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EX-32.2 - EXHIBIT 32.2 - MASONITE INTERNATIONAL CORPa2017q110-qxex322.htm
EX-32.1 - EXHIBIT 32.1 - MASONITE INTERNATIONAL CORPa2017q110-qxex321.htm
EX-31.2 - EXHIBIT 31.2 - MASONITE INTERNATIONAL CORPa2017q110-qxex312.htm
EX-31.1 - EXHIBIT 31.1 - MASONITE INTERNATIONAL CORPa2017q110-qxex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-Q
____________________________

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2017
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
____________________________
masonitelogoa18.jpg
Masonite International Corporation
(Exact name of registrant as specified in its charter)
____________________________
British Columbia, Canada
(State or other jurisdiction of incorporation or organization)
 
98-0377314
(I.R.S. Employer Identification No.)

2771 Rutherford Road
Concord, Ontario L4K 2N6 Canada
(Address of principal executive offices)
(800) 895-2723
(Registrant’s telephone number, including area code)
____________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o (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. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
The registrant had outstanding 29,856,884 shares of Common Stock, no par value, as of May 4, 2017.



masonitelogoa18.jpg

MASONITE INTERNATIONAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
April 2, 2017



i


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "might," "will," "should," "estimate," "project," "plan," "anticipate," "expect," "intend," "outlook," "believe" and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" in our Annual Report on Form 10-K for the year ended January 1, 2017, and elsewhere in this Quarterly Report.

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

our ability to successfully implement our business strategy;
general economic, market and business conditions, including foreign exchange rate fluctuation and inflation;
levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity;
the United Kingdom's formal trigger of the two year process for its exit from the European Union, and related negotiations;
competition;
our ability to manage our operations including integrating our recent acquisitions and companies or assets we acquire in the future;
our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations, and to meet our debt service obligations, including our obligations under our senior notes and our ABL Facility;
labor relations (i.e., disruptions, strikes or work stoppages), labor costs and availability of labor;
increases in the costs of raw materials or any shortage in supplies;
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 Quarterly Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.


ii


PART I – FINANCIAL INFORMATION


Item 1. Unaudited Financial Statements

MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands of U.S. dollars, except per share amounts)
(Unaudited)
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
Net sales
$
487,181

 
$
489,305

Cost of goods sold
391,624

 
391,060

Gross profit
95,557

 
98,245

Selling, general and administration expenses
64,845

 
64,898

Restructuring costs
293

 
19

Operating income (loss)
30,419

 
33,328

Interest expense (income), net
7,024

 
7,232

Other expense (income), net
(249
)
 
786

Income (loss) from continuing operations before income tax expense (benefit)
23,644

 
25,310

Income tax expense (benefit)
(1,679
)
 
6,210

Income (loss) from continuing operations
25,323

 
19,100

Income (loss) from discontinued operations, net of tax
(245
)
 
(188
)
Net income (loss)
25,078

 
18,912

Less: net income (loss) attributable to non-controlling interest
1,513

 
1,084

Net income (loss) attributable to Masonite
$
23,565

 
$
17,828

 
 
 
 
Earnings (loss) per common share attributable to Masonite:
 
 
 
Basic
$
0.79

 
$
0.58

Diluted
$
0.77

 
$
0.57

 
 
 
 
Earnings (loss) per common share from continuing operations attributable to Masonite:
 
 
 
Basic
$
0.80

 
$
0.59

Diluted
$
0.78

 
$
0.57

 
 
 
 
Comprehensive income (loss):
 
 
 
Net income (loss)
$
25,078

 
$
18,912

Other comprehensive income (loss):
 
 
 
Foreign currency translation gain (loss)
5,730

 
3,872

Amortization of actuarial net losses
292

 
242

Income tax benefit (expense) related to other comprehensive income (loss)
(757
)
 
(96
)
Other comprehensive income (loss), net of tax:
5,265

 
4,018

Comprehensive income (loss)
30,343

 
22,930

Less: comprehensive income (loss) attributable to non-controlling interest
1,617

 
1,571

Comprehensive income (loss) attributable to Masonite
$
28,726

 
$
21,359


See accompanying notes to the condensed consolidated financial statements.

1


MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
ASSETS
April 2,
2017
 
January 1,
2017
Current assets:
 
 
 
Cash and cash equivalents
$
34,473

 
$
71,714

Restricted cash
12,210

 
12,196

Accounts receivable, net
270,846

 
242,197

Inventories, net
238,375

 
225,940

Prepaid expenses
24,035

 
24,291

Income taxes receivable
2,662

 
2,399

Total current assets
582,601

 
578,737

Property, plant and equipment, net
541,023

 
542,088

Investment in equity investees
9,599

 
9,302

Goodwill
129,589

 
129,286

Intangible assets, net
186,334

 
190,154

Long-term deferred income taxes
9,917

 
9,478

Other assets, net
19,641

 
16,816

Total assets
$
1,478,704

 
$
1,475,861

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
107,239

 
$
96,178

Accrued expenses
112,505

 
133,799

Income taxes payable
702

 
1,201

Total current liabilities
220,446

 
231,178

Long-term debt
471,242

 
470,745

Long-term deferred income taxes
70,810

 
70,423

Other liabilities
40,604

 
43,739

Total liabilities
803,102

 
816,085

Commitments and Contingencies (Note 8)


 


Equity:
 
 
 
Share capital: unlimited shares authorized, no par value, 29,929,160 and 29,774,784 shares issued and outstanding as of April 2, 2017, and January 1, 2017, respectively
658,156

 
650,007

Additional paid-in capital
220,357

 
234,926

Accumulated deficit
(73,595
)
 
(89,063
)
Accumulated other comprehensive income (loss)
(143,825
)
 
(148,986
)
Total equity attributable to Masonite
661,093

 
646,884

Equity attributable to non-controlling interests
14,509

 
12,892

Total equity
675,602

 
659,776

Total liabilities and equity
$
1,478,704

 
$
1,475,861


See accompanying notes to the condensed consolidated financial statements.

2


MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
(Unaudited)
 
 
Common Shares Outstanding
 
Share Capital
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Equity Attributable to Masonite
 
Equity Attributable to Non-controlling Interests
 
Total Equity
Balances as of January 3, 2016
 
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)
 
 
 
 
 
 
 
23,565

 
 
 
23,565

 
1,513

 
25,078

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
5,161

 
5,161

 
104

 
5,265

Share based compensation expense
 
 
 
 
 
2,427

 
 
 
 
 
2,427

 
 
 
2,427

Common shares issued for delivery of share based awards
 
289,471

 
10,681

 
(10,681
)
 
 
 
 
 

 
 
 

Common shares withheld to cover income taxes payable due to delivery of share based awards
 
 
 
 
 
(6,167
)
 
 
 
 
 
(6,167
)
 
 
 
(6,167
)
Common shares issued under employee stock purchase plan
 
9,352

 
623

 
(148
)
 
 
 
 
 
475

 
 
 
475

Common shares repurchased and retired
 
(144,447
)
 
(3,155
)
 
 
 
(8,097
)
 
 
 
(11,252
)
 
 
 
(11,252
)
Balances as of April 2, 2017
 
29,929,160

 
$
658,156

 
$
220,357

 
$
(73,595
)
 
$
(143,825
)
 
$
661,093

 
$
14,509

 
$
675,602


See accompanying notes to the condensed consolidated financial statements.

3


MASONITE INTERNATIONAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
(Unaudited)
 
Three Months Ended
Cash flows from operating activities:
April 2,
2017
 
April 3,
2016
Net income (loss)
$
25,078

 
$
18,912

Adjustments to reconcile net income (loss) to net cash flow provided by (used in) operating activities:
 
 
 
Loss (income) from discontinued operations, net of tax
245

 
188

Depreciation
14,024

 
14,570

Amortization
5,970

 
6,464

Share based compensation expense
2,427

 
3,728

Deferred income taxes
(1,048
)
 
4,368

Unrealized foreign exchange loss (gain)
266

 
1,428

Share of loss (income) from equity investees, net of tax
(297
)
 
(428
)
Pension and post-retirement expense (funding), net
(1,651
)
 
(1,443
)
Non-cash accruals and interest
456

 
606

Loss (gain) on sale of property, plant and equipment
(274
)
 
132

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
(29,226
)
 
(41,718
)
Inventories
(10,613
)
 
(9,839
)
Prepaid expenses
1,020

 
(365
)
Accounts payable and accrued expenses
(4,334
)
 
7,258

Other assets and liabilities
(4,577
)
 
(694
)
Net cash flow provided by (used in) operating activities
(2,534
)
 
3,167

Cash flows from investing activities:
 
 
 
Proceeds from sale of property, plant and equipment
396

 
57

Additions to property, plant and equipment
(14,668
)
 
(23,756
)
Restricted cash
(14
)
 

Other investing activities
(1,008
)
 
(584
)
Net cash flow provided by (used in) investing activities
(15,294
)
 
(24,283
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
423

 

Repayments of long-term debt
(141
)
 
(34
)
Tax withholding on share based awards
(6,167
)
 
(278
)
Distributions to non-controlling interests

 
(380
)
Repurchases of common shares
(11,252
)
 
(16,026
)
Net cash flow provided by (used in) financing activities
(17,137
)
 
(16,718
)
Net foreign currency translation adjustment on cash
(2,276
)
 
(1,371
)
Increase (decrease) in cash and cash equivalents
(37,241
)
 
(39,205
)
Cash and cash equivalents, beginning of period
71,714

 
89,187

Cash and cash equivalents, at end of period
$
34,473

 
$
49,982


See accompanying notes to the condensed consolidated financial statements.

4


MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1. Business Overview and Significant Accounting Policies

Unless we state otherwise or the context otherwise requires, references to "Masonite," "we," "our," "us" and the "Company" in these notes to the condensed consolidated financial statements refer to Masonite International Corporation and its subsidiaries.

Description of Business

Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 65 manufacturing locations in 8 countries and sells doors to customers throughout the world, including the United States, Canada and the United Kingdom.

Basis of Presentation

We prepare these unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC") regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods presented have been included. All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. These estimates are based on information available as of the date of the unaudited condensed consolidated financial statements; therefore, actual results could differ from those estimates. Interim results are not necessarily indicative of the results for a full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2017, as filed with the SEC. There have been no changes in the significant accounting policies from those that were disclosed in the fiscal year 2016 audited consolidated financial statements, other than as noted below.     

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.

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.


5



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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. We are in the process of evaluating this guidance to determine the impact it may have on our financial statements.

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.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers - Deferral of the Effective Date," and the guidance will now be effective for annual and interim periods beginning on or after December 15, 2017; early application is permitted only as of annual and interim reporting periods beginning after December 15, 2016. While we are still in the process of evaluating the effect of adoption on our consolidated financial statements and are currently assessing our contracts with customers, 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 plan to adopt this standard using the retrospective method and adoption will be effective as of January 1, 2018.

2. 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 1, 2017
2,843

 
32,410

 
94,033

 
129,286

Foreign exchange fluctuations
4

 
262

 
37

 
303

April 2, 2017
$
2,847

 
$
32,672

 
$
94,070

 
$
129,589



6



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:
 
April 2, 2017
(In thousands)
 Cost
 
Accumulated Amortization
 
Translation Adjustment
 
 Net Book Value
Definite life intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
155,927

 
$
(68,380
)
 
$
(14,901
)
 
$
72,646

Patents
31,150

 
(20,026
)
 
(936
)
 
10,188

Software
31,778

 
(27,883
)
 
(223
)
 
3,672

Other
15,480

 
(9,823
)
 
(2,097
)
 
3,560

 
234,335

 
(126,112
)
 
(18,157
)
 
90,066

Indefinite life intangible assets:
 
 
 
 
 
 
 
Trademarks and tradenames
108,338

 

 
(12,070
)
 
96,268

Total intangible assets
$
342,673

 
$
(126,112
)
 
$
(30,227
)
 
$
186,334

 
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 $5.9 million and $6.2 million for the three months ended April 2, 2017, and April 3, 2016, respectively. Amortization expense is classified within selling, general and administration expenses in the condensed consolidated statements of comprehensive income (loss).
    
The estimated future amortization of intangible assets with definite lives as of April 2, 2017, is as follows:
(In thousands)
 
Fiscal year:
 
2017 (remaining nine months)
$
17,318

2018
16,756

2019
14,571

2020
12,027

2021
9,220



7



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


3. Accounts Receivable

Our customers consist mainly of wholesale distributors, dealers, homebuilders and retail home centers. Our ten largest customers accounted for 54.7% and 57.3% of total accounts receivable as of April 2, 2017, and January 1, 2017, respectively. Our two largest customers, The Home Depot, Inc. and Lowe's Companies, Inc., each accounted for more than 10% of the consolidated gross accounts receivable balance as of April 2, 2017, and January 1, 2017. No other individual customers accounted for greater than 10% of consolidated gross accounts receivable balance at either April 2, 2017, or January 1, 2017. The allowance for doubtful accounts balance was $1.1 million and $1.0 million as of April 2, 2017, and January 1, 2017, respectively.

We maintain accounts receivable sales programs with third parties (the "AR Sales Programs"). Under the AR Sales Programs, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to third parties who assume the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under these programs 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 Programs are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Programs were not material for any of the periods presented and were recorded in selling, general and administration expense within the condensed consolidated statements of comprehensive income (loss).

4. Inventories

The amounts of inventory on hand were as follows as of the dates indicated:
(In thousands)
April 2,
2017
 
January 1,
2017
Raw materials
$
171,484

 
$
165,896

Finished goods
73,165

 
65,791

Provision for obsolete or aged inventory
(6,274
)
 
(5,747
)
Inventories, net
$
238,375

 
$
225,940


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)
April 2,
2017
 
January 1,
2017
Land
$
24,718

 
$
24,562

Buildings
164,898

 
163,802

Machinery and equipment
605,543

 
595,929

Property, plant and equipment, gross
795,159

 
784,293

Accumulated depreciation
(254,136
)
 
(242,205
)
Property, plant and equipment, net
$
541,023

 
$
542,088


Total depreciation expense was $14.0 million and $14.6 million in the three months ended April 2, 2017, and April 3, 2016, respectively. Depreciation expense is included primarily within cost of goods sold in the condensed consolidated statements of comprehensive income (loss).


8



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


6. Long-Term Debt
(In thousands)
April 2,
2017
 
January 1,
2017
5.625% senior unsecured notes due 2023
$
475,000

 
$
475,000

Debt issuance costs for 2023 Notes
(5,183
)
 
(5,393
)
Capital lease obligations
632

 
768

Other long-term debt
793

 
370

Total long-term debt
$
471,242

 
$
470,745


Interest expense related to our consolidated indebtedness under senior unsecured notes was $6.9 million and $7.0 million for the three months ended April 2, 2017, and April 3, 2016, respectively.

5.625% Senior Notes due 2023

On March 23, 2015, we issued $475.0 million aggregate principal senior unsecured notes (the "2023 Notes"). The 2023 Notes were issued in a private placement 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 were issued at par and 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. We received net proceeds of $467.9 million after deducting $7.1 million of debt issuance costs. 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 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.
    
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.


9



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


The indenture governing the 2023 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of April 2, 2017, and January 1, 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.

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 April 2, 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.

7. Share Based Compensation Plans
    
Share based compensation expense was $2.4 million and $3.7 million for the three months ended April 2, 2017, and April 3, 2016, respectively. As of April 2, 2017, the total remaining unrecognized compensation expense related to share based compensation amounted to $23.2 million, which will be amortized over the weighted average remaining requisite service period of 2.1 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 condensed 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.

Equity Incentive Plans

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

10



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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 Board of Directors. The Human Resources and Compensation Committee may grant any award under the 2012 Plan in the form of a performance award. The 2012 Plan may be amended, suspended or terminated by the Board at any time; provided, that any amendment, suspension or termination which impairs the rights of a participant is subject to such participant's consent and; provided further, that certain material amendments are subject to shareholder approval. The aggregate number of common shares that can be issued with respect to equity awards under the 2012 Plan cannot exceed 2,000,000 shares plus the number of shares subject to existing grants under the 2009 Plan that may expire or be forfeited or cancelled. As of April 2, 2017, there were 1,459,106 shares of common stock available for future issuance under the 2012 Plan.

Deferred Compensation Plan

We offer to certain of our employees and directors a Deferred Compensation Plan ("DCP"). The DCP is an unfunded non-qualified deferred compensation plan that permits those certain 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, bonus and/or restricted stock units and eligible directors may defer a portion of their director fees or restricted stock units. All contributions to the DCP on behalf of the participant are fully vested (other than restricted stock unit deferrals which remain subject to the vesting terms of the applicable equity incentive plan) and placed into a grantor trust, commonly referred to as a "rabbi trust." Although we are permitted to make matching contributions under the terms of the DCP, we have not elected to do so. The DCP invests the contributions in diversified securities from a selection of investments and the participants choose their investments and 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 by the FASB’s Fair Value Framework.

Assets of the rabbi trust, other than Company stock, are recorded at fair value and included in other assets in the condensed 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 condensed consolidated statements of comprehensive income (loss). The liability relating to deferred compensation represents our obligation to distribute funds to the participants in the future and is included in other liabilities in the condensed consolidated balance sheets. As of April 2, 2017, the liability and asset relating to deferred compensation had a fair value of $4.6 million and $4.5 million, respectively. 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 condensed consolidated statements of comprehensive income (loss). As of April 2, 2017, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan.


11



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


Stock Appreciation Rights

We have granted Stock Appreciation Rights ("SARs") to certain employees under both the 2009 Plan and the 2012 Plan, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of three years, have a life of ten years and settle in common shares. We recognize forfeitures of SARs in the period in which they occur.

The total fair value of SARs vested was $0.4 million during the three months ended April 2, 2017. No SARs vested during the three months ended and April 3, 2016.
Three Months Ended April 2, 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
(181,965
)
 
10,846

 
19.04

 
 
Forfeited
(9,019
)
 
 
 
65.21

 
 
Outstanding, end of period
658,571

 
$
32,339

 
$
30.15

 
5.0
 
 
 
 
 
 
 
 
Exercisable, end of period
556,388

 
$
31,248

 
$
23.09

 
4.2
Three Months Ended April 3, 2016
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
(24,443
)
 
1,122

 
15.35

 
 
Forfeited
(2,400
)
 
 
 
32.68

 
 
Outstanding, end of period
986,109

 
$
40,908

 
$
24.89

 
5.4
 
 
 
 
 
 
 
 
Exercisable, end of period
679,384

 
$
33,765

 
$
16.67

 
4.0

The value of SARs granted in the three months ended April 2, 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


12



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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. We recognize forfeitures of RSUs in the period in which they occur.
 
Three Months Ended
 
April 2, 2017
 
April 3, 2016
 
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

Granted
226,808

 
70.60

 
172,251

 
57.51

Delivered
(176,077
)
 
 
 
(31,120
)
 
 
Withheld to cover (1)
(54,614
)
 
 
 
(4,745
)
 
 
Forfeited
(30,664
)
 
 
 
(3,440
)
 
 
Outstanding, end of period
467,379

 
$
65.72

 
659,876

 
$
50.94

____________
(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-third of the RSUs granted during the three months ended April 2, 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 granted in the three months ended April 2, 2017, was $16.0 million and is being recognized over the weighted average requisite service period of 2.8 years. During the three months ended April 2, 2017, there were 230,691 RSUs vested at a fair value of $12.8 million.

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 three months ended April 2, 2017, and there were no warrants outstanding as of either April 2, 2017, or January 1, 2017. During the three months ended April 3, 2016, holders of the 2016 Warrants exercised 1,076,387 warrants via the cashless option and we issued 108,274 new common shares to the holders. We have accounted for these warrants as equity instruments.


13



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


8. 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:
 
2017 (remaining nine months)
$
16,227

2018
20,404

2019
19,061

2020
16,361

2021
12,453

Thereafter
72,254

Total future minimum lease payments
$
156,760


Total rent expense, including non-cancelable operating leases and month-to-month leases, was $7.1 million and $6.4 million for the three months ended April 2, 2017, and April 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

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 continue to allege violations with respect to overtime pay, meal periods, rest breaks, minimum wage, timely pay, wage statement detail and reimbursement of business expenses. The lawsuit seeks damages, penalties, attorney’s fees and an award under the California Private Attorney General Act. Discovery is underway. The court has set the deadline for the plaintiff to file his motion for class certification for August 21, 2017, and the trial date has been set for November 28, 2017, although those dates may be extended. The parties have engaged in preliminary settlement negotiations and a mediation session is scheduled to be held in May 2017. 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.

14



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


In addition, from time to time, we are involved in various claims, legal actions and government audits. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material effect on our financial condition, results of operations or cash flows.

9. Restructuring Costs

Restructuring costs were not material in the three months ended April 2, 2017, or April 3, 2016. The following table summarizes the cumulative restructuring charges recorded by plan:
 
Cumulative Amount Incurred Through April 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
2016 Plan
$

 
$

 
$
1,584

 
$

 
$
1,584

2015 Plan

 
2,335

 

 
3,303

 
5,638

2014 Plan

 

 

 
9,503

 
9,503

2013 Plan
3,025

 
2,733

 

 
2,157

 
7,915

2012 and Prior Plans
2,378

 
12,695

 

 
3,609

 
18,682

Total Restructuring Costs
$
5,403

 
$
17,763

 
$
1,584

 
$
18,572

 
$
43,322


During 2016, we began implementing a plan (the "2016 Plan") to close one manufacturing facility in the Architectural segment, which includes the reduction of approximately 140 positions. The 2016 Plan is expected to improve our cost structure and enhance operational efficiencies, and is expected to be completed by the end of the third quarter of 2017. Costs associated with the 2016 Plan include closure costs and severance. As of April 2, 2017, we expect to incur approximately $2.2 million of additional charges related to the 2016 Plan.

Our restructuring plans initiated in 2015 and prior years are described in detail in our Annual Report on Form 10-K for the year ended January 1, 2017. Costs associated with the 2015, 2014, 2013 and 2012 and Prior Plans include severance and closure charges and are substantially completed. The 2013 Plan also included impairment of certain property, plant and equipment. 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 April 2, 2017, we do not expect to incur any material future charges relating to the 2015 Plan, the 2013 Plan or the 2012 and Prior Plans and, pending the ultimate resolution of the Stay of Proceedings, we do not anticipate any material future charges related to the 2014 Plan.

The changes in the accrual for restructuring by activity were as follows for the periods indicated:
(In thousands)
January 1,
2017
 
Severance
 
Cash Payments
 
April 2,
2017
2016 Plan
$
1,300

 
$
271

 
$
367

 
$
1,204

2015 Plan
282

 
22

 
76

 
228

2014 Plan
426

 

 

 
426

2012 and Prior Plans
465

 

 
27

 
438

Total
$
2,473

 
$
293

 
$
470

 
$
2,296


15



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


(In thousands)
January 3,
2016
 
Severance
 
Closure Costs
 
Cash Payments
 
April 3,
2016
2015 Plan
$
774

 
$
(8
)
 
$
27

 
$
276

 
$
517

2014 Plan
442

 

 

 
13

 
429

2013 Plan
316

 

 

 
192

 
124

2012 and Prior Plans
858

 

 

 
187

 
671

Total
$
2,390

 
$
(8
)
 
$
27

 
$
668

 
$
1,741


10. Income Taxes

The effective tax rate differs from the Canadian statutory rate of 26.6% primarily due to changes in our valuation allowances, tax exempt income and mix of earnings in foreign jurisdictions which are subject to tax rates that differ from the Canadian statutory rate. In addition, we recognized $5.0 million of income tax benefit due to the exercise and delivery of share-based awards during the three months ended April 2, 2017. There was no such benefit recognized during the three months ended April 3, 2016.

11. Supplemental Cash Flow Information

Certain cash and non-cash transactions were as follows for the periods indicated:
 
Three Months Ended
(In thousands)
April 2, 2017
 
April 3, 2016
Transactions involving cash:
 
 
 
Interest paid
$
13,592

 
$
13,487

Interest received
54

 
70

Income taxes paid
2,763

 
2,737

Income tax refunds
13

 
62

Non-cash transactions:
 
 
 
Property, plant and equipment additions in accounts payable
3,984

 
4,118


12. 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 and Central Eastern Europe 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. 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.


16



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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. Adjusted EBITDA is used to evaluate and compare the 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. Certain information with respect to segments is as follows for the periods indicated:
(In thousands)
Three Months Ended April 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
339,129

 
$
70,827

 
$
75,919

 
$
7,341

 
$
493,216

Intersegment sales
(1,087
)
 
(856
)
 
(4,092
)
 

 
(6,035
)
Net sales to external customers
$
338,042

 
$
69,971

 
$
71,827

 
$
7,341

 
$
487,181

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
44,937

 
$
7,674

 
$
5,214

 
$
(4,966
)
 
$
52,859

(In thousands)
Three Months Ended April 3, 2016
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Net sales
$
330,616

 
$
80,607

 
$
76,309

 
$
6,473

 
$
494,005

Intersegment sales
(1,887
)
 
(16
)
 
(2,797
)
 

 
(4,700
)
Net sales to external customers
$
328,729

 
$
80,591

 
$
73,512

 
$
6,473

 
$
489,305

 
 
 
 
 
 
 
 
 
 
Adjusted EBITDA
$
51,375

 
$
10,118

 
$
4,431

 
$
(7,683
)
 
$
58,241



17



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


A reconciliation of our consolidated Adjusted EBITDA to net income (loss) attributable to Masonite is set forth as follows for the periods indicated:
 
Three Months Ended
(In thousands)
April 2, 2017
 
April 3, 2016
Adjusted EBITDA
$
52,859

 
$
58,241

Less (plus):
 
 
 
Depreciation
14,024

 
14,570

Amortization
5,970

 
6,464

Share based compensation expense
2,427

 
3,728

Loss (gain) on disposal of property, plant and equipment
(274
)
 
132

Restructuring costs
293

 
19

Interest expense (income), net
7,024

 
7,232

Other expense (income), net
(249
)
 
786

Income tax expense (benefit)
(1,679
)
 
6,210

Loss (income) from discontinued operations, net of tax
245

 
188

Net income (loss) attributable to non-controlling interest
1,513

 
1,084

Net income (loss) attributable to Masonite
$
23,565

 
$
17,828


13. 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 April 2, 2017, and January 1, 2017, was $478.1 million and $485.4 million, respectively, compared to a carrying value of $469.8 million and $469.6 million, respectively. 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.


18



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


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)
Three Months Ended
April 2, 2017
 
April 3, 2016
Net income (loss) attributable to Masonite
$
23,565

 
$
17,828

Less: income (loss) from discontinued operations, net of tax
(245
)
 
(188
)
Income (loss) from continuing operations attributable to Masonite
$
23,810

 
$
18,016

 
 
 
 
Shares used in computing basic earnings per share
29,861,099

 
30,494,976

Effect of dilutive securities:
 
 
 
Incremental shares issuable under share compensation plans and warrants
593,889

 
876,980

Shares used in computing diluted earnings per share
30,454,988

 
31,371,956

 
 
 
 
Basic earnings (loss) per common share attributable to Masonite:
 
 
 
Continuing operations attributable to Masonite
$
0.80

 
$
0.59

Discontinued operations attributable to Masonite, net of tax
(0.01
)
 
(0.01
)
Total Basic earnings per common share attributable to Masonite
$
0.79

 
$
0.58

 
 
 
 
Diluted earnings (loss) per common share attributable to Masonite:
 
 
 
Continuing operations attributable to Masonite
$
0.78

 
$
0.57

Discontinued operations attributable to Masonite, net of tax
(0.01
)
 

Total Diluted earnings per common share attributable to Masonite
$
0.77

 
$
0.57

    
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.

19



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


15. 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:
 
Three Months Ended
(In thousands)
April 2, 2017
 
April 3, 2016
Accumulated foreign currency translation gains (losses), beginning of period
$
(127,433
)
 
$
(90,111
)
Foreign currency translation gain (loss)
5,730

 
3,872

Income tax benefit (expense) on foreign currency translation gain (loss)
(643
)
 

Less: foreign currency translation gain (loss) attributable to non-controlling interest
104

 
487

Accumulated foreign currency translation gains (losses), end of period
(122,450
)
 
(86,726
)
 
 
 
 
Accumulated pension and other post-retirement adjustments, beginning of period
(21,553
)
 
(17,837
)
Amortization of actuarial net losses
292

 
242

Income tax benefit (expense) on amortization of actuarial net losses
(114
)
 
(96
)
Accumulated pension and other post-retirement adjustments
(21,375
)
 
(17,691
)
 
 
 


Accumulated other comprehensive income (loss)
$
(143,825
)
 
$
(104,417
)
 
 
 
 
Other comprehensive income (loss), net of tax
$
5,265

 
$
4,018

Less: other comprehensive income (loss) attributable to non-controlling interest
104

 
487

Other comprehensive income (loss) attributable to Masonite
$
5,161

 
$
3,531


Actuarial net losses are reclassified out of accumulated other comprehensive income (loss) into cost of goods sold in the condensed consolidated statements of comprehensive income (loss).


20



NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)


16. Variable Interest Entity

As of April 2, 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 via the terms of the existing operating principles with the VIE. As primary beneficiary via the operating principles, we receive a disproportionate amount of earnings 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 condensed 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)
April 2,
2017
 
January 1,
2017
Current assets
$
9,041

 
$
6,633

Property, plant and equipment, net
13,228

 
13,673

Long-term deferred income taxes
6,550

 
6,505

Other assets, net
1,932

 
1,789

Current liabilities
(2,275
)
 
(2,044
)
Other long-term liabilities
(2,143
)
 
(2,115
)
Non-controlling interest
(5,260
)
 
(4,664
)
Net assets of the VIE consolidated by Masonite
$
21,073

 
$
19,777


Current assets include $4.9 million and $2.6 million of cash and cash equivalents as of April 2, 2017, 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 claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIE.


21


MASONITE INTERNATIONAL CORPORATION



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the three months ended April 2, 2017, and April 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 (i) the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended January 1, 2017. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" elsewhere in this Quarterly Report on Form 10-Q. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties. Certain prior year amounts have been reclassified to conform to the current basis of presentation.

Overview
We are a leading global designer, manufacturer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order to better serve our customers and create sustainable competitive advantages, we focus on developing innovative products, advanced manufacturing capabilities and technology-driven sales and service solutions.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems.
We operate 65 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 and homebuilders; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous door fabrication facilities provide value-added fabrication and logistical services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. In the three months ended April 2, 2017, we generated net sales of $338.0 million or 69.4%, $70.0 million or 14.4% and $71.8 million or 14.7% in our North American Residential, Europe and Architectural segments, respectively.

22


MASONITE INTERNATIONAL CORPORATION



Key Factors Affecting Our Results of Operations
Product Demand
There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
the strength of the economy;
the amount and type of residential and commercial construction;
housing sales and home values;
the age of existing home stock, home vacancy rates and foreclosures;
commercial building occupancy rates;
increases in the cost of raw materials or any shortage in supplies;
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.

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 of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. In fiscal year 2016, our top ten customers together accounted for approximately 44% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 16% of our net sales. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.

23


MASONITE INTERNATIONAL CORPORATION



Organizational Restructuring
During 2016, we began implementing a plan (the "2016 Plan") to close one manufacturing facility in the Architectural segment, which includes the reduction of approximately 140 positions. The 2016 Plan is expected to improve our cost structure and enhance operational efficiencies, and is expected to be completed by the end of the third quarter of 2017. Costs associated with the 2016 Plan include closure costs and severance. As of April 2, 2017, we expect to incur approximately $2.2 million of additional charges related to the 2016 Plan. Once completed, the 2016 Plan is expected to increase our annual earnings and cash flows by approximately $4 million.
Foreign Exchange Rate Fluctuation
Our financial results may be adversely affected by fluctuating exchange rates. In the three months ended April 2, 2017, and April 3, 2016, approximately 34% and 33% 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 translation of the financial statements of our non-U.S. functional currency operations are accumulated in the cumulative translation adjustments account in accumulated other comprehensive income (loss).
Inflation
An increase in inflation could have a significant impact on the cost of our raw material inputs. 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, margins 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.
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.

Components of Results of Operations
There have been no material changes to the information provided in the section entitled "Components of Results of Operations" in our Annual Report on Form 10-K for the year ended January 1, 2017. For the definition of and other information regarding Adjusted EBITDA, please see Note 12. Segment Information to the condensed consolidated financial statements in this Quarterly Report.

24


MASONITE INTERNATIONAL CORPORATION



Results of Operations
 
Three Months Ended
(In thousands)
April 2, 2017
 
April 3, 2016
Net sales
$
487,181

 
$
489,305

Cost of goods sold
391,624

 
391,060

Gross profit
95,557

 
98,245

Gross profit as a % of net sales
19.6
%
 
20.1
%
Selling, general and administration expenses
64,845

 
64,898

Selling, general and administration expenses as a % of net sales
13.3
%
 
13.3
%
Restructuring costs
293

 
19

Operating income (loss)
30,419

 
33,328

Interest expense (income), net
7,024

 
7,232

Other expense (income), net
(249
)
 
786

Income (loss) from continuing operations before income tax expense (benefit)
23,644

 
25,310

Income tax expense (benefit)
(1,679
)
 
6,210

Income (loss) from continuing operations
25,323

 
19,100

Income (loss) from discontinued operations, net of tax
(245
)
 
(188
)
Net income (loss)
25,078

 
18,912

Less: net income (loss) attributable to non-controlling interest
1,513

 
1,084

Net income (loss) attributable to Masonite
$
23,565

 
$
17,828

Three Months Ended April 2, 2017, Compared with Three Months Ended April 3, 2016
Net Sales
Net sales in the three months ended April 2, 2017, were $487.2 million, a decrease of $2.1 million or 0.4% from $489.3 million in the three months ended April 3, 2016. Net sales in the first three months of 2017 were negatively impacted by $8.7 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $6.6 million or 1.3% due to changes in volume, average unit price and sales of other products. Average unit price increased net sales in the first three months of 2017 by $20.7 million or 4.2% compared to the same period in 2016. Partially offsetting this increase was lower volume in the first three months of 2017 which decreased net sales by $13.4 million or 2.7% compared to the same period in 2016 and net sales of components and other products to external customers, which were $0.7 million lower in the first three months of 2017 compared to the same period in 2016.

25


MASONITE INTERNATIONAL CORPORATION



Net Sales and Percentage of Net Sales by Reportable Segment
 
Three Months Ended
(In thousands)
April 2, 2017
 
April 3, 2016
North American Residential
$
339,129

 
$
330,616

North American Residential intersegment
(1,087
)
 
(1,887
)
North American Residential net sales to external customers
$
338,042

 
$
328,729

Percentage of consolidated net sales
69.4
%
 
67.2
%
 
 
 
 
Europe
$
70,827

 
$
80,607

Europe intersegment
(856
)
 
(16
)
Europe net sales to external customers
$
69,971

 
$
80,591

Percentage of consolidated net sales
14.4
%
 
16.5
%
 
 
 
 
Architectural
$
75,919

 
$
76,309

Architectural intersegment
(4,092
)
 
(2,797
)
Architectural net sales to external customers
$
71,827

 
$
73,512

Percentage of consolidated net sales
14.7
%
 
15.0
%
 
 
 
 
Corporate & Other net sales to external customers
$
7,341

 
$
6,473

 
 
 
 
Net sales to external customers
$
487,181

 
$
489,305


North American Residential
Net sales to external customers from facilities in the North American Residential segment in the three months ended April 2, 2017, were $338.0 million, an increase of $9.3 million or 2.8% from $328.7 million in the three months ended April 3, 2016. Net sales in the first three months of 2017 were positively impacted by $0.9 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $8.4 million or 2.6% due to changes in volume, average unit price and sales of other products. Average unit price increased net sales in the first three months of 2017 by $12.2 million or 3.7% compared to the same period in 2016. Partially offsetting this increase were lower volume, which decreased net sales in the first three months of 2017 by $3.5 million or 1.1% compared to the same period in 2016 and net sales of components and other products to external customers, which were $0.3 million lower in the first three months of 2017 compared to the same period in 2016.
Europe
Net sales to external customers from facilities in the Europe segment in the three months ended April 2, 2017, were $70.0 million, a decrease of $10.6 million or 13.2% from $80.6 million in the three months ended April 3, 2016. Net sales in 2017 were negatively impacted by $9.8 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $0.8 million or 1.0% due to changes in volume, average unit price and sales of other products. Lower volume decreased net sales in the first three months of 2017 by $2.4 million or 3.0% compared to the same period in 2016 and net sales of components and other products to external customers were $1.3 million lower in the first three months of 2017 compared to the same period in 2016. Partially offsetting these decreases was a $2.9 million or 3.6% increase in average unit price in the first three months of 2017 compared to the same period in 2016.

26


MASONITE INTERNATIONAL CORPORATION



Architectural
Net sales to external customers from facilities in the Architectural segment in the three months ended April 2, 2017, were $71.8 million, a decrease of $1.7 million or 2.3% from $73.5 million in the three months ended April 3, 2016. Net sales in 2017 were positively impacted by $0.2 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $1.9 million or 2.6% due to changes in volume, average unit price and sales of other products. Lower volume decreased net sales in the first three months of 2017 by $7.8 million or 10.6% compared to the same period in 2016. Partially offsetting this decrease was a $5.6 million or 7.6% increase in average unit price in the first three months of 2017 compared to the same period in 2016 and net sales of components and other products to external customers, which were $0.3 million higher in the first three months of 2017 compared to the same period in 2016.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales was 80.4% and 79.9% for the three months ended April 2, 2017, and April 3, 2016, respectively. Overhead, distribution and direct labor costs as a percentage of net sales in the first three months of 2017 increased 1.4%, 0.8% and 0.7%, respectively. These increases were driven by operational and distribution inefficiencies and wage inflation. Material cost of sales and depreciation costs as a percentage of net sales in the first three months of 2017 decreased 2.3% and 0.1%, respectively, over the 2016 period. The decrease in material cost of sales was driven primarily by favorable average unit prices.
Selling, General and Administration Expenses
In the three months ended April 2, 2017, SG&A expenses, as a percentage of net sales, were 13.3%, which was flat compared to the three months ended April 3, 2016.
SG&A expenses in the three months ended April 2, 2017, were $64.8 million, a decrease of $0.1 million from $64.9 million in the three months ended April 3, 2016. The decrease was driven by a $1.5 million reduction of non-cash items in SG&A expenses including share based compensation, depreciation and amortization, favorable foreign exchange impacts of $0.2 million and other decreases of $0.7 million. These decreases were partially offset by a $2.3 million increase in marketing costs.

Interest Expense, Net
Interest expense, net, in the three months ended April 2, 2017, was $7.0 million, compared to $7.2 million in the three months ended April 3, 2016.
Other Expense (Income), Net
Other expense (income), net, in the three months ended April 2, 2017, was $(0.2) million, compared to $0.8 million in the three months ended April 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 the net gain related to our non-majority owned unconsolidated subsidiary that is recognized under the equity method of accounting and other miscellaneous non-operating expenses.

27


MASONITE INTERNATIONAL CORPORATION



Income Tax Expense (Benefit)
Our income tax expense in the three months ended April 2, 2017, decreased by $7.9 million compared to the three months ended April 3, 2016. The change in our 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, income and losses in tax jurisdictions with existing valuation allowances, income tax benefits related to tax-exempt income and discrete income tax benefits of $8.3 million in the three months ended April 2, 2017, compared to $1.1 million of discrete income tax benefit recorded in the three months ended April 3, 2016. The discrete income tax benefits of $8.3 million are primarily attributable to $5.0 million of discrete income tax benefit related to the exercise and delivery of share-based awards during the three months ended April 2, 2017. Discrete items may occur in any given year, but are not consistent from period to period. Our combined effective income tax rate is primarily the weighted average of federal, state and provincial rates in various countries in which we have operations, including the United States, Canada, the United Kingdom and Ireland and is affected by our ability to realize tax assets in certain jurisdictions.

Segment Information
 
Three Months Ended April 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Adjusted EBITDA
$
44,937

 
$
7,674

 
$
5,214

 
$
(4,966
)
 
$
52,859

Adjusted EBITDA as a percentage of segment net sales
13.3
%
 
11.0
%
 
7.3
%
 
 
 
10.8
%
 
Three Months Ended April 3, 2016
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Adjusted EBITDA
$
51,375

 
$
10,118

 
$
4,431

 
$
(7,683
)
 
$
58,241

Adjusted EBITDA as a percentage of segment net sales
15.6
%
 
12.6
%
 
6.0
%
 
 
 
11.9
%

28


MASONITE INTERNATIONAL CORPORATION



The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:  
 
Three Months Ended April 2, 2017
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Adjusted EBITDA
$
44,937

 
$
7,674

 
$
5,214

 
$
(4,966
)
 
$
52,859

Less (plus):
 
 
 
 
 
 
 
 
 
Depreciation
7,484

 
1,810

 
2,370

 
2,360

 
14,024

Amortization
993

 
1,667

 
2,161

 
1,149

 
5,970

Share based compensation expense

 

 

 
2,427

 
2,427

Loss (gain) on disposal of property, plant and equipment
(399
)
 
140

 
(27
)
 
12

 
(274
)
Restructuring costs

 

 
271

 
22

 
293

Interest expense (income), net

 

 

 
7,024

 
7,024

Other expense (income), net

 
93

 

 
(342
)
 
(249
)
Income tax expense (benefit)

 

 

 
(1,679
)
 
(1,679
)
Loss (income) from discontinued operations, net of tax

 

 

 
245

 
245

Net income (loss) attributable to non-controlling interest
917

 

 

 
596

 
1,513

Net income (loss) attributable to Masonite
$
35,942

 
$
3,964

 
$
439

 
$
(16,780
)
 
$
23,565

 
Three Months Ended April 3, 2016
(In thousands)
North American Residential
 
Europe
 
Architectural
 
Corporate & Other
 
Total
Adjusted EBITDA
$
51,375

 
$
10,118

 
$
4,431

 
$
(7,683
)
 
$
58,241

Less (plus):
 
 
 
 
 
 
 
 
 
Depreciation
7,920

 
2,076

 
2,507

 
2,067

 
14,570

Amortization
1,158

 
2,396

 
2,147

 
763

 
6,464

Share based compensation expense

 

 

 
3,728

 
3,728

Loss (gain) on disposal of property, plant and equipment
91

 
31

 
41

 
(31
)
 
132

Restructuring costs

 
21

 

 
(2
)
 
19

Interest expense (income), net

 

 

 
7,232

 
7,232

Other expense (income), net

 
71

 

 
715

 
786

Income tax expense (benefit)

 

 

 
6,210

 
6,210

Loss (income) from discontinued operations, net of tax

 

 

 
188

 
188

Net income (loss) attributable to non-controlling interest
838

 

 

 
246

 
1,084

Net income (loss) attributable to Masonite
$
41,368

 
$
5,523

 
$
(264
)
 
$
(28,799
)
 
$
17,828


29


MASONITE INTERNATIONAL CORPORATION



Adjusted EBITDA in our North American Residential segment decreased $6.5 million, or 12.6%, to $44.9 million in the three months ended April 2, 2017, from $51.4 million in the three months ended April 3, 2016. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $13.7 million and $12.7 million in the first quarter of 2017 and 2016, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology and research and development.
Adjusted EBITDA in our Europe segment decreased $2.4 million, or 23.8%, to $7.7 million in the three months ended April 2, 2017, from $10.1 million in the three months ended April 3, 2016.
Adjusted EBITDA in our Architectural segment increased $0.8 million, or 18.2%, to $5.2 million in the three months ended April 2, 2017, from $4.4 million in the three months ended April 3, 2016. Adjusted EBITDA in the Architectural segment included corporate allocations of shared costs of $2.2 million and $1.9 million in the first quarter of 2017 and 2016, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology and research and development.
Liquidity and Capital Resources
Our liquidity needs for operations vary throughout the year. Our principal sources of liquidity are cash flows from operating activities, the borrowings under our ABL Facility and accounts receivable sales programs with third parties and our existing cash balance. Our anticipated uses of cash in the near term include working capital needs, especially in the case of a market recovery, capital expenditures and share repurchases. On a continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.
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 April 2, 2017, we had $34.5 million of cash and cash equivalents, availability under our ABL Facility of $125.9 million and availability under our AR Sales Program of $27.1 million.
Cash Flows
            Cash used in operating activities was $2.5 million during the three months ended April 2, 2017, compared to $3.2 million provided in the three months ended April 3, 2016. This $5.7 million net decrease in cash provided by operating activities was primarily due to a $3.4 million decrease in our net income (loss) attributable to Masonite, adjusted for non-cash and non-operating items, in the first three months of 2017 compared to the same period in 2016 with the remaining decrease due to changes in net working capital.

Cash used in investing activities was $15.3 million during the three months ended April 2, 2017, compared to $24.3 million in the three months ended April 3, 2016. This $9.0 million decrease in cash used in investing activities was driven by a decrease of $9.1 million in cash additions to property, plant and equipment in the first three months of 2017 compared to the same period in 2016, partially offset by a $0.1 million reduction in other investing outflows.
Cash used in financing activities was $17.1 million during the three months ended April 2, 2017, compared to $16.7 million used during the three months ended April 3, 2016. This $0.4 million increase in cash used in financing activities was driven by a $5.9 million increase in tax withholding on share based awards delivered in the first three months of 2017 compared to the same period in 2016, mostly offset by a $4.7 million reduction in common shares repurchased and retired and $0.8 million of other financing net inflows.
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 other amount of any share repurchases will be determined by management based on our

30


MASONITE INTERNATIONAL CORPORATION



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 three months ended April 2, 2017, we repurchased and retired 0.1 million of our common shares in the open market at an aggregate cost of $11.3 million as part of the share repurchase programs. As of April 2, 2017, $229.5 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 April 2, 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.

Accounts Receivable Sales Programs
We maintain accounts receivable sales programs with third parties (the "AR Sales Programs"). Under the AR Sales Programs, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to third parties who assume the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under these programs 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 Programs are excluded from trade accounts receivable in the condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Programs were not material for any of the periods presented and were recorded in selling, general and administration expense within the condensed consolidated statements of comprehensive income (loss).
Senior Notes
On March 23, 2015, we issued $475.0 million aggregate principal senior unsecured notes (the "2023 Notes"). The 2023 Notes were issued in a private placement 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 were issued at par and 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. We received net proceeds of $467.9 million after deducting $7.1 million of debt issuance costs. The debt issuance costs were capitalized as deferred financing costs and are being accreted to interest expense over the term of the 2023 Notes using the effective interest method. The net proceeds from the 2023 Notes, together with existing cash balances, were used to redeem the $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

31


MASONITE INTERNATIONAL CORPORATION



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 April 2, 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.

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 April 2, 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

As described above, 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, 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 $434.8 million and $409.3 million for the three months ended April 2, 2017 and April 3, 2016, respectively. Our non-guarantor subsidiaries generated Adjusted EBITDA of $48.9 million and $50.4 million for the three months ended April 2, 2017 and April 3, 2016, respectively. Our non-guarantor subsidiaries had total assets of $1.5 billion and $1.3 billion as of April 2, 2017, and January 1, 2017, respectively; and total liabilities of $686.5 million and $771.2 million as of April 2, 2017, and January 1, 2017, respectively.


32


MASONITE INTERNATIONAL CORPORATION



Changes in Accounting Standards and Policies
Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
For our disclosures about market risk, please see Part II, Item 7A., "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended January 1, 2017. We believe there have been no material changes to the information provided therein.

Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Quarterly Report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

33


PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information required with respect to this item can be found under "Legal Proceedings" in Note 8. Commitments and Contingencies to the condensed consolidated financial statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1.
Item 1A. Risk Factors
You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report on Form 10-K filed for the year ended January 1, 2017. There have been no material changes from the risk factors disclosed in such Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Equity Securities.
None.
(b) Use of Proceeds.
Not applicable.
(c) Repurchases of Our Equity Securities.
During the three months ended April 2, 2017, we repurchased 144,447 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
January 2, 2017, through January 29, 2017
15,637

 
64.44

 
15,637

 
239,789,873

January 30, 2017, through March 2, 2017

 

 

 
239,789,873

March 3, 2017, through April 2, 2017
128,810

 
79.53

 
128,810

 
229,545,340

Total
144,447

 
$
77.90

 
144,447

 
 

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 other 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 April 2, 2017, $229.5 million was available for repurchase in accordance with the share repurchase programs.

34


Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information
None.
Item 6. Exhibits
The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the "Index to Exhibits" immediately following the Signatures.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
    
 
 
MASONITE INTERNATIONAL CORPORATION
 
 
 
(Registrant)
 
 
 
 
 
 
Date:
May 9, 2017
By
/s/ Russell T. Tiejema
 
 
 
Russell T. Tiejema
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 


35


INDEX TO EXHIBITS
The following is a list of all exhibits filed or furnished as part of this report:
Exhibit No.
Description
31.1*
Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.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.

36