##### 



(MASONITE INTERNATIONAL CORPORATION LOGO) Third Quarter Report
to Shareholders
September 30, 2004




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##### 



MASONITE INTERNATIONAL CORPORATION
Quarterly Report to Shareholders
September 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. October 20, 2004 1




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Period of nine months ended September 30(In thousands of U.S. dollars except per share amounts) 2004
    
    2003Sales
    
    $
    1,629,703
    
    
    $
    1,321,341Cost of sales
    
    
    1,276,716
    
    
    
    1,025,880352,987
    
    
    
    295,461Selling, general and administration
    
    
    140,652
    
    
    
    122,828Income before the undernoted
    
    
    212,335
    
    
    
    172,633Depreciation and amortization
    
    
    44,345
    
    
    
    36,017Income before other expense, interest and income taxes
    
    
    167,990
    
    
    
    136,616Other (income) expense
    
    
    (1,337
    )
    
    
    399Interest
    
    
    28,871
    
    
    
    27,129140,456
    
    
    
    109,088Income taxes
    
    
    34,698
    
    
    
    26,088105,758
    
    
    
    83,000Non-controlling interest
    
    
    5,148
    
    
    
    4,527Net income
    
    
    100,610
    
    
    
    78,473Earnings per share:Basic
    
    $
    1.84
    
    
    $
    1.46Diluted
    
    $
    1.80
    
    
    $
    1.42
 2




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Period of three months ended September 30(In thousands of U.S. dollars except per share amounts) 2004
    
    2003Sales
    
    $
    597,169
    
    
    $
    462,169Cost of sales
    
    
    469,283
    
    
    
    359,034127,886
    
    
    
    103,135Selling, general and administration
    
    
    50,125
    
    
    
    40,018Income before the undernoted
    
    
    77,761
    
    
    
    63,117Depreciation and amortization
    
    
    16,875
    
    
    
    12,179Income before other expense, interest and income taxes
    
    
    60,886
    
    
    
    50,938Other (income) expense
    
    
    (2,533
    )
    
    
    69Interest
    
    
    10,968
    
    
    
    8,86352,451
    
    
    
    42,006Income taxes
    
    
    13,398
    
    
    
    9,02739,053
    
    
    
    32,979Non-controlling interest
    
    
    2,378
    
    
    
    2,189Net income
    
    
    36,675
    
    
    
    30,790Earnings per share:Basic
    
    $
    0.67
    
    
    $
    0.57Diluted
    
    $
    0.66
    
    
    $
    0.56
 3




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##### 



UNAUDITED CONSOLIDATED BALANCE SHEETS(In thousands of U.S. dollars) September 30
    
    December 312004
    
    2003ASSETSCash
    
    $
    125,085
    
    
    $
    129,676Accounts receivable
    
    
    259,992
    
    
    
    258,264Inventories
    
    
    391,197
    
    
    
    321,145Prepaid expenses
    
    
    21,677
    
    
    
    17,185Current future income taxes
    
    
    28,785
    
    
    
    29,318826,736
    
    
    
    755,588Property, plant and equipment
    
    
    909,323
    
    
    
    752,110Goodwill and other intangibles
    
    
    300,475
    
    
    
    130,475Other assets
    
    
    49,500
    
    
    
    46,663Long-term future income taxes
    
    
    9,319
    
    
    
    8,3151,268,617
    
    
    
    937,563$
    2,095,353
    
    
    $
    1,693,151LIABILITIES AND SHAREHOLDERS EQUITYBank indebtedness
    
    $
    19,987
    
    
    $
    6,608Accounts payable and accrued liabilities
    
    
    329,176
    
    
    
    301,484Income taxes payable
    
    
    37,729
    
    
    
    27,013Current portion of long-term debt
    
    
    48,936
    
    
    
    35,498435,828
    
    
    
    370,603Long-term debt
    
    
    621,293
    
    
    
    447,260Long-term future income taxes
    
    
    114,575
    
    
    
    106,662Non-controlling interest
    
    
    79,132
    
    
    
    35,9861,250,828
    
    
    
    960,511Share capital
    
    
    270,966
    
    
    
    266,870Contributed surplus
    
    
    530
    
    
    
    191Retained earnings
    
    
    502,270
    
    
    
    403,525Cumulative translation adjustments
    
    
    70,759
    
    
    
    62,054844,525
    
    
    
    732,640$
    2,095,353
    
    
    $
    1,693,151
 4




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##### 



UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY(In thousands of U.S. dollars) September 30
    
    December 312004
    
    2003COMMON SHARESBalance at beginning of period
    
    $
    266,870
    
    
    $
    257,325Issued
    
    
    4,590
    
    
    
    9,545Purchased for cancellation
    
    
    (494
    )
    
    
    Balance at end of period
    
    $
    270,966
    
    
    $
    266,870CONTRIBUTED SURPLUSBalance at beginning of period
    
    $
    191
    
    
    $
    Stock-based compensation awards
    
    
    339
    
    
    
    191Balance at end of period
    
    $
    530
    
    
    $
    191RETAINED EARNINGSBalance at beginning of period
    
    $
    403,525
    
    
    $
    295,854Net income
    
    
    100,610
    
    
    
    107,671Premium paid on common shares purchased
for cancellation
    
    
    (1,865
    )
    
    
    Balance at end of period
    
    $
    502,270
    
    
    $
    403,525CUMULATIVE TRANSLATION ADJUSTMENTSBalance at beginning of period
    
    $
    62,054
    
    
    $
    (738
    )Unrealized gain on translation of net investments
in foreign operations
    
    
    8,705
    
    
    
    62,792Balance at end of period
    
    $
    70,759
    
    
    $
    62,054
 5




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
Period of nine months ended September 30(In thousands of U.S. dollars) 2004
    
    2003Cash provided by (used in) operating activitiesNet income for the period
    
    $
    100,610
    
    
    $
    78,473Depreciation and amortization
    
    
    44,345
    
    
    
    36,017Non-controlling interest
    
    
    5,148
    
    
    
    4,527Cash reinvested in working capital and other
    
    
    (26,112
    )
    
    
    (75,940
    )123,991
    
    
    
    43,077Cash provided by (used in) investing activitiesProceeds from sale of assets
    
    
    9,926
    
    
    
    2,374Acquisitions (note 2)
    
    
    (242,052
    )
    
    
    (4,476
    )Additions to property, plant and equipment
    
    
    (43,636
    )
    
    
    (37,212
    )Other investing activities
    
    
    (22,316
    )
    
    
    (2,113
    )(298,078
    )
    
    
    (41,427
    )Cash provided by (used in) financing activitiesNet issuance of common shares
    
    
    2,231
    
    
    
    5,767Increase in bank and other indebtedness
    
    
    13,379
    
    
    
    7,098Net issue (repayment) of long-term debt
    
    
    147,248
    
    
    
    (43,381
    )162,858
    
    
    
    (30,516
    )Net foreign currency translation adjustment
    
    
    6,638
    
    
    
    11,166Decrease in cash
    
    
    (4,591
    )
    
    
    (17,700
    )Cash, beginning of period
    
    
    129,676
    
    
    
    47,644Cash, end of period
    
    $
    125,085
    
    
    $
    29,944
 6




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##### 



UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
Period of three months ended September 30(In thousands of U.S. dollars) 2004
    
    2003Cash provided by (used in) operating activitiesNet income for the period
    
    $
    36,675
    
    
    $
    30,790Depreciation and amortization
    
    
    16,875
    
    
    
    12,179Non-controlling interest
    
    
    2,378
    
    
    
    2,189Cash (reinvested in) from working capital and other
    
    
    (19,618
    )
    
    
    14,74236,310
    
    
    
    59,900Cash provided by (used in) investing activitiesProceeds from sale of assets
    
    
    9,508
    
    
    
    135Acquisitions (note 2)
    
    
    (56,307
    )
    
    
    (205
    )Additions to property, plant and equipment
    
    
    (11,336
    )
    
    
    (16,048
    )Other investing activities
    
    
    (6,791
    )
    
    
    (2,341
    )(64,926
    )
    
    
    (18,459
    )Cash provided by (used in) financing activitiesNet issuance of common shares
    
    
    (1,721
    )
    
    
    1,268Increase (decrease) in bank and other indebtness
    
    
    8,353
    
    
    
    (26,650
    )Repayment of long-term debt
    
    
    (29,534
    )
    
    
    (10,263
    )(22,902
    )
    
    
    (35,645
    )Net foreign currency translation adjustment
    
    
    4,992
    
    
    
    1,518(Decrease) increase in cash
    
    
    (46,526
    )
    
    
    7,314Cash, beginning of period
    
    
    171,611
    
    
    
    22,630Cash, end of period
    
    $
    125,085
    
    
    $
    29,944
 7




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##### 



UNAUDITED CONSOLIDATED SCHEDULE OF SELECTED SEGMENTED INFORMATION
Period of nine months ended September 30(In thousands of U.S. dollars) 2004
    
    2003SalesNorth America
    
    $
    1,307,823
    
    
    $
    1,068,293Europe and other
    
    
    355,806
    
    
    
    280,657Intersegment
    
    
    (33,926
    )
    
    
    (27,609
    )$
    1,629,703
    
    
    $
    1,321,341Segment operating incomeNorth America
    
    $
    155,754
    
    
    $
    128,441Europe and other
    
    
    38,830
    
    
    
    30,775194,584
    
    
    
    159,216ExpensesGeneral
    
    
    26,594
    
    
    
    22,600Interest
    
    
    28,871
    
    
    
    27,129Other (income) expense
    
    
    (1,337
    )
    
    
    399Income taxes
    
    
    34,698
    
    
    
    26,088Non-controlling interest
    
    
    5,148
    
    
    
    4,52793,974
    
    
    
    80,743Net income
    
    $
    100,610
    
    
    $
    78,473Product line segment dataSales:Interior products
    
    $
    995,823
    
    
    $
    859,059Exterior products
    
    
    633,880
    
    
    
    462,282$
    1,629,703
    
    
    $
    1,321,341
 8




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##### 



UNAUDITED CONSOLIDATED SCHEDULE OF SELECTED SEGMENTED INFORMATION
Period of three months ended September 30(In thousands of U.S. dollars) 2004
    
    2003SalesNorth America
    
    $
    480,581
    
    
    $
    377,443Europe and other
    
    
    131,028
    
    
    
    93,905Intersegment
    
    
    (14,440
    )
    
    
    (9,179
    )$
    597,169
    
    
    $
    462,169Segment operating incomeNorth America
    
    $
    55,724
    
    
    $
    47,684Europe and other
    
    
    14,843
    
    
    
    10,43670,567
    
    
    
    58,120ExpensesGeneral
    
    
    9,681
    
    
    
    7,182Interest
    
    
    10,968
    
    
    
    8,863Other (income) expense
    
    
    (2,533
    )
    
    
    69Income taxes
    
    
    13,398
    
    
    
    9,027Non-controlling interest
    
    
    2,378
    
    
    
    2,18933,892
    
    
    
    27,330Net income
    
    $
    36,675
    
    
    $
    30,790Product line segment dataSales:Interior products
    
    $
    339,645
    
    
    $
    287,012Exterior products
    
    
    257,524
    
    
    
    175,157$
    597,169
    
    
    $
    462,169
 9




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended September 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. 10




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended September 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 2004 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. 11




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSPeriod ended September 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) (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
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 In the nine month period ended September 30, 2004, the Company completed
several acquisitions of entry door, interior door and door component
manufacturers in the United States, Eastern Europe and Malaysia. The preliminary purchase price for these acquisitions, which are subject to
certain post closing adjustments, was allocated as follows: Current assets
    
    $
    49,149Fixed assets
    
    
    152,984Goodwill and intangibles
    
    
    167,193Other assets
    
    
    2,025Liabilities assumed
    
    
    (43,229
    )Long-term debt
    
    
    (39,447
    )288,675Non-controlling interest
    
    
    (36,130
    )Cost of equity investment
    
    
    (10,727
    )241,818Consideration:Cash, net of cash acquired
    
    $
    241,818
 Also during the year, the Company made an equity investment in a door component
manufacturing entity for cash consideration of $10,286 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. 12




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) At
quarter end, the Company had sold $73 million (2003 - $nil) of trade
accounts receivable under this agreement, and excluded this amount from the
balance of accounts receivable. The discount recognized on these transactions
in the income statement for the nine months ended September 30, 2004 amounted
to $573 (2003 - $nil); and for the three month period ended September 30, 2004
the discount recognized totaled $466 (2003 - $nil). Company does not have a
retained interest in the receivables sold under this facility. NOTE 4: INCOME TAXES The Companys income tax expense for the nine month and three month periods
ended September 30, 2004 and September 30, 2003 is comprised of: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Current
    
    $
    21,310
    
    
    $
    11,818
    
    
    $
    15,646
    
    
    $
    1,642Future
    
    
    13,388
    
    
    
    14,270
    
    
    
    (2,248
    )
    
    
    7,385$
    34,698
    
    
    $
    26,088
    
    
    $
    13,398
    
    
    $
    9,027
 NOTE 5: SHARE CAPITAL Information with respect to outstanding common shares is as follows: Shares
    
    AmountSeptember 30, 2004
    
    
    54,786,699
    
    
    $
    270,966October 29, 2004
    
    
    54,793,531
 Information with respect to the Companys stock option plan for the nine month
period ended September 30, 2004 and September 30, 2003 is as follows: September 30, 2004
    
    September 30, 2003Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseNumber
    
    Price
    
    Number
    
    PriceOptions
outstanding,
beginning of period
    
    
    2,743,750
    
    
    $
    12.20
    
    
    
    3,657,200
    
    
    $
    9.30Options granted
    
    
    
    
    
    
    
    
    
    
    113,000
    
    
    
    20.08Options exercised
    
    
    452,900
    
    
    
    10.14
    
    
    
    666,350
    
    
    
    8.65Options cancelled
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    15.90Options
outstanding, end of
period
    
    
    2,290,850
    
    
    $
    13.11
    
    
    
    3,101,850
    
    
    $
    11.70
 13




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##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) In June 2004, the Company filed a Normal Course Issuer Bid (Share Repurchase)
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. For the nine month and three month periods ended September 30,
2004, the Company purchased for cancellation 100,000 (2003  nil) of its common
shares for $2,359 (2003 - $nil) pursuant to its Share Repurchase. 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 nine months ended
September 30, 2004 amounted to $339 (2003 - $nil); and for the three month
period ended September 30, 2004 compensation expense totaled $89
(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
nine month and three month periods ending September 30, 2004 and September 30,
2003 is as follows: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Net income as reported
    
    $
    100,610
    
    
    $
    78,473
    
    
    $
    36,675
    
    
    $
    30,790Deduct: Stock based
compensation costs using
fair value method, net of
tax
    
    
    (406
    )
    
    
    (1,241
    )
    
    
    (106
    )
    
    
    (636
    )Pro-forma net income
    
    $
    100,204
    
    
    $
    77,232
    
    
    $
    36,569
    
    
    $
    30,154Net income per shareBasic  as reported
    
    $
    1.84
    
    
    $
    1.46
    
    
    $
    0.67
    
    
    $
    0.57Basic  pro-forma
    
    
    1.83
    
    
    
    1.44
    
    
    
    0.67
    
    
    
    0.56Diluted  as reported
    
    $
    1.80
    
    
    $
    1.42
    
    
    $
    0.66
    
    
    $
    0.56Diluted  pro-forma
    
    
    1.79
    
    
    
    1.40
    
    
    
    0.65
    
    
    
    0.54
 (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 nine month ended September 30,
2004 was $2,520 (2003 - $nil). For the three month period ended September 30,
2004, total compensation expense was $1,052 (2003 - $nil). 14




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) 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 nine month and three month periods ended September 30, 2004
and September 30, 2003 were as follows: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Cash contributions
    
    $
    4,229
    
    
    $
    3,887
    
    
    $
    1,314
    
    
    $
    1,075
 (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 nine month and three month periods ended
September 30, 2004 and September 30, 2003 is as follows: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Current service cost
    
    $
    651
    
    
    $
    1,297
    
    
    $
    217
    
    
    $
    432Interest cost
    
    
    2,524
    
    
    
    2,549
    
    
    
    841
    
    
    
    850Expected return on
plan assets
    
    
    (2,908
    )
    
    
    (2,980
    )
    
    
    (969
    )
    
    
    (993
    )Amortization of
prior service cost
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    24Net benefit cost
    
    $
    267
    
    
    $
    938
    
    
    $
    89
    
    
    $
    313
 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 nine month and three month
periods ended September 30, 2004 and September 30, 2003 is as follows: 15




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Current service cost
    
    $
    149
    
    
    $
    229
    
    
    $
    32
    
    
    $
    77Interest cost
    
    
    129
    
    
    
    201
    
    
    
    25
    
    
    
    67Settlement gain
    
    
    (80
    )
    
    
    
    
    
    
    (35
    )
    
    
    Curtailment gain
    
    
    (2,015
    )
    
    
    
    
    
    
    
    
    
    
    Net benefit cost (income)
    
    $
    (1,817
    )
    
    $
    430
    
    
    $
    22
    
    
    $
    144
 NOTE 8: EARNINGS PER SHARE The computations for basic and diluted earnings per share for the nine month
and three month periods ending September 30, 2004 and September 30, 2003 are as
follows: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Net income
    
    $
    100,610
    
    
    $
    78,473
    
    
    $
    36,675
    
    
    $
    30,790Weighted average number of
common shares outstanding
(000s):Basic
    
    
    54,763,000
    
    
    
    53,753,000
    
    
    
    54,790,000
    
    
    
    54,032,000Effect of share options
and warrants
    
    
    1,227,000
    
    
    
    1,431,000
    
    
    
    1,117,000
    
    
    
    1,405,000Diluted
    
    
    55,990,000
    
    
    
    55,184,000
    
    
    
    55,907,000
    
    
    
    55,437,000Earnings per shareBasic
    
    $
    1.84
    
    
    $
    1.46
    
    
    $
    0.67
    
    
    $
    0.57Diluted
    
    
    1.80
    
    
    
    1.42
    
    
    
    0.66
    
    
    
    0.56
 All share options to purchase common shares during the three and nine month
periods ended September 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. 16




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) NOTE 9: COMMITMENTS The Company has entered into foreign currency contracts to hedge foreign
currency risk. At September 30, 2004, unrealized gains totaling $1,744 (2003 -
$2,756) and unrealized losses totaling $652 (2003 - $884). The Company had
the following outstanding foreign exchange forward contracts representing
commitments to buy and sell foreign currencies at September 30, 2004: WeightedCurrency
    
    Amount
    
    Currency
    
    AverageYear of Maturity
    
    Sold
    
    Sold
    
    Purchased
    
    Rate2004
    
    GBP
    
    £
    2,700
    
    
    USD
    
    
    1.64842004
    
    GBP
    
    £
    10,500
    
    
    EUR
    
    
    1.39562004
    
    USD
    
    $
    7,500
    
    
    CAD
    
    
    1.37892004
    
    USD
    
    $
    2,586
    
    
    ZAR
    
    
    0.15432005
    
    GBP
    
    £
    1,200
    
    
    USD
    
    
    1.78502005
    
    GBP
    
    £
    6,000
    
    
    EUR
    
    
    1.45952005
    
    USD
    
    $
    10,000
    
    
    CAD
    
    
    1.38062005
    
    USD
    
    $
    577
    
    
    ZAR
    
    
    0.1515
 Future minimum payments, for the next five periods ending September 30, under
non-cancelable operating leases with initial or remaining terms of one year or
more consisted of the following at September 30, 2004: 2005
    
    $
    18,8752006
    
    
    14,0312007
    
    
    10,0052008
    
    
    7,0392009 and thereafter
    
    
    21,912$
    71,862
 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. 17




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) NOTE 11: LONG-TERM DEBT September
    
    December30, 2004
    
    31, 2003Bank term loans due August 31, 2006
    
    $
    41,641
    
    
    $
    34,418Bank term loans due August 31, 2008
    
    
    570,495
    
    
    
    425,181Bank term loans due June 28, 2007
    
    
    15,000
    
    
    
    20,000Other loans with various maturities
    
    
    43,093
    
    
    
    3,159670,229
    
    
    
    482,758Less current portion
    
    
    48,936
    
    
    
    35,498$
    621,293
    
    
    $
    447,260
 In the first quarter of 2004, the Company negotiated an additional term
borrowing of $200 million that was 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 nine month period ended
September 30, 2004 was $28,193 (2003 - $25,134) and for the three months ending
September 30, 2004 was $10,854(2003 - $8,320). The aggregate amount of principal repayments in each of the next five periods
ending September 30 is as follows: 2005
    
    $
    48,9362006
    
    
    29,8862007
    
    
    28,0662008
    
    
    555,5732009 and thereafter
    
    
    7,768
 18




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of U.S. dollars except for per share information) NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the nine month and three month periods
ending September 30, 2004 and September 30, 2003 are as follows: Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Interest paid
    
    $
    29,070
    
    
    $
    28,674
    
    
    $
    12,384
    
    
    $
    7,527Income taxes paid
    
    
    18,970
    
    
    
    13,728
    
    
    
    5,777
    
    
    
    3,288Income tax refunds
    
    
    7,029
    
    
    
    8,967
    
    
    
    2,280
    
    
    
    8,622Note payable issued
in connection with
business
combination
    
    
    
    
    
    
    659
    
    
    
    
    
    
    
    
 NOTE 13: ADDITIONAL SEGMENTED INFORMATION September
    
    December30, 2004
    
    31, 2003Property, plant and equipment:Canada
    
    $
    121,879
    
    
    $
    84,163North America
    
    $
    569,210
    
    
    $
    473,230Europe and other
    
    
    340,113
    
    
    
    278,880$
    909,323
    
    
    $
    752,110Goodwill and other intangibles:Canada
    
    $
    58,028
    
    
    $
    26,442North America
    
    $
    270,608
    
    
    $
    120,578Europe and other
    
    
    29,867
    
    
    
    9,897$
    300,475
    
    
    $
    130,475
 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
nine month and three month periods ended September 30, 2004 and September 30,
2003 respectively: 19




---



##### 



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Period ended September 30, 2004 and 2003 (In thousands of
U.S. dollars except for per share information) Nine Months Ended
    
    Three Months EndedSeptember
    
    September
    
    September
    
    September30, 2004
    
    30, 2003
    
    30, 2004
    
    30, 2003Net income based on
Canadian GAAP
    
    $
    100,610
    
    
    $
    78,473
    
    
    $
    36,675
    
    
    $
    30,790Effect of SFAS 133,
net of tax
    
    
    3,591
    
    
    
    (16
    )
    
    
    1,186
    
    
    
    1,508Net income based on
United States GAAP
    
    $
    104,201
    
    
    $
    78,457
    
    
    $
    37,861
    
    
    $
    32,298Earnings per share
under United States
GAAPBasic
    
    $
    1.90
    
    
    $
    1.46
    
    
    $
    0.69
    
    
    $
    0.60Diluted
    
    
    1.86
    
    
    
    1.42
    
    
    
    0.68
    
    
    
    0.58
 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 September 30, 2004, the total
floating rate debt effectively converted to fixed rate debt was $275,000.
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. NOTE 15: COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current
year basis of presentation. 20




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##### 



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 nine months and quarter ended
September 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 80 facilities in 17 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
    
    
    $
    607,596
  (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 21




---



##### 



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 - Nine Months ended September 30, 2004 compared with Nine
Months ended September 30, 2003 Consolidated sales in the first nine months of 2004 increased approximately 23%
or $308 million to $1.6 billion from sales of $1.3 billion in 2003. The 23%
year-over-year sales increase was the result of internal growth (14%) and
acquisitions (9%). In all Masonite markets demand in both the home improvement
and new construction sectors was stronger in the first nine months of 2004 than
the first nine months of last year. In 2003, the Company was negatively
affected by harsh weather conditions early in the year 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 61% and 39% ($996 million and
$634 million) respectively in 2004, compared to 65% and 35% ($859 million and
$462 million) respectively, in the first nine months 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 22% to $1.3 billion in the first nine months of 2004 versus $1.1
billion reported in the same period in 2003. The 22% year-over-year sales
increase was the result of internal growth (9%) and acquisitions (13%). 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 27% to $356 million in the first nine months of 2004 versus $281
million in the same period in 2003. The 27% year-over-year sales increase was
the result of internal growth (22%) and acquisitions (5%). Demand from both
the new construction and home renovation sectors has been strong in the
Companys primary markets in 2004. With the Companys European acquisitions to
date in 2004, Masonite expanded its European presence to include several
Eastern European markets. Cost of sales, expressed as a percentage of sales, increased to 78.3% 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 and third quarters. 22




---



##### 



The effect of these cost increases were mitigated through improvements to
operating leverage from the 23% increase in sales in the first nine 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. The year to date results for 2004 were also negatively impacted by hurricanes
in the Southeastern USA and a labour disruption. The Companys ten facilities
in the areas most severely impacted by four hurricanes in the U.S. Southeast
lost a number of production and shipping days. While the Companys properties
were not damaged by the events, these facilities were forced to temporarily
close along with many customers in the area. Also in the third quarter a
labour disruption at one of the Companys North American manufacturing
operations resulted in 25 lost days of production. Selling, general and administrative expenses as a percentage of sales were
8.6%, or $141 million, compared with 9.3%, or $123 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 not expected
to exceed 9% of sales. At this time, the Company expects an overall slight improvement in margins in
the fourth quarter. Consolidated EBITDA margins declined to 13.0% from 13.1% for comparable the
nine month period. This 13.0% margin is consistent with the Companys third
quarter results. As disclosed in the segmented information of the financial statements, segment
operating income margins in the North American segment declined to 11.9% from
12.0% for the nine month period ended September 30, 2004. The factors
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 10.9% from
11.0% for the nine 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 $8 million in the
first nine months of 2004 to $44 million from $36 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 increased approximately $2 million in comparison to the first
nine months of 2003. The increase in finance costs is due to higher debt
levels in 2004 as a result of acquisitions and a slight increase in interest
rates. 23




---



##### 



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 nine months of the year increased
approximately 28% or $22 million to $101 million ($1.84 per share) from $78
million in 2003 ($1.46 per share). Basic earnings per share of $1.84 in 2004
and $1.46 in 2003 are calculated using the weighted average number of shares
outstanding for the nine-month period of approximately 54.8 million and 53.8
million, respectively. Calculations of diluted earnings per share of $1.80 in
2004 and $1.42 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 nine month period ended September 30, 2004
were approximately 56.0 million (2003  55.2 million). Results of Operations - Third Quarter of 2004 compared with Third Quarter of
2003 Consolidated sales in the third quarter of 2004 increased approximately 29% or
$135 million to $597 million from sales of $462 million in 2003. The 29%
quarter-over-quarter sales increase was the result of internal growth (16%) and
acquisitions (13%). 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 57% and 43% ($340 million and $258 million)
respectively, in 2004 compared to 62% and 38% ($287 million and $175 million)
respectively, in the third 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 27% to $481 million in the third quarter of 2004 versus $377
million reported in the same period in 2003. The 27% quarter-over-quarter
sales increase was the result of internal growth (12%) and acquisitions (15%).
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 40% to $131 million in the third quarter of 2004 versus $94
million in the same period in 2003. The 40% quarter-over-quarter sales
increase was the result of internal growth (28%) and acquisitions (12%).
Demand from both the new construction and home renovation sectors were strong
in the Companys primary markets in 2004. With the Companys European
acquisitions during the second quarter of 2004, Masonite expanded its European
penetration to include several Eastern European markets. 24




---



##### 



Cost of sales, expressed as a percentage of sales, increased to 78.6% in the
third quarter of 2004 from 77.7% in the third quarter of 2003, and was
unchanged from the second quarter of 2004. 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 third
quarter. The effect of these cost increases were mitigated through
improvements to operating leverage from the 29% 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. The results for the third quarter were negatively impacted
by hurricanes and a labour disruption as discussed previously. Selling, general and administrative expenses as a percentage of sales were
8.4%, or $50 million, compared with 8.7%, or $40 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 not expected
to exceed 9% of sales. Consolidated EBITDA margins decreased to 13.0% from 13.7% for the comparable
three month period. This 13.0% margin is consistent with the Companys first
and second quarter 2004 results. As disclosed in the segmented information of the financial statements, segment
operating income margins in the North American segment decreased to 11.6% in
2004 from 12.6% in 2003 for the three month period. The factors 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 improved to 11.3% in
2004 from 11.1% in 2003 for the three month period, primarily as a result of
higher operating leverage, partially offset by increased transportation and
material costs . Depreciation and amortization expense increased approximately $5 million in the
third quarter of 2004 to $17 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 increased approximately $2 million in comparison to the third
quarter of 2003. The increase in finance costs is due to higher debt levels in
the current years quarter as a result of acquisitions and a slight increase in
interest costs. 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. 25




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##### 



The Companys 2004 net income for the third quarter increased approximately 19%
or $6 million to $37 million ($0.67 per share) from $31 million in 2003 ($0.57
per share). Basic earnings per share of $0.67 in 2004 and $0.57 in 2003 are
calculated using the weighted average number of shares outstanding for the
three-month period of approximately 54.8 million and 54.0 million,
respectively. Calculations of diluted earnings per share of $0.66 in 2004 and
$0.56 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 September 30, 2004 was approximately 55.9
million (2003  55.4 million). Summary of Quarterly Results (unaudited) Selected Quarterly Information
(thousands of dollars, except per share amounts) September 30,
    
    June 30,
    
    March 31,
    
    December2004
    
    2004
    
    2004
    
    31, 2003Sales
    
    $
    597,169
    
    
    $
    564,567
    
    
    $
    467,967
    
    
    $
    455,897Net Income
    
    $
    36,675
    
    
    $
    36,191
    
    
    $
    27,744
    
    
    $
    29,198Net Income per ShareBasic(1)
    
    $
    0.67
    
    
    $
    0.66
    
    
    $
    0.51
    
    
    $
    0.54Diluted(1)
    
    $
    0.66
    
    
    $
    0.65
    
    
    $
    0.50
    
    
    $
    0.53
 September 30,
    
    June 30,
    
    March 31,
    
    December 31,2003
    
    2003
    
    2003
    
    2002Sales
    
    $
    462,169
    
    
    $
    456,955
    
    
    $
    402,217
    
    
    $
    395,808Net Income
    
    $
    30,790
    
    
    $
    27,339
    
    
    $
    20,344
    
    
    $
    22,209Net Income per ShareBasic(1)
    
    $
    0.57
    
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    0.42Diluted(1)
    
    $
    0.56
    
    
    $
    0.50
    
    
    $
    0.37
    
    
    $
    0.40
  (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 $124 million of cash flow in operations for
the first nine months of 2004 compared to $43 million in the same period in the
prior year. At the end of the third quarter 2004, the Company sold
approximately $73 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. 26




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##### 



During the third quarter of 2004, the Company generated approximately $36
million in cash flow from operating activities (2003 - $60 million) primarily
through strong earnings and the reduction of working capital. At the end of
the third quarter 2004, the Company sold approximately $73 million of trade
accounts receivable on a non-recourse basis. Investing activities used cash of approximately $298 million in the first nine
months of 2004 compared to $41 million in the prior year. Capital expenditures
were $6 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. In the nine
month period ended September 30, 2004, the Company completed acquisitions of
entry door, interior door and door component manufacturers in the United
States, Eastern Europe and Malaysia. The Company also disposed of two
redundant facilities in the year resulting in proceeds on disposal of
approximately $10 million, and a gain on disposal of approximately $2 million,
which is included in other income. Investing activities in the third quarter used cash of approximately $65
million, as compared to a use of approximately $18 million in the third quarter
of 2003. The primary uses of cash in the third quarter of 2004 were capital
expenditures ($11 million) and acquisitions ($56 million). Financing activities in the first nine months of 2004 generated approximately
$163 million of cash flow compared to a cash outflow of $31 million in the
prior year. The Company increased its long-term debt by approximately $205
million and made repayments of long term debt of $58 million. The issuance of
common shares on the exercise of options and warrants generated $5 million of
cash flow in 2004 (2003 - $6 million), while the repurchase of common shares
under the Companys Normal Course Issuer Bid (Share Repurchase) used $2
million (2003 - $nil) in the first nine months of 2004. There were no significant financing activities in the third quarter of 2004
other than debt payments of $30 million (2003 - $10 million), and the increase
of bank debt of approximately $8 million (2003  decrease of $27 million). The
continued exercise of options generated cash flows of
$0.3 million (2003 - $1
million), and the repurchase of common shares under the Companys Share
Repurchase used $2 million (2003 - $nil) in the third quarter of 2004. The Companys working capital ratio declined to 1.90 to 1.0 at September 30,
2004 compared to 2.04 to 1.0 at December 31, 2003 as the Company used its cash
on hand to fund acquisitions in the quarter of $56 million. The Companys debt
to equity ratio increased to 0.67 to 1.0 at September 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. 27




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##### 



The following table summarizes the Companys significant contractual
obligations and commercial commitments at September 30, 2004: Contractual Obligation Payments Due by Period Less(In millions of U.S.
    
    
    
    
    
    than
    
    1-3
    
    4-5
    
    After 5dollars)
    
    Total
    
    1 year
    
    Years
    
    years
    
    YearsShort-term debt
    
    $
    20
    
    
    $
    20
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    $
    670
    
    
    $
    49
    
    
    $
    613
    
    
    $
    8
    
    
    $
    Operating leases
    
    $
    72
    
    
    $
    19
    
    
    $
    31
    
    
    $
    5
    
    
    $
    17Commercial
commitments (1)
    
    $
    222
    
    
    $
    40
    
    
    $
    135
    
    
    $
    47
    
    
    $
    Total contractual
cash obligations
    
    $
    984
    
    
    $
    128
    
    
    $
    779
    
    
    $
    60
    
    
    $
    17
 (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 (%) September 30,
    
    December 31,
    
    December 31,2004
    
    2003
    
    2002Shareholders equity
    
    
    49
    %
    
    
    54
    %
    
    
    45
    %Long-term debt (1)
    
    
    38
    
    
    
    35
    
    
    
    44Future income taxes
    
    
    7
    
    
    
    8
    
    
    
    8Non-controlling interest
    
    
    5
    
    
    
    2
    
    
    
    2Short-term debt
    
    
    1
    
    
    
    1
    
    
    
    1100
    %
    
    
    100
    %
    
    
    100
    %
 (1) 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. In June 2004, the Company filed a Share Repurchase with the Toronto Stock
Exchange. A copy of the Notice relating to the Share Repurchase may be
obtained from the Company, without 28




---



##### 



charge, by contacting the Companys Investor
Relations Department at investorrelations@masonite.com. For the nine month and
three month periods ended September
30, 2004, the Company purchased for cancellation 100,000 (2003  nil) of its
common shares for $2,359 (2003  $nil) pursuant to its Share Repurchase. The Companys senior credit facility consists of a $100 million long-term
revolving bank loan and four term loans totaling $612 million. The additional
$200 million in loans negotiated in March 2004 was primarily to fund
acquisitions during the first half of 2004. 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 $662 million
at September 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 September 30, 2004. Nothing was drawn at
September 30, 2004 on the Companys main $100 million revolving bank loan.
Approximately $20 million of the Companys $28 million of other current
revolving bank lines were utilized at the end of the third quarter, and was
classified as current bank indebtedness. The Company also had cash on hand of
approximately $125 million as at September 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. 29




---



##### 



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. 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. 30




---



##### 



Masonite has recorded $38 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 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 of 2004, 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. 31




---



##### 



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 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 60% of the Companys outstanding
interest-bearing debt carries a floating interest rate and the other 40% is
effectively at fixed rates as at September 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 32




---



##### 



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 September 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. Working capital
ratio is calculated as total current assets divided by total current
liabilities. Forward-Looking Statements This press release 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 statements and
should understand that many factors could cause actual results and 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. 33