774 |
| | 13,507 |
| | 81,903 |
|
| Interest expense (income), net | — |
| | — |
| | — |
| | 30,153 |
| | 30,153 |
|
| Income tax expense (benefit) | — |
| | — |
| | — |
| | (27,560 | ) | | (27,560 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended January 1, 2017 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Sales | $ | 1,357,228 |
| | $ | 305,710 |
| | $ | 312,241 |
| | $ | 23,607 |
| | $ | 1,998,786 |
|
| Intersegment sales | (5,926 | ) | | (4,543 | ) | | (14,353 | ) | | — |
| | (24,822 | ) |
| Net sales to external customers | $ | 1,351,302 |
| | $ | 301,167 |
| | $ | 297,888 |
| | $ | 23,607 |
| | $ | 1,973,964 |
|
| | | | | | | | | | |
| Adjusted EBITDA | $ | 212,619 |
| | $ | 38,795 |
| | $ | 25,160 |
| | $ | (24,061 | ) | | $ | 252,513 |
|
| Depreciation and amortization | 35,542 |
| | 17,549 |
| | 17,621 |
| | 11,619 |
| | 82,331 |
|
| Interest expense (income), net | — |
| | — |
| | — |
| | 28,178 |
| | 28,178 |
|
| Income tax expense (benefit) | — |
| | — |
| | — |
| | 21,787 |
| | 21,787 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (In thousands) | Year Ended January 3, 2016 |
| (In thousands) | North American Residential | | Europe | | Architectural | | Corporate & Other | | Total |
| Sales | $ | 1,197,330 |
| | $ | 312,560 |
| | $ | 302,129 |
| | $ | 75,081 |
| | $ | 1,887,100 |
|
| Intersegment sales | (4,106 | ) | | (719 | ) | | (10,310 | ) | | — |
| | (15,135 | ) |
| Net sales to external customers | $ | 1,193,224 |
| | $ | 311,841 |
| | $ | 291,819 |
| | $ | 75,081 |
| | $ | 1,871,965 |
|
| | | | | | | | | | |
| Adjusted EBITDA | $ | 165,560 |
| | $ | 30,468 |
| | $ | 23,281 |
| | $ | (15,112 | ) | | $ | 204,197 |
|
| Depreciation and amortization | 36,410 |
| | 14,965 |
| | 16,651 |
| | 14,859 |
| | 82,885 |
|
| Interest expense (income), net | — |
| | — |
| | — |
| | 32,884 |
| | 32,884 |
|
| Income tax expense (benefit) | — |
| | — |
| | — |
| | 14,172 |
| | 14,172 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of our consolidated Adjusted EBITDA to net income (loss) attributable to Masonite is set forth as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Adjusted EBITDA | $ | 255,568 |
| | $ | 252,513 |
| | $ | 204,197 |
|
| Less (plus): | | | | | |
| Depreciation | 57,528 |
| | 57,604 |
| | 59,160 |
|
| Amortization | 24,375 |
| | 24,727 |
| | 23,725 |
|
| Share based compensation expense | 11,644 |
| | 18,790 |
| | 13,236 |
|
| Loss (gain) on disposal of property, plant and equipment | 1,893 |
| | 2,111 |
| | 1,371 |
|
| Restructuring costs | 850 |
| | 1,445 |
| | 5,678 |
|
| Asset impairment | — |
| | 1,511 |
| | 9,439 |
|
| Loss (gain) on disposal of subsidiaries | 212 |
| | (6,575 | ) | | 59,984 |
|
| Interest expense (income), net | 30,153 |
| | 28,178 |
| | 32,884 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 28,046 |
|
| Other expense (income), net | (1,091 | ) | | (1,959 | ) | | (1,757 | ) |
| Income tax expense (benefit) | (27,560 | ) | | 21,787 |
| | 14,172 |
|
| Loss (income) from discontinued operations, net of tax | 583 |
| | 752 |
| | 908 |
|
| Net income (loss) attributable to non-controlling interest | 5,242 |
| | 5,520 |
| | 4,462 |
|
| Net income (loss) attributable to Masonite | $ | 151,739 |
| | $ | 98,622 |
| | $ | (47,111 | ) |
We derive revenues from two major product lines: interior and exterior products. We do not review or analyze our two major product lines below net sales. Additionally, we sell door components to external customers which are not otherwise consumed in our vertical operations. Sales for the product lines are summarized as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Net sales to external customers: | | | | | |
| Interior products | $ | 1,407,041 |
| | $ | 1,378,959 |
| | $ | 1,254,056 |
|
| Exterior products | 526,487 |
| | 496,617 |
| | 475,161 |
|
| Components | 99,397 |
| | 98,388 |
| | 142,748 |
|
| Total | $ | 2,032,925 |
| | $ | 1,973,964 |
| | $ | 1,871,965 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net sales information with respect to geographic areas exceeding 10% of consolidated net sales is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Net sales to external customers from facilities in: | | | | | |
| United States | $ | 1,333,223 |
| | $ | 1,284,982 |
| | $ | 1,150,889 |
|
| Canada | 327,644 |
| | 306,130 |
| | 275,882 |
|
United Kingdom(1) | 253,564 |
| | 262,854 |
| | — |
|
| Other | 118,494 |
| | 119,998 |
| | 445,194 |
|
| Total | $ | 2,032,925 |
| | $ | 1,973,964 |
| | $ | 1,871,965 |
|
(1) Amount was less than 10% of consolidated net sales in the year ended January 3, 2016, and was included as part of Other.
In the years ended December 31, 2017, January 1, 2017, and January 3, 2016, net sales to The Home Depot, Inc., were $356.5 million, $316.2 million and $302.2 million, respectively, which are included in the North American Residential segment. No other individual customer's net sales exceeded 10% of consolidated net sales for any of the periods presented.
Geographic information regarding property, plant and equipment which exceed 10% of consolidated property, plant and equipment used in continuing operations is as follows as of the dates indicated: |
| | | | | | | | | | | |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| United States | $ | 369,630 |
| | $ | 350,899 |
| | $ | 333,822 |
|
| Canada | 67,358 |
| | 60,086 |
| | 55,440 |
|
| Other | 136,571 |
| | 131,103 |
| | 144,972 |
|
| Total | $ | 573,559 |
| | $ | 542,088 |
| | $ | 534,234 |
|
16. Employee Future Benefits
United States Defined Benefit Pension Plan
We have a defined benefit pension plan covering certain active and former employees in the United States (“U.S.”). Benefits under the plan were frozen at various times in the past. The measurement date used for the accounting valuation of the defined benefit pension plan was December 31, 2017. Information about the U.S. defined benefit pension plan is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Components of net periodic benefit cost: | | | | | |
| Service cost | $ | 811 |
| | $ | 286 |
| | $ | 288 |
|
| Interest cost | 3,421 |
| | 3,570 |
| | 4,627 |
|
| Expected return on assets | (5,852 | ) | | (5,373 | ) | | (6,350 | ) |
| Amortization of actuarial net losses | 1,113 |
| | 1,070 |
| | 889 |
|
| Settlement loss (gain) | — |
| | — |
| | 2,400 |
|
| Net pension expense (benefit) | $ | (507 | ) | | $ | (447 | ) | | $ | 1,854 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2015, we offered lump sum payments over a limited time to certain former employees in our U.S. pension plans. Payments of $12.6 million related to this offer were made from existing plan assets in the fourth quarter of 2015. As a result, total lump sum payments from these plans exceeded annual service and interest cost in 2015, and we recognized a pre-tax pension settlement charge of $2.4 million in the fourth quarter of 2015. This non-cash charge is recorded within other expense (income), net in the consolidated statements of comprehensive income (loss).
Information with respect to the assets, liabilities and net accrued benefit obligation of the U.S. defined benefit pension plan is set forth as follows for the periods indicated: |
| | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 |
| Pension assets: | | | |
| Fair value of plan assets, beginning of year | $ | 83,550 |
| | $ | 76,691 |
|
| Company contributions | 5,000 |
| | 5,000 |
|
| Actual return on plan assets | 10,704 |
| | 7,823 |
|
| Benefits paid | (5,915 | ) | | (5,061 | ) |
| Administrative expenses paid | (623 | ) | | (903 | ) |
| Fair value of plan assets, end of year | 92,716 |
| | 83,550 |
|
| Pension liability: | | | |
| Accrued benefit obligation, beginning of year | 100,887 |
| | 97,686 |
|
| Current service cost | 811 |
| | 286 |
|
| Interest cost | 3,421 |
| | 3,570 |
|
| Actuarial loss (gain) | 6,328 |
| | 5,309 |
|
| Benefits paid | (5,915 | ) | | (5,061 | ) |
| Administrative expenses paid | (623 | ) | | (903 | ) |
| Accrued benefit obligation, end of year | 104,909 |
| | 100,887 |
|
| Net accrued benefit obligation, end of year | $ | 12,193 |
| | $ | 17,337 |
|
The net accrued benefit obligation is carried within other long-term liabilities in the consolidated balance sheets.
Pension fund assets are invested primarily in equity and debt securities. Asset allocation between equity and debt securities and cash is adjusted based on the expected life of the plan and the expected retirement age of the plan participants. No plan assets are expected to be returned to us in the next twelve months. Information with respect to the amounts and types of securities that are held in the U.S. defined benefit pension plan is set forth as follows for the periods indicated: |
| | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 |
| (In thousands) | Amount | | % of Total Plan | | Amount | | % of Total Plan |
| Equity securities | $ | 54,517 |
| | 58.8 | % | | $ | 48,793 |
| | 58.4 | % |
| Debt securities | 33,470 |
| | 36.1 | % | | 30,162 |
| | 36.1 | % |
| Other | 4,729 |
| | 5.1 | % | | 4,595 |
| | 5.5 | % |
| | $ | 92,716 |
| | 100.0 | % | | $ | 83,550 |
| | 100.0 | % |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under our investment policy statement, plan assets are invested to achieve a fully-funded status based on actuarial calculations, maintain a level of liquidity that is sufficient to pay benefit and expense obligations when due, maintain flexibility in determining the future level of contributions and maximize returns within the limits of risk. The target asset allocation for plan assets in the U.S. defined benefit pension plan for 2017 is 60% equity securities, 38% debt securities and 2% of other securities. Our pension funds are not invested directly in the debt or equity of Masonite, but may have been invested indirectly as a result of inclusion of Masonite in certain market or investment funds.
The weighted average actuarial assumptions adopted in measuring our U.S. accrued benefit obligations and costs were as follows for the periods indicated: |
| | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Discount rate applied for: | | | | | |
| Accrued benefit obligation | 3.6 | % | | 4.2 | % | | 4.5 | % |
| Net periodic pension cost | 4.2 | % | | 4.5 | % | | 4.1 | % |
| Expected long-term rate of return on plan assets | 7.0 | % | | 7.0 | % | | 7.0 | % |
The rate of compensation increase for the accrued benefit obligation and net periodic pension costs for the U.S. defined benefit pension plan is not applicable, as benefits under the plan are not affected by compensation increases.
The expected long-term rate of return on plan assets assumption is derived by taking into consideration the target plan asset allocation, historical rates of return on those assets, projected future asset class returns and net outperformance of the market by active investment managers. An asset return model is used to develop an expected range of returns on the plan investments over a 30-year period, with the expected rate of return selected from a best estimate range within the total range of projected results.
United Kingdom Defined Benefit Pension Plan
We also have a defined benefit pension plan in the United Kingdom (“U.K.”), which has been curtailed in prior years. The measurement date used for the accounting valuation of the U.K. defined benefit pension plan was December 31, 2017. Information about the U.K. defined benefit pension plan is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Components of net periodic benefit cost: | | | | | |
| Interest cost | $ | 685 |
| | $ | 873 |
| | $ | 1,098 |
|
| Expected return on assets | (429 | ) | | (640 | ) | | (756 | ) |
| Net pension expense (benefit) | $ | 256 |
| | $ | 233 |
| | $ | 342 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information with respect to the assets, liabilities and net accrued benefit obligation of the U.K. defined benefit pension plan is as follows for the periods indicated: |
| | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 |
| Pension assets: | | | |
| Fair value of plan assets, beginning of year | $ | 21,011 |
| | $ | 21,922 |
|
| Company contributions | 1,002 |
| | 801 |
|
| Actual return on plan assets | 1,867 |
| | 3,765 |
|
| Benefits paid | (800 | ) | | (1,595 | ) |
| Translation adjustment | 2,061 |
| | (3,882 | ) |
| Fair value of plan assets, end of year | 25,141 |
| | 21,011 |
|
| Pension liability | | | |
| Accrued benefit obligation, beginning of year | 29,095 |
| | 29,361 |
|
| Interest cost | 685 |
| | 873 |
|
| Actuarial loss (gain) | (833 | ) | | 5,746 |
|
| Benefits paid | (800 | ) | | (1,595 | ) |
| Translation adjustment | 2,665 |
| | (5,290 | ) |
| Accrued benefit obligation, end of year | 30,812 |
| | 29,095 |
|
| Net accrued benefit obligation, end of year | $ | 5,671 |
| | $ | 8,084 |
|
The net accrued benefit obligation is carried within other long-term liabilities in the consolidated balance sheets.
Pension fund assets are invested primarily in equity and debt securities. Asset allocation between equity and debt securities and cash is adjusted based on the expected life of the plan and the expected retirement age of the plan participants. Information with respect to the amounts and types of securities that are held in the U.K. defined benefit pension plan is set forth as follows for the periods indicated: |
| | | | | | | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 |
| (In thousands) | Amount | | % of Total Plan | | Amount | | % of Total Plan |
| Equity securities | $ | 11,855 |
| | 47.2 | % | | $ | 9,448 |
| | 45.0 | % |
| Debt securities | 12,949 |
| | 51.5 | % | | 11,462 |
| | 54.5 | % |
| Other | 337 |
| | 1.3 | % | | 101 |
| | 0.5 | % |
| | $ | 25,141 |
| | 100.0 | % | | $ | 21,011 |
| | 100.0 | % |
Under our investment policy and strategy, plan assets are invested to achieve a fully funded status based on actuarial calculations, maintain a level of liquidity that is sufficient to pay benefit and expense obligations when due, maintain flexibility in determining the future level of contributions and maximize returns within the limits of risk. The target asset allocation for plan assets in the U.K. defined benefit pension plan for 2017 is 50% equity securities and 50% debt securities.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The weighted average actuarial assumptions adopted in measuring our U.K. accrued benefit obligations and costs were as follows for the periods indicated: |
| | | | | | | | |
| | Year Ended |
| | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Discount rate applied for: | | | | | |
| Accrued benefit obligation | 2.4 | % | | 2.6 | % | | 3.7 | % |
| Net periodic pension cost | 2.2 | % | | 2.3 | % | | 3.3 | % |
| Expected long-term rate of return on plan assets | 4.0 | % | | 3.9 | % | | 4.0 | % |
The rate of compensation increase for the accrued benefit obligation and net pension cost for the U.K. defined benefit pension plan is not applicable, as the plan was curtailed in prior years and benefits under the plan are not affected by compensation increases.
The expected long-term rate of return on plan assets assumption is derived by taking into consideration the target plan asset allocation, historical rates of return on those assets, projected future asset class returns and net outperformance of the market by active investment managers. An asset return model is used to develop an expected range of returns on the plan investments over a 10-year period, with the expected rate of return selected from a best estimate range within the total range of projected results.
Overall Pension Obligation
For all periods presented, the U.S. and U.K. defined benefit pension plans were invested in equity securities, equity funds, bonds, bond funds and cash and cash equivalents. All investments are publicly traded and possess a high level of marketability or liquidity. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
The change in the net differenceemployment agreements between the pension plan assetsCompany and projected benefit obligation that is not attributed to our recognitionwith each of pension expense or funding of the plan is recognized in other comprehensive income (loss) within the consolidated statements of comprehensive income (loss)Messrs. Heckes, Tiejema, White, and the balance of such changes is included in accumulated other comprehensive income (loss) (“AOCI”) in the consolidated balance sheets. The estimated actuarial net losses that will be amortized from AOCI into net periodic benefit cost during 2018 are $1.3 million.
As of December 31, 2017, the estimated future benefit payments from the U.S. and U.K. defined benefit pension plans for the following future periods are set forth as follows: |
| | | |
| (In thousands) | Expected Future Benefit Payments |
| Fiscal year: | |
| 2018 | $ | 6,885 |
|
| 2019 | 7,001 |
|
| 2020 | 7,238 |
|
| 2021 | 7,500 |
|
| 2022 | 7,595 |
|
| 2023 through 2027 | 38,861 |
|
| Total estimated future benefit payments | $ | 75,080 |
|
Expected contributions to the U.S. and U.K. defined benefit pension plans during 2018 are $5.7 million.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Other Comprehensive Income and Accumulated Other Comprehensive Income
A rollforward of the components of accumulated other comprehensive income (loss) is as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Accumulated foreign exchange gains (losses), beginning of period | $ | (127,433 | ) | | $ | (90,111 | ) | | $ | (57,473 | ) |
| Foreign exchange gain (loss) | 38,758 |
| | (35,666 | ) | | (63,664 | ) |
| Income tax benefit (expense) on foreign exchange gain (loss) | (609 | ) | | — |
| | 899 |
|
| Cumulative translation adjustment recognized upon deconsolidation of subsidiaries | 212 |
| | (1,431 | ) | | 29,027 |
|
| Less: foreign exchange gain (loss) attributable to non-controlling interest | 752 |
| | 225 |
| | (1,100 | ) |
| Accumulated foreign exchange gains (losses), end of period | (89,824 | ) | | (127,433 | ) | | (90,111 | ) |
| | | | | | |
| Accumulated pension and other post-retirement adjustments, beginning of period | (21,553 | ) | | (17,837 | ) | | (18,786 | ) |
| Pension and other post-retirement adjustments | 529 |
| | (5,941 | ) | | (1,826 | ) |
| Income tax benefit (expense) on pension and other post-retirement adjustments | 39 |
| | 1,578 |
| | 820 |
|
| Amortization of actuarial net losses | 1,113 |
| | 1,070 |
| | 889 |
|
| Income tax benefit (expense) on amortization of actuarial net losses | (456 | ) | | (423 | ) | | (364 | ) |
| Pension settlement charges | — |
| | — |
| | 2,400 |
|
| Income tax benefit (expense) on pension settlement charges | — |
| | — |
| | (970 | ) |
| Accumulated pension and other post-retirement adjustments | (20,328 | ) | | (21,553 | ) | | (17,837 | ) |
| | | | | | |
| Accumulated other comprehensive income (loss) | $ | (110,152 | ) | | $ | (148,986 | ) | | $ | (107,948 | ) |
| | | | | | |
| Other comprehensive income (loss), net of tax: | $ | 39,586 |
| | $ | (40,813 | ) | | $ | (32,789 | ) |
| Less: other comprehensive income (loss) attributable to non-controlling interest | 752 |
| | 225 |
| | (1,100 | ) |
| Other comprehensive income (loss) attributable to Masonite | $ | 38,834 |
| | $ | (41,038 | ) | | $ | (31,689 | ) |
Cumulative translation adjustments are reclassified out of accumulated other comprehensive income (loss) into loss (gain) on disposal of subsidiaries in the year ended December 31, 2017, and restructuring costs in the year ended January 1, 2017, in the consolidated statements of comprehensive income (loss). Actuarial net losses are reclassified out of accumulated other comprehensive income (loss) into cost of goods sold in the consolidated statements of comprehensive income (loss). Pension settlement charges are reclassified out of accumulated other comprehensive income (loss) into other expense (income), net, in the consolidated statements of comprehensive income (loss).
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated: |
| | | | | | | | | | | |
| | Year Ended |
| (In thousands) | December 31, 2017 | | January 1, 2017 | | January 3, 2016 |
| Transactions involving cash: | | | | | |
| Interest paid | $ | 27,396 |
| | $ | 26,862 |
| | $ | 33,340 |
|
| Interest received | 381 |
| | 279 |
| | 614 |
|
| Income taxes paid | 10,169 |
| | 9,475 |
| | 6,984 |
|
| Income tax refunds | 68 |
| | 1,469 |
| | 303 |
|
| Non-cash transactions: | | | | | |
| Property, plant and equipment additions in accounts payable | 8,431 |
| | 7,724 |
| | 11,417 |
|
19. Variable Interest Entity
As of December 31, 2017, and January 1, 2017, we held an interest in one variable interest entity ("VIE"), Magna Foremost Sdn Bhd, which is located in Bintulu, Malaysia. The VIE is integrated into our supply chain and manufactures door facings. We are the primary beneficiary of the VIE based onPaxton, the terms of the existing supply agreement with the VIE. As primary beneficiary via the supply agreement, we receivewhich expired on that date. The employment agreements provide for a disproportionate amount of earningsterm that commences on sales to third parties in relation to our voting interest, and as a result, receive a majority of the VIE’s residual returns. Sales to third parties did not have a material impact on our consolidated financial statements. We also have the power to direct activities of the VIE that most significantly impact the entity’s economic performance. As its primary beneficiary, we have consolidated the results of the VIE. Our net cumulative investment in the VIE was comprised of the following as of the dates indicated: |
| | | | | | | |
| (In thousands) | December 31,
2017 | | January 1,
2017 |
| Current assets | $ | 7,213 |
| | $ | 6,633 |
|
| Property, plant and equipment, net | 11,344 |
| | 13,673 |
|
| Long-term deferred income taxes | 5,472 |
| | 6,505 |
|
| Other assets, net | 3,386 |
| | 1,789 |
|
| Current liabilities | (2,326 | ) | | (2,044 | ) |
| Other long-term liabilities | (1,699 | ) | | (2,115 | ) |
| Non-controlling interest | (4,029 | ) | | (4,664 | ) |
| Net assets of the VIE consolidated by Masonite | $ | 19,361 |
| | $ | 19,777 |
|
Current assets include $3.2 million and $2.6 million of cash and cash equivalents as of December 31, 20172021, and January 1, 2017, respectively. Assets recognized as a result of consolidating this VIE do not represent additional assets that could be used to satisfy claims against our general assets. Furthermore, liabilities recognized as a result of consolidating these entities do not represent additional claimsexpires on our general assets; rather, they represent claims against the specific assets of the consolidated VIE.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, income taxes receivable, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short-term maturity of those instruments. The estimated fair value of the 2023 Notes as of December 31, 2017, was $653.6 million, compared2024, unless earlier terminated.
Howard C. Heckes
Pursuant to a carrying value of $624.1 million, and the estimated fair value of the 2023 Noteshis employment agreement, Mr. Heckes continues to serve as of January 1, 2017, was $485.4 million, compared to a carrying value of $469.6 million. This estimate is based on market quotes and calculations based on current market rates available to us and is categorized as having Level 2 valuation inputs as established by the FASB’s Fair Value Framework. Market quotes used in these calculations are based on bid prices for our debt instruments and are obtained from and corroborated with multiple independent sources. The market quotes obtained from independent sources are within the range of management’s expectations.
21. Subsequent Event
On January 29, 2018, we completed the acquisition of DW3 Products Holdings Limited (“DW3”), a leading UK provider of high quality premium door solutions and window systems, supplying products under brand names such as Solidor, Residor, Nicedor and Residence. We acquired 100% of the equity interests in DW3 for consideration of approximately $96 million, net of cash acquired. DW3 is based in Stoke-on-Trent and Gloucester, England, and their products and service model are a natural addition to our existing UK business. DW3’s online quick ship capabilities and product portfolio both complement and expand the strategies we are pursuing with our business. Due to the timing of the completion of the acquisition, the purchase price allocation was not complete as of the date the financial statements were issued.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental Unaudited Quarterly Financial Information
The following table sets forth the historical unaudited quarterly financial data for the periods indicated. The information for each of these periods has been prepared on the same basis as the audited consolidated financial statements and, in our opinion, reflects all adjustments necessary to present fairly our financial results. Operating results for previous periods do not necessarily indicate results that may be achieved in any future period. |
| | | | | | | | | | | | | | | |
| | Quarter Ended |
| (In thousands, except per share information) | December 31,
2017 | | October 1,
2017 | | July 2,
2017 | | April 2,
2017 |
| Net sales | $ | 508,500 |
| | $ | 517,503 |
| | $ | 519,741 |
| | $ | 487,181 |
|
| Cost of goods sold | 408,386 |
| | 413,517 |
| | 412,415 |
| | 391,624 |
|
| Gross profit | 100,114 |
| | 103,986 |
| | 107,326 |
| | 95,557 |
|
| Selling, general and administration expenses | 59,608 |
| | 58,798 |
| | 63,604 |
| | 64,845 |
|
| Restructuring costs | (136 | ) | | 1,393 |
| | (700 | ) | | 293 |
|
| Loss (gain) on disposal of subsidiaries | — |
| | — |
| | 212 |
| | — |
|
| Operating income (loss) | 40,642 |
| | 43,795 |
| | 44,210 |
| | 30,419 |
|
| Interest expense (income), net | 8,804 |
| | 7,213 |
| | 7,112 |
| | 7,024 |
|
| Other expense (income), net | (634 | ) | | (186 | ) | | (22 | ) | | (249 | ) |
| Income (loss) from continuing operations before income tax expense (benefit) | 32,472 |
| | 36,768 |
| | 37,120 |
| | 23,644 |
|
| Income tax expense (benefit) | (40,802 | ) | | 5,989 |
| | 8,932 |
| | (1,679 | ) |
| Income (loss) from continuing operations | 73,274 |
| | 30,779 |
| | 28,188 |
| | 25,323 |
|
| Income (loss) from discontinued operations, net of tax | (65 | ) | | (139 | ) | | (134 | ) | | (245 | ) |
| Net income (loss) | 73,209 |
| | 30,640 |
| | 28,054 |
| | 25,078 |
|
| Less: Net income (loss) attributable to non-controlling interest | 1,397 |
| | 1,162 |
| | 1,170 |
| | 1,513 |
|
| Net income (loss) attributable to Masonite | $ | 71,812 |
| | $ | 29,478 |
| | $ | 26,884 |
| | $ | 23,565 |
|
| Earnings (loss) per common share attributable to Masonite: | | | | | | | |
| Basic | $ | 2.52 |
| | $ | 1.01 |
| | $ | 0.90 |
| | $ | 0.79 |
|
| Diluted | $ | 2.48 |
| | $ | 1.00 |
| | $ | 0.89 |
| | $ | 0.77 |
|
| | | | | | | | |
| | | | | | | | |
| | Quarter Ended |
| | January 1,
2017 | | October 2,
2016 | | July 3,
2016 | | April 3,
2016 |
| Net sales | $ | 481,027 |
| | $ | 489,647 |
| | $ | 513,985 |
| | $ | 489,305 |
|
| Cost of goods sold | 384,533 |
| | 385,845 |
| | 402,881 |
| | 391,060 |
|
| Gross profit | 96,494 |
| | 103,802 |
| | 111,104 |
| | 98,245 |
|
| Selling, general and administration expenses | 63,488 |
| | 63,017 |
| | 68,961 |
| | 64,898 |
|
| Restructuring costs | 1,314 |
| | 215 |
| | (103 | ) | | 19 |
|
| Asset impairment | 1,511 |
| | — |
| | — |
| | — |
|
| Loss (gain) on disposal of subsidiaries | — |
| | (5,144 | ) | | (1,431 | ) | | — |
|
| Operating income (loss) | 30,181 |
| | 45,714 |
| | 43,677 |
| | 33,328 |
|
| Interest expense (income), net | 7,028 |
| | 6,985 |
| | 6,933 |
| | 7,232 |
|
| Other expense (income), net | (745 | ) | | (1,199 | ) | | (801 | ) | | 786 |
|
| Income (loss) from continuing operations before income tax expense (benefit) | 23,898 |
| | 39,928 |
| | 37,545 |
| | 25,310 |
|
| Income tax expense (benefit) | 6,196 |
| | 6,526 |
| | 2,855 |
| | 6,210 |
|
| Income (loss) from continuing operations | 17,702 |
| | 33,402 |
| | 34,690 |
| | 19,100 |
|
| Income (loss) from discontinued operations, net of tax | (144 | ) | | (236 | ) | | (184 | ) | | (188 | ) |
| Net income (loss) | 17,558 |
| | 33,166 |
| | 34,506 |
| | 18,912 |
|
| Less: Net income (loss) attributable to non-controlling interest | 2,128 |
| | 1,157 |
| | 1,151 |
| | 1,084 |
|
| Net income (loss) attributable to Masonite | $ | 15,430 |
| | $ | 32,009 |
| | $ | 33,355 |
| | $ | 17,828 |
|
| Earnings (loss) per common share attributable to Masonite: | | | | | | | |
| Basic | $ | 0.51 |
| | $ | 1.05 |
| | $ | 1.09 |
| | $ | 0.58 |
|
| Diluted | $ | 0.50 |
| | $ | 1.03 |
| | $ | 1.06 |
| | $ | 0.57 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017, based on the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based upon our evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017, has been audited by Ernst & Young, an independent registered certified public accounting firm, as stated in their report which is included herein, and which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2017. See "Report of Independent Registered Certified Public Accounting Firm" elsewhere in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recently completed quarter covered by this Annual Report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Certified Public Accounting Firm
To the Shareholders and the Board of Directors of Masonite International Corporation
Opinion on Internal Control over Financial Reporting
We have audited Masonite International Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our opinion, Masonite International Corporation and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Masonite International Corporation and subsidiaries as of December 31, 2017 and the related consolidated statement of comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year ended December 31, 2017, and the related notes and our report dated February 27, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material aspects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tampa, Florida
February 27, 2018
Item 9B. Other Information
Annual Meeting and Record Date. The Board of Directors has set the date of the 2018 Annual General Meeting of Shareholders and the related record date. The Annual General Meeting will be held in Tampa, Florida, on May 10, 2018, and the shareholders entitled to receive notice of and vote at the meeting will be the shareholders of record at the close of business on March 12, 2018.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Some of the information required in response to this item with regard to directors is incorporated by reference into this Annual Report on Form 10-K from our definitive Proxy Statement for our 2018 Annual General Meeting of Shareholders (the "2018 Proxy Statement"). Such information will be included under the captions "Election of Directors," "Corporate Governance; Board and Committee Matters - Certain Legal Proceedings", "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance; Board and Committee Matters - Corporate Governance Guidelines and Code of Ethics", "Corporate Governance; Board and Committee Matters - Board Structure and Director Independence" and "Corporate Governance; Board and Committee Matters - Board Committees; Membership - Audit Committee".
The following table sets forth information as of February 27, 2018, regarding each of our executive officers: |
| | | | |
Name | | Age | | Positions |
Frederick J. Lynch | | 53 | | President and Chief Executive Officer and Director |
Russell T. Tiejema | | 49 | | Executive Vice President and Chief Financial Officer |
Randal A. White | | 47 | | Senior Vice President, Global Operations and Supply Chain |
James A. "Tony" Hair | | 51 | | President, Global Residential |
Robert E. Lewis | | 57 | | Senior Vice President, General Counsel and Secretary |
Robert A. Paxton | | 44 | | Senior Vice President, Human Resources |
Biographies
The present principal occupations and recent employment history of each of the executive officers and directors listed above are as follows:
Frederick J. Lynch, (age 53) has served as President of Masonite since July 2006 and as President and Chief Executive OfficerOfficer. Mr. Heckes’ base salary was increased to $985,000 in 2023 and he is eligible to receive an annual bonus targeted at 120% of Masonite since May 2007. Mr. Lynch has served as a Directorhis base salary, subject to the achievement of Masonite since June 2009. Mr. Lynch joined Masonite from Alpharma Inc., where he served as President of the human generics division and Senior Vice President of global supply chain from 2003 until 2006. Prior to joining Alpharma Inc. in 2003, Mr. Lynch spent nearly 18 years at Honeywell International Inc. (formerly AlliedSignal Inc.), most recently as vice president and general manager of the specialty chemical business. Mr. Lynch is a Director of Ingevity Corporation.applicable performance goals.
Russell T. Tiejema,(age 49) is
Pursuant to his employment agreement, Mr. Tiejema continues to serve as our Executive Vice President and Chief Financial OfficerOfficer. Mr. Tiejema’s base salary was $580,000 in 2023 and he is eligible to earn an annual bonus targeted at 75% of Masonite.his base salary, subject to the achievement of applicable performance goals.
Christopher O. Ball
Pursuant to his employment agreement, Mr. Tiejema joined MasoniteBall serves as our President, Global Residential. Mr. Ball’s base salary was $575,000 in November 2015, from Lennox International, a global leader in2023 and he is eligible to earn an annual bonus targeted at 75% of his base salary, subject to the heating, ventilation, air conditioning and refrigeration industry, where he served as the Vice Presidentachievement of Finance and Chief Financial Officer of LII Residential, the largest reporting segment of Lennox International, since 2013. From 2011 to 2013, Mr. Tiejema served as the Vice President, Business Analysis & Planning, of Lennox International. Prior to joining Lennox in 2011, Mr. Tiejema spent 20 years with General Motors in a variety of financial leadership roles across a number of operating units and staffs, including Finance Director for GM Fleet & Commercial and Director of Financial Planning and Analysis.applicable performance goals.
Randal A. White, (age 47) joined Masonite in September 2017
Pursuant to his employment agreement, Mr. White continues to serve as our Senior Vice President, Global Operations and Supply Chain. Prior to joining Masonite, Mr. WhiteWhite’s base salary was with Joy Global, Inc., a leading manufacturer of high productivity mining equipment now operating as Komatsu Mining, where he served$500,000 in various operations and manufacturing roles since 2008, most recently serving as the Vice President Operations, Supply Chain, Quality and Operational Excellence (Lean) since 2014. Prior to joining Joy Global, Inc., Mr. White held various marketing and operational positions with Magnum Magnetics Inc. and Cooper Crouse-Hinds.
James A. "Tony" Hair, (age 51) joined Masonite in November 2013 as Vice President and Business Leader for the Residential Door Business2023 and he has served most recently as Presidentis eligible to earn an annual bonus targeted at 65% of his base salary, subject to the Global Residential Door Business. Prior to joining Masonite, Mr. Hair was with Newell Rubbermaid, a global manufacturer and marketerachievement of consumer and commercial products, from 2005 to 2013, most recently serving as Senior Vice President and General Manager of the Décor Business Unit. Mr. Hair also held executive leadership positions in the Home Solutions and Tools business groups. Prior to joining Newell Rubbermaid, Mr. Hair held various engineering, supply chain and sales positions with Maytag Corporation.applicable performance goals.
Robert E. Lewis,(age 57) has served as the Senior Vice President, General Counsel and Secretary of Masonite since April 2012. Mr. Lewis joined Masonite from Gerdau Ameristeel Corporation, a mini-mill steel producer, where he served as Vice President, General Counsel and Corporate Secretary from January 2005 to May 2011. Prior to joining Gerdau, Mr. Lewis served as Senior Vice President, General Counsel and Secretary of Eckerd Corporation, a national retail drugstore chain from 1994 to January 2005. Prior to joining Eckerd, Mr. Lewis was an attorney and shareholder with the Tampa law firm of Shackleford, Farrior, Stallings & Evans, P.A.
Robert A. Paxton (age 44) has served
Pursuant to his employment agreement, Mr. Paxton continues to serve as Masonite’sour Senior Vice President, Human Resources since February 2018. PriorResources. Mr. Paxton’s base salary was $475,000 in 2023 and he is eligible to joining Masonite, Mr. Paxton wasearn an annual bonus targeted at 60% of his base salary, subject to the achievement of applicable performance goals.
All of our NEOs are eligible to participate in our Deferred Compensation Plan and all of our employee benefit plans, including the 401(k) Retirement Savings Plan and are entitled to four weeks of vacation per year. In addition, all of our NEOs are subject to covenants, during the term of their employment and for a period of 24 months thereafter, not to (i) engage in any business that competes with Owens Corning,us, (ii) solicit our customers, or (iii) solicit or hire our employees.
Termination and Change in Control Benefits
The employment agreements entered into with each of our NEOs entitle them to receive the payments and benefits upon each termination and change in control event described below.
Termination without cause or for good reason, other than in connection with a change in control
If the employment of an NEO is terminated by us other than for cause or disability (as defined below), or if an NEO resigns for good reason (as defined below), and such termination is not in connection with a change in control, the NEO will be entitled to receive:
•a lump sum payment of an amount equal to a pro-rata portion of the annual cash incentive bonus, based on actual performance, that the NEO would have been paid if he had remained employed by us; and
•continued payment of base salary for 24 months if the date of termination is more than two years after the NEO became employed by the Company, and for 12 months if the date of termination is less than two years after the NEO became an employee of the Company; and
•continued participation in our medical, dental and hospitalization coverage for 12 months on the same terms and conditions as immediately prior to such NEO’s date of termination (i.e., at active employee rates).
Termination without cause or for good reason in connection with a change in control
In the event the employment of an NEO is terminated by us other than for cause or disability, or by an NEO for good reason, either during the two year period following a change in control or if such NEO’s employment is terminated at the request of a third party or otherwise arises in anticipation of a change in control, the NEO will be entitled to receive:
•a lump sum payment of an amount equal to a pro-rata portion of the annual cash incentive bonus, based on actual performance, that the NEO would have been paid if the NEO had remained employed by us; and
•a lump sum payment equal to two times the sum of base salary and the average amount of such NEO’s annual cash incentive bonus earned during the two calendar years immediately preceding the date of termination; and
•continued participation in our medical, dental and hospitalization coverage for 24 months on the same terms and conditions as immediately prior to such NEO’s date of termination (i.e., at active employee rates).
If any payments or benefits provided to an NEO in connection with a change in control are subject to excise taxes as a result of the application of Sections 280G and 4999 of the Internal Revenue Code, such payments and benefits will be reduced so that no excise tax is payable, but only if this reduction results in a more favorable after-tax position for such NEO.
Termination upon expiration of the term
If the term of an NEO’s employment agreement expires without the Company offering to renew it on the same terms and conditions upon the expiration of the term, such NEO will be entitled to receive:
•continued payment of base salary for 24 months; and
•continued participation in our medical, dental and hospitalization coverage for 12 months on the same terms and conditions as immediately prior to the date of termination (i.e., at active employee rates).
Release and Restrictive Covenants
All severance payments to our NEOs are subject to the execution and non-revocation of an effective release in our favor and the NEO’s continued compliance with the restrictive covenants set forth in the employment agreement.
Definitions
For purposes of all of the employment agreements:
“cause” is generally defined as:
•conviction of, or plea of no contest to a felony (other than in connection with a traffic violation);
•the NEO’s continued failure to substantially perform his or her material duties under the employment agreement;
•an act of fraud or gross or willful material misconduct;
•any act of workplace harassment which exposes the Company to risk of material civil or criminal legal damages and materially adversely affects the Company’s business or reputation; or
•a material breach by the NEO of the restrictive covenants of the employment agreement.
“change in control” means:
•an acquisition of more than 50% of our voting securities (other than acquisitions from or by us);
•an acquisition of more than 30% of our voting securities in one or a series of related transactions during any 12-month period (other than acquisition from or by us);
•certain changes in a majority of the Board;
•a merger or consolidation of the Company other than a merger or consolidation in which the Company is the surviving entity (other than a recapitalization in which no person or entity acquires more than 50% of our voting securities); or
•a sale or disposition of at least 40% of the total gross fair market value of our assets, other than a sale or disposition of all or substantially all of our assets to a person or entity that owns more than 50% of our voting securities.
“disability” is generally defined as the NEO being unable to perform their material duties under the employment agreement due to illness, physical or mental disability or other similar incapacity that continues for 180 consecutive days or 240 days in any 24-month period.
“good reason” is generally defined as:
•any material diminution or material adverse change to the applicable NEO’s title, duties or authorities;
•a reduction in the NEO’s base salary or target annual cash incentive bonus, except for a base salary reduction of up to 10% as part of across-the-board reductions in base salary for all senior executives;
•a material adverse change in the applicable NEO’s reporting responsibilities or the assignment of duties substantially inconsistent with his or her position or status with the Company;
•a relocation of the NEO’s primary place of employment to a location more than 25 miles further from his or her primary residence than the current location of the Company’s offices;
•any material breach by the Company of the material provisions of the employment agreement or any other agreement with the Company or its affiliates;
•the failure of any successor of the Company to assume in writing the obligations under the employment agreement; or
•any material diminution in the aggregate value of employee benefits provided to the NEO on the effective date of the employment agreement; however, if such reduction occurs at any time other than within the two year period following a change in control, such NEO will not have good reason for across-the-board reductions in benefits applicable to all senior executives.
NEO EQUITY AWARD AGREEMENTS
The equity award agreements governing the outstanding RSUs and SARs rights held by the NEOs provide for certain accelerated vesting of the underlying award, as summarized below:
Change in Control
For purposes of the 2021 Plan and the 2012 Plan and the applicable equity award agreements, a “change in control” generally has the same meaning as set forth in the employment agreements with the NEOs as described above.
With respect to all unvested restricted stock units and stock appreciation rights, if within 30 days prior or 24 months following the completion of a change in control or at any time prior to a change in control at the request of a prospective purchaser whose proposed purchase would constitute a change in control upon its completion, the participant’s employment is terminated either without “cause” or by the participant for “good reason” (each as defined above for the NEOs), any such awards will become fully vested on the date of such termination of employment. With respect to performance-vesting restricted stock units, the vesting is determined as follows: if a “change in control” occurs (a) before the end of the applicable performance period, the value of accelerated performance-vesting restricted stock units is calculated assuming that the applicable performance goals are achieved at the target levels, or (b) after the end of the applicable performance period, the value of the accelerated performance-vesting restricted stock units is calculated based on the Company’s actual performance against the applicable performance goals.
Death or Disability
If a participant’s employment is terminated due to death or disability, all awards will become fully vested. With respect to any performance-based restricted stock units, the number of units subject to such accelerated vesting will be counted at target.
For purposes of the 2021 Plan and the 2012 Plan and the applicable equity award agreements, a “disability” generally means the inability of a participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
SUMMARY OF POTENTIAL PAYMENTS UPON TERMINATION AND/OR CHANGE OF CONTROL
The following table sets forth for each of our NEOs, the amount of the severance payments and benefits and the accelerated vesting of the restricted stock units and stock appreciation rights that the NEO would have been entitled to under the various termination and change in control events described above, assuming they had terminated employment on December 29, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Cash Severance ($) | Pro-Rate Bonus ($)(1) | Health and Welfare Benefits ($)(2) | Accelerated Vesting of RSUs ($)(3) | Accelerated Vesting of SARs ($)(4) | Total ($) |
| Howard C. Heckes | Without Cause/For Good Reason Without a CIC | 1,970,000 (5) | 1,880,562 | | 326 | | — | | — | | 3,850,888 | |
| Without Cause/For Good Reason in connection with a CIC | 4,905,740 (6) | — | | 653 | | 10,606,289 | | — | | 15,512,682 | |
| Termination upon Expiration of the Employment Agreement | 1,970,000 (7) | — | | 326 | | — | | — | | 1,970,326 | |
| Death or Disability | — | | — | | — | | 10,606,289 | | — | | 10,606,289 | |
| Russell T. Tiejema | Without Cause/For Good Reason Without a CIC | 1,160,000 (5) | 692,085 | | 18,871 | | — | | — | | 1,870,956 | |
| Without Cause/For Good Reason in connection with a CIC | 2,248,498 (6) | — | | 37,741 | | 3,480,711 | | — | | 5,766,950 | |
| Termination upon Expiration of the Employment Agreement | 1,160,000 (7) | — | | 18,871 | | — | | — | | 1,178,871 | |
| Death or Disability | — | | — | | — | | 3,480,711 | | — | | 3,480,711 | |
| Christopher O. Ball | Without Cause/For Good Reason Without a CIC | 1,150,000 (5) | 450,182 | | 18,854 | | — | | — | | 1,619,036 | |
| Without Cause/For Good Reason in connection with a CIC | 2,219,985 (6) | — | | 37,708 | | 2,479,945 | | — | | 4,737,639 | |
| Termination upon Expiration of the Employment Agreement | 1,150,000 (7) | — | | 18,854 | | — | | — | | 1,168,854 | |
| Death or Disability | — | | — | | — | | 2,479,945 | | — | | 2,479,945 | |
| Randal A. White | Without Cause/For Good Reason Without a CIC | 1,000,000 (5) | 517,075 | | 18,854 | | — | | — | | 1,535,929 | |
| Without Cause/For Good Reason in connection with a CIC | 1,788,077 (6) | — | | 37,708 | | 2,163,317 | | — | | 3,989,102 | |
| Termination upon Expiration of the Employment Agreement | 1,000,000 (7) | — | | 18,854 | | — | | — | | 1,018,854 | |
| Death or Disability | — | | — | | — | | 2,163,317 | | — | | 2,163,317 | |
| Robert A. Paxton | Without Cause/For Good Reason Without a CIC | 950,000 (5) | 476,107 | | 18,854 | | — | | — | | 1,444,961 | |
| Without Cause/For Good Reason in connection with a CIC | 1,695,524 (6) | — | | 37,708 | | 2,188,630 | | — | | 3,921,862 | |
| Termination upon Expiration of the Employment Agreement | 950,000 (7) | — | | 18,854 | | — | | — | | 968,854 | |
| Death or Disability | — | | — | | — | | 2,188,630 | | — | | 2,188,630 | |
(1) Represents the full annual cash incentive bonus amount for 2023.
(2) Represents the value of benefits continuation for the Company sponsored portion of the health and welfare benefits at active employee rates, based upon the NEO’s benefit election as of January 1, 2024, for a period of 12 months upon a termination without cause or for good reason without a change in control or due to expiration of the employment agreement, or 24 months upon a termination without cause or for good reason with a change in control, as applicable.
(3) Amounts shown are calculated by aggregating the sums determined by multiplying, for each award, (x) the number of restricted stock units that receive accelerated vesting as a result of the applicable termination of employment, by (y) the closing share price on December 29, 2023 of $84.66. The value of accelerated performance-vesting restricted stock units is calculated assuming that the applicable performance goals are achieved at the target levels.
(4) Amounts shown are calculated by aggregating the sums determined by multiplying, for each award, (x) the number of shares subject to SARs that receive accelerated vesting as a result of the applicable termination of employment, by (y) the difference between the closing price per share of our common stock on December 29, 2023 of $84.66, less the applicable exercise price of the SAR, provided that if such sum is zero or a negative number, the overall calculation result defaults to zero.
(5) Represents a cash severance amount equal to 24 months of base salary if the date of termination is more than two years after the NEO became employed by the Company, or cash severance amount equal to 12 months of base salary if the date of termination is less than two years after the NEO became employed by the Company.
(6) Represents a cash severance amount equal two times (2x) the sum of base salary and the average amount of the NEO’s annual cash incentive bonuses, if any, earned during the two calendar years immediately preceding the calendar year in which the date of termination occurred (i.e., 2023 and 2022).
(7) Represents a cash severance amount equal to 24 months of base salary if the date of termination is more than two years after the NEO became employed by the Company, or cash severance amount equal to 12 months of base salary if the date of termination is less than two years after the NEO became employed by the Company.
CEO Pay Ratio
In accordance with the SEC rules, we are providing the ratio of the annual total compensation of our CEO, to the annual total compensation of our median employee.
To identify our median employee for our 2023 disclosure, we determined our global developeremployee population of approximately 10,168 employees (excluding our CEO, contract, and producerleave of insulation, roofingabsence employees) as of December 31, 2023, which included 6,767 U.S. employees, and fiberglass composites, where he served3,401 non-U.S. employees. We excluded all employees in Malaysia (240) and China (3) under the de minimus exception, as Vice President, Human Resourcesan aggregate number of employees (243) represents less than 5% of our total global employee population. After taking into account this de minimis exception, 9,925 employees, including 3,158 non-U.S. employees, were considered in identifying the median employee.
After determining our global employee population, we used annual taxable compensation as derived from our tax and/or payroll records, converted to U.S. dollars, as our consistently applied compensation measure. We believe that using taxable compensation encompasses all the principal methods of gathering compensation of our employees and Vice President, Business Integration from May 2010 to February 2018. Prior to joining Owens Corning, he servedprovides a reasonable estimate of annual compensation for our employees. Furthermore, in identifying our median employee, we annualized base wages for employees who were not employed for the full 2023 fiscal year.
After identifying our median employee, we then calculated the annual total compensation for our median employee using the same methodology used for our CEO as Senior Vice President, Human Resourcesset forth in the Summary Compensation Table of Broadwind Energy from 2008 to 2010. Prior to joining Broadwind, he served Whirlpool Corporation in various human resources leadership roles from 2002 to 2008, most recently serving as Vice President, Global Human Resources from 2007 to 2008. Mr. Paxton began his career with British Petroleum in 1995.
Item 11. Executive Compensation
Information required in response to this item is incorporated by reference into this Annual Report on Form 10‑K from the 2018 Proxy Statement. Such information willBelow is the calculation of our 2023 CEO pay ratio:
| | | | | |
| CEO Total Annual Compensation | $7,035,842 |
| Median Employee Total Annual Compensation | $46,688 |
| CEO to Median Employee Compensation Ratio | 151 : 1 |
Because the SEC rules for identifying the median compensated employee and calculating the pay ratio based on that employee's annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their compensation practices, the pay ratio reported by other companies may not be includedcomparable to the pay ratio reported above, as other companies may have different employment and compensation practices and may utilize different methodologies, exclusions, estimates, and assumptions in the 2018 Proxy Statement under the captions "Director Compensation", "Compensation Committee Report", "Executive Compensation" and "Corporate Governance; Board and Committee Matters - Compensation Interlocks and Insider Participation".calculating their own pay ratios.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth the number of Common Shares of Masonite securities beneficially owned as of the close of business on April 15, 2024, by (i) each of those known to the Company to be the beneficial owner of more than 5% of our Common Shares, (ii) each director, (iii) the named executive officers listed in the Summary Compensation Table (“NEO’s”), and (iv) all directors and all our executive officers as a group.
The percentage of Common Shares outstanding provided in the tables are based on 21,978,219 Common Shares outstanding as of the close of business on April 15, 2024. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Based solely on filings made under Sections 13(d) and 13(g) of the Exchange Act as of the close of business on April 15, 2024 the only shareholders known to us to beneficially own more than 5% of any class of our voting securities are:
| | | | | | | | | | | |
| Amount and Nature of Beneficial Ownership |
| Name and Address of Beneficial Owner | Total Common Shares Beneficially Owned | | Percentage of Common Shares Beneficially Owned |
The Vanguard Group (1) | 2,366,249 | | | 10.84 | % |
BlackRock, Inc. (2) | 1,684,651 | | | 7.70 | % |
FMR LLC (3) | 1,401,403 | | | 6.42 | % |
(1) Based on the most recently available Schedule 13G/A filed with the SEC on February 13, 2024, as of December 29, 2023, the number of shares reported includes (a) 2,302,240 Common Shares over which The Vanguard Group (“Vanguard”) has sole dispositive power, (b) 40,740 Common Shares over which Vanguard has shared voting power, and (c) 64,009 Common Shares over which Vanguard has shared dispositive power. The mailing address for the holder listed above is 100 Vanguard Blvd, Malvern, PA 19355.
(2) Based on the most recently available Schedule 13G/A filed with the SEC on February 6, 2024, as of December 31, 2023, the number of shares reported includes (a) 1,659,082 Common Shares over which Blackrock, Inc. (“Blackrock”) has sole voting power and (b) 1,684,651 Common Shares over which Blackrock has sole dispositive power. The mailing address for the holder listed above is 50 Hudson Yards, New York, NY 10001.
(3) Based on the most recently available Schedule 13G/A filed with the SEC on February 9, 2024, as of December 29, 2023, the number of shares reported includes (a) 1,400,353 Common Shares over which FMR, LLC (“FMR”) has sole voting power and (b) 1,401,403 Common Shares over which FMR has sole dispositive power. The mailing address for the holder listed above is 245 Summer Street, Boston, Massachusetts 02210.
SHARE OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS: o
f Shares Beneficially Owned as of March 14, 2022
| | | | | | | | | | | | | | |
Name of Beneficial Owner (1) | Number of Shares Beneficially Owned |
Common Shares Directly or Indirectly Owned (2) | SARs Exercisable Within 60 Days (3) | RSUs Vesting Within 60 Days (4) | Total Stock-Based Ownership (5) |
| Howard C. Heckes | 46,212 | 37,652 | — | 83,864 | |
| Robert J. Byrne | 27,856 | — | 1,655 | 29,511 | |
| Jonathan F. Foster | 9,773 | — | 1,121 | 10,894 | |
| Francis M. Scricco | 18,356 | — | 1,121 | 19,477 | |
| Peter R. Dachowski | 11,927 | — | 1,121 | 13,048 | |
| Jody L. Bilney | 12,411 | — | 1,121 | 13,532 | |
| Daphne E. Jones | 6,940 | — | 1,121 | 8,061 | |
| Jay I. Steinfeld | 5,096 | — | 1,121 | 6,217 | |
| Barry A. Ruffalo | 1,191 | — | 1,121 | 2,312 | |
| Russell T. Tiejema | 40,376 | 11,093 | — | 51,469 | |
| Christopher O. Ball | 2,470 | 779 | — | 3,249 | |
| Randal A. White | 20,908 | 2,931 | — | 23,839 | |
| Robert A. Paxton | 19,751 | 2,086 | — | 21,837 | |
| All directors and executive officers as a group (16 persons) | 231,136 | 55,539 | 9,502 | 296,177 | |
(1) As of the close of business on April 15, 2024 (i) no director or executive officer beneficially owned more than 1% of the outstanding Common Shares, and (ii) the directors and executive officers of Masonite as a group beneficially owned approximately 1% of the outstanding Common Shares (including Common Shares they have the right to acquire within 60 days through the exercise of any option, warrant, or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement). The address of each of the Masonite directors and executive officers listed above is c/o Masonite International Corporation, 1242 East 5th Avenue, Tampa, Florida 33605.
(2) Represents Common Shares owned by the directors and executive officers. With respect to Mr. Byrne, 27,856 Common Shares that are held in trust.
(3) The number of Common Shares shown in this column are not currently outstanding but are deemed beneficially owned because of the right to acquire upon exercise of SARs that are currently exercisable or exercisable within 60 days of April 15, 2024. Since the SARs are settled in Common Shares, the table assumes that the SARs were converted to Common Shares using a price of $120.47 per Common Share, the 60 day average closing price of Common Shares on the NYSE, as of the 60 trading days prior to April 15, 2024.
(4) The number of Common Shares shown in this column are not currently outstanding but are deemed beneficially owned because of the right to acquire upon the vesting of time-vesting restricted stock units within 60 days of April 15, 2024.
(5) These amounts are the sum of the number of Common Shares shown in prior columns.
EQUITY COMPENSATION PLANS
The following table summarizes information about our Common Shares that may be issued under the Masonite International Corporation 2021 Omnibus Incentive Plan (the “2021 Plan”), the 2012 Plan, the Masonite International Corporation 2014 Employee Stock Purchase Plan. All outstanding awards relate to Common Shares. Information requiredis as of December 31, 2023.
| | | | | | | | | | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) (#) | Weighted average exercise price of outstanding options, warrants and rights(3) (b) ($) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) (c) (#) |
Equity compensation plans approved by security holders(1) | 1,007,975(2) | $77.00 | 1,377,858(4) |
| Equity compensation plans not approved by security holders | — | — | — |
| Total at December 31, 2023 | 1,007,975 | $77.00 | 1,377,858 |
(1) For additional information concerning our equity compensation plans, see the discussion in responseNote 12 to this item is incorporated by reference into thisthe Company’s consolidated financial statements in the Annual Report on Form 10‑K10-K for the fiscal year ended December 31, 2023.
(2) Consists of outstanding (i) stock appreciation rights under the 2012 Plan covering an aggregate of 27,979 Common Shares, calculated assuming the SARs were converted to Common Shares using a price of $84.66 per Common Share, the closing price of our Common Shares on NYSE on December 29, 2023, (ii) restricted stock unit awards under the 2012 Plan covering an aggregate of 115,052 Common Shares, some of which are subject to time-based vesting and some of which are subject to performance-based vesting, (iii) stock appreciation rights under the 2021 Plan covering an aggregate of zero Common Shares, calculated assuming the SARs were converted to Common Shares using a price of $84.66 per Common Share, and (iv) restricted stock unit awards under the 2021 Plan covering an aggregate of 864,994 Common Shares some of which are subject to time-based vesting and some of which are subject to performance-based vesting. The number of shares to be issued in respect of PSU awards has been calculated based on the assumption that the maximum levels of performance applicable to these awards will be achieved.
(3) Reflects the weighted average exercise price of stock appreciation rights only. As restricted stock unit awards have no exercise price, they are excluded from the 2018 Proxy Statement. Such information will be includedweighted average exercise price calculation set forth in the 2018 Proxy Statementcolumn (b).
(4) Includes 604,693 shares available for future issuance under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance Under Equity Compensation Plans".Masonite International Corporation 2014 Employee Stock Purchase Plan.
Item 13. Certain Relationships and Related Transactions, and Director Independence
InformationCERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company’s Related Person Transaction Policy defines a “Related Person Transaction” as any transaction that would be required to be disclosed pursuant to Item 404(a) of Regulation S-K in responsewhich the Company was or is to be a participant, the amount involved exceeds $120,000, and in which any Related Person had or will have a direct or indirect material interest, other than an employment relationship or transaction involving an executive officer and any related compensation. A “transaction” includes, but is not limited to, any financial transaction, arrangement or relationship (including any indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships. A “Related Person” is (i) any person who is, or at any time since the beginning of 2023, was an executive officer, a director or a director nominee of the Company; (ii) a security holder who is known to the Company to own of record or beneficially more than 5% of any class of the Company’s voting securities at the time of occurrence or existence of the Related Person Transaction; and (iii) a person who is an immediate family member of any of the foregoing persons (the term “immediate family” shall include any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law and any person (other than a tenant or employee) sharing the household of any of the foregoing persons).
Under the Related Person Transaction Policy, each Related Person Transaction must be approved or ratified in accordance with the guidelines set forth in the policy by the Sustainability and Governance Committee or by the disinterested members of the Board. In considering whether to approve or ratify any Related Person Transaction, the Sustainability and Governance Committee or the disinterested members of the Board, as the case may be, shall consider all factors that in their discretion are relevant to the Related Person Transaction. Additionally, any employment relationship or transaction involving an executive officer and any related compensation must be approved by the Human Resources and Compensation Committee or recommended by the Human Resources and Compensation Committee for its approval. In considering whether to approve or ratify any Related Person Transaction, the Sustainability and Governance Committee or the disinterested members of the Board, as the case may be, shall consider all factors that in their discretion are relevant to the Related Person Transaction. There were no transactions, or currently proposed transactions, considered to be a Related Person Transaction since the beginning of 2023 and through the date of this itemAmendment.
DIRECTOR INDEPENDENCE
Our Board has determined, after considering all the relevant facts and circumstances, that all of the directors other than Mr. Heckes, our CEO are independent, as “independence” is incorporateddefined by reference into this Annual Report on Form 10‑K from the 2018 Proxy Statement. Such information willlisting standards of the NYSE, because they have no direct or indirect material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with us) that would cause the independence requirements of the NYSE listing standards to not be included undersatisfied, and otherwise meet the captions "Corporate Governance;NYSE listing standards. Members of our Board are kept informed of our business through discussions with our CEO, Chief Financial Officer and other officers, by reviewing materials provided to them, by visiting our offices and facilities, and by participating in meetings of the Board and Committee Matters -its committees. We currently separate the roles of CEO and Chairman of the Board. This structure properly reflects our belief that our shareholders’ interests are best served by the day-to-day management direction of the Company under Mr. Heckes, our CEO, together with the leadership of our Chairman of the Board, Structure and Director Independence", "Corporate Governance; Board and Committee Matters - Board Committees; Membership" and "Certain Relationships and Related Party Transactions".Mr. Byrne.
Item 14. Principal Accountant Fees and Services
Information requiredSERVICE FEES PAID TO THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our consolidated financial statements for the fiscal year ended December 31, 2023 have been audited by Ernst & Young LLP (“EY”) our independent registered public accounting firm. EY began acting as our independent auditors with respect to the audit of our financial statements beginning with the 2017 fiscal year. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent registered public accounting firm retained to audit our financial statements. The Audit Committee is responsible for the audit fee negotiations associated with the appointment of EY as our independent registered public accounting firm for the fiscal year ending December 31, 2023.
The fees charged by EY for professional services rendered in response to this item is incorporated by reference into this Annual Reportconnection with all audit and non-audit related matters for fiscal years ended December 31, 2023 and January 1, 2023 were as follows:
| | | | | | | | |
| Type of Fees | 2023 ($) | 2022 ($) |
| Audit-Fees | 4,346,870 | | 3,261,298 | |
| Audit-Related Fees | 1,113,948 | | 580,366 | |
| Tax Fees | 604,624 | | 479,814 | |
| All Other Fees | — | | — | |
| Totals | 6,065,442 | | 4,321,478 | |
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS-FEE INFORMATION
Audit Fees
Fees for audit services in 2023 and in 2022 consisted of (a) audits of the Company’s annual consolidated financial statements, (b) reviews of the Company’s quarterly condensed consolidated financial statements included in our Quarterly Reports on Form 10‑K from10-Q, and (c) annual stand-alone statutory audits. Fees for audit services also included services in connection with SEC registrations and other offering or filings.
Audit-Related Fees
Audit-related services principally include assurance and related services by the 2018 Proxy Statement. Such information willindependent auditors that are reasonably related to the performance of the audit or review of our financial statements, or other filings that are not captured under “Audit Fees” above.
Tax Fees
Tax services in 2023 and 2022 consisted of professional services rendered by EY for tax return preparation, tax compliance, and tax advice.
All Other Fees
There were no other fees in 2023 or 2022.
The Audit Committee considered whether EY’s provision of the above non-audit services is compatible with maintaining such firm’s independence and satisfied itself as to EY’s independence.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
Consistent with the SEC policies regarding auditor independence and the Audit Committee charter, the Audit Committee has responsibility for appointing, setting compensation and reviewing the performance of the independent auditors. In exercising this responsibility, the Audit Committee has established pre-approval policies with respect to audit and permissible non-audit services to be included underprovided by the caption "Appointmentindependent auditors and the related fees. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of Independent Registered Public Accounting Firm".services and is generally subject to a specific limit above which separate pre-approval is required. Management is required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. To ensure prompt handling of unexpected matters, the Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve permissible non-audit services and fees. Any action taken in this regard is reported to the Audit Committee at the next scheduled Audit Committee meeting.
PART IV
Item 15. ExhibitsExhibit and Financial Statement Schedules
|
| | | | | | | | | |
| (a) | The following documents are filed as part of this Form 10-K:Amendment: | | | Page No.
| | 1. | Consolidated Financial Statements: | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| 1. | | | | |
| 2. | Financial Statement Schedules | | |
| | All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission and Supplement Data of the schedule or the required information is otherwise included.Original Form 10-K. | | |
| (b) | 3. | See “Index to Exhibits” below. | | |
(b) | The exhibits listed on the “Index"Index to Exhibits”Exhibits" below are filed or furnished with this Form 10‑KAmendment or incorporated by reference as set forth below. | | |
| (c) | Additional Financial Statement Schedules | | |
| None. | | None. | |
INDEX TO EXHIBITS
The following is a list of all exhibits filed or furnished as part of this report:
|
| | |
Exhibit No. | Description |
| Amended and Restated Credit Agreement, dated as of April 9, 2015, by and among Masonite International Corporation, as Canadian borrower and parent borrower, Masonite Corporation and certain other subsidiaries of Masonite Corporation, as U.S. borrowers, Wells Fargo Bank, National Association, as administrative agent and letter of credit issuer, Bank of America, N.A., as a syndication agent, Royal Bank of Canada and Deutsche Bank Securities Inc., as co-documentation agents, Wells Fargo Capital Finance, LLC, Bank of America, N.A., Royal Bank of Canada, Deutsche Bank Securities Inc. and Barclays Bank PLC, as joint lead arrangers and book managers, and the lenders from time to time party thereto. (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on April 14, 2015) |
| |
| |
| Canadian Security Agreement, dated as of May 17, 2011, among Masonite International Corporation, as Canadian Borrower, Masonite Inc., as Holdings, the Canadian Subsidiary Guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.1(d) to the Company's Registration Statement on Form 10 (File No. 001-11796) filed with the Securities and Exchange Commission on August 19, 2013) |
| Canadian Guarantee, dated as of May 17, 2011, among Masonite International Corporation, as Parent Borrower, Masonite Inc., as Holdings, the Canadian Subsidiary Guarantors from time to time party thereto and Wells Fargo Capital Finance, LLC, as Administrative Agent (incorporated by reference to Exhibit 4.1(e) to the Company's Registration Statement on Form 10 (File No. 001-11796) filed with the Securities and Exchange Commission on August 19, 2013) |
| |
| |
| |
| |
| |
| 104* | Inline XBRL and contained in Exhibit 101) |
| | |
101.INS** | XBRL Instance Document |
101.SCH* | XBRL Taxonomy Extension Schema Document |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
* | Filed herewith. |
^ | Denotes management contract or compensatory plan. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | | | | | | | |
| | | | |
| | MASONITE INTERNATIONAL CORPORATION | |
| | (Registrant) | | (Registrant) | |
| | | | |
| Date: | February 27, 2018April 26, 2024 | By | /s/ Russell T. Tiejema | |
| | Russell T. Tiejema | |
| | Executive Vice President and Chief Financial Officer | |
| | (Principal Financial Officer and Principal Accounting Officer) | |
| | | | |
| | | | |
| | | |
| | | |
| | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. |
| | | | | |
Signatures | | Title | | Date |
/s/ Frederick J. Lynch | | President and Chief Executive Officer and Director | | February 27, 2018 |
Frederick J. Lynch | | (Principal Executive Officer) | | |
| | | | | |
/s/ Russell T. Tiejema | | Executive Vice President and Chief Financial Officer | | February 27, 2018 |
Russell T. Tiejema | | (Principal Financial Officer and Principal Accounting Officer) | | |
| | | | | |
/s/ Robert J. Byrne | | Director and Chairman of the Board | | February 27, 2018 |
Robert J. Byrne | | | | |
| | | | | |
/s/ Jody L. Bilney | | Director | | February 27, 2018 |
Jody L. Bilney | | | | |
| | | | | |
/s/ Peter R. Dachowski | | Director | | February 27, 2018 |
Peter R. Dachowski | | | | |
| | | | | |
/s/ Jonathan F. Foster | | Director | | February 27, 2018 |
Jonathan F. Foster | | | | |
| | | | | |
/s/ Thomas W. Greene | | Director | | February 27, 2018 |
Thomas W. Greene | | | | |
| | | | | |
/s/ Daphne E. Jones | | Director | | February 27, 2018 |
Daphne E. Jones | | | | |
| | | | | |
/s/ George A. Lorch | | Director | | February 27, 2018 |
George A. Lorch | | | | |
| | | | | |
/s/ Rick J. Mills | | Director | | February 27, 2018 |
Rick J. Mills | | | | |
| | | | | |
/s/ William S. Oesterle | | Director | | February 27, 2018 |
William S. Oesterle | | | | |
| | | | | |
/s/ Francis M. Scricco | | Director | | February 27, 2018 |
Francis M. Scricco | | | | |
| | | | | |
/s/ John C. Wills | | Director | | February 27, 2018 |
John C. Wills | | | | |
