##### 



(MASONITE LOGO) Second Quarter Report
to Shareholders
June 30, 2004




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##### 



MASONITE INTERNATIONAL CORPORATION
Quarterly Report to Shareholders
June 30, 2004 Managements Report on Financial Statements The accompanying unaudited consolidated financial statements of Masonite
International Corporation are the responsibility of management and have been
prepared in accordance with Canadian generally accepted accounting principles.
The unaudited consolidated financial statements and information in Managements
Discussion and Analysis (MD&A) include amounts based on informed judgments
and estimates of the expected effects of current events and transactions with
appropriate consideration of materiality and have been prepared on a consistent
basis with that in the annual audited consolidated financial statements. Management maintains appropriate systems of internal control. Policies and
procedures have been designed to provide reasonable assurance that transactions
are appropriately authorized, assets are safeguarded and financial records are
properly maintained to ensure that financial information is relevant and
reliable. The Companys independent auditors, KPMG LLP, did not perform a
quarterly review engagement of these unaudited consolidated financial
statements. The Audit Committee of the Board of Directors is composed of independent
directors and meets periodically with the independent auditors and management
representatives to review the unaudited consolidated quarterly and annual
audited financial statements, discuss internal accounting control, the nature,
extent and results of KPMG LLPs audits and other financial reporting matters.
The independent auditors have unrestricted access to the Audit Committee. The
Audit Committee reports its findings and makes recommendations to the Board of
Directors and is responsible for re-appointing the independent auditors. The
Board of Directors has approved these unaudited consolidated financial
statements. July 19, 2004 (MASONITE LOGO) 1




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSPeriod of six months ended June 30(In thousands of U.S. dollars except per share amounts) 2004
    
    2003Sales
    
    $
    1,032,534
    
    
    $
    859,172Cost of sales
    
    
    807,433
    
    
    
    666,846225,101
    
    
    
    192,326Selling, general and administration
    
    
    90,527
    
    
    
    82,810Income before the undernoted
    
    
    134,574
    
    
    
    109,516Depreciation and amortization
    
    
    27,470
    
    
    
    23,838Income before other expense, interest and income taxes
    
    
    107,104
    
    
    
    85,678Other expense
    
    
    1,196
    
    
    
    330Interest
    
    
    17,903
    
    
    
    18,26688,005
    
    
    
    67,082Income taxes
    
    
    21,300
    
    
    
    17,06166,705
    
    
    
    50,021Non-controlling interest
    
    
    2,770
    
    
    
    2,338Net income
    
    
    63,935
    
    
    
    47,683Retained earnings, beginning of period
    
    
    403,525
    
    
    
    295,854Retained earnings, end of period
    
    $
    467,460
    
    
    $
    343,537Earnings per share:Basic
    
    $
    1.17
    
    
    $
    0.89Diluted
    
    $
    1.14
    
    
    $
    0.87
 (MASONITE LOGO) 2




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGSPeriod of three months ended June 30(In thousands of U.S. dollars except per share amounts) 2004
    
    2003Sales
    
    $
    564,567
    
    
    $
    456,955Cost of sales
    
    
    443,847
    
    
    
    354,157120,720
    
    
    
    102,798Selling, general and administration
    
    
    47,033
    
    
    
    42,027Income before the undernoted
    
    
    73,687
    
    
    
    60,771Depreciation and amortization
    
    
    14,546
    
    
    
    12,070Income before other (income) expense, interest and income taxes
    
    
    59,141
    
    
    
    48,701Other (income) expense
    
    
    (534
    )
    
    
    101Interest
    
    
    9,338
    
    
    
    9,39950,337
    
    
    
    39,201Income taxes
    
    
    12,372
    
    
    
    10,06637,965
    
    
    
    29,135Non-controlling interest
    
    
    1,774
    
    
    
    1,796Net income
    
    
    36,191
    
    
    
    27,339Retained earnings, beginning of period
    
    
    431,269
    
    
    
    316,198Retained earnings, end of period
    
    $
    467,460
    
    
    $
    343,537Earnings per share:Basic
    
    $
    0.66
    
    
    $
    0.51Diluted
    
    $
    0.65
    
    
    $
    0.50
 (MASONITE LOGO) 3




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##### 



UNAUDITED CONSOLIDATED BALANCE SHEETS(In thousands of U.S. dollars) June 30
    
    December 312004
    
    2003ASSETSCash
    
    $
    171,611
    
    
    $
    129,676Accounts receivable
    
    
    289,389
    
    
    
    258,264Inventories
    
    
    342,657
    
    
    
    321,145Prepaid expenses
    
    
    25,712
    
    
    
    17,185Current future income taxes
    
    
    29,137
    
    
    
    29,318858,506
    
    
    
    755,588Property, plant and equipment
    
    
    811,338
    
    
    
    752,110Goodwill and other intangibles
    
    
    284,071
    
    
    
    130,475Other assets
    
    
    57,616
    
    
    
    46,663Long-term future income taxes
    
    
    4,408
    
    
    
    8,3151,157,433
    
    
    
    937,563$
    2,015,939
    
    
    $
    1,693,151LIABILITIES
AND SHAREHOLDERS EQUITYBank indebtedness
    
    $
    11,634
    
    
    $
    6,608Accounts payable and accrued liabilities
    
    
    346,904
    
    
    
    301,484Income taxes payable
    
    
    24,237
    
    
    
    27,013Current portion of long-term debt
    
    
    56,849
    
    
    
    35,498439,624
    
    
    
    370,603Long-term debt
    
    
    616,574
    
    
    
    447,260Long-term future income taxes
    
    
    118,229
    
    
    
    106,662Non-controlling interest
    
    
    43,918
    
    
    
    35,9861,218,345
    
    
    
    960,511Share capital
    
    
    270,822
    
    
    
    266,870Contributed surplus
    
    
    441
    
    
    
    191Retained earnings
    
    
    467,460
    
    
    
    403,525Cumulative translation adjustments
    
    
    58,871
    
    
    
    62,054797,594
    
    
    
    732,640$
    2,015,939
    
    
    $
    1,693,151
 (MASONITE LOGO) 4




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWPeriod of six months ended June 30(In thousands of U.S. dollars) 2004
    
    2003Cash provided by (used in) operating activitiesNet income for the period
    
    $
    63,935
    
    
    $
    47,683Depreciation and amortization
    
    
    27,470
    
    
    
    23,838Non-controlling interest
    
    
    2,770
    
    
    
    2,338Cash reinvested in working capital and other
    
    
    (6,494
    )
    
    
    (90,682
    )87,681
    
    
    
    (16,823
    )Cash provided by (used in) investing activitiesProceeds from sale of assets
    
    
    418
    
    
    
    2,239Acquisitions (note 2)
    
    
    (185,745
    )
    
    
    (4,271
    )Additions to property, plant and equipment
    
    
    (32,300
    )
    
    
    (21,164
    )Other investing activities
    
    
    (15,525
    )
    
    
    228(233,152
    )
    
    
    (22,968
    )Cash provided by (used in) financing activitiesProceeds from issuance of common shares
    
    
    3,952
    
    
    
    4,499Increase in bank and other indebtedness
    
    
    5,026
    
    
    
    33,748Net issue (repayment) of long-term debt
    
    
    176,782
    
    
    
    (33,119
    )185,760
    
    
    
    5,128Net foreign currency translation adjustment
    
    
    1,646
    
    
    
    9,649Increase (decrease) in cash
    
    
    41,935
    
    
    
    (25,014
    )Cash, beginning of period
    
    
    129,676
    
    
    
    47,644Cash, end of period
    
    $
    171,611
    
    
    $
    22,630
 (MASONITE LOGO) 5




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWPeriod of three months ended June 30(In thousands of U.S. dollars) 2004
    
    2003Cash provided by (used in) operating activitiesNet income for the period
    
    $
    36,191
    
    
    $
    27,339Depreciation and amortization
    
    
    14,546
    
    
    
    12,070Non-controlling interest
    
    
    1,774
    
    
    
    1,796Cash from (reinvested in) working capital and other
    
    
    70,648
    
    
    
    (26,839
    )123,159
    
    
    
    14,366Cash provided by (used in) investing activitiesProceeds from sale of assets
    
    
    303
    
    
    
    2,005Acquisitions (note 2)
    
    
    (22,472
    )
    
    
    (4,271
    )Additions to property, plant and equipment
    
    
    (16,540
    )
    
    
    (12,945
    )Other investing activities
    
    
    (10,383
    )
    
    
    813(49,092
    )
    
    
    (14,398
    )Cash provided by (used in) financing activitiesProceeds from issuance of common shares
    
    
    948
    
    
    
    3,858Decrease in bank and other indebtness
    
    
    (6,386
    )
    
    
    (6,616
    )Repayment of long-term debt
    
    
    (11,361
    )
    
    
    (8,068
    )(16,799
    )
    
    
    (10,826
    )Net foreign currency translation adjustment
    
    
    756
    
    
    
    6,502Increase (decrease) in cash
    
    
    58,024
    
    
    
    (4,356
    )Cash, beginning of period
    
    
    113,587
    
    
    
    26,986Cash, end of period
    
    $
    171,611
    
    
    $
    22,630
 (MASONITE LOGO) 6




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##### 



UNAUDITED CONSOLIDATED SCHEDULE OF SELECTED SEGMENTED INFORMATIONPeriod of six months ended June 30(In thousands of U.S. dollars) 2004
    
    2003SalesNorth America
    
    $
    827,242
    
    
    $
    690,850Europe and other
    
    
    224,778
    
    
    
    186,752Intersegment
    
    
    (19,486
    )
    
    
    (18,430
    )$
    1,032,534
    
    
    $
    859,172Segment operating incomeNorth America
    
    $
    100,030
    
    
    $
    80,757Europe and other
    
    
    23,987
    
    
    
    20,339124,017
    
    
    
    101,096ExpensesGeneral
    
    
    16,913
    
    
    
    15,418Interest
    
    
    17,903
    
    
    
    18,266Other expense
    
    
    1,196
    
    
    
    330Income taxes
    
    
    21,300
    
    
    
    17,061Non-controlling interest
    
    
    2,770
    
    
    
    2,33860,082
    
    
    
    53,413Net income
    
    $
    63,935
    
    
    $
    47,683Product line segment dataSales:Interior products
    
    $
    656,178
    
    
    $
    572,047Exterior products
    
    
    376,356
    
    
    
    287,125$
    1,032,534
    
    
    $
    859,172
 (MASONITE LOGO) 7




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UNAUDITED CONSOLIDATED SCHEDULE OF SELECTED SEGMENTED INFORMATIONPeriod of three months ended June 30(In thousands of U.S. dollars) 2004
    
    2003SalesNorth America
    
    $
    459,305
    
    
    $
    366,631Europe and other
    
    
    115,743
    
    
    
    98,815Intersegment
    
    
    (10,481
    )
    
    
    (8,491
    )$
    564,567
    
    
    $
    456,955Segment operating incomeNorth America
    
    $
    54,955
    
    
    $
    44,813Europe and other
    
    
    12,931
    
    
    
    11,55767,886
    
    
    
    56,370ExpensesGeneral
    
    
    8,745
    
    
    
    7,669Interest
    
    
    9,338
    
    
    
    9,399Other (income) expense
    
    
    (534
    )
    
    
    101Income taxes
    
    
    12,372
    
    
    
    10,066Non-controlling interest
    
    
    1,774
    
    
    
    1,79631,695
    
    
    
    29,031Net income
    
    $
    36,191
    
    
    $
    27,339Product line segment dataSales:Interior products
    
    $
    337,247
    
    
    $
    288,469Exterior products
    
    
    227,320
    
    
    
    168,486$
    564,567
    
    
    $
    456,955
 (MASONITE LOGO) 8




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 1: SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These unaudited consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles (GAAP) for interim
financial statements, which differ in some respects from United States GAAP.
The differences between Canadian and United States GAAP are disclosed in Note
14 of these unaudited consolidated financial statements. In these unaudited
consolidated financial statements, certain footnote information and footnote
disclosures normally included in annual financial statements prepared in
accordance with GAAP have been condensed or omitted. The unaudited
consolidated financial statements included herein should be read in conjunction
with Masonite International Corporations (the Company) annual audited
financial statements for the year ended December 31, 2003. The unaudited consolidated financial statements are prepared using the same
accounting polices and methods of application as were used in preparing the
most recent annual financial statements except for the adoption of new
accounting standards as described below. Operating results for the interim
period included herein are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004. Principles of Consolidation The unaudited consolidated financial statements include the accounts of the
Company and its subsidiaries. Intercompany accounts and transactions have been
eliminated upon consolidation. The results of subsidiaries acquired during the
period are consolidated from their respective dates of acquisition. New Accounting Standards (a) Accounts Receivable Effective June 2004, the Company applied the Canadian Institute of Chartered
Accounts (CICA) Accounting Guideline 12, Transfer of Receivables which is
substantially similar to United States Accounting Standard SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets, and
Extinguishments of Liabilities. This guideline establishes the criteria to be
met in order to account for the transfer of accounts receivable as a sale.
These criteria are that the transferred receivables have been put presumptively
beyond the reach of the Company and its creditors after the sale, that there
are no constraints put on the transferee taking advantage of its right to
pledge or exchange the assets received, and that the Company no longer
maintains effective control over the transferred receivables. The Company has
assessed the transfer agreement, concluding that all of the above criteria have
been met. Note 3 to these unaudited consolidated financial statements contains
additional disclosure with respect to the transfer of accounts receivable. 9




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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) (b) Employee Future Benefits In April 2004, the CICA revised Handbook Section 3461, Employee Future
Benefits, which became effective for interim periods ending June 30, 2004.
The revised standard establishes additional disclosures surrounding pension
expense for interim periods, requiring interim disclosures for pension expense
to be similar to annual disclosures. The additional disclosure requirements of
this new standard are included in Note 7 of these unaudited consolidated
financial statements. (c) Asset Retirement Obligations In March 2003, the CICA issued Handbook Section 3110, Asset Retirement
Obligations, which became effective January 1, 2004. The standard establishes
recognition, measurement and disclosure standards applicable to legal
obligations associated with the retirement of property, plant and equipment
that results from its acquisition, construction, development or normal
operations. The Company has assessed the effect of this new standard and has
determined that it has no significant impact on the unaudited consolidated
financial statements. (d) Hedging Relationships In December 2001, the CICA issued Accounting Guideline 13, Hedging
Relationships. This guideline establishes new criteria for hedge accounting
and is effective for the Companys current fiscal year. The Company has
reassessed all hedging relationships to determine whether the criteria have
been met. To qualify for hedge accounting, the hedging relationship must be
appropriately documented at the inception of the hedge and there must be
reasonable assurance, both at the inception and throughout the term of the
hedge, that the hedging relationship will be effective. Effectiveness requires
a high degree of correlation of changes in fair values or cash flows between
the hedged item and the hedging instrument. All significant current hedging
relationships have been adequately documented and effectiveness has been
assessed in order to comply with the requirements to continue to apply hedge
accounting. (e) Generally Accepted Accounting Principles and General Standards of Financial
Statement Presentation In July 2003, the CICA issued Handbook Sections 1100, Generally Accepted
Accounting Principles, and 1400, General Standards of Financial Statement
Presentation. These sections establish standards for financial reporting and
fair presentation in accordance with Canadian GAAP and provide guidance on
sources to consult when a matter is not dealt with explicitly in the primary
sources of Canadian GAAP. Upon adoption of these recommendations as of January
1, 2004, the Company determined that they have no significant impact on the
unaudited consolidated financial statements. (f) Revenue Recognition In December 2003, the CICA issued Emerging Issues Committee (EIC) abstracts
141 Revenue Recognition, 142 Revenue Arrangements with Multiple
Deliverables, and 143 Accounting for 10




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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) Separately Priced Extended Warranty and Product Maintenance Contracts. These
abstracts now conform Canadian to United States GAAP regarding revenue
recognition and were effective for fiscal years beginning on or after January
1, 2004. The Company has determined that the adoption of these abstracts have
no significant impact on the unaudited consolidated financial statements. NOTE 2: ACQUISITIONS During the quarter ended June 30, 2004, the Company acquired 75% of the shares
of a door manufacturer in Eastern Europe. In the first quarter ended March 31,
2004, the Company purchased the residential entry door business of The Stanley
Works. Consideration for these acquisitions was paid in cash. These
acquisitions have been accounted for using the purchase method of accounting. The preliminary purchase price for these acquisitions, which are subject to
certain post closing adjustments, was allocated as follows: Current assets
    
    $
    30,458Fixed assets
    
    
    53,768Goodwill and intangibles
    
    
    154,262Other assets
    
    
    2,023Liabilities assumed
    
    
    (35,048
    )Long-term debt
    
    
    (13,744
    )Non-controlling interest
    
    
    (6,208
    )185,511Consideration:Cash
    
    $
    185,511
 During the quarter, the Company also made an equity investment in a door
component manufacturing entity for cash consideration of $8,000 and increased
its ownership percentage in a less than wholly owned subsidiary for cash
consideration of $234. NOTE 3: ACCOUNTS RECEIVABLE At the end of the second quarter, the Company entered into an agreement with
its lead banker to sell up to $75 million of non-interest bearing trade
accounts receivable. Under this agreement, the Company acts as the servicer of
the receivables, and is permitted to sell, on an ongoing basis, additional
eligible accounts receivable on an agreed upon timetable. At quarter end, the Company had sold $65.0 million (2003  $nil) of trade
accounts receivable under this agreement, and excluded this amount from the
balance of accounts receivable. The discount recognized on this transaction in
the period was $107 (2003  $nil). The Company does not have a retained
interest in the receivables sold under this facility. 11




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 4: INCOME TAXES The Companys income tax expense for the six month and three month periods
ended June 30, 2004 and June 30, 2003 is comprised of: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Current
    
    $
    5,664
    
    
    $
    10,176
    
    
    $
    5,600
    
    
    $
    7,473Future
    
    
    15,636
    
    
    
    6,885
    
    
    
    6,772
    
    
    
    2,593$
    21,300
    
    
    $
    17,061
    
    
    $
    12,372
    
    
    $
    10,066
 NOTE 5: SHARE CAPITAL Information with respect to outstanding common shares is as follows: Shares
    
    AmountJune 30, 2004
    
    
    54,825,199
    
    
    $
    270,822August 3, 2004
    
    
    54,731,699
 Information with respect to the Companys stock option plan for the six month
period ended June 30, 2004 and June 30, 2003 is as follows: June 30, 2004
    
    June 30, 2003Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNumber
    
    Price
    
    Number
    
    PriceOptions
outstanding,
beginning of period
    
    
    2,743,750
    
    
    $
    12.20
    
    
    
    3,657,200
    
    
    $
    9.30Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised
    
    
    391,400
    
    
    $
    10.10
    
    
    
    539,500
    
    
    $
    8.34Options cancelled
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    $
    16.58Options
outstanding, end of
period
    
    
    2,352,350
    
    
    $
    12.23
    
    
    
    3,115,700
    
    
    $
    11.32
 In June 2004, the Company filed a Normal Course Issuer Bid with the Toronto
Stock Exchange to repurchase up to 4.7 million common shares, for cancellation,
over the period from June 11, 2004 to June 10, 2005. The shares will be
repurchased at the market price. The number of shares repurchased during any
30-day period may not exceed 2% of the total outstanding common shares. There
were no common shares repurchased during the three month period ending June 30,
2004. 12




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 6: STOCK BASED COMPENSATION (a) Stock option plan In 2003, the Company adopted on a prospective basis the fair value method of
accounting for stock options. The fair value method was applied to all stock
options issued on or after January 1, 2003. Compensation expense relating to
stock options recorded in the income statement for the six months ended June
30, 2004 amounted to $250 (2003  $nil); and for the three month period ended
June 30, 2004 compensation expense totaled $125 (2003  $nil). For options granted in 2002, the pro-forma effect of fair value accounting
applied to stock options issued between January 1 and December 31, 2002 for the
six month and three month periods ending June 30, 2004 and June 30, 2003 is as
follows: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income as reported
    
    $
    63,935
    
    
    $
    47,683
    
    
    $
    36,191
    
    
    $
    27,339Deduct: Stock based
compensation costs using
fair value method, net of
tax
    
    
    (300
    )
    
    
    (605
    )
    
    
    (104
    )
    
    
    (225
    )Pro-forma net income
    
    $
    63,635
    
    
    $
    47,078
    
    
    $
    36,087
    
    
    $
    27,114Net income per shareBasic  as reported
    
    $
    1.17
    
    
    $
    0.89
    
    
    $
    0.66
    
    
    $
    0.51Basic  pro-forma
    
    
    1.16
    
    
    
    0.88
    
    
    
    0.66
    
    
    
    0.50Diluted  as reported
    
    $
    1.14
    
    
    $
    0.87
    
    
    $
    0.65
    
    
    $
    0.50Diluted  pro-forma
    
    
    1.14
    
    
    
    0.86
    
    
    
    0.64
    
    
    
    0.49
 (b) Other stock-based compensation plan Total compensation expense recorded in connection with the Companys Restricted
Share Unit and Deferred Share Unit plans for the six month ended June 30, 2004
was $1,468 (2003  $Nil). For the three month period ended June 30, 2004,
total compensation expense was $600 (2003  $Nil). NOTE 7: PENSION AND POST-RETIREMENT BENEFITS (a) Defined contribution plans For certain subsidiaries the Company matches a portion of employee
contributions to defined contribution retirement plans. Total contributions by
the Company for the six month and three month periods ended June 30, 2004 and
June 30, 2003 were as follows: 13




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Cash contributions
    
    $
    2,915
    
    
    $
    2,812
    
    
    $
    1,408
    
    
    $
    1,331
 (b) Defined benefit plans Certain of the Companys subsidiaries maintain defined benefit pension plans
for specific employees. Information about the Companys total benefit cost for
these defined benefit plans for the six month and three month periods ended
June 30, 2004 and June 30, 2003 is as follows: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Current service cost
    
    $
    434
    
    
    $
    865
    
    
    $
    217
    
    
    $
    432Interest cost
    
    
    1,683
    
    
    
    1,699
    
    
    
    841
    
    
    
    850Expected return on
plan assets
    
    
    (1,939
    )
    
    
    (1,987
    )
    
    
    (969
    )
    
    
    (994
    )Amortization of prior
service cost
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    24Net benefit cost
    
    $
    178
    
    
    $
    625
    
    
    $
    89
    
    
    $
    312
 In the fourth quarter of 2003, the Company curtailed its defined benefit
pension plan for U.S. salaried and non-unionized hourly workers. In addition,
the Company also maintains certain other defined benefit plans, principally in
the U.K. which have been curtailed in prior years and for which the net pension
liability is not significant. (c) Post-retirement benefits Certain of the Companys subsidiaries maintain defined post-retirement benefit
plans for specific employees. Information about the Companys total benefit
cost for these post-retirement benefits for the six month and three month
periods ended June 30, 2004 and June 30, 2003 is as follows: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Current service cost
    
    $
    117
    
    
    $
    152
    
    
    $
    58
    
    
    $
    76Interest cost
    
    
    104
    
    
    
    134
    
    
    
    52
    
    
    
    67Settlement gain
    
    
    (45
    )
    
    
    
    
    
    
    (22
    )
    
    
    Curtailment gain
    
    
    (2,015
    )
    
    
    
    
    
    
    (2,015
    )
    
    
    Net benefit cost (income)
    
    $
    (1,839
    )
    
    $
    286
    
    
    $
    (1,927
    )
    
    $
    143
 14




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 8: EARNINGS PER SHARE The computations for basic and diluted earnings per share for the six month and
three month periods ending June 30, 2004 and June 30, 2003 are as follows: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    63,935
    
    
    $
    47,683
    
    
    $
    36,191
    
    
    $
    27,339Weighted average number of
common shares outstanding
(000s):Basic
    
    
    54,746
    
    
    
    53,607
    
    
    
    54,789
    
    
    
    53,706Effect of share options
and warrants
    
    
    1,293
    
    
    
    1,424
    
    
    
    1,262
    
    
    
    1,344Diluted
    
    
    56,039
    
    
    
    55,031
    
    
    
    56,051
    
    
    
    55,050Earnings per shareBasic
    
    $
    1.17
    
    
    $
    0.89
    
    
    $
    0.66
    
    
    $
    0.51Diluted
    
    
    1.14
    
    
    
    0.87
    
    
    
    0.65
    
    
    
    0.50
 All share options to purchase common shares during the three and six month
periods ended June 30, 2004 and 2003 were included in the computation of
diluted earnings per share because the exercise price was lower than the
average market price of the common shares during the period. The sum of basic and diluted earnings per share for the quarters may differ
from the basic and diluted earnings per share for the year due to differences
in the average number of shares outstanding. NOTE 9: COMMITMENTS The Company has entered into foreign currency contracts to hedge foreign
currency risk. At June 30, 2004, unrealized gains totaled $438 (2003  $5,772)
and unrealized losses totaled $1,532 (2003  $971). At June 30, 2004, the
Company had forward contracts in place to sell UK pound sterling in the amount
of £3,000 in exchange for U.S. dollars over a period of 6 months at an average
exchange rate of $1.6543, and £9,000 in exchange for euros over a period of 6
months at an average exchange rate of ¬1.3955. In addition, the Company had
forward contracts in place to sell US dollars in the amount of $28,639 in
exchange for Canadian dollars over a period of 10 months at an average exchange
rate of $1.3745. Future minimum payments, for the next five periods ending June 30, under
non-cancelable operating leases with initial or remaining terms of one year or
more consisted of the following at June 30, 2004: 15




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) 2005
    
    $
    16,9102006
    
    
    11,4202007
    
    
    8,2022008
    
    
    6,0382009
    
    
    4,399Thereafter
    
    
    11,876$
    58,845
 NOTE 10: GUARANTEES AND CONTINGENCIES The Company is involved in various claims and legal actions. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Companys consolidated financial position or liquidity. The Company was a guarantor under certain performance letters of credit arising
from a previous transaction in the amount of $8.9 million which were
extinguished in April 2004. NOTE 11: LONG-TERM DEBT June 30,
    
    December 31,2004
    
    2003Bank term loans due August 31, 2006
    
    $
    66,918
    
    
    $
    34,418Bank term loans due August 31, 2008
    
    
    572,556
    
    
    
    425,181Bank term loans due June 28, 2007
    
    
    17,500
    
    
    
    20,000Other loans with various maturities
    
    
    16,449
    
    
    
    3,159673,423
    
    
    
    482,758Less current portion
    
    
    56,849
    
    
    
    35,498$
    616,574
    
    
    $
    447,260
 During the first six months of 2004, the Company negotiated additional term
borrowing of $200 million that were used principally to fund an acquisition
(see Note 2). The new facilities consist of a $50 million term loan due August
31, 2006 bearing interest at LIBOR plus 1.50%, and a $150 million term loan due
August 31, 2008 bearing interest at LIBOR plus 2.25%. The additional
borrowings have terms and conditions substantially similar to the existing
borrowings. Interest on long-term debt in the six month period ended June 30,
2004 was $17,339 (2003  $16,814) and for the three months ending June 30, 2004
was $9,132 (2003  $8,458). The aggregate amount of principal repayments in each of the next five periods
ending June 30 is as follows: 16




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) 2005
    
    $
    56,8492006
    
    
    34,7462007
    
    
    19,1782008
    
    
    520,9082009
    
    
    41,742
 NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the six month and three month periods
ending June 30, 2004 and June 30, 2003 are as follows: For the Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest paid
    
    $
    16,686
    
    
    $
    21,147
    
    
    $
    9,452
    
    
    $
    9,008Income taxes paid
    
    
    13,193
    
    
    
    10,440
    
    
    
    6,586
    
    
    
    5,066Income tax refunds
    
    
    4,749
    
    
    
    365
    
    
    
    2,685
    
    
    
    277Note payable issued
in connection with
business
combination
    
    
    
    
    
    
    659
    
    
    
    
    
    
    
    659
 NOTE 13: ADDITIONAL SEGMENTED INFORMATION June 30,
    
    December 31,2004
    
    2003Property, plant and equipment:Canada
    
    $
    83,115
    
    
    $
    84,163North America
    
    $
    515,768
    
    
    $
    473,230Europe and other
    
    
    295,570
    
    
    
    278,880$
    811,338
    
    
    $
    752,110Goodwill and other intangibles:Canada
    
    $
    54,335
    
    
    $
    26,442North America
    
    $
    254,502
    
    
    $
    120,578Europe and other
    
    
    29,569
    
    
    
    9,897$
    284,071
    
    
    $
    130,475
 17




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 14: RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES These unaudited consolidated financial statements have been prepared in
accordance with Canadian GAAP which differs in certain respects from United
States GAAP. Following is a summary of the effect of significant differences
in GAAP on the Companys unaudited consolidated financial statements for the
six month and three month periods ended June 30, 2004 and June 30, 2003
respectively: Six Months Ended
    
    Three Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income based on
Canadian GAAP
    
    $
    63,935
    
    
    $
    47,683
    
    
    $
    36,191
    
    
    $
    27,339Effect of SFAS 133,
net of tax
    
    
    2,405
    
    
    
    (1,524
    )
    
    
    1,265
    
    
    
    (1,231
    )Net income based on
United States GAAP
    
    $
    66,340
    
    
    $
    46,159
    
    
    $
    37,456
    
    
    $
    26,108Earnings per share
under United States
GAAPBasic
    
    $
    1.21
    
    
    $
    0.86
    
    
    $
    0.68
    
    
    $
    0.49Diluted
    
    
    1.18
    
    
    
    0.84
    
    
    
    0.67
    
    
    
    0.47
 Effect of SFAS 133 United States Accounting Standard SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, requires that all derivative instruments
be reported on the balance sheet at fair value and establishes criteria for
designation and effectiveness of hedging relationships. The Company has entered into interest rate swap agreements to convert a portion
of its floating rate debt into fixed rate debt in accordance with the Companys
risk management objective of mitigating the variability and uncertainty in its
cash flows due to variable interest rates. As at June 30, 2004, the total
floating rate debt effectively converted to fixed rate debt was $281,250.
These agreements mature at various dates through 2006. The criteria under United States GAAP for hedge accounting were not met prior
to the establishment of the above noted interest rate swap agreements.
Accordingly, any change in the fair value of the interest rate swaps was
reported in income prior to January 1, 2004. As of January 1, 2004, the
Company had met the criteria for designating and assessing the effectiveness of
hedging relationships, thus the interest rate swaps were designated as cash
flow hedges. Under United States GAAP, a portion of the changes in fair values
of these financial instruments is recognized in the income statement. 18




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended June 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 15: SUBSEQUENT EVENT Subsequent to quarter end, the Company completed its previously announced
acquisition of a 50% equity interest in a composite molding door facing
manufacturing facility for consideration of $25 million in cash from Samling
Strategic Corporation. NOTE 16: COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current
year basis of presentation. 19




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion has been prepared by management and is a review of
Masonite International Corporations (the Company or Masonite) financial
condition and results of operations for the six months and quarter ended June
30, 2004 based upon Canadian generally accepted accounting principles (GAAP).
All amounts are in United States dollars unless specified otherwise. This Management Discussion and Analysis (MD&A) should be read in conjunction
with the Companys unaudited consolidated financial statements and annual
audited financial statements and accompanying notes for the year ended December
31, 2003. Overview of the Business Masonite is one of the worlds largest manufacturers and merchandisers of
doors, door components and door entry systems to the home improvement and home
construction markets. Masonite operates over 75 facilities in 16 countries and
has approximately 14,000 employees. The Company sells its products to
distributors, jobbers, home centre chains and wholesale and retail building
supply dealers worldwide. A summary of the Companys results for the three most recently completed fiscal
years is as follows: For the Fiscal Year Ended December 31,(thousands of dollars, except per share amounts)2003
    
    2002 (1)
    
    2001 (1)Operating DataSales
    
    $
    1,777,238
    
    
    $
    1,619,516
    
    
    $
    1,421,602Net income
    
    $
    107,671
    
    
    $
    89,543
    
    
    $
    39,460Net income per shareBasic
    
    $
    2.00
    
    
    $
    1.70
    
    
    $
    0.84Diluted
    
    $
    1.95
    
    
    $
    1.65
    
    
    $
    0.84Balance Sheet DataTotal assets
    
    $
    1,693,151
    
    
    $
    1,462,791
    
    
    $
    1,442,286Long-term financial
liabilities (2)
    
    $
    482,758
    
    
    $
    533,582
    
    
    $
    489,880
  (1) Net income for 2002 includes a gain on refinancing of $2,990 and 2001
includes debt extinguishment
costs of $17,370.(2) Long-term financial liabilities consists of long-term debt including
current maturities. The market demand for building products is determined by various factors
including general economic conditions, interest rates, levels of unemployment,
consumer confidence and the 20




---



##### 



availability of credit. These factors influence the demand for building
products used in both new residential and commercial construction and, to a
lesser extent, affect building products usage in home renovation, remodeling
and repair. The pace of existing home sales also affects the demand for
building products used in home renovation, remodeling and repair. A
significant and growing portion of the Companys sale of doors, door components
and door entry systems are used for home improvement and repair projects. Results of Operations  Six Months ended June 30, 2004 compared with Six Months
ended June 30, 2003 Consolidated sales in the first six months of 2004 increased approximately 20%
or $174 million to $1,033 million from sales of $859 million in 2003. The 20%
year-over-year sales increase was the result of internal growth (12%) and
acquisitions (8%). In all Masonite markets demand in both the home improvement
and new construction sectors was stronger in the first half of 2004 than the
first half of last year. In 2003, the Company was negatively affected by harsh
weather conditions and greater consumer uncertainty because of geopolitical
events. Sales in 2004 were positively impacted by acquisitions and the release
of several new interior and exterior products as well as the continued
implementation of the Companys All Products Strategy and integrated sales
structure. The proportion of revenues from interior and exterior products was
approximately 64% and 36% ($656 million and $376 million) respectively in 2004,
compared to 67% and 33% ($572 million and $287 million) respectively, in the
first half of 2003. The increase in exterior products as a percent of total
sales was the result of the Companys continued focus on exterior products and
the March 2004 acquisition of the entry door business from the Stanley Works.
Innovative new fiberglass exterior doors, new customers, new programs and
continued marketing and advertising also contributed to the growth in exterior
products. Sales in the Companys principal market segment, North America, increased by
approximately 20% to $827 million in the first six months of 2004 versus $691
million reported in the same period in 2003. The 20% year-over-year sales
increase was the result of internal growth (11%) and acquisitions (9%). North
American sales were positively impacted by acquisitions and the release of
several new interior and exterior products as well as the continued
implementation of the Companys All Products Strategy and integrated sales
structure. Sales in the Companys other segment, Europe and other, increased by
approximately 20% to $225 million in the first six months of 2004 versus $187
million in the same period in 2003. The 20% year-over-year sales increase was
the result of internal growth (19%) and acquisitions (1%). Demand from both
the new construction and home renovation sectors were very strong in the
Companys primary markets in 2004. With the Companys European acquisition in
June, 2004, the Company expanded its European presence to include several
eastern European markets. Cost of sales, expressed as a percentage of sales, increased to 78.2% in 2004
from 77.6% in 2003. Many industries are experiencing increasing costs and, in
some cases shortages of supply, particularly as it relates to steel,
transportation, lumber and wood related components. These external factors
impacted the financial results of the Company in the second quarter. The
effect of these cost increases were substantially mitigated through
improvements to operating leverage 21




---



##### 



from the 20% increase in sales in the first six months, the use of alternative
products and sources of supply, and price increases to customers. The
continuing impact of these and other measures is difficult to estimate due to
the potential timing difference between input cost changes, availability of
material and the Companys ability to mitigate them. These external factors
may impact the financial results of the Company in the second half of 2004.
Assuming costs remain relatively stable for the rest of the year, the Company
expects improvement in margins in the third and fourth quarters. Selling, general and administrative expenses as a percentage of sales were
8.8%, or $91 million, compared with 9.6%, or $83 million, in the previous year.
The decrease in selling, general and administrative expenses as a per cent of
sales is primarily due to the relatively fixed nature of these costs applied
over a larger sales base. The expenditure for the year is expected to be
approximately 9% of sales. Consolidated EBITDA margins increased to 13.0% from 12.7% for comparable the
six month period. This 13% margin is consistent with the Companys first
quarter 2004 results. As disclosed in the segmented information of the financial statements, segment
operating income margins in the North American segment increased to 12.1% from
11.7% for the six month period. The volatility discussed above
disproportionately affected this segment. As disclosed in the segmented information of the financial statements, segment
operating income margins in the Europe and other segment declined to 10.7% from
10.9% for the six month period, primarily as a result of increases in
transportation and material costs not offset by increases in prices.. Depreciation and amortization expense increased approximately $3 million in the
first six months of 2004 to $27 million from $24 million in 2003. The increase
in depreciation and amortization is the result of acquisitions and additional
depreciation being incurred on capital expenditures from 2003. Interest expense decreased approximately $0.4 million in comparison to the
first half of 2003. The decrease in finance costs is due to lower debt levels
in the first part of 2004 and a reduction in interest rates from last year. The Companys effective income tax rate is the weighted average of federal,
state and provincial rates in various countries in which the Company has
operations including the United States, Canada, France, the United Kingdom and
Ireland. The Companys 2004 net income for the first half of the year increased
approximately 34% or $16 million to $64 million ($1.17 per share) from $48
million in 2003 ($0.89 per share). Basic earnings per share of $1.17 in 2004
and $0.89 in 2003 are calculated using the weighted average number of shares
outstanding for the six-month period of approximately 54.7 million and 53.6
million, respectively. Calculations of diluted earnings per share of $1.14 in
2004 and $0.87 in 2003 reflect the dilution effect from the assumed exercise of
options and warrants where the 22




---



##### 



exercise price was lower than the average market price of the common shares for
the reporting period. The weighted average number of diluted shares for the
six month period ended June 30, 2004 were approximately 56.0 million (2003 
55.0 million). Results of Operations  Second Quarter of 2004 compared with Second Quarter of
2003 Consolidated sales in the second quarter of 2004 increased approximately 24% or
$108 million to $565 million from sales of $457 million in 2003. The 24%
quarter-over-quarter sales increase was the result of internal growth (14%) and
acquisitions (10%). In all Masonite markets demand in both the home
improvement and new construction sectors was stronger this quarter than the
comparable period in 2003. Sales in 2004 were also positively impacted by
acquisitions and the release of several new interior and exterior products as
well as the continued implementation of the Companys All Products Strategy
and integrated sales structure. The proportion of revenues from interior and
exterior products was approximately 60% and 40% ($337 million and $227 million)
respectively, in 2004 compared to 63% and 37% ($288 million and $168 million)
respectively, in the second quarter of 2003. The increase in exterior products
as a percent of total sales was the result of the Companys continued focus on
exterior products and the March 2004 acquisition of the entry door business
from the Stanley Works. Innovative new fiberglass exterior doors, new
customers, new programs and continued marketing and advertising also
contributed to the growth in exterior products. Sales in the Companys principal market segment, North America, increased by
approximately 25% to $459 million in the second quarter of 2004 versus $367
million reported in the same period in 2003. The 25% quarter-over-quarter
sales increase was the result of internal growth (11%) and acquisitions (14%).
North American sales were positively impacted by acquisitions and the release
of several new interior and exterior products as well as the continued
implementation of the Companys All Products Strategy and integrated sales
structure. Sales in the Companys other segment, Europe and other, increased by
approximately 17% to $116 million in the second quarter of 2004 versus $99
million in the same period in 2003. The 17% quarter-over-quarter sales
increase was the result of internal growth (15%) and acquisitions (2%). Demand
from both the new construction and home renovation sectors were very strong in
the Companys primary markets in 2004. With the Companys European acquisition
in June, 2004, the Company expanded its European penetration to include several
eastern European markets. Cost of sales, expressed as a percentage of sales, increased to 78.6% in 2004
from 77.5% in 2003. Many industries are experiencing increasing costs and, in
some cases shortages of supply, particularly as it relates to steel,
transportation, lumber and wood related components. These external factors
impacted the financial results of the Company in the second quarter. The
effect of these cost increases were substantially mitigated through
improvements to operating leverage from the 24% increase in sales in the
quarter, the use of alternative products and sources of supply, and price
increases to customers. The continuing impact of these and other proactive
measures is difficult to estimate due to the potential timing difference
between input cost changes, availability of material and the Companys ability
to mitigate them. These external 23




---



##### 



factors may impact the financial results of the Company in the second half of
2004. Assuming costs remain relatively stable for the rest of the year, the
Company expects improvement in margins in the third and fourth quarters. Selling, general and administrative expenses as a percentage of sales were
8.3%, or $47 million, compared with 9.2 %, or $42 million, in the comparable
quarter. The decrease in selling, general and administrative expenses as a per
cent of sales is primarily due to the relatively fixed nature of these costs
applied over a larger sales base. The expenditure for the year is expected to
be approximately 9% of sales. Consolidated EBITDA margins decreased to 13.1% from 13.3% for the comparable
three month period. This 13% margin is consistent with the Companys first
quarter 2004 results. As disclosed in the segmented information of the financial statements, segment
operating income margins in the North American segment decreased to 12.0% in
2004 from 12.2% in 2003 for the three month period. The volatility discussed
above disproportionately affected this segment. As disclosed in the segmented information of the financial statements, segment
operating income margins in the Europe and other segment declined to 11.2% in
2004 from 11.7% in 2003 for the three month period, primarily as a result of
increased transportation and material costs not offset by increases in prices. Depreciation and amortization expense increased approximately $3 million in the
second quarter of 2004 to $15 million from $12 million in 2003. The increase
in depreciation and amortization is the result of acquisitions and additional
depreciation being incurred on capital expenditures from 2003. Interest expense decreased approximately $0.1 million in comparison to the
second quarter of 2003. The decrease in finance costs is due to a reduction in
interest rates from last year. The Companys effective income tax rate is the weighted average of federal,
state and provincial rates in various countries in which the Company has
operations including the United States, Canada, France, the United Kingdom and
Ireland. The Companys 2004 net income for the second quarter increased approximately
32% or $9 million to $36 million ($0.66 per share) from $27 million in 2003
($0.51 per share). Basic earnings per share of $0.66 in 2004 and $0.51 in 2003
are calculated using the weighted average number of shares outstanding for the
three-month period of approximately 54.8 million and 53.7 million,
respectively. Calculations of diluted earnings per share of $0.65 in 2004 and
$0.50 in 2003 reflect the dilution effect from the assumed exercise of options
and warrants where the exercise price was lower than the average market price
of the common shares for the reporting period. The weighted average number of
diluted shares for the quarter ended June 30, 2004 was approximately 56.1
million (2003  55.1 million). 24




---



##### 



Summary of Quarterly Results (unaudited) Selected Quarterly Information(thousands of dollars, except per share amounts)June 30,
    
    March 31,
    
    December 31,
    
    September2004
    
    2004
    
    2003
    
    30, 2003Sales
    
    $
    564,567
    
    
    $
    467,967
    
    
    $
    455,897
    
    
    $
    462,169Net Income
    
    $
    36,191
    
    
    $
    27,744
    
    
    $
    29,198
    
    
    $
    30,790Net Income per ShareBasic (1)
    
    $
    0.66
    
    
    $
    0.51
    
    
    $
    0.54
    
    
    $
    0.57Diluted (1)
    
    $
    0.65
    
    
    $
    0.50
    
    
    $
    0.53
    
    
    $
    0.56
 June 30,
    
    March 31,
    
    December 31,
    
    September2003
    
    2003
    
    2002
    
    30,2002Sales
    
    $
    456,955
    
    
    $
    402,217
    
    
    $
    395,808
    
    
    $
    427,680Net Income
    
    $
    27,339
    
    
    $
    20,344
    
    
    $
    22,209
    
    
    $
    29,176Net Income per ShareBasic (1)
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    0.42
    
    
    $
    0.55Diluted (1)
    
    $
    0.50
    
    
    $
    0.37
    
    
    $
    0.40
    
    
    $
    0.53
  (1)
    
    The sum of basic and diluted earnings per share for the four quarters may
differ from the basic and
diluted earnings per share for the year due to differences in the average
number of shares outstanding. Liquidity Maintaining significant levels of liquidity and generating adequate amounts of
free cash flow are important components of the Companys financial strategy. The Company generated approximately $88 million of cash flow in operations for
the first half of 2004 compared to a use of $17 million in the same period in
the prior year. At the end of the second quarter 2004, the Company sold
approximately $65 million of trade accounts receivable on a non-recourse basis.
The cost of this accounts receivable program is less than the Companys
variable cost of debt. During the second quarter of 2004, the Company generated approximately $123
million in cash flow from operating activities (2003  $14 million) primarily
through strong earnings and the reduction of working capital. At the end of
the second quarter 2004, the Company sold approximately $65 million of trade
accounts receivable on a non-recourse basis. Investing activities used cash of approximately $233 million in the first half
of 2004 compared to $23 million in the prior year. Capital expenditures were
$11 million higher in the current year as the Company is now servicing a larger
fixed asset base. Management expects the Companys total capital expenditures
in 2004 to be in the range of $50  $60 million. Acquisitions thus far in 2004
consisted of the purchase of the residential entry door business of the Stanley
Works for 25




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##### 



$163 million and a 75% interest in a door manufacturer in Eastern Europe for
$22 million. The Company also made an equity investment in a door component
manufacturing facility for cash consideration of $8 million in the second
quarter. Subsequent to quarter end, the Company announced that it had completed its
previously announced acquisition of a 50% equity interest in a wood composite
molded door facing manufacturing subsidiary of Samling Strategic Corporation
for approximately $25 million. Investing activities in the second quarter used cash of approximately $49
million, as compared to a use of approximately $14 million in the second
quarter of 2003. The primary uses of cash in the second quarter of 2004 were
capital expenditures ($17 million) and an acquisition ($22 million). Financing activities in the first half of 2004 generated approximately $186
million of cash flow compared to a cash inflow of $5 million in the prior year.
The Company increased its long-term debt by approximately $200 million and
made repayments of long term debt of $23 million. The issuance of common
shares on the exercise of options and warrants generated $4 million of cash
flow in 2004 (2003  $4 million). There were no significant financing activities in the second quarter other than
normal course debt payments and the continued exercise of options for a net use
of cash of approximately $17 million (2003  $11 million) The Companys working capital ratio declined to 1.95 to 1.0 at June 30, 2004
compared to 2.04 to 1.0 at December 31, 2003. The Companys debt to equity
ratio increased to 0.64 to 1.0 at June 30, 2004 compared to 0.49 to 1.0 at
December 31, 2003. This increase can be attributed to the acquisitions noted
above. Management believes that its current cash balance plus future cash flows from
operations and the additional bank term loans referred to in the above
paragraphs will be sufficient to fund its near-term working capital and other
investment needs. The following table summarizes the Companys significant contractual obligation
and commercial commitments at June 30, 2004: 26




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##### 



Contractual Obligation Payments Due by PeriodLessthan
    
    1-3
    
    4-5
    
    After 5(In millions of U.S. dollars)
    
    Total
    
    1 year
    
    Years
    
    years
    
    YearsShort-term debt
    
    $
    12
    
    
    $
    12
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    $
    673
    
    
    $
    57
    
    
    $
    575
    
    
    $
    41
    
    
    $
    Operating leases
    
    $
    59
    
    
    $
    17
    
    
    $
    20
    
    
    $
    10
    
    
    $
    12Commercial
commitments (1)
    
    $
    188
    
    
    $
    48
    
    
    $
    110
    
    
    $
    30
    
    
    $
    Total contractual
cash obligations
    
    $
    932
    
    
    $
    134
    
    
    $
    705
    
    
    $
    81
    
    
    $
    12
  (1) Commercial commitments consist of agreements to purchase goods and
services that are enforceable and legally binding. In addition, the purchase
commitments specify all significant terms including fixed or minimum quantities
to be purchased and the timing of the transaction. Commercial commitments
exclude normal course purchase orders for raw materials or other goods and
services as they represent authorizations to purchase rather than binding
contracts. Capital Resources Capital Structure Composition (%) June 30,
    
    December 31,
    
    December 31,2004
    
    2003
    
    2002Shareholders equity
    
    
    48
    %
    
    
    54
    %
    
    
    45
    %Non-controlling interest
    
    
    3
    
    
    
    2
    
    
    
    2Short-term debt
    
    
    1
    
    
    
    1
    
    
    
    1Long-term debt (2)
    
    
    41
    
    
    
    35
    
    
    
    44Future income taxes
    
    
    7
    
    
    
    8
    
    
    
    8100
    %
    
    
    100
    %
    
    
    100
    %
  (2) Includes current portion of long-term debt Historically, the Company has funded its growth through a combination of cash
generated from operations, long-term bank debt and other borrowings, and by the
periodic issuance of common shares. The Companys senior credit facility consists of a $100 million long-term
revolving bank loan and four term loans totaling $639 million. The additional
$200 million in loans negotiated in March 2004 was primarily to fund the
Stanley Acquisition. 27




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##### 



Information on the Companys debt maturities is disclosed in Note 11 of the
unaudited consolidated financial statements. The aggregate amount of long-term
debt repayments required over the next five years is approximately $673 million
at June 30, 2004 compared to $483 million at December 31, 2003. Revolving bank lines are maintained to ensure short-term availability of funds.
Masonite and its subsidiaries had approximately $128 million of revolving bank
credit facilities established at June 30, 2004. Nothing was drawn at June 30,
2004 on the Companys main $100 million revolving bank loan. Approximately $12
million of the Companys $28 million of other current revolving bank lines were
utilized at the end of the second quarter, and was classified as current bank
indebtedness. The Company also had cash on hand of approximately $172 million
as at June 30, 2004. Off Balance Sheet Arrangements The Company does not have any material off-balance sheet arrangements other
than those disclosed in notes 5, 7, 11 and 12 in the 2003 annual audited
consolidated financial statements and notes 1, 3, 9 and 10 of these unaudited
consolidated financial statements. Transactions with Related Parties The Company does not engage in transactions with related parties other than in
the normal course of business with equity investments. Critical Accounting Policies and Estimates Masonites significant accounting policies are disclosed in Note 1 of the
unaudited consolidated financial statements, and Note 1 of the Companys annual
audited consolidated financial statements for the year ended December 31, 2003.
The preparation of these financial statements requires management to make
estimates that affect the reported amount of assets, liabilities, revenues and
expenses, and related disclosures of contingent items. The following
discussion addresses the Companys more critical accounting policies. These
policies are important to the presentation of the operating results and
financial position of the Company and require significant judgment or the use
of estimates. Inventory Masonite values its inventories on a first-in, first-out basis at the lower of
cost and replacement cost for raw materials, and the lower of cost and net
realizable value for finished goods. In determining net realizable value, the
Company considers such factors as yield, turnover or aging, expected future
demand and 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 sales. 28




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##### 



Goodwill and other intangibles The Company uses the purchase method of accounting for all business
acquisitions. Use of the purchase method for acquisitions frequently results
in the recording of goodwill and other intangibles as part of the purchase
price. Goodwill and intangibles with indefinite lives are not amortized but
instead are tested for impairment by the Company in the fourth quarter of each
year or more frequently if events or changes in circumstances indicate that an
impairment loss may have been incurred. Other intangible assets are amortized
over their estimated useful lives. Goodwill impairment analysis is performed
at the reporting unit level by comparing the reporting units carrying amount
to its fair value. Fair values of reporting units are estimated using an
income approach. In making this fair value assessment of goodwill and
intangible assets, management relies on a number of factors including operating
results, business plans, economic projections and anticipated future cash
flows. There are inherent uncertainties related to these factors and to
managements judgment in applying them to the analysis of goodwill and
intangible asset impairment. Since managements judgment is involved in
performing goodwill and intangible asset valuation analyses, any change in
estimates can affect the valuation of goodwill and intangible assets. Income Taxes The Companys consolidated income tax provision is calculated by determining
taxable income and then applying varying rates of income tax that are
appropriate in the numerous taxing jurisdictions in which Masonite conducts
business. In the ordinary course of conducting business internationally, there
can be numerous transactions and calculations where the ultimate tax outcome is
uncertain. The final result of these matters may be different from the
estimates that have been made in determining income tax provisions and
accruals. If these estimates and assumptions are determined to be inaccurate,
there could be a material effect on the Companys income tax provision and net
income in the period in which the determination is made. Masonite has recorded $34 million of future income tax assets. Future tax
assets are calculated based on tax rates to be applied in future periods.
Previously recorded tax assets and liabilities need to be adjusted when the
expected date of the future event is revised based on current information. A
valuation allowance has been recorded to reduce future tax assets to the amount
of the future tax benefit that is likely to be realized. In determining the
need for the valuation allowance, management considered such factors as
projected future taxable income, the character of the income tax asset and the
reversal of deferred income tax liabilities. If assumptions related to these
factors change significantly, then the valuation allowance, income tax expense
and net income may change materially in the period for which the determination
is made. Long-lived Assets Management periodically evaluates the recoverability of long-lived assets,
including property, plant and equipment and amortizable intangible assets based
on a two-step impairment analysis. In performing this evaluation, reliance is
placed upon a number of factors, which include operating results, business
plans, economic projections and anticipated cash flows. Masonite writes down
long-lived assets considered to be impaired based on an undiscounted cash flow
test to fair value. Fair values are based on assumptions concerning the amount
and timing of 29




---



##### 



estimated future cash flows and assumed discount rates that reflect varying
degrees of perceived risk. Since fair value is based on estimates of future
events, changes in estimates could result in write downs. Employee Future Benefit Plans The Company maintains defined benefit pension plans and other post retirement
benefits covering certain employees. The determination of Masonites
obligations and expenses for these plans uses several statistical and judgment
factors that include the probable mortality rates of members, expected
investment yields, the rates of wage and salary escalation, and expected ages
at which members will retire. These estimates may differ materially from
actual results that will occur over an extended period of time. Any
significant differences may have a material effect on the recorded pension
expense and carrying value of the plans net assets or net liabilities. In the
second quarter, the Company recognized a $2 million curtailment on its
post-retirement benefit plan as a result of the rationalization of non-core
products. Stock-based Compensation Beginning January 1, 2003, the Company adopted a fair value method of
accounting for all stock-based compensation payments to both employees and
non-employees as discussed in Note 1(n) of the Companys annual audited
consolidated financial statements for the year ended December 31, 2003. The
determination of Masonites obligations and compensation expense for these
plans uses several mathematical and judgment factors that include: the expected
volatility of the Companys common share price, the anticipated life of the
option, an estimated risk free interest rate and the number of options expected
to vest. These estimates may differ from actual results that will occur over
the life of the option. Any difference in the number of options that
ultimately vest can affect future compensation expense. Other assumptions are
not revised after the original estimate. In 2003, the Company adopted a Restricted Share Unit (RSU) and Deferred Share
Unit (DSU) program for certain key executives. Compensation expense related
to the RSUs and DSUs are recognized over the vesting period. Any significant
change in the Companys share price could have an impact on the compensation
expense recognized. Changes in Accounting Policies Included in Note 1 to the Companys unaudited consolidated financial statements
is a discussion on recently adopted accounting policies. Financial Instruments The Company utilizes certain financial instruments, principally interest rate
swap contracts and forward currency exchange contracts to manage the risk
associated with fluctuations in interest rates and currency exchange rates.
The Companys policy is not to utilize financial instruments for trading or
speculative purposes. Interest rate swap contracts are used to reduce the
impact of 30




---



##### 



fluctuating interest rates on the Companys long-term debt. These swap
agreements require the periodic exchange of payments without the exchange of
the notional principal amount of which the payments are based. Forward
currency exchange contracts are used to reduce the impact of fluctuating
exchange rates on the Companys purchases of materials and sale of goods in
foreign currencies. The Company formally documents all significant relationships between hedging
instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives to specific assets and liabilities on the balance sheet
or to specific firm commitments or anticipated transactions. The Company also
formally assesses, both at the hedges inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. Almost 100% of the Companys interest-bearing debt carries a floating interest
rate. Therefore, in the normal course of business Masonite is exposed to
changes in short-term interest rates that can create uncertainty and
variability in its cash flows. To mitigate this exposure, in September 2001 the
Company entered into a five-year interest rate swap agreement converting a
notional $250 million of floating-rate debt into fixed-rate debt that currently
bears interest at 7.96%. In August 2002, another five-year interest rate swap
agreement was executed converting an additional $75 million of amortizing
floating-rate debt into a fixed-rate debt at 5.47%. After giving effect to
these interest rate swaps, approximately 59% of the Companys outstanding
interest-bearing debt carries a floating interest rate and the other 41% is
effectively at fixed rates as at June 30, 2004. Management believes that these
interest rate swaps are highly effective in achieving their economic purpose. The Companys forward exchange contracts do not subject the Company to risk
from exchange rate movements because gains and losses on such contracts offset
losses and gains on transactions being hedged. The Company does not require
collateral or other security to support financial instruments with credit risk.
The amount of foreign exchange contracts outstanding at June 30, 2004 is
described in Note 9 to the unaudited consolidated financial statements.
Additional information with respect to the Companys use of financial
instruments is available in the annual audited consolidated financial for the
year ended December 31, 2003. Non-GAAP Financial Measures This MD&A contains non-GAAP measures. Securities regulators require that
corporations caution readers that these terms do not have standardized meanings
under GAAP and are unlikely to be comparable to similar measures used by other
companies. In this MD&A, debt to equity ratio is defined as interest bearing
debt, net of cash, divided by shareholders equity. In addition, EBITDA is
defined as earnings before depreciation and amortization, other (income)
expense, interest, income taxes and non-controlling interest. 31




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##### 



Normal Course Issuer Bid In June 2004, the Company filed a Normal Course Issuer Bid with the Toronto
Stock Exchange. A copy of the Notice relating to the Normal Course Issuer Bid
may be obtained from the Company, without charge, by contacting the Companys
Investor Relations Department at investorrelations@masonite.com. Forward-Looking Statements These unaudited consolidated financial statements, MD&A and other written
reports and oral statements made by the Company may include forward-looking
statements, all of which are subject to risks and uncertainties. One can
identify these forward-looking statements by their use of words such as
expects, plans, will, estimates, intends, forecasts, projects and
other words of similar meaning, or by the fact that they do not relate strictly
to historical or current facts. These statements are likely to address, but
may not be limited to, the Companys growth strategy and financial results.
Readers must carefully consider any such developments to differ materially from
the Companys forward-looking statements. These factors may include inaccurate
assumptions and a broad variety of other known and unknown risks and
uncertainties, including: general economic, market and business conditions;
levels of construction and renovation activity; competition; financing risks;
ability to manage expanding operations; commitments; new services; retention of
key management personnel; environmental and other government regulation; and
other factors. No forward-looking statement can be guaranteed and actual
future results may vary materially. The Company disclaims any responsibility
to update these forward-looking statements. In addition to the information in the unaudited consolidated financial
statements and MD&A, Masonites Annual Information Form can be found on the
Companys website at www.masonite.com, and the SEDAR website at www.sedar.com. 32