Form 10-12B
Table of Contents

As filed with the Securities and Exchange Commission on August 19, 2013

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10

 

 

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

Masonite International Corporation

(Exact name of registrant as specified in its charter)

 

 

 

British Columbia, Canada   2430   98-0377314
(State or other jurisdiction of incorporation or organization)   (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2771 Rutherford Road

Concord, Ontario L4K 2N6 Canada

(800) 895-2723

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Robert E. Lewis

Senior Vice President/General Counsel and Secretary

Masonite International Corporation

One Tampa City Center

201 North Franklin Street, Suite 300

Tampa, Florida 33602

(813) 739-4074

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With copies to:

Joseph H. Kaufman, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017-3954

(212) 455-2000

Securities to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class to be so Registered

 

Name of Each Exchange on Which

Each Class is to be Registered

Common Shares   New York Stock Exchange

Securities to be registered pursuant to Section 12(g) of the Act:

None.

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Item 1. Business

     1   

Item 1A. Risk Factors

     16   

Item 2. Financial Information

     33   

Item 3. Properties

     68   

Item 4. Security Ownership of Certain Beneficial Owners and Management

     71   

Item 5. Directors and Executive Officers

     73   

Item 6. Executive Compensation

     78   

Item 7. Certain Relationships and Related Transactions, and Director Independence

     107   

Item 8. Legal Proceedings

     108   

Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

     108   

Item 10. Recent Sales of Unregistered Securities

     110   

Item 11. Description of Registrant’s Securities to be Registered

     110   

Item 12. Indemnification of Directors and Officers

     113   

Item 13. Financial Statements and Supplementary Data

     114   

Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     114   

Item 15. Financial Statements and Exhibits

     115   


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INFORMATION REQUIRED IN REGISTRATION STATEMENT

EXPLANATORY NOTE

Masonite International Corporation is filing this registration statement on Form 10 pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), because we are seeking to list our common shares on the New York Stock Exchange (the “NYSE”). As used in this registration statement, unless otherwise specified or the context otherwise requires, “Masonite,” “we,” “our,” “us” and the “Company” refer to Masonite International Corporation.

Once this registration statement is declared effective, we will be subject to the requirements of Section 13(a) of the Exchange Act, including the rules and regulations promulgated thereunder, which will require us to file, among other things, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the Securities and Exchange Commission (the “SEC”), and we will be required to comply with all other obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12 of the Exchange Act.

Our periodic and current reports will be available on our website, www.masonite.com, free of charge, as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This registration statement 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” and “Business.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “may,” “might,” “will,” “should,” “estimate,” “project,” “plan,” “anticipate,” “expect,” “intend,” “outlook,” “believe” and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under “Risk Factors” and elsewhere in this registration statement.

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

 

   

our ability to successfully implement our business strategy;

 

   

general economic, market and business conditions;

 

   

levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity;

 

   

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 senior secured asset-based credit facility, or 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;

 

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our ability to keep pace with technological developments;

 

   

the actions by, and the continued success of, certain key customers;

 

   

our ability to maintain relationships with certain customers;

 

   

new contractual commitments;

 

   

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 registration statement 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.

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Effective July 4, 2011, pursuant to an amalgamation under the Business Corporations Act (British Columbia), Masonite Inc., the former parent of the Company, amalgamated with Masonite International Corporation to form an amalgamated corporation named Masonite Inc., which then changed its name to Masonite International Corporation (the “amalgamation”). The amalgamation had no impact, other than related expenses, on the Company’s consolidated balance sheets or statements of comprehensive income (loss), changes in equity or cash flows as of December 31, 2011, or for the years ended December 31, 2011 and 2010.

The Company has a 52- or 53-week fiscal year that ends on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 26-week period ending on July 1, 2012, is referred to as ending on June 30, 2012, and the 52-week periods ending on December 30, 2012, January 1, 2012, and January 2, 2011, are referred to as ending on December 31, 2012, 2011 and 2010, respectively. As used in this registration statement, “fiscal year 2012,” “fiscal year 2011” and “fiscal year 2010” refer to the Company’s fiscal years ended December 30, 2012, January 1, 2012 and January 2, 2011, respectively.

Since 2010, we have completed several acquisitions. The results of these acquired entities are included in our consolidated statements of comprehensive income (loss) for the periods subsequent to the respective acquisition dates.

 

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ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS

Masonite is organized under the laws of British Columbia, a province of Canada, and, accordingly, is governed by the applicable provincial and federal laws of Canada. There is doubt as to the enforceability, in original actions in Canadian courts, of liabilities based upon the U.S. federal securities laws or the securities laws or “blue sky” laws of any state within the United States and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws or any such state securities laws or blue sky laws. Accordingly, it may not be possible to enforce judgments obtained in the United States against us.

 

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Item 1. Business

We are a leading global designer and manufacturer of interior and exterior doors for the residential new construction; the residential repair, renovation and remodeling; 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. Today, we believe we hold either the number one or two market positions in the seven product categories we target in North America: interior molded residential doors; interior stile and rail residential doors; exterior fiberglass residential doors; exterior steel residential doors; interior commercial and architectural wood doors; door core; and wood veneers and molded door facings.

 

LOGO

Our leadership position in each of the seven product categories above is defined as a number one or number two market position.

We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale and retail distribution channels. Our broad portfolio of brands, including Masonite®, Marshfield®, Premdor®, Mohawk®, Megantic®, Algoma®, Baillargeon®, Birchwood Best® and Lemieux®, are among the most recognized in the door industry and are associated with innovation, quality and value. In 2012, we sold approximately 31 million doors to more than 6,000 customers in 70 countries. Our fiscal year 2012 net sales to our end-markets by segment and in North America are set forth below.

 

Net Sales

by Segment – 2012

   North American Net Sales
by End-Market – 2012

LOGO

   LOGO  

 

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In response to historic declines in the residential and non-residential construction markets as a result of the recent global economic downturn, we proactively sought to optimize our geographic and operational footprint and significantly improve our cost structure. Specifically, we consolidated our manufacturing and distribution operations by closing 50 facilities between 2006 and 2012, reduced our workforce from more than 15,000 employees in 2006 to approximately 9,800 as of June 30, 2013, outsourced back office processes, and strengthened our balance sheet.

At the same time, we also invested in advanced technologies to increase the automation of our manufacturing processes, increase quality and shorten lead times and introduced targeted e-commerce and other marketing initiatives to improve our sales and marketing efforts and customer experience. In addition, we implemented a disciplined tuck-in acquisition strategy that solidified our presence in both the North American residential molded and stile and rail interior door markets and created leadership positions in the attractive North American commercial and architectural interior wood door, door core and wood veneer markets.

We operate 63 manufacturing and distribution facilities in 12 countries in North America, Europe, South America, Asia, Africa and Israel, which are strategically located to serve our customers. We are one of the few vertically integrated door manufacturers in the world and one of only two in the North American residential door industry and the only vertically integrated door manufacturer in the North American non-residential interior wood door industry. Our vertical integration extends to all steps of the production process from initial design, development and production of steel press plates to produce interior molded and exterior fiberglass door facings to the manufacturing of door components, such as door cores, wood veneers and molded facings, to door slab assembly. We also offer incremental value by hanging doors in frames with glass and hardware and pre-finishing doors with paint or stain. We believe that our vertical integration and automation technologies enhance our ability to develop new and proprietary products, provide greater value and improved customer service, and create high barriers to entry. We also believe vertical integration enhances our ability to cut costs, although our cost structure is subject to certain factors beyond our control, such as global commodity shocks.

Market Opportunity

We compete in the multi-billion dollar global door market. According to the 2011/2012 WDMA/AAMA Study of the U.S. Market for Windows, Doors and Skylights and the December 2012 update published by the WDMA/AAMA, the U.S. door market consisted of approximately 52 million units(1) in 2011. Of this total, approximately 83% and 17% were residential and non-residential units, respectively, and approximately 47% and 53% were used in new construction, and repair, renovation and remodeling, respectively. WDMA/AAMA forecasts the U.S. residential door market and non-residential door market will experience 15% and 9% annual growth from 2011 to 2015, respectively.

The primary drivers of the market for doors and door products are the residential new construction, the residential repair, renovation and remodeling, and the non-residential building construction markets.

Residential New Construction

The U.S. housing market has been improving since reaching historic lows during the recent global economic downturn. Housing starts declined by more than 70% from the peak of 2.1 million in 2005 to approximately 600,000 in 2011 according to the U.S. Census Bureau, and home prices declined by nearly 33% during this period according to the S&P/Case-Shiller National U.S. Home Price Index. During 2012, the new housing market and home prices began to recover with total housing starts increasing 28% and fourth quarter 2012 home prices rising approximately 7% compared to fourth quarter 2011, according to the U.S. Census Bureau and the S&P/Case-Shiller National U.S. Home Price Index. However, this level remains significantly below the long term annual average of 1.5 million housing starts since the U.S. Census Bureau began reporting this data in 1959 and there can be no assurance that they will return to historic levels. Standard & Poor’s estimates that 2015 housing starts will be 1.7 million, which would represent a 30% compound annual growth rate from 2012.

 

(1)  Units are counted by individual “leaf.” Bi-fold doors, for example, are counted as two units.

 

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Demographic trends relating to population growth and household formation are also expected to be positive drivers of new housing starts over the long term, according to the Joint Center for Housing Studies, or JCHS. While the average size of completed single family homes fell from an annual high of approximately 2,520 square feet in 2007 to a recent annual low of approximately 2,390 square feet in 2010, it has since recovered to approximately 2,510 square feet in the fourth quarter of 2012, according to the U.S. Census Bureau. In addition, the average number of doors per home has remained relatively constant over the years. According to market research, new single family homes will use an average of 24 doors (20 interior and 4 exterior), and new multi-family homes will use an average of 12 doors (9 interior and 3 exterior). Based on this data, and supported by improving employment rates, record low interest rates and declining new and existing home inventories, we believe a multi-year housing recovery is underway and that we are well positioned to capitalize on it.

Residential Repair, Renovation and Remodeling

According to the Home Improvement Research Institute, or HIRI, and IHS Global Insight, the U.S. residential repair, renovation and remodeling products market declined by an average of approximately 6% per year from 2006 to 2009 on a nominal basis. During this period, declining home prices, increasing unemployment and record foreclosures discouraged homeowners from making repairs or improvements to their homes. More recently there are positive signs that market conditions in the U.S. are beginning to improve, although U.S. economic conditions remain challenged. For example, HIRI estimates that the U.S. residential repair, renovation and remodeling products market grew approximately 5% in 2012 from 2011 levels. HIRI and IHS Global Insight also forecast that the U.S. residential repair, renovation and remodeling products market will grow by an average of approximately 5% per year from 2012 to 2015 on a nominal basis driven by the improving economy, greater consumer confidence and rising home prices.

Non-Residential Building Construction

The U.S. non-residential building construction market did not begin to decline until 2008, which was well after the decline in the residential new construction market. In a pattern that is typical of prior cycles, the recovery in this market has lagged the recovery in residential new construction. According to McGraw-Hill Construction, non-residential building construction starts declined 50% on a square footage basis from 2008 to 2011. This market began to improve modestly in 2012 as the economy improved. According to McGraw-Hill Construction, non-residential building construction increased by 6% in square footage terms in 2012 as compared to 2011. This market is expected to grow by 8% in square footage in 2013, and annualized growth of 21% in square footage is expected from 2013 to 2015, according to McGraw-Hill Construction. Although the demand for doors lags non-residential building construction starts, we believe new construction activity is a strong indicator of future demand for doors.

The non-residential building construction market also includes the repair, renovation and remodeling of existing non-residential properties. According to the March 2012 Buildings Energy data book of the U.S. Department of Energy, there was approximately 81 billion square feet of installed commercial space in the U.S. in 2010. We believe that repair, renovation and remodeling activity in this market will accelerate as the economy and confidence levels continue to improve, although various factors will impact our business in this market, including non-residential building occupancy rates and the availability and cost of credit.

Competitive Strengths

As a result of the actions we have taken and the improvements we made during the economic downturn, including efforts to optimize our operational and geographic footprints, investments in technology and automation, disciplined cost reduction efforts, strategic tuck-in acquisitions and the strengthening of our balance sheet, we expect to benefit from significant growth opportunities and operating leverage as our end markets continue to recover. We believe the following competitive strengths differentiate us from other building product companies and position us for sustainable growth.

 

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Leading Market Positions in Targeted End Markets

Within the North American door market, we believe we hold either the number one or two market position in the seven product categories we target: interior molded residential doors; interior stile and rail residential doors; exterior fiberglass residential doors; exterior steel residential doors; interior commercial and architectural wood doors; door core; and wood veneers and molded door facings. We are also one of the largest manufacturers of doors and door components in the world, selling approximately 31 million residential, commercial and architectural interior and exterior doors in 2012; approximately 19 million of which were sold in the United States, our largest market. We believe our scale and leadership positions support our commitment to invest in advanced manufacturing and e-commerce initiatives and develop innovative new products, to effectively service regional and national customers and to offer broad product lines across our markets, while reducing our materials and unit production costs.

Extensive Portfolio with Strong Brand Recognition

Our broad portfolio of brands, including Masonite®, Marshfield®, Premdor®, Mohawk®, Megantic®, Algoma®, Baillargeon®, Birchwood Best® and Lemieux®, are among the most recognized in the door industry and are associated with superior design, innovation, reliability and quality. Builder Magazine recognized the Masonite® brand as one of the leading interior door brands in the United States in 2012 in the following categories: Brand Used in Past Two Years, Brand Used the Most, Brand Familiarity, and Quality Rating. The Masonite® brand was also named in the top three for exterior doors in the Brand Used in the Past Two Years and the Brand Used the Most categories. Our brand recognition is further strengthened by the numerous design awards we have won, including our LBM Research Institute 2010 Best In Class Award in the category of steel exterior doors.

Long-Term Customer Relationships and Well-Established Multi-Channel Distribution

As a result of our longstanding commitment to customer service and product innovation, we have well-established relationships within the wholesale and retail channels. Ninety-five percent of our top 20 customers have purchased doors from us for at least 10 years, although we generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase our products. In addition, our manufacturing and distribution facilities are strategically located to serve our customers. We believe that our robust and growing sales network, customized marketing initiatives and service-focused culture will continue to reinforce our customer relationships. We also believe that our long-term relationships with leading wholesale distributors, major homebuilders, contractors and architects will enable us to continue to increase our market penetration in the residential and non-residential construction markets.

Leading Technological Innovation Within the Door Industry

We believe we are a leader in technological innovation in the design of doors and door components and in the complex processes required to manufacture high quality products quickly and consistently. We believe that research and development is a key competitive advantage for us, and we intend to continue developing new and innovative products at our 145,245 square foot innovation center in West Chicago, Illinois while improving critical processes in the manufacturing and selling of our products. For example, we have made significant investments to automate selected door manufacturing processes that were previously labor intensive, including our fiberglass door production line in Tennessee, and more recently our interior door slab assembly operations in South Carolina. These investments have reduced our direct labor costs, improved overall product quality, increased throughput rates, and decreased lead times. Our future success will depend on our ability to develop and introduce new or improved products, to continue to improve our manufacturing and product service processes, and to protect our rights to the technologies used in our products. We have also created proprietary web-based sales and marketing tools, including MAX Masonite Xpress ConfiguratorSM, MC2 and MConnectTM, for our wholesale dealer network, to improve selection and order processes, reduce order entry errors, create more accurate quotes, improve communication and facilitate a better customer experience. Further, we

 

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introduced our patented “Torrefied” exterior stile and rail wood door which uses advanced processing technology to dramatically enhance anti-weathering characteristics such as water resistance and was named one of the top five products displayed during the 2013 International Builder Show. As of December 31, 2012, we had 147 design patents and design patent applications and 169 utility patents and patent applications in the United States, and 78 foreign design patents and patent applications and 368 foreign utility patents and patent applications.

Fully Integrated Vertical Operations Across All Steps of the Production Process

We are one of the few fully integrated door manufacturers in the world. In North America, we are one of only two vertically integrated manufacturers for residential doors and the only vertically integrated manufacturer of non-residential interior wood doors. Our vertical integration extends to all steps of the production process from initial design, development and production of steel press plates to produce interior molded and exterior fiberglass door facings to the manufacturing of door components, such as door cores, wood veneers and molded facings, to door slab assembly. We also offer incremental value by hanging doors in frames with glass and hardware and pre-finishing doors with paint or stain. We believe that our vertical integration enhances our ability to develop products and respond quickly to changing consumer preferences, provides greater value and better service for our customers, and potentially lowers our costs. As part of our integration strategy, we own several advanced manufacturing facilities for the production of wood composite molded door facing components, as well as over 1,000 customized steel press plates for the production of interior molded and exterior fiberglass door facings with a replacement value of $75 million. We leverage these assets through our vertically integrated operations in a manner that is difficult to replicate without significant capital investment. For example, the replacement insurance value on our five molded door facing facilities is in excess of $1 billion.

Experienced Management Team with Extensive Experience and a Successful Track Record

We are managed by results-driven executives with a proven track record of successfully managing multiple brands, winning new business, reducing costs and identifying, executing and integrating strategic tuck-in acquisitions. Several members of our management team previously worked at Fortune 500 companies, including Allied Signal Inc., Honeywell International Inc., The Procter & Gamble Company, General Electric Company and The Dow Chemical Company, where they utilized advanced technologies to improve cost structures and create competitive advantages.

Growth Strategy

Our vision is to be the premier provider of doors and door components for the global door industry. We believe our philosophy of continuous improvement through research and development, superior product innovation, advanced manufacturing practices, and effective sales and marketing techniques will continue to strengthen our core operations and drive profitable organic growth. By leveraging our competitive strengths and the improvements we achieved in our cost structure, we believe we are well positioned to capitalize on the anticipated multi-year rebound in our target markets. We are committed to executing the following balanced and complementary strategies to continue to further strengthen our leadership positions, create compelling value for our customers, enhance our portfolio of leading brands and achieve our top and bottom line growth objectives.

Develop Innovative, Market-Leading Products

We intend to continue developing new and innovative products to grow our sales and enhance our returns. On average we have introduced more than 100 new products in the last three years and have been recognized with numerous design awards. We plan to capitalize on the anticipated growth in door demand by continuing to introduce new, value-added products to build upon our comprehensive portfolio of door styles, designs, textures, components, options, applications and materials. We have consistently demonstrated the ability to develop products that are differentiated by compelling design features and recognized for their reliability and quality. For example, we recently introduced the “West End” Series of doors which combines a European inspired award winning design with a patented “hinge-less” closing system to create an elegant look while saving interior living

 

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space. In addition, in order to capture more value per door opening, we continue to invest in next generation ink-jetting technology to support our AvantGuardTM fiberglass exterior doors and have significantly expanded our pre-finishing capabilities.

Expand our Presence in Attractive Markets and Geographies to Accelerate Growth and Improve Margins

We plan to continue to focus our operations on attractive new market and geographic opportunities. For example, we believe we can expand our leading position in the North American commercial and architectural wood door market by focusing on strategic sectors within this market, such as education, health care and hospitality and faster growing regions such as the West Coast, Texas and South-Eastern United States, although certain of these sectors continue to be affected by budgetary constraints. By expanding our market presence and achieving greater economies of scale, we intend to capitalize on the anticipated recovery in the U.S. non-residential construction market. We are also focused on expanding our business in the residential new construction market and with professional repair, renovation and remodeling contractors. Internationally, we believe that South America, India and other Asian markets represent attractive opportunities for us to increase penetration of interior molded residential doors and molded door facings.

Leverage Our Marketing, Sales and Customer Service Activities to Further Drive Sales

We intend to continue to pursue additional growth opportunities by leveraging our extensive sales, marketing and customer service efforts in innovative ways. For example, we have developed several proprietary web-based tools for our customers, including MAX Masonite Xpress ConfiguratorSM, MC2 and MConnectTM, which complement our website to enhance communication and information flow with our customers in our wholesale dealer network providing a more customized buying experience, customer leads and quoting capabilities and simplifying the procurement process. We also intend to capture additional share in the attractive professional repair, renovation and remodeling markets by helping professional contractors produce customized marketing materials to assist them in their sales effort. In addition, we plan to continue developing effective marketing initiatives to expand our business with professional dealers and homebuilders. We also plan to further develop our All Product Distributor program by leveraging our proprietary web-based tools to assist our distributors in improving their sales efficiency and marketing materials, managing their supply chain and sharing best practices with other distributors in our program. We actively leverage the information we gather from our sales, marketing and customer service activities in our product development, production and other strategic decision making processes.

Continue to Pursue Operational Excellence

In 2006 we began our “lean sigma” journey. Since that time we have rolled-out “lean sigma” to 48 facilities, awarded nearly 600 employees with various “belt” attainment certifications and saved over $100 million. We plan to continue to use “lean sigma” tools and practices to lower costs, improve customer service and increase profitability through automation, footprint optimization and disciplined operating practices based on continuous improvement across all functional areas of the business. For example, we intend to draw on our experience with our state of the art interior door slab assembly operations in South Carolina to automate other labor-intensive manufacturing processes throughout our production system. We also plan to further optimize our manufacturing and distribution channels to eliminate cost inefficiencies and to better serve customers with shorter lead times and higher quality.

Pursue Strategic Tuck-in Acquisitions to Create Leadership Positions

We intend to continue our disciplined approach to identifying, executing and integrating strategic tuck-in acquisitions while maintaining a strong balance sheet, although we expect competition for the best candidates. We target companies with differentiated businesses, strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. For example, in the past several years we made six strategic acquisitions to create leadership positions in (i) the attractive North American commercial

 

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and architectural interior wood door and door core market through the acquisitions of Marshfield, Algoma and Baillargeon, (ii) the North American interior stile and rail residential wood door market through the acquisitions of Lemieux and Masisa (iii) the production and sale of wood veneers with the acquisition of Birchwood.

Product Lines

Residential Doors

We sell an extensive range of interior and exterior doors in a wide array of designs, materials, and sizes. While substantially all interior doors are made with wood and related materials such as hardboard (including wood composite molded and flat door facings), the use of wood in exterior doors in North America has declined over the last two decades as a result of the introduction of steel and fiberglass doors. Our exterior doors are made primarily of steel or fiberglass. Our residential doors are molded panel, flush, stile and rail, routed medium-density fiberboard (“MDF”), steel or fiberglass.

Molded panel doors are interior doors available either with a hollow or solid core and are made by assembling two molded door skin panels around a wood or MDF frame. Molded panel doors are routinely used for closets, bedrooms, bathrooms and hallways. Our molded panel product line is subdivided into four distinct product groups: our original Molded Panel series is a combination of classic styling, durable construction, and variety of design preferred by our customers when price sensitivity is a critical component in the product selection; our Palazzo® series is comprised of three distinct patented designs that accentuate the beauty and flexibility of molding wood fiber to replicate high end, historically labor intensive door designs; the four doors within our Anniversary Collection® embody themed, period, and architectural style specific designs; and our newest introduction to the molded panel line, the West End™ Collection, strengthens our tradition of design innovation by introducing the clean and simple aesthetics found in modern linear designs to the molded panel interior door category. All of our molded panel doors except for the Palazzo® series can be upgraded with our proprietary, wheat straw based, Safe ‘N Sound® door core or our environmentally friendly Emerald™ door construction which enables home owners, builders, and architects to meet specific product requirements and “green” specifications to attain LEED certification for a building or dwelling

Flush interior doors are available either with a hollow or solid core and are made by assembling two facings of plywood, MDF, composite wood, or hardboard over a wood or MDF frame. These doors can either have a wood veneer surface suitable for paint or staining or a composite wood surface suitable for paint. Our flush doors range from base residential flush doors consisting of unfinished composite wood, to the ultrahigh end wood veneer door used in the commercial and architectural door market.

Stile and rail doors are made from wood or MDF with individual vertical stiles, horizontal rails and panels, which have been cut, milled, veneered, and assembled from lumber such as clear pine, knotty pine, oak and cherry. Within our stile and rail line, glass panels can be inserted to create what is commonly referred to as a French door and we have over 30 glass designs for use in making French doors. Where horizontal slats are inserted between the stiles and rails, the resulting door is referred to as a louver door. For interior purposes stile and rail doors are primarily used for hallways, room dividers, closets and bathrooms. For exterior purposes these doors are used as entry doors with decorative glass inserts (known as lites) often inserted into these doors.

Routed MDF doors are produced by using a computer controlled router carver to machine a single piece of double refined MDF. Our routed MDF door category is comprised of two distinct product lines known as the Bolection® and Cyma™ door. The offering of designs in this category is extensive, as the manufacturing of routed MDF doors is based on a routing program where the milling machine selectively removes material to reveal the final design.

Steel doors are exterior doors made by assembling two interlocking steel facings (paneled or flat) or attaching two steel facings to a wood or steel frame and injecting the core with polyurethane insulation. With our

 

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functional Utility Steel series, the design centric High Definition family, and the prefinished Sta-Tru® HD, we offer customers the freedom to select the right combination of design, protection, and compliance required for essentially any paint grade exterior door application. In addition, our product offering is significantly increased through our variety of compatible clear or decorative glass designs.

Fiberglass doors are considered premier exterior doors and are made by assembling two fiberglass door facings to a wood frame or composite material and injecting the core with polyurethane insulation. Led by the Barrington® door, our fiberglass door lines offer innovative designs, construction, and finishes. The Barrington® family of doors is specifically designed to replicate the construction, look, and feel of a real wood door. We believe that our patented panel designs, sophisticated wood grain texturing and multiple application-specific construction processes will help our Barrington® and Belleville® fiberglass lines retain a distinct role in the exterior product category in the future.

All of our residential doors can be pre-assembled into door frames.

Non-Residential Doors

Non-residential doors in the commercial and architectural category are typically highly specified products designed, constructed, and tested to ensure regulatory compliance. We offer an extensive line of non-residential interior doors meeting all market requirements and ranging from the entry level molded panel doors to the high end custom designed flush wood doors with exotic veneer inlay designs. Our non-residential doors are molded panel, flush, stile and rail, or routed MDF and can be offered with radiation shielding as well as varying levels of fire and sound rating. Our non-residential flush doors can also be produced with a laminate veneer facing. High pressure laminates are used when durability and aesthetics are the customer’s main concern, while low pressure laminates are utilized when consistency in surface color, texture, and value are equal requirements.

Components

In addition to residential and non-residential doors, we also sell several door products to the building materials industry. Within the residential new construction market, we provide interior door facings, wheat straw door cores, MDF and wood cut-stock components to multiple manufacturers. Within the non-residential building construction market, we are a leading component supplier of various critical door components and the largest wood veneer door skin supplier. Additionally, through our commercial and architectural door businesses, we are one of the leading providers of mineral door cores to the North American door market.

Molded door facings are thin sheets of molded hardboard produced by grinding or defibrating wood chips, adding resin and other ingredients, creating a thick fibrous mat composed of dry wood fibers and pressing the mat between two steel presses to form a molded sheet, the surface of which may be smooth or may contain a wood grain pattern. Following pressing, molded door facings are trimmed, painted and shipped to door manufacturing plants where they are mounted on frames to produce molded doors.

Door framing materials, commonly referred to as cut stock, are wood or MDF components that constitute the frame on which interior and exterior door facings are attached.

Door cores are molded fiber mats or particle boards used in the construction of solid core doors. Where doors must achieve a fire rating higher than 45 minutes, the door core consists of an inert mineral core.

New Products

We develop and engineer innovative products designed to influence the mix of products sold and provide the end user with doors and entry systems that enhance beauty and functionality while creating greater value to our customers. For example, on average we have introduced over 100 new products in each of the past three

 

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years, including the “West End” series of smooth surfaced interior doors which combines a European inspired award winning design with a patented “hinge-less,” “barn door,” closing system to create an elegant look while saving interior living space. The West End Collection is a direct response to recent interior design trends that embody linear patterns and geometric shapes. We also introduced our patented “Torrefied” exterior stile and rail wood door which uses advanced processing technology to significantly enhance weathering characteristics such as water and sun resistance. We have also launched a significant number of new fiberglass door designs, including a new fir wood grain and broadened the number of designs across our range. We have added more than 20 new fiberglass door designs in the last year and have one of the most extensive fiberglass offerings in the industry.

Recently, more consumers are requesting products that are factory finished and we have introduced two distinct approaches to supplying prefinished doors and entry systems. One is the more traditional and more economical application of applying paints and stains utilizing an automated spray on finish. The other is AvantGuardTM, a next generation digital ink jet printing technology that applies a superior finish to fiberglass doors that replicates exotic wood species and provides a longer lasting and more durable exterior finish and is available through both our retail and wholesale channel partners.

Through our acquisition of Marshfield, we expanded our line of interior doors to include the Bolection® and Cyma™ router carved MDF doors. These lines of doors are constructed by a highly automated process where any one of hundreds of door designs are routed from a solid piece of medium density fiberboard. The resulting door is a high-end paint grade product for niche applications. The addition of these routed MDF doors and the full complement of interior and exterior Lemieux Wood Doors have strengthened our position as a leader in the residential wood door market.

Sales and Marketing

Our sales and marketing efforts are focused around several key initiatives designed to drive organic growth, influence the mix sold and strengthen our customer relationships.

Multi-Level/Segment Distribution Strategy

We market our products through and to retail stores, wholesale distributors, independent and pro dealers, builders, remodelers, architects, door and hardware distributors and general contractors.

In the residential market, we deploy an “All Products” cross merchandising strategy, which provides our retail and wholesale customers with access to our entire product range. Our “All Products” customers benefit from consolidating their purchases, leveraging our branding, marketing and selling strategies and improving their ability to influence the mix of products sold to generate greater value. We service our big box retail customers directly from our own door fabrication facilities which provide value added services and logistics, including store direct delivery of doors and entry systems and a full complement of in-store merchandising, displays and field service. Our wholesale residential channel customers are managed by our own sales professionals who focus on down channel initiatives designed to ensure our products are “pulled” through our North American wholesale distribution network.

Our non-residential building construction customers are serviced by a separate and distinct sales team providing architects, door and hardware distributors, and general contractors and project owners a wide variety of technical specifications, specific brand differentiation, compliance and regulatory approvals, product application advice and multi-segment specialization work across North America.

 

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Service Innovation

We leverage our marketing, sales and customer service activities to ensure our products are strategically “pulled” through our multiple distribution channels rather than deploying a more common, tactical “push” strategy like certain of our competitors. Our marketing approach is designed to increase the value of each and every door opening we fill with our doors and entry systems, regardless of the channel being used to access our products.

Our proprietary web based tools accessible on our website also provide our customers with a direct link to our information systems to allow for accelerated and easier access to a wide variety of information and selling aids designed to increase customer satisfaction. Our web based tools include MConnectTM, an on line service allowing our customers access to several other E-Commerce tools designed to enhance the manufacturer/customer relationship. Once connected to our system, customers have access to MAX, Masonite’s Xpress Door Configurator, a web based tool created to design entry systems and influence the mix, improve selection and ordering processes, reduce order entry and quoting errors, and improve overall communication throughout the channel; MC2, our self-service, custom literature tool; the Product Corner, a section advising customers of the features and benefits of our newest products; Market Intelligence Section, which provides some of the latest economic statistics influencing our industry; the Treasure Chest, which is a collection of discontinued glass products providing customers with promotional based pricing on obsolete products; and Order Tracker, which allows customers to follow their purchase orders through the production process and confirm delivery dates. MConnectTM, in conjunction with our web site, improves transaction execution, enhances communication and information flow with our customers and their dealers providing a more customized buying experience.

New Market Segments and Geographies

We continue to expand in attractive segments of the residential and non-residential door market in North America and in growing international markets including South America, India and the Middle East.

We plan to expand our leading position in the North American commercial and architectural interior wood door market by increasing our focus in specific sectors within the market, such as education, health care and hospitality. We also plan to increase our presence in underserviced growing geographies in the United States such as west of the Rockies, Texas and the Southeast.

We are also increasing our focus on multi-location in-home remodeling distributors and contractors. This channel is expected to grow with a shift in certain demographics from a “Do it Yourself” to a “Do it For You” offering. Using enhanced marketing, training and e-commerce tools, our teams will target specific multi-location remodeling distributors and contractors thereby increasing our overall presence in the important repair, renovation and remodeling business.

We have also allocated resources to promote our door and door component products in fast growing international markets in South America, India and the Middle East. As a first mover, we have established a strong presence in many of these markets and believe we are poised for strong growth going forward.

Customers

We sell our products worldwide to more than 6,000 customers. We have developed strong relationships with these customers through our “all products” cross merchandising strategy. Our vertical integration facilitates our all products strategy with our Dorfab facilities in particular providing value-added fabrication and logistical services to our customers, including store delivery of pre-hung interior and exterior doors to our customers in North America. Ninety-five percent of our top 20 customers have purchased doors from us for at least 10 years.

Although we have a large number of customers worldwide, our two largest customers, The Home Depot and Lowe’s, accounted for approximately 16% and 10% of our total gross sales in fiscal year 2012, respectively. Due

 

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to the depth and breadth of the relationship with these two customers, which operate in multiple North American geographic regions and which sell a variety of our products, our management believes that these relationships are likely to continue.

Distribution

Residential doors are primarily sold through wholesale and retail distribution channels.

 

   

Wholesale.  In the wholesale channel, door manufacturers sell their products to homebuilders, contractors, lumber yards, dealers and building products retailers in two-steps or one step. Two-step distributors typically purchase doors from manufacturers in bulk and customize them by installing windows, or “lites,” and pre-hanging them. One-step distributors sell doors directly to homebuilders and remodeling contractors who install the doors.

 

   

Retail.  The retail channel generally targets consumers and smaller remodeling contractors who purchase doors through retail home centers and smaller specialty retailers. Retail home centers offer large, warehouse size retail space with large selections, while specialty retailers are niche players that focus on certain styles and types of doors.

Non-residential doors are primarily sold direct from manufacturers to contractors and installers or through one-step wholesale distribution channels where such distributors sell to contractors and installers.

Research and Development

We believe we are a leader in technological innovation and development in doors, door components and door entry systems and the manufacturing processes involved in making such products. We believe that research and development is a competitive advantage for us, and we intend to capitalize on our leadership in this area through the development of more new and innovative products. Our research and development and engineering capability enables us to develop and implement product and process improvements related to the manufacturing of our products that enhance manufacturing efficiency and reduce costs.

As an integrated manufacturer, we believe that we are well positioned to take advantage of the growing global demand for a variety of molded door facing designs. This capability is particularly important outside North America where we believe newer molded door designs are rapidly replacing traditional wood doors. We have an internal capability to create new molded door facing designs and manufacture our own molds for use in our own facilities. We believe this provides us with the ability to develop proprietary designs that enjoy a strong identity in the marketplace; more flexibility in meeting customer demand; quicker reaction time in the production of new designs or design changes; and greater responsiveness to customer needs. This capability also enables us to develop and implement product and process improvements with respect to the production of molded door facings and doors which enhance production efficiency and reduce costs.

In the past few years, our research and development activities, which we have concentrated in our 145,245 square foot innovation center in West Chicago, Illinois, have had a significant focus on process and material improvements in our products. These improvements have led to significant reductions in manufacturing costs and quality improvements in our products. Research and development activities also resulted in several new products including exterior fiberglass doors with a finish that is applied through digital printing technology and branded under the trademark AvantGuardTM.

Manufacturing Process

Our Manufacturing System consists of three major unit operations: (1) component manufacturing, (2) residential door slab assembly and (3) value-added door fabrication.

 

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We have a leading position in the manufacturing of door components, including internal framing components (stile and rails), glass inserts (lites), door core, interior veneer and molded door facings, and exterior door facings. The manufacturing of interior molded door facings is the most complex of these processes requiring a significant investment in large scale engineered wood processing equipment. We operate five interior molded door facing plants around the world, two in North America and one in each of South America, Europe and Asia. Our sole United States based plant in Laurel, Mississippi is the largest door facing plant in the world and we believe one of the most technologically advanced in the industry. Interior molded door facings are produced by combining fine wood particles, synthetic resins and other additives under heat and pressure in large semi-continuous automated presses utilizing Masonite proprietary steel plates. The facings are then cut, painted and inspected in a second highly automated continuous operation prior to being packed for shipping to our door assembly plants.

Interior residential hollow core door manufacturing is an assembly operation that until recently has been primarily accomplished in the United States through the use of skilled manual labor. In 2012 we invested in a fully automated interior door line in Denmark, South Carolina that exemplifies advanced engineering processes and quality control. The automated line uses single piece flow principles to assemble doors more quickly and reliably than ever before, using improved internal components and advanced adhesive technologies. Whether manual or automated, the construction process for a standard interior door is based on assembly of door facings and various internal framing and support components, following which doors are trimmed to their final specifications.

The assembly process varies by type of door, from a relatively simple process for flush doors, where the door facings are glued to a wood frame, to more complex procedures for the many pieces of a louvre or stile and rail door. Non-residential interior doors require another level of sophistication employing the use of solid cores with varying degrees of sound dampening and fire retarding attributes, furniture quality wood veneer facings, as well as secondary machining operations to incorporate more sophisticated commercial hardware, openers and locks.

The manufacturing of steel and fiberglass exterior door slabs is an automated process that entails combining wooden or synthetic internal framing components between two door facings and then injecting the resulting hollow core with insulating polyurethane expanding foam core materials. We invested in fiberglass manufacturing technology, including the backward integration into basic raw material, with the construction of our fiberglass sheet molding compound plant at our Laurel MS facility in 2006. In 2008 we consolidated fiberglass slab manufacturing from multiple locations throughout North America into a single highly automated facility in Dickson, TN significantly improving the reliability and quality of these products while simultaneously lowering cost.

Short set-up times, proper production scheduling and coordinated material movement are essential to achieve a flexible process capable of producing a wide range of door types, sizes, materials and styles. We make use of flexible manufacturing operations together with scalable logistics primarily through the use of common carriers to fill customers’ orders and to manage our investment in finished goods inventory.

Finally, interior molded, stile and rail, louvre and exterior door slabs manufactured at our door assembly plants are either sold directly to our customers or transferred to our door fabrication facilities where value added services are performed. These value added services include machining doors for hinges and locksets, installing the door in easy to install frames, adding glass inserts and side lites, painting and staining, packaging and logistical services to large retail home center customers throughout North America.

Raw Materials

While Masonite is vertically integrated, we require a regular supply of raw materials, such as wood, wood composites, cut stock, steel, glass, core material, paint, stain and primer as well as petroleum-based products such

 

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as binders, resins and frames to manufacture our products, which accounts for approximately 50% of the total cost of the finished product. In certain instances, we depend on a single or limited number of suppliers for these supplies. Wood chips, logs, resins, binders and other additives utilized in the manufacturing of interior molded facings, exterior fiberglass door facings and door cores are purchased from global, regional and local suppliers taking into account the relative freight cost of these materials. Internal framing components, both wood and synthetic wood cut-stock, and internal door cores are manufactured both internally at our facilities as well as purchased from suppliers located throughout the world. We utilize a network of suppliers based in North America, Europe, South America and Asia to purchase other components including steel coils for the stamping of steel door facings, MDF, plywood and hardboard facings, door jambs and frames, and glass frames and inserts.

Safety

We believe that safety is as important to the success of the company as productivity and quality. We also believe that incidents can be prevented through proper management, employee involvement and attention to detail. Safety programs and training are provided throughout the company to ensure employees and managers have effective tools to help identify and address both unsafe conditions and risky behaviors. We strive to minimize any adverse impact our operations might have to our employees, the general public and the communities of which we are a part.

Through a sustained commitment to improve our safety performance, we have been successful in reducing the number of injuries sustained by our employees. In 2012, we experienced a total incident rate of 1.41% compared to 3.42% in 2007, despite the fact that during this period we acquired 16 facilities which, at the time of acquisition, had an incident rate of more than twice the Masonite average.

Environmental and Other Regulatory Matters

We are subject to extensive environmental laws and regulations. The geographic breadth of our facilities subjects us to environmental laws, regulations and guidelines in a number of jurisdictions, including, among others, the United States, Canada, the United Kingdom, France, Mexico, Chile, Israel, India, Czech Republic, Poland, South Africa and the Republic of Ireland. Such laws, regulations and guidelines relate to, among other things, the discharge of contaminants into water and air and onto land, the storage and handling of certain regulated materials used in the manufacturing process, the disposal of wastes and the remediation of contaminated sites. Many of our products are also subject to various regulations such as building and construction codes, product safety regulations, health and safety laws and regulations and mandates related to energy efficiency.

Our efforts to ensure environmental compliance include the review of our operations on an ongoing basis utilizing in-house staff and on a selective basis by specialized environmental consultants. Although such reviews do not guarantee the identification of all material issues, environmental assessments are typically conducted as part of our due diligence review prior to the completion of acquisitions.

Based on recent experience and current projections, environmental protection requirements and liabilities are not expected to have a material effect on our business, capital expenditures, operations or financial position.

In addition to the various environmental laws and regulations, our operations are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety, consumer protection, trade, labor and employment, tax, and others. We believe we are in compliance in all material respects with existing applicable laws and regulations affecting our operations.

Intellectual Property

In North America, our doors are marketed primarily under the Masonite® brand. Other North American brands include: Premdor®, Belleville®, Barrington®, Oakcraft®, Sta-Tru® HD, AvantGuardTM, FlagstaffTM,

 

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HollisterTM, SierraTM, Specialty®, Fast-FrameTM, Safe’N Sound®, Palazzo Series®, Bellagio®, Capri®, TrevisoTM, CheyenneTM, GlenviewTM, RiversideTM, SaddlebrookTM, West EndTM, Mohawk®, Marshfield® , Birchwood Best®, AlgomaTM, NovodorTM, ArtisanTM, Artisan SFTM, RhinoDoorTM, WeldrockTM, SuperstileTM, UnicolTM and Lemieux DoorsTM

In Europe, doors are marketed under the Premdor®, EkemTM, FonmartyTM, MagriTM, MonnerieTM, BatimetalTM and CrosbyTM brands. We consider the use of trademarks and trade names to be important in the development of product awareness, and for differentiating products from competitors and between customers.

We protect the intellectual property that we develop through, among other things, filing for patents in the United States and various foreign countries. In the United States, we currently have approximately 147 design patents and design patent applications and 169 utility patents and patent applications. We have approximately 368 foreign utility patents and patent applications and 78 foreign design patents and patent applications.

Competition

The North American door industry is highly competitive and includes a number of global and local participants. In the U.S. residential interior door market, the primary participants are Masonite and JELD-WEN which are the only vertically integrated manufacturers of door facings. There are also a number of smaller competitors in the residential interior door market that primarily source door facings from third party suppliers. In the U.S. residential exterior door market, the primary participants are Masonite, JELD-WEN, Plastpro and Therma-Tru. In the U.S. non-residential building construction door market, the primary participants are Masonite, VT Industries, Graham Wood Doors and Eggers Industries. Competition in these markets is primarily based on product quality, design characteristics, brand awareness, service ability, distribution capabilities and value.

We also face competition in the other countries we operate. Competitors based in Canada include other manufacturers that distribute on a national basis as well as smaller regional manufacturers, which focus on particular products. In Europe, South America, Asia and Africa, we face significant competition from a number of regionally based competitors and importers.

There is meaningful competition both in North America and Europe as several firms manufacture similar products using similar raw materials and manufacturing methods. In addition, due to the recent economic downturn there has been excess capacity in the industry.

A large portion of our products is sold through large home centers and other large retailers. The consolidation of our customers and our reliance on fewer larger customers has increased the competitive pressures as some of our largest customers, such as The Home Depot and Lowe’s, perform periodic product line reviews to assess their product offerings.

We are one of the largest manufacturers of molded door facings in the world. The rest of the industry consists of one other large, integrated door manufacturer and a number of smaller regional manufacturers. Competition in the molded door facing business is based on quality, price, product design, logistics and customer service. We produce molded door facings to meet our own requirements and outside of North America we serve as an important supplier to the door industry at large. We manufacture molded door facings at facilities in Mississippi, Ireland, Chile, Canada and Malaysia.

History

Masonite was founded in 1925 in Laurel, Mississippi, by William H. Mason, to utilize vastly available quantities of sawmill waste to manufacture a usable end product. Masonite was acquired by Premdor from International Paper Company in August 2001.

 

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Prior to 2005, Masonite was a public company with shares of our predecessor’s common stock listed on both the NYSE and Toronto Stock Exchange. In March 2005, we were acquired by an affiliate of Kohlberg Kravis Roberts & Co. L.P.

As a result of a liquidity shortfall triggered by the unprecedented downturn in the U.S. housing and construction market that commenced in 2006, on March 16, 2009, Masonite and several affiliated Canadian companies, including the Company, voluntarily filed to reorganize under the CCAA in Canada in the Ontario Superior Court of Justice. In addition, Masonite, its U.S. subsidiaries and the Company filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. On June 9, 2009, we completed our financial restructuring and emerged from protection under both Chapter 11 of the U.S. Bankruptcy Code and the CCAA in Canada, 85 days after our initial filings. We emerged from Chapter 11 and CCAA protection as Masonite Worldwide Holdings Inc. after meeting all closing conditions to our Plan of Reorganization in the United States and Canada. The Plan was confirmed by the U.S. Bankruptcy Court for the District of Delaware on May 29, 2009. The Ontario Superior Court of Justice approved the CBCA Plan on June 1, 2009. Shortly after emergence from bankruptcy, Masonite Worldwide Holdings Inc. changed its name to Masonite Inc.

Effective July 4, 2011, pursuant to an amalgamation under the Business Corporations Act (British Columbia), Masonite Inc., the former parent of the Company, was amalgamated with Masonite International Corporation to form an amalgamated corporation named Masonite Inc., which then changed its name to Masonite International Corporation.

In the past several years, we have pursued strategic tuck-in acquisitions targeting companies with differentiated businesses, strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Acquisitions.”

Employees

As of June 30, 2013, we employed approximately 9,800 employees and contract laborers. This includes approximately 3,000 unionized employees, approximately half of whom are located in various foreign locations with the remainder in North America. Employees in many European countries participate in industry-wide unions with centralized bargaining. Local issues are, however, typically negotiated separately.

Legal Proceedings

We are involved in various legal proceedings, claims and governmental audits in the ordinary course of business, including various legal proceedings that are currently stayed by the U.S. Bankruptcy Court for the District of Delaware, which if not settled will in the future resume active status in federal or state court. In the opinion of management, the ultimate disposition of these proceedings, claims and audits will not have a material adverse effect on the financial position, results of our operations, or cash flows.

Canadian Non-Reporting Issuer Status

We are currently not a reporting issuer, or the equivalent, in any province or territory of Canada and our shares are not listed on any recognized Canadian stock exchange.

 

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Item 1A. Risk Factors

You should carefully consider the following factors in addition to the other information set forth in this registration statement before investing in our common shares. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also adversely impact our operations. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common shares could fall, and you may lose all or part of your investment.

Risks Related to Our Business

Downward trends in our end markets or in economic conditions could negatively impact our business and financial performance.

Our business may be adversely impacted by changes in United States, Canadian, European, Asian, South American or global economic conditions, including inflation, deflation, interest rates, availability and cost of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Volatility in the financial markets in the regions in which we operate and the deterioration of national and global economic conditions have in the past and could in the future materially adversely impact our operations, financial results and liquidity.

Trends in our primary end markets (residential new construction, repair, renovation and remodeling and non-residential building construction) directly impact our financial performance because they are directly correlated to the demand for doors and door components. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:

 

   

the strength of the economy;

 

   

the amount and type of residential and non-residential construction;

 

   

housing sales and home values;

 

   

the age of existing home stock, home vacancy rates and foreclosures;

 

   

non-residential building occupancy rates;

 

   

increases in the cost of raw materials or 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.

In the United States, the housing market crisis has had a negative impact on residential housing construction and related product suppliers and the housing market remains volatile. In addition, the current housing recovery is characterized by an increased number of multi-family new construction starts, which generally use fewer of our products and generate less net sales at a lower margin as compared to typical single family homes.

In many of the non-North American markets in which we manufacture and sell our products, including the United Kingdom, France, Central Europe, the Middle East, and South Africa, economic conditions have deteriorated as various countries are suffering from the after effects of the global financial downturn that began in the United States in 2006. Our non-North American markets were acutely affected by the housing downturn and continue to suffer from excess capacity in housing and building products, including doors and door products, which may make it difficult for us to raise prices. Due in part to both market and operating conditions, we exited certain European markets in the past several years, including the Ukraine, Turkey and Romania. In addition, we closed our production facility in Hungary and have announced that we intend to close our production facilities in Poland.

 

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Our relatively narrow focus within the building products industry amplifies the risks inherent in a prolonged global market downturn. The impact of this weakness on our net sales, net income and margins will be determined by many factors, including industry capacity, industry pricing, and our ability to implement our business plan.

Increases in mortgage rates, changes in mortgage interest deductions and the reduced availability of financing for the purchase of new homes and home construction and improvements could have a material adverse impact on our sales and profitability.

In general, demand for new homes and home improvement products may be adversely affected by increases in mortgage rates and the reduced availability of consumer financing. Currently, mortgage rates are near historic lows and will likely increase in the future. If mortgage rates increase and, consequently, the ability of prospective buyers to finance purchases of new homes or home improvement products is adversely affected, our business, financial condition and results of operations may be materially and adversely affected.

Members of Congress and government officials have from time to time, including recently, suggested the elimination of the mortgage interest deduction for federal income tax purposes, either entirely or in part, based on borrower income, type of loan or principal amount. Future changes in policies set to encourage home ownership and improvement, such as changes to the tax rules allowing for deductions of mortgage interest, may adversely impact demand for our products and have a material adverse impact on us.

Our performance may also depend upon consumers having the ability to finance the purchase of new homes and other buildings and repair and remodeling projects with credit from third-parties. The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures. Adverse developments affecting any of these factors could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. The recent economic downturn, including declining home and other building values, increased home foreclosures and tightening of credit standards by lending institutions, have negatively impacted the home and other building new construction and repair and remodeling sectors. If these credit market trends continue or worsen, our net sales and net income may be adversely affected.

We operate in a competitive business environment. If we are unable to compete successfully, we could lose customers and our sales could decline.

The building products industry is highly competitive. Some of our principal competitors may have greater financial, marketing and distribution resources than we do and may be less leveraged than we are, providing them with more flexibility to respond to new technology or shifting consumer demand. Accordingly, these competitors may be better able to withstand changes in conditions within the industry in which we operate and may have significantly greater operating and financial flexibility than we do. Also, certain of our competitors continue to have excess production capacity, which has led to continued pressure to decrease prices in order for us to remain competitive and has limited our ability to raise prices even in markets where economic and market conditions have improved. For these and other reasons, these competitors could take a greater share of sales and cause us to lose business from our customers or hurt our margins.

As a result of this competitive environment, we face pressure on the sales prices of our products. Because of these pricing pressures, we may in the future experience continued limited growth and reductions in our profit margins, sales or cash flows, and may be unable to pass on future raw material price, labor cost and other input cost increases to our customers which would also reduce profit margins.

 

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Because we depend on a core group of significant customers, our sales, cash flows from operations and results of operations may be negatively affected if our key customers reduce the amount of products they purchase from us.

Our customers consist mainly of wholesalers and retail home centers. Our top ten major customers together accounted for approximately 40% of our net sales in fiscal year 2012, while our two largest customers, The Home Depot and Lowe’s, accounted for approximately 16% and 10% of our net sales in fiscal year 2012, respectively. We expect that a small number of customers will continue to account for a substantial portion of our net sales for the foreseeable future. However, net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. For example, our largest customers, The Home Depot and Lowe’s, perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to loss of business and pricing pressures. Most recently, in the fourth quarter of 2012 we were notified of a loss of business as a result of a product line review by Lowe’s relating to its Northeastern and Southwestern United States interior door business which will have an adverse impact on our net sales in 2013. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our most significant customers. Moreover, if any of these customers fails to remain competitive in the respective markets or encounters financial or operational problems, our net sales and profitability may decline. We generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase products from us. Therefore, we could lose a significant customer with little or no notice. The loss of, or a significant adverse change in, our relationships with The Home Depot, Lowe’s or any other major customer could cause a material decrease in our net sales.

Our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. The loss of, or a reduction in orders from, any significant customers, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer, could have a material adverse effect on us. Also, we have no operational or financial control over these customers and have limited influence over how they conduct their businesses.

Consolidation of our customers and their increasing size could adversely affect our results of operations.

In many of the countries in which we operate, an increasingly large number of building products are sold through large retail home centers and other large retailers. In addition, we have recently experienced consolidation of distributors in our wholesale distribution channel and among businesses operating in different geographic regions resulting in more customers operating nationally and internationally. If the consolidation of our customers and distributors were to continue, leading to the further increase of their size and purchasing power, we may be challenged to continue to provide consistently high customer service levels for increasing sales volumes, while still offering a broad portfolio of innovative products and on-time and complete deliveries. If we fail to provide high levels of service, broad product offerings, competitive prices and timely and complete deliveries, we could lose a substantial amount of our customer base and our profitability, margins and net sales could decrease.

If we are unable to accurately predict future demand preferences for our products, our business and results of operations could be materially affected.

A key element to our continued success is the ability to maintain accurate forecasting of future demand preferences for our products. Our business in general is subject to changing consumer and industry trends, demands and preferences. Changes to consumer shopping habits and potential trends towards “online” purchases could also impact our ability to compete as we currently sell our products exclusively through our distribution channel. Our continued success depends largely on the introduction and acceptance by our customers of new product lines and improvements to existing product lines that respond to such trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these

 

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trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, and could materially adversely affect us. In addition, we are subject to the risk that new products, manufacturing technologies or proprietary designs could be introduced that would replace or reduce demand for our products. We may not have sufficient resources to make necessary investments or we may be unable to make the investments or acquire the intellectual property rights necessary to develop new products or improve our existing products.

Our business is seasonal which may affect our net sales, cash flows from operations and results of operations.

Our business is moderately seasonal and our sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity. The impact of these types of events on our business may adversely impact our sales, cash flows from operations and results of operations. If sales were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted. Moreover, our facilities are vulnerable to severe weather conditions.

A disruption in our operations could materially affect our operating results.

We operate facilities worldwide. Many of our facilities are located in areas that are vulnerable to hurricanes, earthquakes and other natural disasters. In the event that a hurricane, earthquake, natural disaster, fire or other catastrophic event were to interrupt our operations for any extended period of time, particularly at one or more of our door facing facilities or non-residential door plants, such as when Marshfield experienced an autoclave explosion in July 2011, prior to our acquisition, it could delay shipment of merchandise to our customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations. Closure of one of our door facing facilities, which are our most capital intensive and least replaceable production facilities, could have a substantial negative effect on our earnings.

In addition, our operations may be interrupted by terrorist attacks or other acts of violence or war. These attacks may directly impact our suppliers’ or customers’ physical facilities. Furthermore, these attacks may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect our operating results. The United States has entered into, and may enter into, additional armed conflicts which could have a further impact on our sales and our ability to deliver product to our customers in the United States and elsewhere. Political and economic instability in some regions of the world, including the current instabilities in the Middle East and North Africa, may also negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They could also result in economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results.

Manufacturing realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, as well as reduce our flexibility to respond quickly to improved market conditions.

We continually review our manufacturing operations and sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs have in the past and could in the future result in a decrease in our short-term earnings until the expected cost reductions are achieved. For instance, we expect to incur approximately $1.8 million of additional restructuring costs related to activities initiated as of June 30, 2013. We also cannot assure you we will achieve all of our cost savings. Such programs may include the consolidation, integration and upgrading of facilities, functions, systems and procedures. The success of these efforts will depend in part on market conditions, and such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.

 

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In connection with our manufacturing realignment and cost savings programs, we have recently closed or consolidated a substantial portion of our global operations and significantly reduced our personnel, which may reduce our flexibility to respond quickly to improved market conditions. As a result, a failure to anticipate a sharp increase in levels of residential new construction, residential repair, renovation and remodeling and non-residential building construction activity could result in operational difficulties, adversely impacting our ability to provide our products to our customers. This may result in the loss of business to our competitors in the event they are better able to forecast or respond to market demand. There can be no assurance that we will be able to accurately forecast the level of market demand or react in a timely manner to such changes, which may have a material adverse effect on our business, financial condition and results of operations.

We are subject to the credit risk of our customers.

We provide credit to our customers in the normal course of business. We generally do not require collateral in extending such credit. An increase in the exposure, coupled with material instances of default, could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Increased prices for raw materials or finished goods used in our products or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, margins and net sales.

Our profitability is affected by the prices of raw materials and finished goods used in the manufacture of our products. These prices have fluctuated and may continue to fluctuate based on a number of factors beyond our control, including world oil prices, changes in supply and demand, general economic or environmental conditions, labor costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. The commodities we use may undergo major price fluctuations and there is no certainty that we will be able to pass these costs through to our customers. Significant increases in the prices of raw materials or finished goods are more difficult to pass through to customers in a short period of time and may negatively impact our short-term profitability, margins and net sales. In the current competitive environment, opportunities to pass on these cost increases to our customers may be limited.

We require a regular supply of raw materials, such as wood, wood composites, cut stock, steel, glass, core material, paint, stain and primer as well as petroleum-based products such as binders, resins and frames. In certain instances, we depend on a single or limited number of suppliers for these supplies. We typically do not have long-term contracts with our suppliers. If we are not able to accurately forecast our supply needs, the limited number of suppliers may make it difficult to obtain additional raw materials to respond to shifting or increased demand. Our dependency upon regular deliveries from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Furthermore, because our products and the components of some of our products are subject to regulation, such alternative suppliers, even if available, may not be substituted until regulatory approvals for such substitution are received, thereby delaying our ability to respond to supply changes. Moreover, some of our raw materials, especially those that are petroleum or chemical based, interact with other raw materials used in the manufacture of our products and therefore significant lead time may be required to procure a compatible substitute. Substitute materials may also not be of the same quality as our original materials.

If any of our suppliers were unable to deliver materials to us for an extended period of time (including as a result of delays in land or sea shipping), or if we were unable to negotiate acceptable terms for the supply of materials with these or alternative suppliers, our business could suffer. In the future, we may not be able to find acceptable supply alternatives, and any such alternatives could result in increased costs for us. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business.

Furthermore, raw material prices could increase, and supply could decrease, if other industries compete with us for such materials. For example, we are highly dependent upon our supply of wood chips used for the production of our door facings and wood composite materials. In Europe, we are experiencing supply pressure

 

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and increased prices for wood chips due to the high demand for wood chips for alternative energy applications. Failure to obtain significant supply may disrupt our operations and even if we are able to obtain sufficient supply, we may not be able to pass increased supply costs on to our customers in the form of price increases, thereby resulting in reduced margins and profits.

A rapid and prolonged increase in fuel prices may significantly increase our costs and have an adverse impact on our results of operations.

Fuel prices remain volatile and are significantly influenced by international, political and economic circumstances. If increased prices remain in effect, or if further price increases were to arise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our shipping costs, adversely affecting our results of operations. In addition, competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products.

We are highly dependent on information technology, the disruption of which could significantly impede our ability to do business.

Our operations depend on our network of information technology systems, which are vulnerable to damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, breaches in security (such as the actions of computer hackers), natural disasters, or other disasters. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. Any damage to our information technology systems could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition and results of operations. Moreover, our recent technological initiatives and increasing dependence on technology may exacerbate this risk.

Increases in labor costs, potential labor disputes and work stoppages at our facilities or the facilities of our suppliers could materially adversely affect our financial performance.

Our financial performance is affected by the availability of qualified personnel and the cost of labor. We have approximately 9,800 employees worldwide, including approximately 3,000 unionized workers. Employees represented by these unions are subject to collective bargaining agreements. Although none of our North American collective bargaining agreements are subject to renewal in 2013, our agreements with employees and their respective work councils in France, Mexico, United Kingdom and South Africa are subject to annual negotiation. If we are unable to enter into new, satisfactory labor agreements with our unionized employees upon expiration of their agreements, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to customers on a timely basis. If our workers were to engage in strikes, such as the four week labor strike we experienced at our South African facility in 2011, a work stoppage or other slowdowns, we could also experience disruptions of our operations. Such disruptions could result in a loss of business and an increase in our operating expenses, which could reduce our net sales and profit margins. In addition, our non-unionized labor force may become subject to labor union organizing efforts, which could cause us to incur additional labor costs and increase the related risks that we now face.

We believe many of our direct and indirect suppliers and customers also have unionized workforces. Strikes, work stoppages or slowdowns experienced by these suppliers and customers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. For example, a national transportation workers’ strike in South Africa in the third and fourth quarters of 2012 adversely impacted our net sales. Any interruption in the production or delivery of these components could reduce sales, increase costs and have a material adverse effect on us.

 

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Our pension obligations are currently significantly underfunded. We may have to make significant cash payments to our pension plans, which would reduce the cash available for our business.

As of December 31, 2012, our accumulated benefit obligations under our United States and United Kingdom defined benefit pension plans exceeded the fair value of plan assets by approximately $40.4 million and $8.8 million, respectively. During the years ended December 31, 2012, 2011 and 2010, we contributed approximately $6.3 million, $6.3 million and $1.9 million, respectively, to the United States pension plan and approximately $0.8 million, $0.7 million and $0.7 million, respectively, to the United Kingdom pension plan. Additional contributions will be required in future years. We currently anticipate making approximately $3.2 million and $0.7 million of contributions to our United States and United Kingdom pension plans, respectively, in 2013. If the performance of the assets in our pension plans does not meet our expectations or other actuarial assumptions are modified, our contributions to our pension plans could be materially higher than we expect, which would reduce the cash available for our businesses. In addition, our United States pension plans are subject to Title IV of the United States Employee Retirement Income Security Act of 1974, or ERISA. Under ERISA, the Pension Benefit Guaranty Corporation, or the PBGC, generally has the authority to terminate an underfunded pension plan if the possible long-run loss to the PBGC with respect to the plan may reasonably be expected to increase substantially if the plan is not terminated. In the event our pension plans are terminated for any reason while the plans are underfunded, we may incur a liability to the PBGC which could be equal to the entire amount of the underfunding.

Our recent acquisitions and any future acquisitions, if available, could be difficult to integrate and could adversely affect our operating results.

In the past several years we completed several strategic acquisitions of door and door component manufacturers in North America. Historically, we have made acquisitions to vertically integrate and expand our operations, such as our acquisitions of the door manufacturing operations of Masisa S.A. (“Masisa”) in 2013; Portes Lemieux Inc. (“Lemieux”), Algoma Holding Company (“Algoma”), and Les Portes Baillargeon, Inc. (“Baillargeon”) in 2012; and Birchwood Lumber & Veneer Co., Inc. (“Birchwood”) and Porta Industries, Inc (“Marshfield”) in 2011. From time to time, we have evaluated and expect to continue to evaluate possible acquisition transactions on an on-going basis. At any time we may be engaged in discussions or negotiations with respect to possible acquisitions or may have entered into non-binding letters of intent. As part of our strategy, we expect to continue to pursue complementary acquisitions and investments and may expand into product lines or businesses with which we have little or no operating experience. For example, future acquisitions may involve building product categories other than doors. We may also engage in further vertical integration. However, we may face competition for attractive targets and we may not be able to source appropriate acquisition targets at prices acceptable to us, or at all. In addition, in order to pursue our acquisition strategy, we will need significant liquidity, which, as a result of the other factors described herein, may not be available on terms favorable to us, or at all.

Our recent and any future acquisitions involve a number of risks, including:

 

   

our inability to integrate the acquired business;

 

   

our inability to manage acquired businesses or control integration and other costs relating to acquisitions;

 

   

our lack of experience with a particular business should we invest in a new product line;

 

   

diversion of management attention;

 

   

our failure to achieve projected synergies or cost savings;

 

   

impairment of goodwill affecting our reported net income;

 

   

our inability to retain the management or other key employees of the acquired business;

 

   

our inability to establish uniform standards, controls, procedures and policies;

 

   

our inability to retain customers of our acquired companies;

 

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risks associated with the internal controls of acquired companies;

 

   

exposure to legal claims for activities of the acquired business prior to the acquisition;

 

   

unforeseen management and operational difficulties, particularly if we acquire assets or businesses in new foreign jurisdictions where we have little or no operational experience;

 

   

damage to our reputation as a result of performance or customer satisfaction problems relating to an acquired businesses; and

 

   

the performance of any acquired business could be lower than we anticipated.

The integration of any future acquisition into our business will likely require substantial time, effort, attention and dedication of management resources and may distract our management in unpredictable ways from our ordinary operations. If we cannot successfully execute on our investments on a timely basis, we may be unable to generate sufficient net sales to offset acquisition, integration or expansion costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including cost savings and synergies, may not be achieved. If we are not able to effectively manage recent or future acquisitions or realize their anticipated benefits, it may harm our results of operations.

We are exposed to political, economic and other risks that arise from operating a multinational business.

We have operations in the United States, Canada, Europe and, to a lesser extent, other foreign jurisdictions. In the six months ended June 30, 2013, approximately 76% of our net sales were in North America, 20% in Europe, Asia and Latin America and 4% in Africa. Approximately 73% of our fiscal year 2012 net sales were generated in North America, 22% in Europe, Asia and Latin America and 5% in Africa. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to political, economic and other risks that are inherent in operating in numerous countries. These risks include:

 

   

the difficulty of enforcing agreements and collecting receivables through foreign legal systems;

 

   

trade protection measures and import or export licensing requirements;

 

   

tax rates in foreign countries and the imposition of withholding requirements on foreign earnings;

 

   

the imposition of tariffs or other restrictions;

 

   

difficulty in staffing and managing widespread operations and the application of foreign labor regulations;

 

   

required compliance with a variety of foreign laws and regulations; and

 

   

changes in general economic and political conditions in countries where we operate.

Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole.

Fluctuating exchange and interest rates could adversely affect our financial results.

Our financial results may be adversely affected by fluctuating exchange rates. Net sales generated outside of the United States were approximately 42% and 44% for the six months ended June 30, 2013, and the year ended December 31, 2012, 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 facilities, the prices for a significant portion of our raw materials are quoted in the domestic currency of the country where the facility is located or other currencies that are not U.S. dollars. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. For example, we are subject to currency exchange rate risk to the extent that some of our costs

 

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will be denominated in currencies other than those in which we earn revenues. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country and may result in the loss of business to our competitors that sell their products at lower prices in that country.

Moreover, as our current indebtedness is denominated in a currency that is different from the currencies in which we derive a significant portion of our net sales, we are also exposed to currency exchange rate risk with respect to those financial obligations. When the outstanding indebtedness is repaid, we may be subject to taxes on any corresponding foreign currency gain.

Borrowings under our current ABL Facility are incurred at variable rates of interest, which exposes us to interest rate fluctuation risk. If interest rates increase, the payments we are required to make on any variable rate indebtedness will increase.

We may fail to continue to innovate, face claims that we infringe third party intellectual property rights, or be unable to protect our intellectual property from infringement by others except by incurring substantial costs as a result of litigation or other proceedings relating to patent or trademark rights, any of which could cause our net sales or profitability to decline.

Our continued success depends on our ability to develop and introduce new or improved products, to improve our manufacturing and product service processes, and to protect our rights to the technologies used in our products. If we fail to do so, or if existing or future competitors achieve greater success than we do in these areas, our results of operations and our profitability may decline.

We rely on a combination of United States, Canadian and, to a lesser extent, European patent, trademark, copyright and trade secret laws as well as licenses, nondisclosure, confidentiality and other contractual restrictions to protect certain aspects of our business. We have registered trademarks, copyrights and patents, and have pending trademark and patent applications in the United States, Canada and abroad. However, our patent and trademark applications may not be allowed by the applicable governmental authorities to issue as patents or register as trademarks at all, or in a form that will be advantageous to us. In addition, we have selectively pursued patent and trademark protection, and in some instances we may not have registered important patent and trademark rights in these and other countries. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. The failure to obtain worldwide patent and trademark protection may result in other companies copying and marketing products based upon our technologies or under our brand or trade names outside the jurisdictions in which we are protected. This could impede our growth in existing regions and into new regions, create confusion among consumers and result in a greater supply of similar products that could erode prices for our protected products.

Our success depends in part on our ability to protect our patents, trademarks, copyrights, trade secrets and licensed intellectual property from unauthorized use by others. We cannot be sure that the patents we have obtained, or other protections such as confidentiality, trade secrets and copyrights, will be adequate to prevent imitation of our products by others. If we are unable to protect our products through the enforcement of intellectual property rights, our ability to compete based on our current advantages may be harmed. If we fail to prevent substantial unauthorized use of our trade secrets, we risk the loss of those intellectual property rights and whatever competitive advantage they embody.

Although we are not aware that any of our products or intellectual property rights materially infringe upon the proprietary rights of third parties, third parties may accuse us of infringing or misappropriating their patents, trademarks, copyrights or trade secrets. Third parties may also challenge our trademark rights and branding practices in the future. We may be required to institute or defend litigation to defend ourselves from such accusations or to enforce our patent, trademark and copyright rights from unauthorized use by others, which,

 

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regardless of the outcome, could result in substantial costs and diversion of resources and could negatively affect our competitive position, sales, profitability and reputation. If we lose a patent infringement suit, we may be liable for money damages and be enjoined from selling the infringing product unless we can obtain a license or are able to redesign our product to avoid infringement. A license may not be available at all or on terms acceptable to us, and we may not be able to redesign our products to avoid any infringement, which could negatively affect our profitability. In addition, our patents, trademarks and other proprietary rights may be subject to various attacks claiming they are invalid or unenforceable. These attacks might invalidate, render unenforceable or otherwise limit the scope of the protection that our patents and trademarks afford. If we lose the use of a product name, our efforts spent building that brand may be lost and we will have to rebuild a brand for that product, which we may or may not be able to do. Even if we prevail in a patent infringement suit, there is no assurance that third parties will not be able to design around our patents, which could harm our competitive position.

If we are unable to replace our expiring patents, our ability to compete both domestically and internationally will be harmed. In addition, our products face the risk of obsolescence, which, if realized, could have a material adverse effect on our business.

We depend on our door manufacturing intellectual property and products to generate revenue. Some of our patents will begin to expire in the next several years. While we will continue to work to add to our patent portfolio to protect the intellectual property of our products, we believe it is possible that new competitors will emerge in door manufacturing. We do not know whether we will be able to develop additional proprietary designs, processes or products. If any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. Moreover, as our patents expire, competitors may utilize the information found in such patents to commercialize their own products. While we seek to offset the losses relating to important expiring patents by securing additional patents on commercially desirable improvements, and new products, designs and processes, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effect of the expiring patents.

Further, we face the risk that third parties will succeed in developing or marketing products that would render our products obsolete or noncompetitive. New, less expensive methods could be developed that replace or reduce the demand for our products or may cause our customers to delay or defer purchasing our products. Accordingly, our success depends in part upon our ability to respond quickly to market changes through the development and introduction of new products. The relative speed with which we can develop products, complete regulatory clearance or approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. Any delays could result in a loss of market acceptance and market share. We cannot provide assurance that our new product development efforts will result in any commercially successful products.

We may be the subject of product liability claims or product recalls, we may not accurately estimate costs related to such claims or recalls, and we may not have sufficient insurance coverage available to cover potential liabilities.

Our products are used and have been used in a wide variety of residential and commercial applications. We face an inherent business risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are alleged to be defective or that the use of our products is alleged to have resulted in harm to others or to property. We may in the future incur liability if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline materially. In addition, it may be necessary for us to recall defective products, which would also result in adverse publicity, as well as resulting in costs connected to the recall and loss of net sales. We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims that may arise or we may not be able to maintain adequate insurance coverage in the

 

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future at an acceptable cost. Any liability not covered by insurance or that exceeds our established reserves could materially and adversely impact our financial condition and results of operations.

In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs of warranty or breach of contract claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them.

The loss of certain members of our management may have an adverse effect on our operating results.

Our success will depend, in part, on the efforts of our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills and know-how that are critical to the operation of our business. We have significantly reduced our workforce since the beginning of 2006, including management personnel. As a result, the departure of any of our senior officers or key employees would be substantially more disruptive to our operations than in prior periods. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our financial condition and results of operations may be negatively affected. Moreover, the pool of qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. The loss of the services of any key personnel, or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.

Lack of transparency, threat of fraud, public sector corruption and other forms of criminal activity involving government officials increases risk for potential liability under anti-bribery or anti-fraud legislation, including the United States Foreign Corrupt Practices Act.

We operate facilities in 12 countries and sell our products in 70 countries around the world. As a result of these international operations, we may enter from time to time into negotiations and contractual arrangements with parties affiliated with foreign governments and their officials. In connection with these activities, we could be subject to the United States Foreign Corrupt Practices Act, or the FCPA, the United Kingdom Bribery Act and other anti-bribery laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by United States and other business entities for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind and requires the maintenance of internal controls to prevent such payments. In particular, we may be held liable for actions taken by our local partners and agents in foreign countries where we operate, even though such parties are not always subject to our control. As part of our Masonite Values Operating Guide we have established FCPA and other anti-bribery policies and procedures and offer several channels for raising concerns in an effort to comply with applicable U.S. and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. Any determination that we have violated the FCPA or other anti-bribery laws (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our results of operations and financial condition.

As we continue to expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside of North America and our financial condition and results of operations. In addition, any acquisition of businesses with operations outside of North America may exacerbate this risk.

 

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Environmental requirements and other government regulation may impose significant environmental and legal compliance costs and liabilities on us.

Our operations are subject to numerous Canadian (federal, provincial and local), United States (federal, state and local), European (European Union, national and local) and other laws and regulations relating to pollution and the protection of human health and the environment, including, without limitation, those governing emissions to air, discharges to water, storage, treatment and disposal of waste, releases of contaminants or hazardous or toxic substances, remediation of contaminated sites and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. Despite our efforts to comply with environmental requirements, we are at risk of being subject to civil, administrative or criminal enforcement actions, of being held liable, of being subject to an order or of incurring costs, fines or penalties for, among other things, releases of contaminants or hazardous or toxic substances occurring on or emanating from currently or formerly owned or operated properties or any associated offsite disposal location, or for contamination discovered at any of our properties from activities conducted by us or by previous occupants. Although, with the exception of costs incurred relating to compliance with Maximum Achievable Control Technology requirements (as described below), we have not incurred significant costs for environmental matters in prior years, future expenditures required to comply with any changes in environmental requirements are anticipated to be undertaken as part of our ongoing capital investment program, which is primarily designed to improve the efficiency of our various manufacturing processes. The amount of any resulting liabilities, costs, fines or penalties may be material.

In addition, the requirements of such laws and enforcement policies have generally become more stringent over time. Changes in environmental laws and regulations or in their enforcement or the discovery of previously unknown or unanticipated contamination or non-compliance with environmental laws or regulations relating to our properties or operations could result in significant environmental liabilities or costs which could adversely affect our business. In addition, we might incur increased operating and maintenance costs and capital expenditures and other costs to comply with increasingly stringent air emission control laws or other future requirements (such as, in the United States, those relating to compliance with Maximum Achievable Control Technology requirements under the Clean Air Act, for which we made capital expenditures totaling approximately $49 million from 2008 through 2010), which may decrease our cash flow. Also, discovery of currently unknown or unanticipated conditions could require responses that would result in significant liabilities and costs. Accordingly, we are unable to predict the ultimate costs of compliance with or liability under environmental laws, which may be larger than current projections.

Changes in government regulation may have a material effect on our results of operations.

Our manufacturing facilities are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety. Liability under these laws involves inherent uncertainties. Changes in such laws and regulations or in their enforcement could significantly increase our costs of operations which could adversely affect our business. Violations of health and safety laws are subject to civil, and, in some cases, criminal sanctions. As a result of these uncertainties, we may incur unexpected interruptions to operations, fines, penalties or other reductions in income which could adversely impact our business, financial condition and results of operations.

Further, in order for our products to obtain the energy efficient “ENERGYSTAR” label, they must meet certain requirements set by the Environmental Protection Agency, or the EPA. Changes in the energy efficiency requirements established by the EPA for the ENERGYSTAR label could increase our costs, and, if there is a lapse in our ability to label our products as such or we are not able to comply with the new standards at all, negatively affect our net sales and results of operations.

Moreover, many of our products are regulated by building codes and require specific fire, penetration or wind resistance characteristics. A change in the building codes could have a material impact on the manufacturing cost for these products, which we may not be able to pass on to our customers.

 

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To service our consolidated indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.

Our estimated annual payment obligations for 2013 with respect to our consolidated indebtedness consist of our estimated $31 million of interest payments. If we draw funds under the ABL Facility, which is one of our principal sources of liquidity, we will incur additional interest expense. Our ability to satisfy our debt obligations will principally depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments. If we do not generate sufficient cash flow from operations to satisfy our consolidated debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt instruments, including the ABL Facility and the indenture governing our senior notes, may restrict us from adopting some of these alternatives. If we are unable to generate sufficient cash flow to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms, it would have an adverse effect, which could be material, on our business, financial condition and results of operations.

Under such circumstances, we may be unable to comply with the provisions of our debt instruments. If we are unable to satisfy such covenants or other provisions at any future time, we would need to seek an amendment or waiver of such financial covenants or other provisions. Our lenders may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. Certain of our lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to obtain any such waiver or amendment, our inability to meet the financial covenants or other provisions in the agreements governing our indebtedness may constitute an event of default thereunder, which would permit those and other lenders to accelerate repayment of our indebtedness. Our assets and cash flow, including those of our subsidiaries, may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, and our secured lenders could proceed against the collateral securing that indebtedness. Such events would have a material adverse effect on our business, financial condition and results of operations.

We and our subsidiaries may also be able to incur substantial additional indebtedness, including secured indebtedness, in the future. To the extent new debt is incurred by us and our subsidiaries, our leverage risks would increase.

The terms of our ABL Facility and the indenture governing our senior notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.

The credit agreement governing our ABL Facility and the indenture governing our senior notes contain, and the terms of any future indebtedness of ours would likely contain a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The indenture governing our senior notes and the credit agreement governing the ABL Facility include covenants that, among other things, restrict our and our subsidiaries’ ability to:

 

   

incur additional indebtedness and issue preferred stock;

 

   

make restricted payments, including dividends and other distributions on our common shares;

 

   

sell assets;

 

   

create restrictions on the ability of our restricted subsidiaries to pay dividends or distributions;

 

   

create or incur liens;

 

   

enter into sale and lease-back transactions;

 

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merge or consolidate with other entities; and

 

   

enter into transactions with affiliates.

The operating and financial restrictions and covenants in our current debt agreements and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.

Risks Related to Ownership of Our Common Shares

There is no existing market for our common shares and an active, liquid trading market may not develop.

There is no public market for our common shares, although our common shares have been quoted on the OTC Grey Market since June 2009 under the symbol “MASWF.” We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the New York Stock Exchange, or NYSE, or otherwise or how active and liquid that market may become. The trading price on the NYSE may bear no relation to the historical prices on the OTC Grey Market. If an active and liquid trading market does not develop, you may have difficulty selling any of our common shares that you purchase.

Our share price may change significantly and you could lose all or part of your investment as a result.

The trading price of our common shares is likely to be highly volatile and could fluctuate due to a number of factors such as those listed in “—Risks Related to Our Business” and the following, some of which are beyond our control:

 

   

quarterly variations in our results of operations;

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

   

announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;

 

   

announcements by third parties of significant claims or proceedings against us;

 

   

future sales of our common shares; and

 

   

general domestic and international economic conditions.

Furthermore, the stock market has experienced extreme volatility that, in some cases, has been unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common shares, regardless of our actual operating performance.

In the past, following periods of market volatility, shareholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

The availability of shares for sale in the future could reduce the market price of our common shares.

In the future, we may issue securities to raise cash for acquisitions or otherwise. We may also acquire interests in other companies by using a combination of cash and our common shares or just our common shares. We may also issue securities convertible into our common shares. Any of these events may dilute your ownership interest in our company and have an adverse impact on the price of our common shares.

 

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In addition, sales of a substantial amount of our common shares in the public market, or the perception that these sales may occur, could reduce the market price of our common shares. This could also impair our ability to raise additional capital through the sale of our securities.

Because we do not currently intend to pay cash dividends on our common shares for the foreseeable future, you may not receive any return on investment unless you sell your common shares for a price greater than that which you paid for it.

We currently intend to retain future earnings, if any, for future operation, expansion and debt repayment and do not intend to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. Our ABL Facility and the indenture governing our senior notes contain, and the terms of any future indebtedness we or our subsidiaries incur may contain, limitations on our ability to pay dividends. As a result, you may not receive any return on an investment in our common shares unless you sell our common shares for a price greater than that which you paid for it.

A small number of our shareholders could be able to significantly influence our business and affairs, limiting your ability to influence corporate matters.

As of July 31, 2013, shareholders owning 5% or more of our outstanding common shares collectively owned approximately 64% of our common shares. As a result of their holdings, these shareholders may be able to significantly influence the outcome of any matters requiring approval by our shareholders, including the election of directors, mergers and takeover offers, regardless of whether others believe that approval of those matters is in our best interests.

We will incur increased costs and our management will face increased demands as a result of operating as a public company.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, in anticipation of becoming a public company, we will need to adopt additional internal controls and disclosure controls and procedures and bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under applicable securities laws.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Act and related regulations implemented by the Securities and Exchange Commission, or the SEC, and the stock exchanges are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. We are currently evaluating and monitoring developments with respect to new and proposed rules and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.

We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a public company and these new rules and regulations will make it more expensive for us

 

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to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers.

The increased costs associated with operating as a public company may decrease our net income or increase our net loss, and may cause us to reduce costs in other areas of our business or increase the prices of our products or services to offset the effect of such increased costs. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations.

If we fail to maintain an effective system of internal controls, we may not be able to report our financial results accurately or in a timely fashion, and we may not be able to prevent fraud; in such case, our shareholders could lose confidence in our financial reporting, which would harm our business and could negatively impact the price of our common shares.

Effective internal controls are necessary for us to provide reliable, timely financial reports and prevent fraud. In addition, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal control over financial reporting beginning with our Annual Report on Form 10-K for the year ending December 31, 2014. The process of implementing our internal controls and complying with Section 404 will be expensive and time-consuming, and will require significant attention of management. We cannot be certain that these measures will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we conclude that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, including those related to information technology systems, or difficulties encountered in their implementation, could harm our results of operations or cause us to fail to meet our reporting obligations. If we discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm the price of our common shares.

United States civil liabilities may not be enforceable against us.

We exist under the laws of the Province of British Columbia, Canada. In addition, certain experts named herein reside outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us and those experts, or to enforce outside the United States judgments obtained in United States courts, in any action, including actions predicated upon the civil liability provisions of United States securities laws. Additionally, it may be difficult for investors to enforce, in original actions brought in courts in jurisdictions located outside the United States, rights predicated upon United States securities laws. In particular, there is uncertainty as to the enforceability in Canada by a court in original actions, or in actions to enforce judgments of United States courts, of the civil liabilities predicated upon the United States securities laws. Based on the foregoing, there can be no assurance that United States investors will be able to enforce against us or certain experts named herein who are residents of countries other than the United States any judgments obtained in United States courts in civil and commercial matters, including judgments under the United States federal securities laws. In addition, there is doubt as to whether a court in the Province of British Columbia would impose civil liability on us, our directors, officers or certain experts named herein in an original action predicated solely upon the federal securities laws of the United States brought in a court of competent jurisdiction in the Province of British Columbia against us or such directors, officers or experts, respectively.

 

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Canadian laws differ from the laws in effect in the United States and may afford less protection to holders of our securities.

We are a company that exists under the laws of the Province of British Columbia, Canada and are subject to the Business Corporations Act (British Columbia) and certain other applicable securities laws as a Canadian issuer (non-reporting issuer), which laws may differ from those governing a company formed under the laws of a United States jurisdiction. The provisions under the Business Corporations Act (British Columbia) and other relevant laws may affect the rights of shareholders differently than those of a company governed by the laws of a United States jurisdiction, and may, together with our amended and restated articles of amalgamation, or the Articles, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance. See “Description of Registrant’s Securities to be Registered.”

If securities or industry research analysts do not publish or cease publishing research or reports about our business or if they issue unfavorable commentary or downgrade our common shares, our share price and trading volume could decline.

The trading market for our common shares will rely in part on the research and reports that securities and industry research analysts publish about us, our industry, our competitors and our business. We do not have any control over these analysts. Our share price and trading volumes could decline if one or more securities or industry analysts downgrade our common shares, issue unfavorable commentary about us, our industry or our business, cease to cover our company or fail to regularly publish reports about us, our industry or our business.

 

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Item 2. Financial Information

Selected Historical Consolidated Financial Data

On March 16, 2009, Masonite Holdings Corp., Masonite International Inc. and several affiliated companies, including Masonite International Corporation, voluntarily filed to reorganize under the CCAA in Canada in the Ontario Superior Court of Justice. Additionally, Masonite Holdings Corp., Masonite International Inc., Masonite Corporation and all of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware. Masonite’s subsidiaries and affiliates outside of Canada and the United States did not initiate reorganization cases and were not materially impacted by the legal proceedings. We emerged from bankruptcy protection on June 9, 2009, referred to herein as the Effective Date.

Unless we state otherwise or the context otherwise requires, references to “Masonite,” “we,” “our,” “us,” and the “Company” for all periods subsequent to the Effective Date refer to Masonite International Corporation and its subsidiaries, after giving effect to such reorganization and the amalgamation. Masonite International Corporation is also referred to herein as our “Successor.” For all periods prior to the Effective Date, these terms refer to the predecessor, Masonite International Inc., which is also referred to herein as our “Predecessor,” and its subsidiaries.

The following table sets forth selected historical consolidated financial data of the Predecessor and the Successor as of the dates and for the periods indicated. The selected historical consolidated financial data of the Successor as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 have been derived from the Successor’s audited consolidated financial statements included elsewhere in this registration statement. The selected historical consolidated financial data of the Successor as of December 31, 2009 and 2010 and for the period from April 16, 2009 (the Successor’s date of incorporation) to December 31, 2009 have been derived from the Successor’s audited consolidated financial statements not included in this registration statement. The selected historical consolidated financial data of the Predecessor as of December 31, 2008, for the year ended December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 presented in this table have been derived from the Predecessor’s audited consolidated financial statements not included in this registration statement. While the Predecessor and Successor periods overlap, no results of operations of Masonite are included in the Successor period from April 16, 2009 through June 9, 2009 and therefore no offsetting adjustments or eliminations have been made to the information in the overlapping period. Further, the impact, including information for the Successor, in the period from April 16, 2009 through June 9, 2009 on our combined results of operations is not material because the Successor had no operations during the overlapping period.

The selected financial data and other data as of June 30, 2013, and for the six months ended June 30, 2013 and 2012, have been derived from our unaudited condensed consolidated financial statements included elsewhere in this registration statement. The selected unaudited financial data presented have been prepared on a basis consistent with our audited consolidated financial statements. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the results for those periods.

Our emergence from bankruptcy resulted in our being considered a new entity for financial reporting purposes and dramatically impacted second quarter 2009 net income as certain pre-bankruptcy debts were discharged in accordance with our Plan of Reorganization, filed with the Bankruptcy Court immediately prior to emergence and assets and liabilities were adjusted to their fair values upon emergence. As a result, our financial statements for the Successor periods after the Effective Date are not comparable to the financial statements prior to that date.

This historical data includes, in the opinion of management, all adjustments necessary for a fair presentation of the operating results and financial condition of the Predecessor and Successor, respectively, for such periods and as of such dates. The results of operations for any period are not necessarily indicative of the results of future operations. Since 2010, we have completed several acquisitions. The results of these acquired entities are included in our consolidated statements of comprehensive income (loss) for the periods subsequent to the

 

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respective acquisition date. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” our consolidated financial statements and related notes thereto included elsewhere in this registration statement.

 

    Six Months Ended
June 30,
    Year Ended December 31,     Period from
April 16,
2009 to
December 31,
         Period
from
January 1,
2009 to
June 9,
    Year Ended
December 31,
 
    2013     2012     2012     2011     2010     2009          2009     2008  
                (Successor)                      (Predecessor)  
                (In thousands of U.S. dollars, except for share and per share amounts)        

Consolidated Statement of Operations Data:

                   

Net sales

  $ 877,617      $ 832,889      $ 1,676,005      $ 1,489,179      $ 1,383,271      $ 778,407          $ 616,082      $ 1,792,692   

Cost of goods sold

    762,547        724,880        1,459,701        1,303,820        1,203,469        690,310            541,831        1,547,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Gross profit

    115,070        108,009        216,304        185,359        179,802        88,097            74,251        245,344   

Selling, general and administration expenses

    102,992        102,993        208,058        186,776        176,776        105,131            87,380        206,259   

Restructuring costs

    3,202        1,222        11,431        5,116        7,000        2,549            7,584        25,892   

Bankruptcy reorganization costs

    —          —          —          —          —          —              30,963        10,337   

Impairment of goodwill and intangible assets

    —          —          —          —          —          —              —          1,004,180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Operating income (loss)

    8,876        3,794        (3,185     (6,533     (3,974     (19,583         (51,676     (1,001,325

Interest expense, net

    16,458        15,104        31,454        18,068        245        609            84,460        234,509   

Other expense (income), net

    (521     1,117        528        1,111        1,030        (1,338         339        48,437   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Loss from continuing operations before income tax expense

    (7,061     (12,427     (35,167     (25,712     (5,249     (18,854         (136,475     (1,284,271

Income tax expense (benefit)

    (1,444     (6,197     (13,365     (21,560     (11,396     (938         2,583        (49,990
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Income (loss) from continuing operations

    (5,617     (6,230     (21,802     (4,152     6,147        (17,916         (139,058     (1,234,281

Income (loss) from discontinued operations, net of tax

    (134     1,570        1,480        (303     (1,718     (3,024         (3,274     (24,803

Reorganization and fresh start accounting gain, net

    —          —          —          —          —          —              347,123        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Net income (loss)

    (5,751     (4,660     (20,322     (4,455     4,429        (20,940         204,791        (1,259,084

Net income (loss) attributable to noncontrolling interest

    1,285        1,218        2,923        2,079        1,390        1,487            1,917        3,226   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Net income (loss) attributable to Masonite

  $ (7,036   $ (5,878   $ (23,245 ) $      (6,534   $ 3,039      $ (22,427       $ 202,874      $ (1,262,310
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Masonite shareholders per common share (basic and diluted) (1)

  $ (0.25   $ (0.27   $ (0.89 ) $      (0.23   $ 0.17      $ (0.71        

Net income (loss) attributable to Masonite shareholders per common share (basic and diluted) (1)

  $ (0.25   $ (0.21   $ (0.84 ) $      (0.24   $ 0.11      $ (0.82        

Common shares outstanding

    27,978,152        27,546,419        27,943,744        27,531,792        27,523,541        27,500,005           
 

Other Financial Data:

                   

Capital expenditures

  $ (16,276   $ (20,390   $ 48,419      $ 42,413      $ 57,823      $ 27,012          $ 17,099      $ 32,755   

Net cash flow provided by (used for) operating activities

    2,498        (12,436     55,222        32,688        75,154        56,157            14,168        (72,895

Net cash flow provided by (used for) investing activities

    (28,148     (85,975     (136,103     (186,717     (97,974     114,392            (28,252     (56,003

Net cash flow provided by (used for) financing activities

    (1,332     98,709        94,230        136,605        (4,797     (17,933         (25,900     295,165   

 

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     As of
June 30,
2013
     As of December 31,  
        2012      2011      2010     2009     2008  
                   (Successor)                  (Predecessor)  
    

(In thousands of U.S. dollars)

 

Balance Sheet Data:

                 

Cash and cash equivalents

   $ 92,940       $ 122,314       $ 109,205       $ 121,050      $ 152,236      $ 191,010   

Accounts receivable, net

     273,010         256,666         228,729         205,581        209,693        235,135   

Inventories, net

     217,786         208,783         209,041         186,400        178,028        227,333   

Working capital (2)

     421,898         417,584         384,822         349,248        384,344        (1,831,568

Property, plant and equipment

     614,927         648,360         632,655         645,615        634,322        704,789   

Total assets

     1,605,892         1,645,948         1,528,056         1,398,510        1,398,977        1,611,007   

Total debt

     378,215         378,848         275,000         —          143        2,258,334   

Total equity

     811,187         837,815         848,483         1,012,547        1,013,492        (1,071,700

 

(1) Per share amounts for the Predecessor periods are not presented due to the impact of the Plan of Reorganization.
(2) Working capital is defined as current assets less current liabilities and includes cash restricted by letters of credit.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management Discussion and Analysis of Financial Condition and Results of Operations 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 six months ended June 30, 2013 and 2012, and the years ended December 31, 2012, 2011 and 2010.

This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this registration statement. The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for additional cautionary information.

Overview

We are a leading global designer and manufacturer of interior and exterior doors for the residential new construction; the residential repair, renovation and remodeling; 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. Today, we believe we hold either the number one or two market position in the seven product categories we target in North America. In fiscal year 2012, 73% of our net sales were in North America, 22% in Europe, Asia and Latin America and 5% in Africa. For the same year, in North America we generated 34% of our net sales in the residential new construction market, 45% in the residential repair, renovation and remodeling market and 21% in the non-residential building construction market.

We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale and retail distribution channels 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, louvre 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. In fiscal year 2012, sales of interior and exterior products accounted for approximately 74% and 26% of net sales, respectively. In fiscal year 2012, we sold approximately 31 million doors to more than 6,000 customers in 70 countries.

We operate 63 manufacturing and distribution facilities in 12 countries in North America, South America, Europe, Africa, Asia and Israel, which are strategically located to serve our customers through multiple distribution channels. These distribution channels include: (i) direct distribution to retail home center customers; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous Dorfab facilities provide value-added fabrication and logistical services, including 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 geographic region: North America; Europe, Asia and Latin America; and Africa. For the year ended December 31, 2012, we generated net sales of $1,224.1 million, $370.3 million and $81.6 million in our North America, Europe, Asia and Latin America, and Africa segments, respectively.

 

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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 has 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 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 non-residential 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 non-residential construction;

 

   

housing sales and home values;

 

   

the age of existing home stock, home vacancy rates and foreclosures;

 

   

non-residential building occupancy rates;

 

   

increases in the cost of raw materials or 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.

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 2012, our top ten customers together accounted for approximately 40% of our net sales and our top two customers accounted for approximately 16% and 10%. 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. Most recently, in the fourth quarter of 2012 we were notified of a loss of business as a result of a product line review by Lowe’s relating to its Northeastern and Southwestern United States interior door business which will have an adverse impact on our net sales in 2013. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.

Organizational Restructuring

Over the past several years we have initiated, and in the future we plan to initiate, restructuring plans designed to eliminate excess capacity in order to align our manufacturing capabilities with reductions in demand,

 

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as well as to streamline our organizational structure and reposition our business for improved long-term profitability. We expect to incur approximately $1.8 million of additional restructuring costs related to activities initiated as of June 30, 2013.

During 2013, we began implementing plans to rationalize certain international facilities, including related headcount reductions, in order to respond to declines in demand in international markets (the “2013 Restructuring Plan”). Costs associated with these actions include closure and severance charges and are expected to be substantially completed by the end of 2013. The 2013 Restructuring Plan is estimated to increase our annual earnings and cash flows by approximately $2 million.

During 2012, we began implementing plans to close certain of our U.S. manufacturing facilities due to the start-up of our new highly automated interior door slab assembly plant in Denmark, South Carolina, synergy opportunities related to recent acquisitions in the commercial and architectural interior wood door market and footprint optimization efforts resulting from declines in demand in specific markets. We also began implementing plans during 2012 to permanently close our businesses in Poland, Hungary and Romania, due to the continued economic downturn and heightened volatility of the Eastern European economies (collectively, the “2012 Restructuring Plans”). Costs associated with these closure and exit activities relate to closure of facilities and impairment of certain tangible and intangible assets, and are expected to be completed by the end of 2013. The 2012 Restructuring Plans are estimated to increase our annual earnings and cash flows by approximately $10 million.

Foreign Exchange Rate Fluctuation

Our financial results may be adversely affected by fluctuating exchange rates. Net sales generated outside of the United States were approximately 42% and 44% for the six months ended June 30, 2013, and the year ended December 31, 2012, 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 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.

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.

 

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Acquisitions

In the past several years, we have pursued strategic tuck-in acquisitions targeting companies with differentiated businesses, strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies:

 

   

Masisa:  In July 2013, we completed the acquisition of the door manufacturing operations of Masisa for total consideration of $12.5 million. As of June 30, 2013, the total cash consideration paid for Masisa was classified as restricted cash on the condensed consolidated balance sheets. The transaction includes the door component operations in Cabrero, Chile and a door assembly factory in Chillan, Chile. The operations acquired primarily manufacture high quality stile and rail panel and French wood doors for the North American market. The Masisa acquisition acts as a natural complement to Lemieux and our existing residential wood door offering.

 

   

Lemieux:  In August 2012, we completed the acquisition of Lemieux for net consideration of $22.1 million. Lemieux manufactures interior and exterior stile and rail wood doors for residential applications at its two facilities in Windsor, Quebec. The acquisition of Lemieux complemented our residential wood door business and provides us an additional strategic growth platform.

 

   

Algoma:  In April 2012, we completed the acquisition of Algoma for net consideration of $55.6 million. Algoma manufactures interior wood doors for commercial and architectural applications. The acquisition of Algoma complemented our existing Baillargeon, Mohawk and Marshfield branded commercial and architectural interior wood door business.

 

   

Baillargeon:  In March 2012, we completed the acquisition of Baillargeon for net consideration of $9.9 million. Baillargeon is a Canadian manufacturer of interior wood doors for commercial and architectural applications.

 

   

Birchwood:  In November 2011, we completed the acquisition of Birchwood, for net consideration of $41.0 million. We believe Birchwood is one of North America’s largest producers of commercial and architectural flush wood door facings, as well as a significant producer of hardwood plywood. The Birchwood acquisition enhanced our position as a leader in the manufacturing and distribution of components for commercial and architectural wood doors, and acts as a natural complement to our existing business.

 

   

Marshfield:  In August 2011, we completed the acquisition of Marshfield for net consideration of $102.4 million. We believe Marshfield is a leading provider of doors and door components for commercial and architectural applications that enables us to provide our customers with a wider range of innovative door products.

Prior to the acquisition, Marshfield experienced a loss of certain property, plant and equipment, as well as a partial and temporary business interruption, due to an explosion that impacted a portion of its manufacturing facility in Marshfield, Wisconsin. Losses related to the event were recognized by Marshfield prior to the acquisition. Marshfield was insured for these losses, including business interruption, and we retained rights to this insurance claim subsequent to acquisition. During the fourth quarter of 2012, we recognized $3.3 million as partial settlement for business inturruption losses. In the first quarter of 2013, we recognized an additional $4.5 million as final settlement of the claim. These proceeds were recorded as a reduction to selling, general and administration expense in the condensed consolidated statements of comprehensive income (loss). No further business interruption insurance proceeds are expected as a result of this event.

 

   

Lifetime:  In October 2010, we also acquired substantially all of the assets of Lifetime for net consideration of approximately $28.0 million. Lifetime is an interior flush door manufacturer specializing in molded, veneer, prefinished, and bifold doors.

 

   

Ledco:  In March 2010, we acquired substantially all of the assets of Ledco for net consideration of approximately $12.8 million. Ledco is a premier interior flush door manufacturer specializing in molded, veneer, mirror, pine, and bifold doors.

 

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In 2010 we also entered into exclusive supply, manufacturing and distribution arrangements with three leading door manufacturers in India—Feroke Boards Limited, Mahsim High Tech Fab Limited, and Standard Doors. Net combined consideration with respect to the Indian transactions was approximately $9.1 million.

Components of Results of Operations

Net Sales

Net sales are derived from the sale of products to our customers. We recognize sales of our products when an agreement with the customer in the form of a sales order is in place, the sales price is fixed or determinable, collection is reasonably assured and the customer has taken ownership and assumes risk of loss. Certain customers are eligible to participate in various incentive and rebate programs considered as a reduction of the sales price of our products. Accordingly, net sales are reported net of such incentives and rebates. Additionally, shipping and other transportation costs charged to customers are recorded in net sales in the consolidated statements of comprehensive income (loss).

Cost of Goods Sold

Our cost of goods sold is comprised of the cost to manufacture products for our customers. Cost of goods sold includes all of the direct materials and direct labor used to produce our products. Included in our costs of goods sold is also a systematic allocation of fixed and variable production overhead incurred in converting raw materials into finished goods. Fixed production overhead reflects those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overhead consists of those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor. We incur significant fixed and variable overhead at our global component locations that manufacture interior molded door facings. Our overall average production capacity utilization at these locations was approximately 65% and 61% for the twelve months ended June 30, 2013 and 2012, respectively, and 63%, 60% and 56% for the years ended December 31, 2012, 2011 and 2010. Research and development costs are primarily included within cost of goods sold. Finally, cost of goods sold also includes the distribution and transportation costs to deliver products to our customers.

Selling, General and Administration Expenses

Selling, general and administration expenses primarily include the costs for our sales organization and support staff at various plants and corporate offices. These costs include personnel costs for payroll, related benefits costs and stock based compensation expense; professional fees including legal, accounting and consulting fees; depreciation and amortization of our non-manufacturing equipment and assets; travel and entertainment expenses; director, officer and other insurance policies; environmental, health and safety costs; advertising expenses and rent and utilities related to administrative office facilities. Certain charges that are also incurred less frequently and are included in selling, general and administration costs include gain or loss on disposal of property, plant and equipment, asset impairments and bad debt expense.

Restructuring Costs

Restructuring costs include all salary-related severance benefits that are accrued and expensed when a restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable. In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization. Upon termination of a contract we record liabilities and expenses pursuant to the terms of the relevant agreement. For non-contractual restructuring activities, liabilities and expenses are measured and recorded at fair value in the period in which they are incurred.

 

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Interest Expense, Net

Interest expense, net relates primarily to our $375.0 million aggregate principal amount of 8.25% senior unsecured notes due April 15, 2021, $275.0 million of which were issued in April 2011 and $100.0 million of which were issued in March 2012. The transaction costs were capitalized as deferred financing costs and are being amortized to interest expense over their term. The senior notes issued in March 2012 were issued at 103.5% of the principal amount and resulted in a premium from the issuance that will be amortized to interest expense over their term. Additionally, we pay interest on any outstanding principal under our ABL Facility and we are required to pay a commitment fee for unutilized commitments under the ABL Facility both of which are recorded in interest expense as incurred.

Other Expense (Income), Net

Other expense (income), net includes profit and losses related to our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting and various miscellaneous non-operating expenses.

Income Taxes

Income taxes are recorded using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the date of enactment. A valuation allowance is recorded to reduce deferred tax assets to an amount that is anticipated to be realized on a more likely than not basis. Our combined effective income tax rate is primarily the weighted average of federal, state and provincial rates in various countries where we have operations, including the United States, Canada, France, the United Kingdom and Ireland. Our income tax rate is also affected by estimates of our ability to realize tax assets and changes in tax laws. As of December 31, 2012, we had $207 million of losses carried forward which are available to reduce our future income taxes.

 

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Results of Operations

 

     Six Months Ended June 30,     Year Ended December 31,  
           2013                 2012                 2012                 2011                 2010        

Net sales

   $ 877,617      $ 832,889      $ 1,676,005      $ 1,489,179      $ 1,383,271   

Cost of goods sold

     762,547        724,880        1,459,701        1,303,820        1,203,469   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     115,070        108,009        216,304        185,359        179,802   

Gross profit as a % of net sales

     13.1     13.0     12.9     12.4     13.0

Selling, general and administration expenses

     102,992        102,993        208,058        186,776        176,776   

Restructuring costs

     3,202        1,222        11,431        5,116        7,000   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     8,876        3,794        (3,185     (6,533     (3,974

Interest expense, net

     16,458        15,104        31,454        18,068        245   

Other expense (income), net

     (521     1,117        528        1,111        1,030   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (7,061     (12,427     (35,167     (25,712     (5,249

Income tax expense (benefit)

     (1,444     (6,197     (13,365     (21,560     (11,396
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (5,617     (6,230     (21,802     (4,152     6,147   

Income (loss) from discontinued operations, net of tax

     (134     1,570        1,480        (303     (1,718
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5,751     (4,660     (20,322     (4,455     4,429   

Less: Net income (loss) attributable to noncontrolling interest

     1,285        1,218        2,923        2,079        1,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ (7,036   $ (5,878   $ (23,245   $ (6,534   $ 3,039   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013, Compared With Six Months Ended June 30, 2012

Net Sales

Net sales in the six months ended June 30, 2013, were $877.6 million, an increase of $44.7 million or 5.4% from $832.9 million in the six months ended June 30, 2012. Net sales in the first half of 2013 were $5.8 million lower due to a strengthening of the U.S. dollar. Excluding this exchange rate impact, net sales would have increased by $50.5 million or 6.1% due to unit volume, average unit price and component sales. Higher unit volumes in the first half of 2013 increased net sales by $42.8 million or 5.1%, primarily due to incremental sales from our 2012 acquisitions, as well as increased residential new construction in North America, partially offset by a decline in unit volumes in Europe, Asia and Latin America. Changes in average unit price increased net sales in the first half of 2013 by $11.5 million or 1.4%. Net sales of door components were $3.8 million lower in the first half of 2013 compared to the 2012 period.

The proportion of net sales from interior and exterior products in the six months ended June 30, 2013, was 74.2% and 25.8%, respectively, compared to 74.3% and 25.7% in the six months ended June 30, 2012. The reduced proportion of sales of our interior products was primarily driven by the closures of our businesses in Hungary and Romania in 2012, which was partially offset by an increase in interior products as a percentage of net sales due to incremental sales from our 2012 acquisitions, which predominantly service the commercial and residential interior wood door markets.

 

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Net Sales and Percentage of Net Sales by Principal Geographic Region

 

     Six Months Ended June 30,  
           2013                 2012        
     (In thousands)  

North America

   $ 666,377      $ 599,405   

North America intersegment

     (358     (769
  

 

 

   

 

 

 

North America net sales to external customers

   $ 666,019      $ 598,636   
  

 

 

   

 

 

 

Percentage of net sales

     75.9     71.9

Europe, Asia and Latin America

   $ 184,649      $ 200,512   

Europe, Asia and Latin America intersegment

     (8,330     (8,150
  

 

 

   

 

 

 

Europe, Asia and Latin America net sales to external customers

   $ 176,319      $ 192,362   
  

 

 

   

 

 

 

Percentage of net sales

     20.1     23.1

Africa

   $ 35,319      $ 41,992   

Africa intersegment

     (40     (101
  

 

 

   

 

 

 

Africa net sales to external customers

   $ 35,279      $ 41,891   
  

 

 

   

 

 

 

Percentage of net sales

     4.0     5.0
  

 

 

   

 

 

 

Net sales to external customers

   $ 877,617      $ 832,889   
  

 

 

   

 

 

 

North America

Net sales to external customers from facilities in the North America segment in the six months ended June 30, 2013, were $666.0 million, an increase of $67.4 million or 11.3% from $598.6 million in the six months ended June 30, 2012. Net sales in the first half of 2013 were $0.1 million lower due to a strengthening of the U.S. dollar. Excluding this exchange rate impact, net sales would have increased by $67.5 million or 11.3% due to unit volume, average unit price and component sales. Higher unit volumes in the first half of 2013 increased net sales by $60.4 million or 10.1% compared to the 2012 period, primarily due to incremental sales from our 2012 acquisitions, as well as increased residential new construction. Additionally, changes in average unit price increased net sales in the first half of 2013 by $8.9 million or 1.5% compared to the 2012 period. These increases were partially offset by net sales of door components to external customers which were $1.8 million or 0.3% lower in the first half of 2013 compared to the 2012 period.

The proportion of net sales from interior and exterior products in the six months ended June 30, 2013, was 69.4% and 30.6%, respectively, compared to 68.0% and 32.0% in the six months ended June 30, 2012. The increase in our interior products as a percentage of North America net sales was primarily due to incremental sales from our 2012 acquisitions, which predominantly service the commercial and residential interior wood door markets.

Europe, Asia and Latin America

Net sales to external customers from facilities in the Europe, Asia and Latin America segment in the six months ended June 30, 2013, were $176.3 million, a decrease of $16.1 million or 8.4% from $192.4 million in the six months ended June 30, 2012. Net sales in the first half of 2013 were $0.2 million higher due to a weakening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have decreased by $16.3 million or 8.5% due to unit volume, average unit price and component sales. Net sales in the six months ended June 30, 2013, decreased due to a decline in unit volumes as a result of the broader market downturn in these regions and our decision to discontinue certain unprofitable product lines, which resulted in a $22.0 million or 11.4% decrease in net sales in the first half of 2013 compared to the 2012 period. Net sales of door components to external customers were $2.0 million or 1.0% lower in 2013 compared to the 2012 period.

 

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Partially offsetting the decline in net sales in the first half of 2013, were changes in average unit price, which increased net sales in the first half of 2013 by $7.7 million or 4.0% compared to the 2012 period.

The proportion of net sales from interior and exterior products for the six months ended June 30, 2013, was 87.3% and 12.7%, respectively, compared to 88.0% and 12.0% in the six months ended June 30, 2012. The reduced proportion of sales of our interior products was primarily driven by the closure of our businesses in Hungary and Romania in 2012.

Africa

Net sales to external customers from facilities in the Africa segment in the six months ended June 30, 2013, were $35.3 million, a decrease of $6.6 million or 15.8% from $41.9 million in the six months ended June 30, 2012. Net sales in the first half of 2013 were $5.9 million lower due to a strengthening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have decreased by $0.7 million or 1.7% due to unit volume and average unit price. Changes in average unit price in the first half of 2013 decreased net sales by $5.1 million or 12.2% compared to the 2012 period. This decrease was partially offset by higher unit volumes which increased net sales in the first half of 2013 by $4.4 million or 10.5% compared to the 2012 period.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales was 86.9% and 87.0% for the six months ended June 30, 2013 and 2012, respectively. Cost of goods sold as a percentage of net sales was impacted by a number of factors, including average unit price. Additionally, materials costs and direct labor as a percentage of net sales in the first half of 2013 increased 0.2% and 0.3%, respectively, over the 2012 period. This was offset by a decrease in overhead, depreciation and distribution costs as a percentage of net sales in the first half of 2013 of 0.2% each, over the 2012 period.

Selling, General and Administration Expenses

In the six months ended June 30, 2013, selling, general and administration expenses, as a percentage of net sales, were 11.7%, compared to 12.4% in the six months ended June 30, 2012, a decrease of 70 basis points.

Selling, general and administrative expenses remained flat at $103.0 million in the six months ended June 30, 2013 and 2012. Excluding the favorable impact of foreign exchange, selling, general and administrative expenses would have increased $0.2 million. The increase was driven by increased depreciation and amortization of $2.2 million, impairment and losses on sales of property, plant and equipment of $2.4 million and higher personnel costs of $1.8 million. These increases were partially offset due to the net business interruption insurance claim recovery of $4.5 million and a decrease in bad debt expense of $0.9 million and miscellaneous decreases of $0.8 million.

Restructuring Costs

Restructuring costs in the six months ended June 30, 2013, were $3.2 million, compared to $1.2 million in six months ended June 30, 2012. Restructuring costs in the first half of 2013 were related primarily to expenses incurred as part of the 2012 Restructuring Plans, as well as expenses incurred concurrent with the implementation of the 2013 Restructuring Plan. Costs incurred in the second half of 2012 were related primarily to the implementation of the U.S. portion of the 2012 Restructuring Plans.

Interest Expense, Net

Interest expense, net, in the six months ended June 30, 2013, was $16.5 million, compared to $15.1 million in the six months ended June 30, 2012. This increase primarily relates to the additional interest paid in the first half of 2013 on the $100.0 million principal amount of 8.25% senior unsecured notes issued in March of 2012.

 

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The increase in indebtedness and related interest expense in Canada was due to the issuance by the Company of the senior unsecured notes, which was reported in the North America segment results.

Other Expense (Income), Net

Other expense (income), net, in the six months ended June 30, 2013, was $(0.5) million, compared to $1.1 million in the six months ended June 30, 2012. The change in other expense (income), net, is due to our portion of the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting and various miscellaneous non-operating expenses.

Income Tax Expense (Benefit)

Our income tax benefit in the six months ended June 30, 2013, was $1.4 million, compared to $6.2 million in the six months ended June 30, 2012. Changes in our income tax benefit primarily relate to the rate of tax due on income earned in foreign jurisdictions and changes in deferred tax valuation. It is also affected by discrete items that 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, France, the United Kingdom and Ireland and is affected by our ability to realize tax assets in certain jurisdictions.

Segment Information

The segment discussion that follows contains discussion surrounding “Adjusted EBITDA,” a non-GAAP financial measure. Adjusted EBITDA does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measure used by other companies. Adjusted EBITDA is defined as net income (loss) attributable to Masonite, adjusted to exclude the following items:

 

   

depreciation;

 

   

amortization;

 

   

share based compensation expense;

 

   

restructuring costs;

 

   

loss (gain) on sale and impairment of property, plant and equipment;

 

   

interest expense (income), net;

 

   

other expense (income), net;

 

   

income taxes;

 

   

loss from discontinued operations; and

 

   

income (loss) attributable to non-controlling interest.

We believe that Adjusted EBITDA, from an operations standpoint, provides an appropriate way to measure and assess operating performance. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. We believe that Adjusted EBITDA is useful to users of the condensed consolidated financial statements because it provides the same information that we use internally for purposes of assessing our operating performance and making compensation decisions. This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indenture governing the Senior Notes and the credit agreement governing the ABL facility.

 

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Adjusted EBITDA is not a presentation made in accordance with GAAP, is not a measure of financial condition or profitability, and should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP.

 

     North
America
    Europe, Asia and
Latin America
    Africa     Total  
     Six Months Ended June 30, 2013  
     (In thousands)  

Adjusted EBITDA

   $ 48,555      $ 8,919      $ 2,164      $ 59,638   

Percentage of segment net sales

     7.3     5.1     6.1     6.8
    

 

Six Months Ended June 30, 2012

 

Adjusted EBITDA

   $ 33,697      $ 9,246      $ 3,716      $ 46,659   

Percentage of segment net sales

     5.6     4.8     8.9     5.6

Our management team has established the practice of reviewing the performance of each geographic segment based on the measures of net sales and Adjusted EBITDA. Intersegment transfers are negotiated on an arm’s length basis, using market prices.

Adjusted EBITDA in our North America segment increased $14.9 million, or 44.2%, to $48.6 million in the six months ended June 30, 2013, from $33.7 million in the six months ended June 30, 2012. Adjusted EBITDA in the North America segment included corporate allocations of shared costs of $34.1 million and $26.8 million in the first half of 2013 and 2012, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     North America
Six Months Ended June 30,
 
           2013                 2012        
     (In thousands)  

Adjusted EBITDA

   $ 48,555      $ 33,697   

Less (plus):

    

Depreciation

     22,185        20,649   

Amortization of intangible assets

     7,589        5,579   

Share based compensation expense

     3,911        2,819   

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

     832        443   

Impairment of property, plant and equipment

     1,904        —     

Restructuring costs

     1,030        692   

Interest expense (income), net

     31,517        29,283   

Other expense (income), net

     (538     1,142   

Income tax expense (benefit)

     (2,622     (6,706

Loss (income) from discontinued operations, net of tax

     134        (1,570

Net income (loss) attributable to noncontrolling interest

     1,285        1,218   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ (18,672   $ (19,852
  

 

 

   

 

 

 

 

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Adjusted EBITDA in our Europe, Asia and Latin America segment decreased $0.3 million, or 3.3%, to $8.9 million in the six months ended June 30, 2013, from $9.2 million in the six months ended June 30, 2012. Adjusted EBITDA in the Europe, Asia and Latin America segment included corporate allocations of shared costs of $1.4 million and $2.2 million in the first half of 2013 and 2012, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Europe, Asia and Latin America
Six Months Ended June 30,
 
           2013                 2012        
     (In thousands)  

Adjusted EBITDA

   $ 8,919      $ 9,246   

Less (plus):

    

Depreciation

     8,033        8,876   

Amortization of intangible assets

     1,017        1,135   

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

     130        40   

Restructuring costs

     2,172        530   

Interest expense (income), net

     (15,075     (14,220

Other expense (income), net

     17        (25

Income tax expense (benefit)

     1,134        98   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ 11,491      $ 12,812   
  

 

 

   

 

 

 

Adjusted EBITDA in our Africa segment decreased $1.5 million, or 40.5%, to $2.2 million in six months ended June 30, 2013, from $3.7 million in the six months ended June 30, 2012. Adjusted EBITDA in the Africa segment included corporate allocations of shared costs of $1.1 million and $1.5 million in the first half of 2013 and 2012, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Africa
Six Months Ended  June 30,
 
           2013                  2012        
     (In thousands)  

Adjusted EBITDA

   $ 2,164       $ 3,716   

Less (plus):

     

Depreciation

     1,959         2,102   

Interest expense (income), net

     16         41   

Income tax expense (benefit)

     44         411   
  

 

 

    

 

 

 

Net income (loss) attributable to Masonite

   $ 145       $ 1,162   
  

 

 

    

 

 

 

Year Ended December 31, 2012 Compared with Year Ended December 31, 2011

Net Sales

Net sales in fiscal year 2012, were $1,676.0 million, an increase of $186.8 million or 12.5% from $1,489.2 million in fiscal year 2011. Net sales in fiscal year 2012 were $38.4 million lower due to a strengthening of the U.S. dollar. Excluding this exchange rate impact, net sales would have increased by $225.2 million or 15.1% due to acquisitions, unit volume, sales price/mix and component sales. Our 2012 and 2011 acquisitions contributed $177.2 million or 11.9% of incremental net sales in fiscal year 2012. Higher unit volumes in fiscal year 2012 increased net sales by $34.3 million or 2.3%, primarily due to increased residential new construction in North America, partially offset by a decline in unit volumes in Europe. Changes in the average sales price per unit, driven by product, geographic and customer mix, increased net sales in fiscal year

 

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2012 by $8.8 million or 0.6%. The increase in average sales price per unit on a consolidated basis was realized despite a modest decline in the average sales price per unit in the North America segment. Net sales of door components were $4.9 million higher in fiscal year 2012 compared to fiscal year 2011.

The proportion of net sales from interior and exterior products in fiscal year 2012 was 73.6% and 26.4%, respectively, compared to 71.7% and 28.3% in fiscal year 2011. The increase in interior products as a percentage of our overall net sales in fiscal year 2012 was due to our acquisitions of Lemieux, Algoma, Baillargeon, Birchwood and Marshfield, which predominantly service the commercial interior wood and residential wood door markets.

Net Sales and Percentage of Net Sales by Principal Geographic Region

 

     Year Ended December 31,  
     2012     2011  
     (In thousands)  

North America

   $ 1,225,420      $ 1,009,983   

North America intersegment

     (1,369     (930
  

 

 

   

 

 

 

North America net sales to external customers

   $ 1,224,051      $ 1,009,053   
  

 

 

   

 

 

 

Percentage of net sales

     73.0     67.8

Europe, Asia and Latin America

   $ 385,323      $ 406,065   

Europe, Asia and Latin America intersegment

     (14,988     (15,403
  

 

 

   

 

 

 

Europe, Asia and Latin America net sales to external customers

   $ 370,335      $ 390,662   
  

 

 

   

 

 

 

Percentage of net sales

     22.1     26.2

Africa

   $ 81,801      $ 89,551   

Africa intersegment

     (182     (87
  

 

 

   

 

 

 

Africa net sales to external customers

   $ 81,619      $ 89,464   
  

 

 

   

 

 

 

Percentage of net sales

     4.9     6.0
  

 

 

   

 

 

 

Net sales to external customers

   $ 1,676,005      $ 1,489,179   
  

 

 

   

 

 

 

North America

Net sales to external customers from facilities in the North America segment in fiscal year 2012 were $1,224.1 million, an increase of $215.0 million or 21.3% from $1,009.1 million in fiscal year 2011. Net sales in fiscal year 2012 were $4.8 million lower due to a strengthening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $219.8 million or 21.8% due to acquisitions, unit volume, sales price/mix and component sales. Our 2012 and 2011 North America acquisitions contributed $177.2 million or 17.6% in incremental net sales in fiscal year 2012. Higher unit volumes in fiscal year 2012 increased net sales by $52.5 million or 5.2% compared to fiscal year 2011, primarily due to increased residential new construction. These increases were partially offset by changes in the average sales price per unit, driven by product, geographic and customer mix, which decreased net sales in fiscal year 2012 by $5.7 million or 0.6% compared to fiscal year 2011. Additionally, net sales of door components to external customers were $4.2 million or 0.4% lower in fiscal year 2012 compared to fiscal year 2011.

The proportion of net sales from interior and exterior products in fiscal year 2012 was 67.4% and 32.6%, respectively, compared to 63.1% and 36.9% in fiscal year 2011. The increase in our interior products as a percentage of North America net sales in fiscal year 2012 was due to our acquisitions of Lemieux, Algoma, Baillargeon, Birchwood and Marshfield, which predominantly service the commercial interior wood and residential wood door markets.

 

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Europe, Asia and Latin America

Net sales to external customers from facilities in the Europe, Asia and Latin America segment in fiscal year 2012 were $370.3 million, a decrease of $20.4 million or 5.2% from $390.7 million in fiscal year 2011. Net sales in fiscal year 2012 were $23.3 million lower due to a strengthening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $2.9 million or 0.7% due to sales price/mix, component sales and unit volume. Changes in the average sales price per unit, driven by product, geographic and customer mix, increased net sales in fiscal year 2012 by $8.7 million or 2.2% compared to fiscal year 2011. Net sales of door components to external customers were $9.1 million or 2.3% higher in fiscal year 2012 compared to fiscal year 2011. Partially offsetting these increases was a decline in unit volumes due to the broader market downturn in these regions and our decision to discontinue certain unprofitable product lines, which resulted in a $14.9 million or 3.8% decrease in net sales in fiscal year 2012 compared to fiscal year 2011.

The proportion of net sales from interior and exterior products in fiscal year 2012 was 88.0% and 12.0%, respectively, compared to 87.6% and 12.4% in fiscal year 2011.

Africa

Net sales to external customers from facilities in the Africa segment in fiscal year 2012 were $81.6 million, a decrease of $7.9 million or 8.8% from $89.5 million in fiscal year 2011. Net sales in fiscal year 2012 were $10.3 million lower due to a strengthening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $2.4 million or 2.7% due to sales price/mix and unit volume. Changes in the average sales price per unit, driven by product, geographic and customer mix in fiscal year 2012 increased net sales by $5.7 million or 6.4% compared to fiscal year 2011. This increase was partially offset by lower unit volumes which decreased net sales in fiscal year 2012 by $3.3 million or 3.7% compared to fiscal year 2011. Results in both periods were adversely impacted by a three week national transportation workers’ strike in the third and fourth quarter of fiscal year 2012 and a four week national work strike in South Africa during the third quarter of fiscal year 2011.

Cost of Goods Sold

In fiscal year 2012, cost of goods sold as a percentage of net sales was 87.1% compared to 87.6% in fiscal year 2011, a decrease of 0.5 percentage points. Excluding the impact of acquisitions, cost of goods sold as a percentage of net sales was unchanged when compared to fiscal year 2011. Cost of goods sold as a percentage of net sales, excluding acquisitions, was impacted by a number of factors, including product pricing and mix. Additionally, materials costs and depreciation as a percentage of net sales in fiscal year 2012 decreased 0.6% and 0.2%, respectively, over fiscal year 2011. This was offset by increases in overhead costs and direct labor and distribution costs as a percentage of net sales in fiscal year 2012 of 0.5%, 0.2% and 0.1% respectively, over fiscal year 2011.

Selling, General and Administration Expenses

In fiscal year 2012, selling, general and administration expenses, as a percentage of net sales, were 12.4%, compared to 12.5% in fiscal year 2011, a decrease of 10 basis points.

Selling, general and administration expenses in fiscal year 2012 were $208.1 million, an increase of $21.3 million from $186.8 million in fiscal year 2011. Selling, general and administration expenses in fiscal year 2012 were $4.5 million lower due a strengthening of the U.S. dollar. Excluding the impact of changes in exchange rates, selling, general and administration expenses would have increased by $25.8 million over fiscal year 2011. The increase in selling, general and administration expenses included incremental expenses of $21.4 million from Lemieux, Algoma, Baillargeon, Birchwood and Marshfield. Net of acquisitions and foreign exchange, the overall $4.4 million increase in selling, general and administration expenses was driven by increases in personnel costs, including share based compensation, of $6.9 million, depreciation and amortization

 

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of $1.6 million, advertising costs of $0.9 million, bad debt expense of $0.8 million and other miscellaneous increases of $1.0 million. These increases were partially offset by the receipt of business interruption insurance proceeds related to the Marshfield acquisition, as well as decreases in losses on disposals and impairment of property, plant and equipment of $2.0 million and professional and other fees of $1.5 million.

Restructuring Costs

Restructuring costs in fiscal year 2012 were $11.4 million, an increase of $6.3 million from $5.1 million in fiscal year 2011. Restructuring costs in fiscal year 2012 were related to implementing plans to close certain of our U.S. manufacturing facilities due to the expected start-up of our new highly automated interior door slab assembly plant in Denmark, South Carolina; synergy opportunities related to recent acquisitions and footprint optimization efforts resulting from declines in demand in specific markets. We also began implementing plans during fiscal year 2012 to permanently close our businesses in Hungary and Romania, due to the continued economic downturn and heightened volatility of the Eastern European economies. These restructuring activities are estimated to increase our annual earnings and cash flows by approximately $10 million in 2013, although there can be no assurance we will achieve such benefits.

Interest Expense, Net

Interest expense, net in fiscal year 2012 was $31.5 million, an increase of $13.4 million from $18.1 million in fiscal year 2011. This increase primarily relates to the $100.0 million principal amount of 8.25% senior unsecured notes issued in March of 2012 and the full year impact of the $275.0 million principal amount of 8.25% senior unsecured notes issued in April of 2011. The increase in indebtedness and related interest expense in Canada was due to the issuance by the Company of the senior unsecured notes, which was reported in the North America segment results.

Other Expense (Income), Net

Other expense (income), net in fiscal year 2012 was $0.5 million, a decrease of $0.6 million from $1.1 million in fiscal year 2011. The reduction in other expense (income), net is primarily due to our portion of the net losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting.

Income Tax Expense (Benefit)

Our income tax benefit in fiscal year 2012 was $13.4 million, a decrease of $8.2 million from $21.6 million in fiscal year 2011. Our income tax benefit is affected by recurring items, such as tax rates in foreign jurisdictions in which we have operations and the relative amount of income we earn in these jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The decrease in our income tax benefit is the result of a $5.8 million decline related to changes in our income tax valuation allowances, a $2.6 million decline in income tax benefits related to permanent tax differences and a $2.1 million decline in the income tax benefit related to tax rate differences on income earned in foreign jurisdictions. These amounts were partially offset by a $2.3 million increase in our income tax benefit related to tax exempt income.

 

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Segment Information

 

     North America     Europe, Asia and
Latin America
    Africa     Total  
     Year Ended December 31, 2012  
    

(In thousands)

 

Adjusted EBITDA

   $ 73,786      $ 17,060      $ 6,415      $ 97,261   

Percentage of segment net sales

     6.0     4.6     7.9     5.8
    

 

Year Ended December 31, 2011

 

Adjusted EBITDA

   $ 59,906      $ 17,630      $ 4,458      $ 81,994   

Percentage of segment net sales

     5.9     4.5     5.0     5.5

Our management team has established the practice of reviewing the performance of each geographic segment based on the measures of net sales and Adjusted EBITDA. Intersegment transfers are negotiated on an arm’s length basis, using market prices.

Adjusted EBITDA in our North America segment increased $13.9 million, or 23.2%, to $73.8 million in 2012, from $59.9 million in fiscal year 2011. Adjusted EBITDA in the North America segment included corporate allocations of shared costs of $52.1 million and $46.3 million in fiscal year 2012 and 2011, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     North America
Year Ended
December 31,
 
     2012     2011  
    

(In thousands)

 

Adjusted EBITDA

   $ 73,786      $ 59,906   

Less (plus):

    

Depreciation

     41,665        38,490   

Amortization of intangible assets

     12,787        8,221   

Share based compensation expense

     6,517        5,888   

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

     2,494        3,795   

Impairment of property, plant and equipment

     1,350        2,516   

Restructuring costs

     3,721        1,337   

Interest expense (income), net

     60,939        39,792   

Other expense (income), net

     688        656   

Income tax expense (benefit)

     (13,007     (21,555

Loss (income) from discontinued operations, net of tax

     (1,480     250   

Net income (loss) attributable to noncontrolling interest

     2,923        2,079   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ (44,811   $ (21,563
  

 

 

   

 

 

 

 

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Adjusted EBITDA in our Europe, Asia and Latin America segment decreased $0.5 million, or 2.8%, to $17.1 million in fiscal year 2012, from $17.6 million in fiscal year 2011. Adjusted EBITDA in the Europe, Asia and Latin America segment included corporate allocations of shared costs of $4.4 million and $6.3 million in fiscal year 2012 and 2011, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Europe, Asia and Latin America
Year Ended December 31,
 
         2012             2011      
    

(In thousands)

 

Adjusted EBITDA

   $ 17,060      $ 17,630   

Less (plus):

    

Depreciation

     17,540        18,006   

Amortization of intangible assets

     2,289        2,348   

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

     230        (141

Restructuring costs

     7,710        3,779   

Interest expense (income), net

     (29,422     (21,591

Other expense (income), net

     (160     455   

Income tax expense (benefit)

     (828     (117

Loss (income) from discontinued operations, net of tax

     —          53   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ 19,701      $ 14,838   
  

 

 

   

 

 

 

Adjusted EBITDA in our Africa segment increased $1.9 million, or 42.2%, to $6.4 million in fiscal year 2012, from $4.5 million in fiscal year 2011. Adjusted EBITDA in the Africa segment included corporate allocations of shared costs of $2.7 million and $3.0 million in fiscal year 2012 and 2011, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Africa
Year Ended December 31,
 
             2012                     2011          
    

(In thousands)

 

Adjusted EBITDA

   $ 6,415      $ 4,458   

Less (plus):

    

Depreciation

     4,143        4,288   

Interest expense (income), net

     (63     (133

Income tax expense (benefit)

     470        112   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ 1,865      $ 191   
  

 

 

   

 

 

 

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Net Sales

Net sales in fiscal year 2011 were $1,489.2 million, an increase of $105.9 million or 7.7% from $1,383.3 million in fiscal year 2010. Net sales in fiscal year 2011 were $25.9 million higher due to a weakening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $80.1 million or 5.8%. Our 2011 and 2010 acquisitions contributed $73.0 million in incremental net sales in fiscal year 2011. Changes in the average sales price per unit, driven by product, geographic and customer mix, increased net sales in fiscal year 2011 by $9.6 million compared to fiscal year 2010. Net sales of door components were $12.2 million higher in fiscal year 2011 compared to fiscal year 2010. These increases were partially offset by a decline in unit volumes that resulted in a $14.8 million decrease in fiscal year 2011 compared to fiscal year 2010.

 

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The proportion of net sales from interior and exterior products in fiscal year 2011 was 71.7% and 28.3%, respectively, compared to 69.2% and 30.8% in fiscal year 2010. The shift towards our interior products in fiscal year 2011 was driven mainly by the acquisitions of Birchwood and Marshfield, which predominantly service the commercial interior door market.

Net Sales and Percentage of Net Sales by Principal Geographic Region

 

     Year Ended December 31,  
     2011     2010  
    

(In thousands)

 

North America

   $ 1,009,983      $ 973,297   

North America intersegment

     (930     (18,279
  

 

 

   

 

 

 

North America net sales to external customers

   $ 1,009,053      $ 955,018   
  

 

 

   

 

 

 

Percentage of net sales

     67.8     69.0

Europe, Asia and Latin America

   $ 406,065      $ 395,146   

Europe, Asia and Latin America intersegment

     (15,403     (41,610
  

 

 

   

 

 

 

Europe, Asia and Latin America net sales to external customers

   $ 390,662      $ 353,536   
  

 

 

   

 

 

 

Percentage of net sales

     26.2     25.6

Africa

   $ 89,551      $ 74,942   

Africa intersegment

     (87     (225
  

 

 

   

 

 

 

Africa net sales to external customers

   $ 89,464      $ 74,717   
  

 

 

   

 

 

 

Percentage of net sales

     6.0     5.4
  

 

 

   

 

 

 

Net sales to external customers

   $ 1,489,179      $ 1,383,271   
  

 

 

   

 

 

 

North America

Net sales to external customers from facilities in the North America segment in fiscal year 2011 were $1,009.1 million, an increase of $54.1 million or 5.7% from $955.0 million in fiscal year 2010. Net sales in fiscal year 2011 were $10.2 million higher due to a weakening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $43.9 million or 4.6%. Our 2011 and 2010 North America acquisitions contributed $67.5 million in incremental net sales in fiscal year 2011. Net sales of door components were $2.0 million higher in fiscal year 2011 compared to fiscal year 2010. These increases were partially offset by a decline in unit volumes that resulted in a $17.8 million decrease in net sales in fiscal year 2011 compared to fiscal year 2010. The decline in unit volumes was partially the result of the expiration of the U.S. homebuyer tax credit in May 2010, which strengthened sales in the first and second quarters of fiscal year 2010. Changes in the average sales price per unit, driven by product, geographic and customer mix, decreased net sales in fiscal year 2011 by $7.8 million compared to the fiscal year 2010.

The proportion of net sales from interior and exterior products in fiscal year 2011 was 63.1% and 36.9%, respectively, compared to 60.7% and 39.3% in fiscal year 2010. The shift towards our interior products in fiscal year 2011 was driven mainly by the acquisitions of Birchwood and Marshfield, which predominantly service the commercial interior door market.

Europe, Asia and Latin America

Net sales to external customers from facilities in the Europe, Asia and Latin America segment in fiscal year 2011 were $390.7 million, an increase of $37.2 million or 10.5% from $353.5 million in fiscal year 2010. Net sales in fiscal year 2011 were $15.5 million higher due to a weakening of the U.S. dollar. Excluding the impact of

 

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changes in exchange rates, net sales would have increased $21.7 million or 6.1%. Our 2010 expansion into India contributed $5.6 million in incremental net sales in fiscal year 2011 compared to fiscal year 2010. Changes in the average sales price per unit, driven by product, geographic and customer mix, increased net sales in 2011 by $15.1 million compared to the fiscal year 2011 period. Net sales of door components were $10.2 million higher in fiscal year 2011 compared to fiscal year 2010. Partially offsetting these increases was a decline in unit volumes, which resulted in a $9.2 million decrease in net sales in fiscal year 2011 compared to the fiscal year 2010.

The proportion of net sales from interior and exterior products in fiscal year 2011 was 87.6% and 12.4%, respectively, compared to 85.9% and 14.1% in fiscal year 2010.

Africa

Net sales to external customers from facilities in the Africa segment in fiscal year 2011 were $89.5 million, an increase of $14.8 million or 19.8% from $74.7 million in fiscal year 2010. Net sales in fiscal year 2011 were $0.3 million higher due to a weakening of the U.S. dollar. Excluding the impact of changes in exchange rates, net sales would have increased by $14.5 million or 19.4%. Higher unit volumes in fiscal year 2011 contributed to an increase in sales of $12.2 million compared to 2010. Changes in the average sales price per unit, driven by product, geographic and customer mix, increased net sales in 2011 by $2.3 million compared to the fiscal year 2011 period. Results would have been stronger absent a four week national work strike in South Africa during the third quarter of fiscal year 2011.

Cost of Goods Sold

In fiscal year 2011, cost of goods sold as a percentage of net sales was 87.6% compared to 87.0% in fiscal year 2010, an increase of 0.6 percentage points. Cost of goods sold as a percentage of net sales was impacted by a number of factors, including product pricing and mix. Additionally, distribution costs, materials costs and direct labor as a percentage of net sales in fiscal year 2011 increased 0.4%, 0.3% and 0.1%, respectively, over fiscal year 2010. This was slightly offset by decreases in overhead costs as a percentage of net sales in 2011 of 0.2% over fiscal year 2010.

Selling, General and Administration Expenses

In fiscal year 2011, selling, general and administration expenses, as a percentage of net sales, were 12.5%, compared to 12.8% in fiscal year 2010, a decrease of 30 basis points.

In fiscal year 2011, selling, general and administration expenses were $186.8 million, an increase of $10.0 million from $176.8 million in fiscal year 2010. The increase in selling, general and administration expenses included additional expenses of $5.6 million from Birchwood and Marshfield. Net of acquisitions, the overall $4.4 million increase in selling, general and administration expenses was driven by increases of $4.9 million in losses on disposals and impairment of property, plant and equipment, $1.0 million in depreciation and amortization, and $1.6 million in other miscellaneous increases. The increases were partially offset by decreases in personnel and share based compensation costs of $1.6 million and advertising costs of $1.5 million.

Restructuring Costs

Restructuring costs in fiscal year 2011 were $5.1 million, a decrease of $1.9 million from $7.0 million in fiscal year 2010. Restructuring costs in 2011 were related to costs of headcount reductions and facility rationalizations as a result of weakened market conditions. In response to the decline in demand, we reviewed the required levels of production and reduced the workforce and plant capacity accordingly, resulting in severance charges. These actions were incurred in order to rationalize capacity with existing and forecasted market demand conditions.

 

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Interest Expense, Net

Interest expense, net in fiscal year 2011 was $18.1 million, an increase of $17.9 million from $0.2 million in fiscal year 2010. This increase primarily relates to the $275.0 million principal amount of 8.25% senior unsecured notes issued in April of 2011. The increase in indebtedness and related interest expense in Canada was due to the issuance by the Company of the senior unsecured notes, which was reported in the North America segment results.

Other Expense (Income), Net

Other expense (income), net in fiscal year 2011 was $1.1 million, an increase of $0.1 million from $1.0 million in fiscal year 2010. The increase in other expense (income), net is primarily due to our portion of the net losses related to our non-majority owned unconsolidated subsidiaries that are recognize under the equity method of accounting.

Income Tax Expense (Benefit)

Our income tax benefit in fiscal year 2011 was $21.6 million, an increase of $10.2 million from $11.4 million in fiscal year 2010. Our income tax benefit is affected by recurring items, such as tax rates in foreign jurisdictions in which we have operations and the relative amount of income we earn in these jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. The increase in our income tax benefit is the result of a $4.5 million increase in income tax benefits related to permanent tax differences, a $3.2 million increase in the income tax benefit related to tax rate differences on income earned in foreign jurisdictions, a $2.8 million increase in our income tax benefit related to tax exempt income and a $2.2 million increase in unrealized foreign exchange gains. These amounts were partially offset by a $2.5 million decrease in our income tax benefit related to functional currency adjustments.

Segment Information

 

     North America     Europe, Asia and
Latin America
    Africa     Total  
     Year Ended December 31, 2011  
     (In thousands)  

Adjusted EBITDA

   $ 59,906      $ 17,630      $ 4,458      $ 81,994   

Percentage of segment net sales

     5.9     4.5     5.0     5.5

 

     North America     Europe, Asia and
Latin America
    Africa     Total  
(In thousands)    Year Ended December 31, 2010  

Adjusted EBITDA

   $ 61,868      $ 15,769      $ 3,041      $ 80,678   

Percentage of segment net sales

     6.5     4.5     4.1     5.8

Our management team has established the practice of reviewing the performance of each geographic segment based on the measures of net sales and Adjusted EBITDA. Intersegment transfers are negotiated on an arm’s length basis, using market prices.

 

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Adjusted EBITDA in our North America segment decreased $2.0 million, or 3.2%, to $59.9 million in fiscal year 2011, from $61.9 million in fiscal year 2010. Adjusted EBITDA in the North America segment included corporate allocations of shared costs of $46.3 million and $41.5 million in fiscal year 2011 and 2010, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development and share based compensation. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     North America
Year Ended December 31,
 
     2011      2010  
     (In thousands)  

Adjusted EBITDA

   $ 59,906       $ 61,868   

Less (plus):

     

Depreciation

     38,490         36,202   

Amortization of intangible assets

     8,221         5,747   

Share based compensation expense

     5,888         9,626   

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

     3,795         1,329   

Impairment of property, plant and equipment

     2,516         —     

Restructuring costs

     1,337         3,169   

Interest expense (income), net

     39,792         10,168   

Other expense (income), net

     656         1,803   

Income tax expense (benefit)

     (21,555      (7,737

Loss (income) from discontinued operations, net of tax

     250         665   

Net income (loss) attributable to noncontrolling interest

     2,079         1,390   
  

 

 

    

 

 

 

Net income (loss) attributable to Masonite

   $ (21,563    $ (494
  

 

 

    

 

 

 

Adjusted EBITDA in our Europe, Asia and Latin America segment increased $1.8 million, or 11.4%, to $17.6 million in fiscal year 2011, from $15.8 million in fiscal year 2010. Adjusted EBITDA in the Europe, Asia and Latin America segment included corporate allocations of shared costs of $6.3 million and $4.7 million in fiscal year 2011 and 2010, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Europe, Asia and Latin America
Year Ended December 31,
 
             2011                     2010          
     (In thousands)  

Adjusted EBITDA

   $ 17,630      $ 15,769   

Less (plus):

    

Depreciation

     18,006        18,192   

Amortization of intangible assets

     2,348        2,345   

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

     (141     (28

Impairment of property, plant and equipment

     —          —     

Restructuring costs

     3,779        3,831   

Interest expense (income), net

     (21,591     (9,971

Other expense (income), net

     455        (773

Income tax expense (benefit)

     (117     (1,836

Loss (income) from discontinued operations, net of tax

     53        1,053   
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ 14,838      $ 2,956   
  

 

 

   

 

 

 

 

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Adjusted EBITDA in our Africa segment increased $1.5 million, or 50.0%, to $4.5 million in fiscal year 2011, from $3.0 million in fiscal year 2010. Adjusted EBITDA in the Africa segment included corporate allocations of shared costs of $3.0 million and $2.7 million in fiscal year 2011 and 2010, respectively. The allocations generally consist of certain costs of human resources, legal, finance and information technology. The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:

 

     Africa
Year Ended December 31,
 
             2011                     2010          
     (In thousands)  

Adjusted EBITDA

   $ 4,458      $ 3,041   

Less (plus):

    

Depreciation

     4,288        4,239   

Interest expense (income), net

     (133     48   

Income tax expense (benefit)

     112        (1,823
  

 

 

   

 

 

 

Net income (loss) attributable to Masonite

   $ 191      $ 577   
  

 

 

   

 

 

 

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 program, or AR Sales Program, and our existing cash balance.

We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of June 30, 2013, we had $92.9 million of cash and cash equivalents, availability under our ABL Facility of $121.2 million and availability under our AR Sales Program of $14.5 million.

Other Liquidity Matters

Our anticipated uses of cash in the near term include working capital needs, especially in the case of a market recovery, and capital expenditures. As of June 30, 2013, we do not have any material commitments for capital expenditures. We anticipate capital expenditures in fiscal year 2013 to be less than $50 million. On a continual basis, we evaluate and consider tuck-in and strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance. Additionally, we currently have assets held for sale at a book value of $5.7 million.

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 June 30, 2013, 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 results of operations in a future period, and this impact could be material.

 

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Cash Flows

Cash flows from Operating Activities of Continuing Operations

Cash provided by operating activities of continuing operations was $2.8 million during the six months ended June 30, 2013. This amount is primarily driven by certain noncash items in net income (loss) including depreciation and amortization of $40.8 million, share based compensation costs of $3.9 million and loss on sale and impairment of property, plant and equipment of $2.9 million. Additionally, cash inflows were generated by an increase in accounts payable and accrued expenses of $6.7 million. These cash inflows were partially offset by our net loss of $5.8 million, noncash deferred income tax benefit of $2.2 million, an increase in accounts receivable of $24.0 million correlating to our increased sales, an increase in inventories of $14.2 million, an increase in prepaid expenses of $3.2 million, a net cash outflow from changes in other assets and liabilities of $1.7 million, and other miscellaneous outflows of $0.4 million.

Cash used in operating activities of continuing operations was $12.3 million during the six months ended June 30, 2012. This amount was driven by our net loss of $4.7 million, noncash deferred income tax benefit of $9.5 million, pension funding (net of expense) of $1.8 million, an increase in accounts receivable of $34.8 million correlating to our increased sales, an increase in inventories of $10.3 million, an increase in prepaid expenses of $2.9 million and a net cash outflow from other assets and liabilities of $1.0 million. These cash outflows were partially offset by certain noncash items in net income (loss) including depreciation and amortization of $38.3 million and share based compensation costs of $2.8 million. Additionally, cash inflows were generated by an increase in accounts payable and accrued expenses of $11.2 million and other miscellaneous inflows of $0.4 million.

Cash provided by operating activities of continuing operations was $55.7 million during fiscal year 2012. This amount is primarily driven by certain noncash items in net income (loss) including depreciation and amortization of $79.0 million, share based compensation costs of $6.5 million and loss on sale and impairment of property, plant and equipment of $5.3 million. Additionally, cash inflows were generated by dividends from equity investees of $1.3 million, an increase in accounts payable and accrued expenses of $16.3 million, a decrease in prepaid expenses of $1.3 million and other operating inflows of $0.1 million. These cash inflows were partially offset by our net loss of $20.3 million, pension and post-retirement funding (net of expenses) of $3.7 million, income related to discontinued operations of $1.5 million, an increase in accounts receivable of $9.6 million correlating to our increased sales, an increase in inventories of $3.1 million and a net decrease in deferred income taxes, income taxes receivable and income taxes payable of $15.9 million.

Cash provided by operating activities of continuing operations was $32.9 million during fiscal year 2011. The primary sources of cash in operations were depreciation and amortization of $72.2 million, loss on sale and impairment of property, plant and equipment of $6.2 million, share based compensation costs of $5.9 million, non-cash interest and other accruals of $3.6 million, dividends from equity investees of $1.2 million, a decrease of prepaid expenses of $3.1 million and other operating inflows of $1.2 million. These cash inflows were partially offset by our net loss of $4.5 million, pension and post-retirement funding (net of expenses) of $3.6 million, an increase in accounts receivable of $8.6 million, an increase in inventories of $9.0 million, a decrease in accounts payable and accrued expenses of $1.1 million and a net decrease in deferred income taxes, income taxes receivable and income taxes payable of $33.7 million. The increase in accounts receivable correlates to our increased sales, and the increase in inventories relates to a modest build of inventory at certain locations.

Cash provided by operating activities of continuing operations was $75.6 million during fiscal year 2010. The primary sources of cash in operations were our net income of $4.4 million, depreciation and amortization of $66.7 million, share based compensation costs of $9.6 million, a decrease of accounts receivable of $7.2 million, an increase of accounts payable and accrued expenses of $3.8 million, a decrease in prepaid expenses of $1.6 million and other operating inflows of $1.2 million. These cash inflows were partially offset by a net decrease in deferred income taxes, income taxes receivable and income taxes payable of $18.9 million. The increase in accounts payable was the result of higher North American purchases of inventory.

 

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Cash flows from Investing Activities of Continuing Operations

Cash used in investing activities of continuing operations was $28.1 million during the six months ended June 30, 2013. The primary uses of cash in investing activities were additions to property, plant and equipment of $16.3 million, an increase of restricted cash of $13.7 million, primarily due to the cash consideration paid for the Masisa acquisition subsequent to the period end which was classified as restricted cash on the condensed consolidated balance sheets, and other miscellaneous outflows of $1.4 million. These outflows were partially offset by proceeds from sale of property, plant and equipment of $3.3 million.

Cash used in investing activities of continuing operations was $87.7 million during the six months ended June 30, 2012. The primary uses of cash in investing activities were cash used in acquisitions of $66.4 million (net of cash acquired), additions to property, plant and equipment of $20.4 million and other miscellaneous outflows of $0.9 million.

Cash used in investing activities of continuing operations was $137.8 million during fiscal year 2012. The primary uses of cash in investing activities were cash used in acquisitions of $88.4 million (net of cash acquired), additions to property, plant and equipment of $48.4 million and other investing outflows of $1.0 million. The cash used in acquisitions relates to the Lemieux, Algoma and Baillargeon acquisitions, as well as portions of holdbacks paid for our 2010 acquisitions.

Cash used in investing activities of continuing operations was $186.7 million during fiscal year 2011. The primary uses of cash in investing activities were cash used in acquisitions of $145.5 million (net of cash acquired) and additions to property, plant and equipment of $42.4 million. These outflows were partially offset by other investing inflows of $1.2 million. The cash used in acquisitions relates to the Birchwood and Marshfield acquisitions, as well as portions of holdbacks paid for our 2010 acquisitions.

Cash used in investing activities of continuing operations was $100.5 million during fiscal year 2010. The primary uses of cash in investing activities were additions to property, plant and equipment of $57.8 million and cash used in acquisitions of $43.9 million (net of holdbacks). These outflows were partially offset by other investing inflows of $1.2 million. Approximately half of the property, plant and equipment additions were related to the cost of complying with regulations enacted by the U.S. Environmental Protection Agency related to Maximum Achievable Control Technology. The cash used in acquisitions relates to the Lifetime, Ledco and India acquisitions.

Cash flows from Financing Activities of Continuing Operations

Cash used from financing activities of continuing operations was $1.3 million during the six months ended June 30, 2013. The use of cash in financing activities was due to distributions to non-controlling interests.

Cash provided by financing activities of continuing operations was $98.7 million during the six months ended June 30, 2012. The primary source of cash provided by financing activities was the proceeds from the issuance of the Add-On Notes in the amount of $103.5 million. This cash inflow was partially offset by the payment of financing costs relating to the Add-On Notes of $2.0 million and dividends paid to the minority owners of our non-wholly-owned operations of $2.8 million.

Cash provided by financing activities of continuing operations was $94.2 million during fiscal year 2012. The primary source of cash provided by financing activities was the proceeds from the issuance of the $100 million aggregate principal amount of additional senior notes in the amount of $103.5 million. This cash inflow was partially offset by the payment of financing costs relating to the additional notes of $2.0 million, dividends paid to the minority owners of our non-wholly-owned subsidiaries of $5.7 million and the return of capital paid to recipients of share based awards in the amount of $1.5 million.

 

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Cash provided by financing activities of continuing operations was $136.6 million during fiscal year 2011. The primary source of cash provided by financing activities was the proceeds from the issuance of the $275 million aggregate principal amount of senior notes in the amount of $275.0 million. This cash inflow was partially offset by the return of capital paid to shareholders in the amount of $125.0 million, payment of financing costs relating to the senior notes of $9.5 million and dividends paid to the minority owners of our non-wholly-owned subsidiaries of $3.9 million.

Cash used in financing activities of continuing operations was $4.4 million during fiscal year 2010. The primary use of cash in financing activities was dividends paid to the minority owners of our non-wholly owned subsidiaries of $4.3 million and other financing outflows of $0.1 million.

Sources

Accounts Receivable Sales Program

We maintain an AR Sales Program with a third party. Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of a large retail customer without recourse or ongoing involvement to a third party purchaser in exchange for cash. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the consolidated balance sheets and are reflected as cash provided by operating activities in the consolidated statements of cash flows. The discount on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded to selling, general and administration expense within the consolidated statements of comprehensive income (loss).

Senior Notes

In April 2011, we issued $275.0 million aggregate principal senior unsecured notes (the “Initial Notes”), and in March 2012, we issued an additional $100.0 million aggregate principal senior unsecured notes (the “Add-On Notes”). The Add-On Notes have the same terms, rights and obligations as the Initial Notes, and were issued in the same series as the Initial Notes (collectively, the “Senior Notes”). In total, we issued $375.0 million aggregate principal amount of 8.25% senior unsecured notes due April 15, 2021, in two private placements for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”) and to buyers outside the United States pursuant to Regulation S under the Securities Act. The Senior Notes were issued without registration rights and are not listed on any securities exchange. The Senior Notes bear interest at 8.25% per annum, payable in cash semiannually in arrears on April 15 and October 15 of each year. We received net proceeds of $101.5 million in 2012 from the Add-On Notes and $265.5 million in 2011 from the Initial Notes, after deducting $2.0 million and $9.5 million of transaction issuance costs, respectively. The transaction costs were capitalized as deferred financing costs (included in other assets) and are being amortized to interest expense over the term of the Senior Notes using the effective interest method. The Initial Notes were issued at par, while the Add-On Notes were issued at 103.5% of the principal amount. The resulting premium of $3.5 million from the issuance of the Add-On Notes will be amortized to interest expense over the term of the Add-On Notes using the effective interest method. The net proceeds from the Senior Notes were used to fund a $125.0 million return of capital to shareholders during 2011, in the form of cash, in the amount of $4.54 per share; as well as the acquisitions of five companies during 2012 and 2011 for aggregate consideration of $231.0 million. The remaining proceeds from Senior Notes have been used for subsequent acquisitions. Interest expense relating to the Senior Notes was $15.9 million and $14.2 million for the six months ended June 30, 2013 and 2012, respectively, and $30.0 million and $16.5 million for the years ended December 31, 2012 and 2011, respectively.

Obligations under the Senior 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

 

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Senior Notes under certain circumstances specified therein. The indenture governing the Senior Notes contains restrictive covenants that, among other things, limit our ability and our subsidiaries’ ability to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to us, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the Senior Notes. In addition, if in the future the Senior 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 Senior Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of June 30, 2013, and December 31, 2012 and 2011, we were in compliance with all covenants under the indenture governing the Senior Notes.

ABL Facility

In May 2011, we and certain of our subsidiaries, as borrowers, entered into a $125.0 million ABL Facility. The borrowing base is calculated based on a percentage of the value of selected U.S. and Canadian accounts receivable and U.S. and Canadian inventory, less certain ineligible amounts. Based upon the borrowing base as of June 30, 2013, we had approximately $121.2 million of availability under the ABL Credit Facility. In conjunction with this ABL Facility, our $30.0 million Bilateral Loan Facility was terminated during 2011.

Obligations under the ABL Facility are secured by a first priority security interest in substantially all of our current assets, including those of our subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries.

Borrowings under the ABL Facility will bear interest at a variable rate per annum equal to, at our option, (i) the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 2.00% to 2.50% per annum, or (ii) the Base Rate (as defined in the ABL Facility Agreement), plus a margin ranging from 1.00% to 1.50% per annum.

In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of unutilized commitments of 0.25% of the aggregate commitments under the ABL Facility if the average utilization is greater than 50% for any applicable period, and 0.375% of the aggregate commitments under the ABL Facility if the average utilization is less than or equal to 50% for any applicable period. We must also pay customary letter of credit fees and agency fees.

The ABL Facility contains various customary representations, warranties and covenants by us, that, among other things, and subject to certain exceptions, restrict our ability and our subsidiaries’ ability to: (i) incur additional indebtedness, (ii) pay dividends on our common shares and make other restricted payments, (iii) make investments and acquisitions, (iv) engage in transactions with our affiliates, (v) sell assets, (vi) merge and (vii) create liens. As of June 30, 2013, and December 31, 2012 and 2011, we were in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.

Supplemental Guarantor Financial Information

Our obligations under the Senior Notes and the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis 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 $710.3 million and $718.6 million for the six months ended June 30, 2013 and 2012, respectively, and $1,472.9 million, $1,256.9 million and $1,126.0 million for the years ended December 31, 2012, 2011 and 2010.

 

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Our non-guarantor subsidiaries generated Adjusted EBITDA of $45.9 million and $43.2 million for the six months ended June 30, 2013 and 2012, respectively, and $97.0 million, $59.4 million and $70.2 million for the years ended December 31, 2012, 2011 and 2010.

Our non-guarantor subsidiaries had total assets of $1.4 billion, $1.6 billion and $1.5 billion as of June 30, 2013, and December 31, 2012 and 2011, respectively; and total liabilities of $696.5 million, $759.5 million and $709.4 million as of June 30, 2013, and December 31, 2012 and 2011.

Contractual Obligations

The following table presents our contractual obligations over the periods indicated:

 

     Year Ended December 31,                
     2013      2014      2015      2016      2017      Thereafter      Total  
     (In thousands)  

Long-term debt maturities

   $ —         $ —         $ —         $ —         $ —         $ 375,000       $ 375,000   

Scheduled interest payments

     30,938         30,938         30,938         30,938         30,938         101,882         256,569   

Operating leases

     21,588         16,775         13,990         9,982         7,939         27,581         97,855   

Pension contributions

     3,641         6,372         7,396         7,623         6,599         4,096         32,727   

Other liabilities

     938         522         118         —           —           —           1,578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57,105       $ 54,606       $ 57,441       $ 48,543       $ 45,476       $ 508,559       $ 766,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our significant accounting policies are fully disclosed in our annual consolidated financial statements included elsewhere in this registration statement. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Business Acquisition Accounting

We use the acquisition method of accounting for all business acquisitions. We allocate the purchase price of our business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total cost of the acquisitions and the sum of the fair values of the acquired tangible and intangible assets less liabilities is recorded as goodwill.

Goodwill

We evaluate all business combinations for intangible assets that should be recognized and reported apart from goodwill. Goodwill is not amortized but instead is tested annually for impairment on November 30, or more frequently if events or changes in circumstances indicate the carrying amount may not be recoverable. The test for impairment is performed at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Possible impairment in goodwill is first analyzed using qualitative factors such as macroeconomic and market conditions, changing costs and actual and projected performance, amongst others, to determine whether it is more likely than not that the book value of the reporting unit exceeds its fair value. If it is determined more likely than not that the book value exceeds fair value, a quantitative analysis is performed to test for impairment. When quantitative steps are determined necessary, the fair values of the reporting units are estimated through the use of discounted cash flow analyses and market multiples. If the carrying amount exceeds fair value, then goodwill is impaired. Any impairment in goodwill is measured by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation and comparing the notional goodwill from the fair value

 

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allocation to the carrying value of the goodwill. We performed a quantitative impairment test during the fourth quarter of 2012 and determined that goodwill was not impaired. The estimated fair value of our goodwill significantly exceeded the estimated carrying value.

Intangible Assets

Intangible assets with definite lives include customer relationships, non-compete agreements, patents, supply agreements, certain acquired trademarks and system software development. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the fair value of the asset, determined using discounted cash flows when quoted market prices are not readily available. Indefinite-lived intangible assets are tested for impairment annually on November 30, or more frequently if events or circumstances indicated that the carrying value may exceed the fair value. The inputs utilized to derive projected cash flows are subject to significant judgments and uncertainties. As such, the realized cash flows could differ significantly from those estimated. We performed a quantitative impairment test during the fourth quarter of 2012 and determined that indefinite-lived intangible assets were not impaired.

Long-lived Assets

Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimates of asset’s useful lives and undiscounted future cash flows based on market participant assumptions. If the undiscounted expected future cash flows are less than the carrying amount of the asset and the carrying amount of the asset exceeds its fair value, an impairment loss is recognized

Income Taxes

As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date. We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at enacted rates. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be a credit to income in the period such determination was made. The consolidated financial statements include increases in the valuation allowances as a result of uncertainty regarding our ability to realize certain deferred tax assets in the future.

Our accounting for deferred tax consequences represents our best estimate of future events that can be appropriately reflected in the accounting estimates. Changes in existing tax laws, regulations, rates and future operating results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time.

The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are also subject to change as a result in changes in fiscal policy,

 

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changes in legislation, the evolution of regulations and court rulings. Although we believe the measurement of liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcomes of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability is reversed and a tax benefit is recognized in the period in which such determination is made. Conversely, additional tax charges are recorded in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be. If additional taxes are assessed as a result of an audit or litigation, there could be a material effect on our income tax provision and net income in the period or periods for which that determination is made.

Inventory

We value inventories at the lower of cost or replacement cost for raw materials, and the lower of cost or net realizable value for finished goods, with expense estimates made for obsolescence or unsaleable inventory. In determining net realizable value, we consider such factors as yield, turnover and aging, expected future demand and market conditions, as well as past experience. A change in the underlying assumptions related to these factors could affect the valuation of inventory and have a corresponding effect on cost of goods sold. Historically, actual results have not significantly deviated from those determined using these estimates.

Employee Future Benefit Plans

Measurements of the obligations under our defined benefit pension plans are subject to several significant estimates. These estimates include the rate of return on plan assets and the rate at which the future obligations are discounted to value the liability. Additionally, the cost of providing benefits depends on demographic assumptions including retirements, mortality, turnover and plan participation. We typically use actuaries to assist us in preparing these calculations and determining these assumptions. Our annual measurement date is December 31 for our defined benefit pension plans. Changes in these assumptions could impact future pension expense. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets at the beginning of the year is amortized over the average remaining service lives of its members. These estimates may differ from actual results that will occur over an extended period of time. Any significant differences may have an effect on the recorded pension expense and carrying value of the plans’ net assets or net liabilities.

Share Based Compensation Plan

We have a share based compensation plan, which dictates the issuance of common shares to employees as compensation through various grants of share instruments. We apply the fair value method of accounting using the Black-Scholes-Merton option pricing model to determine the compensation expense for stock appreciation rights. The compensation expense for the Restricted Stock Units awarded is based on the fair value of the restricted stock units at the date of grant. Compensation expense is recorded in the consolidated statements of comprehensive income (loss) and is recognized over the requisite service period. The determination of obligations and compensation expense requires the use of several mathematical and judgmental factors, including stock price, expected volatility, the anticipated life of the option, and estimated risk free rate and the number of shares or share options expected to vest. Any difference in the number of shares or share options that actually vest can affect future compensation expense. Other assumptions are not revised after the original estimate.

Deferred Compensation Plan

Effective August 13, 2012, the Board of Directors adopted a Deferred Compensation Plan, or DCP, whereby certain employees and directors in the United States may elect to defer to a later date a portion of their base pay, bonuses, restricted stock awards and director fees. The DCP is an unfunded participant-directed plan where we have the option to contribute the deferrals into a rabbi trust where investments could be made.

 

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Assets of the rabbi trust, other than Company shares, are recorded at fair value and included in other assets in the consolidated balance sheets. These assets in the rabbi trust are classified as trading securities and changes in their fair values are recorded in other income (loss) in the consolidated statements of comprehensive income (loss). The liability relating to deferred compensation represents our obligation to distribute funds to the participants in the future and is included in other liabilities in the consolidated balance sheets. Any unfunded gain or loss relating to changes in the fair value of the deferred compensation liability are recognized in selling, general and administration expense in the consolidated statements of comprehensive income (loss).

Variable Interest Entity

The accounting method used for our investments is dependent upon the influence we have over the investee. We consolidate subsidiaries when we are able to exert control over the financial and operating policies of the investee, which generally occurs if we own a 50% or greater voting interest.

Pursuant to ASC 810, “Consolidation”, for certain investments where the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may be consolidated if we are considered the primary beneficiary of the VIE. The primary beneficiary of a VIE is the party that has the power to direct the activities of the VIE which most significantly impact the VIE’s economic performance and that has the obligation to absorb losses of the VIE which could potentially be significant to the VIE.

Significant judgment is required in the determination of whether we are the primary beneficiary of a VIE. Estimates and assumptions made in such analyses include, but are not limited to, the market price of input costs, the market price for finished products, market demand conditions within various regions and the probability of certain other outcomes.

Changes in Accounting Standards and Policies

Adoption of Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income,” and requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items of net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional details about those amounts. This ASU is effective prospectively for annual reporting periods beginning after December 15, 2012, and interim periods within those annual periods. The adoption of this standard did not result in a change to the accounting treatment of comprehensive income and did not have a material impact on the presentation of our financial statements.

In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU addresses annual impairment testing for indefinite-lived intangible assets other than goodwill as contemplated in ASC 350, “Intangibles-Goodwill and other,” and was issued to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment by permitting an entity to perform a qualitative assessment to determine whether an indefinite-lived intangible asset other than goodwill is impaired. If the qualitative assessment leads to the determination that it is more likely than not that an indefinite-lived intangible asset other than goodwill is impaired, further impairment testing is necessary using the current two-step quantitative impairment test. This pronouncement is effective for reporting periods beginning after September 15, 2012, and early adoption is permitted. The adoption of this standard did not have a material impact on our reported results of operations, cash flows or financial position.

 

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In September 2011, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2011-08, “Testing Goodwill for Impairment.” This ASU addresses annual impairment testing for goodwill as contemplated in Accounting Standards Codification, or ASC, 350, “Intangibles–Goodwill and Other,” and permits an entity to first perform an assessment of qualitative factors to determine whether goodwill is impaired. If the qualitative assessment leads to the determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then performing the current two-step quantitative impairment test is unnecessary. The guidance is effective for all reporting periods, including interim periods, beginning after December 15, 2011, and early adoption is permitted. We have adopted this guidance early, beginning in the year ended December 31, 2011, which did not have a material impact on our reported results of operations or financial position.

In June 2011, the FASB issued ASU 2011-05, which provides an entity with the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income, or in two separate but consecutive statements. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income (or operations). The statement of other comprehensive income should immediately follow the statement of income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. These changes apply to both annual and interim financial statements, and should be applied retrospectively. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this standard only impacted the location of the disclosure of comprehensive income within our financial statements and did not result in any change to the accounting treatment of comprehensive income.

In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe the requirements in GAAP for measuring fair value and disclosing information about fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this standard did not have any impact on our reported disclosures.

Other Recent Accounting Pronouncements not yet Adopted

In March 2013, the FASB issued ASU 2013-05, “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity,” which amended ASC 830, “Foreign Currency Matters.” This ASU updates accounting guidance related to the application of consolidation guidance and foreign currency matters. This ASU resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. This ASU is effective prospectively for annual reporting periods beginning after December 15, 2013, and interim periods within those annual periods. We are in the process of evaluating this guidance to determine the magnitude of its impact on our financial statements.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are generally contracted with a diversified group of investment grade counterparties to reduce exposure to nonperformance on such instruments. We held no such material derivative financial instruments as of June 30, 2013, or December 31, 2012 or 2011.

We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.

 

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Foreign Exchange Rate Risk

We have foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which we operate. When deemed appropriate, we enter into various derivative financial instruments to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments, and certain anticipated foreign currency transactions. We held no such material derivative financial instruments as of June 30, 2013, or December 31, 2012 or 2011.

Interest Rate Risk

We are subject to market risk from exposure to changes in interest rates with respect to borrowings under our ABL Facility to the extent it is drawn on and due to our other financing, investing, and cash management activities. As of June 30, 2013, and December 31, 2012 and 2011, there were no outstanding borrowings under our ABL Facility.

Impact of Inflation, Deflation and Changing Prices

We have experienced inflation and deflation related to our purchase of certain commodity products. We believe that volatile prices for commodities have impacted our net sales and results of operations. We maintain strategies to mitigate the impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing and other actions, which typically offset only a portion of the adverse impact. Inflation and deflation related to our purchases of certain commodity products could have an adverse impact on our operating results in the future.

 

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Item 3. Properties

Our principal executive offices are located in Tampa, Florida. The following table provides certain information regarding our properties of 2,000 square feet and more as of June 30, 2013.

 

Country

   Facility Location    Principal Purpose    Square
Footage/
Acreage
     Status

United States

   Haleyville, AL    Manufacturing      260,000       Owned
   Los Banos, CA    Closed      140,435       Owned
   Moreno Valley, CA    Manufacturing      251,630       Leased
   Stockton, CA    Manufacturing      120,000       Leased
   Stockton, CA    Manufacturing      95,779       Owned
   Stockton, CA    Manufacturing      91,809       Owned
   Stockton, CA    Office/Warehouse      50,000       Owned
   Stockton, CA    Maintenance/Storage      3,000       Owned
   Stockton, CA    Storage      2,500       Owned
   Ukiah, CA    Vacant Land      48 acres       Owned
   Largo, FL    Manufacturing      50,000       Leased
   Tampa, FL    Display Center      44,000       Leased
   Tampa, FL    Office      40,357       Leased
   Yulee, FL    Manufacturing      136,320       Leased
   Lawrenceville, GA    Manufacturing      220,100       Leased
   Watseka, IL    Closed      138,720       Owned
   West Chicago, IL    R&D      145,245       Owned
   South Bend, IN    Closed      117,700       Owned
   Walkerton, IN    Manufacturing      190,000       Owned
   Pittsburg, KS    Manufacturing      338,082       Owned
   Pittsburg, KS    Warehouse      65,970       Owned
   Pittsburg, KS    Warehouse      28,125       Leased
   Lake Charles, LA    Manufacturing      150,000       Leased
   Laurel, MS    Manufacturing      2,079,520       Owned
   North Platte, NE    Manufacturing      96,002       Owned
   North Platte, NE    Warehouse      17,030       Leased
   Kirkwood, NY    Manufacturing      137,500       Leased
   Kirkwood, NY    Warehouse      15,000       Leased
   Charlotte, NC    Manufacturing      334,264       Leased
   Wahpeton, ND    Manufacturing      92,500       Leased
   Broken Bow, OK    Manufacturing      199,660       Owned(1)
   Vandalia, OH    Manufacturing      102,400       Leased
   Northumberland, PA    Manufacturing      198,000       Owned
   Northumberland, PA    Warehouse      8,400       Leased
   Denmark, SC    Manufacturing      170,000       Owned
   Denmark, SC    Manufacturing      132,842       Owned
   Dickson, TN    Manufacturing      217,375       Owned
   Jefferson City, TN    Manufacturing      150,000       Leased
   Jefferson City, TN    Warehouse      50,000       Leased
   Greenville, TX    Manufacturing      254,000       Owned
   Greenville, TX    Warehouse      105,000       Owned
   Hearne, TX    Closed      141,088       Owned
   Mansfield, TX    Manufacturing      14,837       Leased
   Mesquite, TX    Manufacturing      232,800       Leased
   Danville, VA    Warehouse      16,000       Leased

 

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Country

   Facility Location    Principal Purpose    Square
Footage/
Acreage
     Status
   Fredricksburg, VA    Manufacturing      40,480       Leased
   Luray, VA    Warehouse      74,972       Leased
   Stanley, VA    Manufacturing      112,800       Owned
   Winchester, VA    Manufacturing      109,781       Leased
   Winchester, VA    Warehouse      7,500       Leased
   Algoma, WI    Manufacturing      600,000       Leased
   Algoma, WI    Warehouse      5,000       Leased
   Birchwood, WI    Manufacturing      139,299       Owned
   Marshfield, WI    Manufacturing      699,882       Owned
   Rice Lake, WI    Retail/Outlet Store      6,000       Leased
   Thorp, WI    Manufacturing      61,920       Owned

Canada

   Calgary, AB    Warehouse      19,677       Leased
   Langley, BC    Manufacturing      100,000       Leased
   Langley, BC    Warehouse      60,000       Leased
   Surrey, BC    Manufacturing      87,995       Leased
   Yarrow, BC    Manufacturing      186,000       Owned
   Toronto, ON    Manufacturing      214,066       Leased
   Berthierville, QC    Manufacturing      154,408       Owned
   Berthierville, QC    Warehouse      114,352       Leased
   Berthierville, QC    Warehouse      7,825       Owned
   Lac-Mégantic, QC    Manufacturing      171,714       Owned
   Lac-Mégantic, QC    Manufacturing      148,220       Owned
   Lac-Mégantic, QC    Warehouse      42,400       Owned
   Lac-Mégantic, QC    Warehouse      18,000       Owned
   Lac-Mégantic, QC    Warehouse      15,000       Owned
   Lac-Mégantic, QC    Warehouse      15,000       Leased
   Lac-Mégantic, QC    Warehouse      15,000       Leased
   Lac-Mégantic, QC    Warehouse      6,000       Owned
   Sacre-Coeur, QC    Manufacturing      90,000       Owned(1)
   Saint Ephrem, QC    Manufacturing      70,000       Owned
   Saint Ephrem, QC    Warehouse      4,440       Leased
   Saint Romuald, QC    Manufacturing      71,926       Leased
   Saint Romuald, QC    Warehouse      40,331       Leased
   Windsor, QC    Manufacturing      149,845       Owned
   Windsor, QC    Manufacturing      48,004       Owned
   Windsor, QC    Warehouse      12,000       Leased

Chile

   Cabrero    Manufacturing      272,819       Owned
   Cabrero    Warehouse      18,988       Leased
   Colina    Warehouse      8,650       Leased

China

   Shanghai-Huangpa    Office      2,917       Leased

Costa Rica

   Limon/Guapiles    Forest      16,732 acres       Owned

Czech Republic

   Jihlava    Manufacturing      295,576       Leased

France

   Bazas    Manufacturing      412,715       Owned
   Bordeaux    Manufacturing      139,461       Owned
   Douvres la Delivrande    Manufacturing      196,838       Owned
   Giberville    Manufacturing      19,073       Leased
   Orange    Manufacturing      75,000       Owned
   Thignonville    Manufacturing      99,700       Owned
   Tillieres    Manufacturing      82,602       Owned

 

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Country

   Facility Location    Principal
Purpose
   Square
Footage/
Acreage
     Status

Hungary

   Kenderes-Banhalma    Closed      68,179       Owned
   Vecses    Closed      54,950       Owned

Ireland

   Carrick-on-Shannon    Manufacturing      620,329       Owned

Israel

   Ashkelon    Manufacturing      58,653       Leased
   Karmiel    Manufacturing      152,901       Owned
   Rishon    Warehouse      25,833       Leased

Malaysia

   Bintulu    Manufacturing      151,073       Leased(1)

Mexico

   Cienega de Flores    Manufacturing      180,687       Owned

Poland

   Jaslo    Manufacturing      125,625       Leased

South Africa

   Estcourt    Manufacturing      7,350       Owned(1)
   Kwa-Zulu Natal    Forest      55,599 acres       Owned(1)
   Riverhorse Valley    Office      10,440       Leased(1)

United Kingdom

   Barnsley    Manufacturing      503,528       Owned
   Barnsley    Warehouse      55,000       Leased
   Hedingham    Closed      200,000       Owned(2)
   Middlesbrough    Manufacturing      12,000       Leased

 

(1) Less than wholly owned facility
(2) Under contract for sale

 

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Item 4. Security Ownership of Certain Beneficial Owners and Management

The following table shows the amount of our common shares beneficially owned as of July 31, 2013, by those known to us to beneficially own more than 5% of our common shares, by our directors and executive officers individually and by our directors and all of our executive officers as a group.

The percentage of shares outstanding provided in the tables are based on 28,361,152 shares outstanding as of July 31, 2013. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. The address of each of our directors and executive officers listed below is c/o Masonite International Corporation, One Tampa City Center, 201 North Franklin Street, Suite 300, Tampa, Florida 33602.

 

Name and Address of
Owner

   Common Shares
Beneficially
Owned(1)
     Percentage
of Common
Shares
Beneficially
Owned
 
               

Principal shareholders:

     

Oaktree Capital Management, L.P. (2)

     4,778,334         16.8

Mount Kellett Capital Management LP (3)

     4,323,201         15.2

Centerbridge Partners, L.P. (4)

     3,540,449         12.5

Kohlberg Kravis Roberts & Co. L.P. (5)

     2,084,674         7.4

Gilder Gagnon Howe & Co. LLC (6)

     1,719,896         6.6

12 West Capital Management, L.P. (7)

     1,518,584         5.4

Executive officers and

directors:

     

Frederick J. Lynch

     108,026         *   

Robert J. Byrne

     57,176         *   

Jonathan F. Foster

     57,176         *   

George A. Lorch

     57,176         *   

Francis M. Scricco

     57,176         *   

John C. Wills

     57,176         *   

Peter Dachowski

     —           *   

Mark J. Erceg

     37,595         *   

Lawrence P. Repar

     55,540         *   

Glenwood E. Coulter, Jr.

     31,391         *   

Robert E. Lewis

     7,257         *   

Christopher A. Virostek

     22,009         *   

Gail N. Auerbach

     21,536         *   

All directors and executive officers as a group (13 persons)

     570,234         2.0

 

* Represents less than one percent
(1) Does not reflect (x) 40,433 common shares issuable upon the delivery of vested restricted stock units outstanding as of July 31, 2013 or (y) an indeterminate number of common shares issuable upon the exercise of 1,108,790 stock appreciation rights outstanding as of July 31, 2013, with the number of common shares to be issued upon exercise dependent upon the fair market value of the common shares as of the date of such exercise or (z) common shares issuable upon the exercise of warrants to purchase common shares, with an exercise price of $50.77 per share.
(2) According to information provided to Masonite by Oaktree Capital Management, L.P., as of July 31, 2013, Oaktree Capital Management, L.P. and its affiliates beneficially owned 4,778,334 common shares of Masonite International Corporation. The address of Oaktree Capital Management, L.P. and its affiliates is 333 S. Grand Avenue, 28th Floor, Los Angeles, California 90071.

 

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(3) According to information provided to Masonite by Mount Kellett Capital Management LP, as of July 31, 2013, Mount Kellett Capital Management LP and its affiliates beneficially owned 4,323,201 common shares of Masonite International Corporation. The address of Mount Kellett Capital Management LP and its affiliates is 623 Fifth Avenue, 18th Floor, New York, New York 10022.
(4) According to information provided to Masonite by Centerbridge Partners, L.P., as of July 31, 2013, Centerbridge Partners, L.P. and its affiliates beneficially owned 3,540,449 common shares of Masonite International Corporation. The address of Centerbridge Partners, L.P. and its affiliates is 375 Park Avenue, 12th Floor, New York, New York 10152.
(5) According to information provided to Masonite by Kohlberg Kravis Roberts & Co. L.P., as of July 31, 2013, Kohlberg Kravis Roberts & Co. L.P. owned 2,084,674 common shares of Masonite International Corporation. The address of Kohlberg Kravis Roberts & Co. L.P. and its affiliates is 9 West 57th Street, Suite 4200, New York, New York 10019.
(6) According to information provided by Gilder Gagnon Howe & Co. LLC, as of July 31, 2013, Gilder Gagnon Howe & Co. LLC owned 1,719,896 common shares of Masonite International Corporation. The address of Gilder Gagnon Howe & Co. LLC and its affiliates is 3 Columbus Circle, New York, NY 10019.
(7) According to information provided by 12 West Capital Management, L.P., as of July 31, 2013, 12 West Capital Management, L.P. owned 1,518,584 common shares of Masonite International Corporation. The address of 12 West Capital Management, L.P. and its affiliates is 90 Park Avenue, 41st Floor, New York, NY 10016.

 

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Item 5. Directors and Executive Officers

The following table sets forth information as of June 30, 2013 regarding each of our executive officers and current directors:

 

Name

   Age   

Positions

Frederick J. Lynch

   49    President and Chief Executive Officer, Director

Mark J. Erceg

   44    Executive Vice President and Chief Financial Officer

Lawrence P. Repar

   51    Executive Vice President, Global Sales and Marketing, and Chief Operating Officer

Glenwood E. Coulter, Jr

   56    Executive Vice President, Global Operations and Europe

Robert E. Lewis

   52    Senior Vice President, General Counsel and Secretary

Christopher A. Virostek

   40    Senior Vice President, Strategy Implementation and Corporate Development

Gail N. Auerbach

   57    Senior Vice President, Human Resources

Robert J. Byrne

   51    Director and Chairman of the Board

Peter R. Dachowski

   65    Director

Jonathan F. Foster

   52    Director

George A. Lorch

   71    Director

Francis M. Scricco

   64    Director

John C. Wills

   60    Director

Biographies

The present principal occupations and recent employment history of each of the executive officers and directors listed above are as follows:

Frederick J. Lynch,  (age 49) has served as President of Masonite since July 2006 and as President and Chief Executive Officer of Masonite since May 2007. Mr. Lynch has served as a Director of Masonite since June 2009. Mr. Lynch joined Masonite from Alpharma Inc., where he served as President of the human generics division and Senior Vice President of global supply chain from 2003 until 2006. Prior to joining Alpharma Inc. in 2003, Mr. Lynch spent nearly 18 years at Honeywell International Inc. (formerly AlliedSignal Inc.), most recently as vice president and general manager of the specialty chemical business. Mr. Lynch is a founding Director and Chief Financial Officer of the Michael Lynch Memorial Foundation, a non-profit organization that provides college scholarships to children of firefighters and victims of 9/11.

Mark J. Erceg,  (age 44) is Executive Vice President and Chief Financial Officer of Masonite. Prior to joining Masonite in June 2010, Mr. Erceg spent 18 years in a variety of progressive positions at The Procter & Gamble Company, where he most recently held one of the top finance positions as vice president and general manager of global investor relations from 2008 until 2010. Prior to that assignment, Mr. Erceg was based in Geneva, Switzerland, serving as the finance director for the Western Europe Fabric Care Division.

Lawrence P. Repar,  (age 51) joined Masonite (then known as Premdor) in 1995 and has served in a variety of executive roles, most recently as Executive Vice President of Global Sales and Marketing and Chief Operating Officer. Mr. Repar has more than 20 years of experience in the door business. Prior to joining Masonite, Mr. Repar worked for Sanwa McCarthy Securities Limited from 1992 to 1995, most recently as director of institutional sales and trading focusing on companies in the building products sector. Previously he owned his own window and door company in Toronto, Canada. He is a member of the board of trustees for The Hospital for Sick Children in Toronto.

Glenwood E. Coulter,  Jr, (age 56) joined Masonite in 2006 and has served has served in a number of executive operations roles, most recently as Executive Vice President of Global Operations and Europe. Mr. Coulter joined Masonite from W.R. Grace & Co., a global supplier of catalysts and engineered materials,

 

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where he served as vice president of global operations for the GraceDavison Division from 2005 to 2006. Prior to joining W.R. Grace & Co., Mr. Coulter spent 24 years in operations and supply chain leadership for several major corporations, including AlliedSignal (now Honeywell), Rhone-Poulenc, The Dow Chemical Company and Rockwell International.

Robert E. Lewis,  (age 52) has served as the Senior Vice President, General Counsel and Secretary of Masonite since April 2012. Mr. Lewis joined Masonite from Gerdau Ameristeel Corporation, a mini-mill steel producer, where he served as Vice President, General Counsel and Corporate Secretary January 2005 to May 2012. Prior to joining Gerdau, Mr. Lewis served as Senior Vice President, General Counsel and Secretary of Eckerd Corporation, a national retail drugstore chain from 1994 to January 2005. Prior to joining Eckerd, Mr. Lewis was an attorney and shareholder with the Tampa law firm of Shackleford, Farrior, Stallings & Evans, P.A.

Christopher A. Virostek,  (age 40) has served as Senior Vice President, Strategy Implementation and Corporate Development of Masonite since December 2012. He served as Senior Vice President, Corporate Development of Masonite from June 2010 to December 2012. Prior to June 2010, Mr. Virostek was Vice President Finance and Chief Accounting Officer for Masonite. Mr. Virostek joined Masonite in March 2002 from Arthur Andersen, LLP, where he served as a senior audit manager in the manufacturing practice.

Gail N. Auerbach,  (age 57) has served as Senior Vice President of Human Resources for Masonite since September 2007 and is responsible for Masonite’s global human resources and employee communications. She launched her 30-year career in human resources with GE, spending 10 years in progressive human resources roles in several GE business divisions. She joined the Ray Ban division of Bausch & Lomb and was promoted to vice president of human resources for the Oral Care Division in 1992. For the next 10 years she managed the human resources function for international based businesses including the Dutch based Randstad HR Solutions from 2002 to 2006.

Robert J. Byrne,  (age 51) has served as a Director of Masonite since June 2009 and has been Chairman of the Board of Masonite since July 2010. Mr. Byrne is the founder and has served as the President of Power Pro-Tech Services, Inc., which specializes in the installation, maintenance and repair of emergency power and solar photovoltaic power systems since 2002. Power Pro-Tech is Mr. Byrne’s fourth start-up. His other entrepreneurial ventures have been in telecommunications, private equity and educational software. From 1999 to 2001, Mr. Byrne was Executive Vice President and Chief Financial Officer of EPIK Communications, a start-up telecommunications company which merged with Progress Telecom in 2001 and was subsequently acquired by Level3 Communications. Having begun his career in investment banking, Mr. Byrne served as Partner at Advent International, a global private equity firm, from 1997 to 1999 and immediately prior to that, from 1993 to 1997, served as a Director of Orion Capital Partners.

Peter R. Dachowski, (age 65) has served as a Director of Masonite since July 2013. Mr. Dachowski spent 35 years with CertainTeed Corporation, a manufacturer of exterior residential and building envelope construction products, and its parent company Saint-Gobain, most recently serving as CertainTeed’s Chairman and CEO from 2004 to 2011. Prior to joining CertainTeed, he was employed by The Boston Consulting Group as a Consultant and Engagement Manager from 1973 to 1976. He began his career as a Financial Analyst with the Treasury Department of Exxon Corporation in 1971. Mr. Dachowski is currently a Senior Advisor to Graham Partners, a middle-market private equity firm.

Jonathan F. Foster,  (age 52) has served as a Director of Masonite since June 2009. Mr. Foster is the founder and Managing Director of Current Capital LLC, a private equity firm and management services firm. Previously, from 2007 until 2008, Mr. Foster served as a Managing Director and Co-Head of Diversified Industrials and Services at Wachovia Securities. From 2005 until 2007, he served as Executive Vice President–Finance and Business Development of Revolution LLC. From 2002 until 2004, Mr. Foster was a Managing Director of The Cypress Group, a private equity investment firm and from 2001 until 2002, he served as a Senior

 

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Managing Director of Bear Stearns & Co. From 1999 until 2000, Mr. Foster served as the Executive Vice President, Chief Operating Officer and Chief Financial Officer of ToysRUs.com, Inc. Previously, Mr. Foster was with Lazard Frères & Company LLC for over ten years in various positions, including as a Managing Director. Mr. Foster is a Director of Lear Corporation and Chemtura Corporation.

George A. Lorch,  (age 71) has served as a Director of Masonite since June 2009. Mr. Lorch spent over 37 years with Armstrong World Industries, Inc., which designs and manufactures flooring and ceilings. From 1993 to 1994 Mr. Lorch served as the Chief Executive Officer and President of Armstrong World Industries, Inc. and from 1994 to 2000, he served as Chairman, Chief Executive Officer and President. In 2000, he became Chairman and Chief Executive Officer of Armstrong Holdings, Inc. and upon retirement at the end of 2000, he was named Chairman Emeritus. Currently, Mr. Lorch serves as Lead Director of the board of Pfizer, Inc. and has been a member of their board since 2000. He is also currently a Director on the boards of WPX Energy, Autoliv Inc. and HSBC North America Holdings Inc. and HSBC Finance Company, both subsidiaries of HSBC, a global bank based in the United Kingdom.

Francis M. Scricco,  (age 64) has served as a Director of Masonite since June 2009. Prior to joining our Board, Mr. Scricco was with Avaya, Inc., a global business communications provider, where he served as senior vice president, global services from March 2004 to February 2007 and subsequently as senior vice president, manufacturing, logistics and procurement until his retirement in October 2008. Prior to joining Avaya, Inc., he was employed by Arrow Electronics as its COO from 1997 to 2000 and then as its president and CEO from 2000 to 2002. Mr. Scricco’s first operating role was as a general manager for General Electric. He began his career with The Boston Consulting Group in 1973. Mr. Scricco is currently a Director of Tembec, Inc., an integrated forest products company, and Chairman of the Board of Visteon Corporation, a global automotive supplier.

John C. Wills,  (age 60) has served as a Director of Masonite since June 2009. Mr. Wills retired from Masco Corporation in 2007 where as Group President he was responsible for their worldwide plumbing business. He started his career with Procter & Gamble Corporation and entered the building product industry in 1985 when he joined Moen Incorporated in Canada. He also has retail big box experience participating in the start-up of The Home Depot in Canada in 1991, which at the time was called Aikenhead’s Home Improvement Warehouse. Mr. Wills is currently a member of the boards of Armstrong Cabinets, Phillips Service Industries, Inc. and Global Emission Systems, Inc.

Director Qualifications

The board of directors seeks to ensure that the board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the board to satisfy its oversight responsibilities effectively. More specifically, in identifying candidates for membership on the board, the nominating and corporate governance committee takes into account (1) individual qualifications, such as strength of character, mature judgment and industry knowledge or business experience, and (2) all other factors it considers appropriate, including alignment with our shareholders.

When determining whether our current directors have the experience, qualifications, attributes and skills, taken as a whole, to enable our board to satisfy its oversight responsibilities effectively in light of our business and structure, our board focused primarily on our directors’ contributions to our success in recent years and on the information discussed in the biographies set forth under “Management—Executive Officers and Directors—Biographies.” With respect to Mr. Fred Lynch, our board considered in particular his current role as our Chief Executive Officer, his familiarity with our business operations, and his extensive management expertise. With respect to Mr. John Foster, our board considered in particular his experience as a Chief Financial Officer and member of the audit committee and board of directors of public companies, as well as his financial, investment banking and transactional experience. With respect to Mr. Bob Byrne, our board considered in particular his financial, investment banking and transactional experience and his proven entrepreneurial and operational skills in the industrial services industry. With respect to Mr. Peter Dachowski, our board considered in particular his

 

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extensive financial and building products industry experience. With respect to Mr. George Lorch, our board considered in particular his extensive management expertise and board experience at public companies, including serving as non-executive chairman of Pfizer and as a director, chairman and Chief Executive Officer of a public company in the building products industry. With respect to Mr. Fran Scricco, our board considered in particular his extensive management experience, including as Chief Executive Officer of an electronics distribution business, his prior public-company board experience, his strategy consulting experience, and his familiarity with product marketing, distribution channels and branding. With respect to Mr. John Wills, our board considered in particular his sales and marketing experience in a large multiproduct public company in the building products industry and specifically his familiarity with big box retail customers such as The Home Depot.

Board and Committee Membership

Our business, property and affairs are managed under the direction of our board of directors. Our board consists of seven directors, all of whom are “independent” as defined under applicable NYSE listing standards other than Frederick Lynch, our Chief Executive Officer. Members of our board are kept informed of our business through discussions with our Chief Executive Officer, Chief Financial Officer and other officers, by reviewing materials provided to them, by visiting our offices and facilities, and by participating in meetings of the board and its committees. While retaining overall responsibilities, our board of directors assigns certain of its responsibilities to permanent committees consisting of board members appointed by it. We currently have the following committees: Audit Committee, Human Resources and Compensation Committee and Corporate Governance and Nominating Committee, each of which has the responsibilities and composition described below.

The Audit Committee currently consists of Jonathan Foster (Chair), Robert Byrne and John Wills. Each member of our Audit Committee is independent under applicable NYSE listing standards and meets the standards for independence required by U.S. securities law requirements applicable to public companies, including Rule 10A-3 of the Securities Exchange Act of 1934, or the Exchange Act. Each member is financially literate under applicable NYSE listing standards and our board of directors has determined that each of Mr. Foster and Mr. Byrne is qualified as an audit committee financial expert within the meaning of applicable SEC regulations. The Audit Committee oversees and evaluates and, where necessary or advisable, makes recommendations as to the quality and integrity of the financial statements of the Company, the internal control and financial reporting systems of the Company, the compliance by the Company with legal and regulatory requirements in respect of financial disclosure, the qualification, independence and performance of the Company’s independent auditors and the performance of the Company’s internal audit functions. In addition, the Audit Committee is directly responsible for the appointment, compensation, retention, termination and oversight of the work of the independent auditor (including oversight of the resolution of any disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing audit reports or performing other audit, review or attest services for the Company, subject to any applicable approvals required from our board of directors or our shareholders.

The Human Resources and Compensation Committee currently consists of Francis Scricco (Chair), Peter Dachowski and George Lorch. Each member of our Human Resources and Compensation Committee is independent under applicable NYSE listing standards and qualifies as a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act. The Human Resources and Compensation Committee reviews and, as it deems appropriate, recommends to the board of directors policies, practices and procedures relating to the compensation and succession planning for the executive officers and other managerial employees and the establishment and administration of employee benefit plans. The Human Resources and Compensation Committee also exercises all authority under the Company’s employee equity incentive plans, subject to any applicable approvals required from our board of directors or our shareholders.

 

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The Corporate Governance and Nominating Committee currently consists of George Lorch (Chair), Francis Scricco and Peter Dachowski. Each member of our Corporate Governance and Nominating Committee is independent under applicable NYSE listing standards. The Corporate Governance and Nominating Committee reviews and, as it deems appropriate, recommends to the board of directors policies and procedures relating to director and board of directors committee nominations and corporate governance policies, oversees compliance with the Company’s ethics training and compliance programs, reviews policies with respect to risk assessment and risk management and provides oversight for risk management processes, and establishes and administers assessment of board, committee and individual director performance.

 

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Item 6. Executive Compensation

Introduction

Our Compensation Discussion and Analysis, or CD&A, explains the philosophy and objectives of our compensation program and our process for setting compensation for our named executive officers. The discussion relates primarily to fiscal year 2012, although we also discuss compensation-related actions taken in fiscal year 2013 through the date of this registration statement.

Our executive compensation program is overseen by the Human Resources and Compensation Committee. As discussed in greater detail below, we offer our named executive officers a balanced compensation structure, comprised of the following components:

 

   

Annual base salary

 

   

Annual cash bonuses

 

   

Long-term equity incentive awards

 

   

Severance and change in control benefits

 

   

Other employee benefits.

In making its decisions on an executive’s compensation, the Human Resources and Compensation Committee considers the nature and scope of all elements of an executive’s total compensation package, the executive’s responsibilities and his or her effectiveness in supporting our key strategic, operational and financial goals (but does not assign any specific weighting to any of the items considered).

Compensation Discussion & Analysis

Our Named Executive Officers

For the fiscal year ended December 31, 2012, the following individuals were our named executive officers, or NEOs:

 

   

Frederick J. Lynch, our President and Chief Executive Officer

 

   

Mark J. Erceg, our Executive Vice President and Chief Financial Officer

 

   

Lawrence P. Repar, our Executive Vice President, Global Sales and Marketing and Chief Operating Officer

 

   

Glenwood E. Coulter, Jr., our Executive Vice President, Global Operations and Europe, and

 

   

Gail N. Auerbach, our Senior Vice President, Human Resources.

Executive Compensation Objectives and Philosophy

Our executive compensation programs are overseen by the Human Resources and Compensation Committee, which following the effectiveness of this registration statement will continue to be comprised of Messrs. Francis M. Scricco (Committee chair), George A. Lorch and Peter Dachowski. The Human Resources and Compensation Committee consults with the board of directors in determining the compensation package of our Chief Executive Officer and determines compensation for the NEOs by considering, among other things, market data and trends, as well as, with respect to the NEOs other than our Chief Executive Officer, the recommendations of our Chief Executive Officer (as discussed in more detail below), and the Human Resources and Compensation Committee’s independent compensation consultant, Frederic W. Cook & Company, or Cook & Co., whose role is discussed below.

 

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The Human Resources and Compensation Committee is responsible for establishing and annually reviewing the overall compensation philosophy of the Company for its executive officers. The key principles guiding the Human Resources and Compensation Committee in making compensation determinations are:

 

   

Masonite offers a total compensation program comprising base salary and variable compensation (consisting of short-term cash and long-term equity components) linked to business goals, designed to attract, retain and motivate talented executives to deliver the Company’s financial and operating performance objectives and long-term vision.

 

   

To align the interests of management with those of our shareholders, our pay mix is weighted in favor of at-risk compensation, both in the form of annual bonus and equity awards.

Compensation Mix and Benchmarking

Our compensation policy provides for a mix of performance-based and guaranteed compensation elements and our Human Resources and Compensation Committee strives to achieve an appropriate balance between these two types of compensation, as well as an appropriate mix of cash and equity-based compensation. The mix of compensation elements is primarily designed to reward individual performance and enterprise value growth, and is weighted towards at-risk compensation, both in the form of our annual bonus plan and equity-based compensation vesting over a number of years. The Human Resources and Compensation Committee strives to target the median of the market (i.e., the 50th percentile), as determined using both our peer group and national market survey data supplied by Cook & Co. or available to the general public, in setting each NEO’s target total cash compensation and annual equity awards. In 2011, the Human Resources and Compensation Committee approved the following list of companies as an appropriate peer group for benchmarking executive compensation:

 

American Woodmark Corp    Libbey Inc.
Apogee Enterprises Inc.    Louisiana-Pacific Corp.
Armstrong World Industries    Smith (AO) Corp.
Gibraltar Industries Inc.    Universal Forest Products Inc.
Grace (WR) & Co.    USG Corp.
Griffon Corp    Valspar Corp.
Lennox International Inc.    Vulcan Materials Co.

Cook & Co. utilized data from this peer group and other market information from third-party surveys to benchmark executive pay in 2011 and the Human Resources and Compensation Committee used the results of such benchmarking in determining 2012 target total cash compensation levels and equity grants. As a result of this benchmarking exercise, it was determined that each NEO was between the 50th and 75th percentile with respect to target total cash compensation. The Human Resources and Compensation Committee considered the results of such benchmarking in its determination that the target total cash compensation of our NEOs for 2012 was competitive with the marketplace. Accordingly, none of our NEOs received a base salary increase in 2012. With respect to annual equity awards, the benchmarking exercise indicated that each NEO other than Mr. Lynch was either at or marginally below the 50th percentile and that Mr. Lynch’s annual equity grants were significantly below the 50th percentile. The Human Resources and Compensation Committee intends to review the appropriate size of the annual long-term incentive grants for Mr. Lynch following the effectiveness of this registration statement, but no decision as to how this issue should be addressed has been made at this time. The benchmarking exercise had no impact on the size of the equity grants to our NEOs for 2012 and 2013. The Human Resources and Compensation Committee did not otherwise use the above described (or any other) peer group in making executive compensation decisions in 2012 or with respect to 2013 compensation decisions made prior to the effectiveness of this registration statement. Following the effectiveness of this registration statement, the Human Resources and Compensation Committee intends to continue to target each NEO’s total compensation at the market median and expects that a significant portion of our NEOs’ total compensation package will continue to be focused on rewarding long-term future performance through a combination of at-risk cash and equity incentive awards. In addition, following the effectiveness of this registration statement, the

 

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Human Resources and Compensation Committee may work with Cook & Co. to re-evaluate our peer group and may engage in more formal annual benchmarking of executive compensation in making compensation decisions for our executive officers.

Role of our Human Resources and Compensation Committee

The Human Resources and Compensation Committee makes compensation decisions for our NEOs after reviewing our performance for the preceding fiscal year, our short- and long-term strategies, and current economic and market conditions, and carefully evaluating each NEO’s performance during the preceding fiscal year against established organizational goals, leadership qualities, operational performance, business responsibilities, career with us, current compensation arrangements and long-term potential to enhance enterprise value. The Human Resources and Compensation Committee does not specifically weigh any of the foregoing factors in its assessment of executive compensation arrangements, and may not rely on these factors exclusively in determining compensation for our NEOs. In making compensation decisions, the Human Resources and Compensation Committee receives advice from Cook & Co. and input from our Chief Executive Officer, as further discussed below.

Following the effectiveness of this registration statement, we expect that our Human Resources and Compensation Committee will continue to make executive compensation decisions based upon the position and responsibility of each NEO and its consideration of the factors described above and that our executive compensation plans and policies will remain consistent with the compensation principles described above. However, as we evolve as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to reflect that evolution. For example, over time the Human Resources and Compensation Committee may adopt a more empirically-based approach that involves increased reliance on annual benchmarking against peer companies. Accordingly, the compensation paid to our NEOs for fiscal year 2012 is not necessarily indicative of how we will compensate our NEOs following the effectiveness of this registration statement.

Role of our Chief Executive Officer

Our Chief Executive Officer reviews the base salaries of our NEOs (other than himself) on an annual basis and recommends increases to the Human Resources and Compensation Committee, based on each NEO’s performance and responsibilities. Mr. Lynch confers with our Senior Vice President of Human Resources, Ms. Auerbach, and together they consider applicable market data provided by Cook & Co. The Human Resources and Compensation Committee has historically followed the recommendations made by Mr. Lynch, although it is not obligated to do so. Mr. Lynch and Ms. Auerbach also provide the Human Resources and Compensation Committee with input regarding our annual bonus plan (as discussed below) and equity grants for executive officers, including but not limited to recommendations regarding eligibility for such grants and the size of the applicable grant (determined as a percentage of base salary). Additionally, Mr. Erceg provides input to Mr. Lynch and the Human Resources and Compensation Committee with respect to the financial performance aspects of our annual bonus plan and any performance-based equity awards. This is Mr. Erceg’s only role in the compensation process. Although Mr. Lynch often attends meetings of the Human Resources and Compensation Committee, he recuses himself from those portions of the meetings related to his compensation. The Human Resources and Compensation Committee is exclusively responsible for determining any base salary increases and for making any other compensation decisions with respect to Mr. Lynch.

Role of Compensation Consultant

The Human Resources and Compensation Committee has utilized Cook & Co. as its independent consulting firm since 2010. Cook & Co. is engaged by, and reports directly to, the Human Resources and Compensation Committee and does not provide other services to Masonite. Cook & Co. provides our Human Resources and Compensation Committee with input and guidance on all components of our executive compensation program and has advised the Human Resources and Compensation Committee with respect to (i) market data for base

 

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salary, annual bonus and long-term incentive compensation, (ii) setting the performance goals, and the applicable levels of achievement for such goals, for our annual incentive plan, (iii) adopting executive stock ownership guidelines, (iv) advising on certain terms and conditions of our NEO employment agreements, and (v) determining the size of the share reserve under our 2012 Equity Incentive Plan, or 2012 Plan. The Human Resources and Compensation Committee expects to continue to use Cook & Co. as its independent compensation consultant following the effectiveness of this registration statement.

Elements of Our Executive Compensation Program

Historically and for 2012, our executive compensation program consisted of the following elements:

Base Salary

Base salary is designed to provide our NEOs with a fixed amount of income that is competitive in relation to the responsibilities of each NEO’s position. In 2012, the annual base salaries of our NEOs were as follows:

 

Frederick J. Lynch

   $ 850,000   

Mark J. Erceg

   $ 450,000   

Lawrence P. Repar

   $ 625,000   

Glenwood E. Coulter, Jr.

   $ 400,000   

Gail N. Auerbach

   $ 335,000   

In light of the difficult economic environment in which our business operated in 2012 and in which we continue to operate, the Human Resources and Compensation Committee determined that none of the NEOs would receive a base salary adjustment in 2012. Effective January 1, 2013, the Human Resources and Compensation Committee approved an increase in Mr. Repar’s base salary from $625,000 to $630,000, solely in order to compensate him for the loss of a cross-border tax preparation assistance reimbursement benefit that ended with the filing of his 2011 tax return.

Annual Cash Incentive Bonus

2012 Annual Incentive Plan

The compensation program for our NEOs includes an annual short-term incentive plan which provides a cash bonus award based on the achievement of annual business goals. The Human Resources and Compensation Committee approves the Annual Incentive Plan (AIP) each year, including the applicable performance goals, weighting, payout parameters and specific targets for each performance goal. Each fiscal year, Mr. Lynch, following discussions with Ms. Auerbach and Mr. Erceg, makes recommendations to the Human Resources and Compensation Committee for the AIP performance goals (and the applicable targets for achievement of each such performance goal at threshold, target and maximum levels of performance) applicable to all NEOs (including himself) as well as any proposed changes in the terms of the AIP for that fiscal year. The Human Resources and Compensation Committee considers these recommendations, as well as input from Cook & Co. regarding both current incentive plan design trends and specific feedback regarding Mr. Lynch’s recommendations, in approving the AIP for each fiscal year.

For fiscal year 2012, the AIP performance goals were established as follows:

 

Performance Goal

   Weighting  

AIP Adjusted EBITDA

     55

Operating Cash Flow

     25

Individual Performance Factor

     20

 

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For 2012, the AIP also required achievement of a minimum AIP Adjusted EBITDA of $65 million in order for any AIP bonuses to be payable (even if the Operating Cash Flow performance goal is achieved at or above the threshold level).

For 2012, the AIP Adjusted EBITDA performance goals were $95 million at the target level, $82 million at the threshold level and $104.5 million at the maximum level and the Operating Cash Flow performance goal was $16.1 million at the target level, $3.1 million at the threshold level and $25.6 million at the maximum level. For both financial performance goals, achievement below the threshold performance level results in no bonuses being paid under the AIP with respect to that performance goal, while performance at the threshold level results in a payout at 25% of the applicable bonus target for each such performance goal, performance at the target level results in a payout at 100% of the applicable bonus target for each such performance goal, and achievement at or above the maximum performance level results in a payout at 175% of the applicable bonus target for each such performance goal. For each performance goal, performance between the threshold and target levels and between the target and maximum levels is determined using straight-line interpolation.

Following the completion of each fiscal year, the AIP payout pool is calculated using audited financial results. For purposes of calculating the payout pool, the IPF performance goal is excluded and the two financial performance goals are proportionally reweighted to equal 100% at target performance levels, such that AIP Adjusted EBITDA equals 68.75% of the target bonus at target performance levels and Operating Cash Flow equals 31.25% of the target bonus at target performance levels. 20% of the payout pool is then used to apply the IPF to individual bonus awards. The IPF was designed for senior leaders (or the Human Resources and Compensation Committee in the case of Mr. Lynch) to consider the overall performance and contributions of each AIP participant within his or her functional area and specify a payout of the IPF portion of the target bonus of between 0% and 150% for each such participant. Determination of the amount of the IPF award was primarily based on the subjective assessment of each participant, considering the three following primary factors (none of which is individually weighted): (1) the participant’s individual performance in support of achieving the business results, (2) the degree to which the participant modeled the Masonite Values (as defined in our Mission, Vision & Values statement as: integrity, customer commitment, continuous improvement, innovation, teamwork and respect, leadership and accountability), and demonstrated acceptable or extraordinary levels of leadership, and (3) the manner in which the participant achieved results.

In 2012, the Human Resources and Compensation Committee reviewed the appropriateness of using the IPF in determining the annual bonuses for our NEOs. Cook & Co. advised the Human Resources and Compensation Committee that a subjective element may not be appropriate for executive officers and advised the Human Resources and Compensation Committee to consider replacing the IPF with an additional financial performance goal in the future. Mr. Lynch, following consultation with Ms. Auerbach, proposed a change for the 2013 AIP to remove the IPF for senior officers and replace it with a Net Revenue performance goal (as discussed in more detail below under the heading “2013 Annual Incentive Plan”). Accordingly, based on Cook & Co.’s advice regarding the removal of the subjective element in senior officer bonus determinations, Mr. Lynch recommended to the Human Resources and Compensation Committee that he not use the IPF to adjust payouts for the 2012 AIP for the senior officers reporting directly to him. The Human Resources and Compensation Committee concurred with his recommendation and also determined that it would not use the IPF to adjust Mr. Lynch’s bonus under the AIP in 2012. This action removed subjectivity from the calculation of the NEOs’ 2012 AIP payouts, resulting in a payout calculated solely based on the level of achievement of the two financial performance goals.

The definitions for each of the financial performance goals for purposes of the 2012 AIP are as follows:

“AIP Adjusted EBITDA” is Adjusted EBITDA as defined elsewhere in this registration statement, less EBITDA from any acquisitions in the current year, plus professional fees incurred that are related to acquisitions or board initiatives that have been undertaken in the current year, plus conversion costs for new business, plus or minus any changes to generally accepted accounting principles and other adjustments for unusual and nonrecurring events approved by the Human Resources and Compensation Committee or our board

 

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of directors, and plus or minus the impact of foreign exchange rate fluctuations. For 2012, AIP Adjusted EBITDA also included an adjustment to include a $3.3 million insurance recovery from a business interruption claim that was received in 2012.

“Operating Cash Flow” for purposes of the AIP is defined as AIP Adjusted EBITDA (as defined for purposes of the AIP), plus or minus any change in Foreign Exchange Adjusted Net Operating Working Capital, plus any unfavorable change in Net Operating Working Capital due to any acquisitions in the current year, plus any conversion costs for new business, less any capital expenditures. For purposes of the foregoing definition, (1) “Foreign Exchange Adjusted Net Operating Working Capital” is defined as trade accounts receivable, plus total inventory, minus trade accounts payable, excluding the following items: accrued interest on debt, purchase price holdbacks related to acquisitions in the current year, accrual for plant restructuring (primarily lease obligations related to plan closures), and the foreign exchange impact on trade accounts receivable, total inventory and trade accounts payable and (2) “Net Operating Working Capital” is defined as accounts receivable plus inventory less accounts payable, further adjusted for the impact on translational foreign exchange, the impact of acquisitions, accrued interest, and restructuring activities.

Based on performance against the pre-established performance goals, and using straight-line interpolation between the target level of performance and the threshold level of performance and as adjusted based on the removal of the IPF, the 2012 bonus was calculated as follows:

 

Performance
Goals

   Weightings
(a)
    Threshold
(25%)
     Target
(100%)
     Maximum
(175%)
     Actual
Attainment
     Attainment %
(b)
    Weighted
Attainment

c=a*b
 

Global AIP Adjusted EBITDA

     68.75   $ 82.0 million       $ 95.0 million       $ 104.5 million       $ 93.3 million        90.2     62.0

Global Operating Cash Flow

     31.25   $ 3.1 million       $ 16.1 million       $ 25.6 million       $ 35.9 million         175.0     54.7
                  
 
 
Total AIP
Payout
Percentage
  
  
  
    116.7

The actual 2012 bonus payouts for each NEO are calculated by multiplying (1) his or her annual base salary, times (2) his or her target bonus percentage, times (3) the AIP payout percentage of 116.7%. Applying this formula, the bonuses payable to each NEO under the 2012 AIP were paid during March 2013:

 

     Base Salary
($)
     Target Bonus
Percentage of
Base Salary
    2012 Overall
Plan Payout
Percentage
    2012 Bonus
($)
 

Frederick J. Lynch

     850,000         100     116.7     850,000

Mark J. Erceg

     450,000         60     116.7     315,090   

Lawrence P. Repar

     625,000         60     116.7     437,625   

Glenwood E. Coulter, Jr.

     400,000         50     116.7     233,400   

Gail N. Auerbach

     335,000         50     116.7     195,473   

 

* Mr. Lynch would have been entitled to a bonus in the amount of $991,950; however, he voluntarily elected to cap his maximum AIP payout for 2012 at $850,000, as indicated in the table.

2013 Annual Incentive Plan

As discussed under the heading “2012 Annual Incentive Plan” above, and in order to respond to the changing business climate and maintain alignment between incentive payouts and our strategic objectives, the Human Resources and Compensation Committee, from time to time, considers changes to the AIP. For 2013, the

 

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Human Resources and Compensation Committee, based on management’s recommendation, approved several changes to the 2013 AIP. The primary focus of our AIP will still measure profitability (AIP Adjusted EBITDA), but will also emphasize our ability to grow the top line by measuring revenues (Net Revenue), and our ability to improve (i.e. shorten) the cash conversion cycle (Cash Conversion).

Under the 2013 AIP, the AIP Adjusted EBITDA performance goal is weighted at 60% of each NEO’s bonus based on target levels of performance, with a threshold level of performance set at 90% of the target level of performance (paying out at 50% of the target bonus percentage) and a maximum level of performance set at 110% of the target level of performance (paying out at 150% of the target bonus percentage). The Human Resources and Compensation Committee believes this performance range is appropriate because management has the ability to influence AIP Adjusted EBITDA through pricing, product and customer mix, and by controlling spending and the cost of goods.

The IPF has been replaced with an additional company financial performance goal for senior officers participating in the 2013 AIP (including each NEO). The Human Resources and Compensation Committee determined that this additional performance goal should be Net Revenue because this performance goal serves to reinforce management’s focus on top-line growth, while the AIP maintains an appropriate focus on achieving profitable growth through the continued use of the AIP Adjusted EBITDA performance goal. The Net Revenue performance goal is weighted at 20% of each NEO’s bonus based on target levels of performance, with a threshold level of performance set at 96% of the target level of performance (paying at 50% of the target bonus percentage) and a maximum level of performance set at 104% of the target level of performance (paying out at 150% of the target bonus percentage). “Net Revenue” for purposes of the AIP is defined as Net Revenue as externally reported, less: (1) net revenue from current year acquisitions, (2) conversion costs for new business wins, (3) changes in accounting principles, (4) changes to translational foreign exchange rates used in Masonite’s annual operating plan, and (5) other unusual and non-recurring adjustments as approved by the Human Resources and Compensation Committee or our board of directors.

In the 2013 AIP, the Operating Cash Flow performance goal has been replaced by a Cash Conversion performance goal that is measured in terms of days of improvement in our cash conversion cycle. Unlike the Operating Cash Flow performance goal used in 2012, this performance goal removes the effect of under or over spending on our budgeted capital expenditures for the year and focuses attention on controlling inventory levels and maximizing cash flow through the effective management of the payment of accounts payable and the collection of accounts receivable. The Cash Conversion performance goal is weighted at 20% of the bonus based on target levels of performance, with a threshold level of performance set at 20% of the target level of performance (paying out at 20% of the target bonus percentage) and a maximum level of performance set at 200% of the target level of performance (paying out at 200% of the target bonus percentage).

In connection with establishing the 2013 AIP, Cook & Co. provided input to the Human Resources and Compensation Committee regarding typical plan structures with respect to the spread for threshold, target and maximum levels of performance for various performance goals and typical payout percentages based on the level of performance achieved for each performance goal. The 2013 AIP also contains a minimum AIP Adjusted EBITDA threshold which must be met for any performance goal to result in bonus payments under the AIP (regardless of the level at which the other performance goals are achieved).

Discretionary Bonuses

In March 2012, the Human Resources and Compensation Committee approved a cash pool for Mr. Lynch to award discretionary bonus payments to executives selected by him, considering each executive’s performance and contributions in 2011. The Human Resources and Compensation Committee made this discretionary pool available because it was of the view that, as a result of our performance falling short of the target financial goals in the 2011 AIP, certain executives had not received compensation for 2011 that adequately rewarded them for their extraordinary efforts in a very challenging year. The Human Resources and Compensation Committee chose

 

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not to award Mr. Lynch a discretionary bonus and Mr. Lynch did not award a discretionary bonus to all of the other executives. The discretionary bonuses paid to select executives were determined based on Mr. Lynch’s subjective judgment of each executive’s efforts during 2011. The amount of the discretionary bonuses, together with the actual 2011 bonus payouts, were less than the amount that would have been paid if the performance goals had been met at the target level of performance. The discretionary bonuses received by each of our NEOs (other than Mr. Lynch) are set forth in the Summary Compensation Table under the heading “Bonus”.

Long-Term Equity Incentive Awards

Special Award in Recognition of 2011 Contributions

The restricted stock units granted on March 15, 2012 were discretionary awards in recognition of the services provided by Messrs. Lynch, Erceg, Repar and Coulter to the Company in 2011, to acknowledge significant efforts to improve our long-term growth prospects in a year in which the annual bonus financial targets were not fully achieved. Mr. Lynch received 3,000 restricted stock units, Messrs. Erceg and Coulter each received 1,000 restricted stock units, and Mr. Repar received 2,000 restricted stock units. These restricted stock units vest over 3 years, with 50% vesting on the first anniversary of the grant date and 25% vesting on each of the second and third anniversaries of the grant date. In making these awards to the NEOs who received this award, other than our CEO, the Human Resources and Compensation Committee considered the recommendations of Mr. Lynch in determining the size of the award to each of the NEOs who received such an award.

Long-Term Incentive Grant for 2012

Each NEO was granted an award of restricted stock units on May 30, 2012 that vest over 3 years, with 50% vesting on the first anniversary of the grant date and 25% vesting on each of the second and third anniversaries of the date of grant. Mr. Lynch received 20,000 restricted stock units and each of Messrs. Erceg, Repar and Coulter and Ms. Auerbach received 10,000 restricted stock units. The target equity value for this grant was based on a target percentage of base salary for each NEO, as previously approved by the Human Resources and Compensation Committee after considering data and recommendations by Cook & Co., as follows:

 

Frederick J. Lynch

     200

Mark J. Erceg

     100

Lawrence P. Repar

     90

Glenwood E. Coulter, Jr.

     90

Gail N. Auerbach

     75

This equity grant covered other senior leaders in addition to the NEOs. At the time the grants were made, the remaining shares available for awards under the Masonite Worldwide Holdings Inc. 2009 Equity Incentive Plan, or 2009 Plan, were insufficient to make the May 30, 2012 grants to all participants at the levels targeted by the Human Resources and Compensation Committee. In order to ensure that the grants made to non-NEO senior leaders were made at the targeted levels, the NEOs received grants in an amount less than their targeted levels from the remaining available share pool after all grants had been made to the other senior leaders. Accordingly, the restricted stock units granted to Messrs. Erceg, Repar, and Coulter and Ms. Auerbach on November 1, 2012, and to Mr. Lynch on December 5, 2012, were made in order to bring each of them up to the above-described targeted levels after we adopted the 2012 Plan. Mr. Lynch received 77,825 restricted stock units, Mr. Erceg received 15,898 restricted stock units, Mr. Repar received 22,371 restricted stock units, Mr. Coulter received 10,719 restricted stock units and Ms. Auerbach received 4,462 restricted stock units. The November 1 restricted stock unit grants vest 50% on each of the second and third anniversaries of the grant date. Mr. Lynch’s second grant was made on December 5, 2012 and vests 33% on the first and second anniversaries of the date of grant and 34% on the third anniversary.

 

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Long-Term Incentive Grant for 2013

On February 25, 2013, the Human Resources and Compensation Committee used the same target percentage of base salary as was used to grant the 2012 restricted stock unit awards (see above) to grant to each of our NEOs an award consisting of the following number of restricted stock units: Mr. Lynch: 72,095; Mr. Erceg: 19,084, Mr. Repar: 24,046, Mr. Coulter: 15,267 and Ms. Auerbach: 10,655. For Messrs. Erceg, Repar and Coulter and Ms. Auerbach 50%, and for Mr. Lynch 40%, of the restricted stock units granted pursuant to each award are subject to time vesting requirements and for Messrs. Erceg, Repar and Coulter and Ms. Auerbach the remaining 50%, and for Mr. Lynch 60%, of the restricted stock units subject to each award are subject to performance vesting criteria. The time-vesting restricted stock units vest 50% on the first anniversary of the date of grant, 30% on the second anniversary and 20% on the third anniversary.

One half of the performance-vesting restricted stock units vest on the third anniversary of the date of grant subject to the level at which the 2015 Adjusted EBITDA Margin performance goal is achieved, with 100% of the units vesting upon achievement at the target level, 50% of the units vesting for performance at the threshold level threshold level, and 200% of the units vesting for performance at the maximum level. The other one half of the performance-vesting restricted stock units vest on the third anniversary of the date of grant subject to the level at which the Return on Assets performance goal is achieved, with 100% of the units vesting upon achievement at the target level, 50% of the units vesting for performance at the threshold level, and 200% of the units vesting for performance at the maximum level. In each case, straight-line interpolation will be used to determine the number of units that will vest if the level of achievement is between threshold and target or between target and maximum and any outstanding units that do not vest once the applicable level of performance has been determined will be automatically forfeited. For purposes of the 2013 long-term incentive grant, Adjusted EBITDA Margin means 2015 Adjusted EBITDA divided by 2015 Net Revenue and Return on Assets means 2015 Adjusted EBITDA divided by total assets. We believe that these performance targets will be challenging to achieve and will require substantial efforts from management in order to achieve them. Since only the target number of performance-vesting restricted stock units have been granted, additional shares will be issued upon vesting to the extent the level of performance achieved exceeds the target level.

In determining the number of restricted stock units granted in 2013, the Human Resources and Compensation Committee used the same targeted percentage of base salary that was used to determine the number of restricted stock units granted in 2012. In anticipation of our becoming a publicly traded company following the effectiveness of this registration statement, the Human Resources and Compensation Committee concluded that a portion of the equity awards granted to our executive officers should be earned based on the level of our performance under each of the applicable performance goals at the end of a three-year period. Tying a portion of the annual equity grants to our long term performance serves to tie a greater portion of our NEO’s compensation to the achievement of our financial and operating performance objectives and serves as a balance to the AIP, which measures our performance over a one-year period. 50% of the restricted stock units awarded to each of the NEOs other than Mr. Lynch were made subject to performance-based vesting conditions. 60% of Mr. Lynch’s 2013 equity grant was made subject to performance based vesting conditions as the Human Resources and Compensation Committee believes that a greater portion of Mr. Lynch’s annual equity award should earned based upon our long term performance in light of his responsibilities for the company as a whole.

Executive Stock Ownership Guidelines

Effective as of July 1, 2012, we implemented stock ownership guidelines that require each of our NEOs and all of our other executive officers to own meaningful equity stakes in Masonite to further align their economic interests with those of our shareholders. Our stock ownership guidelines require that (1) our Chief Executive Officer owns common shares in an amount not less than five times his base salary and (2) all other executive officers (including our NEOs) own common shares in an amount not less than three times their respective base salaries. Compliance with these guidelines will be measured once per fiscal year on the last day of the first fiscal quarter. Vested stock appreciation rights and restricted stock units count as shares for purposes of the guidelines, but unvested stock appreciation rights do not count. To the extent performance-vesting restricted stock units are

 

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granted, such restricted stock units will only count towards the guideline when and if earned, not before. There is no particular date by which the requisite share ownership level must be achieved. However, until the required level of ownership is achieved, each executive must retain at least fifty percent of the number of shares acquired by the executive upon the exercise of stock appreciation rights or the settlement of any restricted stock units (net of shares forfeited to pay any applicable exercise price and to satisfy any applicable tax withholding). Since the guidelines have only been in effect for less than a year, none of our NEOs currently owns the requisite number of shares.

Severance and Change in Control Benefits

Each NEO is entitled to receive severance benefits under the terms of his or her employment agreement upon either termination by us without cause or a resignation by the NEO for good reason. We provide these severance benefits in order to provide an overall compensation package that is competitive with that offered by the companies with whom we compete for executive talent. Additionally, severance benefits allow our executives to focus on our objectives without concern for their employment security in the event of a termination.

The severance benefits provided upon a qualifying termination of an NEO’s employment in connection with a change in control are notably higher th