EDGAR 10-K Filing

Company CIK: 893691
Filing Year: 2023
Filename: 893691_10-K_2023_0000893691-23-000013.json

---

ITEM 1. BUSINESS
Item 1. Business
Overview
We are a leading global designer, manufacturer, marketer and distributor of interior and exterior doors and door systems for the new construction and repair, renovation and remodeling sectors of the residential and non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. Today, we believe we hold either the number one or two market position in the seven product categories we target in North America: interior molded residential doors; interior stile and rail residential doors; exterior fiberglass residential doors; exterior steel residential doors; interior architectural wood doors; wood veneers; and door core. We operate 59 manufacturing and distribution facilities in seven countries in North America, Europe, South America and Asia, which are strategically located to serve our customers.
We are committed to delivering growth for our customers, partners, shareholders and employees through our Doors That Do MoreTM strategy, which has three pillars: (1) Drive Product Leadership, (2) Win the Sale and (3) Deliver Reliable Supply. Drive Product Leadership emphasizes offering innovative door solutions that address human needs for comfort, safety, convenience and style. Win the Sale focuses on making Masonite the brand that customers never substitute by providing a better door-buying experience. Deliver Reliable Supply is our commitment to consistently deliver high-quality products and services for our customers and partners.
In addition, we have implemented a disciplined acquisition strategy that solidified our presence in the markets we serve. In 2022, we announced our intent to acquire Endura Products, a leading innovator and manufacturer of high-performance door frames and door system components. Endura has a long history of product innovation and holds more than 100 patents on its door system components. This acquisition accelerates ours Doors That Do MoreTM strategy by unlocking the value of fully integrated door solutions.
Segment Overview
The Company has an integrated business model with three reportable segments: North American Residential, Europe and Architectural.
North American Residential
Our North American Residential segment is our largest segment, focused on providing high-quality interior doors from wood and recycled wood fibers and energy-efficient, durable exterior doors in a wide array of designs, materials and sizes. As of the end of 2022, the residential repair, renovation and remodeling end market accounted for over half of the net sales for the segment.
Europe
Our Europe segment is a leading provider of interior doors from recycled wood fibers and energy-efficient, durable exterior doors to the United Kingdom market. We also sell door skins (facings) into Western Europe from our manufacturing facility in Ireland. Our European segment has a balanced portfolio of consumers across our exterior and interior residential business.
Architectural
Our Architectural segment provides highly specified products that are designed, constructed and tested in accordance with regulatory compliance and environmental certifications such as Forest Stewardship Council and LEED certifications. For example, the AspiroTM series offers high-end aesthetic and performance qualities, and its doors are available in exotic and domestic veneers, with acoustic, fire-rated, lead-lined and attack-resistant options and include lifetime warranties.
In the fiscal year ended January 1, 2023, we sold approximately 31 million doors to approximately 6,500 customers globally. Our fiscal year 2022 net sales by segment and estimated global net sales of doors by end market are set forth below:
Net Sales by Segment
Fiscal 2022 Global Net Sales of Doors by End Market
Fiscal 2022
See Note 17 to our consolidated financial statements in this Annual Report for additional information about our segments.
Our Products
We aim to be the brand that customers request for the innovation and value we create. Our door solutions address the dynamic nature of compliance, technical specifications and developing market needs.
We sell an extensive range of interior and exterior doors in a wide array of designs, materials and sizes. Our interior doors are made with wood and related materials such as hardboard (including wood composite molded and flat door facings). Our exterior doors are made primarily of steel, fiberglass or composite materials.
Our focus on consumer driven innovation led us to think broadly about the entire door system and the value it can bring when integrated. This approach combined with Masonite’s business relationships in the industry led to the development of award winning products such as the M-PwrTM Smart Doors and the Masonite Performance Door System. Masonite’s M-PwrTM Smart Doors are the first residential exterior doors to integrate power, lights, a video doorbell and smart lock into the door system. They employ patent-pending, Underwriters Laboratories ("UL") certified technology to connect residential front doors to a home’s electrical system and wireless internet network. The Masonite Performance Door System features the company’s industry-leading 4-Point Performance Seal, which includes Premium Square Edge Fiberglass Doors, Endura Products’ Z-Articulating Cap SillTM, PE650 Weatherstripping, Simple Solution® Corner Pads and FrameSaver® rot-proof door frame.
Residential Doors
Interior Doors
Molded panel doors are interior doors available either with a hollow or solid core and are made by assembling two molded door skin panels around a wood or medium-density fiberboard ("MDF") frame. Molded panel doors are routinely used for closets, bedrooms, bathrooms and hallways. Our molded panel product line is subdivided into several distinct product groups: our Classic Molded Panel series is a combination of classic styling, period and architectural style-specific designs, durable construction and a variety of profiles preferred by our customers when price sensitivity is a critical component in the product selection; the West EndTM Collection strengthens our tradition of design innovation by introducing the clean and simple aesthetics found in modern linear designs to the molded panel interior door category; the Heritage® Series, which features recessed, flat panels and sharp, Shaker-style profiles which speak to a clean, modern aesthetic while retaining comfortable familiarity found in today’s interiors; and the Livingston door, which features versatile and timeless design for any style of home. Our doors can be upgraded to our environmentally friendly EmeraldTM door construction which enables homeowners, builders and architects to meet specific product
requirements and "green" specifications to attain Leadership in Energy and Environmental Design ("LEED") certification.
Flush interior doors are available either with a hollow or solid core and are made by assembling two facings of plywood, MDF, composite wood or hardboard over a wood or MDF frame. These doors can either have a wood veneer surface suitable for paint or staining or a composite wood surface suitable for paint. Our flush doors range from base residential flush doors consisting of unfinished composite wood to the ultra high-end exotic wood veneer doors.
Exterior Doors
Fiberglass doors are considered premier exterior doors and are made by assembling two fiberglass door facings to a wood frame or composite material and injecting the core with polyurethane insulation. Fiberglass is strong, durable, lightweight and impervious to many caustics and to extreme temperatures. These attributes make fiberglass an ideal material for an exterior door that may face extremes in temperature, exposure to the elements and general wear and tear. In the United Kingdom, Door-StopTM branded fiberglass doors are manufactured into pre-hung door sets and shipped to our customers with industry-leading lead times. We believe our innovative designs, construction and finishes will help our fiberglass door collections retain a distinct role in the exterior product category in the future. Our Solidor® exterior doors are composite doors that provide the appearance of timber, but with the benefits of modern, low maintenance materials. A solid timber core is complemented by a variety of innovative design and color choices that has led Solidor® to become one of the United Kingdom's most recognized manufacturers and suppliers of composite doors.
Steel doors are exterior doors made by assembling two interlocking steel facings (paneled or flat) or attaching two steel facings to a wood or steel frame and injecting the core with polyurethane insulation. With our functional Utility Steel series, the design centric High Definition family and the pre-finished Sta-Tru® HD, we offer customers the freedom to select the right combination of design, protection and compliance required for essentially any paint grade exterior door application. In addition, our product offering is significantly increased through our variety of compatible clear or decorative glass designs.
Stile and rail doors are made from wood or MDF with individual panels, which have been cut, milled, veneered and assembled from lumber such as clear pine, knotty pine, oak and cherry. Within our stile and rail line, glass panels can be inserted to create what is commonly referred to as a French door and we offer a number of glass designs for use in this purpose. Where horizontal slats are inserted between the stiles and rails, the resulting door is referred to as a louver door. For interior purposes, stile and rail doors are primarily used for hallways, room dividers, closets and bathrooms. For exterior purposes, stile and rail doors are used as entry doors often including decorative glass inserts.
Architectural Doors
Architectural doors are typically highly specified products designed, constructed and tested to ensure that regulatory compliance such as fire codes and environmental certifications such as Forest Stewardship Council are met. These doors are sold into institutional (schools, healthcare and government) and commercial (hotels, offices and retail) end markets. These end markets require doors that provide fire safety, security, acoustic comfort and sustainability. Our architectural portfolio is represented by two series, AspiroTM and CenduraTM which are comprised of stile and rail, flush wood veneer, painted and laminate doors. The AspiroTM series offers premium and custom aesthetic options along with high performance options in acoustic, fire-rated, lead-lined, attack- and bullet-resistance and sustainability. The CenduraTM series provides a balance of performance and value and is available with our standard aesthetic options with acoustic and fire-rated options. Our portfolio allows us to provide a wide range of solutions to cover the varied needs of commercial and institutional end markets.
Components
In addition to residential and architectural doors, we also sell several door components to the building materials industry. Within the residential new construction market, we provide interior door facings, agri-fiber and particleboard door cores, MDF and wood cut stock components to multiple manufacturers. Within the architectural building construction market, we are a leading component supplier of various critical door components. Additionally, we are one of the leading providers of mineral and particleboard door cores to the North American architectural door industry.
Molded door facings are thin sheets of molded hardboard produced by grinding or defibrating wood chips, adding resin and other ingredients, creating a thick mat of wood fibers, which is then pressed between steel die plates to
form a molded sheet, the surface of which may be smooth or may contain a wood grain pattern. Following pressing, molded door facings are trimmed, primed and shipped to door manufacturing plants where they are mounted on frames to produce molded doors.
Door framing materials, commonly referred to as cut stock, are wood or MDF components that constitute the frame on which interior and exterior door facings are attached. Door cores are pressed fiber mats of refined wood chips or agri-fiber used in the construction of solid core doors. For doors that must achieve a fire rating higher than 45 minutes or longer, the door core typically consists of an inert mineral core or similar compounds.
Research and Development
We believe we are a global leader in end user focused innovation and development of doors, door components and full door solutions as well as the manufacturing processes involved in making such products. We believe that research and development is a competitive advantage for us, and we intend to capitalize on our leadership in this area through focus on end user problems that lead to the development of more new and innovative products. Our end user experience, research and development and engineering capabilities enable us to organically create and solicit external innovative ideas; methodically validate commercial and technical viability; use cross functional teams to develop business case hypotheses for promising concepts; and implement new to world products and manufacturing process improvements. The result of this rigorous approach enables us to launch new innovative, proprietary end user valued solutions, enhance the manufacturing efficiency of our products, improve quality and reduce costs. As part of Masonite’s Doors That Do MoreTM strategy, we have invested in innovation activities with a significant focus on the development of new, differentiated products such as our M-PwrTM Smart Doors, as well as focusing on process and material improvements to improve quality. In the Architectural wood door market, we have directed research and development to address the growing need for specified door systems in critical areas of safety and security, including our first attack resistant door system and expanded offerings of fire-resistant products.
As an integrated manufacturer focused on the door industry, we have technical depth and expertise from material science to components and full door system testing and development that parallels our vertical integration. These capabilities have been instrumental in our ability to thoroughly qualify alternative materials and components to address supply challenges over the past few years. We leverage our deep knowledge and experience in door construction and assembly as well as our ability to manufacture dies for use in our facilities. We believe this provides us with a unique ability to offer a combination of high value door solutions to meet the needs of a variety of end users and customers. This capability also enables us to develop and implement product and production process improvements which increase average unit price, enhance production efficiency and/or reduce costs.
Raw Materials
While Masonite is vertically integrated, we require a regular supply of raw materials, such as wood chips, some cut stock components, various composites, steel, glass, paint, stain and primer as well as petroleum-based products such as binders, resins and plastic injection frames to manufacture and assemble our products. In 2022, our materials cost accounted for approximately 53% of the total cost of the finished product. In certain instances, we depend on a single or limited number of suppliers for these supplies. Wood chips, logs, resins, binders and other additives utilized in the manufacturing of interior molded facings, exterior fiberglass door facings and door cores are purchased from global, regional and local suppliers taking into consideration the relative freight cost of these materials. Internal framing components, MDF, cut stock and internal door cores are manufactured internally at our facilities and supplemented from suppliers located throughout the world. We utilize a network of suppliers based in North America, Europe, South America and Asia to purchase other components including steel coils for the stamping of steel door facings, MDF, plywood and hardboard facings, door jambs and frames and glass frames and inserts.
Manufacturing Process
Our manufacturing process is designed to deliver reliable supply of high-quality products and outstanding service. Over the past several years, we have invested in advanced manufacturing technologies to increase quality and shorten lead times. Launched in 2015, we leverage the Mvantage operating system within our manufacturing processes to systemically focus on the elimination of waste and non-value-added activities throughout the organization. In 2022, we continued to progress our deployment of Mvantage throughout the entire enterprise to drive improvements in manufacturing efficiency. Our newest European plant, Stoke-on-Trent, has been optimized to improve material flow and to reduce the need for forklift trucks to enhance safety and reduce emissions and utilizes advanced manufacturing automation to improve production and efficiency, product quality and the work experience for our employees. Our
newest North American interior door facility in Fort Mill, South Carolina, was designed to incorporate all of our best Mvantage practices as well as incorporate the latest manufacturing technology to optimize the door manufacturing process.
We are one of the few vertically integrated door manufacturers in the world and one of only two in the North American residential molded interior door industry as well as the only vertically integrated door manufacturer in the North American architectural interior wood door industry. Our vertical integration extends to all steps of the production process from initial design, development and production of steel press plates to produce interior molded and exterior fiberglass door facings to the manufacturing of door components, such as door cores, wood veneers and molded facings, to door assembly. We also offer incremental value by pre-machining doors for hardware, hanging doors in frames with glass and hardware and pre-finishing doors with paint or stain. We believe that our vertical integration and automation enhance our ability to develop new and proprietary products, provide greater value and improved customer service and create high barriers to entry. We also believe vertical integration enhances our ability to be more cost efficient, although our cost structure is subject to certain factors beyond our control, such as global commodity shocks.
Our manufacturing operations consist of three major manufacturing processes: (1) component manufacturing, (2) door assembly and (3) value-added ready to install door fabrication.
We have a leading position in the manufacturing of door components, including internal framing components (stile and rails), glass inserts (lites), door core, interior door facings (molded and veneer) and exterior door facings. The manufacturing of interior molded door facings is the most complex of these processes requiring a significant investment in large scale wood fiber processing equipment. Interior molded door facings are produced by combining fine wood particles, synthetic resins and other additives under heat and pressure in large multi-opening automated presses utilizing Masonite proprietary steel plates. The facings are then primed, cut and inspected in a second highly automated continuous operation prior to being packed for shipping to our door assembly plants. We operate five interior molded door facing plants around the world, two in North America and one in each of South America, Europe and Asia. Our plant in Laurel, Mississippi, is one of the largest door facing plants in the world and we believe one of the most technologically advanced in the industry.
Interior residential hollow and solid core door manufacturing is an assembly operation that is primarily accomplished through the use of semi-skilled manual labor. The construction process for a standard flush or molded interior door is based on assembly of door facings and various internal framing and support components, followed by the doors being trimmed to their final specifications.
The assembly process varies by type of door, from a relatively simple process for flush and molded doors, where the door facings are glued to a wood frame, to more complex processes where many pieces of solid and engineered wood are converted to louver or stile and rail doors. Architectural interior doors require another level of customization and sophistication employing the use of solid cores with varying degrees of sound dampening and fire retarding attributes, furniture quality wood veneer facings, as well as secondary machining operations to incorporate more sophisticated commercial hardware, openers and locks. Additionally, architectural doors are typically pre-finished prior to sale.
The manufacturing of steel and fiberglass exterior doors is a semi-automated process that entails combining laminated wood or rot free composite framing components between two door facings and then injecting the resulting hollow core structure with insulating polyurethane expanding foam core materials. We invested in fiberglass manufacturing technology, including the vertical integration of our own fiberglass sheet molding compound plant at our Laurel, Mississippi, facility. In addition, fiberglass doors are predominantly manufactured in our highly automated facility in Dickson, Tennessee, which has led to improved reliability and quality of these products.
Short set-up times, proper production scheduling and coordinated material movement are essential to achieve a flexible process capable of producing a wide range of door types, sizes, materials and styles. We make use of our vertically integrated and flexible manufacturing operations together with scalable logistics primarily through the use of common carriers to fill customers’ orders and to minimize our investment in finished goods inventory.
Finally, doors manufactured at our door assembly plants are either sold directly to our customers or transferred to our door fabrication facilities where value added services are performed. These value added services include machining doors for hinges and locksets, installing the doors into ready to install frames, installing hardware, adding glass inserts and side lites, painting and staining, packaging and logistical services to our customers.
We continued to drive operational performance through our three-prong strategy, at times using a virtual approach, which includes the Model Plant Transformation Process, Process Improvement Teams and the focus on global standards and training. Our Model Plant Transformation Process is designed to improve the throughput and the efficiency of our factories using multiple approaches such as reconfiguring equipment to enhance safety and material flow, optimizing inventory levels and implementing and tracking sustaining performance metrics. To support our Doors That Do MoreTM strategy, we continue to leverage Mvantage as our operational performance driver and have expanded the use of our Mvantage operating system throughout the enterprise and are focused on driving improvement throughout the value stream. Our focus on training has expanded to not only include our traditional kaizen facilitator training but also training that focuses on making improvements in our business process areas. We have launched Six Sigma training and are now certifying Masonite trained Green and Black Belts. At Masonite, kaizen is ingrained into our continuous improvement culture. Through this structured approach, we are driving improvements in quality and productivity while remaining focused on reliable service to our customers.
Sales and Marketing
We focus on making Masonite the brand that customers never substitute. Our curated product portfolio aligns with our customers' needs and positions us for future growth.
Multi-Level/Segment Distribution Strategy
Our sales and marketing efforts are concentrated on key initiatives designed to build a strong brand preference through creative end-user and channel marketing and a seamless purchasing experience. The targeted approach is driven by our consumer-centric research which uncovered unmet needs around the home for style, comfort, safety, and convenience.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Our portfolio of brands includes Masonite®, Premdor®, Solidor®, Residor®, Nicedor®, Door-Stop InternationalTM, Harring DoorsTM, National HickmanTM, Masonite ArchitecturalTM, Graham-MaimanTM, BaillargeonTM, USA Wood DoorTM, Florida Made Door, Louisiana Millwork, and BWISM Distribution. These are among the most recognized brands in the door industry and are respected for the innovation, quality and value they provide.
In the residential market, we utilize an "All Products" merchandising strategy which provides our retail and wholesale customers access to our entire product range and the ability to leverage our branding, marketing and selling strategies. We service our big box retail customers directly from our own door fabrication facilities which provide value added services and logistics, including store direct delivery of doors and entry systems and a full complement of in-store merchandising, displays and field service. Our residential wholesale sales professionals focus on down channel initiatives designed to ensure our products are "pulled" through our North American wholesale distribution network.
Our North American architectural customers are serviced by a dedicated sales and marketing team providing architects, door and hardware distributors, general contractors and project owners a wide range of product application advice, technical specifications, and applicable compliance and regulatory certifications.
Service Innovation
We leverage our marketing, sales and customer service activities to ensure our products are strategically pulled through our multiple distribution channels rather than deploying a more common, tactical "push" strategy. Regardless of channel, our marketing approach is to drive demand for our doors and door systems for the solutions they provide for the people who pass through them every day.
Our proprietary web-based tools provide our channel customers with direct access to a wide range of information and materials to make it easier for them to sell our products. Within our North American Residential business, these tools include Mconnect®, an online service portal providing our customers access to several other e-commerce tools designed to enhance the manufacturer-customer relationship. Once connected to our system, customers have secure access to Masonite products; the Product Corner, a section advising customers of the features and benefits of our newest products; the Media Library, a comprehensive supply of marketing materials and self-service resources; and Order Tracker, which allows customers to follow their purchase orders through the production process and confirm delivery dates.
Our Solidor® and Door-Stop International websites are fully functional configuration and order platforms that support our entry door customers in the United Kingdom. The dynamic integration of Solidor's and Door-Stop's enterprise resource planning systems and their websites ensure that the products customers view, configure and order are available, which ensures that we are able to deliver on our promise of dependable lead-times.
In our Architectural business, our cloud-based door configurator, DoorBuilderTM Live, enables customers to select and order the right door easily and intuitively. Additionally, our DoorUniversity training program helps architects select solutions to meet their project and client goals while earning American Institute of Architect continuing education units.
Intellectual Property
In North America, our doors are marketed primarily under the Masonite® brand. Other North American brands include: Premdor®, Masonite Architectural®, Barrington®, Oakcraft®, Sta-Tru® HD, Vistagrande®, Flagstaff®, Hollister®, Sierra®, Fast-Frame®, Safe ’N Sound®, Livingston®, AquaSeal®, Cheyenne®, Riverside®, Fast-Fit®, Megantic®, Lemieux Doors®, Harring Doors®, FyreWerks® and Marshfield-Algoma®. In Europe, doors are marketed under the Masonite®, Premdor®, Premdor Speed Set®, Door-Stop International®, National Hickman®, Defining Spaces®, Solidor®, Residor® and Nicedor® brands. We consider the use of trademarks and trade names to be important in the development of product awareness, and for differentiating products from competitors and between customers.
We protect the intellectual property that we develop through, among other things, filing for patents in the United States and various foreign countries. In the United States, we currently have 297 design patents and design patent applications and 126 utility patents and patent applications. We currently have 201 foreign design patents and patent applications and 187 foreign utility patents and patent applications. Our United States utility patents are generally applicable for 20 years from the earliest filing date, our United States design patents for 15 years and our United States registered trademarks and tradenames are generally applicable for 10 years and are renewable. Our foreign patents and trademarks have terms as set by the particular country, although trademarks generally are renewable.
Distribution
Residential doors are primarily sold through wholesale and retail distribution channels.
•Wholesale. In the wholesale channel, door manufacturers sell their products to homebuilders, contractors, lumberyards, dealers and building products retailers in two steps or one step. Two-step distributors typically purchase doors from manufacturers in bulk and customize them by installing windows, or "lites", and pre-hanging them. One-step distributors sell doors directly to homebuilders and remodeling contractors who install the doors.
•Retail. The retail channel generally targets consumers and smaller remodeling contractors who purchase doors through retail home centers, both in store and online, and smaller specialty retailers. Retail home centers offer large, warehouse size retail space with large selections, while specialty retailers are niche players that focus on certain styles and types of doors.
Architectural doors are primarily sold through specialized one-step wholesale distribution channels where distributors sell to general contractors and end-use clients.
Customers
During fiscal year 2022, we sold our products worldwide to approximately 6,500 customers. We have developed strong relationships with these customers through our "All Products" cross merchandising strategy. Our vertical integration facilitates our "All Products" strategy with our door fabrication facilities in particular providing value-added fabrication and logistical services to our customers, including store delivery of pre-hung interior and exterior doors to our customers in North America. All of our top 20 customers have purchased doors from us for at least 10 years.
Although we have a large number of customers worldwide, our largest customer, The Home Depot, accounted for approximately 22% of our total net sales in fiscal year 2022. Due to the depth and breadth of the relationship with this customer, which operates in multiple North American geographic regions and which sells a variety of our products, our management believes that this relationship is likely to continue.
Competition
The North American door industry is highly competitive and includes a number of global and local participants. In the North American residential interior door industry, the primary participants are Masonite and JELD-WEN, which are the only vertically integrated manufacturers of molded door facings. There are also a number of smaller competitors in the residential interior door industry, including Steves and Sons Inc. and Lynden Door, Inc., that primarily source door facings from third party suppliers. In the North American residential exterior door industry, the primary participants are Masonite, JELD-WEN, Plastpro, Therma-Tru, Feather River and Steves and Sons Inc. In the North American non-residential building construction door industry, the primary participants are Masonite and VT Industries with the remainder supplied by multiple regional manufacturers. Our primary market in Europe is the United Kingdom. The United Kingdom door industry is similarly competitive, including a number of global and local participants. The primary participants in the United Kingdom are our subsidiary Premdor, JELD-WEN, Vicaima and Distinction Doors. Competition in these markets is primarily based on product quality, design characteristics, brand awareness, serviceability, distribution capabilities and value. We also face competition in the other countries in which we operate.
A significant portion of our net sales are sold to large home centers and other large retailers. The consolidation of our customers and our reliance on fewer larger customers has increased the competitive pressures as some of our largest customers, such as The Home Depot, perform periodic product line reviews to assess their product offerings and suppliers.
We are one of the largest manufacturers of molded door facings in the world. Competition in the molded door facing business is based on quality, price, product design, logistics and customer service. We produce molded door facings to meet our own requirements, and outside of North America we serve as an important supplier to the door industry at large.
Human Capital Resources
Our Company culture is based upon a strong set of values. Our Cultural Pillars define how we act and interact, both as individuals and as an organization. They reflect the environment we create where people are empowered, collaborative and focused on doing the right thing for our customers, teammates, shareholders, suppliers and communities in which we work.
Our workforce includes over 10,000 employees and contract personnel located in nine different countries. This includes approximately 2,600 unionized employees, approximately 80% of whom are located in North America with the remainder in various foreign locations. Nine of our North American facilities have individual collective bargaining agreements, which are negotiated locally and the terms of which vary by location.
Our Company’s Purpose: We Help People Walk Through WallsSM, is reflected in our talent strategy that is focused on attracting and selecting exceptional talent, helping them develop and grow professionally and providing opportunities to recognize and reward their performance in order to engage and retain our skilled, diverse and motivated workforce. We focus on the employee experience, removing barriers to inclusion, in an effort for our people to realize their full potential and highest levels of performance. We aspire to be the employer of choice within our markets we operate and seek to grow and develop the different capabilities and skills we need for the future, while maintaining a robust pipeline of available talent throughout the organization.
We embrace the diversity of our employees and our customers, including their unique backgrounds, experiences and talents. In 2021, we furthered our progress towards a more equitable and inclusive workforce by forming a corporate Diversity Council and five regional Diversity, Equity and Inclusion ("DEI") councils representing Canada, the United States, Chile, Mexico and the United Kingdom/Ireland regions. These councils are comprised of cross-functional individuals and leaders from across their respective regions that represent various diversity demographics and assist in driving forward DEI initiatives and programming. In 2022, our diversity strategy was further enhanced with the establishment of employee affinity groups that provide a place of belonging, support and allyship for employees. At Masonite, everyone is valued and appreciated for their unique contributions to the growth and sustainability of our business. We strive to cultivate a culture that supports and enhances our ability to recruit, develop, engage and retain diverse talent at every level. We monitor engagement in part through a voluntary turnover metric as our goal is to retain a highly engaged team, thereby reducing voluntary turnover year over year. During fiscal year 2022, our voluntary employee turnover rate for employees in the United States, Canada and the United Kingdom was approximately 21%, a reduction of approximately 300 bps from 2021. These locations collectively make up 83% of our
global workforce. We also track 12-month retention rates, which have improved over time. At the end of 2022, our combined hourly employee retention rate in the United States, Canada and the United Kingdom was over 85% across all locations.
We use a variety of methods to listen to our employees and capture their feedback. These methods include all-employee calls, focus groups, employee and manager forums, town hall meetings and an annual company-wide employee engagement survey. Our annual employee engagement survey is conducted by an external analytics and advisory firm. In 2022, the employee response rate increased by 5% to our highest-ever rate of 90% with six facilities having a 100% response rate. Since we initially administered the survey in 2017, our mean results have increased each year, reaching 3.75 out of 5.00 in 2022.
In support of our Company's purpose, in 2021 we launched a quarterly grant program to provide funding to assist individuals, organizations and causes in the communities where we live and work. Our We Help People Walk Through Walls Community Grant Program provides funding for the organizations our employees care about most in their local communities. To date, the program has awarded over $180,000 in community grants to 50 different causes.
We believe that safety is as important to our success as productivity and quality. This is reflected in our goal of Target Zero injuries and our continued effort to create an injury-free workplace. We also believe that incidents can be prevented through proper management, employee involvement, standardized operations and equipment and attention to detail. Safety programs and training are provided throughout the company to ensure employees and managers have effective tools to help identify and address both unsafe conditions and at-risk behaviors.
Through a continued commitment to improve our safety performance, we have historically been successful in reducing the number of injuries sustained by our employees. In 2022 our total incident rate, or the annual number of injuries per 100 full time equivalent employees, increased nominally. While our total incident rate remains well below the industry average, our ambition is to advance workplace safety by striving toward our ultimate goal of zero harm operations or Target Zero.
Environmental and Other Regulatory Matters
Under our sustainability approach, we plan to set a carbon reduction target aligned to the latest climate science by the end of fiscal year 2024 and responsibly source 100% of our wood by 2030. In 2022 we continued to develop a comprehensive carbon reduction strategy to reduce our Scope 1 and 2 greenhouse gas emissions. This strategy is centered on reducing our reliance on fossil fuels, increasing our renewable energy supply and improving overall operational efficiencies. We released a Global Wood Sourcing Policy that reinforces our commitment to sourcing products and materials responsibly, and outlines expectations of our responsibly sourced wood goal.
We strive to minimize any adverse environmental impact our operations might have to our employees, the general public and the communities of which we are a part. Reducing waste and conserving resources is core to our business. We continually look for opportunities to divert our manufacturing waste from landfills by recycling material back into the process or for beneficial use as a byproduct. We evaluate our entire manufacturing process, from supply sourcing to shipping, to identify ways to conserve natural resources and reduce solid waste, wastewater and air emissions.
We are subject to extensive environmental laws and regulations. The geographic breadth of our facilities subjects us to environmental laws, regulations and guidelines in a number of jurisdictions, including, among others, the United States, Canada, Mexico, the United Kingdom, the Republic of Ireland, Chile and Malaysia. Such laws, regulations and guidelines relate to, among other things, the discharge of contaminants into water and air and onto land, the storage and handling of certain regulated materials used in the manufacturing process, waste minimization, the disposal of wastes and the remediation of contaminated sites. Many of our products are also subject to various regulations such as building and construction codes, product safety regulations, health and safety laws and regulations and mandates related to energy efficiency.
The Mvantage lean operating system is rooted in the lean principle of waste elimination and teaches employees throughout Masonite the skills to help identify and eliminate sources of waste including defects, over-processing and transportation. By identifying and eliminating waste, we are creating a safer, more efficient and productive operation.
Our efforts to ensure environmental compliance include the review of our operations on an ongoing basis utilizing in-house staff and on a selective basis by specialized environmental consultants. The Environmental, Health
and Safety team participates in industry groups to monitor developing regulatory actions and actively develop comments on specific issues. Furthermore, for our prospective acquisition targets, environmental assessments are conducted as part of our due diligence review process. Based on recent experience and current projections, environmental protection requirements and liabilities are not expected to have a material effect on our business, capital expenditures, operations or financial position.
In addition to the various environmental laws and regulations, our operations are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety, consumer protection, trade, labor and employment, tax and others. We believe we are in compliance in all material respects with existing applicable laws and regulations affecting our operations. Environmental laws have changed rapidly in recent years, and we may be subject to more stringent environmental laws in the future. It is possible our operations may result in noncompliance with, or liability for remediation pursuant to, environmental laws. Should such eventualities occur, we would record liabilities for remediation costs when remediation costs are probable and can be reasonably estimated. See Item 1A. Risk Factors: "Environmental requirements and other government regulation may impose significant environmental and legal compliance costs and liabilities on us."
History and Reporting Status
Masonite was founded in 1925 in Laurel, Mississippi, by William H. Mason, to utilize vastly available quantities of sawmill waste to manufacture a usable end product.
After a series of transformational corporate activity, on March 16, 2009, Masonite International Corporation and several affiliated companies, voluntarily filed to reorganize. Additionally, Masonite International Corporation and Masonite Inc. (the former parent of the Company) and all of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court in the District of Delaware. On June 9, 2009, we emerged from reorganization proceedings under the CCAA in Canada and under Chapter 11 of the U.S. Bankruptcy Code in the United States.
Effective July 4, 2011, pursuant to an amalgamation under the Business Corporations Act (British Columbia), Masonite Inc. amalgamated with Masonite International Corporation to form an amalgamated corporation named Masonite Inc., which then changed its name to Masonite International Corporation.
On September 9, 2013, our shares commenced listing on the New York Stock Exchange under the symbol "DOOR" and we became subject to periodic reporting requirements under the United States federal securities laws. We are currently not a reporting issuer, or the equivalent, in any province or territory of Canada and our shares are not listed on any recognized Canadian stock exchange.
Our United States executive offices are located at 1242 E. 5th Avenue, Tampa, Florida 33605 and our Canadian executive offices are located at 2771 Rutherford Road, Concord, Ontario L4K 2N6.
Available Information
We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available through our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our website is www.masonite.com. Information on our website does not constitute part of this Annual Report on Form 10-K.

---

ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider the following factors in addition to the other information set forth in this Annual Report before investing in our common shares. The risks and uncertainties described below are not the only ones facing us. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common shares could fall, and you may lose all or part of your investment.
Economic and Market Risks
Downward trends in our end markets or in economic conditions could negatively impact our business and financial performance.
Our business may be adversely impacted by changes in global economic conditions, including inflation, deflation, interest rate fluctuations, foreign exchange rate fluctuation, availability and cost of capital, supply chain constraints, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Volatility in the financial markets in the regions in which we operate and the deterioration of national and global economic conditions have in the past and could in the future materially adversely impact our operations, financial results and liquidity.
Trends in our primary end markets (residential new construction; repair, renovation and remodeling and non-residential building construction) directly impact our financial performance because they are directly correlated to the demand for doors and door components. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
•the strength of the economy;
•the amount and type of residential and non-residential construction;
•housing sales and home values;
•the age of existing home stock, home vacancy rates and foreclosures;
•non-residential building occupancy rates;
•increases in the cost of raw materials, energy or wages, or any shortage in supplies or labor;
•the availability and cost of credit;
•employment rates and consumer confidence; and
•demographic factors such as immigration and migration of the population and trends in household formation.
In the United States, for example, the housing market has occasionally experienced significant volatility. For example, the current and continued macro-economic conditions of high inflation and rising interest rates, especially the steep increases in mortgage rates during 2022, is one of the primary drivers behind the overall decrease in demand for new single family homes. Market conditions and/or government actions could cause mortgage rates to increase even further in the future. The current housing market is volatile with rising interest rates resulting in more expensive mortgages, elongated build cycles due to labor and supply chain constraints and an increased number of multi-family new construction starts, which generally use fewer of our products and may generate less net sales than typical single family homes.
Many of our non-North American markets were acutely affected by the 2006 housing downturn and future downturns could cause excess capacity in housing and building products, including doors and door products, which may make it difficult for us to raise prices. Due in part to both market and operating conditions, we exited certain markets over the past several years, including the Czech Republic, India, Ukraine, Turkey, Romania, Hungary, Poland, Israel, France and South Africa.
Our relatively narrow focus within the building products industry amplifies the risks inherent in a prolonged global market downturn. The impact of this weakness on our net sales, net income and margins will be determined by many factors, including industry capacity, industry pricing, and our ability to implement our business plan.
Increases in mortgage rates, changes in mortgage interest deductions and related tax changes and the reduced availability of financing for the purchase of new homes and home construction and improvements could have a material adverse impact on our sales and profitability.
Demand for new homes and home improvement products may be adversely affected by increases in mortgage rates and the reduced access to consumer financing. If mortgage rates continue to increase and, consequently, the ability
of prospective buyers to finance purchases of new homes or home improvement products is adversely affected, our business, financial condition and results of operations may be materially and adversely affected.
In addition, the Tax Cuts and Jobs Act in the United States placed a cap on the amount of mortgage debt on which interest can be deducted and also made interest on home equity debt non-deductible. These changes and future changes in policies set to encourage home ownership and improvement may adversely impact demand for our products and have a material adverse impact on us.
The ability of consumers to finance these purchases is affected by such factors as new and existing home prices, homeowners’ equity values, interest rates and home foreclosures. Adverse developments affecting any of these factors could result in a tightening of lending standards by financial institutions and reduce the ability of some consumers to finance home purchases or repair and remodeling expenditures. Interest rates have recently experienced significant volatility; for example, in response to increasing inflation, the U.S. Federal Reserve began to raise interest rates in March 2022 for the first time in over three years, ultimately increasing interest rates by over 4%, and has signaled it expects to make additional rate increases. A worsening in credit markets could adversely impact our net sales and net income.
We operate in a competitive business environment. If we are unable to compete successfully, we could lose customers and our sales could decline.
The building products industry is highly competitive. Some of our principal competitors may have greater financial, marketing and distribution resources than we do and may be less leveraged than we are, providing them with more flexibility to respond to new technology or shifting consumer demand. Accordingly, these competitors may be better able to withstand changes in conditions within the industry in which we operate and may have significantly greater operating and financial flexibility than we do. Also, certain of our competitors may have excess production capacity, which may lead to pressure to decrease prices in order to remain competitive and may limit our ability to raise prices even in markets where economic and market conditions have improved. For these and other reasons, our competitors could take a greater share of sales and cause us to lose business from our customers or hurt our margins.
As a result of this competitive environment, we face pressure on the sales prices of our products. Because of these pricing pressures, we may in the future experience limited growth and reductions in our profit margins, sales or cash flows, and may be unable to pass on future raw material price, labor cost and other input cost increases to our customers which would also reduce profit margins.
Because we depend on a core group of significant customers, our sales, cash flows from operations, results of operations and our ability to implement price increases for our products may be negatively affected if our key customers reduce the amount of products they purchase from us or demand lower prices.
Our customers consist mainly of wholesalers, retail home centers and contractors. Our top ten customers together accounted for approximately 50% of our net sales in fiscal year 2022, while our largest customer, The Home Depot, accounted for approximately 22% of our net sales in fiscal year 2022. We expect that a small number of customers will continue to account for a substantial portion of our net sales for the foreseeable future. However, net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue to do so in future periods, or if continued, may not reach or exceed historical levels in any period. For example, many of our largest customers, including The Home Depot, perform periodic line reviews to assess their product offerings, which have, on past occasions, led to loss of business and pricing pressures. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our most significant customers. Moreover, if any of these customers fails to remain competitive in the respective markets or encounters financial or operational problems, our net sales and profitability may decline. We generally do not enter into long-term contracts with our customers and they generally do not have an obligation to purchase products from us. Therefore, we could lose a significant customer with little or no notice. Alternatively, our customers could expect that we lower the prices of our products should the cost of raw materials decrease; our failure to do so could cause such customers to seek similar products from our competitors. The loss of, or a significant adverse change in, our relationships with The Home Depot or any other major customer could cause a material decrease in our net sales. The loss of, or a reduction in orders from, any significant customers, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer, could have a material adverse effect on us. Also, we have no operational or financial control over these customers and have limited influence over how they conduct their businesses.
Consolidation of our customers and their increasing size could adversely affect our results of operations.
In many of the countries in which we operate, an increasingly large number of building products are sold through large retail home centers and other large retailers. In addition, we have experienced consolidation of distributors in our wholesale distribution channel and among businesses operating in different geographic regions resulting in more customers operating nationally and internationally. If the consolidation of our customers and distributors were to continue, leading to the further increase of their size and purchasing power, it could impact our margin growth and profitability as larger customers may realize certain operational and other benefits of scale. If we fail to provide high levels of service, broad product offerings, competitive prices and timely and complete deliveries, we could lose a substantial amount of our customer base and our profitability, margins and net sales could decrease. Consolidation of our customers could also result in the loss of a customer or a substantial portion of a customer's business.
If we are unable to accurately predict future demand preferences for our products, our business and results of operations could be materially affected.
A key element to our continued success is the ability to maintain accurate forecasting of future demand preferences for our products. Our business in general is subject to changing consumer and industry trends, demands and preferences. Changes to consumer shopping habits and potential trends towards online purchases could also impact our ability to compete as we currently sell our products mainly through our distribution channels. Our continued success depends largely on the introduction and acceptance by our customers of new product lines and improvements to existing product lines that respond to such trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line, increased substitution of our products and reduced demand and price reductions for our products, and could materially adversely affect us. In addition, we are subject to the risk that new products or product pricing could be introduced that would replace or reduce demand for our products. Furthermore, new proprietary designs and/or changes in manufacturing technologies may render our products obsolete or we may not be able to manufacture products or designs at prices that would be competitive in the marketplace. We may not have sufficient resources to make necessary investments or we may be unable to make the investments or acquire the intellectual property rights necessary to develop new products or improve our existing products.
Our business is subject to climate change and related extreme weather events that may affect our net sales, cash flows from operations and results of operations.
Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity. Ongoing climate change has increased the frequency and severity of these events and the related risk of an extreme weather event may affect our corporate headquarters, our manufacturing plants or plants owned by one of our customers or suppliers. An increase in average global temperatures could result in more frequent and severe weather events that disrupt supply of inbound raw materials, outbound finished products or our ability to run our plants and could reduce the quality and volume of wood available to our manufacturing locations due to an increase in pest infestation, disease or prolonged drought or flooding. The impact of these types of events on our business may adversely impact our sales, cash flows from operations and results of operations. Concern over global climate change has led to significant federal, state and international regulatory efforts to limit greenhouse gas emissions and increase climate-related reporting and disclosures, which could impose substantial compliance costs. In addition, new laws or future regulations could directly and indirectly affect our customers and suppliers and our business. We cannot predict the effects on our business that may result from global climate change.
Changes in climate change regulation may have a material effect on our results of operations.
Laws or regulations aimed at addressing climate change, including local building codes, greenhouse gas emissions, laws or regulations impacting energy supply, and other laws or regulations, may materially impact demand for our products or our cost of doing business. For example, in December 2022, the European Union reached an agreement to introduce a carbon tax under the European Union Carbon Border Adjustment Mechanism and there are several United States federal carbon tax proposals that would introduce an economy-wide carbon tax. These proposals include a fee on each unit of carbon dioxide released into the atmosphere thus making carbon-intensive goods and services more expensive, which then provides a financial incentive to use less of these products or shift to lower-carbon alternatives. Currently the use of biomass for energy is considered carbon neutral. A carbon tax scheme might not
include this assumption and thus tax our bio-mass emissions at an equal rate as our fossil fuel emissions. These carbon taxes could adversely affect our business, financial condition, results of operations and cash flows.
Acquisition-related Risks
Our recent acquisitions and any future acquisitions, if available, could be difficult to integrate and could adversely affect our operating results.
In the past several years, we completed several strategic acquisitions of door and door component manufacturers in North America and the United Kingdom to vertically integrate and expand our operations. In January 2023, we completed our acquisition of Endura, which further enhances our product offerings and capabilities. From time to time, we have evaluated and we continue to evaluate possible acquisition transactions on an on-going basis. Our acquisitions may not be immediately accretive. At any time we may be engaged in discussions or negotiations with respect to possible acquisitions or may have entered into non-binding letters of intent. As part of our strategy, we expect to continue to pursue complementary acquisitions and investments and may expand into product lines or businesses with which we have little or no operating experience. For example, acquisitions may involve product categories beyond what we currently sell, such as the acquisition of Endura in January 2023. We may also engage in further vertical integration. However, we may face competition for attractive targets and we may not be able to source appropriate acquisition targets at prices acceptable to us, or at all. In addition, in order to pursue our acquisition strategy, we will need significant liquidity, which, as a result of the other factors described herein, may not be available on terms favorable to us, or at all.
Our recent and any future acquisitions involve a number of risks, including:
•our inability to integrate the acquired business, including their information technology systems;
•our inability to manage acquired businesses or control integration and other costs relating to acquisitions;
•our lack of experience with a particular business should we invest in a new product line;
•diversion of management attention;
•our failure to achieve projected synergies or cost savings;
•impairment of goodwill affecting our reported net income;
•our inability to retain the management or other key employees of the acquired business;
•our inability to establish uniform standards, controls, procedures and policies;
•our inability to retain customers of our acquired companies;
•risks associated with the internal controls of acquired companies;
•exposure to legal claims for activities of the acquired business prior to the acquisition;
•our due diligence procedures could fail to detect material issues related to the acquired business;
•unforeseen management and operational difficulties, particularly if we acquire assets or businesses in new foreign jurisdictions where we have little or no operational experience;
•damage to our reputation as a result of performance or customer satisfaction problems relating to any acquired business;
•the performance of any acquired business could be lower than we anticipated; and
•our inability to enforce indemnifications and non-compete agreements.
Rising interest rates could impair or prohibit our ability to finance acquisitions. The integration of any future acquisition into our business will likely require substantial time, effort, attention and dedication of management resources and may distract our management in unpredictable ways from our ordinary operations. The integration may also result in consolidation of certain existing operations. If we cannot successfully execute on our investments on a timely basis, we may be unable to generate sufficient net sales to offset acquisition, integration or expansion costs, we may incur costs in excess of what we anticipate, and our expectations of future results of operations, including cost savings and synergies, may not be achieved. If we are not able to effectively manage recent or future acquisitions or realize their anticipated benefits, it may harm our results of operations.
Manufacturing and Operations
Changing prices for and diminished availability of raw materials or finished goods used in our products or interruptions in deliveries of raw materials or finished goods could adversely affect our profitability, margins and net sales.
Our profitability is affected by the prices and availability of raw materials and finished goods used in the manufacturing of our products. These prices have fluctuated and may continue to fluctuate based on a number of factors beyond our control, including world oil prices, changes in supply and demand, weather, general economic or environmental conditions, labor costs, competition, import duties, tariffs, currency exchange rates and, in some cases, government regulation. The commodities we use may undergo major price fluctuations and there is no certainty that we will be able to pass these costs through to our customers. Significant increases in the prices of raw materials or finished goods are more difficult to pass through to customers in a short period of time and may negatively impact our short-term profitability, margins and net sales. We may not be able to pass on these cost increases to our customers. Alternatively, should the prices of raw materials or finished goods decrease, our customers may seek corollary reductions in the pricing of our products.
We require a regular supply of raw materials, such as wood, wood composites, cut stock, steel, glass, core material, paint, stain and primer as well as petroleum-based products such as binders, resins and frames. In certain instances, we depend on a single or limited number of suppliers for these raw materials. We typically do not have long-term contracts with our suppliers. If we are not able to accurately forecast our supply needs, the limited number of suppliers may make it difficult to obtain additional raw materials to respond to shifting or increased demand. Our dependency upon regular deliveries from particular suppliers means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers could be made. Furthermore, because our products and the components of some of our products are subject to regulation, such alternative suppliers, even if available, may not be substituted until regulatory approvals for such substitutions are received, thereby delaying our ability to respond to supply changes. Moreover, some of our raw materials, especially those that are petroleum or chemical based, interact with other raw materials used in the manufacture of our products and therefore significant lead time may be required to procure a compatible substitute. Substituted materials may also not be of the same quality as our original materials.
If any of our suppliers were unable to deliver raw materials to us for an extended period of time (including as a result of delays in land or sea shipping), or if we were unable to negotiate acceptable terms for the supply of raw materials with these or alternative suppliers, our business could suffer. In the future, we may not be able to find acceptable supply alternatives, and any such alternatives could result in elongated build cycles and our net sales and profitability may decline. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business.
Furthermore, raw material prices could increase, and supply could decrease, if other industries compete with us for such materials. For example, we are highly dependent upon our supply of wood chips used for the production of our door facings and wood composite materials. Failure to obtain significant supply may disrupt our operations and even if we are able to obtain sufficient supply, we may not be able to pass increased supply costs on to our customers in the form of price increases, thereby resulting in reduced margins and profits.
A rapid and prolonged increase in fuel prices may significantly increase our costs and have an adverse impact on our results of operations.
Fuel prices may be volatile and are significantly influenced by international, political and economic circumstances, such as the ongoing war between Russia and Ukraine. Fuel prices rose significantly during extended portions of 2022. Although such price increases appear to have leveled off, if fuel prices continue to rise for any reason, including fuel supply shortages or unusual price volatility, the resulting higher fuel prices could materially increase our shipping costs, adversely affecting our results of operations. In addition, competitive pressures in our industry may have the effect of inhibiting our ability to reflect these increased costs in the prices of our products.
Tariffs and evolving trade policy between the United States and other countries, including China, and the impact of anti-dumping and countervailing duties on our business and results of operations.
Steps taken by the United States government to apply tariffs on certain products and materials could potentially disrupt our existing supply chains and impose additional costs on our business, including costs with respect to raw materials upon which our business depends. The increased costs may negatively impact our margins as we may not be able to pass on the additional costs by increasing the prices of our products. For example, anti-dumping and countervailing duty trade cases, such as the January 8, 2020, Coalition of American Millwork Producers anti-dumping and countervailing duty petitions against Wood Mouldings and Millwork Products from Brazil and China, has had and could continue to have an adverse effect on our business and results of operations. In order to reduce the impact on our business and results of operations, we have qualified alternate suppliers and are in the process of attempting to qualify additional alternate suppliers in other jurisdictions and continue to evaluate additional alternate suppliers as a result of these duties.
Increases in labor costs, availability of labor, or potential labor disputes and work stoppages at our facilities or the facilities of our suppliers could materially adversely affect our financial performance.
Our financial performance is affected by the availability of qualified personnel and the cost of labor as it impacts our direct labor, overhead, distribution and selling, general and administration costs. Increased costs of wages and benefits and the lack of qualified labor available has had and could continue to have an adverse effect on our results of operations.
Additionally, we have approximately 10,000 employees and contract personnel worldwide, including approximately 2,600 unionized workers. Employees represented by these unions are subject to collective bargaining agreements that are subject to periodic negotiation and renewal, including our agreements with employees and their respective work councils in the United States, Canada, Mexico and Chile. If we are unable to enter into new, satisfactory labor agreements with our unionized employees upon expiration of their agreements, we could experience a significant disruption of our operations, which could cause us to be unable to deliver products to customers on a timely basis. If our workers were to engage in strikes, a work stoppage or other slowdowns, we could also experience disruptions of our operations. Such disruptions could result in a loss of business and an increase in our operating expenses, which could reduce our net sales and profit margins.
We believe many of our direct and indirect suppliers and customers also have unionized workforces. Strikes, work stoppages or slowdowns experienced by our suppliers and customers could result in slowdowns or closures of facilities where components of our products are manufactured or delivered. Any interruption in the production or delivery of these components could reduce sales, increase costs and have a material adverse effect on us.
A disruption in our operations could materially affect our operating results.
We operate facilities worldwide. Some of our facilities are located in areas that are vulnerable to hurricanes, earthquakes and other natural disasters. In the event that a hurricane, earthquake, natural disaster, fire or other catastrophic event were to interrupt our operations for any extended period of time, it could delay shipment of merchandise to our customers, damage our reputation or otherwise have a material adverse effect on our financial condition and results of operations. Closure of one of our door facing facilities, which are our most capital intensive and least replaceable production facilities, could have a substantial negative effect on our earnings. We maintain insurance coverage to protect us against losses under our property, casualty and umbrella insurance policies, but that coverage may not be adequate to cover all claims that may arise or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance could materially and adversely impact our financial condition and results of operations.
In addition, our operations may be interrupted by terrorist attacks, other acts of violence or war. These events may directly impact our suppliers’ or customers’ physical facilities. Furthermore, these events may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect our operating results. The United States has entered into, and may enter into, additional armed conflicts which could have a further impact on our sales and our ability to deliver product to our customers in the United States and elsewhere. Political and economic instability in some regions of the world, including instabilities in the Middle East and North Korea, may also negatively impact our business. The consequences of any of these armed conflicts are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United
States and worldwide financial markets and economy. They could also result in an economic recession in the United States or abroad. Any of these occurrences could have a significant impact on our operating results.
Manufacturing realignments may result in a decrease in our short-term earnings, until the expected cost reductions are achieved, as well as reduce our flexibility to respond quickly to improved market conditions.
We continually review our manufacturing operations and sourcing capabilities. Effects of periodic manufacturing realignments and cost savings programs have in the past and could in the future result in a decrease in our short-term earnings, including the impacts of restructuring charges and related impairments and other expenses, until the expected cost reductions are achieved. We also cannot assure you we will achieve all of our cost savings. Such programs may include the consolidation, integration and upgrading of facilities, functions, systems and procedures. The success of these efforts will depend in part on market conditions, and such actions may not be accomplished as quickly as anticipated and the expected cost reductions may not be achieved or sustained.
In connection with our manufacturing realignment and cost savings programs, we have closed or consolidated a substantial portion of our global operations and reduced our personnel, which may reduce our flexibility to respond quickly to improved market conditions. In addition, we have in the past and may again in the future, restructure portions of our global workforce to simplify and streamline our organization, improve our cost structure and strengthen our overall business. These changes could affect employee morale and productivity and be disruptive to our business and financial performance. For example, in 2020 we closed our St. Romuald, Quebec, facility and Lac Megantic, Quebec, components facility and in 2021 we closed our Springfield, Missouri, stile and rail facility in order to improve our cost structure and enhance operational efficiencies. In December 2022, we approved a restructuring plan intended to (i) better align our operational structure and long-term business strategy and (ii) continue to drive cost efficiencies through an optimized manufacturing footprint. Further, a failure to anticipate a sharp increase in levels of residential new construction, residential repair, renovation and remodeling and non-residential building construction activity could result in operational difficulties, adversely impacting our ability to provide our products to our customers. This may result in the loss of business to our competitors in the event they are better able to forecast or respond to market demand. There can be no assurance that we will be able to accurately forecast the level of market demand or react in a timely manner to such changes, which may have a material adverse effect on our business, financial condition and results of operations.
We are subject to the credit risk of our customers.
We provide credit to our customers in the normal course of business. We generally do not require collateral in extending such credit. An increase in the exposure, coupled with material instances of default, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may be the subject of product liability claims or product recalls, we may not accurately estimate costs related to such claims or recalls, and we may not have sufficient insurance coverage available to cover potential liabilities.
Our products are used and have been used in a wide variety of residential and architectural applications. We face an inherent business risk of exposure to product liability or other claims, including class action lawsuits, in the event our products are alleged to be defective or that the use of our products is alleged to have resulted in harm to others or to property. Because we manufacture a significant portion of our products based on the specific requirements of our customers, failure to provide our customers the products and services they specify could result in product-related claims and reduced or cancelled orders and delays in the collection of accounts receivable. We may in the future incur expenses if product liability lawsuits against us are successful. Moreover, any such lawsuits, whether or not successful, could result in adverse publicity to us, which could cause our sales to decline materially. In addition, it may be necessary for us to recall defective products, which would also result in adverse publicity, as well as resulting in costs connected to the recall and loss of net sales. We maintain insurance coverage to protect us against product liability claims, but that coverage may not be adequate to cover all claims or costs that may arise or we may not be able to maintain adequate insurance coverage in the future at an acceptable cost. Any liability not covered by insurance or that exceeds our established reserves could materially and adversely impact our financial condition and results of operations.
In addition, consistent with industry practice, we provide warranties on many of our products and we may experience costs of warranty or breach of contract claims if our products have defects in manufacture or design or they do not meet contractual specifications. We estimate our future warranty costs based on historical trends and product sales, but we may fail to accurately estimate those costs and thereby fail to establish adequate warranty reserves for them.
Financial Risks
To service our consolidated indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.
Our estimated annual payment obligation for 2023 with respect to our consolidated indebtedness is $60.0 million of interest payments, which gives effect to our increased indebtedness in 2023 in connection with our acquisition of Endura. To finance such acquisition, we entered into a new five-year $250.0 million delayed-draw term loan facility (the "Term Loan Facility") and an amendment to the ABL Facility increasing the borrowing capacity to $350.0 million. The loans under the Term Loan Facility are repayable in equal quarterly installments for an annual aggregate amortization payment equal to 15% of the aggregate principal amount, with the balance of the principal being due on the term loan maturity date. If we draw funds under the ABL Facility, we incur additional interest expense. Our ability to pay interest on and principal of the senior notes, Term Loan Facility and ABL Facility along with our ability to satisfy our other debt obligations will principally depend upon our future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect our ability to make these payments.
If we do not generate sufficient cash flows from operations to satisfy our consolidated debt service obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance our debt will depend on the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt instruments, including the Term Loan Facility, the ABL Facility and the indentures governing the senior notes, may restrict us from adopting some of these alternatives. If we are unable to generate sufficient cash flows to satisfy our debt service obligations, or to refinance our obligations on commercially reasonable terms, it would have an adverse effect, which could be material, on our business, financial condition and results of operations.
Under such circumstances, we may be unable to comply with the provisions of our debt instruments, including the financial covenants in the Term Loan Facility and the ABL Facility. If we are unable to satisfy such covenants or other provisions at any future time, we would need to seek an amendment or waiver of such financial covenants or other provisions. The lenders under the Term Loan Facility and the ABL Facility may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. The lenders will also have the right in these circumstances to terminate any commitments they have to provide further borrowings. If we are unable to obtain any such waiver or amendment, our inability to meet the financial covenants or other provisions of the Term Loan Facility and the ABL Facility would constitute an event of default thereunder, which would permit the lenders to accelerate repayment of borrowings under the Term Loan Facility and the ABL Facility, which in turn would constitute an event of the default under the indenture governing the senior notes, permitting the holders of the senior notes to accelerate payment thereon. Our assets and/or cash flows, and/or that of our subsidiaries, may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, and the secured lenders under the Term Loan Facility and the ABL Facility could proceed against the collateral securing that indebtedness. Such events would have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of the senior notes.
The terms of the Term Loan Facility, the ABL Facility and the indentures governing the senior notes may restrict our current and future operations, particularly our ability to respond to changes in our business or to take certain actions.
The credit agreements governing the Term Loan Facility and the ABL Facility as well as the indentures governing the senior notes contain, and the terms of any future indebtedness of ours would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interests. The indentures governing the senior notes and the credit agreements governing the Term Loan Facility and ABL Facility include covenants that, among other things, restrict our and our subsidiaries’ ability to:
•incur additional indebtedness and issue disqualified or preferred stock;
•make restricted payments;
•sell assets;
•create restrictions on the ability of their restricted subsidiaries to pay dividends or distributions;
•create or incur liens;
•enter into sale and lease-back transactions;
•merge or consolidate with other entities; and
•enter into transactions with affiliates.
The operating and financial restrictions and covenants in the debt agreements entered into in connection with the Term Loan Facility, the ABL Facility and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Fluctuating exchange and interest rates could adversely affect our financial results.
Our financial results may be adversely affected by fluctuating exchange rates. Net sales generated outside of the United States were approximately 26% for the year ended January 1, 2023. In addition, a significant percentage of our costs during the same period were not denominated in U.S. dollars. For example, for most of our non-U.S. manufacturing facilities, the prices for a significant portion of our raw materials are quoted in the domestic currency of the country where the facility is located or other currencies that are not U.S. dollars. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. For example, we are subject to currency exchange rate risk to the extent that some of our costs will be denominated in currencies other than those in which we earn revenues. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country and may result in the loss of business to our competitors that sell their products at lower prices in that country.
Moreover, as our current indebtedness is denominated in a currency that is different from the currencies in which we derive a portion of our net sales, we are also exposed to currency exchange rate risk with respect to those financial obligations. When the outstanding indebtedness is repaid, we may be subject to taxes on any corresponding foreign currency gain.
Borrowings under our current Term Loan Facility and ABL Facility are incurred at variable rates of interest, which exposes us to interest rate fluctuation risk. As described above, interest rates rose significantly in 2022 and such rates may continue to increase in the future.
Data Security and Privacy
We rely on the continuous operation of our information technology systems. Failure to maintain or prevent damage to such information technology systems or implement contemporary technology systems may adversely affect our business, results of operations and customer relationships.
Our information technology systems allow us to accurately maintain books and records, record transactions, provide information to management and prepare our consolidated financial statements. We may not have sufficient redundant operations to cover a loss or failure in a timely manner. Our operations depend on our network of information technology systems, which are vulnerable to damage from hardware failure, fire, power loss, telecommunications failure, impacts of terrorism, cyber security vulnerabilities (such as threats and attacks), computer viruses, natural disasters (including those related to climate change) or other disasters. Any damage to our information technology systems could cause interruptions to our operations that materially adversely affect our ability to meet customers’ requirements, resulting in an adverse impact to our business, financial condition and results of operations. Periodically, these systems need to be expanded, updated or upgraded as our business needs change. For example, we are in the process of implementing a new enterprise resource planning system in our Europe segment. In addition, we are increasingly using cloud-based technology to enable our customers a secure link to our systems in ways that enhance our customer relationships. We may not be able to successfully implement changes in our information technology systems without experiencing difficulties, which could require significant financial and human resources and impact our ability to efficiently service our customers. Moreover, our recent technological initiatives and increasing dependence on technology may exacerbate this risk.
Potential cyber threats and attacks and data privacy requirements could disrupt our information security systems and cause damage to our business and our reputation.
Our internal information security systems and those of our current and any future partners, acquisitions, contractors and consultants are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. Information security threats, which pose a risk to the security of our network of systems and the confidentiality and integrity of our data, are increasing in frequency and sophistication as evidenced by significant ransomware attacks and foreign attacks on prominent computer software systems that has had an impact on a wide variety of companies and industries. We have established policies, processes and multiple layers of defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our network of systems, including third party vendors' systems. Should damage to our network of systems occur, it could lead to the compromise of confidential information, manipulation and destruction of data and product specifications, production downtimes, disruption in the availability of financial data, or misrepresentation of information via digital media. While we have not experienced any material breaches in information security, the occurrence of any of these events could adversely affect our reputation and could result in litigation, regulatory action, financial loss, project delay claims and increased costs and operational consequences of implementing further data protection systems. Further, regulators continue to expand data privacy and data security requirements, as well as increased fines for non-compliance of security and data breach obligations, specifically in the European Union and United Kingdom under their separate General Data Protection Regulations, in Canada under the
Personal Information Protection and Electronic Documents Act and additional provincial data privacy laws, in the United States under the California Consumer Privacy Act and California Privacy Rights and Enforcement Act and other state data privacy laws. Failure to comply with these current and future data privacy laws, policies, industry standards or legal obligations or any security incident resulting in the unauthorized access to, or acquisition, release or transfer of personal information may result in governmental enforcement actions, litigation (including a private right of action), fines, penalties and statutory damages, as well as adverse publicity that may cause our customers to lose trust in us, which could have a material adverse effect on our business and results of operations. In addition, the SEC issued a proposed rule intended to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance and cybersecurity incident reporting, which if approved, will require us to develop additional policies and procedures to comply with these new rules.
Geopolitical Uncertainties
We are exposed to political, economic and other risks that arise from operating a multinational business.
We have operations in the United States, Canada, Europe and, to a lesser extent, other foreign jurisdictions. In the year ended January 1, 2023, approximately 74% of our net sales were in the United States, 14% in Canada and 9% in the United Kingdom. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to political, economic and other risks that are inherent in operating in numerous countries.
These risks include:
•the difficulty of enforcing agreements and collecting receivables through foreign legal systems;
•trade protection measures and import or export licensing requirements;
•tax rates in foreign countries and the imposition of withholding requirements on foreign earnings;
•the imposition of tariffs, such as those recently adopted by the United States and other jurisdictions, or other restrictions;
•difficulty in staffing and managing widespread operations and the application of foreign labor regulations;
•required compliance with a variety of foreign laws and regulations; and
•changes in general economic and political conditions in countries where we operate.
Our business success depends in part on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our international operations or on our business as a whole. See also "Tariffs and evolving trade policy between the United States and other countries, including China, and the impact of anti-dumping and countervailing duties on our business and results of operations."
Human Capital Risks
The loss of certain members of our management may have an adverse effect on our operating results.
Our success will depend, in part, on the efforts to retain our senior management and other key employees. These individuals possess sales, marketing, engineering, manufacturing, financial and administrative skills and know-how that are critical to the operation of our business. If we lose or suffer an extended interruption in the services of one or more of our senior officers or other key employees, our financial condition and results of operations may be negatively affected. Moreover, the pool of qualified individuals may be highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. The loss of the services of any key personnel or our inability to hire new personnel with the requisite skills, could impair our ability to develop new products or enhance existing products, sell products to our customers or manage our business effectively.
Legal and Regulatory Risks
Environmental requirements and other government regulation may impose significant environmental and legal compliance costs and liabilities on us.
We analyze environmental-related risks in two separate categories: transition risks and physical risks. Transition risks are those risks relating to the transition of the global economy to a focus on more climate-friendly technologies. Physical risks from climate change that could affect our business include acute weather events such as floods, tornadoes or other severe weather and ongoing changes such as rising temperatures or extreme variability in weather patterns. For a discussion on physical risks, please see the risk factor "-Our business is subject to climate change and related extreme weather events that may affect our net sales, cash flows from operations and results of operations."
In respect to transition risks, our operations are subject to numerous Canadian (federal, provincial and local), United States (federal, state and local), European (European Union, national and local) and other laws and regulations relating to pollution, public reporting and disclosure related to climate change, and the protection of human health and the environment, including, without limitation, those governing emissions to air, discharges to water, storage, treatment and disposal of waste, releases of contaminants or hazardous or toxic substances, remediation of contaminated sites and protection of worker health and safety. From time to time, our facilities are subject to investigation by governmental regulators. Despite our efforts to comply with environmental requirements, we are at risk of being subject to civil, administrative or criminal enforcement actions, of being held liable, of being subject to an order or of incurring costs, fines or penalties for, among other things, releases of contaminants or hazardous or toxic substances occurring on or emanating from currently or formerly owned or operated properties or any associated offsite disposal location, or for contamination discovered at any of our properties from activities conducted by us or by previous occupants. We have incurred costs relating to compliance with Maximum Achievable Control Technology standard and future expenditures may be required to comply with any changes in environmental requirements are anticipated to be undertaken as part of our ongoing capital investment program, which is primarily designed to improve the efficiency of our various manufacturing processes. The amount of any resulting liabilities, costs, fines or penalties may be material.
In addition, the requirements of such laws and enforcement policies have generally become more stringent over time. Changes in environmental laws and regulations or in their enforcement or the discovery of previously unknown or unanticipated contamination or non-compliance with environmental laws or regulations relating to our properties or operations could result in significant environmental liabilities or costs which could adversely affect our business. Accordingly, we might incur increased operating and maintenance costs and capital expenditures and other costs to comply with such laws as well as increasingly stringent air emission control laws or other future requirements, which may decrease our cash flows. Also, discovery of currently unknown or unanticipated conditions could require responses that would result in significant liabilities and costs. Accordingly, we are unable to predict the ultimate costs of compliance with or liability under environmental laws, which may be larger than current projections.
Lack of transparency, threat of fraud, public sector corruption and other forms of criminal activity involving government officials increases risk for potential liability under anti-bribery or anti-fraud legislation, including the United States Foreign Corrupt Practices Act.
We operate facilities in seven countries and sell our products around the world. As a result of these international operations, we may enter from time to time into negotiations and contractual arrangements with parties
affiliated with foreign governments and their officials. In connection with these activities, we are subject to the FCPA, the United Kingdom Bribery Act and other anti-bribery laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by United States and other business entities for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind and requires the maintenance of internal controls to prevent such payments. In particular, we may be held liable for actions taken by our local partners and agents in foreign countries where we operate, even though such parties are not always subject to our control. As part of our Masonite Values Operating Guide, we have established FCPA and other anti-bribery policies and procedures and offer several channels for raising concerns in an effort to comply with applicable United States and international laws and regulations. However, there can be no assurance that our policies and procedures will effectively prevent us from violating these laws and regulations in every transaction in which we may engage. Any determination that we have violated the FCPA or other anti-bribery laws (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our results of operations and financial condition.
If we expand our business globally, we may have difficulty anticipating and effectively managing these and other risks that our international operations may face, which may adversely impact our business outside of North America and our financial condition and results of operations. In addition, any acquisition of businesses with operations outside of North America may exacerbate this risk.
Changes in government regulation may have a material effect on our results of operations.
Our manufacturing facilities and components of our products are subject to numerous foreign, federal, state and local laws and regulations, including those relating to the presence of hazardous materials and protection of worker health and safety. Liability under these laws involves inherent uncertainties. Changes in such laws and regulations or in their enforcement could significantly increase our costs of operations which could adversely affect our business. Violations of health and safety laws are subject to civil, and, in some cases, criminal sanctions. As a result of these uncertainties, we may incur unexpected interruptions to operations, fines, penalties or other reductions in income which could adversely impact our business, financial condition and results of operations.
Further, in order for our products to obtain the energy efficient "ENERGYSTAR" label, they must meet certain requirements set by the Environmental Protection Agency ("EPA"). Changes in the energy efficiency requirements established by the EPA for the ENERGYSTAR label could increase our costs, and, if there is a lapse in our ability to label our products as such or we are not able to comply with the new standards at all, negatively affect our net sales and results of operations.
Moreover, many of our products are regulated by building codes and require specific fire, penetration or wind resistance characteristics. A change in the building codes could have a material impact on the manufacturing cost for these products, which we may not be able to pass on to our customers.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act, the Dodd-Frank Act and related regulations implemented by the Securities and Exchange Commission ("SEC"), and the stock exchanges are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. Further, new regulations or interpretations of existing laws may result in enhanced disclosure obligations, including with respect to climate change or other Environmental, Social and Governance matters, which could negatively affect us or materially increase our regulatory burden. Increased regulations generally increase our costs, and we could continue to experience higher costs if new laws require us to spend more time, hire additional personnel or purchase new technology to comply effectively. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We also expect that being a public company and these new rules and regulations will make it more expensive for us to obtain director and officer
liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and attract and retain qualified executive officers.
General Risks
Public health issues such as a major epidemic or pandemic could adversely affect our business or results of operations.
Demand for our product is dependent on a variety of macroeconomic factors, such as employment levels, interest rates, changes in stock market valuations, consumer confidence, housing demand and availability of financing for home buyers. These factors, in particular consumer confidence, can be significantly adversely affected by a variety of factors beyond our control. Since 2019, the ongoing spread of COVID-19 caused significant volatility in U.S. and international debt and equity markets, which negatively impacted consumer confidence, and caused business disruptions. For example, at various times in 2020, we temporarily closed certain locations as a result of government orders and furloughed employees, as well as significantly altered our operations, thereby reducing production. The impact of these actions resulted in a decrease in net sales of approximately $100 million in the second quarter of fiscal year 2020. The impacts of COVID-19-related absenteeism, labor constraints and supply chain disruptions resulted in lost production at our facilities and may continue in future periods.
While government restrictions have eased throughout 2022 and people have largely resumed pre-pandemic activities, the effects of COVID-19 continue to linger in the global economy and our supply chains. There is continuing uncertainty regarding how long the impacts of COVID-19 will affect the U.S. economy and our supply chain and operations. Future disruptions and governmental actions, due to COVID-19 or a different epidemic or pandemic, combined with any associated economic and/or social instability or distress, may have an adverse impact on our results of operations, financial condition and cash flows, and may lead to higher-than-normal inventory levels, higher sales-related reserves, impairment of goodwill and other long-lived assets, a volatile effective tax rate driven by changes in the mix and earnings across our jurisdictions and an impact on the effectiveness of our internal controls over financial reporting.
We may face claims that we infringe third party intellectual property rights, or be unable to protect our intellectual property from infringement by others except by incurring substantial costs as a result of litigation or other proceedings relating to patent or trademark rights, any of which could cause our net sales or profitability to decline.
We rely on a combination of United States, Canadian and, to a lesser extent, European patent, trademark, copyright and trade secret laws as well as licenses, nondisclosure, confidentiality and other contractual restrictions to protect our intellectual property portfolio. We have registered trademarks, and copyrights and our patent and trademark applications may not be allowed by the applicable governmental authorities to issue as patents or register as trademarks at all, or in a form that will be advantageous to us. In addition, we have selectively pursued patent and trademark protection, and in some instances we may not have registered important patent and trademark rights in these and other countries. Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. Additionally, the processes by which we clear our intellectual property or obtain "freedom to operate" opinions could fail. The failure to obtain worldwide patent and trademark protection may result in other companies copying and marketing products based upon our technologies or under our brand or tradenames outside the jurisdictions in which we are protected. This could impede our growth in existing regions and into new regions, create confusion among consumers and result in a greater supply of similar products that could erode prices for our protected products.
Our ability to protect our intellectual property, including our patents, trademarks, copyrights, trade secrets and licensed intellectual property, from unauthorized use by others is critical to our success. There is no guarantee that the patents we have obtained, or other protections such as confidentiality, trade secrets and copyrights, will be adequate to prevent imitation of our products by others. Our ability to compete based on our advantageous intellectual property may be harmed if we are unable to protect our products through enforcing or prosecuting our intellectual property rights. If we fail to protect our intellectual property from unauthorized use, we risk the loss of these rights and any associated competitive advantage.
Moreover, we may be accused of misappropriating or infringing on third-party intellectual property. Our trademarks and branding practices could also be challenged. In the event of a challenge, we may be required to defend the Company in litigation, or we may be required to institute litigation to enforce such intellectual property rights from
unauthorized use by others. Regardless of the outcome, the enforcement or defense of such rights could result in substantial costs and diversion of resources, and could negatively affect our competitive position, sales, profitability and reputation. Further, if we are found to have infringed on a patent in litigation, we may be liable for monetary damages as well as injunctive relief, which would prevent us from selling the infringing product unless we obtain a license or are able to redesign our product to avoid infringement. Such a license may not be available at all or on terms acceptable to us, and we may not be able to redesign our products to avoid infringement, which could adversely affect our operations.
Our intellectual property rights may be subject to various attacks claiming such rights are valid or unenforceable. These attacks might invalidate, render unenforceable or otherwise limit the scope of the protection that our patents and trademarks afford. In the event we lose the use of a product name, our efforts building such brand would be lost and we would have to devote management resources to rebuilding a brand for such product, which we may do to varying degrees of success. Even if we do prevail in a patent infringement litigation, third parties may still be able to design around our patents, which could harm our competitive position.
If we are unable to replace our expiring patents or fail to continue to innovate, our ability to compete both domestically and internationally will be harmed. In addition, our products face the risk of obsolescence, which, if realized, could have a material adverse effect on our business.
Our continued success depends on our ability to develop and introduce new or improved products, to improve our manufacturing and product service processes and to protect our rights to the technologies used in our products. If we fail to do so, or if existing or future competitors achieve greater success than we do in these areas, our results of operations and our profitability may decline.
We depend on our door manufacturing intellectual property and products to generate revenue. Some of our patents will begin to expire in the next several years. While we will continue to work to add to our patent portfolio to protect the intellectual property of our products, we believe it is possible that new competitors will emerge in door manufacturing. We do not know whether we will be able to develop additional proprietary designs, processes or products. If any protection we obtain is reduced or eliminated, others could use our intellectual property without compensating us, resulting in harm to our business. Moreover, as our patents expire, competitors may utilize the information found in such patents to commercialize their own products. While we seek to offset the losses relating to important expiring patents by securing additional patents on commercially desirable improvements, and new products, designs and processes, there can be no assurance that we will be successful in securing such additional patents, or that such additional patents will adequately offset the effect of the expiring patents.
Further, we face the risk that third parties will succeed in developing or marketing products that would render our products obsolete or noncompetitive. New, less expensive methods could be developed that replace or reduce the demand for our products or may cause our customers to delay or defer purchasing our products. Accordingly, our success depends in part upon our ability to respond quickly to market changes through the development and introduction of new products. The relative speed with which we can develop products, complete regulatory clearance or approval processes and supply commercial quantities of the products to the market are important to remain competitive. Any delays could result in a loss of market acceptance and market share. We cannot provide assurance that our new product development efforts will result in any commercially successful products.

---

ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

---

ITEM 2. PROPERTIES
Item 2. Properties
Our United States executive headquarters are located in Tampa, Florida, and consist of approximately 88,000 square feet of leased office space at two sites. Our Canadian executive offices are located in a single leased site in Concord, Ontario. As of January 1, 2023, we owned and leased the following number of properties, by reportable segment:
Manufacturing and Distribution Warehouse Support Total
Owned properties:
North American Residential 19 5 - 24
Europe 4 - - 4
Architectural 6 - - 6
Corporate & Other - - 1 1
Total owned properties 29 5 1 35
Leased properties:
North American Residential 20 16 2 38
Europe 3 5 1 9
Architectural 6 7 - 13
Corporate & Other 1 - 4 5
Total leased properties 30 28 7 65
Total owned and leased properties 59 33 8 100
Our properties in the North American Residential and Architectural segments are distributed across 28 states in the United States and four provinces in Canada, as well as two manufacturing facilities in Mexico and three manufacturing facilities in Chile. Our properties in the Europe segment are distributed across the United Kingdom, as well as one manufacturing facility in Ireland. Our material properties in the Corporate and Other category include one manufacturing facility in Malaysia and four support facilities in the United States. As of January 1, 2023, total floor space at our manufacturing facilities was 12.4 million square feet, including 3.2 million square feet in our five molded door facings facilities. In addition to the properties outlined above, we lease one idle manufacturing facility in the United States and own 17,000 acres of forestland in Costa Rica.
We believe that our facilities are suitable to our respective businesses and have production capacity adequate to support our current level of production to meet our customers’ demand. Additional investments in manufacturing facilities are made as appropriate to balance our capacity with our customers’ demand.

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
The information required with respect to this item can be found under "Commitments and Contingencies" in Note 10 to the consolidated financial statements in this Annual Report and is incorporated by reference into this Item 3.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
Information about the Company's executive officers is incorporated herein by reference from Part III, Item 10 hereof.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares are listed on the New York Stock Exchange ("NYSE") under the symbol "DOOR".
Holders
As of February 28, 2023, we had one record holder of our common shares, Cede & Co., the nominee of the Depository Trust Corporation.
Dividends
We do not intend to pay any cash dividends on our common shares for the foreseeable future and instead may retain earnings, if any, for future operations and expansion, share repurchases or debt repayments, among other things. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, liquidity requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our Term Loan Facility, in our ABL Facility and in the indenture governing our senior notes. Future agreements may also limit our ability to pay dividends. See Note 9 to our audited consolidated financial statements contained elsewhere in this Annual Report for restrictions on our ability to pay dividends.
Stock Performance Graph
The following graph depicts the total return to shareholders from January 1, 2018, through January 1, 2023, relative to the performance of the Standard & Poor's 500 Index and the Standard & Poor's 1500 Building Products Index. The graph assumes an investment of $100 in our common stock and each index on January 1, 2018, and the reinvestment of dividends paid since that date. The stock performance shown in the graph is not necessarily indicative of future price performance.
Comparison of Cumulative Total Stockholder Return
Masonite International Corporation, Standard & Poor's 500 Index and
Standard & Poor's 1500 Building Products Index
(Performance Results through January 1, 2023)
January 1, 2018 December 30, 2018 December 29, 2019 January 3, 2021 January 2, 2022 January 1, 2023
Masonite International Corporation $ 100.00 $ 61.92 $ 96.90 $ 132.62 $ 159.07 $ 108.71
Standard & Poor's 500 Index 100.00 95.62 125.72 148.85 191.58 156.89
Standard & Poor's 1500 Building Products Index 100.00 78.05 110.97 142.42 208.97 160.15
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.
Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended January 1, 2023, we repurchased 123,911 of our common shares in the open market.
Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
October 3, 2022 through October 30, 2022 - - - $ 256,393,264
October 31, 2022 through November 27, 2022 - - - $ 256,393,264
November 28, 2022 through January 1, 2023 123,911 $ 76.58 123,911 $ 246,904,280
Total 123,911 $ 76.58 123,911
The Company's Board of Directors has approved five share repurchase authorizations, the most recent being an incremental $200.0 million share repurchase program approved on February 21, 2022. The share repurchase programs have no specified end date and the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. Any repurchases under the share repurchase programs may be made in the open market, in privately negotiated transactions or otherwise, subject to market conditions, applicable legal requirements and other relevant factors. The share repurchase programs do not obligate us to acquire any particular amount of common shares, and they may be suspended or terminated at any time at our discretion. Repurchases under the share repurchase programs are permitted to be made under one or more Rule 10b5-1 plans, which would permit shares to be repurchased when we might otherwise be precluded from doing so under applicable insider trading laws.
During the first quarter of 2022, the Company entered into an ASR transaction with a third-party financial institution for the repurchase of $100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $100.0 million to the financial institution using cash on hand and received an initial delivery of 848,087 common shares on the same day. The final delivery of 319,678 common shares were delivered in the second quarter. The $100.0 million ASR transaction was completed in the second quarter with a total delivery of 1,167,765 common shares at a volume-weighted average price ("VWAP") per share minus an agreed upon discount totaling $85.63 per share. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery.
As of January 1, 2023, since inception of the repurchase programs we have repurchased $763.1 million of our common shares and have $246.9 million available for repurchase in accordance with our share repurchase programs.

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]
MASONITE INTERNATIONAL CORPORATION

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the years ended January 1, 2023, and January 2, 2022. For further discussion of our results of operations for the years ended January 2, 2022, and January 3, 2021, see "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended January 2, 2022, which was filed with the SEC on February 24, 2022, and which is incorporated herein by reference. In this MD&A, "Masonite," "we," "us," "our" and the "Company" refer to Masonite International Corporation and its subsidiaries and does not include the Endura acquisition.
This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" and Part I, Item 1A, "Risk Factors" elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties.
Overview
We are a leading global designer, manufacturer, marketer and distributor of interior and exterior doors and door systems for the new construction and repair, renovation and remodeling sectors of the residential and non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. Through innovative door solutions, a better door buying experience for our customers and partners and advanced manufacturing and service delivery, we deliver a commitment of Doors That Do MoreTM.
We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture an extensive range of interior and exterior doors in a wide array of designs, materials and sizes. Our interior doors are made with wood and related materials such as hardboard (including wood composite molded and flat door facings). Our exterior doors are made primarily of steel, fiberglass or composite materials. Our residential doors are molded panel, flush, stile and rail, steel or fiberglass.
We operate 59 manufacturing and distribution facilities in seven countries in North America, South America, Europe and Asia, which are strategically located to serve our customers through multiple distribution channels. These distribution channels include: (i) direct distribution to retail home center customers; (ii) one-step distribution that sells directly to homebuilders and contractors; and (iii) two-step distribution through wholesale distributors. For retail home center customers, numerous door fabrication facilities provide value-added fabrication and logistical services, including pre-finishing and store delivery of pre-hung interior and exterior doors. We believe our ability to provide: (i) a broad product range; (ii) frequent, rapid, on-time and complete delivery; (iii) consistency in products and merchandising; (iv) national service; and (v) special order programs enables retail customers to increase comparable store sales and helps to differentiate us from our competitors. We believe investments in innovative new product manufacturing and distribution capabilities, coupled with an ongoing commitment to operational excellence, provide a strong platform for future growth.
Our reportable segments are currently organized and managed principally by end market: North American Residential, Europe and Architectural. In the year ended January 1, 2023, we generated net sales of $2,283.6 million or 79.0%, $280.8 million or 9.7% and $307.0 million or 10.6% in our North American Residential, Europe and Architectural segments, respectively. See "Segment Information" below for a description of our reportable segments.
During 2022, we were negatively impacted by rising energy and fuel costs, partly attributable to the war between Russia and Ukraine, as well as rising costs for raw materials. In addition, production challenges in some of our facilities impacted our ability to service customers, particularly in our Architectural segment. Consumer sentiment, inflationary pressures and strengthening of the U.S. dollar negatively impacted our Europe segment. During the second half of the year, base volumes decreased in our North American Residential segment due to new housing weakness and wholesale inventory destocking with the residential repair, renovation and remodeling channel remaining resilient until late in the fourth quarter. The extent to which labor and logistics constraints, supply chain disruptions, rising energy and
MASONITE INTERNATIONAL CORPORATION
fuel costs, material inflation, consumer sentiment, interest rates and global economic pressures impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Key Factors Affecting Our Results of Operations
Product Demand
There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in global economic conditions, including inflation, deflation, interest rates, availability of capital, supply chain constraints, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:
•the strength of the economy;
•the amount and type of residential and commercial construction;
•housing sales and home values;
•the age of existing home stock, home vacancy rates and foreclosures;
•non-residential building occupancy rates;
•increases in the cost of raw materials or wages or any shortage in supplies or labor;
•the availability and cost of credit;
•employment rates and consumer confidence; and
•demographic factors such as immigration and migration of the population and trends in household formation.
Product Pricing and Mix
The building products industry is highly competitive and we therefore face pressure on sales prices of our products. In addition, our competitors may adopt more aggressive sales policies and devote greater resources to the development, promotion and sale of their products than we do, which could result in a loss of customers. Our business in general is subject to changing consumer and industry trends, demands and preferences. Trends within the industry change often and our failure to anticipate, identify or quickly react to changes in these trends could lead to, among other things, rejection of a new product line and reduced demand and price reductions for our products, which could materially adversely affect us. Changes in consumer preferences may also lead to increased demand for our lower margin products relative to our higher margin products, which could reduce our future profitability.
Business Wins and Losses
Our customers consist mainly of wholesalers and retail home centers. In fiscal year 2022, our top ten customers together accounted for approximately 50% of our net sales and our top customer, The Home Depot, Inc. accounted for approximately 22% of our net sales in fiscal year 2022. Net sales from customers that have accounted for a significant portion of our net sales in past periods, individually or as a group, may not continue in future periods, or if continued, may not reach or exceed historical levels in any period. Certain customers perform periodic product line reviews to assess their product offerings, which have, on past occasions, led to business wins and losses. In addition, as a result of competitive bidding processes, we may not be able to increase or maintain the margins at which we sell our products to our customers.
Organizational Restructuring
Over the past several years, we have engaged in a series of restructuring programs related to exiting certain geographies and non-core businesses, consolidating certain internal support functions and engaging in other actions designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and lease termination costs. Management continues to evaluate our business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made
MASONITE INTERNATIONAL CORPORATION
or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for those assets sold, abandoned or made obsolete as a result of these programs.
In December 2022, we began implementing a plan to improve overall business performance that includes the optimization of our manufacturing capacity and reduction of our overhead and selling, general and administration workforce primarily in our North American Residential reportable segment as well as actions in the Architectural reportable segment and in our head offices (collectively, the "2022 Plan"). The optimization of our manufacturing capacity involves specific plants in the North American Residential segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2022 Plan include severance and closure charges and will continue through 2023. The actions taken as part of the 2022 Plan are expected to increase our annual earnings and cash flows by approximately $15 million to $20 million.
In May 2021, we initiated further actions to improve overall business performance including the reorganization of our specialty door manufacturing capacity in our Architectural reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the reorganization of these facilities, which resulted in the closure of one existing stile and rail facility and related headcount reductions beginning in the second quarter of 2021 (collectively, the "2021 Plan"). Costs associated with the 2021 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2021 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations.
In November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and continued through 2021. The actions taken as part of the 2020 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and continued through 2021. Additionally, the plan to divest non-core assets was determined to be a triggering event requiring a test of the carrying value of the definite-lived assets relating to the divestitures, as further described in Note 14. In the fourth quarter of 2019, we initiated additional restructuring actions related to both manufacturing capacity and reduction of our overhead and selling, general and administration workforce. The actions taken as part of the 2019 Plan are substantially complete and the annual earnings and cash flow savings realized were materially in line with expectations.
Inflation
In 2021 and 2022, we realized higher costs across the various materials we purchase as a result of macroeconomic factors as well as increased logistics costs, wages, anti-dumping and countervailing duties and energy and fuel costs. Additionally, rising interest rates may impact the ability of end consumers to purchase our products. Our profitability, margins and net sales could be adversely affected if we are not able to pass these costs on to our customers or otherwise mitigate the impact of these inflationary pressures.
MASONITE INTERNATIONAL CORPORATION
Acquisitions and Divestitures
We are pursuing a strategic initiative of optimizing our global business portfolio. On a continual basis, we evaluate and consider strategic acquisitions, divestitures and joint ventures to create shareholder value and enhance financial performance.
Acquisitions
•On January 3, 2023, we completed the acquisition of Endura Products for approximately $375.0 million in cash using a combination of cash on hand and borrowings under our Term Loan Facility and ABL Facility. In connection with the acquisition, we borrowed $250.0 million under our Term Loan Facility and $100.0 million under our ABL Facility. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States.
•On December 4, 2020, we completed the acquisition of a Lowe's Companies, Inc. door fabrication facility in the United States for cash consideration of $3.9 million. During the first quarter of 2021, as a result of working capital adjustments we paid an additional $0.2 million.
•On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million.
Divestitures
•During the fourth quarter of 2022, we completed the liquidation of our legal entity in Turkey. As a result, we recognized $0.9 million in loss on disposal of subsidiaries.
•On June 14, 2021, we completed the sale of all of the capital stock of our Czech business ("Czech") for consideration of $7.0 million, net of cash disposed. The divestiture of this business resulted in a loss on sale of subsidiaries of $8.6 million, which was recognized during the second quarter of 2021 in the Europe segment.
•During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries.
MASONITE INTERNATIONAL CORPORATION
Results of Operations
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Net sales $ 2,891,687 $ 2,596,920
Cost of goods sold 2,217,792 1,985,141
Gross profit 673,895 611,779
Gross profit as a % of net sales 23.3 % 23.6 %
Selling, general and administration expenses 344,614 308,430
Selling, general and administration expenses as a % of net sales 11.9 % 11.9 %
Restructuring costs 1,904 5,567
Asset impairment - 69,900
Loss on disposal of subsidiaries 850 8,590
Operating income 326,527 219,292
Interest expense, net 41,331 46,123
Loss on extinguishment of debt - 13,583
Other (income) expense, net (5,001) 15,620
Income before income tax expense 290,197 143,966
Income tax expense 71,753 44,772
Net income 218,444 99,194
Less: net income attributable to non-controlling interests 4,211 4,693
Net income attributable to Masonite $ 214,233 $ 94,501
Year Ended January 1, 2023, Compared with Year Ended January 2, 2022
Net Sales
Net sales in the year ended January 1, 2023, were $2,891.7 million, an increase of $294.8 million or 11.4% from $2,596.9 million in the year ended January 2, 2022. Net sales in 2022 were negatively impacted by $46.8 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $341.6 million or 13.2% due to changes in volume, average unit price, impact of divestitures and sales of components. Average unit price in 2022 increased net sales by $464.7 million or 17.9% compared to 2021. Lower volumes excluding the incremental impact of acquisitions or divestitures ("base volume") decreased net sales by $99.5 million or 3.8% in 2022 compared to 2021. Net sales of components to external customers decreased $11.9 million or 0.5% in 2022 compared to 2021. Our 2021 divestiture decreased net sales by $11.7 million or 0.5% of net sales in 2022.
Net Sales and Percentage of Net Sales by Reportable Segment
Year Ended January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Sales $ 2,286,098 $ 282,989 $ 323,175 $ 20,293 $ 2,912,555
Intersegment sales (2,456) (2,220) (16,192) - (20,868)
Net sales to external customers $ 2,283,642 $ 280,769 $ 306,983 $ 20,293 $ 2,891,687
Percentage of consolidated external net sales 79.0 % 9.7 % 10.6 %
MASONITE INTERNATIONAL CORPORATION
Year Ended January 2, 2022
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Sales $ 1,955,424 $ 342,172 $ 303,078 $ 20,014 $ 2,620,688
Intersegment sales (2,526) (7,640) (13,602) - (23,768)
Net sales to external customers $ 1,952,898 $ 334,532 $ 289,476 $ 20,014 $ 2,596,920
Percentage of consolidated external net sales 75.2 % 12.9 % 11.1 %
North American Residential
Net sales to external customers from facilities in the North American Residential segment in the year ended January 1, 2023, were $2,283.6 million, an increase of $330.7 million or 16.9% from $1,952.9 million in the year ended January 2, 2022. Net sales in 2022 were negatively impacted by $13.2 million as a result of foreign exchange rate fluctuations. Excluding this exchange rate impact, net sales would have increased by $343.9 million or 17.6% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in 2022 by $373.1 million or 19.1% compared to 2021. Lower base volume decreased net sales by $24.4 million or 1.2% in 2022 compared to 2021. Net sales of components to external customers were $4.8 million lower in 2022 compared to 2021.
Europe
Net sales to external customers from facilities in the Europe segment in the year ended January 1, 2023, were $280.8 million, a decrease of $53.7 million or 16.1% from $334.5 million in the year ended January 2, 2022. Net sales in 2022 were negatively impacted by $31.9 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have decreased by $21.8 million or 6.5% due to changes in volume, average unit price, divestitures and sales of components. Lower base volume decreased net sales by $53.8 million or 16.1% compared to 2021 due to weakening consumer confidence in the United Kingdom that affected demand in the repair and remodel market and unexpected material supply constraints late in the year. The 2021 divestiture of our Czech business decreased net sales by $11.7 million or 3.5% in 2022. Average unit price increased net sales in 2022 by $43.6 million or 13.0% compared to 2021. Net sales of components to external customers were $0.1 million higher in 2022 compared to 2021.
Architectural
Net sales to external customers from facilities in the Architectural segment in the year ended January 1, 2023, were $307.0 million, an increase of $17.5 million or 6.0% from $289.5 million in the year ended January 2, 2022. Net sales in 2022 were negatively impacted by $1.5 million as a result of foreign exchange fluctuations. Excluding this exchange rate impact, net sales would have increased by $19.0 million or 6.6% due to changes in volume, average unit price and sales of components. Average unit price increased net sales in 2022 by $44.9 million or 15.5% compared to 2021. Lower base volume decreased net sales in 2022 by $21.3 million or 7.4% compared to 2021 resulting from production challenges. Net sales of components to external customers were $4.6 million lower in 2022 compared to 2021.
Cost of Goods Sold
Our cost of goods sold is comprised of the cost to manufacture products for our customers and includes the cost of materials, direct labor, overhead, distribution and depreciation associated with assets used to manufacture products. Research and development costs are primarily included within cost of goods sold. We incur significant fixed and variable overhead at our global component locations that manufacture interior molded door facings.
Cost of goods sold as a percentage of net sales was 76.7% and 76.4% for the years ended January 1, 2023, and January 2, 2022, respectively. Material cost of sales as a percentage of net sales increased by 1.8% in 2022 compared to 2021. Direct labor, distribution, overhead and depreciation as a percentage of net sales decreased by 0.7%, 0.4%, 0.2% and 0.2%, respectively, compared to the 2021 period. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in logistics costs, partially offset by higher average unit prices and material cost savings projects. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by manufacturing wage and benefit inflation and startup costs. Distribution as a percentage of net sales
MASONITE INTERNATIONAL CORPORATION
decreased due to higher average unit prices, partially offset by increased inbound logistics and personnel costs. Overhead as a percentage of net sales decreased due to higher average unit prices, partially offset by wage inflation, increased plant maintenance and increased investment in the business as compared to 2021. The decrease in depreciation as a percentage of net sales was driven by higher average unit prices.
Selling, General and Administration Expenses
Selling, general and administration ("SG&A") expenses primarily include the costs for our sales organization and support staff at various plants and corporate offices. These costs include personnel costs for payroll, related benefits and stock based compensation expense; professional fees; depreciation and amortization of our non-manufacturing equipment and assets; environmental, health and safety costs; advertising expenses and rent and utilities related to administrative office facilities. In the year ended January 1, 2023, selling, general and administration expenses, as a percentage of net sales, were 11.9%, remaining flat compared to the year ended January 2, 2022.
Selling, general and administration expenses in the year ended January 1, 2023, were $344.6 million, an increase of $36.2 million from $308.4 million in the year ended January 2, 2022. The overall increase was driven by a $16.2 million increase in personnel costs primarily driven by increased incentive compensation, wage and benefit inflation and resource investments to support growth; a $9.9 million increase in professional and other fees to support growth, $6.8 million in acquisition and due diligence related costs; a $5.4 million increase in travel expense as business activities fully returned to pre-pandemic levels; a $3.2 million increase in advertising and a $0.2 million increase in non-cash items including share based compensation; deferred compensation; gain on disposal of property, plant and equipment; and depreciation and amortization. These increases were partially offset by favorable foreign exchange impacts of $4.5 million and $1.0 million of incremental SG&A savings from our 2021 divestiture.
Restructuring Costs
Restructuring costs in the year ended January 1, 2023, were $1.9 million, compared to $5.6 million in the year ended January 2, 2022. Restructuring costs in 2022 primarily related to closure costs associated with the 2022 Plan. Restructuring costs in the prior year period related to severance and closure costs associated with the 2021, 2020 and 2019 Plans.
Asset Impairment
There were no asset impairment charges in the year ended January 1, 2023, compared to $69.9 million in the year ended January 2, 2022. Asset impairment charges in 2021 resulted from a goodwill impairment charge recorded in our Architectural reporting unit and actions associated with the 2021 and 2020 Plans in our Architectural reporting unit. Refer to Note 14. Asset Impairment, in Item 8 of this Annual Report for additional information.
Loss on Disposal of Subsidiaries
Loss on disposal of subsidiaries represents the difference between proceeds received upon disposition and the book value of a subsidiary which has been divested and was excluded from treatment as a discontinued operation. Also included in loss on disposal of subsidiaries is recognition of the cumulative translation adjustment out of accumulated other comprehensive loss. Loss on disposal of subsidiaries was $0.9 million in the year ended January 1, 2023, compared to $8.6 million in the year ended January 2, 2022. The current year loss arose as a result of the liquidation of our legal entity in Turkey and is comprised of $0.7 million relating to the recognition of cumulative translation adjustment out of accumulated other comprehensive loss and $0.2 million relating to the write-off of net assets. The prior year loss arose as a result of the sale of our Czech business and is comprised of $5.1 million relating to the write-off of net assets sold and other professional fees and $3.5 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
Interest Expense, Net
Interest expense, net, in the year ended January 1, 2023, was $41.3 million, compared to $46.1 million in the year ended January 2, 2022. The decrease in interest expense, net is primarily due to the refinancing of our senior notes in 2021.
MASONITE INTERNATIONAL CORPORATION
Loss on Extinguishment of Debt
Loss on extinguishment of debt represents the difference between the redemption price of debt and the net carrying amount of the extinguished debt. The net carrying amount includes the principal, unamortized premium and unamortized debt issuance costs. There was no loss on extinguishment of debt in the year ended January 1, 2023, compared to $13.6 million in the year ended January 2, 2022. The prior year loss related to the redemption of our senior unsecured notes due 2026. This charge represents the difference between the redemption price of our senior unsecured notes due 2026 of $310.8 million and the net carrying amount of such notes of $297.2 million. In addition to the $300.0 million of principal, the redemption price included a make-whole premium of $10.8 million and the net carrying amount included unamortized debt issuance costs of $2.8 million.
Other (Income) Expense, Net
Other (income) expense, net includes profits and losses related to our non-majority owned unconsolidated subsidiaries that we recognize under the equity method of accounting, unrealized gains and losses on foreign currency remeasurements, pension settlement charges and other miscellaneous non-operating expenses. Other (income) expense, net, in the year ended January 1, 2023, was $5.0 million of income, compared to $15.6 million of expense in the year ended January 2, 2022. The change in other (income) expense, net is primarily due to a pre-tax pension settlement charge of $23.3 million recognized in the fourth quarter of 2021, partially offset by unrealized gains and losses on foreign currency remeasurements, a change in the fair value of plan assets in the deferred compensation rabbi trust and an increase in pension expense.
Income Tax Expense
Income tax expense in the year ended January 1, 2023, was $71.8 million, compared to $44.8 million in the year ended January 2, 2022. The increase in income tax expense is primarily due to (i) the mix of income or losses within the tax jurisdictions with various tax rates in which we operate, primarily the increase in overall pre-tax book earnings, and (ii) an increase in income tax expense attributable to recognizing additional valuation allowance.
Segment Information
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments that were not aggregated into any reportable segment. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
Our management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• registration and listing fees;
• restructuring costs (benefit);
• asset impairment;
• loss (gain) on disposal of subsidiaries;
• interest expense (income), net;
• loss on extinguishment of debt;
• other (income) expense, net;
• income tax expense (benefit);
MASONITE INTERNATIONAL CORPORATION
• other items;
• loss (income) from discontinued operations, net of tax; and
• net income (loss) attributable to non-controlling interest.
This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indenture governing the 2030 Notes, the 2028 Notes and the credit agreements governing the Term Loan Facility and the ABL Facility. Adjusted EBITDA is used to evaluate and compare the performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
We believe that Adjusted EBITDA, from an operations standpoint, provides an appropriate way to measure and assess segment performance. Our management team has established the practice of reviewing the performance of each segment based on the measures of net sales and Adjusted EBITDA. We believe that Adjusted EBITDA is useful to users of the consolidated financial statements because it provides the same information that we use internally to evaluate and compare the performance of the segments and it is one of the primary measures used to determine employee incentive compensation.
Year Ended January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Adjusted EBITDA $ 461,750 $ 28,774 $ (3,748) $ (40,978) $ 445,798
Adjusted EBITDA as a percentage of segment net sales 20.2 % 10.2 % (1.2) % 15.4 %
Year Ended January 2, 2022
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Adjusted EBITDA $ 374,452 $ 60,624 $ (2,704) $ (19,766) $ 412,606
Adjusted EBITDA as a percentage of segment net sales 19.2 % 18.1 % (0.9) % 15.9 %
MASONITE INTERNATIONAL CORPORATION
The following reconciles Adjusted EBITDA to net income (loss) attributable to Masonite:
Year Ended January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Net income (loss) attributable to Masonite $ 412,917 $ 6,851 $ (13,345) $ (192,190) $ 214,233
Plus:
Depreciation 41,077 8,874 11,530 9,687 71,168
Amortization 1,881 12,187 844 2,215 17,127
Share based compensation expense - - - 21,771 21,771
Loss (gain) on disposal of property, plant and equipment 2,457 (1) (2,856) 22 (378)
Restructuring costs 1,736 - 79 89 1,904
Loss on disposal of subsidiaries - - - 850 850
Interest expense, net - - - 41,331 41,331
Other (income) expense, net (791) 863 - (5,073) (5,001)
Income tax expense - - - 71,753 71,753
Other items (1)
- - - 6,829 6,829
Net income attributable to non-controlling interest 2,473 - - 1,738 4,211
Adjusted EBITDA $ 461,750 $ 28,774 $ (3,748) $ (40,978) $ 445,798
(1) Other items include $6,829 in acquisition and due diligence related costs in the year ended January 1, 2023, and were recorded in selling, general and administration expenses within the consolidated statements of income and comprehensive income. Refer to Note 23. Subsequent Events in Item 8 of this Annual Report for additional information.
Year Ended January 2, 2022
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Net income (loss) attributable to Masonite $ 329,925 $ 29,519 $ (91,255) $ (173,688) $ 94,501
Plus:
Depreciation 37,864 9,752 10,986 12,039 70,641
Amortization 1,640 14,073 3,634 1,994 21,341
Share based compensation expense - - - 15,959 15,959
Loss (gain) on disposal of property, plant and equipment 2,209 (1) (410) (482) 1,316
Restructuring (benefit) costs (149) - 5,165 551 5,567
Asset impairment - - 69,171 729 69,900
Loss on disposal of subsidiaries - 8,590 - - 8,590
Interest expense, net - - - 46,123 46,123
Loss on extinguishment of debt - - - 13,583 13,583
Other (income) expense, net - (1,309) 5 16,924 15,620
Income tax expense - - - 44,772 44,772
Net income attributable to non-controlling interest 2,963 - - 1,730 4,693
Adjusted EBITDA $ 374,452 $ 60,624 $ (2,704) $ (19,766) $ 412,606
MASONITE INTERNATIONAL CORPORATION
Adjusted EBITDA in our North American Residential segment increased $87.3 million, or 23.3%, to $461.8 million in the year ended January 1, 2023, from $374.5 million in the year ended January 2, 2022. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $89.5 million and $76.6 million in 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Adjusted EBITDA in our Europe segment decreased $31.9 million, or 52.5%, to $28.8 million in the year ended January 1, 2023, from $60.6 million in the year ended January 2, 2022. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $6.8 million and $4.1 million in 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, marketing and share based compensation.
Adjusted EBITDA in our Architectural segment decreased $1.0 million or 38.6% to a loss of $3.7 million in the year ended January 1, 2023, from a loss of $2.7 million in the year ended January 2, 2022. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $11.4 million and $11.1 million in 2022 and 2021, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.
Liquidity and Capital Resources
Our liquidity needs for operations vary throughout the year. Our principal sources of liquidity are cash flows from operating activities, the borrowings under our ABL Facility and an accounts receivable sales program with a third party ("AR Sales Program") and our existing cash balance. Our anticipated uses of cash in the near term include the Endura acquisition, working capital needs, capital expenditures and share repurchases. As of January 1, 2023, we do not have any material commitments for capital expenditures. We anticipate capital expenditures in fiscal year 2023 to be approximately $100 to $115 million. On a continual basis, we evaluate and consider strategic acquisitions, divestitures and joint ventures to create shareholder value and enhance financial performance.
We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility and our Term Loan Facility along with our ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of January 1, 2023, we had $296.9 million of cash and cash equivalents, availability under our Term Loan Facility of $250.0 million earmarked for the Endura acquisition, availability under our ABL Facility of $324.9 million and availability under our AR Sales Program of $15.8 million.
Cash Flows
Year Ended January 1, 2023, Compared with Year Ended January 2, 2022
Cash provided by operating activities was $189.2 million during the year ended January 1, 2023, compared to $156.5 million during the year ended January 2, 2022. This $32.7 million increase in cash provided by operating activities was due to a $21.0 million increase in net income attributable to Masonite, adjusted for non-cash and other items, and an $11.7 million increase in working capital and other assets and liabilities in 2022 compared to 2021.
Cash used in investing activities was $111.1 million during the year ended January 1, 2023, compared to $76.1 million during the year ended January 2, 2022. This $35.0 million increase in cash used in investing activities was primarily driven by a $27.7 million increase in cash additions to property, plant and equipment, the absence of $6.9 million of net proceeds from divestitures and acquisitions and a $0.4 increase in cash used for other investing activities in 2022 compared to 2021.
Cash used in financing activities was $157.4 million during the year ended January 1, 2023, compared to $63.7 million during the year ended January 2, 2022. This $93.7 million increase in cash used in financing activities was driven by a $58.6 million decrease in cash provided by debt-related transactions, a $35.6 million increase in cash used for repurchases of common shares and a $1.2 million increase in distributions to non-controlling interests, partially offset by a $1.7 million decrease in cash used for tax withholding on share based awards in 2022 compared to 2021.
MASONITE INTERNATIONAL CORPORATION
Share Repurchases
The Company's Board of Directors has approved five share repurchase authorizations, the most recent being an incremental $200.0 million share repurchase program approved on February 21, 2022. The share repurchase programs have no specified end date and the timing and amount of any share repurchases will be determined by management based on our evaluation of market conditions and other factors. Any repurchases under the share repurchase programs may be made in the open market, in privately negotiated transactions or otherwise, subject to market conditions, applicable legal requirements and other relevant factors. The share repurchase programs do not obligate us to acquire any particular amount of common shares, and they may be suspended or terminated at any time at our discretion. Repurchases under the share repurchase programs are permitted to be made under one or more Rule 10b5-1 plans, which would permit shares to be repurchased when we might otherwise be precluded from doing so under applicable insider trading laws.
During the first quarter of 2022, the Company entered into an ASR transaction with a third-party financial institution for the repurchase of $100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $100.0 million to the financial institution using cash on hand and received an initial delivery of 848,087 common shares on the same day. The final delivery of 319,678 common shares were delivered in the second quarter. The $100.0 million ASR transaction was completed in the second quarter with a total delivery of 1,167,765 common shares at a volume-weighted average price ("VWAP") per share minus an agreed upon discount totaling $85.63 per share. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery. During the year ended January 1, 2023, we repurchased 1,679,919 of our common shares in the open market at an aggregate cost of $149.5 million. During the year ended January 2, 2022, we repurchased 1,014,003 of our common shares in the open market at an aggregate cost of $113.9 million.
As of January 1, 2023, since inception of the programs we have repurchased $763.1 million of our common shares and have $246.9 million available for repurchase in accordance with our share repurchase programs.
Other Liquidity Matters
Our cash and cash equivalents balance includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of January 1, 2023, we do not believe adverse tax consequences exist that restrict our use of cash or cash equivalents in a material manner.
We also routinely monitor the changes in the financial condition of our customers and the potential impact on our results of operations. There has not been a change in the financial condition of a customer that has had a material adverse effect on our results of operations. However, if economic conditions were to deteriorate, it is possible there could be an impact on our results of operations in a future period and this impact could be material.
Accounts Receivable Sales Program
Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the consolidated balance sheets and are included in cash flows from operating activities in the consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expense within the consolidated statements of income and comprehensive income.
Senior Notes
On July 26, 2021, we issued $375.0 million aggregate principal senior unsecured notes (the "2030 Notes"). The 2030 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to buyers outside of the United States pursuant to
MASONITE INTERNATIONAL CORPORATION
Regulation S under the Securities Act. The 2030 Notes bear interest at 3.50% per annum, payable in cash semiannually in arrears on February 15 and August 15 of each year commencing on February 15, 2022, and the principal is due February 15, 2030. The 2030 Notes were issued at par. We received net proceeds of $370.3 million after deducting $4.7 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2030 Notes using the effective interest method. The net proceeds from the issuance of the 2030 Notes were used to redeem the remaining $300.0 million aggregate principal amount of the 2026 Notes (as described below), including the payment of related premiums, fees and expenses, with the balance of the proceeds available for general corporate purposes.
Obligations under the 2030 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries. We may redeem the 2030 Notes under certain circumstances specified therein.
The indenture governing the 2030 Notes contains limited covenants that, among other things, limit our ability and the ability of our subsidiaries to (i) incur certain secured debt, (ii) engage in certain sale and leaseback transactions and (iii) merge or consolidate with other entities. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2030 Notes. The indenture governing the 2030 Notes contains customary events of default (subject to certain cases to customary grace and cure periods). As of January 1, 2023, we were in compliance with all covenants under the indenture governing the 2030 Notes.
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and to buyers outside of the United States pursuant to Regulation S under the Securities Act. The 2028 Notes were issued without registration rights and are not listed on any securities exchange. The 2028 Notes bear interest at 5.375% per annum, payable in cash semiannually in arrears on February 1 and August 1 of each year and the principal is due February 1, 2028. The 2028 notes were issued at par. We received net proceeds of $493.3 million after deducting $6.7 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2028 Notes using the effective interest method. The net proceeds from issuance of the 2028 Notes, together with available cash balances, were used to redeem the remaining $500.0 million aggregate principal amount of similar senior unsecured notes.
Obligations under the 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries. We may redeem the 2028 Notes under certain circumstances specified therein.
The indenture governing the 2028 Notes contains restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to the parent company, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2028 Notes. In addition, if in the future the 2028 Notes have an investment grade rating from at least two nationally recognized statistical rating organizations, certain of these covenants will be terminated. The indenture governing the 2028 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of January 1, 2023, we were in compliance with all covenants under the indenture governing the 2028 Notes.
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"). The 2026 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to buyers outside of the United States pursuant to Regulation S under the Securities Act. The 2026 Notes were issued without registration rights and are not listed on any securities exchange. The 2026 Notes bear interest at 5.75% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and were originally due September 15, 2026. The 2026 Notes were issued at par. We received net proceeds of $295.7 million after deducting $4.3 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and were accreted to interest expense over the term of the 2026 Notes using the effective interest method.
MASONITE INTERNATIONAL CORPORATION
Subsequent to the closing of the 2030 Notes offering, the 2026 Notes were redeemed, and the notes were considered extinguished as of July 26, 2021. Under the terms of the indenture governing the 2026 Notes, we paid the applicable premium of $10.8 million. Additionally, the unamortized debt issuance costs of $2.8 million relating to the 2026 Notes were written off in conjunction with the extinguishment of the 2026 Notes. The resulting loss on extinguishment of debt was $13.6 million and was recorded as part of income from continuing operations before income tax expense in the consolidated statements of income and comprehensive income in the third quarter of 2021. Additionally, the cash payment of interest accrued to, but not including, the redemption date was accelerated to the redemption date.
Term Loan Facility
On December 13, 2022, we and certain of our subsidiaries entered into a new delayed-draw term loan credit agreement (the "Term Loan Credit Agreement") maturing on December 12, 2027 (the "Term Loan Maturity Date"). The Term Loan Credit Agreement provides for a senior secured five-year delayed-draw term loan facility of $250.0 million (the "Term Loan Facility"). Loans under the Term Loan Facility (the "Term Loans") will bear interest at a rate equal to, at our option, (1) the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of 2.25% or (2) an alternate base rate equal to the greatest of (i) the "Prime Rate" in the U.S. last quoted by The Wall Street Journal, (ii) 0.50% above the greater of the federal funds rate and the rate comprised of both overnight federal funds and overnight eurodollar transactions denominated in Dollars, (iii) 1.00% above the Adjusted Term SOFR Rate for a one month interest period and (iv) 1.00%, plus, in each case, an applicable margin of 1.25%, subject to, in each of cases (1) and (2), an agreed interest rate floor. The Term Loans are repayable in equal quarterly installments for an annual aggregate amortization payment equal to 15% of the aggregate principal amount of the Term Loans, with the balance of the principal being due on the Term Loan Maturity Date.
The Term Loan Credit Agreement also includes a quarterly ticking fee of 25 basis points per annum payable to the lenders under the Term Loan Facility beginning on January 3, 2023 (the "Closing Date") in respect of the unutilized commitments thereunder. As a result of the incurrence of the Term Loans on the Closing Date such ticking fees were not (and shall not be) payable to the Lenders.
The Borrower also pays customary agency fees.
Obligations under the Term Loan Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by us and by certain of our directly or indirectly wholly-owned subsidiaries organized in the United States and are secured by the equity in, and substantially all the assets of, such subsidiaries. The Term Loans were funded in an amount of $250.0 million and applied to finance a portion of the consideration payable in connection with the consummation of the Endura acquisition on January 3, 2023.
The Term Loan Credit Agreement contains restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge, (vi) incur additional debt and (vii) create liens. The Term Loan Credit Agreement includes certain exceptions and exemptions under the restricted payment, investment, dispositions, liens and indebtedness covenants.
The Term Loan Credit Agreement requires us to maintain at all times a total leverage ratio of no more than 4.50:1.00. The Term Loan Credit Agreement contains change of control provisions and certain customary affirmative covenants and events of default. As of January 1, 2023, we were in compliance with all such covenants and events of default and there were no amounts outstanding. As of January 1, 2023, we were in compliance with all covenants under the credit agreement governing the Term Loan Facility and there were no amounts outstanding.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. On October 28, 2022, we and certain of our subsidiaries entered into an amendment to the "ABL Facility" which, among other things, (i) increased the revolving credit commitments available thereunder by $100.0 million to an aggregate amount of $350.0 million and (ii) replaced the LIBOR-based interest rate applicable to borrowings thereunder in U.S. dollars with an interest rate based on the sum of (x) a "Term SOFR" rate published by the CME Group Benchmark Administration Limited (CBA) plus (y) 10 basis points ("Adjusted Term SOFR"). Additionally, on December 12, 2022, we and certain
MASONITE INTERNATIONAL CORPORATION
of our subsidiaries entered into an amendment to the ABL Facility, which, among other things, extended the maturity of the ABL Facility from January 31, 2024 to December 12, 2027. The terms of the ABL Facility remained otherwise substantially unchanged. In connection with the acquisition of Endura on January 3, 2023, the Company borrowed $100.0 million under the ABL Facility in order to fund a portion of the cash consideration paid. On February 3, 2023, we subsequently repaid $50.0 million of the outstanding borrowings under our ABL Facility.
Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the United States, Canadian and United Kingdom Base Rate (each as defined in the credit agreement relating to the ABL Facility, the "Amended and Restated Credit Agreement") plus a margin ranging from 0.25% to 0.50% per annum, or (ii) the Term SOFR or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.50% per annum. In addition to paying interest on any outstanding principal under the ABL Facility, a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties and covenants by us that, among other things, and subject to certain exceptions, restricts our ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge and (vi) create liens. The ABL Facility, among other things, (i) permits us to incur unlimited unsecured debt as long as such debt does not contain covenants or default provisions that are more restrictive than those contained in the ABL Facility, (ii) permits us to incur debt as long as the pro forma secured leverage ratio is less than 4.5 to 1.0, and (iii) adds certain additional exceptions and exemptions under the restricted payment, investment and indebtedness covenants (including increasing the amount of certain debt permitted to be incurred under existing exceptions). As of January 1, 2023, we were in compliance with all covenants under the credit agreement governing the ABL Facility and there were no amounts outstanding under the ABL Facility.
Critical Accounting Policies and Estimates
Our significant accounting policies are fully disclosed in our annual consolidated financial statements included elsewhere in this Annual Report. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Business Acquisition Accounting
We use the acquisition method of accounting for all business acquisitions. We allocate the purchase price of our business acquisitions based on the fair value of identifiable tangible and intangible assets. The difference between the total cost of the acquisitions and the sum of the fair values of the acquired tangible and intangible assets less liabilities is recorded as goodwill.
Goodwill
Goodwill is not amortized but instead is tested annually for impairment on the last day of fiscal November, or more frequently if events or changes in circumstances indicate the carrying amount may not be recoverable. The test for impairment is performed at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Possible impairment in goodwill is first analyzed using qualitative factors such as macroeconomic and market conditions, changing costs and actual and projected performance, amongst others, to determine whether it is more likely than not that the book value of the reporting unit exceeds its fair value. If it is determined more likely than not that the book value exceeds fair value, a quantitative analysis is performed to test for impairment. When quantitative steps are determined necessary, the fair values of the reporting units are estimated through the use of discounted cash flow analyses and market multiples. If the carrying amount exceeds fair value, then goodwill is impaired. Any impairment in goodwill is measured as the excess of the carrying value of goodwill over the fair value. The inputs utilized to derive projected cash flows are subject to significant judgments and uncertainties. As such, the realized cash flows could differ significantly from those estimated. We performed our annual impairment test during the fourth quarter of 2022 and determined that goodwill was not impaired.
Intangible Assets
Intangible assets with definite lives include customer relationships, non-compete agreements, patents, supply agreements, certain acquired trademarks and system software development. Definite-lived intangible assets are amortized
MASONITE INTERNATIONAL CORPORATION
on a straight-line basis over their estimated useful lives. Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the fair value of the asset, determined using discounted cash flows when quoted market prices are not readily available. Indefinite-lived intangible assets are tested for impairment annually on the last day of fiscal November, or more frequently if events or circumstances indicated that the carrying value may exceed the fair value. We performed a qualitative impairment test during the fourth quarter of 2022 and determined that indefinite-lived intangible assets were not impaired.
Long-lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the estimates of asset’s useful lives and undiscounted future cash flows based on market participant assumptions. If the undiscounted expected future cash flows are less than the carrying amount of the asset and the carrying amount of the asset exceeds its fair value, an impairment loss is recognized.
Income Taxes
As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date.
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities at enacted rates. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax assets would be a credit to income in the period such determination was made. The consolidated financial statements include changes to the valuation allowances as a result of uncertainty regarding our ability to realize certain deferred tax assets in the future.
Our accounting for deferred tax consequences represents our best estimate of future events that can be appropriately reflected in the accounting estimates. Changes in existing tax laws, regulations, rates and future operating results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselves are also subject to change as a result in changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings.
Although we believe the measurement of liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcomes of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If we ultimately determine that the payment of these liabilities will be unnecessary, the liability is reversed and a tax benefit is recognized in the period in which such determination is made. Conversely, additional tax charges are recorded in a period in which it is determined that a recorded tax liability is less than the ultimate assessment is expected to be. If additional taxes are assessed as a result of an audit or litigation, there could be a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Inventory
We value inventories at the lower of cost or net realizable value, with expense estimates made for obsolescence or unsaleable inventory. In determining net realizable value, we consider such factors as yield, turnover and aging, expected future demand and market conditions, as well as past experience. A change in the underlying assumptions related to these factors could affect the valuation of inventory and have a corresponding effect on cost of goods sold. Historically, actual results have not significantly deviated from those determined using these estimates.
MASONITE INTERNATIONAL CORPORATION
Changes in Accounting Standards and Policies
Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies in the Notes to the Consolidated Financial Statements in this Annual Report.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in foreign currency exchange rates, interest rates and commodity prices, which can affect our operating results and overall financial condition. We manage exposure to these risks through our operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are viewed as risk management tools and are not used for speculation or for trading purposes. Derivative financial instruments are generally contracted with a diversified group of investment grade counterparties to reduce exposure to nonperformance on such instruments.
We have in place an enterprise risk management process that involves systematic risk identification and mitigation covering the categories of enterprise, strategic, financial, operation and compliance and reporting risk. The enterprise risk management process receives Board of Directors and Management oversight, drives risk mitigation decision-making and is fully integrated into our internal audit planning and execution cycle.
Foreign Exchange Rate Risk
We have foreign currency exposures related to buying, selling and financing in currencies other than the local currencies in which we operate. In the years ended January 1, 2023, January 2, 2022, and January 3, 2021, approximately 26%, 32% and 29% of our net sales were generated outside of the United States, respectively. We also have substantial assets outside the United States. As a result, the volatility in the price of the U.S. dollar has exposed, and in the future may continue to expose, us to currency exchange risks. Also, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on many aspects of our financial results. Changes in currency exchange rates for any country in which we operate may require us to raise the prices of our products in that country or allow our competitors to sell their products at lower prices in that country. Unrealized exchange gains and losses arising from the translation of the financial statements of our non-U.S. functional currency operations are accumulated in the cumulative translation adjustments account in accumulated other comprehensive loss. Net losses from currency translation adjustments as a result of translating our foreign assets and liabilities into U.S. dollars and upon deconsolidation of subsidiaries during the year ended January 1, 2023, were $35.6 million, which were primarily driven by weakening of the Pound Sterling, the Canadian dollar and the Euro in comparison to the U.S. dollar during the period.
When deemed appropriate, we enter into various derivative financial instruments to preserve the carrying amount of foreign currency-denominated assets, liabilities, commitments and certain anticipated foreign currency transactions. If not mitigated by derivative financial instruments, price increases or other methods, a hypothetical 10% strengthening of the U.S. dollar against all foreign currencies in the jurisdictions in which we operate would result in an approximate $68.5 million translational decrease in our net sales and an approximate $7.7 million translational decrease in our net income.
Interest Rate Risk
We are subject to market risk from exposure to changes in interest rates with respect to borrowings under our Term Loan Facility and ABL Facility to the extent they are drawn on and due to our other financing, investing and cash management activities. As of January 1, 2023, and January 2, 2022, there were no outstanding borrowings under our Term Loan Facility or ABL Facility. On January 3, 2023, we borrowed $250.0 million under our Term Loan Facility and $100.0 million under our ABL Facility in connection with the consummation of the Endura acquisition. On February 3, 2023, we subsequently repaid $50.0 million of the outstanding borrowings under our ABL Facility. A 100 basis point increase in the variable interest rate component of our borrowings as of February 4, 2023, would increase our annual interest expense by approximately $3.0 million.
Impact of Inflation, Deflation and Changing Prices
We have experienced inflation and deflation related to our purchase of certain commodity products. We believe that volatile prices for commodities have impacted our net sales and results of operations. We maintain strategies to
mitigate the impact of higher raw material, energy and commodity costs, which include cost reduction, sourcing and other actions, which typically offset only a portion of the adverse impact. Inflation and deflation related to our purchases of certain commodity products could have an adverse impact on our operating results in the future. A hypothetical 10% inflationary increase in our material cost of goods sold would result in approximately $117.5 million of increased consolidated cost of goods sold. Additionally, anti-dumping and countervailing duty trade cases, such as the January 8, 2020, Coalition of American Millwork Producers anti-dumping and countervailing duty petitions against Wood Mouldings and Millwork Products from Brazil and China, has had, and is expected to continue to have, an impact our business and results of operations.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm (PCAOB ID 42)
Consolidated Statements of Income and Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Masonite International Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Masonite International Corporation (the Company) as of January 1, 2023 and January 2, 2022, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the three fiscal years in the period ended January 1, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at January 1, 2023 and January 2, 2022, and the results of its operations and its cash flows for each of the three fiscal years in the period ended January 1, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
Accounting for Income Taxes
Description of the Matter As discussed in Notes 1 and 15 to the consolidated financial statements, the Company is subject to income taxes in Canada, the U.S., and other foreign jurisdictions, which affect the Company’s provision for income taxes. The provision for income taxes is based upon management’s understanding of the facts, circumstances and information available as of the reporting date. For the year-ended January 1, 2023, the Company recognized consolidated income tax expense of $71.8 million.
Auditing management’s calculation of the provision for income taxes was complex because the Company’s global structure required an assessment of the Company’s interpretation and application of tax laws in multiple jurisdictions including the income tax impact of the legal entity ownership structure and intercompany transactions. The assessment of tax positions involves the evaluation and application of complex statutes, regulations, and case law which are subject to legal and factual interpretation and judgment. Our audit procedures required significant audit effort including the use of our tax professionals to assist in evaluating the audit evidence obtained from these procedures.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over management’s calculation of its provision for income taxes. For example, we tested management’s controls over the identification and analysis of changes to tax laws in the various jurisdictions in which it operates.
To test the Company’s calculation of the provision for income taxes, we performed audit procedures that included, among others, evaluating the income tax impact of the Company’s structure, operations and jurisdictional tax law and considered the impact of any changes in the current year. We involved our tax professionals to evaluate the application of tax law to management’s tax positions, including assessing the Company’s correspondence with the relevant tax authorities and its analysis of income tax positions. Additionally, our procedures included testing the related effective tax rate reconciliation, evaluating the tax impact of permanent and temporary differences, and testing the application of new regulations, case law, and other authoritative guidance.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Tampa, Florida
February 28, 2023
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Income and Comprehensive Income
(In thousands of U.S. dollars, except per share amounts)
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Net sales $ 2,891,687 $ 2,596,920 $ 2,257,075
Cost of goods sold 2,217,792 1,985,141 1,684,571
Gross profit 673,895 611,779 572,504
Selling, general and administration expenses 344,614 308,430 366,772
Restructuring costs 1,904 5,567 8,236
Asset impairment - 69,900 51,515
Loss on disposal of subsidiaries 850 8,590 2,091
Operating income 326,527 219,292 143,890
Interest expense, net 41,331 46,123 46,807
Loss on extinguishment of debt - 13,583 -
Other (income) expense, net (5,001) 15,620 (5,217)
Income before income tax expense 290,197 143,966 102,300
Income tax expense 71,753 44,772 28,611
Net income 218,444 99,194 73,689
Less: net income attributable to non-controlling interests 4,211 4,693 4,652
Net income attributable to Masonite $ 214,233 $ 94,501 $ 69,037
Basic earnings per common share attributable to Masonite $ 9.51 $ 3.91 $ 2.81
Diluted earnings per common share attributable to Masonite $ 9.41 $ 3.85 $ 2.77
Comprehensive income:
Net income $ 218,444 $ 99,194 $ 73,689
Other comprehensive (loss) income:
Foreign currency translation (loss) gain (35,637) (3,175) 19,820
Pension and other post-retirement adjustment (4,718) 2,250 (3,163)
Pension settlement charges - 15,654 -
Amortization of actuarial net losses 22 1,336 1,002
Income tax (expense) benefit related to other comprehensive (loss) income (846) (5,518) 632
Other comprehensive (loss) income, net of tax: (41,179) 10,547 18,291
Comprehensive income 177,265 109,741 91,980
Less: comprehensive income attributable to non-controlling interests 3,674 4,759 4,837
Comprehensive income attributable to Masonite $ 173,591 $ 104,982 $ 87,143
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Balance Sheets
(In thousands of U.S. dollars, except share amounts)
ASSETS January 1, 2023 January 2, 2022
Current assets:
Cash and cash equivalents $ 296,922 $ 381,395
Restricted cash 11,999 10,110
Accounts receivable, net 375,918 343,414
Inventories, net 406,828 347,476
Prepaid expenses and other assets 55,051 50,399
Income taxes receivable 16,922 1,332
Total current assets 1,163,640 1,134,126
Property, plant and equipment, net 652,329 626,797
Operating lease right-of-use assets 160,695 176,445
Investment in equity investees 16,111 14,994
Goodwill 69,868 77,102
Intangible assets, net 136,056 150,487
Deferred income taxes 16,133 20,764
Other assets 33,346 45,903
Total assets $ 2,248,178 $ 2,246,618
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 111,526 $ 138,788
Accrued expenses 223,046 237,300
Income taxes payable 14,361 8,551
Total current liabilities 348,933 384,639
Long-term debt 866,116 865,721
Long-term operating lease liabilities 151,242 165,670
Deferred income taxes 79,590 77,936
Other liabilities 59,515 52,874
Total liabilities 1,505,396 1,546,840
Commitments and Contingencies (Note 10)
Equity:
Share capital: unlimited shares authorized, no par value, 22,155,035 and 23,623,887 shares issued and outstanding as of January 1, 2023, and January 2, 2022, respectively
520,003 543,400
Additional paid-in capital 226,514 222,177
Retained earnings 127,826 24,244
Accumulated other comprehensive loss (142,224) (101,582)
Total equity attributable to Masonite 732,119 688,239
Equity attributable to non-controlling interests 10,663 11,539
Total equity 742,782 699,778
Total liabilities and equity $ 2,248,178 $ 2,246,618
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
January 1, 2023 January 2, 2022 January 3, 2021
Total equity, beginning of period $ 699,778 $ 695,117 $ 636,862
Share capital:
Beginning of period 543,400 552,969 558,514
Common shares issued for delivery of share based awards 13,868 12,125 8,269
Common shares issued under employee stock purchase plan 1,573 1,593 1,305
Common shares repurchased and retired (38,838) (23,287) (15,119)
End of period 520,003 543,400 552,969
Additional paid-in capital:
Beginning of period 222,177 223,666 216,584
Share based compensation expense 21,771 15,959 19,423
Common shares issued for delivery of share based awards (13,868) (12,125) (8,269)
Common shares withheld to cover income taxes payable due to delivery of share based awards (3,359) (5,001) (3,623)
Common shares issued under employee stock purchase plan (207) (322) (449)
End of period 226,514 222,177 223,666
Retained earnings (accumulated deficit):
Beginning of period 24,244 20,385 (20,047)
Net income attributable to Masonite 214,233 94,501 69,037
Common shares repurchased and retired (110,651) (90,642) (28,605)
End of period 127,826 24,244 20,385
Accumulated other comprehensive loss:
Beginning of period (101,582) (112,063) (130,169)
Other comprehensive (loss) income attributable to Masonite, net of tax (40,642) 10,481 18,106
End of period (142,224) (101,582) (112,063)
Equity attributable to non-controlling interests:
Beginning of period 11,539 10,160 11,980
Net income attributable to non-controlling interests 4,211 4,693 4,652
Other comprehensive (loss) income attributable to non-controlling interests, net tax (537) 66 185
Dividends to non-controlling interests (4,550) (3,380) (6,657)
End of period 10,663 11,539 10,160
Total equity, end of period $ 742,782 $ 699,778 $ 695,117
Common shares outstanding:
Beginning of period 23,623,887 24,422,934 24,869,921
Common shares issued for delivery of share based awards 194,500 199,865 209,407
Common shares issued under employee stock purchase plan 16,567 15,091 16,505
Common shares repurchased and retired (1,679,919) (1,014,003) (672,899)
End of period 22,155,035 23,623,887 24,422,934
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Year Ended
Cash flows from operating activities: January 1, 2023 January 2, 2022 January 3, 2021
Net income $ 218,444 $ 99,194 $ 73,689
Adjustments to reconcile net income to net cash flow provided by operating activities:
Loss on disposal of subsidiaries 850 8,590 2,091
Loss on extinguishment of debt - 13,583 -
Depreciation 71,168 70,641 68,350
Amortization 17,127 21,341 23,423
Share based compensation expense 21,771 15,959 19,423
Deferred income taxes 6,024 4,881 (10,085)
Unrealized foreign exchange loss (gain) 820 (1,244) (324)
Share of income from equity investees, net of tax (4,768) (4,858) (2,811)
Dividend from equity investee 4,500 4,500 4,275
Pension and post-retirement funding, net of expense (2,342) 15,448 (4,654)
Non-cash accruals and interest (511) 1,678 1,601
(Gain) loss on sale of property, plant and equipment (378) 1,316 6,234
Asset impairment - 69,900 51,515
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (39,056) (56,831) (13,006)
Inventories (66,372) (92,641) (15,568)
Prepaid expenses and other assets 7,266 (8,021) (9,179)
Accounts payable and accrued expenses (33,302) 1,473 107,129
Other assets and liabilities (12,044) (8,452) 19,077
Net cash flow provided by operating activities 189,197 156,457 321,180
Cash flows from investing activities:
Additions to property, plant and equipment (114,307) (86,670) (72,908)
Acquisition of businesses, net of cash acquired - (160) (5,814)
Proceeds from sale of subsidiaries, net of cash disposed (74) 7,001 -
Proceeds from sale of property, plant and equipment 6,413 6,027 7,362
Other investing activities (3,130) (2,340) (2,530)
Net cash flow used in investing activities (111,098) (76,142) (73,890)
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 375,000 -
Repayments of long-term debt - (300,945) (57)
Payment of debt extinguishment costs - (10,810) -
Payment of debt issuance costs - (4,672) -
Tax withholding on share based awards (3,359) (5,001) (3,623)
Distributions to non-controlling interests (4,550) (3,380) (6,657)
Repurchases of common shares (149,489) (113,929) (43,724)
Net cash flow used in financing activities (157,398) (63,737) (54,061)
Net foreign currency translation adjustment on cash (3,285) (307) 4,397
(Decrease) Increase in cash, cash equivalents and restricted cash (82,584) 16,271 197,626
Cash, cash equivalents and restricted cash, beginning of period 391,505 375,234 177,608
Cash, cash equivalents and restricted cash, at end of period $ 308,921 $ 391,505 $ 375,234
See accompanying notes to the consolidated financial statements.
MASONITE INTERNATIONAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Business Overview and Significant Accounting Policies
Unless we state otherwise or the context otherwise requires, references to "Masonite," "we," "our," "us" and the "Company" in these notes to the consolidated financial statements refer to Masonite International Corporation and its subsidiaries.
Description of Business
Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 59 manufacturing locations in seven countries and sells doors to customers throughout the world, including the United States, Canada and the United Kingdom.
Basis of Presentation
We prepare these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These consolidated financial statements include the accounts of Masonite International Corporation, a company incorporated under the laws of British Columbia, and its subsidiaries, as of January 1, 2023, and January 2, 2022, and for the years ended January 1, 2023, January 2, 2022, and January 3, 2021.
Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. In a 52-week year, each fiscal quarter consists of 13 weeks. For ease of disclosure, the 13-week periods are referred to as three-month periods and the 52- or 53-week periods are referred to as years. Our 2020 fiscal year, which ended on January 3, 2021, contained 53 weeks of operating results, with the additional week occurring in the fourth quarter.
Changes in Accounting Standards and Policies
Adoption of Recent Accounting Pronouncements
In December 2021, the Financial Accounting Standards Board ("FASB") issued ASU 2021-10, "Government Assistance," which requires annual disclosures that increase the transparency of transactions involving government grants, including (1) the types of transactions, (2) the accounting for those transactions and (3) the effect of those transactions on an entity's financial statements. The guidance was effective for annual periods beginning after December 15, 2021, with early adoption permitted. We have adopted the new guidance as of January 3, 2022, the beginning of fiscal year 2022, and the adoption did not have a material impact on our financial statements or disclosures.
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes," as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes. This standard removes certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. We adopted the new guidance prospectively as of January 4, 2021, the beginning of fiscal year 2021, and the adoption did not have a material impact on our financial statements.
Other Recent Accounting Pronouncements not yet Adopted
In October 2021, the FASB issued ASU 2021-08, "Accounting for Contract Assets and Contract Liabilities from Contracts with Customers," which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with ASU 2014-09," Revenue from Contracts with Customers" as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022, with early application permitted. We did not early adopt and believe the adoption of this new guidance will not have a material impact on our financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Summary of Significant Accounting Policies
(a) Principles of consolidation:
These consolidated financial statements include the accounts of Masonite and our subsidiaries and the accounts of any variable interest entities for which we are the primary beneficiary. Intercompany accounts and transactions have been eliminated upon consolidation. The results of subsidiaries acquired during the periods presented are consolidated from their respective dates of acquisition using the acquisition method. Subsidiaries are prospectively deconsolidated as of the date we no longer have effective control of the entity.
(b) Translation of consolidated financial statements into U.S. dollars:
These consolidated financial statements are expressed in U.S. dollars. The accounts of the majority of our self-sustaining foreign operations are maintained in functional currencies other than the U.S. dollar. Assets and liabilities for these subsidiaries have been translated into U.S. dollars at the exchange rates prevailing at the end of the period and results of operations at the average exchange rates for the period. Unrealized exchange gains and losses arising from the translation of the financial statements of our non-U.S. functional currency operations are accumulated in the cumulative translation adjustments account in accumulated other comprehensive loss. For our foreign subsidiaries where the U.S. dollar is the functional currency, all foreign currency-denominated accounts are remeasured into U.S. dollars. Unrealized exchange gains and losses arising from remeasurements of foreign currency-denominated assets and liabilities are included within other (income) expense, net in the consolidated statements of income and comprehensive income. Gains and losses arising from international intercompany transactions that are of a long-term investment nature are reported in the same manner as translation gains and losses. Realized exchange gains and losses are included in net income for the periods presented.
(c) Cash and cash equivalents:
Cash includes cash equivalents which are short-term highly liquid investments with original maturities of three months or less.
(d) Restricted cash:
Restricted cash includes cash we have placed as collateral for standby letters of credit. The letters of credit guarantee payment to third parties in the event the company is in breach of contract terms as detailed in each letter of credit. As of January 1, 2023, and January 2, 2022, we had standby letters of credit totaling $2.1 million and $2.6 million, respectively. There were no amounts drawn upon these letters of credit as of January 1, 2023, or January 2, 2022.
(e) Accounts receivable:
Our customers are primarily retailers, distributors and contractors. We record an allowance for credit losses at the time that accounts receivable are initially recorded based on the historical write-off experience and the current economic environment as well as our expectations of future economic conditions. We reassess the allowance at each reporting date. When it becomes apparent, based on age or customer circumstances, that such amounts will not be collected, they are charged to the allowance. Payments subsequently received are credited to the credit loss expense account included within selling, general and administration expenses in the consolidated statements of income and comprehensive income. Generally, we do not require collateral for our accounts receivable.
(f) Inventories:
Raw materials and finished goods are valued at the lower of cost or net realizable value. Cost is determined on a first in, first out basis. In determining the net realizable value, we consider factors such as yield, turnover, expected future demand and past experience.
The cost of inventories includes all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The costs of conversion of inventories include costs directly related to the units of production, such as direct labor. They also include a systematic allocation of fixed and variable
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
production overheads that are incurred in converting raw materials into finished goods. Fixed production overheads are those indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance of factory buildings and equipment, and the cost of factory management and administration. Variable production overheads are those indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor.
To determine the cost of inventory, we allocate fixed expenses to the cost of production based on the normal capacity, which refers to a range of production levels and is considered the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. Fixed overhead costs allocated to each unit of production are not increased due to abnormally low production. Those excess costs are recognized as a current period expense. When a production facility is completely shut down temporarily, it is considered idle, and all related expenses are charged to cost of goods sold.
(g) Property, plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is recorded based on the carrying values of buildings, machinery and equipment using the straight-line method over the estimated useful lives set forth as follows:
Useful Life (Years)
Buildings 20 - 40
Machinery and equipment
Tooling 10 - 25
Machinery and equipment 5 - 25
Molds and dies 12 - 25
Office equipment, fixtures and fittings 3 - 12
Information technology systems 5 - 15
Improvements and major maintenance that extend the life of an asset are capitalized; other repairs and maintenance are expensed as incurred. When assets are retired or otherwise disposed, their carrying values and accumulated depreciation are removed from the accounts.
Property, plant and equipment are tested for impairment when events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. An impairment loss is recognized when the carrying amount of an asset or asset group being tested for recoverability exceeds the sum of the undiscounted cash flows expected from its use and disposal. Impairments are measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value, as determined using a discounted cash flows approach when quoted market prices are not available.
(h) Leases:
We determine if a contract is a lease at inception or upon acquisition and reevaluate each time a lease contract is amended or otherwise modified. A lease will be classified as an operating lease if it does not meet any of the criteria for a finance lease. Those criteria include the transfer of ownership of the underlying asset by the end of the lease term; an option to purchase the underlying asset that we would be reasonably certain to exercise; the lease term is for the major part of the remaining economic life of the underlying asset; the present value of the sum of the lease payments and any residual value guaranteed by us that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset or if the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
The assets and liabilities relating to operating leases are included in operating lease right-of-use assets, accrued expenses, and long-term operating lease liabilities in our consolidated balance sheets. The assets and liabilities relating to finance leases are included in property, plant and equipment, net and other liabilities in our consolidated balance sheets.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the respective lease commencement date based on the present value of lease payments over the expected lease term. Since our leases do not specify implicit discount rates, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any initial direct costs and is adjusted for lease incentives and prepaid or accrued rent. The lease term begins on the date when the lessor makes the underlying asset available for use to us, and our expected lease terms include options to extend the lease when it is reasonably certain that we will exercise those options. Lease payments are recognized in the consolidated statements of income and comprehensive income on a straight-line basis over the expected lease term.
Leases with an initial term of 12 months or less are not recorded on the balance sheet, with the related lease expense recognized on a straight-line basis over the lease term. Lease and non-lease components of a contract are combined into a single lease component for accounting purposes.
Our operating leases include leases for real estate (including manufacturing sites, warehouses and offices) and machinery and equipment and our finance leases include leases for real estate. We have no material subleases. Certain of our operating leases contain provisions for renewal ranging from one to four options of one to ten years each.
(i) Goodwill:
We use the acquisition method of accounting for all business combinations, and we evaluate all business combinations for intangible assets that should be recognized apart from goodwill. Goodwill adjustments are recorded for the effect on goodwill of changes to net assets acquired during the measurement period (up to one year from the date of acquisition) for new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
Goodwill is not amortized, but instead is tested annually for impairment on the last day of fiscal November, or more frequently if events or changes in circumstances indicate the carrying amount may not be recoverable. The test for impairment is performed at the reporting unit level by comparing the reporting unit’s carrying amount to its fair value. Possible impairment in goodwill is first analyzed using qualitative factors such as macroeconomic and market conditions, changing costs and actual and projected performance, amongst others, to determine whether it is more likely than not that the book value of the reporting unit exceeds its fair value. If it is determined more likely than not that the book value exceeds fair value, a quantitative analysis is performed to test for impairment. When quantitative steps are determined necessary, the fair values of the reporting units are estimated through the use of discounted cash flow analysis and market multiples. If the carrying amount exceeds fair value, then goodwill is impaired. Any impairment in goodwill is measured as the excess of the carrying value of goodwill over the fair value. There were no impairment charges recorded against goodwill in 2022.
When developing our discounted cash flow analyses, a number of assumptions and estimates are involved to forecast operating cash flows, including future net sales growth, EBITDA margin growth, benefits from restructuring initiatives, income tax rates, capital spending, business initiatives and working capital changes. These assumptions may vary significantly among the reporting units. Operating cash flow forecasts are based on operating plans for the early years and historical relationships and long-term economic outlooks for our industry in later years. The discount rate is estimated for each specific reporting unit. Due to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of our impairment analyses. In 2021 and 2020, we recorded $59.5 million and $51.5 million, respectively, in impairment charges related to the Architectural reporting unit. See Note 14 for further information.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(j) Intangible assets:
Intangible assets with definite lives include customer relationships, patents, system software development and acquired trademarks and tradenames. Definite lived intangible assets are amortized over their estimated useful lives. Information pertaining to the estimated useful lives of intangible assets is as follows:
Estimated Useful Life
Customer relationships Over expected relationship period
Patents Over expected useful life
System software development Over expected useful life
Acquired trademarks and tradenames Straight-line over expected useful life
Amortizable intangible assets are tested for impairment whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. An impairment loss is recognized when the estimate of undiscounted future cash flows generated by such assets is less than the carrying amount. Measurement of the impairment loss is based on the fair value of the asset. Fair value is measured using discounted cash flows.
Indefinite lived intangible assets are not amortized, but instead are tested for impairment annually on the last day of fiscal November, or more frequently if events or circumstances indicate the carrying value may exceed the fair value.
(k) Income taxes:
As a multinational corporation, we are subject to taxation in many jurisdictions and the calculation of our tax liabilities involves dealing with inherent uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. We assess the income tax positions and record tax liabilities for all years subject to examination based upon our evaluation of the facts, circumstances and information available as of the reporting date. Our global structure required an assessment of the Company’s interpretation and application of tax laws in multiple jurisdictions including the income tax impact of the legal entity ownership structure and intercompany transactions.
We use the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income in the period that includes the date of enactment. A valuation allowance is recorded to reduce deferred tax assets to an amount that is anticipated to be realized on a more likely than not basis.
We account for uncertain taxes in accordance with ASC 740, "Income Taxes." The initial benefit recognition model follows a two-step approach. First, we evaluate if the tax position is more likely than not of being sustained if audited based solely on the technical merits of the position. Second, we measure the appropriate amount of benefit to recognize. This is calculated as the largest amount of tax benefit that has a greater than 50% likelihood of ultimately being realized upon settlement. Subsequently at each reporting date, the largest amount that has a greater than 50% likelihood of ultimately being realized, based on information available at that date, will be measured and recognized.
We recognize interest and penalties related to unrecognized tax benefits within the income tax expense line in the consolidated statements of income and comprehensive income. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
(l) Employee future benefits:
We maintain defined benefit pension plans. Benefits under the plans were frozen or curtailed at various times in the past. Earnings are charged with the cost of benefits earned by employees as services are rendered. The cost reflects management’s best estimates of the pension plans’ expected investment yields, wage and salary escalation, mortality of members, terminations and the ages at which members will retire. Changes in these assumptions could impact future
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
pension expense. Service cost components are recognized within cost of goods sold and non-service cost components are recognized within other (income) expense, net in the consolidated statements of income and comprehensive income. The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation or fair value of plan assets at the beginning of the year is amortized over the average remaining service lives of the members.
Assets are valued at fair value for the purpose of calculating the expected return on plan assets. Past service costs arising from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment.
When a restructuring of a benefit plan gives rise to both a curtailment and a settlement of obligations, the curtailment is accounted for prior to the settlement. Curtailment gains are offset against unrecognized losses and any excess gains and all curtailment losses are recorded in the period in which the curtailment occurs.
(m) Restructuring costs:
Restructuring costs include all salary-related severance benefits that are accrued and expensed when a restructuring plan has been put into place, the plan has received approval from the appropriate level of management and the benefit is probable and reasonably estimable. In addition to salary-related costs, we incur other restructuring costs when facilities are closed or capacity is realigned within the organization. Upon termination of a contract we record liabilities and expenses pursuant to the terms of the relevant agreement. For non-contractual restructuring activities, liabilities and expenses are measured and recorded at fair value in the period in which they are incurred.
Restructuring-related costs are presented separately in the consolidated statements of income and comprehensive income whereas non-restructuring severance benefits are charged to cost of goods sold or selling, general and administration expense depending on the nature of the job responsibilities.
(n) Financial instruments:
We have applied a framework consistent with ASC 820, "Fair Value Measurement and Disclosure," and have disclosed all financial assets and liabilities measured at fair value and non-financial assets and liabilities measured at fair value on a non-recurring basis (at least annually).
We classify and disclose assets and liabilities carried at fair value in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. These estimates, although based on the relevant market information about the financial instrument, are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(o) Share based compensation expense:
We have a share based compensation plan, which is described in detail in Note 12. We apply the fair value method of accounting using comprehensive valuation models, including the Black-Scholes-Merton option pricing model, to determine the compensation expense.
(p) Revenue recognition:
Revenue from the sale of products is recognized when control of the promised goods is transferred to our customers based on the agreed-upon shipping terms, in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Volume rebates, expected returns, discounts and other incentives to customers are considered variable consideration and we estimate these amounts based on the expected amount to be
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
provided to customers and reduce the revenues we recognize accordingly. Sales taxes and value added taxes assessed by governmental entities are excluded from the measurement of consideration expected to be received. Shipping and handling costs incurred after a customer has taken possession of our goods are treated as a fulfillment cost and are not considered a separate performance obligation. Shipping and other transportation costs charged to customers are recorded in both revenues and cost of goods sold in the consolidated statements of income and comprehensive income.
(q) Product warranties:
We warrant certain qualitative attributes of our door products. We have recorded provisions for estimated warranty and related costs within accrued expenses on the consolidated balance sheets, based on historical experience and we periodically adjust these provisions to reflect actual experience. The rollforward of our warranty provision is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Balance at beginning of period $ 4,015 $ 4,635 $ 4,414
Additions charged to expense 5,085 4,646 6,807
Deductions (5,219) (5,266) (6,586)
Balance at end of period $ 3,881 $ 4,015 $ 4,635
(r) Vendor rebates:
We account for cash consideration received from a vendor as a reduction of cost of goods sold and inventory, in the consolidated statements of income and comprehensive income and consolidated balance sheets, respectively. The cash consideration received represents agreed-upon vendor rebates that are earned in the normal course of operations.
(s) Advertising costs:
We recognize advertising costs as they are incurred. Advertising costs incurred primarily relate to tradeshows and are included within selling, general and administration expense in the consolidated statements of income and comprehensive income. Advertising costs were $16.9 million, $14.2 million and $10.8 million in the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.
(t) Research and development costs:
We recognize research and development costs as they are incurred. Research and development costs incurred primarily relate to the development of new products and the improvement of manufacturing processes, and are primarily included within cost of goods sold in the consolidated statements of income and comprehensive income. These costs exclude the significant investments in other areas such as advanced automation. Research and development costs were $21.2 million, $18.4 million and $17.0 million in the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.
(u) Insurance losses and proceeds:
All involuntary conversions of property, plant and equipment are recorded as losses within loss (gain) on disposal of property, plant and equipment, which is included within selling, general and administration expense in the consolidated statements of income and comprehensive income and as reductions to property, plant and equipment in the consolidated balance sheets. Any subsequent proceeds received for insured losses of property, plant and equipment are also recorded as gains within loss (gain) on disposal of property, plant and equipment, and are classified as cash flows from investing activities in the consolidated statements of cash flows in the period in which the cash is received. Proceeds received for business interruption recoveries are recorded as a reduction to selling, general and administration expense in the consolidated statements of income and comprehensive income and are classified as cash flows from operating activities in the consolidated statements of cash flows in the period in which an acknowledgment from the insurance carrier of settlement or partial settlement of a non-refundable nature has been presented to us.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(v) Equity investments:
We account for investments in affiliates of between 20% and 50% ownership, over which we have significant influence, using the equity method. We record our share of earnings of the affiliate within other income, net of expense, in the consolidated statements of income and comprehensive income and dividends as a reduction of the investment in the affiliate in the consolidated balance sheets when declared.
(w) Segment reporting:
Our reportable segments are organized and managed principally by end market: North American Residential, Europe and Architectural. The Corporate & Other category includes unallocated corporate costs and the results of immaterial operating segments that were not aggregated into any reportable segment. In addition to similar economic characteristics we also consider the following factors in determining the reportable segments: the nature of business activities, the management structure directly accountable to our chief operating decision maker for operating and administrative activities, availability of discrete financial information and information presented to the Board of Directors and investors.
(x) Use of estimates:
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting periods. During 2022, there were no material changes in the methods or policies used to establish estimates and assumptions. Actual results may differ from our estimates.
2. Acquisitions and Divestitures
Acquisitions
On January 3, 2023, we completed the acquisition of Endura Products for approximately $375.0 million in cash using a combination of cash on hand and borrowings under our Term Loan Facility and ABL Facility. In connection with the acquisition, we borrowed $250.0 million under our Term Loan Facility and $100.0 million under our ABL Facility. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States. Refer to Note 23. Subsequent Events for additional information.
On December 4, 2020, we completed the acquisition of a Lowe's Companies, Inc. door fabrication facility in the United States for cash consideration of $3.9 million. During the first quarter of 2021, as a result of the working capital adjustments we paid an additional $0.2 million. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for the acquisition are not presented as they were not material for any period presented.
On August 31, 2020, we acquired intellectual property and other assets related to an interior door technology for cash consideration of $1.9 million. The purchase price allocation, net sales, net income (loss) attributable to Masonite and pro forma information for the acquisition are not presented as they were not material for any period presented.
Divestitures
During the fourth quarter of 2022, we completed the liquidation of our legal entity in Turkey. As a result, we recognized $0.9 million in loss on disposal of subsidiaries. The total charge consists of $0.7 million relating to the recognition of cumulative translation adjustment out of accumulated other comprehensive loss and $0.2 million relating to the write-off of net assets.
On June 14, 2021, we completed the sale of all the capital stock of our Czech business ("Czech") for consideration of $7.0 million, net of cash disposed. The divestiture of this business resulted in a loss on disposal of subsidiaries of $8.6 million, which was recognized in the second quarter of 2021 in the Europe segment. The total charge
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
consisted of $5.1 million relating to the write-off of the net assets sold and other professional fees and $3.5 million relating to the recognition of the cumulative translation adjustment out of accumulated other comprehensive loss.
During the second quarter of 2020, we completed the liquidation of our legal entity in India. As a result, we recognized $2.1 million in loss on disposal of subsidiaries. The total charge consists of $2.3 million relating to the recognition of cumulative translation adjustment out of accumulated other comprehensive loss and $0.2 million relating to the write-off of net assets and other professional fees.
3. Accounts Receivable
Our customers consist mainly of retailers, distributors and contractors. Our ten largest customers accounted for 62.3% and 56.7% of total accounts receivable as of January 1, 2023, and January 2, 2022, respectively. Our largest customer, The Home Depot, Inc. accounted for more than 10% of the consolidated gross accounts receivable balance as of January 1, 2023, and January 2, 2022. No other individual customer accounted for greater than 10% of the consolidated gross accounts receivable balance at either January 1, 2023, or January 2, 2022.
The changes in the allowance for doubtful accounts were as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Balance at beginning of period $ 2,087 $ 2,809 $ 1,752
Additions charged to expense 1,062 242 1,443
Deductions (669) (964) (386)
Balance at end of period $ 2,480 $ 2,087 $ 2,809
We maintain an accounts receivable sales program with a third party (the "AR Sales Program"). Under the AR Sales Program, we can transfer ownership of eligible trade accounts receivable of certain customers. Receivables are sold outright to a third party who assumes the full risk of collection, without recourse to us in the event of a loss. Transfers of receivables under this program are accounted for as sales. Proceeds from the transfers reflect the face value of the accounts receivable less a discount. Receivables sold under the AR Sales Program are excluded from trade accounts receivable in the consolidated balance sheets and are included in cash flows from operating activities in the consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expense within the consolidated statements of income and comprehensive income.
In most countries we pay and collect Value Added Tax ("VAT") when procuring goods and services within the normal course of business. VAT receivables are established in jurisdictions where VAT paid exceeds VAT collected and are recoverable through the filing of refund claims.
Certain wood moldings and millwork products being imported into the United States are subject to import tariffs. Tariff deposits are paid to the government and are recoverable through an assessment process.
4. Inventories
The amounts of inventory on hand were as follows as of the dates indicated:
(In thousands) January 1, 2023 January 2, 2022
Raw materials $ 320,553 $ 275,269
Finished goods 95,005 78,324
Provision for obsolete or aged inventory (8,730) (6,117)
Inventories, net $ 406,828 $ 347,476
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
We carry an inventory provision which is the result of obsolete or aged inventory. The rollforward of our inventory provision is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Balance at beginning of period $ 6,117 $ 6,305 $ 7,136
Additions charged to expense 7,692 3,402 5,150
Deductions (5,079) (3,590) (5,981)
Balance at end of period $ 8,730 $ 6,117 $ 6,305
5. Property, Plant and Equipment
The carrying amounts of our property, plant and equipment and accumulated depreciation were as follows as of the dates indicated:
(In thousands) January 1, 2023 January 2, 2022
Land $ 21,415 $ 22,851
Buildings 222,340 216,510
Machinery and equipment 837,407 783,913
Property, plant and equipment, gross 1,081,162 1,023,274
Accumulated depreciation (428,833) (396,477)
Property, plant and equipment, net $ 652,329 $ 626,797
Total depreciation expense was $71.2 million, $70.6 million and $68.4 million for the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively. Depreciation expense is included primarily within cost of goods sold in the consolidated statements of income and comprehensive income.
6. Leases
The following table summarizes the components of lease expense recorded in the consolidated statements of income and comprehensive income for the periods indicated:
(In thousands) Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Operating lease expense $ 49,972 $ 47,263 $ 38,922
Finance lease expense
Amortization of leased assets 1,123 865 882
Interest on lease liabilities 1,356 1,443 1,458
Total lease expense $ 52,451 $ 49,571 $ 41,262
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table includes a detail of lease assets and liabilities included in the consolidated balance sheet as of the period indicated:
(In thousands) January 1, 2023 January 2, 2022
Operating lease right-of-use assets $ 160,695 $ 176,445
Finance lease right-of-use assets (1)
25,409 23,931
Total lease assets, net $ 186,104 $ 200,376
Current portion of operating lease liabilities $ 24,372 $ 25,551
Long-term operating lease liabilities 151,242 165,670
Long-term finance lease liabilities 29,561 27,043
Total lease liabilities $ 205,175 $ 218,264
____________
(1) Net of accumulated amortization of $3.5 million and $2.4 million, as of January 1, 2023, and January 2, 2022, respectively.
The following table is a summary of the weighted-average remaining lease terms and weighted-average discount rates of the Company's leases as of the period indicated:
January 1, 2023 January 2, 2022
Weighted-average remaining lease term (years)
Operating leases 11.2 11.8
Finance leases 26.6 27.6
Weighted-average discount rate (1)
Operating leases 4.3 % 4.1 %
Finance leases 4.8 % 5.4 %
____________
(1) Based on the Company's incremental borrowing rate at lease commencement or modification.
As of January 1, 2023, the future minimum lease payments under non-cancelable leases are as follows:
(In thousands) Operating Leases Finance Leases
Fiscal year:
2023 $ 31,073 $ 1,311
2024 28,862 1,471
2025 25,331 1,515
2026 18,362 1,693
2027 14,622 1,612
Thereafter 113,393 49,127
Total minimum lease payments 231,643 56,729
Less imputed interest (56,029) (27,168)
Present value of future lease payments $ 175,614 $ 29,561
As of January 1, 2023, we have one undiscounted commitment for an operating lease that had not yet commenced of $25.8 million. This operating lease will commence during fiscal year 2023 with a lease term of 7.2 years.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill were as follows as of the dates indicated:
(In thousands) North American Residential Europe Architectural Total
January 3, 2021 $ 9,730 $ 69,439 $ 59,523 $ 138,692
Measurement period adjustment 160 - - 160
Goodwill related to 2021 divestiture - (1,395) - (1,395)
Goodwill impairment - - (59,526) (59,526)
Foreign exchange fluctuations 3 (835) 3 (829)
January 2, 2022 9,893 67,209 - 77,102
Foreign exchange fluctuations (19) (7,215) - (7,234)
January 1, 2023 $ 9,874 $ 59,994 $ - $ 69,868
Gross goodwill before cumulative impairment charges in the Architectural reporting unit was $111.0 million as of January 1, 2023, January 2, 2022, and January 3, 2021. In the third quarter of 2020, we determined the continued decreased demand in the Architectural door market due to the impact of COVID-19 in the year, along with the uncertainty of the duration and intensity of the pandemic on the Architectural door market for future periods were indicators that goodwill impairment was present in the Architectural reporting unit. A goodwill impairment charge of $51.5 million was recorded to selling, general and administration expenses. The charge represents the amount by which the carrying value of the Architectural reporting unit exceeded its fair value and reduced the goodwill balance in the Architectural reporting unit from $111.0 million to $59.5 million. See Note 14 for further information.
We performed an annual qualitative impairment test of each of our reporting units during the fourth quarter of 2021. As a result of manufacturing constraints in the Architectural reporting unit due to COVID-19 related absenteeism, material availability and production challenges, a goodwill impairment charge of $59.5 million was recorded to selling, general and administration expenses in 2021. The charge represents the amount by which the carrying value of the Architectural reporting unit exceeded its fair value and reduced the goodwill balance in the Architectural reporting unit from $59.5 million to zero. See Note 14 for further information.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The cost and accumulated amortization values of our intangible assets were as follows as of the dates indicated:
January 1, 2023 January 2, 2022
(In thousands) Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value
Definite life intangible assets:
Customer relationships $ 165,700 $ (135,518) $ 30,182 $ 176,779 $ (132,840) $ 43,939
Patents 34,776 (29,665) 5,111 34,438 (28,148) 6,290
Software 37,187 (33,900) 3,287 36,354 (33,281) 3,073
Trademarks and tradenames 30,918 (15,827) 15,091 34,210 (14,063) 20,147
License rights and other 6,584 (84) 6,500 94 (94) -
Total definite life intangible assets 275,165 (214,994) 60,171 281,875 (208,426) 73,449
Indefinite life intangible assets:
Trademarks and tradenames 75,885 - 75,885 77,038 - 77,038
Total intangible assets $ 351,050 $ (214,994) $ 136,056 $ 358,913 $ (208,426) $ 150,487
Amortization of intangible assets was $15.8 million, $20.2 million and $22.2 million for the years ended January 1, 2023, January 2, 2022, and January 3, 2021 respectively. Amortization expense is classified within selling, general and administration expenses in the consolidated statements of income and comprehensive income.
The estimated future amortization of intangible assets with definite lives as of January 1, 2023, is as follows:
(In thousands)
Fiscal year:
2023 $ 15,487
2024 14,054
2025 12,063
2026 8,617
2027 8,305
8. Accrued Expenses
The details of our accrued expenses were as follows as of the dates indicated:
(In thousands) January 1, 2023 January 2, 2022
Accrued payroll $ 69,224 $ 66,048
Accrued rebates 50,200 51,200
Current portion of operating lease liabilities 24,372 25,551
Accrued interest 16,480 17,125
Other accruals 62,770 77,376
Total accrued expenses $ 223,046 $ 237,300
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Long-Term Debt
(In thousands) January 1, 2023 January 2, 2022
3.50% senior unsecured notes due 2030 $ 375,000 $ 375,000
5.375% senior unsecured notes due 2028 500,000 500,000
Debt issuance costs (8,884) (9,279)
Total long-term debt $ 866,116 $ 865,721
Interest expense on our long-term debt was $41.3 million, $43.9 million and $45.5 million for years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively, and primarily related to our consolidated indebtedness under senior unsecured notes. Debt issuance costs incurred in connection with the 2030 Notes and the 2028 Notes were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over their respective terms. Additionally, we pay interest on any outstanding principal under our Term Loan Facility and ABL Facility, each as defined below, and we are required to pay a commitment fee for unutilized commitments under the ABL Facility, both of which are recorded in interest expense as incurred.
3.50% Senior Notes due 2030
On July 26, 2021, we issued $375.0 million aggregate principal senior unsecured notes (the "2030 Notes"). The 2030 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and to buyers outside of the United States pursuant to Regulation S under the Securities Act. The 2030 Notes bear interest at 3.50% per annum, payable in cash semiannually in arrears on February 15 and August 15 of each year and the principal is due February 15, 2030. The 2030 Notes were issued at par. We received net proceeds of $370.3 million after deducting $4.7 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2030 Notes using the effective interest method. The net proceeds from the issuance of the 2030 Notes were used to redeem the remaining $300.0 million aggregate principal amount of the 2026 Notes (as described below), including the payment of related premiums, fees and expenses, with the balance of the proceeds available for general corporate purposes.
Obligations under the 2030 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries. We may redeem the 2030 Notes, in whole or in part, at any time, at the applicable redemption prices specified under the indenture governing the 2030 Notes, plus accrued and unpaid interest, if any, to the date of redemption. If we experience certain changes of control, we must offer to repurchase all of the 2030 Notes at a purchase price of 101.00% of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The indenture governing the 2030 Notes contains limited covenants that, among other things, limit our ability and the ability of our subsidiaries to (i) incur certain secured debt, (ii) engage in certain sale and leaseback transactions and (iii) merge or consolidate with other entities. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2030 Notes. The indenture governing the 2030 Notes contains customary events of default (subject to certain cases to customary grace and cure periods). As of January 1, 2023, we were in compliance with all covenants under the indenture governing the 2030 Notes.
5.375% Senior Notes due 2028
On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"). The 2028 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to buyers outside of the United States pursuant to Regulation S under the Securities Act. The 2028 Notes were issued without registration rights and are not listed on any securities exchange. The 2028 Notes bear interest at 5.375% per annum, payable in cash semiannually in arrears on February 1 and August 1 of each year and the principal is due February 1, 2028. The 2028 notes were issued at par. We received net proceeds of $493.3 million after deducting $6.7 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and are being accreted to interest expense over the term of the 2028 Notes using the effective interest
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
method. The net proceeds from issuance of the 2028 Notes, together with available cash balances, were used to redeem the remaining $500.0 million aggregate principal amount of similar senior unsecured notes.
Obligations under the 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by certain of our directly or indirectly wholly-owned subsidiaries. We may redeem the 2028 Notes, in whole or in part, at any time on or after February 1, 2023, at the applicable redemption prices specified under the indenture governing the 2028 Notes, plus accrued and unpaid interest, if any, to the date of redemption. If we experience certain changes of control or consummate certain asset sales and do not reinvest the net proceeds, we must offer to repurchase all of the 2028 Notes at a purchase price of 101.00% (in the case of changes in control) or 100.00% (in the case of asset sales) of their principal amount, plus accrued and unpaid interest, if any, to, but excluding, the repurchase date.
The indenture governing the 2028 Notes contains restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to: (i) incur additional debt and issue disqualified or preferred stock, (ii) make restricted payments, (iii) sell assets, (iv) create or permit restrictions on the ability of our restricted subsidiaries to pay dividends or make other distributions to the parent company, (v) create or incur certain liens, (vi) enter into sale and leaseback transactions, (vii) merge or consolidate with other entities and (viii) enter into transactions with affiliates. The foregoing limitations are subject to exceptions as set forth in the indenture governing the 2028 Notes. In addition, if in the future the 2028 Notes have an investment grade rating from at least two nationally recognized statistical rating organizations, certain of these covenants will be terminated. The indenture governing the 2028 Notes contains customary events of default (subject in certain cases to customary grace and cure periods). As of January 1, 2023, we were in compliance with all covenants under the indenture governing the 2028 Notes.
5.750% Senior Notes due 2026
On August 27, 2018, we issued $300.0 million aggregate principal senior unsecured notes (the "2026 Notes"). The 2026 Notes were issued in a private placement for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act, and to buyers outside of the United States pursuant to Regulation S under the Securities Act. The 2026 Notes were issued without registration rights and are not listed on any securities exchange. The 2026 Notes bore interest at 5.75% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and were originally due September 15, 2026. The 2026 notes were issued at par. We received net proceeds of $295.7 million after deducting $4.3 million of debt issuance costs. The debt issuance costs were capitalized as a reduction to the carrying value of debt and were accreted to interest expense over the term of the 2026 Notes using the effective interest method.
Subsequent to the closing of the 2030 Notes offering, the 2026 Notes were redeemed, and the notes were considered extinguished as of July 26, 2021. Under the terms of the indenture governing the 2026 Notes, we paid the applicable premium of $10.8 million. Additionally, the unamortized debt issuance costs of $2.8 million relating to the 2026 Notes were written off in conjunction with the extinguishment of the 2026 Notes. The resulting loss on extinguishment of debt was $13.6 million and was recorded as part of income from continuing operations before income tax expense in the condensed consolidated statements of income and comprehensive income in 2021. Additionally, the cash payment of interest accrued to, but not including, the redemption date was accelerated to the redemption date.
Term Loan Facility
On December 13, 2022, we and certain of our subsidiaries entered into a new delayed-draw term loan credit agreement (the "Term Loan Credit Agreement") maturing on December 12, 2027 (the "Term Loan Maturity Date"). The Term Loan Credit Agreement provides for a senior secured five-year delayed-draw term loan facility of $250.0 million (the "Term Loan Facility"). Loans under the Term Loan Facility (the "Term Loans") will bear interest at a rate equal to, at our option, (1) the Adjusted Term SOFR Rate (as defined in the Term Loan Credit Agreement) plus an applicable margin of 2.25% or (2) an alternate base rate equal to the greatest of (i) the "Prime Rate" in the U.S. last quoted by The Wall Street Journal, (ii) 0.50% above the greater of the federal funds rate and the rate comprised of both overnight federal funds and overnight eurodollar transactions denominated in Dollars, (iii) 1.00% above the Adjusted Term SOFR Rate for a one month interest period and (iv) 1.00%, plus, in each case, an applicable margin of 1.25%, subject to, in each of cases (1) and (2), an agreed interest rate floor. The Term Loans are repayable in equal quarterly installments for
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
an annual aggregate amortization payment equal to 15% of the aggregate principal amount of the Term Loans, with the balance of the principal being due on the Term Loan Maturity Date.
The Term Loan Credit Agreement also includes a quarterly ticking fee of 25 basis points per annum payable to the lenders under the Term Loan Facility beginning on January 3, 2023 (the "Closing Date") in respect of the unutilized commitments thereunder. As a result of the incurrence of the Term Loans on the Closing Date such ticking fees were not (and shall not be) payable to the Lenders.
The Borrower also pays customary agency fees.
Obligations under the Term Loan Credit Agreement are fully and unconditionally guaranteed, jointly and severally, by us and by certain of our directly or indirectly wholly-owned subsidiaries organized in the United States and are secured by the equity in, and substantially all the assets of, such subsidiaries. The Term Loans were funded in an amount of $250.0 million and applied to finance a portion of the consideration payable in connection with the consummation of the Endura acquisition on January 3, 2023.
The Term Loan Credit Agreement contains restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge, (vi) incur additional debt and (vii) create liens. The Term Loan Credit Agreement includes certain exceptions and exemptions under the restricted payment, investment, dispositions, liens and indebtedness covenants.
The Term Loan Credit Agreement requires us to maintain at all times a total leverage ratio of no more than 4.50:1.00. The Term Loan Credit Agreement contains change of control provisions and certain customary affirmative covenants and events of default. As of January 1, 2023, we were in compliance with all covenants under the credit agreement governing the Term Loan Facility and there were no amounts outstanding.
ABL Facility
On January 31, 2019, we and certain of our subsidiaries entered into a $250.0 million asset-based revolving credit facility (the "ABL Facility") maturing on January 31, 2024, which replaced the previous facility. On October 28, 2022, we and certain of our subsidiaries entered into an amendment which, among other things, (i) increased the revolving credit commitments available thereunder by $100.0 million to an aggregate amount of $350.0 million and (ii) replaced the LIBOR-based interest rate applicable to borrowings thereunder in U.S. dollars with an interest rate based on the sum of (x) a "Term SOFR" rate published by the CME Group Benchmark Administration Limited (CBA) plus (y) 10 basis points ("Adjusted Term SOFR"). Additionally, on December 12, 2022, we entered into an amendment to the ABL Facility, which, among other things, extended the maturity of the ABL Facility from January 31, 2024 to December 12, 2027. The terms of the ABL Facility remained otherwise substantially unchanged. Obligations under the ABL Facility are secured by a first priority security interest in such accounts receivable, inventory and other related assets of Masonite and our subsidiaries. In addition, obligations under the ABL Facility are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by certain of our directly or indirectly wholly-owned subsidiaries.
Borrowings under the ABL Facility bear interest at a rate equal to, at our option, (i) the United States, Canadian or United Kingdom Base Rate (each as defined in the credit agreement relating to the ABL Facility, the "Amended and Restated Credit Agreement") plus a margin ranging from 0.25% to 0.50% per annum, or (ii) the Adjusted Term SOFR or BA Rate (each as defined in the Amended and Restated Credit Agreement), plus a margin ranging from 1.25% to 1.50% per annum. In addition to paying interest on any outstanding principal under the ABL Facility, a commitment fee is payable on the undrawn portion of the ABL Facility in an amount equal to 0.25% per annum of the average daily balance of unused commitments during each calendar quarter.
The ABL Facility contains various customary representations, warranties and covenants by us that, among other things, and subject to certain exceptions, restrict Masonite's ability and the ability of our subsidiaries to: (i) pay dividends on our common shares and make other restricted payments, (ii) make investments and acquisitions, (iii) engage in transactions with our affiliates, (iv) sell assets, (v) merge and (vi) create liens. The ABL Facility, among other things, (i) permits us to incur unlimited unsecured debt as long as such debt does not contain covenants or default provisions that are more restrictive than those contained in the ABL Facility, (ii) permits us to incur debt as long as the pro forma
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
secured leverage ratio is less than 4.5 to 1.0, and (iii) adds certain additional exceptions and exemptions under the restricted payment, investment and indebtedness covenants (including increasing the amount of certain debt permitted to be incurred under an existing exception). As of January 1, 2023, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $324.9 million under our ABL Facility and there were no amounts outstanding as of January 1, 2023.
10. Commitments and Contingencies
We may become involved from time-to-time in litigation and regulatory compliance matters incidental to our business, including employment and wage and hour claims, antitrust, tax, product liability, environmental, health and safety, commercial disputes, intellectual property, contracts and other matters arising out of the normal conduct of our business. Since litigation is inherently unpredictable and unfavorable resolutions can occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review and accrue for contingencies related to litigation and regulatory compliance matters, if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on current information, in the opinion of management, the ultimate resolution of these matters, individually or in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.
Antitrust Class Action Proceedings - Canada
On May 19, 2020, an intended class proceeding was commenced in the Province of Québec, Canada naming as defendants Masonite Corporation, Corporation Internationale Masonite, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing involving interior molded doors. The intended class proceeding seeks damages, punitive damages, and other relief. On December 22, 2020, the parties filed a motion with the court seeking to stay the proceeding.
On October 2, 2020, an intended class proceeding was commenced in the Federal Court of Canada naming as defendants Masonite International Corporation, Masonite Corporation, JELD-WEN, Inc., JELD-WEN Holding, Inc. and JELD-WEN of Canada, Ltd. The plaintiff alleges that the Masonite and JELD-WEN defendants engaged in anticompetitive conduct, including price-fixing involving interior molded doors. The intended class proceeding seeks damages, punitive damages, and other relief. The plaintiff served its certification record on March 31, 2021. The parties are waiting confirmation from the Federal Court of hearing dates in 2023 for a two-day certification hearing.
As of January 1, 2023, we have not accrued an expense in connection with this matter because, although an adverse outcome is reasonably possible, the amount or range of any potential loss cannot be reasonably estimated. This proceeding is at an early stage. While we intend to defend against these claims vigorously, there can be no assurance that the ultimate resolution of this litigation will not have a material, adverse effect on our consolidated financial condition, results of operations or cash flow.
11. Revenues
We derive our revenues primarily from the manufacture and delivery of doors and door components as performance obligations that arise from our contracts with customers are satisfied. Materially all of our revenues are generated from contracts with customers and the nature, timing and any uncertainty in the recognition of revenues are not affected by the type of good, customer or geographical region to which the performance obligation relates. Our contracts with our customers are generally in the form of purchase orders and the performance obligation arises upon receipt of the purchase order and agreement upon the transaction price. The performance obligations are satisfied at a point in time when control of the promised goods is transferred to the customer and payment terms vary from customer to customer. Payment terms are short-term, are customary for our industry and in some cases, early payment incentives are offered.
The transaction price recognized as revenue and accounts receivable is determined based upon a number of estimates, including:
•Incentive-based volume rebates, which are based on individual rebate agreements with our customers, as well as historical and expected performance of each individual customer,
•Estimated sales returns, which are based on historical returns as a percentage of revenues, and
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
•Adjustments for early payment discounts offered by us.
Contract assets are represented by our trade accounts receivable balances on the consolidated balance sheets, and are described in Note 3. Accounts Receivable. There were no other material contract assets or liabilities as of January 1, 2023, or January 2, 2022. Our warranties are assurance-type warranties and do not represent separate performance obligations to our customers. There were no material impairment losses related to contract assets during the years ended January 1, 2023, January 2, 2022, or January 3, 2021.
12. Share Based Compensation Plans
Share based compensation expense was $21.8 million, $16.0 million and $19.4 million for the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively. As of January 1, 2023, the total remaining unrecognized compensation expense related to share based compensation amounted to $27.1 million, which will be amortized over the weighted average remaining requisite service period of 1.7 years. Share based compensation expense is recognized using a graded-method approach, or to a lesser extent a straight-line approach, depending on the terms of the individual award, and is classified within selling, general and administration expenses in the consolidated statements of income and comprehensive income. All forfeitures are accounted for as they occur. All share based awards are settled through issuance of new shares of our common stock. The share based award agreements contain restrictions on sale or transfer other than in limited circumstances. All other transfers would cause the share based awards to become null and void.
Equity Incentive Plan
On March 10, 2021, the Board of Directors adopted the Masonite International Corporation 2021 Omnibus Incentive Equity Plan (the "2021 Equity Plan"), which was approved by our shareholders at the Annual General Meeting of Shareholders on May 13, 2021. The 2021 Equity Plan is effective for ten years from the date of approval. The aggregate number of common shares that can be issued with respect to equity awards under the 2021 Equity Plan cannot exceed 880,000 shares; plus the number of shares reserved for the 2012 Plan that is in excess of the number of shares related to outstanding grants; plus the number of shares subject to existing grants under the 2012 Plan that may expire or be forfeited or cancelled.
On July 12, 2012, the Board of Directors adopted the Masonite International Corporation 2012 Equity Incentive Plan, which was amended on June 21, 2013, by our Board of Directors, further amended and restated by our Board of Directors on February 23, 2015, and approved by our shareholders on May 12, 2015 (as amended and restated, the "2012 Plan").
The 2021 Equity Plan and the 2012 Plan ("the Plans") were adopted because the Board of Directors believes that long-term incentive awards granted under the Plans will help to attract, motivate and retain employees and non-employee directors, align employee and stockholder interests and encourage a performance-based culture built on employee stock ownership. The Plans permit us to offer eligible directors, employees and consultants cash and share-based incentives, including stock options, stock appreciation rights, restricted stock, other share-based awards (including restricted stock units) and cash-based awards. The Plans are effective for ten years from the date of its adoption. Awards granted under the Plans are at the discretion of the Human Resources and Compensation Committee of the Board of Directors. The Human Resources and Compensation Committee may grant any award under the Plans in the form of a performance award. The Plans may be amended, suspended or terminated by the Board at any time; provided, that any amendment, suspension or termination which impairs the rights of a participant is subject to such participant's consent and; provided further, that certain material amendments are subject to shareholder approval. As of January 1, 2023, there were 938,667 shares of common stock available for future issuance under the 2021 Equity Plan.
Deferred Compensation Plan
We offer to certain of our employees and directors a Deferred Compensation Plan ("DCP"). The DCP is an unfunded non-qualified deferred compensation plan that permits those certain employees and directors to defer a portion of their compensation to a future time. Eligible employees may elect to defer a portion of their base salary, bonus and/or restricted stock units and eligible directors may defer a portion of their director fees or restricted stock units. All contributions to the DCP on behalf of the participant are fully vested (other than restricted stock unit deferrals which
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
remain subject to the vesting terms of the applicable equity incentive plan) and placed into a grantor trust, commonly referred to as a "rabbi trust." Although we are permitted to make matching contributions under the terms of the DCP, we have not elected to do so. The DCP invests the contributions in diversified securities from a selection of investments and the participants choose their investments and may periodically reallocate the assets in their respective accounts. Participants are entitled to receive the benefits in their accounts upon separation of service or upon a specified date, with benefits payable as a single lump sum or in annual installments. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
Assets of the rabbi trust, other than Company stock, are recorded at fair value and included in other assets in the consolidated balance sheets. These assets in the rabbi trust are classified as trading securities and changes in their fair values are recorded in other (income) expense, net in the consolidated statements of income and comprehensive income. The liability relating to deferred compensation represents our obligation to distribute funds to the participants in the future and is included in other liabilities in the consolidated balance sheets. As of January 1, 2023, the liability and asset relating to deferred compensation had a fair value of $7.2 million and $7.0 million, respectively. As of January 2, 2022, the liability and asset relating to deferred compensation had a fair value of $8.9 million and $9.0 million, respectively. Any gain or loss relating to changes in the fair value of the deferred compensation liability is recognized in selling, general and administration expense in the consolidated statements of income and comprehensive income.
As of January 1, 2023, participation in the DCP is limited and no restricted stock awards have been deferred into the DCP.
Stock Appreciation Rights
We have granted Stock Appreciation Rights ("SARs") to certain employees, which entitle the recipient to the appreciation in value of a number of common shares over the exercise price over a period of time, each as specified in the applicable award agreement. The exercise price of any SAR granted may not be less than the fair market value of our common shares on the date of grant. The compensation expense for the SARs is measured based on the fair value of the SARs at the date of grant and is recognized over the requisite service period. The SARs vest over a maximum of four years, have a life of ten years and settle in common shares. It is assumed that all time-based SARs will vest.
The total fair value of SARs vested was $0.8 million, $0.8 million and $1.0 million, in the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.
Twelve Months Ended January 1, 2023 Stock Appreciation Rights Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Average Remaining Contractual Life (Years)
Outstanding, beginning of period 158,725 $ 7,324 $ 71.81 7.5
Granted 33,803 88.43
Exercised (4,580) 169 56.51
Forfeited (3,743) 96.15
Outstanding, end of period 184,205 $ 2,153 $ 74.75 7.0
Exercisable, end of period 124,842 $ 2,118 $ 66.14 6.3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Twelve Months Ended January 2, 2022 Stock Appreciation Rights Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Average Remaining Contractual Life (Years)
Outstanding, beginning of period 207,094 $ 7,409 $ 62.56 7.5
Granted 28,707 107.68
Exercised (69,223) 4,305 57.79
Forfeited (7,853) 82.76
Outstanding, end of period 158,725 $ 7,324 $ 71.81 7.5
Exercisable, end of period 81,474 $ 4,451 $ 63.32 6.9
Twelve Months Ended January 3, 2021 Stock Appreciation Rights Aggregate Intrinsic Value (in thousands) Weighted Average Exercise Price Average Remaining Contractual Life (Years)
Outstanding, beginning of period 404,447 $ 7,615 $ 53.62 4.7
Granted 32,435 83.39
Exercised (209,793) 7,033 48.59
Forfeited (19,995) 62.10
Outstanding, end of period 207,094 $ 7,409 $ 62.56 7.5
Exercisable, end of period 94,883 $ 3,736 $ 58.97 6.4
The value of SARs granted in the year ended January 1, 2023, as determined using the Black-Scholes-Merton valuation model, was $0.9 million and is expected to be recognized over the average requisite service period of 2.0 years. Expected volatility is based upon the historical volatility of our common shares amongst other considerations. The expected term is calculated based on historical employee behavior and the contractual term of the options amongst other considerations. The weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:
2022 Grants
2021 Grants
2020 Grants
SAR value (model conclusion) $ 26.52 $ 28.08 $ 20.56
Risk-free rate 2.0 % 0.8 % 1.2 %
Expected dividend yield 0.0 % 0.0 % 0.0 %
Expected volatility 26.5 % 25.2 % 22.6 %
Expected term (years) 6.0 6.0 6.0
Restricted Stock Units
We have granted Restricted Stock Units ("RSUs") to directors and certain employees under the 2021 Equity Plan and the 2012 Plan. The RSUs confer the right to receive shares of our common stock at a specified future date or when certain conditions are met. The compensation expense for the RSUs awarded is based on the fair value of the RSUs at the date of grant, which is equal to the stock price on the date of grant, and is recognized over the requisite service period. The RSUs vest over a maximum of three years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be delivered once the blackout restriction has been lifted. It is assumed that all time-based RSUs will vest.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Total Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value Total Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value Total Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding, beginning of period 291,925 $ 88.66 319,675 $ 68.33 318,520 $ 58.89
Granted 216,774 88.22 142,540 111.02 154,332 79.66
Delivered (138,682) 78.51 (116,663) 66.40 (115,340) 60.30
Withheld to cover (1)
(23,319) (24,471) (16,234)
Forfeited (32,945) 95.83 (29,156) 82.85 (21,603) 58.15
Outstanding, end of period 313,753 $ 92.85 291,925 $ 88.66 319,675 $ 68.33
____________
(1) A portion of the vested RSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
RSUs granted during the year ended January 1, 2023, vest at specified future dates with only service requirements. The value of RSUs granted in the year ended January 1, 2023, was $19.1 million and is being recognized over the weighted average requisite service period of 1.9 years. During the year ended January 1, 2023, 162,001 RSUs vested at a fair value of $12.7 million.
Performance-based Restricted Stock Units
We have granted certain Performance-based Restricted Stock Units ("PRSUs") under the 2021 Equity Plan and the 2012 Plan. These PRSUs are settled with payouts ranging from zero to 200% of the target award value depending on performance goal achievement. The compensation expense for the PRSUs awarded is based on the fair value of the PRSUs at the date of grant, which is equal to the stock price on the date of grant, and is recognized over the requisite service period. The PRSUs vest over a maximum of three years and call for the underlying shares to be delivered no later than 30 days following the vesting date unless the participant is subject to a blackout period. In such case, the shares are to be delivered once the blackout restriction has been lifted.
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Total Performance Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value Total Performance Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value Total Performance Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding, beginning of period 150,181 $ 84.47 168,382 $ 67.80 204,687 $ 60.66
Granted 211,251 88.37 59,728 109.25 64,611 79.83
Performance adjustment (1)
25,234 57.19 14,474 63.05 (59,936) 67.50
Delivered (52,265) 57.19 (60,252) 63.05 - -
Withheld to cover (2)
(11,809) (9,518) -
Forfeited (11,914) 94.50 (22,633) 78.20 (40,980) 51.51
Outstanding, end of period 310,678 $ 90.15 150,181 $ 84.47 168,382 $ 67.80
____________
(1) PRSUs are presented as outstanding, granted and forfeited in the table above assuming targets are met and the awards pay out at 100%. These awards are settled with payouts ranging from zero to 200% of the target award value depending on performance goal achievement. The performance adjustment represents the difference in shares ultimately awarded due to performance attainment above or below target.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(2) A portion of the vested PRSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.
PRSUs granted during the year ended January 1, 2023, vest at specified future dates based on both performance and service requirements. The value of PRSUs granted in the year ended January 1, 2023, was $18.7 million and is being recognized over the weighted average requisite service period of 3.0 years. During the year ended January 1, 2023, 64,074 PRSUs vested at a fair value of $3.7 million.
13. Restructuring Costs
Over the past several years, we have engaged in a series of restructuring programs related to exiting certain geographies and non-core businesses, consolidating certain internal support functions and engaging in other actions designed to reduce our cost structure and improve productivity. These initiatives primarily consist of severance actions and plant closure costs. Management continues to evaluate our business; therefore, in future years, there may be additional provisions for new plan initiatives, as well as changes in previously recorded estimates, as payments are made or actions are completed. Asset impairment charges were also incurred in connection with these restructuring actions for certain assets sold, abandoned or made obsolete as a result of these programs.
In December 2022, we began implementing a plan to improve overall business performance that includes the optimization of our manufacturing capacity and reduction of our overhead and selling, general and administration workforce primarily in our North American Residential reportable segment as well as actions in the Architectural reportable segment and in our head offices (collectively, the "2022 Plan"). The optimization of our manufacturing capacity involves specific plants in the North American Residential segment and costs associated with the closure of these plants and related headcount reductions. Costs associated with the 2022 Plan include severance and closure charges and will continue through 2023. As of January 1, 2023, we expect to incur approximately $13 million to $18 million of additional charges related to the 2022 Plan.
In May 2021, we initiated further actions to improve overall business performance including the reorganization of our specialty door manufacturing capacity in our Architectural reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the reorganization of these facilities, which resulted in the closure of one existing stile and rail facility and related headcount reductions beginning in the second quarter of 2021 (collectively, the "2021 Plan"). Costs associated with the 2021 Plan include severance and closure charges and continued through 2021.
In November 2020, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce primarily in our Architectural reportable segment as well as limited actions in the North American Residential reportable segment. The reorganization of our manufacturing capacity involves specific facilities in the Architectural segment and costs associated with the closure of these facilities and related headcount reductions began taking place in the fourth quarter of 2020 (collectively, the "2020 Plan"). Costs associated with the 2020 Plan include severance and closure charges and continued through 2021.
In February 2019, we began implementing a plan to improve overall business performance that includes the reorganization of our manufacturing capacity and a reduction of our overhead and selling, general and administration workforce across all of our reportable segments and in our head offices. The reorganization of our manufacturing capacity involves specific plants in the North American Residential and Architectural segments and costs associated with the closure of these plants and related headcount reductions began taking place in the first quarter of 2019 (collectively, the "2019 Plan"). Costs associated with the 2019 Plan include severance, retention and closure charges and continued through 2021. Additionally, the plan to divest non-core assets was determined to be a triggering event requiring a test of the carrying value of the definite-lived assets relating to the divestitures, as further described in Note 14. In the fourth quarter of 2019, we initiated additional restructuring actions related to both manufacturing capacity and reduction of our overhead and selling, general and administration workforce.
During the fourth quarter of 2018, we began implementing a plan to reorganize and consolidate certain aspects of our United Kingdom head office function and optimize our portfolio by divesting non-core assets to enable more
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
effective and consistent business processes in the Europe segment. In addition, in the North American Residential segment we announced a new facility that will optimize and expand capacity through increased automation, which resulted in the closure of one existing facility and related headcount reductions beginning in the second quarter of 2019 (collectively, the "2018 Plan"). Costs associated with the 2018 Plan included severance, retention and closure charges and continued throughout 2019.
As of January 1, 2023, we do not expect to incur any material future charges related to the 2021 Plan, 2020 Plan, 2019 Plan or 2018 Plan.
The following table summarizes the restructuring charges recorded for the periods indicated:
Year Ended January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
2022 Plan $ 2,131 $ - $ - $ - $ 2,131
2021 Plan - - 17 - 17
2020 Plan - - 62 16 78
2019 Plan (395) - - 73 (322)
Total Restructuring Costs $ 1,736 $ - $ 79 $ 89 $ 1,904
Year Ended January 2, 2022
(In thousands) North American Residential Europe Architectural Corporate & Other Total
2021 Plan $ - $ - $ 1,666 $ - $ 1,666
2020 Plan 23 - 3,499 23 3,545
2019 Plan (172) - - 528 356
Total Restructuring Costs $ (149) $ - $ 5,165 $ 551 $ 5,567
Year Ended January 3, 2021
(In thousands) North American Residential Europe Architectural Corporate & Other Total
2020 Plan $ 29 $ - $ 1,733 $ - $ 1,762
2019 Plan 3,863 (37) 1,165 1,048 6,039
2018 Plan 435 - - - 435
Total Restructuring Costs $ 4,327 $ (37) $ 2,898 $ 1,048 $ 8,236
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cumulative Amount Incurred Through
January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
2022 Plan $ 2,131 $ - $ - $ - $ 2,131
2021 Plan - - 1,683 - 1,683
2020 Plan 52 - 5,294 39 5,385
2019 Plan 8,755 359 1,671 2,668 13,453
Total Restructuring Costs $ 10,938 $ 359 $ 8,648 $ 2,707 $ 22,652
The changes in the accrual for restructuring by activity were as follows for the periods indicated:
(In thousands) January 2,
2022 Severance Closure Costs Cash Payments January 1,
2022 Plan $ - $ 143 $ 1,988 $ (2,131) $ -
2021 Plan 25 (26) 43 (42) -
2020 Plan 22 (35) 113 (100) -
2019 Plan 2 31 (353) 320 -
Total $ 49 $ 113 $ 1,791 $ (1,953) $ -
(In thousands) January 3,
2021 Severance Closure Costs Cash Payments January 2,
2021 Plan $ - $ 513 $ 1,153 $ (1,641) $ 25
2020 Plan 1,492 264 3,281 (5,015) 22
2019 Plan 291 175 181 (645) 2
Total $ 1,783 $ 952 $ 4,615 $ (7,301) $ 49
(In thousands) December 29,
2019 Severance Closure Costs Cash Payments January 3,
2020 Plan $ - $ 1,506 $ 256 $ (270) $ 1,492
2019 Plan 1,535 1,752 4,287 (7,283) 291
2018 Plan - 163 272 (435) -
Total $ 1,535 $ 3,421 $ 4,815 $ (7,988) $ 1,783
14. Asset Impairment
During the year ended January 2, 2022, we recognized asset impairment charges of $69.9 million, of which $59.5 million related to a goodwill impairment charge in the Architectural reporting unit as a result of manufacturing constraints due to COVID-19 related absenteeism, material availability and production challenges and $10.4 million related to assets in the Architectural segment and an asset in the Corporate & Other category as a result of announced plant closures under the 2021 and 2020 Plans. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis and market approach, which utilizes Level 3 fair value inputs, and resulted in a goodwill impairment charge of $59.5 million. The charge represents the amount by which the carrying value of the Architectural reporting unit exceeded its fair value and reduced the goodwill balance in the Architectural reporting unit from $59.5 million to zero. The $10.4 million asset impairment charge was determined based upon the excess of the carrying values of property, plant and equipment over the respective fair values of such assets, determined using a discounted cash flows approach for each asset group. Each of these valuations was performed on a non-recurring basis and is categorized as having Level 3 valuation inputs as established by the FASB's Fair Value Framework. The Level 3
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
unobservable inputs include an estimate of future cash flows and the salvage value for each of the assets. The fair value of the assets was determined to be $6.3 million, compared to a book value of $16.7 million, with the difference representing the asset impairment charges recorded in the consolidated statements of income and comprehensive income.
During the year ended January 3, 2021, we recognized asset impairment charges of $51.5 million related to the Architectural reporting unit, as a result of continued decreased demand in the Architectural door market due to the impact of COVID-19 in the year, along with the uncertainty of the duration and intensity of the pandemic on the Architectural door market for future periods were indicators that goodwill impairment was present in the Architectural unit. The quantitative impairment test was conducted using multiple valuation techniques, including a discounted cash flow analysis and market approach, which utilizes Level 3 fair value inputs, and resulted in a goodwill impairment charge of $51.5 million. The charge represents the amount by which the carrying value of the Architectural reporting unit exceeded its fair value. The fair value of the reporting unit was determined to be $59.5 million, compared to a book value of $111.0 million, with the difference representing the asset impairment charge recorded in the consolidated statements of income and comprehensive income.
15. Income Taxes
For financial reporting purposes, income before income taxes includes the following components:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Income before income tax expense:
Canada $ 78,768 $ 44,935 $ 54,355
Foreign 211,429 99,031 47,945
Total income before income tax expense $ 290,197 $ 143,966 $ 102,300
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income tax expense for income taxes consists of the following:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Current income tax expense:
Canada $ 15,266 $ 9,392 $ 8,283
Foreign 50,463 30,499 30,413
Total current income tax expense: 65,729 39,891 38,696
Deferred income tax expense (benefit):
Canada 7,931 3,626 (235)
Foreign (1,907) 1,255 (9,850)
Total deferred income tax expense (benefit): 6,024 4,881 (10,085)
Income tax expense $ 71,753 $ 44,772 $ 28,611
The Canadian statutory rate (inclusive of provincial rates) is 26.1%, 26.5% and 26.5% for the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively. A summary of the differences between expected income tax expense calculated at the Canadian statutory rate and the reported consolidated income tax expense (benefit) is as follows:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Income tax expense computed at statutory income tax rate $ 75,829 $ 38,137 $ 27,130
Foreign rate differential (10,045) (12,370) (4,900)
Permanent differences (2,012) 3,843 (1,286)
Disposal of subsidiaries 287 1,651 493
Income attributable to a permanent establishment (6,517) 2,608 2,253
Change in valuation allowance 5,202 1,569 (9,271)
Income tax credits 2,673 (5,591) (1,831)
Change in tax rate 1,120 2,706 883
Goodwill impairment - 11,296 7,965
Limitation on executive compensation 2,273 1,904 2,209
Withholding and other taxes 2,100 1,761 2,435
Nondeductible interest 1,970 - 1,714
Other (1,127) (2,742) 817
Income tax expense $ 71,753 $ 44,772 $ 28,611
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are presented below:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Deferred tax assets:
Non-capital loss carryforwards $ 12,525 $ 11,142
Capital loss carryforwards 7,753 6,740
Deferred interest expense 9,052 12,518
Accruals and reserves currently not deductible for tax purposes 20,268 18,208
Share based compensation 4,887 4,456
Income tax credits 872 5,466
Lease right-of-use assets 53,985 57,735
Capitalized research and development 5,732 -
Other 2,031 1,319
Total deferred tax assets 117,105 117,584
Valuation allowance (14,102) (10,286)
Total deferred tax assets, net of valuation allowance 103,003 107,298
Deferred tax liabilities:
Plant and equipment (86,337) (77,807)
Intangibles (21,043) (23,147)
Basis difference in subsidiaries (7,469) (7,488)
Unrealized foreign exchange loss (gain) 1,850 (287)
Lease liabilities (48,889) (52,955)
Other (4,572) (2,786)
Total deferred tax liabilities (166,460) (164,470)
Net deferred tax liability $ (63,457) $ (57,172)
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.
As of January 1, 2023, and January 2, 2022, a valuation allowance of $14.1 million and $10.3 million, respectively, has been established to reduce the deferred tax assets to an amount that is more likely than not to be realized. We have established valuation allowances on certain deferred tax assets resulting from loss carryforwards and other assets in Canada, Costa Rica and the United Kingdom.
The following is a rollforward of the valuation allowance for deferred tax assets:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Balance at beginning of period $ 10,286 $ 5,970 $ 15,569
Additions charged to expense and other 10,252 4,473 851
Deductions (6,436) (157) (10,450)
Balance at end of period $ 14,102 $ 10,286 $ 5,970
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The losses carried forward for tax purposes are available to reduce future taxable income by $47.2 million. We can apply these losses against future taxable income based on the period of expiration as follows:
(In thousands) Canada Other Foreign Total
2023-2028 $ - $ 3,237 $ 3,237
2029-2043 39,482 - 39,482
Indefinitely - 4,502 4,502
Total tax losses carried forward $ 39,482 $ 7,739 $ 47,221
We have outside basis differences, including undistributed earnings in our foreign subsidiaries. For those subsidiaries in which we are considered to be indefinitely reinvested, no provision for Canadian income or local country withholding taxes has been recorded. Upon reversal of the outside basis difference and/or repatriation of those earnings, in the form of dividends or otherwise, we may be subject to both Canadian income taxes and withholding taxes payable to the various foreign countries. For those subsidiaries where the earnings are not considered indefinitely reinvested, taxes have been accrued. The determination of the unrecorded deferred tax liability for temporary differences related to investments in foreign subsidiaries that are considered to be indefinitely reinvested is not considered practicable.
As of January 1, 2023, and January 2, 2022, our unrecognized tax benefits were $7.7 million and $7.6 million, respectively, excluding interest and penalties. The unrecognized tax benefits would favorably impact the effective tax rate if the tax benefits were recognized. The unrecognized tax benefits are recorded in other long-term liabilities and as a reduction to related long-term deferred income taxes in the consolidated balance sheets. The changes to our unrecognized tax benefits were as follows:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Unrecognized tax benefit at beginning of period $ 7,592 $ 8,108 $ 8,156
Gross increases in tax positions in current period 151 103 62
Gross decreases in tax positions in prior period (173) (108) (110)
Gross increases in tax positions in prior period 110 - 1
Lapse of statute of limitations - (511) (1)
Unrecognized tax benefit at end of period $ 7,680 $ 7,592 $ 8,108
We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. During the years ended January 1, 2023, January 2, 2022, and January 3, 2021, we recorded accrued interest of $0.6 million, $0.4 million and $0.6 million, respectively. Additionally, we have recognized a liability for accumulated penalties of $0.3 million, $0.3 million and $0.3 million, and accumulated interest of $3.1 million, $2.8 million and $3.1 million, respectively. The interest and penalties accrued related to unrecognized tax benefits would also favorably impact the effective tax rate if those benefits were recognized.
We estimate that the amount of unrecognized tax benefits will not significantly increase or decrease within the 12 months following the reporting date.
We are subject to taxation in Canada, the United States and other foreign jurisdictions. As of January 1, 2023, we are no longer subject to Canadian income tax examination for years prior to 2018. Additionally, we are no longer subject to U.S. federal tax examinations for years prior to 2019. To the extent that income tax attributes such as net operating losses and tax credits have been carried forward from years prior to 2019, those attributes can still be audited when utilized on returns subject to audit. In state and local jurisdictions, we are no longer subject to income tax examination for years prior to 2016.
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 ("IRA") into law. The IRA includes several changes to existing tax law, including a minimum tax on adjusted financial statement income of applicable corporations and an excise tax on certain corporate stock buybacks. The tax provisions included in the IRA
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
are generally effective beginning January 1, 2023, and no significant impact to the consolidated financial statements is anticipated. Management continues to review the IRA tax provisions to assess impacts to our future consolidated financial statements.
16. Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing earnings attributable to Masonite by the weighted average number of our common shares outstanding during the period. Diluted EPS is calculated by dividing earnings attributable to Masonite by the weighted average number of common shares plus the incremental number of shares issuable from non-vested and vested RSUs and SARs outstanding during the period.
Year Ended
(In thousands, except share and per share information) January 1, 2023 January 2, 2022 January 3, 2021
Net income attributable to Masonite $ 214,233 $ 94,501 $ 69,037
Shares used in computing basic earnings per share 22,532,722 24,176,846 24,569,727
Effect of dilutive securities:
Incremental shares issuable under share compensation plans 239,743 385,687 373,451
Shares used in computing diluted earnings per share 22,772,465 24,562,533 24,943,178
Basic earnings per common share attributable to Masonite $ 9.51 $ 3.91 $ 2.81
Diluted earnings per common share attributable to Masonite $ 9.41 $ 3.85 $ 2.77
Anti-dilutive instruments excluded from diluted earnings per common share 223,968 28,707 215,563
The weighted average number of shares outstanding utilized for the diluted EPS calculation contemplates the exercise of all currently outstanding SARs and the conversion of all RSUs. The dilutive effect of such equity awards is calculated based on the weighted average share price for each fiscal period using the treasury stock method.
The Company's Board of Directors has approved five share repurchase authorizations, the most recent being an incremental $200.0 million share repurchase program approved on February 21, 2022. In addition, the Company announced that its Board of Directors authorized it to enter into an accelerated share repurchase ("ASR") transaction as part of the new share repurchase program. The Company entered into an ASR transaction during the first quarter of 2022 with a third-party financial institution for the repurchase of $100.0 million of its outstanding common shares. At inception, pursuant to the agreement, the Company paid $100.0 million to the financial institution using cash on hand and received an initial delivery of 848,087 common shares on the same day. The final delivery of 319,678 common shares occurred in the second quarter. The $100.0 million ASR transaction was therefore completed in the second quarter with a total delivery of 1,167,765 common shares at a volume-weighted average price ("VWAP") per share minus an agreed upon discount totaling 85.63 per share. The cash paid was reflected as a reduction of equity at the initial delivery of shares and the number of shares outstanding were reduced at the dates of physical delivery.
17. Segment Information
Our management reviews net sales and Adjusted EBITDA (as defined below) to evaluate segment performance and allocate resources. Net assets are not allocated to the reportable segments. Adjusted EBITDA is a non-GAAP financial measure which does not have a standardized meaning under GAAP and is unlikely to be comparable to similar measures used by other companies. Adjusted EBITDA should not be considered as an alternative to either net income or operating cash flows determined in accordance with GAAP. Adjusted EBITDA is defined as net income (loss) attributable to Masonite adjusted to exclude the following items:
• depreciation;
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
• amortization;
• share based compensation expense;
• loss (gain) on disposal of property, plant and equipment;
• registration and listing fees;
• restructuring costs (benefit);
• asset impairment;
• loss (gain) on disposal of subsidiaries;
• interest expense (income), net;
• loss on extinguishment of debt;
• other expense (income), net;
• income tax expense (benefit);
• other items;
• loss (income) from discontinued operations, net of tax; and
• net income (loss) attributable to non-controlling interest.
The definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indenture governing the 2030 Notes and the 2028 Notes and the credit agreements governing the Term Loan Facility and the ABL Facility. Although Adjusted EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, it is used to evaluate and compare the operating performance of the segments and it is one of the primary measures used to determine employee incentive compensation. Intersegment sales are recorded using market prices.
Certain information with respect to reportable segments is as follows for the periods indicated:
Year Ended January 1, 2023
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Sales $ 2,286,098 $ 282,989 $ 323,175 $ 20,293 $ 2,912,555
Intersegment sales (2,456) (2,220) (16,192) - (20,868)
Net sales to external customers $ 2,283,642 $ 280,769 $ 306,983 $ 20,293 $ 2,891,687
Adjusted EBITDA $ 461,750 $ 28,774 $ (3,748) $ (40,978) $ 445,798
Depreciation and amortization 42,958 21,061 12,374 11,902 88,295
Interest expense, net - - - 41,331 41,331
Income tax expense - - - 71,753 71,753
Year Ended January 2, 2022
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Sales $ 1,955,424 $ 342,172 $ 303,078 $ 20,014 $ 2,620,688
Intersegment sales (2,526) (7,640) (13,602) - (23,768)
Net sales to external customers $ 1,952,898 $ 334,532 $ 289,476 $ 20,014 $ 2,596,920
Adjusted EBITDA $ 374,452 $ 60,624 $ (2,704) $ (19,766) $ 412,606
Depreciation and amortization 39,504 23,825 14,620 14,033 91,982
Interest expense, net - - - 46,123 46,123
Income tax expense - - - 44,772 44,772
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended January 3, 2021
(In thousands) North American Residential Europe Architectural Corporate & Other Total
Sales $ 1,640,323 $ 260,834 $ 358,049 $ 19,947 $ 2,279,153
Intersegment sales (2,204) (2,721) (17,153) - (22,078)
Net sales to external customers $ 1,638,119 $ 258,113 $ 340,896 $ 19,947 $ 2,257,075
Adjusted EBITDA $ 347,822 $ 40,474 $ 34,201 $ (58,785) $ 363,712
Depreciation and amortization 37,705 23,732 17,735 12,601 91,773
Interest expense, net - - - 46,807 46,807
Income tax benefit - - - 28,611 28,611
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of our consolidated net income attributable to Masonite to Adjusted EBITDA is set forth as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Net income attributable to Masonite $ 214,233 $ 94,501 $ 69,037
Plus:
Depreciation 71,168 70,641 68,350
Amortization 17,127 21,341 23,423
Share based compensation expense 21,771 15,959 19,423
(Gain) loss on disposal of property, plant and equipment (378) 1,316 6,234
Restructuring costs 1,904 5,567 8,236
Asset impairment - 69,900 51,515
Loss on disposal of subsidiaries 850 8,590 2,091
Interest expense, net 41,331 46,123 46,807
Loss on extinguishment of debt - 13,583 -
Other (income) expense, net (5,001) 15,620 (5,217)
Income tax expense 71,753 44,772 28,611
Other items (1)
6,829 - 40,550
Net income attributable to non-controlling interest 4,211 4,693 4,652
Adjusted EBITDA $ 445,798 $ 412,606 $ 363,712
____________
(1) Other items include $6,829 in acquisition and due diligence related costs in the year ended January 1, 2023, and $40,550 in legal reserves related to the settlement of U.S. class action litigation in the year ended January 3, 2021, and were recorded in selling, general and administration expenses within the consolidated statements of income and comprehensive income.
We derive revenues from two major product lines: interior and exterior products. Additionally, we sell door components to external customers which are not otherwise consumed in our vertical operations. Sales for the product lines are summarized as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Net sales to external customers:
Interior products $ 1,871,103 $ 1,654,379 $ 1,479,196
Exterior products 892,945 813,605 647,241
Components 127,639 128,936 130,638
Total $ 2,891,687 $ 2,596,920 $ 2,257,075
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net sales information with respect to geographic areas exceeding 10% of consolidated net sales is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Net sales to external customers from facilities in:
United States $ 2,153,689 $ 1,776,180 $ 1,595,398
Canada 395,938 364,179 319,937
United Kingdom 259,944 300,008 218,382
Other 82,116 156,553 123,358
Total $ 2,891,687 $ 2,596,920 $ 2,257,075
In the years ended January 1, 2023, January 2, 2022, and January 3, 2021, net sales to The Home Depot, Inc., were $630.7 million, $491.5 million and $411.1 million, respectively, which are included in the North American Residential segment. No other individual customer's net sales exceeded 10% of consolidated net sales for any of the periods presented.
Geographic information regarding property, plant and equipment which exceed 10% of consolidated property, plant and equipment is as follows as of the dates indicated:
(In thousands) January 1, 2023 January 2, 2022
United States $ 443,105 $ 413,289
Other (1)
209,224 213,508
Total $ 652,329 $ 626,797
____________
(1) Except for the United States, property, plant and equipment in any single country was less than 10% of consolidated property, plant and equipment, net.
18. Employee Future Benefits
United States Defined Benefit Pension Plan
We had a defined benefit pension plan covering certain active and former employees in the United States ("U.S. Pension Plan"). Benefits under the plan were frozen at various times in the past. On December 9, 2020, the Board of Directors approved a resolution to terminate the U.S. Pension Plan and we initiated the process to terminate and annuitize the plan, which continued into 2021. During the fourth quarter of 2021, we completed balance sheet risk mitigation actions related to the U.S. Pension Plan and terminated the plan. In connection with the plan termination, we settled all future obligations under the U.S. Pension Plan through a combination of lump-sum payments to eligible participants who elected to receive them, and the transfer of any remaining benefit obligations to a third-party insurance company under a group annuity contract, which resulted in the settlement of liabilities to affected participants. As a result of these actions, we recognized a pre-tax pension settlement charge of $23.3 million in the fourth quarter of 2021, primarily comprised of the recognition of past actuarial losses. This charge is recorded within other (income) expense, net in the consolidated statements of income and comprehensive income. Information about the U.S. Pension Plan is as follows for the periods indicated:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Components of net periodic benefit cost:
Service cost $ - $ 331 $ 309
Interest cost - 1,516 2,183
Expected return on assets - (2,953) (5,328)
Amortization of actuarial net losses - 1,047 662
Settlement loss 23,343 -
Net pension expense (benefit) $ - $ 23,284 $ (2,174)
Information with respect to the assets, liabilities and net plan assets of the U.S. Pension Plan is set forth as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Pension assets:
Fair value of plan assets, beginning of year $ - $ 86,464
Company contributions - 5,550
Actual return on plan assets - (2,347)
Plan settlements - (84,573)
Benefits paid - (3,711)
Administrative expenses paid - (1,383)
Fair value of plan assets, end of year - -
Pension liability:
Accrued benefit obligation, beginning of year - 85,330
Current service cost - 331
Interest cost - 1,516
Plan settlements - (84,573)
Actuarial loss - 2,490
Benefits paid - (3,711)
Administrative expenses paid - (1,383)
Accrued benefit obligation, end of year - -
Net plan assets, end of year $ - $ -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the change in accumulated other comprehensive loss ("AOCL") is set forth as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Net actuarial loss $ - $ 7,790
Amortization of:
Curtailment recognition of prior service cost - (15)
Settlement recognition of net loss - (24,375)
Change in AOCL, pre-tax $ - $ (16,600)
The weighted average actuarial assumptions adopted in measuring our U.S. accrued benefit obligations and costs prior to termination were as follows for the periods indicated:
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Discount rate applied for:
Accrued benefit obligation - % 2.4 % 2.4 %
Net periodic pension cost - % 2.4 % 3.3 %
Expected long-term rate of return on plan assets - % 3.5 % 3.5 %
The rate of compensation increase for the accrued benefit obligation and net periodic pension costs for the U.S. Pension Plan is not applicable, as benefits under the plan are not affected by compensation increases.
The expected long-term rate of return on plan assets assumption was derived by taking into consideration the target plan asset allocation, historical rates of return on those assets, projected future asset class returns and net outperformance of the market by active investment managers. An asset return model was used to develop an expected range of returns on the plan investments over a 30-year period, with the expected rate of return selected from a best estimate range within the total range of projected results.
United Kingdom Defined Benefit Pension Plan
We have a defined benefit pension plan in the United Kingdom ("U.K. Pension Plan"), which has been curtailed in prior years. The measurement date used for the accounting valuation of the U.K. Pension Plan was January 1, 2023. Information about the U.K. Pension Plan is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Components of net periodic benefit cost:
Interest cost $ 504 $ 366 $ 536
Expected return on assets (934) (1,292) (1,021)
Amortization of actuarial net losses 22 289 340
Settlement loss - - 127
Net pension benefit $ (408) $ (637) $ (18)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
Information with respect to the assets, liabilities and net plan assets (accrued benefit obligation) of the U.K. Pension Plan is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Pension assets:
Fair value of plan assets, beginning of year $ 33,389 $ 31,222
Company contributions 2,021 1,376
Actual return on plan assets (13,071) 2,159
Benefits paid (1,006) (919)
Translation adjustment (3,251) (449)
Fair value of plan assets, end of year 18,082 33,389
Pension liability
Accrued benefit obligation, beginning of year 33,002 35,394
Interest cost 504 366
Actuarial gain (9,153) (1,431)
Benefits paid (1,006) (919)
Translation adjustment (3,276) (408)
Accrued benefit obligation, end of year 20,071 33,002
Net (accrued benefit obligation) plan assets, end of year $ (1,989) $ 387
There were $9.2 million of actuarial gains during fiscal year 2022 primarily as a result of a change in the discount rate from 1.83% to 4.81% driven by an increase in both government and corporate bond yields. There were $1.4 million of actuarial gains during fiscal year 2021 primarily as a result of a change in the discount rate from 1.27% to 1.83%. There were no material changes to any other key assumptions nor was there a significant demographic gain or loss.
Amounts deferred in AOCL is set forth for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Net actuarial loss $ 7,212 $ 2,794
Prior service cost 440 518
Total amount recognized in AOCL, pre-tax $ 7,652 $ 3,312
A reconciliation of the change in AOCL is set forth as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022
Net actuarial loss (gain) $ 4,852 $ (2,298)
Amortization of:
Prior service cost (22) (25)
Net actuarial loss from prior years - (264)
Translation adjustment (490) (22)
Change in AOCL, pre-tax $ 4,340 $ (2,609)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
The net plan assets are recorded within other assets in the consolidated balance sheets. Pension fund assets are invested primarily in equity and debt securities. Asset allocation between equity and debt securities and cash is adjusted based on the expected life of the plan and the expected retirement age of the plan participants. Information with respect to the amounts and types of securities that are held in the U.K. Pension Plan is set forth as follows for the periods indicated:
Year Ended
January 1, 2023 January 2, 2022
(In thousands) Amount % of Total Plan Amount % of Total Plan
Equity securities $ 3,740 20.7 % $ 8,327 24.9 %
Debt securities - - % - - %
Other 14,342 79.3 % 25,062 75.1 %
$ 18,082 100.0 % $ 33,389 100.0 %
Under the plan's investment policy and strategy, plan assets are invested to achieve a fully funded status based on actuarial calculations, maintain a level of liquidity that is sufficient to pay benefit and expense obligations when due, maintain flexibility in determining the future level of contributions and maximize returns within the limits of risk. The target asset allocation for plan assets in the U.K. Pension Plan for 2022 is 80% other securities and 20% equity securities. Other securities represent investments that are primarily invested in a mixture of debt and equity securities.
The weighted average actuarial assumptions adopted in measuring our U.K. accrued benefit obligations and costs were as follows for the periods indicated:
Year Ended
January 1, 2023 January 2, 2022 January 3, 2021
Discount rate applied for:
Accrued benefit obligation 4.8 % 1.8 % 1.3 %
Net periodic pension cost 1.7 % 1.0 % 1.0 %
Expected long-term rate of return on plan assets 3.0 % 4.1 % 4.1 %
The rate of compensation increase for the accrued benefit obligation and net pension cost for the U.K. Pension Plan is not applicable, as the plan was curtailed in prior years and benefits under the plan are not affected by compensation increases.
The expected long-term rate of return on plan assets assumption is derived by taking into consideration the target plan asset allocation, historical rates of return on those assets, projected future asset class returns and net outperformance of the market by active investment managers. An asset return model is used to develop an expected range of returns on the plan investments over a 10-year period, with the expected rate of return selected from a best estimate range within the total range of projected results.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of January 1, 2023, the estimated future benefit payments from the U.K. Pension Plan for the following future periods are set forth as follows:
(In thousands) Expected Future Benefit Payments
Fiscal year:
2023 $ 977
2024 1,079
2025 1,162
2026 1,120
2027 1,168
2028 through 2032 6,750
Total estimated future benefit payments $ 12,256
Expected contributions to the U.K. Pension Plan during 2023 are $2.0 million.
Overall Pension Obligation
For all periods presented, the U.S. and U.K. Pension Plans were invested in equity securities, equity funds, bonds, bond funds and cash and cash equivalents. All investments are publicly traded and possess a high level of marketability or liquidity. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.
The change in the net difference between the pension plan assets and projected benefit obligation that is not attributed to our recognition of pension expense or funding of the plan is recognized in other comprehensive (loss) income within the consolidated statements of income and comprehensive income and the balance of such changes is included in AOCL in the consolidated balance sheets.
Defined Contribution Benefit Plans
We have defined contribution benefit plans covering certain U.S. and foreign subsidiary employees subject to eligibility requirements set up in accordance with local statutory requirements. Contributions made to these plans were $16.1 million, $15.6 million and $13.7 million for the years ended January 1, 2023, January 2, 2022, and January 3, 2021, respectively.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Accumulated Other Comprehensive Loss and Other Comprehensive (Loss) Income
A rollforward of the components of accumulated other comprehensive loss is as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Accumulated foreign exchange losses, beginning of period $ (96,919) $ (93,684) $ (113,336)
Foreign currency translation (loss) gain (36,369) (6,719) 17,566
Income tax benefit on foreign currency translation (loss) gain 18 6 17
Cumulative translation adjustment recognized upon deconsolidation of subsidiaries 732 3,544 2,254
Less: foreign exchange (loss) gain attributable to non-controlling interest (537) 66 185
Accumulated foreign exchange losses, end of period (132,001) (96,919) (93,684)
Accumulated pension and other post-retirement adjustments, beginning of period (4,663) (18,379) (16,833)
Pension and other post-retirement adjustments (4,718) 2,250 (3,163)
Income tax (expense) benefit on pension and other post-retirement adjustments (858) (437) 851
Amortization of actuarial net losses 22 1,336 1,002
Income tax expense on amortization of actuarial net losses (6) (258) (236)
Pension settlement charges - 15,654 -
Income tax expense on pension settlement charges - (4,829) -
Accumulated pension and other post-retirement adjustments, end of period (10,223) (4,663) (18,379)
Accumulated other comprehensive loss $ (142,224) $ (101,582) $ (112,063)
Other comprehensive (loss) income, net of tax: $ (41,179) $ 10,547 $ 18,291
Less: other comprehensive (loss) income attributable to non-controlling interest (537) 66 185
Other comprehensive (loss) income attributable to Masonite $ (40,642) $ 10,481 $ 18,106
Cumulative translation adjustments are reclassified out of accumulated other comprehensive loss into loss on disposal of subsidiaries in the years ended January 1, 2023, and January 2, 2022, in the consolidated statements of income and comprehensive income. Actuarial net losses are reclassified out of accumulated other comprehensive loss into cost of goods sold in the consolidated statements of income and comprehensive income. Pension settlement charges are reclassified out of accumulated other comprehensive loss into other (income) expense, net, in the consolidated statements of income and comprehensive income.
Foreign currency translation losses as a result of translating our foreign assets and liabilities into U.S. dollars during the year ended January 1, 2023, were $36.4 million, primarily driven by weakening of the Pound Sterling, the Canadian dollar and the Euro in comparison to the U.S. dollar during the period.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. Supplemental Cash Flow Information
Certain cash and non-cash transactions were as follows for the periods indicated:
Year Ended
(In thousands) January 1, 2023 January 2, 2022 January 3, 2021
Transactions involving cash:
Interest paid $ 41,846 $ 42,703 $ 45,380
Interest received 2,783 250 1,110
Income taxes paid 77,500 40,506 24,336
Income tax refunds 1,596 875 805
Cash paid for operating lease liabilities 33,451 29,886 29,943
Cash paid for finance lease liabilities 1,359 1,470 1,393
Non-cash transactions from operating activities:
Right-of-use assets acquired under operating leases 9,307 49,703 51,381
The following reconciles total cash, cash equivalents and restricted cash as of the dates indicated:
January 1, 2023 January 2, 2022
Cash and cash equivalents $ 296,922 $ 381,395
Restricted cash 11,999 10,110
Total cash, cash equivalents and restricted cash $ 308,921 $ 391,505
Property, plant and equipment additions in accounts payable were $10.4 million and $10.7 million as of January 1, 2023, and January 2, 2022, respectively.
During the fourth quarter of 2018, we provided debt financing to a distribution company via an interest-bearing note that is scheduled to mature in 2028. The interest-bearing note receivable is carried at amortized cost, with the interest payable in kind at the election of the borrower. The note receivable balance was $12.6 million as of January 1, 2023, and January 2, 2022. The note receivable was recorded in the consolidated balance sheets as a component of prepaid expenses and other assets, and as a component of other assets as of January 1, 2023, and January 2, 2022, respectively. On January 26, 2023, the note receivable was redeemed and fully repaid.
21. Variable Interest Entity
As of January 1, 2023, and January 2, 2022, we held an interest in one variable interest entity ("VIE"), Magna Foremost Sdn Bhd, which is located in Bintulu, Malaysia. The VIE is integrated into our supply chain and manufactures door facings. We are the primary beneficiary of the VIE based on the terms of the existing supply agreement with the VIE. As primary beneficiary via the supply agreement, we receive a disproportionate amount of earnings on sales to third parties in relation to our voting interest, and as a result, receive a majority of the VIE’s residual returns. Sales to third parties did not have a material impact on our consolidated financial statements. We also have the power to direct activities of the VIE that most significantly impact the entity’s economic performance. As its primary beneficiary, we have consolidated the results of the VIE. Our net cumulative investment in the VIE was comprised of the following as of the dates indicated:
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands) January 1, 2023 January 2, 2022
Current assets $ 5,699 $ 9,057
Property, plant and equipment, net 8,056 8,573
Long-term deferred income taxes 1,170 1,023
Other assets 4,067 4,202
Current liabilities (1,396) (3,895)
Other long-term liabilities (4) (139)
Non-controlling interest (3,229) (3,803)
Net assets of the VIE consolidated by Masonite $ 14,363 $ 15,018
Current assets include $1.0 million and $4.9 million of cash and cash equivalents as of January 1, 2023, and January 2, 2022, respectively. Assets recognized as a result of consolidating this VIE do not represent additional assets that could be used to satisfy claims against our general assets. Furthermore, liabilities recognized as a result of consolidating these entities do not represent additional claims on our general assets; rather, they represent claims against the specific assets of the consolidated VIE.
22. Fair Value of Financial Instruments
The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable, income taxes receivable, accounts payable, accrued expenses and income taxes payable approximate fair value because of the short-term maturity of those instruments. The estimated fair values and carrying values of our long-term debt instruments were as follows for the periods indicated:
January 1, 2023 January 2, 2022
(In millions) Fair Value Carrying Value Fair Value Carrying Value
3.50% senior unsecured notes due 2030 $ 303,870 $ 371,136 $ 373,238 $ 370,593
5.375% senior unsecured notes due 2028 $ 462,495 $ 495,868 $ 526,730 $ 495,128
These estimates are based on market quotes and calculations based on current market rates available to us and are categorized as having Level 2 valuation inputs as established by the FASB’s Fair Value Framework. Market quotes used in these calculations are based on bid prices for our debt instruments and are obtained from and corroborated with multiple independent sources. The market quotes obtained from independent sources are within the range of management’s expectations.
23. Subsequent Events
Acquisition of Endura
On January 3, 2023, we completed the acquisition of 100% of the outstanding equity of EPI Holdings, Inc. ("Endura"), for approximately $375.0 million in cash. Endura is a leading innovator and manufacturer of high-performance door frames and door system components in the United States. Endura’s product offerings include engineered frames, self-adjusting sill systems, weather sealing, multi-point locks and installation accessories used by builders and contractors in residential new construction as well as repair and remodeling applications. The acquisition will allow us to accelerate our Doors That Do MoreTM strategy and maximize our growth potential. The acquisition will be accounted for as a business combination, with the goodwill being non-deductible for tax purposes.
Since the closing of the acquisition occurred subsequent to the Company's fiscal year end, the allocation of the purchase price to the underlying assets acquired and liabilities assumed is subject to a formal valuation process, which has not yet been completed. The major classes of assets acquired will include trade receivables, inventories, trade payables and goodwill and intangibles. Our 2023 operating results will include the results from Endura from the date of acquisition. Based on the timing of the acquisition and lack of available information, we determined it to be impracticable to disclose a preliminary purchase price allocation or proforma financial information at this time.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the year ended January 1, 2023, we recorded $6.8 million of acquisition and due diligence related costs. These costs were recorded in selling, general and administration expense within the consolidated statements of income and comprehensive income.
Term Loan Facility and ABL Facility
In connection with the acquisition of Endura on January 3, 2023, we borrowed $250.0 million under our Term Loan Facility and $100.0 million under our ABL Facility in order to fund a portion of the cash consideration paid. On February 3, 2023, we subsequently repaid $50.0 million of the outstanding borrowings under our ABL Facility. In the first quarter of 2023, we incurred $2.7 million of incremental debt issuance costs on our Term Loan Facility.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of the end of the period covered by this Annual Report, our disclosure controls and procedures were effective.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that certain controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of January 1, 2023, based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based upon our evaluation, management concluded that our internal control over financial reporting was effective as of January 1, 2023.
The effectiveness of our internal control over financial reporting as of January 1, 2023, has been audited by Ernst & Young, an independent registered public accounting firm, as stated in their report which is included below, and which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of January 1, 2023. See "Report of Independent Registered Public Accounting Firm" below.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recently completed quarter covered by this Annual Report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Masonite International Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Masonite International Corporation’s internal control over financial reporting as of January 1, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Masonite International Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of January 1, 2023, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Masonite International Corporation as of January 1, 2023 and January 2, 2022, the related consolidated statements of income and comprehensive income, changes in equity, and cash flows for each of the three fiscal years in the period ended January 1, 2023, and the related notes and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tampa, Florida
February 28, 2023

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Annual Meeting and Record Date. The Board of Directors has set the date of the 2023 Annual General Meeting of Shareholders and the related record date. The Annual General Meeting will be held on May 11, 2023, and the shareholders entitled to receive notice of and vote at the meeting will be the shareholders of record at the close of business on March 20, 2023.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
Some of the information required in response to this item with regard to directors is incorporated by reference into this Annual Report on Form 10-K from our definitive Proxy Statement for our 2023 Annual General Meeting of Shareholders (the "2023 Proxy Statement"). Such information will be included under the captions "Election of Directors," "Corporate Governance; Delinquent Section 16(a) Reports," "Corporate Governance; Board and Committee Matters-Corporate Governance Guidelines and Code of Ethics," "Corporate Governance; Board and Committee Matters-Board Structure and Director Independence" and "Corporate Governance; Board and Committee Matters-Board Committees; Membership-Audit Committee."
The following table sets forth information as of February 28, 2023, regarding each of our executive officers:
Name Age Positions
Howard C. Heckes 58 President and Chief Executive Officer and Director
Russell T. Tiejema 54 Executive Vice President and Chief Financial Officer
Christopher O. Ball 45 President, Global Residential
Victoria Philemon 50 Senior Vice President, General Manager, Europe
Alexander A. Legall 54 Senior Vice President, Business Leader, Architectural
Randal A. White 52 Senior Vice President, Global Operations and Supply Chain
James C. Pelletier 45 Senior Vice President, General Counsel and Corporate Secretary
Robert A. Paxton 49 Senior Vice President, Human Resources
Patrick D. Brisley 44 Vice President, Chief Accounting Officer
Biographies
The present principal occupations and recent employment history of each of the executive officers and directors listed above are as follows:
Howard C. Heckes, (age 58) has served as President and Chief Executive Officer of Masonite and as a Director of Masonite since June 2019. Mr. Heckes joined Masonite from Energy Management Collaborative where he served as Chief Executive Officer since 2017. From 2008 to 2017, Mr. Heckes served in a variety of operations roles at Valspar Corporation, now a subsidiary of The Sherwin-Williams Company, most recently overseeing Valspar's industrial coatings portfolio. Prior to joining Valspar, Mr. Heckes held various leadership roles at Newell Rubbermaid, including President of Sanford Brands and President of Graco Children's Products. Mr. Heckes is also a member of the Board of Directors of the AZEK Company Inc.
Russell T. Tiejema, (age 54) is Executive Vice President and Chief Financial Officer of Masonite. Mr. Tiejema joined Masonite in November 2015, from Lennox International, a global leader in the heating, ventilation, air conditioning and refrigeration industry, where he served as the Vice President of Finance and Chief Financial Officer of LII Residential, the largest reporting segment of Lennox International, since 2013. From 2011 to 2013, Mr. Tiejema served as the Vice President, Business Analysis & Planning, of Lennox International. Prior to joining Lennox in 2011, Mr. Tiejema spent 20 years with General Motors in a variety of financial leadership roles across a number of operating units and staffs, including Finance Director for GM Fleet & Commercial and Director of Financial Planning and Analysis.
Christopher O. Ball, (age 45) joined Masonite in September 2021 as President of the Global Residential Door Business. Prior to joining Masonite, Mr. Ball was with Cooper Tire & Rubber Company, a global manufacturer and marketer of consumer and commercial products, from 2018 to 2021, most recently serving as President - Americas, where he led the North American, Latin America and Global Commercial Truck business units. Prior to joining Cooper Tire, Mr. Ball held various roles at Whirlpool Corporation from 2003 to 2018, including leadership of sales and operations for the KitchenAid small appliance business and general management of the North America Laundry unit, Whirlpool's largest business.
Victoria Philemon, (age 50) has served as Masonite’s Senior Vice President, General Manager, Europe since August 2021. Prior to joining Masonite, Ms. Philemon was most recently Managing Director for Morphy Richards, a supplier of small appliances in the United Kingdom from 2017 to 2021. She also previously served in senior sales and marketing roles at Stanley Black & Decker from 2008 to 2016. Earlier in her career, Ms. Philemon held progressive leadership positions in sales.
Alexander A. Legall, (age 54) has served as Masonite’s Senior Vice President & Business Leader - Architectural since September 2020. Mr. Legall joined Masonite from Owens Corning, where he served in a variety of leadership roles with the company from 2012 to 2020, most recently as Vice President and General Manager of their North American Technical Insulation business from 2018 to 2020. Prior to joining Owens Corning, Mr. Legall was with Carrier Corporation for 18 years where he held multiple leadership roles both domestically and in Latin America.
Randal A. White, (age 52) joined Masonite in September 2017 as Senior Vice President, Global Operations and Supply Chain. Prior to joining Masonite, Mr. White was with Joy Global, Inc., a leading manufacturer of high productivity mining equipment now operating as Komatsu Mining, where he served in various operations and manufacturing roles since 2008, most recently serving as the Vice President Operations, Supply Chain, Quality and Operational Excellence (Lean) since 2014. Prior to joining Joy Global, Inc., Mr. White held various marketing and operational positions with Magnum Magnetics Inc. and Cooper Crouse-Hinds.
James C. Pelletier, (age 45) joined Masonite in April 2022 as the Senior Vice President, General Counsel and Secretary. Prior to joining Masonite, Mr. Pelletier was Senior Vice President, General Counsel and Secretary for Barnes Group Inc. from 2015 to 2022. Prior to joining Barnes Group Inc., Mr. Pelletier held corporate counsel positions as Associate Counsel with United Technologies Corporation from 2009 to 2015 and as Compliance Counsel for GE Aviation from 2007 to 2009. Mr. Pelletier began his career as an Associate with the law firm Orrick, Herrington, & Sutcliffe, LLP in Washington, D.C. and worked in the Office of the General Counsel at the U.S. Department of Commerce as an Attorney-Advisor within the Bureau of Industry and Security.
Robert A. Paxton, (age 49) has served as Masonite’s Senior Vice President, Human Resources since February 2018. Prior to joining Masonite, Mr. Paxton was with Owens Corning, a global developer and producer of insulation, roofing and fiberglass composites, where he served as Vice President, Human Resources and Vice President, Business Integration from May 2010 to February 2018. Prior to joining Owens Corning, he served as Senior Vice President, Human Resources of Broadwind Energy from 2008 to 2010. Prior to joining Broadwind, he served Whirlpool Corporation in various human resources leadership roles from 2002 to 2008, most recently serving as Vice President, Global Human Resources from 2007 to 2008. Mr. Paxton began his career with British Petroleum in 1995 to 2002.
Patrick D. Brisley, (age 44) has served as Masonite's Vice President, Chief Accounting Officer since June 2019 and joined Masonite as Corporate Controller in May 2015. Mr. Brisley is a Certified Public Accountant. Prior to joining Masonite, Mr. Brisley was a member of the assurance practice of PricewaterhouseCoopers working with clients in various industries and on technical matters such as initial public offerings, mergers and acquisitions as well as other U.S. GAAP and SEC requirements.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
Information required in response to this item is incorporated by reference into this Annual Report on Form 10-K from the 2023 Proxy Statement. Such information will be included in the 2023 Proxy Statement under the captions "Director Compensation", "Compensation Committee Report," "Executive Compensation" and "Corporate Governance; Board and Committee Matters-Compensation Interlocks and Insider Participation."

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required in response to this item is incorporated by reference into this Annual Report on Form 10-K from the 2023 Proxy Statement. Such information will be included in the 2023 Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance Under Equity Compensation Plans".

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required in response to this item is incorporated by reference into this Annual Report on Form 10-K from the 2023 Proxy Statement. Such information will be included under the captions "Corporate Governance;
Board and Committee Matters-Board Structure and Director Independence", "Corporate Governance; Board and Committee Matters-Board Committees; Membership" and "Certain Relationships and Related Party Transactions".

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
Information required in response to this item is incorporated by reference into this Annual Report on Form 10-K from the 2023 Proxy Statement. Such information will be included under the caption "Appointment of Independent Registered Public Accounting Firm".
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibit and Financial Statement Schedules
(a)
The following documents are filed as part of this Form 10-K:
Page No.
1. Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income and Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
All schedules have been omitted because they are not required, not applicable, not present in amounts sufficient to require submission of the schedule or the required information is otherwise included.
3. See "Index to Exhibits" below.
(b) The exhibits listed on the "Index to Exhibits" below are filed or furnished with this Form 10-K or incorporated by reference as set forth below.
(c) Additional Financial Statement Schedules
None.
INDEX TO EXHIBITS
The following is a list of all exhibits filed or furnished as part of this report:
Exhibit No. Description
2.1
Securities Purchase Agreement, dated as of November 2, 2022, by and among Masonite, Endura, Endura Stockholders, Endura Warrant Holders and Endura’s equityholders’ representative (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on November 3, 2022)
2.2
Amendment to the Securities Purchase Agreement, dated as of December 30, 2022, by and among Buyer, Masonite, Endura, Endura Stockholders, Endura Warrant Holders and Endura’s equityholders’ representative (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on January 3, 2023)
3.1
Amended and Restated Articles of Masonite International Corporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on February 26, 2015)
4.1
Indenture, dated as of July 26, 2021, by and among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, governing the 3.50% Senior Notes due 2030 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on July 27, 2021)
4.2
Form of 3.50% Senior Notes due 2030 (included in Exhibit 4.1)
4.3
Indenture, dated as of July 25, 2019, by and among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, governing the 5.375% Senior Notes due 2028 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on July 25, 2019)
4.4
Form of 5.375% Senior Notes due 2028 (included in Exhibit 4.3)
4.5
Transfer Agency and Registrar Services, dated July 1, 2013, between Masonite International Corporation and American Stock Transfer & Trust Company, LLC of New York (incorporated by reference to Exhibit 4.3(e) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on February 27, 2014)
4.6
Form of Second Amended and Restated Shareholders Agreement (incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on May 15, 2014)
Exhibit No. Description
4.7
Description of Securities (incorporated by reference to Exhibit 4.5 to the Company's Annual Report on Form 10-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 20, 2020)
10.1 #
Masonite International Corporation 2014 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on May 15, 2014)
10.2 #
Masonite International Corporation Deferred Compensation Plan, effective as of August 13, 2012 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form 10 (File No. 001-11796) filed with the Securities and Exchange Commission on August 19, 2013)
10.3(a) #
Masonite International Corporation 2021 Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2021)
10.3(b) #
Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan for United States Employees (May 2021) (incorporated by reference to Exhibit 10.2(a) to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2021)
10.3(c) #
Form of Performance Restricted Stock Unit Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan for United States Employees (May 2021) (incorporated by reference to Exhibit 10.2(b) to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2021)
10.3(d) #
Form of Stock Appreciation Rights Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan for United States Employees (May 2021) (incorporated by reference to Exhibit 10.2(c) to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2021)
10.3(e) #*
Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan for United States Directors (May 2021) (correcting Exhibit 10.2(d) to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2021)
10.3(f) #
Form of Performance Restricted Stock Unit Agreement pursuant to the Masonite International Corporation 2021 Omnibus Incentive Plan (August 2022) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q (File No. 011-11796) filed with the Securities and Exchange Commission on August 9, 2022)
10.3(g) #
Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on May 18, 2015)
10.3(h) #
Form of Stock Appreciation Rights Agreement pursuant to the Masonite International Corporation 2012 Equity Incentive Plan for United States Employees (incorporated by reference to Exhibit 10.3(d) to the Company's Registration Statement on Form 10 (File No. 001-11796) filed with the Securities and Exchange Commission on August 19, 2013)
10.3(i) #
Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Directors (2015) (incorporated by reference to Exhibit 10.3(m) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 2, 2016)
10.3(j) #
Form of Stock Appreciation Rights Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2016) (incorporated by reference to Exhibit 10.3(q) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 2, 2016)
10.3(k) #
Amendment No. 1 to Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan dated February 7, 2017 (incorporated by reference to Exhibit 10.3(s) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 1, 2017)
10.3(l) #
Form of Performance Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2017) (incorporated by reference to Exhibit 10.3(t) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 1, 2017)
10.3(m) #
Form of Stock Appreciation Rights Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2017) (incorporated by reference to Exhibit 10.3(u) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 1, 2017)
Exhibit No. Description
10.3(n) #
Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2017) (incorporated by reference to Exhibit 10.3(v) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on March 1, 2017)
10.3(o) #
Form of Stock Appreciation Rights Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2019) (incorporated by reference to Exhibit 10.3(v) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on February 26, 2019)
10.3(p) #
Form of Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2019) (incorporated by reference to Exhibit 10.3(w) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on February 26, 2019)
10.3(q) #
Form of Performance Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan for United States Employees (February 2019) (incorporated by reference to Exhibit 10.3(x) to the Company's Annual Report on Form 10-K (File No. 001-11796) filed with the Securities and Exchange Commission on February 26, 2019)
10.3(r) #
Restricted Stock Unit Agreement pursuant to the Masonite International Corporation Amended and Restated 2012 Equity Incentive Plan, dated as of May 24, 2019, by and between Masonite International Corporation and James A. Hair (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-11796) filed with the Securities and Exchange Commission on May 24, 2019)
10.4* #
2023 Masonite Incentive Plan (MIP) Plan Document
10.5(a) #
Amended and Restated Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Howard C. Heckes (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on January 4, 2022)
10.5(b) #
Amended and Restated Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Russell T. Tiejema (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on January 4, 2022)
10.5(c) #
Amended and Restated Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Robert E. Lewis (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on January 4, 2022)
10.5(d) #
Amended and Restated Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Randal A. White (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on January 4, 2022)
10.5(e) #
Amended and Restated Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Robert A. Paxton (incorporated by reference to Exhibit 10.4(e) to the Company's Annual Report on Form 10-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 22, 2022)
10.5(f)* #
Employment Agreement, dated as of December 31, 2021, by and between Masonite International Corporation and Christopher O. Ball
10.6 #
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form 10 (File No. 001-11796) filed with the Securities and Exchange Commission on August 19, 2013)
10.7(a)
Credit Agreement, dated as of December 13, 2022, among Masonite International Corporation, Masonite Corporation, the lenders from time to time party thereto and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on December 13, 2022)
Exhibit No. Description
10.7(b)
Second Amended and Restated Credit Agreement, dated as of January 31, 2019, among Masonite International Corporation, as Canadian borrower and parent borrower, Masonite Corporation and the other U.S. borrowers from time to time party thereto, as U.S. borrowers, Premdor Crosby Limited and the other U.K. borrowers from time to time party thereto, as U.K. Borrowers, the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent and letter of credit issuer, Bank of America, N.A., as a syndication agent, and Royal Bank of Canada, HSBC Bank USA, National Association, JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank and TD Bank, N.A., as co-documentation agents, Wells Fargo Bank, National Association, Bank of America, N.A., Royal Bank of Canada, and HSBC Bank USA, National Association, as joint lead arrangers and joint lead bookrunners (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
10.7(c)
Amendment No. 3 to the Second Amended and Restated Credit Agreement and Facility Increase Amendment, dated as of October 28, 2022, by and among Masonite, Masonite Corporation, Premdor Crosby Limited, each other subsidiary of Masonite party thereto, each lender party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on November 3, 2022)
10.7(d)
Amendment No. 4 to Second Amended and Restated Credit Agreement, dated as of December 12, 2022, by and among Masonite International Corporation, Masonite Corporation, Premdor Crosby Limited, each other subsidiary of Masonite party thereto, each lender party thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on December 13, 2022)
10.7(e)
Amended and Restated U.S. Security Agreement, dated as of January 31, 2019, among Masonite Corporation, the other U.S. Borrowers from time to time party thereto and Wells, the U.S. Guarantors from time to time party thereto, and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
10.7(f)
Amended and Restated Canadian Security Agreement, dated as of January 31, 2019, among Masonite International Corporation, as Canadian Borrower and the Canadian Subsidiary Guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Collateral Agent (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
10.7(g)
Amended and Restated U.S. Guaranty, dated as of January 31, 2019, among Masonite Corporation, the other U.S. Borrowers from time to time party thereto, the U.S. Subsidiary Guarantors from time to time party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 4.4 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
10.7(h)
Amended and Restated Canadian Guarantee, dated as of January 31, 2019, among Masonite International Corporation and the Canadian Subsidiary Guarantors from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 4.5 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
10.7(i)
Guarantee and Debenture, dated as of January 31, 2019, among Premdor Crosby Limited (and others as Chargors) and Wells Fargo Bank, National Association (as Agent) (incorporated by reference to Exhibit 4.6 to the Company's Current Report on Form 8-K (File No. 011-11796) filed with the Securities and Exchange Commission on February 6, 2019)
21.1*
Subsidiaries of the Registrant
23.1*
Consent of Ernst & Young LLP, an Independent Registered Public Accounting Firm
31.1*
Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit No. Description
101* Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) the Registrant's Consolidated Statements of Income and Comprehensive Income for the years ended January 1, 2023, January 2, 2022, and January 3, 2021; (ii) the Registrant's Consolidated Balance Sheets as of January 1, 2023, and January 2, 2022; (iii) the Registrant's Consolidated Statements of Changes in Equity for the years ended January 1, 2023, January 2, 2022, and January 3, 2021; (iv) the Registrant's Consolidated Statements of Cash Flows for the years ended January 1, 2023, and January 2, 2022; and (v) the notes to the Registrant's Consolidated Financial Statements
104* Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
# Denotes management contract or compensatory plan.