MasterBrand, Inc. (NYSE:MBC) Q1 2023 Earnings Conference Call May 9, 2023 4:30 AM ET Company Participants Farand Pawlak - Vice President of Investor Relations & Corporate Communication Dave Banyard - President & Chief Executive Officer Andi Simon - Executive Vice President & Chief Financial Officer Conference Call Participants Adam Baumgarten - Zelman Garik Shmois - Loop Capital Markets Operator Welcome to MasterBrand's First Quarter 2023 Earnings Conference Call. During the company's prepared remarks, all ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 26, 2023 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 001-41545 MasterBrand, Inc. (Exact name of registrant as specified in its charter) (State or other jurisdiction of incorporation or organization) (I.R.S. Emplo ...

PART I [Item 1. Business](index=3&type=section&id=Item%201.%20Business) MasterBrand, Inc., North America's largest residential cabinet manufacturer, focuses on operational excellence and strategic growth post-spin-off - **MasterBrand, Inc.** was founded in **1954** and is the largest manufacturer of residential cabinets in North America based on **2021 net sales**[10](index=10&type=chunk) - On **December 14, 2022**, the company completed a tax-free spin-off from **Fortune Brands Innovations, Inc.**, becoming an independent, publicly-traded company[11](index=11&type=chunk) - The company's strategy, 'The MasterBrand Way,' focuses on three initiatives: Align to Grow (reduce complexity, standardize platforms), Lead Through Lean (engage teams, foster problem-solving), and Tech Enabled (leverage digital, data, and analytics for profitable growth and enhanced customer experience)[15](index=15&type=chunk)[16](index=16&type=chunk)[19](index=19&type=chunk) - Products are sold through three primary channels: dealers (over **4,500** across **U.S.** and **Canada**), top North American retailers (**Lowe's**, **Home Depot**), and strategic builders. The company is also actively growing its presence in the e-commerce channel[22](index=22&type=chunk)[24](index=24&type=chunk) Net Sales by Key Customer (2022 vs. 2021) | Customer | 2022 Net Sales (%) | 2021 Net Sales (%) | | :--------------- | :--------------- | :--------------- | | Lowe's Companies | 20% | 18% |\ | The Home Depot | 17% | 18% |\ | International | 6% | 6% | Workforce Distribution (as of Dec 25, 2022) | Role | Number of Associates | | :------------------------ | :------------------- | | Production and Distribution | 11,392 |\ | Office | 2,262 |\ | Total | 13,654 | Safety Measures (2022 vs. 2021) | Metric | 2022 | 2021 | BLS 2021 Industry Average | | :----- | :----- | :----- | :------------------------ | | TRIR | **1.04** | **1.10** | **3.4** |\ | LTR | **0.26** | **0.34** | **1.1** | [Item 1A. Risk Factors](index=9&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from economic conditions, competition, operations, its spin-off, and common stock - **Risks** related to the business include: downward changes in the general economy, housing market, or **interest rates**; intense competition in the cabinet industry with low barriers to entry; competition from countries with lower labor costs; failure to develop new products; reliance on dealer/retailer performance; **loss** of significant customers (**Lowe's** and **Home Depot** account for ~**37%** of **net sales** in **2022**); and challenges in improving organizational productivity and supply chain efficiency[48](index=48&type=chunk)[56](index=56&type=chunk)[58](index=58&type=chunk)[61](index=61&type=chunk)[62](index=62&type=chunk)[64](index=64&type=chunk)[65](index=65&type=chunk)[69](index=69&type=chunk) - Operational **risks** include: global commodity and energy **price volatility**, sustained inflation, inability to attract/retain qualified personnel, labor disputes, **COVID-19** disruptions, IT system delays/breaches, and **risks** associated with international operations (e.g., political, economic, trade environments)[49](index=49&type=chunk)[71](index=71&type=chunk)[73](index=73&type=chunk)[75](index=75&type=chunk)[76](index=76&type=chunk)[78](index=78&type=chunk)[81](index=81&type=chunk)[82](index=82&type=chunk)[83](index=83&type=chunk)[84](index=84&type=chunk) - **Risks** related to the Separation and Distribution include: short independent operating history, reduced diversification compared to **Fortune Brands**, potential inability to achieve expected benefits of independence, significant time/expense involved in separation, less beneficial terms in agreements with **Fortune Brands**, and potential tax liabilities if the spin-off fails to qualify as tax-free[52](index=52&type=chunk)[111](index=111&type=chunk)[112](index=112&type=chunk)[113](index=113&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk)[118](index=118&type=chunk)[119](index=119&type=chunk)[122](index=122&type=chunk)[123](index=123&type=chunk)[124](index=124&type=chunk) - **Risks** related to **common stock** include: no historical public market for **common stock**, potential significant fluctuations in market **price**, future dilution from equity issuances, reliance on subsidiary dividends (as a holding company), and anti-takeover provisions in corporate documents[53](index=53&type=chunk)[134](index=134&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk)[139](index=139&type=chunk) [Item 1B. Unresolved Staff Comments](index=27&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments from the **SEC** [Item 2. Properties](index=27&type=section&id=Item%202.%20Properties) **MasterBrand, Inc.** operates **48** manufacturing and distribution facilities across North America, primarily in the **United States** Operational Facilities by Type and Region (as of Dec 25, 2022) | Type of Facility | United States | Mexico | Canada | Total | | :--------------------------- | :------------ | :----- | :----- | :---- | | Manufacturing facilities | 17 | 4 | 2 | 23 |\ | Distribution centers and warehouses | 20 | 5 | 0 | 25 |\ | Total | 37 | 9 | 2 | 48 | - **18** manufacturing facilities are owned and **5** are leased; **21** distribution centers and warehouses are leased and **4** are owned[156](index=156&type=chunk) [Item 3. Legal Proceedings](index=27&type=section&id=Item%203.%20Legal%20Proceedings) Routine litigation matters are not expected to materially affect the company's financial condition or operations - The company is a defendant in routine litigation matters but believes these will not materially adversely affect its **financial condition**, **results of operations**, or **cash flows**[158](index=158&type=chunk) [Item 4. Mine Safety Disclosures](index=27&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company PART II [Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=28&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) **MasterBrand's common stock** is listed on the **NYSE** under '**MBC**', with no short-term **cash dividends** expected - **MasterBrand's common stock** is listed on the **New York Stock Exchange** under the trading symbol "**MBC**"[161](index=161&type=chunk) - The company currently intends to retain future earnings to finance its business or reduce **debt** and does not expect to pay **cash dividends** in the short term[162](index=162&type=chunk) - As of **March 7, 2023**, there were **8,090** record holders of the company's **common stock**[164](index=164&type=chunk) - No equity securities were purchased by the issuer during the thirteen-week period ended **December 25, 2022**[166](index=166&type=chunk) [Item 6. Reserved](index=28&type=section&id=Item%206.%20Reserved) This item is reserved and contains no information [Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations](index=29&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Conditions%20and%20Results%20of%20Operations) This section analyzes **MasterBrand's financial condition**, operations, liquidity, and critical accounting estimates post-spin-off [Overview](index=30&type=section&id=Overview) **MasterBrand**, North America's largest cabinet manufacturer, reported **$3.28 billion** in **net sales** and **$203.3 million** in **operating income** for **2022**, impacted by charges - **MasterBrand** is the largest manufacturer of residential cabinets in North America, leveraging superior product quality, innovative design, and service excellence[174](index=174&type=chunk) Financial Performance Overview (2022 vs. 2021) | Metric | 2022 (Millions USD) | 2021 (Millions USD) | Change (Millions USD) | Change (%) | | :-------------- | :-------- | :-------- | :---------- | :--------- | | Net Sales | $3,275.5 | $2,855.3 | $420.2 | **14.7%** |\ | Operating Income| 203.3 | 234.3 | (31.0) | (**13.2%**) | - The decrease in **operating income** was primarily due to **$46.4 million** in indefinite-lived tradename **impairment**, **$20.9 million** in additional **restructuring charges**, and **$30.1 million** in increased **corporate expense allocations** from **Fortune Brands**[175](index=175&type=chunk) [Separation from Fortune Brands](index=30&type=section&id=Separation%20from%20Fortune%20Brands) **MasterBrand** completed a tax-free spin-off from **Fortune Brands** on **December 14, 2022**, becoming an independent public company - On **December 14, 2022**, **Fortune Brands** completed a tax-free spin-off of its Cabinets segment, **MasterBrand, Inc.**, to its stockholders, making **MasterBrand** an independent, publicly-traded company listed on the **NYSE** under '**MBC**'[176](index=176&type=chunk)[177](index=177&type=chunk)[178](index=178&type=chunk) - The separation was facilitated by several agreements, including a **Separation and Distribution Agreement**, **Transition Services Agreement**, **Tax Allocation Agreement**, and **Employee Matters Agreement**, to govern ongoing relationships and ensure an orderly transition[179](index=179&type=chunk)[272](index=272&type=chunk) - Benefits of the separation include sharpened strategic and management focus, tailored resource allocation and capital deployment, and distinct investment opportunities for investors[179](index=179&type=chunk) [Basis of Presentation](index=31&type=section&id=Basis%20of%20Presentation) Financial statements reflect historical carve-out information and **corporate expense allocations** from **Fortune Brands** on a **52**- or **53**-week fiscal year - The consolidated financial statements are prepared on a **52**- or **53**-week fiscal year basis, ending on the last Sunday in December, and reflect historical carve-out financial information prior to the Separation[180](index=180&type=chunk)[274](index=274&type=chunk) - Historical financial statements include **allocations of corporate expenses** from **Fortune Brands**, totaling **$92.5 million** in **2022**, **$62.0 million** in **2021**, and **$61.6 million** in **2020**, which may not be indicative of future standalone costs[181](index=181&type=chunk)[276](index=276&type=chunk) - **Income tax** amounts are calculated on a separate return method, and pre-Separation tax payments/refunds were handled by **Fortune Brands**, with **net taxes payable** to **Fortune Brands** recorded as **$32.6 million** as of **December 25, 2022**[182](index=182&type=chunk)[278](index=278&type=chunk) - The company incurred **$2.2 million** in **interest expense** in **2022** due to new indebtedness incurred post-Separation, whereas prior periods had no third-party borrowings[196](index=196&type=chunk) [Results of Operations](index=32&type=section&id=Results%20of%20Operations) **Net sales** increased by **14.7%** to **$3.28 billion** in **2022**, while **operating income** decreased by **13.2%** to **$203.3 million** due to charges and **expenses** Consolidated Statements of Income (2022 vs. 2021) | (Millions USD) | 2022 | 2021 | Change (Millions USD) | Change (%) | | :---------------------------------- | :-------- | :-------- | :---------- | :--------- | | Net sales | $3,275.5 | $2,855.3 | $420.2 | **14.7%** |\ | Cost of products sold | 2,335.0 | 2,071.4 | 263.6 | **12.7%** |\ | Gross Profit | 940.5 | 783.9 | 156.6 | **20.0%** |\ | Selling, general and administrative expenses | 648.5 | 527.6 | 120.9 | **22.9%** |\ | Amortization of intangible assets | 17.2 | 17.8 | (0.6) | (**3.4%**) |\ | Asset impairment charges | 46.4 | — | 46.4 | n/m |\ | Restructuring charges | 25.1 | 4.2 | 20.9 | n/m |\ | Operating income | 203.3 | 234.3 | (31.0) | (**13.2%**) |\ | Related party interest income, net | (12.9) | (4.6) | (8.3) | **180.4%** |\ | Interest expense | 2.2 | — | 2.2 | n/m |\ | Other expense, net | 0.6 | 0.6 | — | n/m |\ | Income before taxes | 213.4 | 238.3 | (24.9) | (**10.4%**) |\ | Income tax expense | 58.0 | 55.7 | 2.3 | **4.1%** |\ | Net income | $155.4 | $182.6 | $(27.2) | (**14.9%**) | - **Net sales** increased by **$420.2 million (14.7%)** in **2022**, driven by favorable pricing, partially offset by lower sales volume and unfavorable foreign currency impact[188](index=188&type=chunk) - **Cost of products sold** increased by **$263.6 million (12.7%)** due to commodity and labor inflation, and higher inbound transportation costs, partially offset by manufacturing productivity improvements[189](index=189&type=chunk) - **Selling, general and administrative expenses** rose by **$120.9 million (22.9%)** due to higher distribution costs, employee-related costs, increased **corporate expense allocations** from **Fortune Brands**, and direct separation-related costs[190](index=190&type=chunk) - **Asset impairment charges** of **$46.4 million** were recognized in **2022**, primarily related to indefinite-lived tradenames due to shifts in production and customer demand amid inflation and elevated **interest rates**[191](index=191&type=chunk)[192](index=192&type=chunk) - **Restructuring charges** increased by **$20.9 million** to **$25.1 million** in **2022**, mainly for severance and employee-related costs from facility relocations and closures[193](index=193&type=chunk) - **Operating income** decreased by **$31.0 million (13.2%)** in **2022**, primarily due to the aforementioned **impairment**, **restructuring**, and increased **corporate expense allocations**[194](index=194&type=chunk) Income Tax Expense and Effective Tax Rate (2022 vs. 2021) | (Millions USD) | 2022 | 2021 | | :------------------ | :----- | :----- | | Income before taxes | $213.4 | $238.3 |\ | Income tax expense | 58.0 | 55.7 |\ | Effective tax rate | **27.2%** | **23.4%** | - The **effective tax rate** increased to **27.2%** in **2022** from **23.4%** in **2021**, mainly due to state and local **income taxes** and **IRS** audit adjustments, partially offset by benefits from uncertain tax position releases and lower foreign tax rates[199](index=199&type=chunk)[200](index=200&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) **MasterBrand** established its own treasury post-spin-off, securing a **$1.25 billion credit agreement** for **working capital** and **capital expenditures** - Post-Separation, **MasterBrand** no longer receives financial support from **Fortune Brands** and has established its own centralized treasury and **cash management**. The company's primary liquidity needs are for **working capital**, **capital expenditures**, and potential acquisitions[202](index=202&type=chunk)[203](index=203&type=chunk) - On **November 18, 2022**, **MasterBrand** entered into a **5**-year, **$1.25 billion credit agreement**, comprising a **$750 million** term loan and a **$500 million** revolving **credit facility**. Initial proceeds of **$955 million** were used to pay a **$940.0 million cash dividend** to **Fortune Brands** and cover related fees[204](index=204&type=chunk) - As of **December 25, 2022**, the company had **$985.0 million** in outstanding third-party borrowings and was in compliance with all financial covenants of the **2022 Credit Agreement**[207](index=207&type=chunk)[206](index=206&type=chunk) Cash Flows Summary (2022 vs. 2021) | (Millions USD) | 2022 | 2021 | | :-------------------------------- | :------ | :------ | | Net cash provided by operating activities | $235.6 | $148.2 |\ | Net cash used in investing activities | (55.9) | (51.5) |\ | Net cash used in financing activities | (215.3) | (109.7) |\ | Net (decrease) in cash and cash equivalents | $(40.3) | $(12.9) | - **Operating cash flow** increased in **2022** due to **net income** and non-cash charges, despite increases in **inventory** driven by higher material costs and strategic **inventory** build-up[210](index=210&type=chunk) - **Financing activities** in **2022** reflect the **$940.0 million dividend payment** to **Fortune Brands**, funded by new external **debt**, and the cessation of financing relationships with **Fortune Brands**[212](index=212&type=chunk) - The company believes its **cash**, **operating cash flows**, and **credit facilities** are adequate for future needs, with access to additional **capital markets** for strategic initiatives[214](index=214&type=chunk) Allowance for Doubtful Accounts (2022 vs. 2021) | (Millions USD) | 2022 | 2021 | | :------------ | :---- | :---- | | Ending balance| $11.6 | $2.5 | - The **pension plan**, frozen since **2016**, had **assets** of **$119.4 million (92.6%** of **accumulated benefit obligation)** as of **December 25, 2022**, with **$1.1 million** in contributions during fiscal **2022**[217](index=217&type=chunk) Contractual Obligations (as of Dec 25, 2022) | Obligation Type | Total (Millions USD) | Due within 1 year (Millions USD) | | :-------------------- | :--------- | :--------------------- | | Purchase obligations | $234.6 | $223.9 |\ | Operating lease payments | $59.0 | $15.2 |\ | Debt payments | $985.0 | $18.8 |\ | Interest payments | $301.9 | $70.6 | [Recently Issued Accounting Standards](index=38&type=section&id=Recently%20Issued%20Accounting%20Standards) Recent accounting standards for government assistance and **income taxes** did not materially affect the company's financial statements - The adoption of **ASU 2021-10** (Government Assistance) and **ASU 2019-12** (Simplifying the Accounting for **Income Taxes**) did not have a material effect on the company's financial statements[225](index=225&type=chunk)[331](index=331&type=chunk)[332](index=332&type=chunk) - There are no other recently issued accounting pronouncements expected to have a material effect on the company's **financial position**, **results of operations**, or **cash flows**[333](index=333&type=chunk) [Critical Accounting Estimates](index=38&type=section&id=Critical%20Accounting%20Estimates) Critical accounting estimates include **inventories**, **intangible assets**, **defined benefit plans**, **income taxes**, and **customer program costs**, with **$46.4 million** in **2022 impairment charges** - **Critical accounting estimates** include **inventories** (provisions for obsolete/slow-moving items), **goodwill** and indefinite-lived **intangible assets** (annual **impairment testing** using discounted **cash flow** and relief-from-royalty approaches), **defined benefit plans** (actuarial assumptions for **discount rates**, **asset returns**, mortality), **income taxes** (deferred taxes, uncertain tax benefits, valuation allowances), and **customer program costs** (**revenue reductions** for incentives)[227](index=227&type=chunk)[228](index=228&type=chunk)[241](index=241&type=chunk)[247](index=247&type=chunk)[253](index=253&type=chunk) - In **2022**, the company recognized **$46.4 million** in **asset impairment charges** related to indefinite-lived tradenames due to shifts in production and customer demand, influenced by inflation and elevated **interest rates**[234](index=234&type=chunk)[235](index=235&type=chunk)[236](index=236&type=chunk) Key Assumptions for Indefinite-Lived Tradenames Impairment Testing (2022 vs. 2021 vs. 2020) | Unobservable Input | 2022 (Weighted Average) | 2021 (Weighted Average) | 2020 (Weighted Average) | | :-------------------------- | :------------- | :------------- | :------------- | | Discount rate | **12.2%** | **11.2%** | **12.9%** |\ | Royalty rate | **3.5%** | **3.4%** | **3.3%** |\ | Long-term revenue growth rate | **2.0%** | **2.6%** | **2.6%** | - A **50** basis point change in **discount rate**, **royalty rate**, or long-term **revenue growth rate** at **December 25, 2022**, would have resulted in incremental **impairments** of **$2.8 million**, **$12.2 million**, and **$1.5 million**, respectively, for the impaired tradenames[240](index=240&type=chunk) Pension Expense (Income) and Actuarial Loss (2022 vs. 2021 vs. 2020) | (Millions USD) | 2022 | 2021 | 2020 | | :---------------------------------- | :----- | :----- | :----- | | Total pension expense (income) | $(2.0) | $(2.8) | $(0.2) |\ | Actuarial loss component of expense | 0.2 | — | 0.5 | - The **2022 actuarial losses** were primarily due to negative **asset returns**, partially offset by increased **discount rates** (**5.2%** in **2022** vs. **3.0%** in **2021** for benefit obligations)[245](index=245&type=chunk)[244](index=244&type=chunk) [Item 7A. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) **MasterBrand** is exposed to **market risks** from **interest rates**, foreign currency, and commodity prices, using forward foreign exchange contracts for hedging - **MasterBrand** is exposed to **market risks** from changes in **interest rates**, foreign currency exchange **rates**, and commodity **prices**[254](index=254&type=chunk) - The company uses forward foreign exchange contracts to hedge currency fluctuations, primarily for the **Canadian dollar** and **Mexican peso**, but does not use derivatives for trading or speculation[256](index=256&type=chunk)[254](index=254&type=chunk) - A hypothetical **100** basis point increase in **interest rates** on the **$985.0 million** variable **rate** borrowings as of **December 25, 2022**, would increase annual pre-tax borrowing costs by **$9.9 million**[255](index=255&type=chunk) [Item 8. Financial Statements and Supplementary Data](index=44&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements, notes, and the independent auditor's report [Consolidated Statements of Income](index=44&type=section&id=Consolidated%20Statements%20of%20Income) This section presents consolidated statements of **income** for **2022**, **2021**, and **2020**, detailing **net sales**, **gross profit**, **operating income**, and **net income** Consolidated Statements of Income (2022, 2021, 2020) | (Millions USD, except per share amounts) | 2022 | 2021 | 2020 | | :-------------------------------------- | :-------- | :-------- | :-------- | | NET SALES | $3,275.5 | $2,855.3 | $2,469.3 |\ | Cost of products sold | 2,335.0 | 2,071.4 | 1,766.3 |\ | GROSS PROFIT | 940.5 | 783.9 | 703.0 |\ | Selling, general and administrative expenses | 648.5 | 527.6 | 473.6 |\ | Amortization of intangible assets | 17.2 | 17.8 | 17.8 |\ | Asset impairment charges | 46.4 | — | 9.5 |\ | Restructuring charges | 25.1 | 4.2 | 6.1 |\ | OPERATING INCOME | 203.3 | 234.3 | 196.0 |\ | Related party interest income, net | (12.9) | (4.6) | (2.4) |\ | Interest expense | 2.2 | — | — |\ | Other expense, net | 0.6 | 0.6 | 2.2 |\ | Income before taxes | 213.4 | 238.3 | 196.2 |\ | Income tax expense | 58.0 | 55.7 | 50.5 |\ | NET INCOME | $155.4 | $182.6 | $145.7 |\ | Basic Earnings Per Common Share | $1.21 | $1.43 | $1.14 |\ | Diluted Earnings Per Common Share | $1.20 | $1.43 | $1.14 | [Consolidated Statements of Comprehensive Income](index=45&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents consolidated statements of **comprehensive income** for **2022**, **2021**, and **2020**, detailing **net income** and other **comprehensive income** components Consolidated Statements of Comprehensive Income (2022, 2021, 2020) | (Millions USD) | 2022 | 2021 | 2020 | | :---------------------------------------------- | :-------- | :-------- | :-------- | | NET INCOME | $155.4 | $182.6 | $145.7 |\ | Other comprehensive (loss) income, before tax: | | | |\ | Foreign currency translation adjustments | (9.9) | (0.9) | 4.2 |\ | Unrealized gains (losses) on derivatives | 2.7 | (2.4) | 0.9 |\ | Defined benefit plans | (4.4) | 9.4 | 0.2 |\ | Other comprehensive (loss) income, before tax | (11.6) | 6.1 | 5.3 |\ | Income tax benefit (expense) related to items of other comprehensive income | 1.0 | (2.3) | (0.3) |\ | Other comprehensive (loss) income, net of tax | (10.6) | 3.8 | 5.0 |\ | COMPREHENSIVE INCOME | $144.8 | $186.4 | $150.7 | [Consolidated Balance Sheets](index=46&type=section&id=Consolidated%20Balance%20Sheets) This section presents consolidated **balance sheets** as of **December 25, 2022**, and **December 26, 2021**, detailing **assets**, **liabilities**, and **equity** Consolidated Balance Sheets (as of Dec 25, 2022 vs. Dec 26, 2021) | (Millions USD) | 2022 | 2021 | | :---------------------------------------------- | :-------- | :-------- | | **ASSETS** | | |\ | Cash and cash equivalents | $101.1 | $141.4 |\ | Accounts receivable, net | 289.6 | 305.3 |\ | Inventories | 373.1 | 304.3 |\ | TOTAL CURRENT ASSETS | 830.0 | 810.0 |\ | Property, plant and equipment, net | 352.6 | 338.7 |\ | Goodwill | 924.2 | 926.2 |\ | Other intangible assets, net | 349.8 | 415.7 |\ | Related party receivable | — | 419.7 |\ | TOTAL ASSETS | $2,529.4 | $3,004.9 |\ | **LIABILITIES AND EQUITY** | | |\ | Accounts payable | $219.2 | $203.9 |\ | Current portion of long-term debt | 17.5 | — |\ | TOTAL CURRENT LIABILITIES | 411.1 | 364.1 |\ | Long-term debt | 961.5 | — |\ | Deferred income taxes | 87.3 | 88.9 |\ | Related party payable | — | 9.1 |\ | TOTAL LIABILITIES | 1,520.2 | 551.1 |\ | TOTAL EQUITY | 1,009.2 | 2,453.8 |\ | TOTAL LIABILITIES AND EQUITY | $2,529.4 | $3,004.9 | [Consolidated Statements of Cash Flows](index=47&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section presents consolidated statements of **cash flows** for **2022**, **2021**, and **2020**, detailing **operating**, **investing**, and **financing activities** Consolidated Statements of Cash Flows (2022, 2021, 2020) | (Millions USD) | 2022 | 2021 | 2020 | | :-------------------------------------- | :-------- | :-------- | :-------- | | NET CASH PROVIDED BY OPERATING ACTIVITIES | $235.6 | $148.2 | $204.6 |\ | NET CASH USED IN INVESTING ACTIVITIES | (55.9) | (51.5) | (26.7) |\ | NET CASH USED IN FINANCING ACTIVITIES | (215.3) | (109.7) | (179.2) |\ | Effect of foreign exchange rate changes on cash | (4.7) | 0.1 | 0.8 |\ | NET DECREASE IN CASH AND CASH EQUIVALENTS | $(40.3) | $(12.9) | $(0.5) |\ | Cash and cash equivalents at beginning of year | $141.4 | $154.3 | $154.8 |\ | Cash and cash equivalents at end of year | $101.1 | $141.4 | $154.3 | [Consolidated Statements of Equity](index=48&type=section&id=Consolidated%20Statements%20of%20Equity) This section presents consolidated statements of **equity** for **2022**, **2021**, and **2020**, detailing changes in **common stock**, **paid-in capital**, and **retained earnings** Consolidated Statements of Equity (2022, 2021, 2020) | (Millions USD) | Common Stock Shares | Common Stock Amount (Millions USD) | Paid-In Capital (Millions USD) | Treasury stock, at cost (Millions USD) | Accumulated Other Comprehensive (Loss) Income (Millions USD) | Retained Earnings (Millions USD) | Total Equity (Millions USD) | | :---------------------------------------------- | :------------------ | :------------------ | :-------------- | :---------------------- | :-------------------------------------------- | :---------------- | :----------- | | Balance at December 29, 2019 | 0.0 | $0.0 | $157.8 | $— | $(12.7) | $1,857.2 | $2,002.3 |\ | Net income | — | — | — | — | — | 145.7 | 145.7 |\ | Other comprehensive income | — | — | — | — | 5.0 | — | 5.0 |\ | Stock-based compensation | — | — | 9.7 | — | — | — | 9.7 |\ | Net contributions from Fortune Brands | — | — | 51.7 | — | — | — | 51.7 |\ | Balance at December 27, 2020 | 0.0 | $0.0 | $219.2 | $— | $(7.7) | $2,002.9 | $2,214.4 |\ | Net income | — | — | — | — | — | 182.6 | 182.6 |\ | Other comprehensive income | — | — | — | — | 3.8 | — | 3.8 |\ | Stock-based compensation | — | — | 9.3 | — | — | — | 9.3 |\ | Net contributions from Fortune Brands | — | — | 43.7 | — | — | — | 43.7 |\ | Balance at December 26, 2021 | — | $— | $272.2 | $— | $(3.9) | $2,185.5 | $2,453.8 |\ | Distribution of MasterBrand, Inc. stock to Fortune Brands shareholders | 128.0 | 1.3 | — | | — | — | 1.3 |\ | Net income | — | — | — | — | — | 155.4 | 155.4 |\ | Other comprehensive loss | — | — | — | — | (10.6) | — | (10.6) |\ | Stock-based compensation | — | — | 10.9 | (0.1) | — | — | 10.8 |\ | Dividend to Fortune Brands | — | — | — | — | — | (940.0) | (940.0) |\ | Net contributions from (distributions to) Fortune Brands | — | — | 110.6 | — | — | (105.3) | 5.3 |\ | Return of capital to Fortune Brands | — | — | (393.7) | — | — | (273.1) | (666.8) |\ | Balance at December 25, 2022 | 128.0 | $1.3 | $— | $(0.1) | $(14.5) | $1,022.5 | $1,009.2 | [Notes to Consolidated Financial Statements](index=49&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed notes to the financial statements, covering accounting policies, **debt**, **income taxes**, **pension plans**, and related party transactions - Note **1** details the company's background, including its spin-off from **Fortune Brands** on **December 14, 2022**, and the basis of presentation for its consolidated financial statements as a standalone public company[269](index=269&type=chunk)[271](index=271&type=chunk)[272](index=272&type=chunk) - Note **2** outlines significant accounting policies, including **revenue recognition**, **customer program costs**, **cost of products sold**, **SG&A expenses**, **stock-based compensation**, foreign currency translation, **income taxes**, **earnings per share**, allowances for **credit losses**, **inventories**, **property/plant/equipment**, leases, **goodwill**, indefinite-lived **intangible assets**, derivative financial instruments, **pension/postretirement benefits**, insurance reserves, and litigation contingencies[283](index=283&type=chunk)[284](index=284&type=chunk)[285](index=285&type=chunk)[287](index=287&type=chunk)[288](index=288&type=chunk)[290](index=290&type=chunk)[292](index=292&type=chunk)[293](index=293&type=chunk)[302](index=302&type=chunk)[303](index=303&type=chunk)[304](index=304&type=chunk)[305](index=305&type=chunk)[306](index=306&type=chunk)[307](index=307&type=chunk)[309](index=309&type=chunk)[312](index=312&type=chunk)[318](index=318&type=chunk)[324](index=324&type=chunk)[326](index=326&type=chunk)[328](index=328&type=chunk)[329](index=329&type=chunk)[330](index=330&type=chunk) Disaggregated Revenue by Channel (2022, 2021, 2020) | (Millions USD) | 2022 | 2021 | 2020 | | :------------ | :-------- | :-------- | :-------- | | Dealers | $1,674.0 | $1,489.6 | $1,220.0 |\ | Retailers | 1,083.0 | 931.4 | 879.9 |\ | Builders | 329.8 | 259.5 | 219.7 |\ | U.S. net sales| 3,086.8 | 2,680.5 | 2,319.6 |\ | International | 188.7 | 174.8 | 149.7 |\ | Net sales | $3,275.5 | $2,855.3 | $2,469.3 | - Note **11** details the company's **debt**, including a **$1.25 billion credit agreement** (a **$750 million** term loan and a **$500 million** revolving **credit facility**) entered into on **November 18, 2022**, with **$985.0 million** outstanding as of **December 25, 2022**[369](index=369&type=chunk) - Note **12** reports **restructuring charges** of **$25.1 million** in **2022**, primarily for severance and employee-related costs due to facility relocations and closures[374](index=374&type=chunk) - Note **13** discusses **income taxes**, with an **effective tax rate** of **27.2%** in **2022**, up from **23.4%** in **2021**, influenced by **IRS** audit adjustments and state/local taxes[381](index=381&type=chunk) - Note **14** covers **pension** and other postretirement plans, noting the **pension plan** was frozen in **2016**. **Actuarial losses** in **2022** were mainly due to negative **asset returns**[401](index=401&type=chunk)[404](index=404&type=chunk) - Note **17** details **stock-based compensation**, including the adjustment of **Fortune Brands' awards** into **MasterBrand stock awards** post-Separation. Total pre-tax **expense** was **$10.9 million** in **2022**[421](index=421&type=chunk)[424](index=424&type=chunk) - Note **20** addresses related party transactions, explaining the historical financial support and **expense allocations** from **Fortune Brands** prior to the Separation, and the cessation of these arrangements[438](index=438&type=chunk)[439](index=439&type=chunk)[440](index=440&type=chunk) - Note **21** reports a subsequent event: a tornado hit the **Jackson, Georgia** facility on **January 12, 2023**, causing damage and disrupting operations, with potential insurance coverage for **losses**[447](index=447&type=chunk) [Report of Independent Registered Public Accounting Firm](index=84&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) **PricewaterhouseCoopers LLP** issued an unqualified opinion on the financial statements, highlighting indefinite-lived tradename **impairment** as a critical audit matter - **PricewaterhouseCoopers LLP** issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the **financial position**, **results of operations**, and **cash flows** in conformity with **GAAP**[452](index=452&type=chunk) - A Critical Audit Matter identified was the quantitative **impairment tests** for certain indefinite-lived tradenames, due to significant management judgment in fair value estimates and the complexity of evaluating assumptions like forecasted **revenue growth rates**, **royalty rates**, and **discount rates**[457](index=457&type=chunk)[458](index=458&type=chunk) [Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures](index=87&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) There have been no changes in or disagreements with accountants on accounting and financial disclosures [Item 9A. Controls and Procedures](index=87&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of **December 25, 2022**, with no material changes in internal control over financial reporting - As of **December 25, 2022**, the **CEO** and **CFO** concluded that disclosure controls and procedures were effective[463](index=463&type=chunk) - The report does not include a management's assessment or auditor attestation on internal control over financial reporting due to a transition period for newly public companies[464](index=464&type=chunk) - There were no material changes in internal control over financial reporting during the quarter ended **December 25, 2022**[465](index=465&type=chunk) [Item 9B. Other Information](index=87&type=section&id=Item%209B.%20Other%20Information) This item contains no other information [Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=87&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company PART III [Item 10. Directors, Executive Officers and Corporate Governance](index=88&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the **2023 Proxy Statement** - Information on directors, executive officers, and corporate governance is incorporated by reference from the **2023 Annual Meeting of Shareholders Proxy Statement**[470](index=470&type=chunk) - The company's code of conduct is available on its website under the 'Investors' section[471](index=471&type=chunk) [Item 11. Executive Compensation](index=88&type=section&id=Item%2011.%20Executive%20Compensation) Information on executive compensation is incorporated by reference from the **2023 Proxy Statement** - Information on executive compensation is incorporated by reference from the **2023 Annual Meeting of Shareholders Proxy Statement**[472](index=472&type=chunk) [Item 12. Security Ownership of Certain Beneficial Owner and Management and Related Stockholder Matters](index=88&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owner%20and%20Management%20and%20Related%20Stockholder%20Matters) Information on security ownership and related stockholder matters is incorporated by reference from the **2023 Proxy Statement** - Information on security ownership and related stockholder matters is incorporated by reference from the **2023 Annual Meeting of Shareholders Proxy Statement**[473](index=473&type=chunk) [Item 13. Certain Relationships and Related Transactions, and Director Independence](index=88&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the **2023 Proxy Statement** - Information on certain relationships, related transactions, and director independence is incorporated by reference from the **2023 Annual Meeting of Shareholders Proxy Statement**[474](index=474&type=chunk) [Item 14. Principal Accounting Fees and Services](index=88&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information on principal accounting fees and services is incorporated by reference from the **2023 Proxy Statement** - Information on principal accounting fees and services is incorporated by reference from the **2023 Annual Meeting of Shareholders Proxy Statement**[475](index=475&type=chunk) PART IV [Item 15. Exhibits, Financial Statement Schedules](index=89&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists consolidated financial statements, schedules, and exhibits, including key spin-off agreements and corporate governance documents - The report includes **Consolidated Statements of Income**, **Comprehensive Income**, **Balance Sheets**, **Cash Flows**, and **Equity** for the years ended **December 25, 2022**, **December 26, 2021**, and **December 27, 2020**, along with **Notes to Consolidated Financial Statements** and the **Report of Independent Registered Public Accounting Firm**[478](index=478&type=chunk) - Financial statement schedules include **Valuation and Qualifying Accounts** for allowances related to **cash discounts**, **sales allowances**, **customer programs**, and **deferred tax assets**[479](index=479&type=chunk) - Exhibits include the **Separation and Distribution Agreement**, Amended and Restated Certificate of Incorporation and Bylaws, **Transition Services Agreement**, **Tax Allocation Agreement**, **Employee Matters Agreement**, and various incentive plans[482](index=482&type=chunk) [Item 16. Form 10-K Summary](index=90&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable and contains no summary [Signatures](index=91&type=section&id=Signatures) This section contains the required signatures for the **Annual Report on Form 10-K** from the **CEO**, **CFO**, **Chief Accounting Officer**, and **Board of Directors** - The report is signed by **R. David Banyard, Jr.** (**President** & **CEO**), **Andrea H. Simon** (**EVP** & **CFO**), **Mark A. Young** (**VP** & **Chief Accounting Officer**), and several Directors, dated **March 10, 2023**[487](index=487&type=chunk)[490](index=490&type=chunk) [Schedule II Valuation and Qualifying Accounts](index=92&type=section&id=Schedule%20II%20Valuation%20and%20Qualifying%20Accounts) This schedule summarizes changes in **valuation and qualifying accounts** for **2022**, **2021**, and **2020**, including allowances for discounts, **customer programs**, and **deferred tax assets** Valuation and Qualifying Accounts Activity (2022, 2021, 2020) | (Millions USD) | Balance at Beginning of Period | Charges (Millions USD) | Write-offs and (Millions USD) Deductions | Balance at End of Period | | :---------------------------------------------- | :----------------------------- | :---------- | :---------------------------- | :----------------------- | | **2022:** | | | | |\ | Allowance for cash discounts and sales allowances | $5.6 | $85.2 | $85.2 | $5.6 |\ | Customer program allowance | 55.3 | 141.0 | 138.0 | 58.3 |\ | Allowance for deferred tax assets | 1.2 | — | — | 1.2 |\ | **2021:** | | | | |\ | Allowance for cash discounts and sales allowances | $5.9 | $66.5 | $66.8 | $5.6 |\ | Customer program allowance | 37.2 | 157.1 | 139.0 | 55.3 |\ | Allowance for deferred tax assets | 1.3 | (0.1) | — | 1.2 |\ | **2020:** | | | | |\ | Allowance for cash discounts and sales allowances | $4.8 | $98.7 | $97.6 | $5.9 |\ | Allowance for credit losses | 0.8 | 2.5 | 0.9 | 2.4 |\ | Customer program allowance | 28.1 | 9.1 | — | 37.2 |\ | Allowance for deferred tax assets | 0.2 | 1.1 | — | 1.3 | - Charges for **cash discounts**, **sales allowances**, and **customer program allowances** are classified as a reduction in **net sales**. Charges for **credit losses** are classified as **selling, general and administrative expenses**. Charges for **deferred tax assets** are classified as **income tax expense**[491](index=491&type=chunk)

Financial Data and Key Metrics Changes - Fourth quarter net sales were $784.4 million, an increase of 5.3% year-over-year, primarily driven by previously implemented price increases, partially offset by volume declines due to higher interest rates and economic uncertainty [43][162] - Adjusted diluted earnings per share were $0.52 in the fourth quarter, a 62.5% year-over-year increase compared to $0.32 in the fourth quarter of 2021 [15] - Adjusted EBITDA was $97.8 million in the fourth quarter, a 46.6% increase compared to $66.7 million in the same period last year [172] - Full year net sales reached approximately $3.3 billion, representing year-on-year growth of roughly 14.7% [46][155] - Gross profit margin expanded 120 basis points year-over-year from 27.5% to 28.7% [16] Business Line Data and Key Metrics Changes - The mantra brand, an affordably priced full plywood construction product, grew double digits year-over-year in the fourth quarter, outperforming other parts of the business [5] - R&R (repair and remodel) through both dealer and retail channels has been consistent since the end of the third quarter, albeit at a lower level than the prior year [37] - The company has seen a shift towards lower-priced products, impacting overall average selling prices (ASP) [156] Market Data and Key Metrics Changes - The new construction market in the Southeast U.S. has held up better than other regions, although builder channel orders slowed more than anticipated as the year ended [6] - Market conditions have softened further since the Investor Day, with expectations for end markets to be down low double digits in 2023 [20] - The backlog has returned to a more normalized level, presenting a headwind of nearly $200 million in 2023, impacting net sales year-over-year [21] Company Strategy and Development Direction - The company aims to leverage its industry-leading dealer network, unmatched product portfolio, and operational excellence to maintain its position as the number one North American residential cabinet business [8] - Strategic initiatives include "Align to Grow," "Lead Through Lean," and "Tech-Enabled," focusing on continuous improvement and operational efficiency [165] - The company plans to continue investing in strategic initiatives, particularly in high-return areas such as tech-enabled efforts, despite a challenging market environment [22] Management's Comments on Operating Environment and Future Outlook - Management acknowledges a softer environment in 2023 but believes long-term trends for the housing market remain favorable [7] - The company expects adjusted EBITDA in the range of $305 million to $335 million for 2023, with related adjusted EBITDA margins roughly 11% to 12% [54] - Management emphasizes the importance of maintaining cash flow and controlling costs while navigating market challenges [114] Other Important Information - Capital expenditures in 2022 were $55.9 million, with free cash flow of $179.7 million compared to $96.6 million the previous year [19] - The company achieved an OSHA recordable rate of 1.04 in 2022, a year-on-year improvement of 5% from 2021, reflecting a strong commitment to safety [136] Q&A Session Summary Question: Update on the company's strategy since the Investor Day - The company has made significant progress on its strategic initiatives, including "Align to Grow," which focuses on identifying growth opportunities [58] Question: Outlook on the R&R side of the market - Management believes the R&R market has been steady, with good visibility on its pace, although influenced by interest rates [139] Question: Drivers behind better than expected decremental margin guidance - The company has proactively managed fixed costs and improved operational efficiency, leading to better decremental margins [78] Question: Sustainability of initiatives driving better decrementals - The company believes that tech-enabled initiatives will enhance the stickiness of changes made, contributing to sustainable improvements [86] Question: Components of inventory growth year-over-year - The majority of inventory increases were related to raw materials, with efforts underway to reduce inventory to normal levels [89][104]