MASONITE INTERNATIONAL CORP - Quarter Report: 2021 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________

FORM 10-Q

____________________________

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-11796

____________________________

Masonite International Corporation

(Exact name of registrant as specified in its charter)

____________________________


British Columbia, Canada						98-0377314
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

2771 Rutherford Road

Concord, Ontario L4K 2N6 Canada

(Address of principal executive offices)

(800) 895-2723

(Registrant's telephone number, including area code)

____________________________


Securities registered pursuant to Section 12(b) of the Act:
Common Stock (no par value)	DOOR	New York Stock Exchange
(Title of class)	(Trading symbol)	(Name of exchange on which registered)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

The registrant had outstanding 23,778,958 shares of Common Stock, no par value, as of November 5, 2021.

MASONITE INTERNATIONAL CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

October 3, 2021



PART I		Page
Item 1	Unaudited Financial Statements
	Condensed Consolidated Statements of Comprehensive Income (Loss)	1
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Changes in Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to the Condensed Consolidated Financial Statements	5
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4	Controls and Procedures	37
PART II
Item 1	Legal Proceedings	38
Item 1A	Risk Factors	38
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3	Defaults Upon Senior Securities	39
Item 4	Mine Safety Disclosures	39
Item 5	Other Information	39
Item 6	Exhibits	40

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws, including, without limitation, statements concerning the conditions in our industry, our operations, our economic performance and financial condition, including, in particular, statements relating to our business and growth strategy and product development efforts under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "might," "could," "will," "would," "should," "expect," "believes," "outlook," "predict," "forecast," "objective," "remain," "anticipate," "estimate," "potential," "continue," "plan," "project," "targeting," and other similar expressions. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. These forward-looking statements are based on estimates and assumptions by our management that, although we believe to be reasonable, are inherently uncertain and subject to a number of risks and uncertainties. These risks and uncertainties include, without limitation, those identified under "Risk Factors" in our Annual Report on Form 10-K for the year ended January 3, 2021, subsequent reports on Form 10-Q, and elsewhere in this Quarterly Report.

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

•downward trends in our end markets and in economic conditions;

•reduced levels of residential new construction; residential repair, renovation and remodeling; and non-residential building construction activity due to increases in mortgage rates, changes in mortgage interest deductions and related tax changes and reduced availability of financing;

•competition;

•the continued success of, and our ability to maintain relationships with, certain key customers in light of customer concentration and consolidation;

•our ability to accurately anticipate demand for our products including seasonality;

•scale and scope of the coronavirus ("COVID-19") pandemic and its impact on our operations, customer demand and supply chain, including any adverse effects of the U.S. government's COVID-19 vaccine mandates;

•increases in prices of raw materials and fuel;

•tariffs and evolving trade policy and friction between the United States and other countries, including China, and the impact of anti-dumping and countervailing duties;

•increases in labor costs, the availability of labor or labor relations (i.e., disruptions, strikes or work stoppages);

•our ability to manage our operations including potential disruptions, manufacturing realignments (including related restructuring charges) and customer credit risk;

•product liability claims and product recalls;

•our ability to generate sufficient cash flows to fund our capital expenditure requirements, to meet our pension obligations and to meet our debt service obligations, including our obligations under our senior notes and our asset-based revolving credit facility ("ABL Facility");

•limitations on operating our business as a result of covenant restrictions under our existing and future indebtedness, including our senior notes and ABL Facility;

•fluctuating foreign exchange and interest rates;

•our ability to replace our expiring patents and to innovate, keep pace with technological developments and successfully integrate acquisitions;

•the continuous operation of our information technology and enterprise resource planning systems and management of potential cyber security threats and attacks;

•political, economic and other risks that arise from operating a multinational business;

•uncertainty relating to the United Kingdom's exit from the European Union;

•retention of key management personnel; and

•environmental and other government regulations, including the United States Foreign Corrupt Practices Act ("FCPA"), and any changes in such regulations.

We caution you that the foregoing list of important factors is not all-inclusive. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Quarterly Report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

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The Company may use its website and/or social media outlets, such as LinkedIn, as distribution channels of material company information. Financial and other important information regarding the Company is routinely posted on and accessible through the Company’s website at http://investor.masonite.com and its LinkedIn page at https://www.linkedin.com/company/masonitedoors/mycompany/. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” section at http://investor.masonite.com.

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PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands of U.S. dollars, except per share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Net sales	$	652,208	$	587,652	$	1,960,955	$	1,638,538
Cost of goods sold	498,103		427,331		1,483,870		1,207,582
Gross profit	154,105		160,321		477,085		430,956
Selling, general and administration expenses	76,632		118,354		242,774		272,077
Restructuring costs	1,311		1,895		5,146		4,984
Asset impairment	—		51,515		10,374		51,515
Loss on disposal of subsidiaries	—		—		8,590		2,091
Operating income (loss)	76,162		(11,443)		210,201		100,289
Interest expense, net	11,349		11,805		35,213		34,911
Loss on extinguishment of debt	13,583		—		13,583		—
Other (income) expense, net	(1,471)		(1,953)		(4,400)		(3,350)
Income (loss) before income tax expense	52,701		(21,295)		165,805		68,728
Income tax expense (benefit)	13,854		(804)		42,713		23,522
Net income (loss)	38,847		(20,491)		123,092		45,206
Less: net income attributable to non-controlling interests	1,156		1,275		3,374		3,090
Net income (loss) attributable to Masonite	$	37,691	$	(21,766)	$	119,718	$	42,116

Basic earnings (loss) per common share attributable to Masonite	$	1.57	$	(0.89)	$	4.92	$	1.71
Diluted earnings (loss) per common share attributable to Masonite	$	1.54	$	(0.89)	$	4.84	$	1.69

Comprehensive income (loss):
Net income (loss)	$	38,847	$	(20,491)	$	123,092	$	45,206
Other comprehensive income (loss):
Foreign currency translation (loss) gain	(9,164)		14,137		(897)		(9,818)


Amortization of actuarial net losses	334		173		1,000		518
Income tax expense related to other comprehensive income (loss)	(83)		(25)		(196)		(142)
Other comprehensive income (loss), net of tax:	(8,913)		14,285		(93)		(9,442)
Comprehensive income (loss)	29,934		(6,206)		122,999		35,764
Less: comprehensive income (loss) attributable to non-controlling interests	990		1,481		3,477		2,947
Comprehensive income (loss) attributable to Masonite	$	28,944	$	(7,687)	$	119,522	$	32,817

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

(In thousands of U.S. dollars, except share amounts)

(Unaudited)


ASSETS	October 3, 2021		January 3, 2021
Current assets:
Cash and cash equivalents	$	393,730	$	364,674
Restricted cash	10,246		10,560
Accounts receivable, net	352,167		290,508
Inventories, net	309,832		260,962
Prepaid expenses and other assets	41,186		42,538
Income taxes receivable	3,737		1,124
Total current assets	1,110,898		970,366
Property, plant and equipment, net	601,415		625,126
Operating lease right-of-use assets	183,284		146,806
Investment in equity investees	12,540		14,636
Goodwill	136,958		138,692
Intangible assets, net	154,816		169,392
Deferred income taxes	21,287		25,331
Other assets	48,802		47,411
Total assets	$	2,270,000	$	2,137,760

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	117,748	$	97,211
Accrued expenses	221,932		277,716
Income taxes payable	12,912		11,086
Total current liabilities	352,592		386,013
Long-term debt	865,399		792,242

Long-term operating lease liabilities	171,940		136,235
Deferred income taxes	80,195		73,073
Other liabilities	59,393		55,080
Total liabilities	1,529,519		1,442,643
Commitments and Contingencies (Note 7)
Equity:
Share capital: unlimited shares authorized, no par value, 23,896,040 and 24,422,934 shares issued and outstanding as of October 3, 2021, and January 3, 2021, respectively	549,468		552,969
Additional paid-in capital	218,127		223,666
Accumulated earnings	73,905		20,385
Accumulated other comprehensive loss	(112,259)		(112,063)
Total equity attributable to Masonite	729,241		684,957
Equity attributable to non-controlling interests	11,240		10,160
Total equity	740,481		695,117
Total liabilities and equity	$	2,270,000	$	2,137,760

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Changes in Equity

(In thousands of U.S. dollars, except share amounts)

(Unaudited)


	Three Months Ended				Nine Months Ended
	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Total equity, beginning of period	$	750,173	$	646,245	$	695,117	$	636,862
Share capital:
Beginning of period	556,398		553,766		552,969		558,514
Common shares issued for delivery of share based awards	779		310		11,843		7,583
Common shares issued under employee stock purchase plan	769		597		1,593		1,305
Common shares repurchased and retired	(8,478)		—		(16,937)		(12,729)
End of period	549,468		554,673		549,468		554,673
Additional paid-in capital:
Beginning of period	217,599		213,814		223,666		216,584
Share based compensation expense	2,336		6,299		11,460		13,509
Common shares issued for delivery of share based awards	(779)		(310)		(11,843)		(7,583)
Common shares withheld to cover income taxes payable due to delivery of share based awards	(890)		(356)		(4,834)		(2,752)
Common shares issued under employee stock purchase plan	(139)		(140)		(322)		(451)
End of period	218,127		219,307		218,127		219,307
Accumulated earnings (deficit):
Beginning of period	68,845		21,794		20,385		(20,047)
Net income attributable to Masonite	37,691		(21,766)		119,718		42,116
Common shares repurchased and retired	(32,631)		—		(66,198)		(22,041)
End of period	73,905		28		73,905		28
Accumulated other comprehensive loss:
Beginning of period	(103,512)		(153,547)		(112,063)		(130,169)
Other comprehensive income (loss) attributable to Masonite, net of tax	(8,747)		14,079		(196)		(9,299)
End of period	(112,259)		(139,468)		(112,259)		(139,468)
Equity attributable to non-controlling interests:
Beginning of period	10,843		10,418		10,160		11,980
Net income attributable to non-controlling interests	1,156		1,275		3,374		3,090
Other comprehensive income (loss) attributable to non-controlling interests, net of tax	(166)		206		103		(143)
Dividends to non-controlling interests	(593)		(937)		(2,397)		(3,965)
End of period	11,240		10,962		11,240		10,962
Total equity, end of period	$	740,481	$	645,502	$	740,481	$	645,502

Common shares outstanding:
Beginning of period	24,238,024		24,487,121		24,422,934		24,869,921
Common shares issued for delivery of share based awards	20,370		8,767		195,858		183,812
Common shares issued under employee stock purchase plan	6,794		7,079		15,091		16,505
Common shares repurchased and retired	(369,148)		—		(737,843)		(567,271)
End of period	23,896,040		24,502,967		23,896,040		24,502,967

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands of U.S. dollars)

(Unaudited)


	Nine Months Ended
Cash flows from operating activities:	October 3, 2021		September 27, 2020
Net income	$	123,092	$	45,206
Adjustments to reconcile net income to net cash flow provided by operating activities:
Loss on disposal of subsidiaries	8,590		2,091
Loss on extinguishment of debt	13,583		—
Depreciation	52,876		50,742
Amortization	16,749		17,900
Share based compensation expense	11,460		13,509
Deferred income taxes	11,989		(2,806)
Unrealized foreign exchange gain	(490)		(83)
Share of income from equity investees, net of tax	(2,404)		(1,972)
Dividend from equity investee	4,500		4,275
Pension and post-retirement funding, net of expense	(3,708)		(3,447)
Non-cash accruals and interest	1,268		1,268
Loss on sale of property, plant and equipment	1,954		3,629
Asset impairment	10,374		51,515
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(65,448)		(51,071)
Inventories	(54,425)		(3,950)
Prepaid expenses and other assets	1,261		2,823
Accounts payable and accrued expenses	(28,587)		69,865
Other assets and liabilities	(2,615)		19,762
Net cash flow provided by operating activities	100,019		219,256
Cash flows from investing activities:
Additions to property, plant and equipment	(46,626)		(45,899)
Acquisition of businesses, net of cash acquired	(160)		(1,912)
Proceeds from sale of subsidiaries, net of cash disposed	7,001		—
Proceeds from sale of property, plant and equipment	3,377		5,086
Other investing activities	(1,782)		(1,762)
Net cash flow used in investing activities	(38,190)		(44,487)
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	(4,834)		(2,752)
Distributions to non-controlling interests	(2,397)		(3,965)
Repurchases of common shares	(83,135)		(34,770)
Net cash flow used in financing activities	(31,793)		(41,544)
Net foreign currency translation adjustment on cash	(1,294)		524
Increase in cash, cash equivalents and restricted cash	28,742		133,749
Cash, cash equivalents and restricted cash, beginning of period	375,234		177,608
Cash, cash equivalents and restricted cash, at end of period	$	403,976	$	311,357

See accompanying notes to the condensed consolidated financial statements.

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MASONITE INTERNATIONAL CORPORATION

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business Overview and Significant Accounting Policies

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

Description of Business

Masonite International Corporation is one of the largest manufacturers of doors in the world, with significant market share in both interior and exterior door products. Masonite operates 58 manufacturing and distribution facilities in seven countries and sells doors to customers throughout the world with our largest markets being the United States, Canada and the United Kingdom.

Basis of Presentation

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

These unaudited condensed consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 2021, as filed with the SEC. 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 year.

Changes in Accounting Standards and Policies

There have been no changes in the significant accounting policies from those that were disclosed in the fiscal year 2020 audited consolidated financial statements, other than as noted below.

Adoption of Recent Accounting Pronouncements

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 have 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.

In August 2018, the FASB issued ASU 2018-14, "Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans," which amended ASC 715, "Compensation—Retirement Benefits." This standard is applicable for employers that sponsor defined benefit pension or other postretirement plans, and eliminates disclosures no longer considered cost beneficial, clarifies specific disclosure requirements for entities that provide aggregate disclosures for two or more plans and adds requirements for explanations for significant gains and losses related to changes in benefit obligations. We adopted the new guidance using a retrospective approach as of January 3, 2021, the end of fiscal year 2020, and the adoption did not have a material impact on our financial statements or disclosures.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)”, which replaced the incurred loss methodology for recognizing credit losses with a current expected credit losses model. This standard applied to most financial assets, including trade receivables. Our prior accounts receivable policy is described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. We adopted the new guidance using a modified retrospective approach as of December 30, 2019, the beginning of fiscal year 2020, and the adoption did not have a material impact on our financial statements and no adjustment was necessary to retained earnings on December 30, 2019.

2. Acquisitions and Divestitures

Acquisitions

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. 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

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 purchasers are not considered to be a related party. 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 consists 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 57.1% and 53.1% of total accounts receivable as of October 3, 2021, and January 3, 2021, respectively. Our largest customer, The Home Depot, Inc., accounted for more than 10% of the consolidated gross accounts receivable balance as of October 3, 2021, and January 3, 2021. The allowance for doubtful accounts balance was $2.2 million and $2.8 million as of October 3, 2021, and January 3, 2021, respectively.

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 condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

4. Inventories

The amounts of inventory on hand were as follows as of the dates indicated:


(In thousands)	October 3, 2021		January 3, 2021
Raw materials	$	235,553	$	191,784
Finished goods	81,361		75,483
Provision for obsolete or aged inventory	(7,082)		(6,305)
Inventories, net	$	309,832	$	260,962

5. Accrued Expenses

The details of our accrued expenses were as follows as of the dates indicated:


(In thousands)	October 3, 2021		January 3, 2021
Accrued payroll	$	64,361	$	86,517
Accrued rebates	50,845		49,531
Current portion of operating lease liabilities	25,407		22,667
Accrued interest	7,126		16,435
Accrued legal settlement	—		40,000
Other accruals	74,193		62,566
Total accrued expenses	$	221,932	$	277,716

6. Long-Term Debt


(In thousands)	October 3, 2021		January 3, 2021
3.50% senior unsecured notes due 2030	$	375,000	$	—
5.375% senior unsecured notes due 2028	500,000		500,000
5.750% senior unsecured notes due 2026	—		300,000
Debt issuance costs	(9,601)		(8,694)

Other long-term debt	—		936
Total long-term debt	$	865,399	$	792,242

Interest expense related to our consolidated indebtedness under senior unsecured notes was $10.7 million and $33.5 million for the three and nine months ended October 3, 2021, respectively, and $11.4 million and $34.1 million for the three and nine months ended September 27, 2020, respectively.

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 commencing on February 15, 2022, and are 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.

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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 comprehensive income (loss) 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.

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 October 3, 2021, 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 bear interest at 5.375%, payable in cash semiannually in arrears on February 1 and August 1 of each year and are due February 1, 2028. The 2028 Notes were issued at par.

Information concerning obligations under the 2028 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of October 3, 2021, 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 bear interest at 5.750% per annum, payable in cash semiannually in arrears on March 15 and September 15 of each year and are due September 15, 2026. The 2026 Notes were issued at par.

Information concerning obligations under the 2026 Notes and the indenture governing them are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of July 26, 2021, the 2026 Notes were fully redeemed, as described above.

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. 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 LIBO Rate 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 by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of October 3, 2021, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $208.8 million under our ABL Facility and there were no amounts outstanding as of October 3, 2021.

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7. Commitments and Contingencies

The following discussion describes material developments in previously disclosed legal proceedings that occurred since January 3, 2021. Refer to Note 10. Commitments and Contingencies in the consolidated financial statements in our Annual Report on Form 10-K for the year ended January 3, 2021, for a full description of the previously disclosed legal proceedings.

Indemnifications

We have provided customary indemnifications to our landlords under certain property lease agreements for claims by third parties in connection with their use of the premises. We also have provided routine indemnifications against adverse effects related to changes in tax laws and patent infringements by third parties. The maximum amount of these indemnifications cannot be reasonably estimated due to their nature. In some cases, we have recourse against other parties to mitigate the risk of loss from these indemnifications. Historically, we have not made any significant payments relating to such indemnifications.

Antitrust Class Action Proceedings - United States

With respect to the putative class action antitrust cases pending in the Eastern District of Virginia (the "Court"), on June 3, 2021, the Court granted final approval of the settlement with the direct purchaser plaintiffs and subsequently: (i) we paid the remainder of the previously agreed upon settlement in June 2021 that had been accrued for the direct purchaser settlement within accrued expenses in the condensed consolidated balance sheet, and (ii) the Court entered final judgment of dismissal as to defendants in the direct purchaser case. Additionally, on July 27, 2021, the Court granted final approval of the settlement with the indirect purchaser plaintiffs and subsequently: (i) we paid $9.25 million in August 2021, representing the remainder of the previously agreed upon settlement that had been accrued for the indirect purchaser settlement within accrued expenses in the condensed consolidated balance sheet, and (ii) the Court entered final judgment of dismissal as to defendants in the indirect purchaser case.

During the three months ended September 27, 2020, we recorded a legal reserve of $37.75 million in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss) related to these settlements.

Class Action Proceedings - Canada

With respect to the putative class action antitrust case pending in Quebec, Canada, all parties in the Quebec proceeding filed a motion with the Quebec court seeking to stay the proceeding on December 22, 2020. The Quebec court has not yet released its decision regarding this motion.

With respect to the putative class action antitrust case pending in the Federal Court of Canada, the plaintiff served its certification record on March 31, 2021. The parties are conferring regarding a narrowing of issues and with respect to a mutually agreeable timeline of steps leading up to the plaintiff's certification motion. The parties have written to the Federal Court advising that the parties do not yet propose to set a timetable of steps leading to the certification motion and requesting that the parties be permitted to provide a further update to the Federal Court by January 31, 2022, and the court granted this request. We have not recognized an expense related to damages 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.

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 or results of operations.

General

In addition to the above, from time to time, we are involved in various claims and legal actions, including but not limited to wage and hour and labor lawsuits. In the opinion of management, the ultimate disposition of these matters, individually and in the aggregate, will not have a material adverse effect on our financial condition, results of operations or cash flows.

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8. Share Based Compensation Plans

Share based compensation expense was $2.3 million and $11.5 million for the three and nine months ended October 3, 2021, respectively, and $6.3 million and $13.5 million for the three and nine months ended September 27, 2020, respectively. As of October 3, 2021, the total remaining unrecognized compensation expense related to share based compensation amounted to $19.7 million, which will be amortized over the weighted average remaining requisite service period of 1.5 years.

Equity Incentive Plans

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. As of October 3, 2021, there were 1,555,528 shares of common stock available for future issuance under the 2021 Equity Plan.

Our equity incentive plans under the 2009 Plan and the 2012 Plan are described in detail and defined in our Annual Report on Form 10-K for the year ended January 3, 2021. Aside from shares issuable for outstanding awards, there are no further shares of common stock available for future issuance under the 2009 and 2012 Plans.

Deferred Compensation Plan

We offer to certain of our employees and directors a Deferred Compensation Plan, which is further described in our Annual Report on Form 10-K for the year ended January 3, 2021. As of October 3, 2021, the liability and asset relating to deferred compensation had a fair value of $8.9 million and $9.0 million, respectively. As of October 3, 2021, participation in the deferred compensation plan is limited and no restricted stock awards have been deferred into the deferred compensation plan. All plan investments are categorized as having Level 1 valuation inputs as established by the FASB’s Fair Value Framework.

Stock Appreciation Rights

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

The total fair value of SARs vested was $0.8 million during the nine months ended October 3, 2021.


Nine Months Ended October 3, 2021	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	(61,916)	3,943		56.67
Forfeited	(7,853)			82.76
Outstanding, end of period	166,032	$	6,260	$	71.61	7.7

Exercisable, end of period	88,781	$	4,054	$	63.64	7.1

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The value of SARs granted is determined using the Black-Scholes-Merton valuation model, and the corresponding expense 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 using the simplified method, due to insufficient exercise activity during recent years as a basis from which to estimate future exercise patterns. The weighted average grant date assumptions used for the SARs granted were as follows for the periods indicated:


	2021 Grants
SAR value (model conclusion)	$	28.08
Risk-free rate	0.8		%
Expected dividend yield	0.0		%
Expected volatility	25.2		%
Expected term (years)	6.0

Restricted Stock Units

We have granted Restricted Stock Units ("RSUs") to directors and certain employees under the 2012 and 2021 Plans. 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. We recognize forfeitures of RSUs in the period in which they occur.


Nine Months Ended October 3, 2021	Total Restricted Stock Units Outstanding	Weighted Average Grant Date Fair Value
Outstanding, beginning of period	488,057	$	68.15
Granted	186,968	109.89
Performance adjustment (1)	14,474	63.05
Delivered	(173,835)	66.61
Withheld to cover (2)	(33,061)
Forfeited	(48,115)	79.85
Outstanding, end of period	434,488	$	85.95

___________

(1) Performance-based RSUs 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 achievement. The performance adjustment represents the difference in shares ultimately awarded due to performance attainment above or below target.

(2) A portion of the vested RSUs delivered were net share settled to cover statutory requirements for income and other employment taxes. We remit the equivalent cash to the appropriate taxing authorities. These net share settlements had the effect of share repurchases by us as we reduced and retired the number of shares that would have otherwise been issued as a result of the vesting.

Approximately two-thirds of the RSUs granted during the nine months ended October 3, 2021, vest at specified future dates with only service requirements, while the remaining portion of the RSUs vest based on both performance and service requirements. The value of RSUs granted in the nine months ended October 3, 2021, is being recognized over the weighted average requisite service period of 2.3 years. During the nine months ended October 3, 2021, 206,896 RSUs vested at a fair value of $13.5 million.

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9. Restructuring Costs

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 will continue through 2021. As of October 3, 2021, we expect to incur up to $0.5 million of additional charges related to the 2020 Plan.

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 will continue through 2021. As of October 3, 2021, we expect to incur up to $0.5 million of additional charges related to the 2019 Plan.

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 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 October 3, 2021, we do not expect to incur any material future charges related to the 2018 Plan.

The following tables summarize the restructuring charges recorded for the periods indicated:


	Three Months Ended October 3, 2021
(In thousands)	North American Residential		Architectural		Corporate & Other		Total
2021 Plan	$	—	$	875	$	—	$	875
2020 Plan	4		439		—		443
2019 Plan	(40)		—		33		(7)

Total Restructuring Costs	$	(36)	$	1,314	$	33	$	1,311


	Three Months Ended September 27, 2020
(In thousands)	North American Residential		Architectural		Corporate & Other		Total
2019 Plan	$	1,825	$	82	$	67	$	1,974
2018 Plan	(79)		—		—		(79)
Total Restructuring Costs	$	1,746	$	82	$	67	$	1,895

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	Nine Months Ended October 3, 2021
(In thousands)	North American Residential		Architectural		Corporate & Other		Total
2021 Plan	$	—	$	1,414	$	—	$	1,414
2020 Plan	23		3,454		—		3,477
2019 Plan	(68)		—		323		255
Total Restructuring Costs	$	(45)	$	4,868	$	323	$	5,146


	Nine Months Ended September 27, 2020
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
2019 Plan	$	3,122	$	(37)	$	1,030	$	482	$	4,597
2018 Plan	387		—		—		—		387
Total Restructuring Costs	$	3,509	$	(37)	$	1,030	$	482	$	4,984


	Cumulative Amount Incurred Through October 3, 2021
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
2021 Plan	$	—	$	—	$	1,414	$	—	$	1,414
2020 Plan	52		—		5,187		—		5,239
2019 Plan	9,254		359		1,671		2,390		13,674
2018 Plan	2,180		2,275		—		—		4,455
Total Restructuring Costs	$	11,486	$	2,634	$	8,272	$	2,390	$	24,782

The changes in the accrual for restructuring by activity were as follows for the periods indicated:


(In thousands)	January 3, 2021		Severance		Closure Costs		Cash Payments		October 3, 2021
2021 Plan	$	—	$	546	$	868	$	(1,321)	$	93
2020 Plan	1,492		264		3,213		(4,945)		24
2019 Plan	291		175		80		(456)		90

Total	$	1,783	$	985	$	4,161	$	(6,722)	$	207


(In thousands)	December 29, 2019		Severance		Closure Costs		Cash Payments		September 27, 2020
2019 Plan	$	1,535	$	1,073	$	3,524	$	(5,475)	$	657
2018 Plan	—		151		236		(387)		—
Total	$	1,535	$	1,224	$	3,760	$	(5,862)	$	657

10. Asset Impairment

During the three months ended September 27, 2020, we determined the continued decreased demand in the Architectural door market due to the impact of COVID-19, 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. 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

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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.

During the nine months ended October 3, 2021, we recognized asset impairment charges of $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. This amount 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 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 condensed consolidated statements of comprehensive income (loss).

11. Income Taxes

The effective tax rate differs from the Canadian statutory rate of 26.5% primarily due to mix of earnings in foreign jurisdictions that are subject to tax rates which differ from the Canadian statutory rate. In addition, we recognized $0.4 million and $2.7 million of income tax benefit due to the exercise and delivery of share-based awards during the three and nine months ended October 3, 2021, respectively, compared to $0.1 million and $0.9 million of income tax benefit during the three and nine months ended September 27, 2020, respectively.

12. 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.

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.


(In thousands, except share and per share information)	Three Months Ended				Nine Months Ended
	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Net income (loss) attributable to Masonite	$	37,691	$	(21,766)	$	119,718	$	42,116

Shares used in computing basic earnings per share	24,068,744		24,495,760		24,329,647		24,607,926
Effect of dilutive securities:
Incremental shares issuable under share compensation plans	357,649		—		389,971		332,339
Shares used in computing diluted earnings per share	24,426,393		24,495,760		24,719,618		24,940,265

Basic earnings (loss) per common share attributable to Masonite	$	1.57	$	(0.89)	$	4.92	$	1.71
Diluted earnings (loss) per common share attributable to Masonite	$	1.54	$	(0.89)	$	4.84	$	1.69

Anti-dilutive instruments excluded from diluted earnings per common share	31,530		417,309		31,530		137,822

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13. 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 which 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;

• 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.

This definition of Adjusted EBITDA differs from the definitions of EBITDA contained in the indentures governing the 2030 Notes, 2028 Notes and 2026 Notes and the credit agreement governing 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.

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Certain information with respect to reportable segments is as follows for the periods indicated:


	Three Months Ended October 3, 2021
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net sales	$	489,156	$	86,280	$	79,526	$	4,030	$	658,992
Intersegment sales	(636)		(1,882)		(4,266)		—		(6,784)
Net sales to external customers	$	488,520	$	84,398	$	75,260	$	4,030	$	652,208

Adjusted EBITDA	$	91,482	$	16,680	$	1,040	$	(4,441)	$	104,761


	Three Months Ended September 27, 2020
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net sales	$	421,186	$	75,192	$	92,021	$	6,100	$	594,499
Intersegment sales	(654)		(910)		(5,283)		—		(6,847)
Net sales to external customers	$	420,532	$	74,282	$	86,738	$	6,100	$	587,652

Adjusted EBITDA	$	97,492	$	15,021	$	11,126	$	(14,639)	$	109,000


	Nine Months Ended October 3, 2021
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net sales	$	1,460,358	$	266,665	$	235,834	$	15,761	$	1,978,618
Intersegment sales	(1,985)		(5,918)		(9,760)		—		(17,663)
Net sales to external customers	$	1,458,373	$	260,747	$	226,074	$	15,761	$	1,960,955

Adjusted EBITDA	$	286,009	$	50,019	$	3,514	$	(22,192)	$	317,350


	Nine Months Ended September 27, 2020
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net sales	$	1,187,239	$	176,778	$	275,972	$	14,493	$	1,654,482
Intersegment sales	(1,685)		(1,882)		(12,377)		—		(15,944)
Net sales to external customers	$	1,185,554	$	174,896	$	263,595	$	14,493	$	1,638,538

Adjusted EBITDA	$	260,319	$	23,782	$	33,208	$	(34,900)	$	282,409

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A reconciliation of our net income attributable to Masonite to consolidated Adjusted EBITDA is set forth as follows for the periods indicated:


	Three Months Ended				Nine Months Ended
(In thousands)	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Net income (loss) attributable to Masonite	$	37,691	$	(21,766)	$	119,718	$	42,116
Plus:
Depreciation	17,365		17,881		52,876		50,742
Amortization	5,423		5,519		16,749		17,900
Share based compensation expense	2,336		6,299		11,460		13,509
Loss (gain) on disposal of property, plant and equipment	2,164		(416)		1,954		3,629
Restructuring costs	1,311		1,895		5,146		4,984
Asset impairment	—		51,515		10,374		51,515
Loss on disposal of subsidiaries	—		—		8,590		2,091
Interest expense, net	11,349		11,805		35,213		34,911
Loss on extinguishment of debt	13,583		—		13,583		—
Other (income) expense, net	(1,471)		(1,953)		(4,400)		(3,350)
Income tax expense	13,854		(804)		42,713		23,522
Other items (1)	—		37,750		—		37,750
Net income attributable to non-controlling interest	1,156		1,275		3,374		3,090
Adjusted EBITDA	$	104,761	$	109,000	$	317,350	$	282,409

(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the settlement of U.S. class action litigation in the three and nine months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

14. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss)

A rollforward of the components of accumulated other comprehensive loss is as follows for the periods indicated:


	Three Months Ended				Nine Months Ended
(In thousands)	October 3, 2021		September 27, 2020		October 3, 2021		September 27, 2020
Accumulated foreign currency translation losses, beginning of period	$	(85,664)	$	(136,969)	$	(93,684)	$	(113,336)
Foreign currency translation gain (loss)	(9,164)		14,137		(4,441)		(12,072)
Income tax benefit (expense) on foreign currency translation gain (loss)	(15)		19		7		(8)
Cumulative translation adjustment recognized upon deconsolidation of subsidiary	—		—		3,544		2,254
Less: foreign currency translation gain (loss) attributable to non-controlling interest	(166)		206		103		(143)
Accumulated foreign currency translation losses, end of period	(94,677)		(123,019)		(94,677)		(123,019)

Accumulated pension and other post-retirement adjustments, beginning of period	(17,848)		(16,578)		(18,379)		(16,833)


Amortization of actuarial net losses	334		173		1,000		518
Income tax expense on amortization of actuarial net losses	(68)		(44)		(203)		(134)


Accumulated pension and other post-retirement adjustments	(17,582)		(16,449)		(17,582)		(16,449)

Accumulated other comprehensive loss	$	(112,259)	$	(139,468)	$	(112,259)	$	(139,468)

Other comprehensive income (loss), net of tax	$	(8,913)	$	14,285	$	(93)	$	(9,442)
Less: other comprehensive income (loss) attributable to non-controlling interest	(166)		206		103		(143)
Other comprehensive income (loss) attributable to Masonite	$	(8,747)	$	14,079	$	(196)	$	(9,299)

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

Foreign currency translation losses as a result of translating our foreign assets and liabilities into U.S. dollars during the three months ended October 3, 2021, were $9.2 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. During the nine months ended October 3, 2021, foreign currency translation losses were $4.4 million, primarily driven by weakening of the Euro and the Pound Sterling, partially offset by strengthening of the Canadian Dollar in comparison to the U.S. Dollar during the period.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Unaudited)

15. Supplemental Cash Flow Information

Certain cash and non-cash transactions were as follows for the periods indicated:


	Nine Months Ended
(In thousands)	October 3, 2021		September 27, 2020
Transactions involving cash:
Interest paid	$	42,472	$	45,147
Interest received	182		956
Income taxes paid	31,587		14,756
Income tax refunds	406		791
Cash paid for operating lease liabilities	22,100		20,986
Cash paid for finance lease liabilities	989		957
Non-cash transactions from operating activities:
Right-of-use assets acquired under operating leases	49,040		27,884

The following reconciles total cash, cash equivalents and restricted cash as of the dates indicated:


	October 3, 2021		January 3, 2021
Cash and cash equivalents	$	393,730	$	364,674
Restricted cash	10,246		10,560
Total cash, cash equivalents and restricted cash	$	403,976	$	375,234

Property, plant and equipment additions in accounts payable were $4.1 million and $5.6 million as of October 3, 2021, and January 3, 2021, respectively.

16. 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:


	October 3, 2021				January 3, 2021
(In thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
3.50% senior unsecured notes due 2030	$	374,006	$	370,456	$	—	$	—
5.375% senior unsecured notes due 2028	$	527,160	$	494,943	$	535,580	$	494,393
5.750% senior unsecured notes due 2026	$	—	$	—	$	315,972	$	296,913

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.

17. Subsequent Event

In November 2021, liquidation of the United States pension plan began through the purchase of annuity contracts to settle liabilities for all remaining members under the plan. Calculation of the expected non-cash pension settlement charge is ongoing and will be recorded in the fourth quarter of 2021.

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

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is based upon accounting principles generally accepted in the United States of America and discusses the financial condition and results of operations for Masonite International Corporation for the three and nine months ended October 3, 2021, and September 27, 2020. In this MD&A, "Masonite," "we," "us," "our" and the "Company" refer to Masonite International Corporation and its subsidiaries.

This discussion should be read in conjunction with (i) the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and (ii) the annual audited consolidated financial statements, including the accompanying notes and MD&A, which are included in our Annual Report on Form 10-K for the year ended January 3, 2021. The following discussion should also be read in conjunction with the disclosure under "Special Note Regarding Forward Looking Statements" elsewhere in this Quarterly Report on Form 10-Q. Our actual results could differ materially from the forward-looking statements as a result of these risks and uncertainties.

Overview

We are a leading global designer, manufacturer, marketer and distributor of interior and exterior doors for the new construction and repair, renovation and remodeling sectors of the residential and the non-residential building construction markets. Since 1925, we have provided our customers with innovative products and superior service at compelling values. In order to better serve our customers and create sustainable competitive advantages, we focus on developing innovative products, advanced manufacturing capabilities and technology-driven sales and service solutions.

We market and sell our products to remodeling contractors, builders, homeowners, retailers, dealers, lumberyards, commercial and general contractors and architects through well-established wholesale, retail and direct distribution channels as part of our cross-merchandising strategy. Customers are provided a broad product offering of interior and exterior doors and entry systems at various price points. We manufacture a broad line of interior doors, including residential molded, flush, stile and rail, louver and specially-ordered commercial and architectural doors; door components for internal use and sale to other door manufacturers; and exterior residential steel, fiberglass and wood doors and entry systems.

We operate 58 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 organized and managed principally by end market: North American Residential, Europe and Architectural. In the nine months ended October 3, 2021, we generated net sales of $1,458.4 million or 74.4%, $260.7 million or 13.3% and $226.1 million or 11.5% in our North American Residential, Europe and Architectural segments, respectively.

During the third quarter, demand remained positive across all three reportable segments, but labor and logistics constraints as well as supply chain disruptions have impacted our ability to service customers and reduced production in our facilities, which we expect will continue in future periods. The COVID-19 pandemic impacted our business operations and financial results beginning in the second quarter of fiscal year 2020 leading to an estimated $100 million of lost revenue in the second quarter of 2020, and continues to impact us in fiscal year 2021. Our United Kingdom facilities closed on March 27, 2020, for approximately half the quarter and subsequently operated at a reduced capacity for the remainder of the second quarter of 2020. The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. These impacts include, but are not limited to, the duration, spread, severity and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our employees, operations, customers, suppliers and supply chain,

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the remedial actions and stimulus measures adopted by federal, state and local governments and the extent to which normal economic and operating conditions can resume. Uncertainty associated with future forecasts, demand in the Architectural market and the duration of impacts from COVID-19 may impact our judgments and estimates and affect, among other things, our goodwill, long-lived assets and indefinite-lived intangible asset valuation, annual effective tax rate and inventory valuation, and may result in the need to write down goodwill in the Architectural reporting unit to its fair value in the future.

On September 9th, 2021, President Biden announced a proposed new rule which would mandate the COVID-19 vaccine or weekly testing for most U.S. employees, which would include our employees.The new rule was published on November 5, 2021, through an Emergency Temporary Standard ("ETS") promulgated by the Occupational Safety and Health Administration. Companies have until January 4, 2022, to comply with the order. As a result of this rule, there may be further disruptions to our operations, such as an inability to maintain adequate staffing at our facilities, difficulties in replacing disqualified employees with temporary employees or new hires, increased costs and diminished availability of raw materials and component parts. In addition, increased compliance burdens, including financial costs, diversion of administrative resources and increased downtimes to accommodate for weekly COVID-19 testing, could result in delays in the manufacturing process, which could negatively impact our future sales and ongoing customer relationships.

For discussion regarding the impact of COVID-19 and related economic conditions on our results for the year ended January 3, 2021, see Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended January 3, 2021. For further discussion regarding the potential future impacts of COVID-19 and related economic conditions on the Company, see “Risks Related to COVID-19” included in Part I, Item 1A, "Risk Factors” in our 2020 Annual Report.

Key Factors Affecting Our Results of Operations

Product Demand

There are numerous factors that influence overall market demand for our products. Demand for new homes, home improvement products and other building construction products have a direct impact on our financial condition and results of operations. Demand for our products may be impacted by changes in United States, Canadian, European, Asian or other global economic conditions, including inflation, deflation, interest rates, availability of capital, consumer spending rates, energy availability and costs, and the effects of governmental initiatives to manage economic conditions. Additionally, trends in residential new construction, repair, renovation and remodeling and architectural building construction may directly impact our financial performance. Accordingly, the following factors may have a direct impact on our business in the countries and regions in which our products are sold:

•the strength of the economy;

•the amount and type of residential and commercial construction;

•housing sales and home values;

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

•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.

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Business Wins and Losses

Our customers consist mainly of wholesalers and retail home centers. 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 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 May 2021, we initiated further actions to improve overall business performance that includes 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 rails 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 will continue through 2022. As of October 3, 2021, we expect to incur up to $0.5 million of additional charges related to the 2021 Plan. Once fully implemented, the actions taken as part of the 2021 Plan are expected to increase our annual earnings and cash flows by approximately $2 million.

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 will continue through 2020. As of October 3, 2021, we expect to incur up to $0.5 million of additional charges related to the 2019 Plan. Once fully implemented, the actions taken as part of the 2019 Plan are expected to increase our annual earnings and cash flows by approximately $17 million to $21 million.

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Inflation

In the first nine months of 2021, we realized higher costs in the wood, resins, metals and packaging product categories as a result of macroeconomic factors as well as increased logistics costs and wages. Additionally, we continued to incur higher costs as a result of tight supply chains as well as from previously disclosed anti-dumping and countervailing duties. We expect the macroeconomic pressures on wood, resins and other certain key product categories and supply chain disruptions will continue throughout the remainder of fiscal year 2021 and into 2022. Our profitability, margins and net sales could be adversely affected if we are not able to pass these costs on to our customers or mitigate the impact of these inflationary pressures.

Seasonality

Our business is moderately seasonal and our net sales vary from quarter to quarter based upon the timing of the building season in our markets. Severe weather conditions in any quarter, such as unusually prolonged warm or cold conditions, rain, blizzards or hurricanes, could accelerate, delay or halt construction and renovation activity.

Acquisitions and Divestitures

We are pursuing a strategic initiative of optimizing our global business portfolio. As part of this strategy, in the last several years we have pursued strategic acquisitions targeting companies who produce components for our existing operations, manufacture niche products and provide value-added services. Additionally, we target companies with strong brands, complementary technologies, attractive geographic footprints and opportunities for cost and distribution synergies. We also continuously analyze our operations to determine which businesses, market channels and products create the most value for our customers and acceptable returns for our shareholders.

Acquisitions

•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

•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.

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Results of Operations


	Three Months Ended						Nine Months Ended
(In thousands)	October 3, 2021			September 27, 2020			October 3, 2021			September 27, 2020
Net sales	$	652,208		$	587,652		$	1,960,955		$	1,638,538
Cost of goods sold	498,103			427,331			1,483,870			1,207,582
Gross profit	154,105			160,321			477,085			430,956
Gross profit as a % of net sales	23.6		%	27.3		%	24.3		%	26.3		%
Selling, general and administration expenses	76,632			118,354			242,774			272,077
Selling, general and administration expenses as a % of net sales	11.7		%	20.1		%	12.4		%	16.6		%
Restructuring costs	1,311			1,895			5,146			4,984
Asset impairment	—			51,515			10,374			51,515
Loss on disposal of subsidiaries	—			—			8,590			2,091
Operating income (loss)	76,162			(11,443)			210,201			100,289
Interest expense, net	11,349			11,805			35,213			34,911
Loss on extinguishment of debt	13,583			—			13,583			—
Other (income) expense, net	(1,471)			(1,953)			(4,400)			(3,350)
Income (loss) before income tax expense	52,701			(21,295)			165,805			68,728
Income tax expense (benefit)	13,854			(804)			42,713			23,522
Net income (loss)	38,847			(20,491)			123,092			45,206
Less: net income attributable to non-controlling interests	1,156			1,275			3,374			3,090
Net income (loss) attributable to Masonite	$	37,691		$	(21,766)		$	119,718		$	42,116

Three Months Ended October 3, 2021, Compared with Three Months Ended September 27, 2020

Net Sales

Net sales in the three months ended October 3, 2021, were $652.2 million, an increase of $64.5 million or 11.0% from $587.7 million in the three months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2021 by $11.9 million. Excluding this exchange rate impact, net sales would have increased by $52.6 million or 9.0% due to changes in volume, average unit price, impact of acquisitions and divestitures, and sales of components and other products. Average unit price increased net sales in the third quarter of 2021 by $46.7 million or 7.9% compared to the 2020 period. Higher volumes excluding the incremental impact of acquisitions and divestitures ("base volume") increased net sales by $10.4 million or 1.8% in the third quarter of 2021 compared to the 2020 period. Net sales of components and other products to external customers increased $1.3 million or 0.2% in the third quarter of 2021 compared to the 2020 period. Our 2021 divestiture decreased net sales by $5.8 million or 1.0% in the three months ended of 2021.

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Net Sales and Percentage of Net Sales by Reportable Segment


	Three Months Ended October 3, 2021
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Sales	$	489,156		$	86,280		$	79,526		$	4,030	$	658,992
Intersegment sales	(636)			(1,882)			(4,266)			—		(6,784)
Net sales to external customers	$	488,520		$	84,398		$	75,260		$	4,030	$	652,208
Percentage of consolidated external net sales	74.9		%	12.9		%	11.5		%


	Three Months Ended September 27, 2020
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Sales	$	421,186		$	75,192		$	92,021		$	6,100	$	594,499
Intersegment sales	(654)			(910)			(5,283)			—		(6,847)
Net sales to external customers	$	420,532		$	74,282		$	86,738		$	6,100	$	587,652
Percentage of consolidated external net sales	71.6		%	12.6		%	14.8		%

North American Residential

Net sales to external customers from facilities in the North American Residential segment in the three months ended October 3, 2021, were $488.5 million, an increase of $68.0 million or 16.2% from $420.5 million in the three months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2021 by $6.5 million. Excluding this exchange rate impact, net sales would have increased by $61.5 million or 14.6% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the third quarter of 2021 by $39.9 million or 9.5% compared to the 2020 period. Higher base volume increased net sales in the third quarter of 2021 by $18.5 million or 4.4% compared to the 2020 period, including our previously announced new retail business win. Net sales of components and other products to external customers were $3.1 million higher in the third quarter of 2021 compared to the 2020 period.

Europe

Net sales to external customers from facilities in the Europe segment in the three months ended October 3, 2021, were $84.4 million, an increase of $10.1 million or 13.6% from $74.3 million in the three months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2021 by $5.0 million. Excluding this exchange rate impact, net sales would have increased by $5.1 million or 6.9% due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Average unit price increased net sales in the third quarter of 2021 by $8.1 million or 10.9% compared to the 2020 period. Higher base volume increased net sales by $1.9 million or 2.6% in the third quarter of 2021 compared to the 2020 period. Net sales of components and other products to external customers were $0.9 million higher in the third quarter of 2021 compared to the 2020 period. Our 2021 divestiture decreased net sales by $5.8 million or 7.8% in the third quarter of 2021.

Architectural

Net sales to external customers from facilities in the Architectural segment in the three months ended October 3, 2021, were $75.3 million, a decrease of $11.4 million or 13.1% from $86.7 million in the three months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the third quarter of 2021 by $0.5 million. Excluding this exchange rate impact, net sales would have decreased by $11.9 million or 13.7% due to changes in volume, average unit price and sales of components and other products. Lower base volume decreased net sales in the third quarter of 2021 by $12.8 million or 14.8% compared to the 2020 period due to the impacts of labor constraints as a result of COVID-19. Net sales of components and other products to external customers were $2.5 million lower in the

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third quarter of 2021 compared to the 2020 period. Average unit price increased net sales in the third quarter of 2021 by $3.4 million or 3.9% compared to the 2020 period.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales was 76.4% and 72.7% for the three months ended October 3, 2021, and September 27, 2020, respectively. Material cost of sales, distribution, direct labor and overhead as a percentage of net sales increased by 1.9%, 1.4%, 0.5% and 0.2% respectively, compared to the 2020 period. Depreciation as a percentage of sales decreased by 0.3%, compared to the third quarter of 2020. The increase in material cost of sales as a percentage of net sales was driven by commodity inflation and an increase in logistics costs and tariffs, partially offset by higher average unit prices and material cost savings projects. Distribution as a percentage of net sales increased due to higher logistics costs and personnel costs including wage inflation. Direct labor as a percentage of net sales increased due to production inefficiencies related to labor constraints and manufacturing wage inflation, partially offset by higher average unit prices. Overhead as a percentage of net sales increased due to wage inflation, higher factory costs and increased plant maintenance, partially offset by higher average unit prices as compared to the 2020 period. The decrease in depreciation as a percentage of net sales was driven by higher average unit prices as compared to the 2020 period.

Selling, General and Administration Expenses

In the three months ended October 3, 2021, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 11.7%, as compared to 20.1% in the three months ended September 27, 2020, a decrease of 840 basis points.

SG&A expenses in the three months ended October 3, 2021, were $76.6 million, a decrease of $41.8 million from $118.4 million in the three months ended September 27, 2020. The overall decrease was driven by the absence of a $37.8 million legal reserve related to the settlement of U.S. class action litigation recorded in the period year period, a $7.6 million decrease in personnel costs primarily due to a $12.5 million decrease in incentive compensation, partially offset by $4.9 million of resource investments to support growth; a $2.4 million decrease in non-cash items in SG&A expenses, including loss (gain) on disposal of property, plant and equipment, depreciation and amortization, deferred compensation and share based compensation; and incremental SG&A savings from our 2021 divestiture of $0.5 million. These decreases were partially offset by a $5.0 million increase in professional and other fees and a $0.6 million increase in travel expense as business activities returned to pre-pandemic levels and unfavorable foreign exchange impacts of $0.9 million.

Restructuring Costs

Restructuring costs in the three months ended October 3, 2021, and September 27, 2020, were $1.3 million and $1.9 million, respectively. Restructuring costs in the current year related primarily to the 2021 and 2020 Plans. Restructuring costs in the prior year period related primarily to the 2019 Plan.

Asset Impairment

There were no asset impairment charges in the three months ended October 3, 2021. Asset impairment charges in the three months ended September 27, 2020, were $51.5 million, and represent a goodwill impairment charge recorded in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information.

Loss on Disposal of Subsidiaries

There was no loss on disposal of subsidiaries in the three months ended October 3, 2021, and September 27, 2020.

Interest Expense, Net

Interest expense, net, in the three months ended October 3, 2021, was $11.3 million, compared to $11.8 million in the three months ended September 27, 2020, remaining relatively flat as compared to the 2020 period.

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Loss on Extinguishment of Debt

Loss on extinguishment of debt in the three months ended October 3, 2021, was $13.6 million 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. There was no loss on extinguishment of debt in three months ended September 27, 2020.

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 three months ended October 3, 2021, was $1.5 million of income, compared to $2.0 million of income in the three months ended September 27, 2020, remaining relatively flat as compared to the 2020 period.

Income Tax Expense

Income tax expense in the three months ended October 3, 2021, was $13.9 million, compared to $0.8 million of income tax benefit in the three months ended September 27, 2020. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate. We recognized discrete items resulting in $2.3 million of income tax expense in the three months ended October 3, 2021, compared to $1.2 million of income tax expense in the three months ended September 27, 2020.

Segment Information


	Three Months Ended October 3, 2021
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Adjusted EBITDA	$	91,482		$	16,680		$	1,040		$	(4,441)	$	104,761
Adjusted EBITDA as a percentage of segment net sales	18.7		%	19.8		%	1.4		%			16.1		%


	Three Months Ended September 27, 2020
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Adjusted EBITDA	$	97,492		$	15,021		$	11,126		$	(14,639)	$	109,000
Adjusted EBITDA as a percentage of segment net sales	23.2		%	20.2		%	12.8		%			18.5		%

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The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:


	Three Months Ended October 3, 2021
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net income (loss) attributable to Masonite	$	79,262	$	10,989	$	(4,428)	$	(48,132)	$	37,691
Plus:
Depreciation	9,364		2,371		2,665		2,965		17,365
Amortization	372		3,561		993		497		5,423
Share based compensation expense	—		—		—		2,336		2,336
Loss (gain) on disposal of property, plant and equipment	1,738		(82)		496		12		2,164
Restructuring costs	(36)		—		1,314		33		1,311


Interest expense, net	—		—		—		11,349		11,349
Loss on extinguishment of debt	—		—		—		13,583		13,583
Other (income) expense, net	—		(159)		—		(1,312)		(1,471)
Income tax expense	—		—		—		13,854		13,854

Net income attributable to non-controlling interest	782		—		—		374		1,156
Adjusted EBITDA	$	91,482	$	16,680	$	1,040	$	(4,441)	$	104,761


	Three Months Ended September 27, 2020
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net income (loss) attributable to Masonite	$	85,889	$	9,655	$	(45,074)	$	(72,236)	$	(21,766)
Plus:
Depreciation	8,868		2,437		3,088		3,488		17,881
Amortization	508		3,354		1,268		389		5,519
Share based compensation expense	—		—		—		6,299		6,299
Loss (gain) on disposal of property, plant and equipment	(391)		(317)		247		45		(416)
Restructuring costs	1,746		—		82		67		1,895
Asset impairment	—		—		51,515		—		51,515

Interest expense, net	—		—		—		11,805		11,805

Other (income) expense, net	—		(108)		—		(1,845)		(1,953)
Income tax benefit	—		—		—		(804)		(804)
Other items (1)	—		—		—		37,750		37,750
Net income attributable to non-controlling interest	872		—		—		403		1,275
Adjusted EBITDA	$	97,492	$	15,021	$	11,126	$	(14,639)	$	109,000

(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the settlement of U.S. class action litigation in the three months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).

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Adjusted EBITDA in our North American Residential segment was $91.5 million in the three months ended October 3, 2021, a decrease of $6.0 million, or 6.2%, from $97.5 million in the three months ended September 27, 2020. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $19.3 million and $16.3 million, in the third quarter of 2021 and 2020, 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 was $16.7 million in the three months ended October 3, 2021, an increase of $1.7 million, or 11.3%, from $15.0 million in the three months ended September 27, 2020. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $1.0 million and $0.3 million, in the third quarter of 2021 and 2020, 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 was $1.0 million in the three months ended October 3, 2021, a decrease of $10.1 million, or 91.0%, from $11.1 million in the three months ended September 27, 2020. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $2.8 million and $2.7 million, in the third quarter of 2021 and 2020, respectively. The allocations generally consist of certain costs of human resources, legal, finance, information technology, research and development, marketing and share based compensation.

Nine Months Ended October 3, 2021, Compared with Nine Months Ended September 27, 2020

Net Sales

Net sales in the nine months ended October 3, 2021, were $1,961.0 million, an increase of $322.5 million or 19.7% from $1,638.5 million in the nine months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the first nine months of 2021 by $45.5 million. Excluding this exchange rate impact, net sales would have increased by $277.0 million or 16.9% due to changes in volume, average unit price, impact of acquisitions and divestitures and sales of components and other products. Average unit price increased net sales in the first nine months of 2021 by $157.8 million or 9.6% compared to the same period in 2020. Higher volumes excluding the incremental impact of acquisitions and divestitures ("base volume") increased net sales by $107.6 million or 6.6% in the first nine months of 2021 compared to the same period in 2020. Net sales of components and other products to external customers increased $17.7 million or 1.1% in the first nine months of 2021 compared to the same period in 2020. Our 2021 divestiture decreased net sales by $6.1 million or 0.4% in the first nine months of 2021.

Net Sales and Percentage of Net Sales by Reportable Segment


	Nine Months Ended October 3, 2021
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Sales	$	1,460,358		$	266,665		$	235,834		$	15,761	$	1,978,618
Intersegment sales	(1,985)			(5,918)			(9,760)			—		(17,663)
Net sales to external customers	$	1,458,373		$	260,747		$	226,074		$	15,761	$	1,960,955
Percentage of consolidated external net sales	74.4		%	13.3		%	11.5		%


	Nine Months Ended September 27, 2020
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Sales	$	1,187,239		$	176,778		$	275,972		$	14,493	$	1,654,482
Intersegment sales	(1,685)			(1,882)			(12,377)			—		(15,944)
Net sales to external customers	$	1,185,554		$	174,896		$	263,595		$	14,493	$	1,638,538
Percentage of consolidated external net sales	72.4		%	10.7		%	16.1		%

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North American Residential

Net sales to external customers from facilities in the North American Residential segment in the nine months ended October 3, 2021, were $1,458.4 million, an increase of $272.8 million or 23.0% from $1,185.6 million in the nine months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the first nine months of 2021 by $22.2 million. Excluding this exchange rate impact, net sales would have increased by $250.6 million or 21.1% due to changes in volume, average unit price and sales of components and other products. Average unit price increased net sales in the first nine months of 2021 by $132.4 million or 11.2% compared to the 2020 period. Higher base volume increased net sales by $106.7 million or 9.0% in the first nine months of 2021 compared to the same period in 2020 including our previously announced new retail business win. Net sales of components and other products to external customers were $11.5 million higher in the first nine months of 2021 compared to the same period in 2020.

Europe

Net sales to external customers from facilities in the Europe segment in the nine months ended October 3, 2021, were $260.7 million, an increase of $85.8 million or 49.1% from $174.9 million in the nine months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the first nine months of 2021 by $21.2 million. Excluding this exchange rate impact, net sales would have increased by $64.6 million or 36.9% due to changes in volume, average unit price, acquisitions and divestitures and sales of components and other products. Higher base volume increased net sales in the first nine months of 2021 by $46.8 million or 26.8% compared to the same period in 2020, primarily due to our manufacturing facilities being closed approximately half of the prior year second quarter and other impacts as a result of COVID-19. Average unit price increased net sales in the first nine months of 2021 by $19.3 million or 11.0% compared to the same period in 2020. Net sales of components and other products to external customers were $4.6 million higher in the first nine months of 2021 compared to the same period in 2020. Our 2021 divestiture decreased net sales by $6.1 million or 3.5% in the first nine months of 2021.

Architectural

Net sales to external customers from facilities in the Architectural segment in the nine months ended October 3, 2021, were $226.1 million, a decrease of $37.5 million or 14.2% from $263.6 million in the nine months ended September 27, 2020. Foreign exchange rate fluctuations positively impacted net sales in the first nine months of 2021 by $1.9 million. Excluding this exchange rate impact, net sales would have decreased by $39.4 million or 14.9% due to changes in volume, average unit price and sales of components and other products. Lower base volume decreased net sales in the first nine months of 2021 by $45.9 million or 17.4% compared to the 2020 period primarily due to the impacts of labor constraints as a result of COVID-19 and the lingering weakness in commercial end markets during the first six months of 2021. Net sales of components and other products to external customers were $4.3 million lower in the first nine months of 2021 compared to the same period in 2020. Average unit price increased net sales in the first nine months of 2021 by $10.8 million or 4.1% compared to the 2020 period.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales was 75.7% and 73.7% for the nine months ended October 3, 2021, and September 27, 2020, respectively. Material cost of sales and distribution as a percentage of net sales increased by 1.5% and 1.0%, respectively, compared to the 2020 period. Depreciation, direct labor and overhead as a percentage of net sales decreased by 0.3%, 0.1% and 0.1%, respectively, compared to the 2020 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 and tariffs, partially offset by higher average unit prices and material cost savings projects. Distribution as a percentage of net sales increased due to higher logistics costs and personnel costs including wage inflation. The decrease in depreciation in the first nine months of 2021 was driven by higher average unit prices as compared to the first nine months of 2020. Direct labor as a percentage of net sales decreased due to higher average unit prices, partially offset by manufacturing wage inflation. 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 the 2020 period.

Selling, General and Administration Expenses

In the nine months ended October 3, 2021, selling, general and administration ("SG&A") expenses, as a percentage of net sales, were 12.4% compared to 16.6% the nine months ended September 27, 2020, a decrease of 420 basis points.

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SG&A expenses in the nine months ended October 3, 2021, were $242.8 million, a decrease of $29.3 million from $272.1 million in the nine months ended September 27, 2020. The overall decrease was driven by the absence of a $37.8 million legal reserve related to the settlement of U.S. class action litigation recorded in the period year period, a $4.5 million decrease in non-cash items including depreciation and amortization, deferred compensation, loss on disposal of property, plant and equipment and share based compensation, $0.5 million of incremental SG&A savings from our 2021 divestiture and a $0.2 million decrease in travel expense. These decreases were partially offset by a $5.7 million increase in personnel costs primarily due to $16.0 million of resource investments to support growth and $1.9 million of payroll taxes due to timing of prior year incentive compensation, partially offset by a $12.2 million decrease in incentive compensation as well as the absence of certain personnel costs in the prior year due to COVID-19; a $4.2 million increase in professional and other fees as business activities returned to pre-pandemic levels and unfavorable foreign exchange impacts of $3.8 million.

Restructuring Costs

Restructuring costs in the nine months ended October 3, 2021, were $5.1 million, compared to $5.0 million in the nine months ended September 27, 2020. Restructuring costs in the current year related primarily to the 2021 and 2020 Plans. Restructuring costs in the prior year period related primarily to the 2019 Plan.

Asset Impairment

Asset impairment charges in the nine months ended October 3, 2021, were $10.4 million, and resulted from actions associated with the 2021 and 2020 Plans in our Architectural reporting unit. Asset impairment charges in the nine months ended September 27, 2020, were $51.5 million, and represent a goodwill impairment charge recorded in our Architectural reporting unit. Refer to Note 10. Asset Impairment, in Item 1 of this Quarterly Report for additional information.

Loss on Disposal of Subsidiaries

Loss on disposal of subsidiaries in the nine months ended October 3, 2021, was $8.6 million, compared to $2.1 million in the nine months ended September 27, 2020. The current 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 income. The loss in the prior year arose as a result of the liquidation of our legal entity in India and is comprised of the recognition of the cumulative translation adjustment out of accumulated other comprehensive income of $2.3 million and $0.2 million relating to the write-off of net assets and other professional fees.

Interest Expense, Net

Interest expense, net, in the nine months ended October 3, 2021, was $35.2 million, compared to $34.9 million in the nine months ended September 27, 2020, remaining relatively flat as compared to the 2020 period.

Loss on Extinguishment of Debt

Loss on extinguishment of debt in the nine months ended October 3, 2021, was $13.6 million. Loss on extinguishment of debt in the current year 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. There was no loss on extinguishment of debt in nine months ended September 27, 2020.

Other (Income) Expense, Net

Other (income) expense, net, in the nine months ended October 3, 2021, was $4.4 million, compared to $3.4 million in the nine months ended September 27, 2020. The change in other (income) expense, net is primarily due to a change in the fair value of plan assets in the deferred compensation rabbi trust and a change in our portion of the net gains and losses related to our non-majority owned unconsolidated subsidiaries that are recognized under the equity method of accounting, partially offset by an increase in pension expense.

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Income Tax Expense

Our income tax expense in the nine months ended October 3, 2021, was $42.7 million, compared to $23.5 million of income tax expense in the nine months ended September 27, 2020. The increase in income tax expense is primarily due to the mix of income or losses within the tax jurisdictions with various tax rates in which we operate, as well as an increase in discrete income tax expense. We recognized discrete items resulting in income tax expense of $5.5 million in the nine months ended October 3, 2021, compared to $1.1 million of income tax expense recorded in the nine months ended September 27, 2020. The discrete income tax expense for the period is primarily attributable to (1) an increase in the tax rate applied to certain deferred tax assets and liabilities in the United Kingdom and (2) the nondeductible loss on disposal of subsidiaries resulting from the sale of the Czech business.

Segment Information


	Nine Months Ended October 3, 2021
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Adjusted EBITDA	$	286,009		$	50,019		$	3,514		$	(22,192)	$	317,350
Adjusted EBITDA as a percentage of segment net sales	19.6		%	19.2		%	1.6		%			16.2		%


	Nine Months Ended September 27, 2020
(In thousands)	North American Residential			Europe			Architectural			Corporate & Other		Total
Adjusted EBITDA	$	260,319		$	23,782		$	33,208		$	(34,900)	$	282,409
Adjusted EBITDA as a percentage of segment net sales	22.0		%	13.6		%	12.6		%			17.2		%

The following reconciles net income (loss) attributable to Masonite to Adjusted EBITDA:


	Nine Months Ended October 3, 2021
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net income attributable to Masonite	$	252,471	$	23,851	$	(22,867)	$	(133,737)	$	119,718
Plus:
Depreciation	28,035		7,462		7,936		9,443		52,876
Amortization	1,284		10,704		3,282		1,479		16,749
Share based compensation expense	—		—		—		11,460		11,460
Loss (gain) on disposal of property, plant and equipment	1,862		(70)		645		(483)		1,954
Restructuring costs	(45)		—		4,868		323		5,146
Asset impairment	—		—		9,645		729		10,374
Loss on disposal of subsidiaries	—		8,590		—		—		8,590
Interest expense, net	—		—		—		35,213		35,213
Loss on extinguishment of debt	—		—		—		13,583		13,583
Other (income) expense, net	—		(518)		5		(3,887)		(4,400)
Income tax expense	—		—		—		42,713		42,713

Net income attributable to non-controlling interest	2,402		—		—		972		3,374
Adjusted EBITDA	$	286,009	$	50,019	$	3,514	$	(22,192)	$	317,350

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	Nine Months Ended September 27, 2020
(In thousands)	North American Residential		Europe		Architectural		Corporate & Other		Total
Net income (loss) attributable to Masonite	$	224,541	$	6,762	$	(35,511)	$	(153,676)	$	42,116
Plus:
Depreciation	26,961		7,261		8,687		7,833		50,742
Amortization	1,615		10,186		4,940		1,159		17,900
Share based compensation expense	—		—		—		13,509		13,509
Loss (gain) on disposal of property, plant and equipment	1,319		(307)		2,547		70		3,629
Restructuring costs	3,509		(37)		1,030		482		4,984
Asset impairment	—		—		51,515		—		51,515
Loss on disposal of subsidiaries	—		—		—		2,091		2,091
Interest expense, net	—		—		—		34,911		34,911

Other (income) expense, net	—		(83)		—		(3,267)		(3,350)
Income tax expense	—		—		—		23,522		23,522
Other items (1)	—		—		—		37,750		37,750
Net income attributable to non-controlling interest	2,374		—		—		716		3,090
Adjusted EBITDA	$	260,319	$	23,782	$	33,208	$	(34,900)	$	282,409

(1) Other items not part of our underlying business performance include $37,750 in legal reserves related to the settlement of U.S. class action litigation in the nine months ended September 27, 2020, and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).

Adjusted EBITDA in our North American Residential segment was $286.0 million in the nine months ended October 3, 2021, an increase of $25.7 million, or 9.9%, from $260.3 million in the nine months ended September 27, 2020. Adjusted EBITDA in the North American Residential segment included corporate allocations of shared costs of $57.7 million and $48.8 million in the first nine months of 2021 and 2020, 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 was $50.0 million in the nine months ended October 3, 2021, an increase of $26.2 million, or 110.1%, from $23.8 million in the nine months ended September 27, 2020. Adjusted EBITDA in the Europe segment included corporate allocations of shared costs of $3.0 million and $0.8 million in the first nine months of 2021 and 2020. The allocations generally consist of certain costs of human resources, legal, finance and information technology, marketing and share based compensation.

Adjusted EBITDA in our Architectural segment was $3.5 million in the nine months ended October 3, 2021, a decrease of $29.7 million, or 89.5%, from $33.2 million in the nine months ended September 27, 2020. Adjusted EBITDA in the Architectural segment also included corporate allocations of shared costs of $8.4 million and $8.1 million in the first nine months of 2021 and 2020, 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 working capital needs, capital expenditures for critical maintenance, safety and regulatory projects, and share repurchases. On a

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continual basis, we evaluate and consider strategic acquisitions, divestitures, and joint ventures to create shareholder value and enhance financial performance.

We anticipate capital expenditures in fiscal year 2021 will be approximately $85 million to $100 million as compared to our original estimate of $80 million to $90 million as previously disclosed under "Key Factors Affecting Our Results of Operations" in our Annual Report on Form 10-K for the year ended January 3, 2021. We believe that our cash balance on hand, future cash generated from operations, the use of our AR Sales Program, our ABL Facility, and ability to access the capital markets will provide adequate liquidity for the foreseeable future. As of October 3, 2021, we had $393.7 million of cash and cash equivalents, availability under our ABL Facility of $208.8 million and availability under our AR Sales Program of $11.3 million.

Cash Flows

Cash provided by operating activities was $100.0 million during the nine months ended October 3, 2021, compared to $219.3 million of cash provided by operating activities in the nine months ended September 27, 2020. This $119.3 million decrease in cash provided by operating activities was due to changes in net working capital and a $22.4 million decrease in other assets and liabilities, partially offset by a $68.0 million increase in net income attributable to Masonite, adjusted for non-cash and non-operating items in the first nine months of 2021 compared to the same period in 2020.

Cash used in investing activities was $38.2 million during the nine months ended October 3, 2021, compared to $44.5 million in the nine months ended September 27, 2020. This $6.3 million decrease in cash used in investing activities was driven by a $7.0 million increase in cash obtained from the sale of subsidiaries in 2021 and a $1.7 million decrease in cash used in acquisitions, net of cash acquired and other investing activities, partially offset by a $1.7 million decrease in proceeds from the sale of property, plant and equipment and a $0.7 million increase in cash additions to property, plant and equipment in the first nine months of 2021 compared to the same period in 2020.

Cash used in financing activities was $31.8 million during the nine months ended October 3, 2021, compared to $41.5 million during the nine months ended September 27, 2020. This $9.7 million decrease in cash used in financing activities was driven by a net increase in cash provided by debt-related transactions of $58.6 million and a $1.6 million decrease in distributions to non-controlling interests, partially offset by a $48.4 million increase in cash used for repurchases of common shares and a $2.1 million increase in cash used for tax withholding on share based awards in the first nine months of 2021 compared to the same period in 2020.

Share Repurchases

We currently have in place an $810.0 million share repurchase authorization, stemming from four separate authorizations by our Board of Directors, the most recent being an incremental $210.0 million share repurchase program approved by the Company's Board of Directors on August 9, 2021. During the nine months ended October 3, 2021, we repurchased and retired 737,843 of our common shares in the open market at an aggregate cost of $83.1 million as part of the share repurchase programs. During the nine months ended September 27, 2020, we repurchased 567,271 of our common shares in the open market at an aggregate cost of $34.8 million, prior to temporarily suspending our repurchase program on March 18, 2020. The temporary suspension was lifted during the third quarter of 2020. As of October 3, 2021, there was $227.2 million available for repurchase in accordance with the share repurchase programs.

Other Liquidity Matters

Our cash and cash equivalents balance includes cash held in foreign countries in which we operate. Cash held outside Canada, in which we are incorporated, is free from significant restrictions that would prevent the cash from being accessed to meet our liquidity needs including, if necessary, to fund operations and service debt obligations in Canada. However, earnings from certain jurisdictions are indefinitely reinvested in those jurisdictions. Upon the repatriation of any earnings to Canada, in the form of dividends or otherwise, we may be subject to Canadian income taxes and withholding taxes payable to the various foreign countries. As of October 3, 2021, 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 any customer that has had a material

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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 condensed consolidated balance sheets and are included in cash flows from operating activities in the condensed consolidated statements of cash flows. The discounts on the sales of trade accounts receivable sold, if any, under the AR Sales Program were not material for any of the periods presented and were recorded in selling, general and administration expenses within the condensed consolidated statements of comprehensive income (loss).

3.50% Senior Notes due 2030

5.375% Senior Notes due 2028

On July 25, 2019, we issued $500.0 million aggregate principal senior unsecured notes (the "2028 Notes"), all of which was outstanding as of October 3, 2021. The 2028 Notes bear interest at 5.375% per annum. 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, including the payment of related premiums, fees and expenses. The 2028 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of October 3, 2021, we were in compliance with all covenants under the indenture governing the 2028 Notes.

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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 bear interest at 5.750% per annum. The 2026 Notes were issued under an indenture which contains restrictive covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of July 26, 2021, the 2026 Notes were fully redeemed, as described above.

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. Borrowings under the ABL Facility bear interest at a rate which is described in more detail in Note 6. The ABL Facility contains various customary representations, warranties by us and covenants that are described in detail in our Annual Report on Form 10-K for the year ended January 3, 2021. As of October 3, 2021, we were in compliance with all covenants under the credit agreement governing the ABL Facility. We had availability of $208.8 million under our ABL Facility and there were no amounts outstanding as of October 3, 2021.

Supplemental Guarantor Financial Information

Our obligations under the 2030 Notes, 2028 Notes and the ABL Facility are fully and unconditionally guaranteed, jointly and severally, by certain of our directly or indirectly wholly-owned subsidiaries. The following unaudited supplemental financial information for our non-guarantor subsidiaries is presented:

Our non-guarantor subsidiaries generated external net sales of $583.7 million and $1.7 billion for the three and nine months ended October 3, 2021, respectively, and $522.4 million and $1.5 billion for the three and nine months ended September 27, 2020, respectively. Our non-guarantor subsidiaries generated Adjusted EBITDA of $94.1 million and $264.5 million for the three and nine months ended October 3, 2021, respectively, and $94.0 million and $238.7 million for the three and nine months ended September 27, 2020, respectively. Our non-guarantor subsidiaries had total assets of $2.3 billion and $2.2 billion as of October 3, 2021, and January 3, 2021, and total liabilities of $974.1 million and $935.3 million as of October 3, 2021, and January 3, 2021, respectively.

Critical Accounting Policies and Estimates

There have been no material changes to the information provided in the section entitled "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended January 3, 2021, other than as noted below:

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. For the year ended January 3, 2021, we recorded $51.5 million in impairment charges related to the Architectural reporting unit.

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

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MASONITE INTERNATIONAL CORPORATION

initiatives, income tax rates, capital spending, business initiatives and working capital changes. 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.

While there has been no identification of potential impairment in the Architectural reporting unit as of October 3, 2021, the impact of labor constraints has resulted in lost production and extended lead times in our Architectural business. If we are unable to resolve these labor constraints to meet the market demand, it is possible that the estimate of discounted cash flows for the Architectural reporting unit may change in the near term based upon actual results and updated forward-looking forecasts, resulting in the need to write down goodwill to its fair value. While an interim impairment test of the Architectural reporting unit’s goodwill was not required during the three and nine months ended October 3, 2021, it is possible that such a test could be required during future interim periods.

Changes in Accounting Standards and Policies

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

For our disclosures about market risk, please see Part II, Item 7A. "Quantitative and Qualitative Disclosures about Market Risk," in our Annual Report on Form 10-K for the year ended January 3, 2021. We believe there have been no material changes to the information provided therein.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The information required with respect to this item can be found in Note 7. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements in this Quarterly Report and is incorporated by reference into this Part II, Item 1. Such information should be read in conjunction with the information contained under Part I, Item 3 "Legal Proceedings" included in our Annual Report on Form 10-K for the year ended January 3, 2021.

Item 1A. Risk Factors

You should carefully review and consider the information regarding certain factors which could materially affect our business, financial condition or future results as set forth under Item 1A "Risk Factors" in our Annual Report on Form 10-K filed for the year ended January 3, 2021. In light of developments relating to the coronavirus ("COVID-19") pandemic occurring subsequent to the filing of our Annual Report on Form 10-K, we are supplementing the risk factors discussed in our Annual Report with the following risk factor, which should be read in conjunction with the risk factors contained in our Annual Report.

Risks Related to COVID-19

Various United States federal government orders and regulations directing employers to require their employees to be vaccinated could adversely impact our business, operating results, cash flows and financial position.

On September 9th, 2021, President Biden announced a proposed new rule which would mandate the COVID-19 vaccine or weekly testing for most U.S. employees, which would include our employees. The new rule was published on November 5, 2021, through an Emergency Temporary Standard ("ETS") promulgated by the Occupational Safety and Health Administration. Companies have until January 4, 2022, to comply with the order. As a result of this rule, there may be further disruptions to our operations, such as an inability to maintain adequate staffing at our facilities, difficulties in replacing disqualified employees with temporary employees or new hires, increased costs and diminished availability of raw materials and component parts. In addition, increased compliance burdens, including financial costs, diversion of administrative resources and increased downtimes to accommodate for weekly COVID-19 testing, could result in delays in the manufacturing process, which could negatively impact our future sales and ongoing customer relationships.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sale of Equity Securities.

None.

(b) Use of Proceeds.

Not applicable.

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During the three months ended October 3, 2021, we repurchased 369,148 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
July 5, 2021, through August 1, 2021	157,204	$	111.33	157,204	$	250,795,122
August 2, 2021, through August 29, 2021	15,500	115.53		15,500	249,004,334
August 30, 2021, through October 3, 2021	196,444	111.06		196,444	227,187,012
Total	369,148	$	111.37	369,148

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

The following is a list of all exhibits filed or furnished as part of this report:


Exhibit No.		Description







31.1*		Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*		Interactive Data Files pursuant to Rule 405 of Regulation S-T formatted in Inline Extensible Business Reporting Language ("Inline XBRL"): (i) the Registrant's Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended October 3, 2021, and September 27, 2020; (ii) the Registrant's Condensed Consolidated Balance Sheets as of October 3, 2021, and January 3, 2021; (iii) the Registrant's Condensed Consolidated Statements of Changes in Equity for the three and nine months ended October 3, 2021, and September 27, 2020; (iv) the Registrant's Condensed Consolidated Statements of Cash Flows for the nine months ended October 3, 2021, and September 27, 2020; and (v) the notes to the Registrant's Condensed Consolidated Financial Statements
104*		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed or furnished herewith.
#	Denotes management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MASONITE INTERNATIONAL CORPORATION

(Registrant)

Date:

November 9, 2021

/s/ Russell T. Tiejema

Russell T. Tiejema

Executive Vice President and Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)