Masonite(DOOR) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Unaudited Financial Statements The company's unaudited condensed consolidated financial statements for the periods ended June 30, 2019 are presented Condensed Consolidated Statements of Comprehensive Income Net sales and net income attributable to Masonite declined for the three and six months ended June 30, 2019 Net Sales and Net Income Attributable to Masonite | Metric | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $562,943 | $566,726 | $1,093,254 | $1,084,605 | | Net Income Attributable to Masonite | $24,242 | $34,741 | $28,031 | $55,567 | Basic Earnings Per Common Share Attributable to Masonite | Period | Three Months Ended June 30, 2019 | Three Months Ended July 1, 2018 | Six Months Ended June 30, 2019 | Six Months Ended July 1, 2018 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.96 | $1.26 | $1.11 | $1.99 | Condensed Consolidated Balance Sheets Total assets and liabilities increased while total equity decreased as of June 30, 2019 Consolidated Balance Sheet Summary | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | Total Assets | $1,925,798 | $1,778,465 | | Total Liabilities | $1,311,227 | $1,156,160 | | Total Equity | $614,571 | $622,305 | - Operating lease right-of-use assets were recognized at $143,613 thousand as of June 30, 2019, with corresponding long-term operating lease liabilities of $132,949 thousand[18] Condensed Consolidated Statements of Changes in Equity Total equity decreased from the prior year, influenced by lower net income and continued share repurchases Total Equity and Net Income Attributable to Masonite | Item | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Total Equity, end of period | $614,571 | $709,515 | | Net Income Attributable to Masonite (six months) | $28,031 | $55,567 | - Common shares repurchased and retired for the six months ended June 30, 2019, totaled 953,888 shares, compared to 961,534 shares for the six months ended July 1, 2018[21] Condensed Consolidated Statements of Cash Flows Operating cash flow remained stable while cash used in investing activities decreased significantly in H1 2019 Cash Flow Summary (Six Months Ended) | Activity | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash flow provided by operating activities | $88,213 | $87,977 | | Net cash flow used in investing activities | $(39,237) | $(169,893) | | Net cash flow used in financing activities | $(52,458) | $(65,811) | | Decrease in cash, cash equivalents and restricted cash | $(2,853) | $(147,928) | Notes to the Condensed Consolidated Financial Statements Detailed notes provide context on accounting policies, acquisitions, debt, segment performance, and other financial items Note 1. Business Overview and Significant Accounting Policies Masonite, a global door manufacturer, adopted new accounting standards for leases, cloud computing, and goodwill in 2019 - Masonite is one of the largest manufacturers of doors globally, operating 65 manufacturing locations in 8 countries[29] - Early adopted ASU 2018-15 (Cloud Computing) and ASU 2017-04 (Goodwill Impairment) in fiscal year 2019, with no material impact on results of operations or financial statements[33][36] Impact of Lease Standard Adoption (as of December 31, 2018) | Item | Amount (in thousands) | | :--- | :--- | | ROU asset recognized | $108,000 | | Lease liability recognized | $113,900 | Note 2. Acquisitions and Disposition The company completed three acquisitions in 2018 and disposed of one subsidiary in March 2019 at a loss 2018 Acquisitions Summary | Acquisition | Date | Cash Consideration (net of cash acquired) | | :--- | :--- | :--- | | Bridgewater Wholesalers Inc. (BWI) | Nov 1, 2018 | $22.3 million | | Graham Manufacturing Corporation and The Maiman Company | Jun 1, 2018 | $39.0 million | | DW3 Products Holdings Limited | Jan 29, 2018 | $96.3 million | - Finalized purchase price allocation for the BWI acquisition resulted in a $0.4 million increase in goodwill during the six months ended June 30, 2019[45] - Disposed of Performance Doorset Solutions Limited (PDS) on March 21, 2019, for nominal consideration, recognizing a $4.6 million loss on disposal of subsidiaries[56] Note 3. Accounts Receivable Net accounts receivable increased, with The Home Depot remaining a key customer representing over 10% of the balance Accounts Receivable, Net | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2019 | $308,236 | | December 30, 2018 | $283,580 | - The Home Depot, Inc. accounted for more than 10% of the consolidated gross accounts receivable balance as of June 30, 2019, and December 30, 2018[57] - The company maintains an accounts receivable sales program where receivables are sold outright to a third party who assumes full collection risk, without recourse[58] Note 4. Inventories Net inventories increased slightly as of June 30, 2019, driven by a rise in finished goods Inventories, Net | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | Raw materials | $183,240 | $189,145 | | Finished goods | $80,577 | $69,026 | | Provision for obsolete or aged inventory | $(9,192) | $(7,764) | | Inventories, net | $254,625 | $250,407 | Note 5. Property, Plant and Equipment Net property, plant and equipment decreased while total depreciation expense increased in the first half of 2019 Property, Plant and Equipment, Net | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | Property, plant and equipment, gross | $935,193 | $934,972 | | Accumulated depreciation | $(340,655) | $(325,219) | | Property, plant and equipment, net | $594,538 | $609,753 | Total Depreciation Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Depreciation expense | $18,200 | $13,700 | $36,500 | $27,600 | Note 6. Leases The adoption of new lease standards resulted in the recognition of significant right-of-use assets and lease liabilities - Adopted ASU 2016-02, 'Leases (Topic 842),' utilizing the modified retrospective method as of December 31, 2018, requiring recognition of ROU assets and lease liabilities[37][62] Operating Lease Financials (June 30, 2019) | Item | Amount (in thousands) | | :--- | :--- | | Operating lease right-of-use assets | $143,613 | | Current portion of operating lease liabilities | $21,271 | | Long-term operating lease liabilities | $132,949 | | Total operating lease liabilities | $154,220 | Total Operating Lease Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Operating lease expense | $10,500 | $7,800 | $19,700 | $15,500 | Note 7. Goodwill and Intangible Assets Goodwill increased slightly due to an acquisition adjustment, while net intangible assets decreased Goodwill by Segment (June 30, 2019) | Segment | Amount (in thousands) | | :--- | :--- | | North American Residential | $6,590 | | Europe | $63,275 | | Architectural | $111,000 | | Total Goodwill | $180,865 | Intangible Assets, Net | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | Total definite life intangible assets | $123,000 | $136,014 | | Indefinite life intangible assets | $76,597 | $76,031 | | Total intangible assets | $199,597 | $212,045 | Amortization of Intangible Assets | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Amortization expense | $7,100 | $7,200 | $14,300 | $13,300 | Note 8. Accrued Expenses Total accrued expenses increased, driven by the inclusion of operating lease liabilities and higher accrued payroll Accrued Expenses | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | Accrued payroll | $46,886 | $39,823 | | Accrued rebates | $35,071 | $36,711 | | Current portion of operating lease liabilities | $21,271 | $0 | | Accrued interest | $13,667 | $14,570 | | Other accruals | $55,280 | $56,241 | | Total accrued expenses | $172,175 | $147,345 | Note 9. Long-Term Debt Total long-term debt remained stable at $796.7 million, with new senior notes issued and planned Long-Term Debt | Item | June 30, 2019 (in thousands) | December 30, 2018 (in thousands) | | :--- | :--- | :--- | | 5.625% senior unsecured notes due 2023 | $500,000 | $500,000 | | 5.75% senior unsecured notes due 2026 | $300,000 | $300,000 | | Total long-term debt | $796,711 | $796,398 | - Issued $300.0 million aggregate principal 5.75% Senior Unsecured Notes due 2026 on August 27, 2018[78] - On July 25, 2019, issued $500.0 million aggregate principal 5.375% Senior Unsecured Notes due 2028, intended to redeem all existing 2023 Notes in August 2019[88] - Amended and restated ABL Facility on January 31, 2019, increasing revolving commitments to $250.0 million and extending maturity to January 31, 2024[89] - As of June 30, 2019, and December 30, 2018, the company was in compliance with all covenants under the 2026 Notes, 2023 Notes, and ABL Facility[83][87][90] Note 10. Commitments and Contingencies The company is involved in class action proceedings, with management believing the outcome will not be material - A motion to dismiss class action complaints against Masonite and JELD-WEN, Inc. was filed on March 1, 2019, with a ruling pending as of August 6, 2019[93] - Management believes the ultimate disposition of legal matters will not materially affect the company's financial condition, results of operations, or cash flows[94] Note 11. Share Based Compensation Plans Share-based compensation expense decreased in H1 2019, with $22.4 million of unrecognized expense remaining Share Based Compensation Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Share based compensation expense | $2,100 | $3,500 | $4,800 | $6,600 | - Total remaining unrecognized compensation expense related to share-based compensation amounted to $22.4 million as of June 30, 2019, to be amortized over a weighted average remaining requisite service period of 1.9 years[95] Stock Appreciation Rights (SARs) Activity (Six Months Ended June 30, 2019) | Item | Number of Rights | Weighted Average Exercise Price | | :--- | :--- | :--- | | Outstanding, beginning of period | 514,313 | $39.01 | | Granted | 111,230 | $57.29 | | Exercised | (32,088) | $18.73 | | Forfeited | (8,329) | $67.24 | | Outstanding, end of period | 585,126 | $43.20 | Restricted Stock Units (RSUs) Activity (Six Months Ended June 30, 2019) | Item | Number of Units | Weighted Average Grant Date Fair Value | | :--- | :--- | :--- | | Outstanding, beginning of period | 429,027 | $66.03 | | Granted | 289,945 | $56.16 | | Delivered | (112,709) | - | | Forfeited | (15,931) | - | | Outstanding, end of period | 549,318 | $59.86 | Note 12. Restructuring Costs The company incurred $5.1 million in restructuring costs in H1 2019 related to ongoing optimization plans Total Restructuring Costs (Six Months Ended June 30, 2019) | Plan | North American Residential (in thousands) | Europe (in thousands) | Architectural (in thousands) | Corporate & Other (in thousands) | Total (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | 2019 Plan | $2,404 | $336 | $486 | $459 | $3,685 | | 2018 Plan | $789 | $627 | — | — | $1,416 | | Total Restructuring Costs | $3,193 | $963 | $486 | $459 | $5,101 | - The 2019 Plan, initiated in February 2019, involves reorganizing manufacturing capacity and reducing workforce, with an expected $9 million to $11 million of additional charges through 2020[110] - The 2018 Plan, initiated in the fourth quarter of 2018, includes reorganizing the UK head office and optimizing North America capacity, with an expected $1 million of additional charges through 2019[111] Note 13. Asset Impairment Non-cash asset impairment charges of $13.8 million were recognized in H1 2019 due to plant closures Asset Impairment Charges | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Asset impairment | $3,142 | — | $13,767 | — | - Asset impairment charges were related to two asset groups in the North American Residential segment as a result of announced plant closures under the 2019 Plan[117] - The fair value of the asset groups was determined to be $9.4 million, compared to a book value of $23.2 million, resulting in the impairment charge[117] Note 14. Income Taxes Income tax expense decreased in H1 2019 compared to the prior year due to the mix of earnings across jurisdictions Income Tax Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | $10,293 | $7,894 | $10,351 | $14,595 | - The effective tax rate differs from the Canadian statutory rate of 26.4% primarily due to the mix of earnings in foreign jurisdictions and changes in valuation allowances[118] Note 15. Earnings Per Share Basic and diluted EPS for H1 2019 decreased significantly from the prior year, reflecting lower net income Earnings Per Share (EPS) Attributable to Masonite | Period | Basic EPS (2019) | Basic EPS (2018) | Diluted EPS (2019) | Diluted EPS (2018) | | :--- | :--- | :--- | :--- | :--- | | Three months ended June 30/July 1 | $0.96 | $1.26 | $0.96 | $1.24 | | Six months ended June 30/July 1 | $1.11 | $1.99 | $1.09 | $1.96 | Shares Used in EPS Calculation (Six Months Ended June 30/July 1) | Item | 2019 (shares) | 2018 (shares) | | :--- | :--- | :--- | | Shares used in computing basic EPS | 25,350,488 | 27,899,461 | | Shares used in computing diluted EPS | 25,645,523 | 28,402,214 | Note 16. Segment Information The North American Residential segment drives the majority of sales, while total Adjusted EBITDA grew in H1 2019 - Masonite's reportable segments are North American Residential, Europe, and Architectural[122] Net Sales to External Customers by Segment (Six Months Ended June 30, 2019) | Segment | Net Sales (in thousands) | Percentage of Consolidated External Net Sales | | :--- | :--- | :--- | | North American Residential | $733,335 | 67.1% | | Europe | $165,220 | 15.1% | | Architectural | $182,772 | 16.7% | | Corporate & Other | $11,927 | - | | Total | $1,093,254 | - | Adjusted EBITDA by Segment (Six Months Ended) | Segment | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | North American Residential | $117,022 | $109,361 | +$7,661 | | Europe | $23,405 | $23,572 | -$167 | | Architectural | $20,392 | $19,658 | +$734 | | Corporate & Other | $(15,607) | $(12,891) | -$2,716 | | Total Adjusted EBITDA | $145,212 | $139,700 | +$5,512 | Note 17. Accumulated Other Comprehensive Loss and Other Comprehensive Income (Loss) Accumulated other comprehensive loss increased, driven by foreign currency translation and pension adjustments Accumulated Other Comprehensive Loss | Item | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Accumulated foreign currency translation losses | $(121,440) | $(114,926) | | Accumulated pension and other post-retirement adjustments | $(22,392) | $(19,886) | | Accumulated other comprehensive loss | $(143,832) | $(134,812) | Other Comprehensive Income (Loss) Attributable to Masonite (Six Months Ended) | Period | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Other comprehensive income (loss) attributable to Masonite | $9,087 | $(24,660) | Note 18. Supplemental Cash Flow Information Interest and income taxes paid increased in H1 2019, with significant non-cash activity in operating leases Cash Transactions (Six Months Ended) | Item | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Interest paid | $24,068 | $17,775 | | Income taxes paid | $8,392 | $4,380 | | Cash paid for operating lease liabilities | $12,724 | — | - Non-cash transactions for the six months ended June 30, 2019, included $48.97 million in right-of-use assets acquired under operating leases[132] Total Cash, Cash Equivalents and Restricted Cash | Date | Amount (in thousands) | | :--- | :--- | | June 30, 2019 | $123,288 | | December 30, 2018 | $126,141 | Note 19. Fair Value of Financial Instruments The estimated fair values of the company's senior notes exceeded their carrying values as of June 30, 2019 Fair Value vs. Carrying Value of Senior Notes (June 30, 2019) | Note Type | Estimated Fair Value (in thousands) | Carrying Value (in thousands) | | :--- | :--- | :--- | | 2026 Notes | $310,400 | $296,100 | | 2023 Notes | $514,200 | $499,500 | - Fair value estimates are based on market quotes and categorized as having Level 2 valuation inputs[133] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, liquidity, and critical accounting policies Overview Masonite is a leading global door manufacturer serving residential and non-residential markets through three primary segments - Masonite is a leading global designer, manufacturer, and distributor of interior and exterior doors for new construction and repair, renovation, and remodeling sectors[137] - The company operates 65 manufacturing and distribution facilities in 8 countries across North America, South America, Europe, and Asia[139] Net Sales by Reportable Segment (Six Months Ended June 30, 2019) | Segment | Net Sales (in millions) | Percentage of Total Net Sales | | :--- | :--- | :--- | | North American Residential | $733.3 | 67.1% | | Europe | $165.2 | 15.1% | | Architectural | $182.8 | 16.7% | Key Factors Affecting Our Results of Operations Performance is influenced by product demand, competition, customer concentration, restructuring, FX rates, inflation, and seasonality Product Demand Product demand is tied to economic conditions and construction activity, with Brexit creating uncertainty in Europe - Demand for products is directly impacted by changes in global economic conditions, residential new construction, repair/renovation, and architectural building construction markets[141][143] - The UK's anticipated exit from the European Union ('Brexit') has created uncertainty in European demand, particularly in the UK, potentially having a material adverse effect[144] Product Pricing and Mix The highly competitive building products industry creates pressure on sales prices and product margins - The building products industry is highly competitive, leading to pressure on sales prices and potential loss of customers[145] - Changes in consumer preferences may lead to increased demand for lower margin products relative to higher margin products, which could reduce future profitability[145] Business Wins and Losses The company has a concentrated customer base, with its top ten customers accounting for 44% of 2018 net sales - Top ten customers accounted for approximately 44% of net sales in fiscal year 2018, with The Home Depot, Inc. accounting for approximately 18%[146] - Competitive bidding processes may prevent the company from increasing or maintaining product margins[146] Organizational Restructuring Ongoing restructuring plans aim to optimize manufacturing and reduce costs, with expected future charges and benefits - The 2019 Plan, initiated in February 2019, involves reorganizing manufacturing capacity and reducing overhead and SG&A workforce across all reportable segments[148] - Expected to incur approximately $9 million to $11 million of additional charges related to the 2019 Plan through 2020, with an anticipated annual earnings and cash flow increase of $14 million to $19 million[150] - The 2018 Plan, initiated in Q4 2018, includes reorganizing the UK head office and optimizing North America capacity, with an expected $1 million of additional charges through 2019 and an anticipated annual earnings and cash flow increase of $6 million[151] Foreign Exchange Rate Fluctuation With 32% of H1 2019 sales outside the US, the company is exposed to currency risk, particularly from the Pound Sterling - Approximately 32% of net sales in the six months ended June 30, 2019, were generated outside the United States, exposing the company to currency exchange risks[152] - The average exchange rate of the Pound Sterling to the U.S. Dollar during the six months ended June 30, 2019, was 6% lower than the average for the same period in 2018, impacting net sales and net income in the Europe segment[153] - Brexit continues to create instability in global financial and foreign exchange markets, potentially increasing import costs or decreasing profitability for UK operations[153] Inflation Inflation poses a risk to raw material and wage costs, which could harm profitability if not passed on to customers - An increase in inflation could significantly impact the cost of raw material inputs and labor costs[154] - Inability to pass incurred costs onto customers could adversely affect profitability, margins, and net sales[154] - Historically, increasing interest rates during periods of rising inflation decrease demand for new homes and home improvement products[154] Seasonality The business is moderately seasonal, with sales varying quarterly based on building seasons and weather conditions - The business is moderately seasonal, with net sales varying from quarter to quarter based on the timing of the building season[155] - Severe weather conditions can accelerate, delay, or halt construction and renovation activity[155] Acquisitions and Disposition The company pursues strategic acquisitions and divests non-core assets to optimize its global business portfolio - Strategic acquisitions target companies with strong brands, complementary technologies, attractive geographic footprints, and opportunities for cost and distribution synergies[157] - Completed acquisitions in 2018 include Bridgewater Wholesalers Inc. (BWI), Graham Manufacturing Corporation and The Maiman Company (Graham & Maiman), and DW3 Products Holdings Limited (DW3)[158][159][160] - Disposed of Performance Doorset Solutions Limited (PDS) on March 21, 2019, resulting in a $4.6 million loss on deconsolidation[161] Components of Results of Operations This section analyzes changes in key financial performance components for the three and six months ended June 30, 2019 Net Sales Net sales were flat, as higher prices and acquisitions were offset by lower volumes and negative foreign exchange impacts Net Sales Performance (Three Months Ended June 30, 2019 vs. July 1, 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $562,943 | $566,726 | -0.7% | | Foreign exchange impact | $(7,800) | - | - | | Average unit price impact | $36,100 | - | +6.4% | | 2018 acquisitions (net of dispositions) | $11,400 | - | +2.0% | | Lower base volume impact | $(39,800) | - | -7.0% | Net Sales Performance (Six Months Ended June 30, 2019 vs. July 1, 2018) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $1,093,254 | $1,084,605 | +0.8% | | Foreign exchange impact | $(17,500) | - | - | | Average unit price impact | $59,600 | - | +5.5% | | 2018 acquisitions (net of dispositions) | $36,200 | - | +3.3% | | Lower base volume impact | $(65,600) | - | -6.0% | - North American Residential net sales increased by 0.4% (3 months) and decreased by 0.6% (6 months), impacted by weak end market conditions and foreign exchange, but supported by average unit price increases and the BWI acquisition[170][195] - Europe net sales decreased by 19.6% (3 months) and 12.0% (6 months), primarily due to foreign exchange, 2019 dispositions, and lower base volume from share loss in the builder channel[171][196] - Architectural net sales increased by 18.8% (3 months) and 23.1% (6 months), driven by the Graham & Maiman acquisition, higher average unit prices, and increased base volume[172][197] Cost of Goods Sold Cost of goods sold as a percentage of net sales improved due to lower material and direct labor costs Cost of Goods Sold as a Percentage of Net Sales | Period | 2019 | 2018 | Change (bps) | | :--- | :--- | :--- | :--- | | Three months ended June 30/July 1 | 77.1% | 78.2% | -110 | | Six months ended June 30/July 1 | 78.0% | 78.9% | -90 | - Material cost of sales and direct labor as a percentage of net sales decreased by 2.2% and 0.5% respectively for the three months, and 1.7% and 0.5% respectively for the six months[174][200] - Incurred $4.0 million of discrete charges in both the three and six months ended June 30, 2019, related to plant damages and factory start-up costs[174][200] Selling, General and Administration Expenses SG&A expenses increased as a percentage of net sales, driven by higher personnel costs and acquisition-related expenses SG&A Expenses as a Percentage of Net Sales | Period | 2019 | 2018 | Change (bps) | | :--- | :--- | :--- | :--- | | Three months ended June 30/July 1 | 13.9% | 12.7% | +120 | | Six months ended June 30/July 1 | 14.3% | 12.9% | +140 | - SG&A expenses increased by $6.2 million (3 months) and $16.1 million (6 months) due to personnel costs, incremental SG&A from 2018 acquisitions, and a net increase in non-cash items[176][202] - Personnel costs increased by $4.0 million (3 months) and $6.4 million (6 months), primarily due to incentive compensation and investments in Architectural segment resources[176][202] Restructuring Costs, Net Restructuring costs of $5.1 million were incurred in H1 2019 related to ongoing optimization plans Restructuring Costs | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Restructuring costs | $1,361 | — | $5,101 | — | - Restructuring costs in 2019 were related to the 2019 Plan (manufacturing capacity reorganization, workforce reduction) and the 2018 Plan (UK head office reorganization, North America facility optimization)[177][203] Asset Impairment Asset impairment charges of $13.8 million were recognized in H1 2019 due to plant closures Asset Impairment Charges | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Asset impairment | $3,142 | — | $13,767 | — | - Asset impairment charges in 2019 resulted from actions associated with the 2019 Plan, specifically plant closures in the North American Residential segment[178][204] Loss on Disposal of Subsidiaries A loss of $4.6 million was recognized in H1 2019 from the sale of Performance Doorset Solutions Limited Loss on Disposal of Subsidiaries | Period | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | | Loss on disposal of subsidiaries | $4,605 | — | - The loss was related to the sale of PDS for nominal consideration, consisting of a $3.6 million write-off of net assets and $1.0 million from the recognition of cumulative translation adjustment[205] Interest Expense, Net Net interest expense increased due to the issuance of $300.0 million in senior notes in August 2018 Interest Expense, Net | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Interest expense, net | $11,357 | $9,074 | $22,484 | $17,830 | - The increase in interest expense primarily relates to the issuance of $300.0 million aggregate principal amount of 2026 Senior Notes on August 27, 2018[179][206] Other Income, Net of Expense Other income, net of expense, fluctuated due to foreign currency remeasurements and equity investee results Other Income, Net of Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Other income, net of expense | $(456) | $(839) | $(1,586) | $(861) | - The change in other income, net of expense, for the six months was primarily due to unrealized gains and losses on foreign currency remeasurements and the company's portion of dividends and net gains/losses related to equity method investees[209] Income Tax Expense Income tax expense for H1 2019 decreased from the prior year due to the mix of income across tax jurisdictions Income Tax Expense | Period | Three Months Ended June 30, 2019 (in thousands) | Three Months Ended July 1, 2018 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | Six Months Ended July 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Income tax expense | $10,293 | $7,894 | $10,351 | $14,595 | - The decrease in income tax expense for the six months ended June 30, 2019, was primarily due to the mix of income or losses within the tax jurisdictions with various tax rates[210] Segment Information Total Adjusted EBITDA increased in H1 2019, driven by strong growth in the North American Residential segment Adjusted EBITDA by Segment (Three Months Ended) | Segment | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | North American Residential | $63,401 | $58,963 | +$4,438 | | Europe | $13,408 | $13,642 | -$234 | | Architectural | $12,778 | $11,998 | +$780 | | Corporate & Other | $(9,854) | $(6,317) | -$3,537 | | Total Adjusted EBITDA | $79,733 | $78,286 | +$1,447 | Adjusted EBITDA by Segment (Six Months Ended) | Segment | June 30, 2019 (in thousands) | July 1, 2018 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | North American Residential | $117,022 | $109,361 | +$7,661 | | Europe | $23,405 | $23,572 | -$167 | | Architectural | $20,392 | $19,658 | +$734 | | Corporate & Other | $(15,607) | $(12,891) | -$2,716 | | Total Adjusted EBITDA | $145,212 | $139,700 | +$5,512 | - North American Residential Adjusted EBITDA increased by 7.5% for the three months and 6.9% for the six months ended June 30, 2019[186][215] Liquidity and Capital Resources Liquidity is supported by cash from operations and credit facilities, with fewer acquisitions reducing investment cash outflows Cash Flows Operating cash flow was stable, while cash used for investing and financing activities decreased in H1 2019 Cash Flow Summary (Six Months Ended) | Activity | June 30, 2019 (in millions) | July 1, 2018 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Operating Activities | $88.2 | $88.0 | +$0.2 | | Investing Activities | $(39.2) | $(169.9) | +$130.7 | | Financing Activities | $(52.5) | $(65.8) | +$13.3 | - The $130.7 million decrease in cash used in investing activities was driven by $135.6 million less cash used in acquisitions in 2018[222] - The $13.3 million decrease in cash used in financing activities was driven by a $12.0 million decrease in cash used for repurchases of common shares[223] Share Repurchases The company continued its share repurchase program, buying back 953,888 shares for $48.7 million in H1 2019 - The company has a $600 million share repurchase authorization from three separate Board of Directors authorizations[224] Common Share Repurchases (Six Months Ended) | Period | Shares Repurchased | Aggregate Cost (in millions) | | :--- | :--- | :--- | | June 30, 2019 | 953,888 | $48.7 | | July 1, 2018 | 961,534 | $60.7 | - As of June 30, 2019, $155.3 million was available for repurchase in accordance with the share repurchase programs[226] Other Liquidity Matters Cash held in foreign countries is generally accessible without material adverse tax consequences - Cash held in foreign countries is free from significant restrictions that would prevent it from being accessed to meet liquidity needs, and no material adverse tax consequences are believed to exist for repatriation[227] - No material adverse effect on results of operations from changes in customer financial condition to date, but potential for future impact if economic conditions deteriorate[228] Accounts Receivable Sales Program The company utilizes an AR Sales Program to transfer eligible trade accounts receivable without recourse - The AR Sales Program allows the company to transfer ownership of eligible trade accounts receivable to a third party, who assumes the full risk of collection without recourse[229] - Discounts on the sales of trade accounts receivable were not material for any of the periods presented and were recorded in selling, general and administration expense[229] Senior Notes The company actively manages its debt profile, issuing new senior notes to redeem existing ones - Issued $300.0 million aggregate principal 5.75% Senior Unsecured Notes due 2026 on August 27, 2018[230] - On July 25, 2019, issued $500.0 million aggregate principal 5.375% Senior Unsecured Notes due 2028, intended to redeem all existing 2023 Notes in August 2019[236] - Obligations under the 2026 Notes and 2023 Notes are fully and unconditionally guaranteed, jointly and severally, by certain wholly-owned subsidiaries[231][235] - As of June 30, 2019, and December 30, 2018, the company was in compliance with all covenants under the 2026 Notes and 2023 Notes[233][235] ABL Facility The ABL Facility was amended to increase commitments to $250.0 million and extend its maturity to 2024 - Amended and restated ABL Facility on January 31, 2019, increasing revolving commitments to $250.0 million and extending maturity to January 31, 2024[237] - Obligations under the ABL Facility are secured by a first priority security interest in accounts receivable, inventory, and other related assets, and fully and unconditionally guaranteed by certain wholly-owned subsidiaries[237] - As of June 30, 2019, and December 30, 2018, the company was in compliance with all covenants under the ABL Facility, with no amounts outstanding[239] Supplemental Guarantor Financial Information Non-guarantor subsidiaries generated $972.4 million in external net sales in H1 2019 Non-Guarantor Subsidiaries Financials (Six Months Ended June 30, 2019) | Metric | Amount (in millions) | | :--- | :--- | | External Net Sales | $972.4 | | Adjusted EBITDA | $124.8 | | Total Assets | $1,900.0 | | Total Liabilities | $833.5 | Critical Accounting Policies and Estimates The company's critical accounting policies include goodwill impairment testing, which identified no impairment in 2018 Goodwill Goodwill is tested annually for impairment, with no impairment identified in the 2018 test - Goodwill 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[241] - The test involves qualitative factors and, if necessary, a quantitative analysis using discounted cash flow analyses and market multiples to estimate fair value[241] - No goodwill impairment was identified in the 2018 annual test, but it is possible that estimates for the Architectural reporting unit may change, potentially requiring an interim impairment test in future periods[242] Changes in Accounting Standards and Policies Details on changes in accounting standards and policies are provided in Note 1 of the financial statements - Changes in accounting standards and policies are discussed in Note 1. Business Overview and Significant Accounting Policies[244] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk since the 2018 Annual Report on Form 10-K - No material changes to the information provided in Part II, Item 7A, 'Quantitative and Qualitative Disclosures about Market Risk,' in the Annual Report on Form 10-K for the year ended December 30, 2018[245] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019 - Management, with the participation of the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019[247] - There have been no material changes in internal control over financial reporting during the fiscal quarter covered by this report[248] PART II – OTHER INFORMATION Item 1. Legal Proceedings Information regarding legal proceedings is detailed in Note 10 of the financial statements - Information required for this item can be found in Note 10. Commitments and Contingencies in the Notes to the Condensed Consolidated Financial Statements[251] Item 1A. Risk Factors There have been no material changes to the risk factors disclosed in the 2018 Annual Report on Form 10-K - No material changes from the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 30, 2018[252] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 307,786 common shares for $15.5 million in the second quarter of 2019 - No unregistered sales of equity securities occurred[254] Common Share Repurchases (Three Months Ended June 30, 2019) | Period | Total Number of Shares Purchased | Average Price per Share | | :--- | :--- | :--- | | April 1, 2019, through April 28, 2019 | 166,167 | $50.85 | | April 29, 2019, through May 26, 2019 | 19,608 | $52.60 | | May 27, 2019, through June 30, 2019 | 122,011 | $49.27 | | Total | 307,786 | $50.34 | - As of June 30, 2019, $155.3 million was available for repurchase in accordance with the share repurchase programs[258] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities - No defaults upon senior securities[262] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[263] Item 5. Other Information There is no other information to report under this item - No other information[264] Item 6. Exhibits This section lists all exhibits filed as part of the report, including indentures, agreements, and certifications - Exhibits include the Indenture for the 5.375% Senior Notes due 2028, employment and consulting agreements, and certifications by the Chief Executive Officer and Chief Financial Officer[265] - Interactive Data Files (Inline XBRL) for the registrant's condensed consolidated financial statements are included as Exhibit 101[265]