MasterBrand, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, other than purely historical information, including, but not limited to, estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are forward-looking statements. Statements preceded by, followed by or that otherwise include the word “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may,” and “could,” are generally forward-looking in nature and not historical facts. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is based on the current plans and expectations of our management. Although we believe that these statements are based on reasonable assumptions, they are subject to numerous factors, risks and uncertainties that could cause actual outcomes and results to be materially different from those indicated in such statements. These factors include those listed under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 within Part I, Item 1A. The forward-looking statements included in this document are made as of the date of this Quarterly Report on Form 10-Q and, except pursuant to any obligations to disclose material information under the federal securities laws, we undertake no obligation to update, amend or clarify any forward-looking statements to reflect events, new information or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Some of the important factors that could cause our actual results to differ materially from those projected in any such forward-looking statements include: ◦ Our ability to develop and expand our business; ◦ Our ability to develop new products or respond to changing consumer preferences and purchasing practices; ◦ Our anticipated financial resources and capital spending; ◦ Our ability to manage costs; ◦ Our ability to effectively manage manufacturing operations, and capacity or an inability to maintain the quality of our products; ◦ The impact of our dependence on third parties to source raw materials and our ability to obtain raw materials in a timely manner or fluctuations in raw material costs; ◦ Our ability to accurately price our products; ◦ Our projections of future performance, including future revenues, capital expenditures, gross margins, and cash flows; ◦ The effects of competition and consolidation of competitors in our industry; ◦ Costs of complying with evolving tax and other regulatory requirements and the effect of actual or alleged violations of tax, environmental or other laws; ◦ The effect of climate change and unpredictable seasonal and weather factors; ◦ Conditions in the housing market in the United States and Canada; ◦ The expected strength of our existing customers and consumers and any loss or reduction in business from one or more of our key customers or increased buying power of large customers; ◦ Information systems interruptions or intrusions or the unauthorized release of confidential information concerning customers, employees, or other third parties; ◦ Worldwide economic, geopolitical and business conditions and risks associated with doing business on a global basis; ◦ The effects of a public health crisis or other unexpected event; and ◦ Other statements contained in this Quarterly Report on Form 10-Q regarding items that are not historical facts or that involve predictions. Introduction Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying condensed consolidated financial statements of MasterBrand and its consolidated subsidiaries and provides additional information on our business, recent developments, financial condition, liquidity and capital resources, cash flows and results of operations. 20 Table of Contents MD&A is organized as follows: • Overview: This section provides a general description of our business, as well as recent developments we believe are important in understanding our results of operations and financial condition or in understanding anticipated future trends. • Basis of Presentation: This section provides a discussion of the basis on which our condensed consolidated financial statements were prepared. • Results of Operations: Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year. This section provides an analysis of our results of operations for the thirteen weeks ended March 31, 2024 as compared to March 26, 2023. Unless the context otherwise requires, references to years and quarters contained in this Quarterly Report on Form 10-Q pertain to our fiscal years and fiscal quarters. Additionally, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “2024,” or “fiscal 2024” refers to our 2024 fiscal year that is a 52-week period that will end on December 29, 2024; and (2) “2023,” or “fiscal 2023” refers to our 2023 fiscal year that was a 53-week period that ended on December 31, 2023. Furthermore, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “the first quarter of 2024” refers to the thirteen week period that ended on March 31, 2024; and (2) “the first quarter of 2023” refers to the thirteen week period that ended on March 26, 2023. • Liquidity and Capital Resources: This section provides a discussion of our financial condition and an analysis of our cash flows for our thirteen week period that ended on March 31, 2024 as compared to our thirteen week period that ended on March 26, 2023. This section also provides a discussion of our ability to fund our future commitments and ongoing operating activities through internal and external sources of capital. • Recently Issued Accounting Standards: This section identifies our adoption of recently issued accounting standards. • Critical Accounting Estimates: This section identifies and summarizes those accounting policies that significantly impact our reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application. Overview Founded nearly 70 years ago, we are the largest manufacturer of residential cabinets in North America. Our superior product quality, innovative design and service excellence drives a compelling value proposition. We have insight into the fashion and features consumers desire, which we use to tailor our product lines across price points. Our volume leadership allows us to achieve an advantaged cost structure and service platform by standardizing product platforms and components to the greatest extent possible—resulting in an improved facility footprint and an efficient supply chain. Further, our decades of experience have informed how we use global geographies to optimize procurement and manufacturing costs. Finally, with the most extensive dealer network throughout the United States and Canada, we have an advantaged distribution model that cannot be easily replicated. We expect to further extend our competitive advantages by using technology and data to enhance the consumer’s experience from visualization to ordering to delivery and installation. Basis of Presentation Our consolidated financial statements are based on a 52- or 53-week fiscal year ending on the last Sunday in December in each calendar year and have been principally derived from the consolidated financial statements of our Company and its consolidated subsidiaries using the historical results of operations, and historical basis of assets and liabilities. Our condensed consolidated financial statements have been prepared in accordance with GAAP. 21 Table of Contents Results of Operations The following discussion of condensed consolidated results of operations refers to the thirteen weeks ended March 31, 2024 compared to the thirteen weeks ended March 26, 2023. Thirteen Weeks Ended March 31, 2024 Compared to the Thirteen Weeks Ended March 26, 2023 Thirteen Weeks Ended (U.S. Dollars presented in millions) March 31, 2024 $ change % change March 26, 2023 NET SALES $ 638.1 $ (38.6) (5.7) % $ 676.7 Cost of products sold 433.4 (38.7) (8.2) % 472.1 GROSS PROFIT 204.7 0.1 — % 204.6 Selling, general and administrative expenses 137.8 2.5 1.8 % 135.3 Amortization of intangible assets 3.7 (0.3) (7.5) % 4.0 Restructuring charges (adjustments) 0.4 0.8 n/m (1) (0.4) OPERATING INCOME 62.8 (2.9) (4.4) % 65.7 Interest expense 14.1 (3.3) (19.0) % 17.4 Other (income) expense, net (0.3) (0.7) n/m (1) 0.4 INCOME BEFORE TAXES 49.0 1.1 2.3 % 47.9 Income tax expense 11.5 (1.4) (10.9) % 12.9 NET INCOME $ 37.5 $ 2.5 7.1 % $ 35.0 ___________ (1) Not meaningful. Net sales Net sales were $638.1 million for the thirteen weeks ended March 31, 2024 compared to $676.7 million for the thirteen weeks ended March 26, 2023, a decrease of $38.6 million, or 5.7 percent. The lower net sales, compared to the thirteen weeks ended March 26, 2023, were driven by lower average selling prices due primarily to trade down and promotional activity on flat year-over-year sales unit volume. The change in foreign currency during the thirteen weeks ended March 31, 2024 was comparable to the thirteen weeks ended March 26, 2023. Cost of products sold Cost of products sold decreased by $38.7 million, or 8.2 percent, to $433.4 million (67.9 percent of net sales) in the thirteen weeks ended March 31, 2024 as compared to $472.1 million (69.8 percent of net sales) in the thirteen weeks ended March 26, 2023. The lower cost of products sold was driven by realized savings from various cost reduction actions taken in the fourth quarter of 2022 and throughout 2023 and deflation in commodity costs and inbound transportation compared to the thirteen weeks ended March 26, 2023. Additionally, the thirteen weeks ended March 26, 2023 included $9.4 million of incremental costs related to the tornado that occurred at our Jackson, GA facility. Selling, general and administrative expenses Selling, general and administrative expenses increased by $2.5 million, or 1.8 percent, to $137.8 million (21.6 percent of net sales) in the thirteen weeks ended March 31, 2024 compared to $135.3 million (20.0 percent of net sales) in the thirteen weeks ended March 26, 2023. The increase in the thirteen weeks ended March 31, 2024 is primarily due to increased associate-related costs ($6.2 million), including salaries and incentive compensation. These increases are partially offset by lower distribution and commission costs ($3.9 million), as well as lower restructuring-related costs ($1.7 million), as we took actions in fiscal 2022 and 2023 to rightsize our manufacturing footprint to satisfy forecasted customer demand. 22 Table of Contents Restructuring charges (adjustments) Restructuring charges were $0.4 million in the thirteen weeks ended March 31, 2024, which was comparable to restructuring (adjustments) of $0.4 million in the thirteen weeks ended March 26, 2023. Interest expense Interest expense was $14.1 million in the thirteen weeks ended March 31, 2024 as compared to $17.4 million in the thirteen weeks ended March 26, 2023, as strong cash from operations throughout fiscal 2023 was used, in part, to pay down our revolving credit facility and term loan. Other (income) expense, net Other income, net was $0.3 million in the thirteen weeks ended March 31, 2024, which was comparable to other expense, net of $0.4 million in the thirteen weeks ended March 26, 2023. Income taxes Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the thirteen week periods ended March 31, 2024 and March 26, 2023 were as follows: Thirteen Weeks Ended (U.S. Dollars presented in millions, except percentages) March 31, 2024 March 26, 2023 Income before taxes $ 49.0 $ 47.9 Income tax expense 11.5 12.9 Effective tax rate 23.5 % 26.9 % The effective income tax rates for the thirteen weeks ended March 31, 2024 , and March 26, 2023, were 23.5 percent and 26.9 percent, respectively. The net decrease in the effective tax rate between the periods is primarily due to the mix of earnings in jurisdictions with differing tax rates, the stock compensation windfall benefit for shares which vested, state and local income taxes and deferred tax liability for foreign earnings, partially offset by changes in foreign income inclusions with offsetting foreign tax credits. The difference between our effective income tax rate for the thirteen weeks ended March 31, 2024 , and the U.S. statutory rate of 21.0 percent is due to the unfavorable impact of state and local income taxes, foreign income inclusions with offsetting tax credits and nondeductible compensation partially offset by the stock compensation windfall benefit for shares which vested and the mix of earnings in jurisdictions with differing tax rates. The difference between our effective income tax rate for the thirteen weeks ended March 26, 2023, and the U.S. statutory rate of 21.0 percent primarily relates to unfavorable changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits, changes due to foreign tax return filings, recognition of a deferred tax liability for foreign earnings and the mix of earnings in jurisdictions with differing tax rates. LIQUIDITY AND CAPITAL RESOURCES Our operating income is generated by our subsidiaries. There are generally no restrictions on the ability of our subsidiaries to pay dividends or make other distributions to MasterBrand, other than the fact our subsidiaries have financial obligations that must be satisfied before funding us and such dividends are subject to applicable local law and may be limited due to terms of other contractual arrangements, including our indebtedness. We periodic ally review our portfolio of brands, manufacturing and supply chain footprint, and evaluate potential strategic transactions to increase stockholder value. However, we cannot predict whether or when we may enter into acquisitions, joint ventures or dispositions, or what impact any such transactions could have on our results of operations, cash flows or financial condition. Our cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Risk Factors” within Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 23 Table of Contents On November 18, 2022, we entered into a 5-year, $1.25 billion credit agreement, consisting of a $750.0 million term loan and a $500.0 million revolving credit facility. The 2022 Credit Agreement is secured by certain assets as well as the guarantee of certain of our subsidiaries. Interest rates under these facilities are variable based on the SOFR at the time of the borrowing and our net leverage ratio, as measured by our Net Leverage to our Consolidated EBITDA. Net Leverage is defined as consolidated total indebtedness minus certain cash and cash equivalents. Consolidated EBITDA is defined as consolidated net income before interest expense, income taxes, depreciation, amortization of intangible assets, losses from asset impairments, and certain other one-time adjustments. The Net Leverage Ratio could not exceed 3.875 to 1.0 at the initial borrowing through the second fiscal quarter of 2023, adjusting downward in various future quarters before settling at 3.25 to 1.0 in January 2025. As of March 31, 2024 , the net leverage ratio may not exceed 3.5 to 1.0. Interest rates can range from SOFR plus 1.85 percent to SOFR plus 2.60 percent. We also are required to maintain a minimum Interest Coverage Ratio of 3.0 to 1.0. The Interest Coverage Ratio is defined as Consolidated EBITDA compared to consolidated interest expense. Our 2022 Credit Agreement contains additional covenants which limit or preclude certain corporate actions based upon the measurement of certain financial covenant metrics. The $750.0 million Term Loan has quarterly required amortization payments, which began in March 2023. During the thirteen weeks ended September 24, 2023, the Company made total payments of $28.1 million on the term loan, consisting of a $4.7 million required payment due September 2023, and $23.4 million of required amortization payments due during each of the next three quarters. We did not make any additional term loan payments during the fourth quarter of fiscal 2023 or the first quarter of fiscal 2024, and as of March 31, 2024 we are paid in advance for our next scheduled quarterly payment due during the second quarter of 2024. These additional amortization payments, made possible due to the generation of strong operating cash flow, were made to reduce future interest expense and provide financial flexibility. The revolving credit facility was paid in full during the third quarter of fiscal 2023. The revolving credit facility did not have an outstanding balance as of March 31, 2024 and December 31, 2023. As of March 31, 2024, the Company was in compliance with all financial covenants set forth in the 2022 Credit Agreement, and expects to remain in compliance for the foreseeable future. As of March 31, 2024, we had $708.0 million outstanding in third-party borrowings, net of deferred financing fees. We may also incur additional indebtedness in the future. Cash Flows Below is a summary of cash flows for the thirteen weeks ended March 31, 2024 and March 26, 2023. Thirteen Weeks Ended (U.S. Dollars presented in millions) March 31, 2024 March 26, 2023 Net cash provided by operating activities $ 18.7 $ 62.1 Net cash used in investing activities (7.0) (2.7) Net cash used in financing activities (7.1) (42.7) Effect of foreign exchange rate changes on cash and cash equivalents 0.4 (1.5) Net increase in cash and cash equivalents $ 5.0 $ 15.2 24 Table of Contents Net cash provided by operating activities was $18.7 million in the first quarter of 2024 as compared to $62.1 million in the first quarter of 2023. Net cash provided by operating activities included net income of $37.5 million in the thirteen weeks ended March 31, 2024, as compared to net income of $35.0 million in the thirteen weeks ended March 26, 2023. In the first quarter of 2024, accounts receivable increased $21.7 million from the low fiscal 2023 ending balance resulting from strong cash collection efforts. In the first quarter of 2023, our accounts receivable decreased $14.1 million, as a result of improvements in our collection processes throughout 2023. In the first quarter of 2024, the movement in inventory was $1.6 million favorable, as compared to the first quarter of 2023, which had favorable movement in inventory of $23.3 million. In 2022, we executed an intentional build in inventory in the first half of the year in order to mitigate the impact of an uncertain and volatile global supply chain environment. The favorable inventory movement in the first quarter of 2023 reflects our efforts to more efficiently manage our inventory levels in the current supply chain environment, which have continued through the first quarter of 2024. Accounts payable was $10.2 million favorable in the thirteen weeks ended March 31, 2024 as compared to unfavorable accounts payable movement of $16.9 million in the thirteen weeks ended March 26, 2023 as a result of decreased purchasing levels aligned with our lower inventory levels. Accrued expenses and other current liabilities had an unfavorable impact of $29.6 million in the first quarter of 2024 compared to an unfavorable impact of $14.6 million in the first quarter of 2023. Both unfavorable impacts were primarily driven by the annual incentive compensation payouts related to the prior fiscal year. Net cash used in investing activities was $7.0 million in the first quarter of 2024, compared to net cash used in investing activities of $2.7 million in the first quarter of 2023. The year-over-year increase is due to increased capital expenditures as compared to the prior year. Net cash used in financing activities was $7.1 million in the thirteen weeks ended March 31, 2024, as compared to cash used of $42.7 million in the thirteen weeks ended March 26, 2023. The first quarter of 2023 included net payments on external debt of $39.6 million, as we used excess cash to pay down our revolving credit facility. No debt payments were made during the first quarter of 2024. The first quarter of 2024 also includes $1.6 million of stock repurchases made under the $50.0 million stock repurchase program authorized in the second quarter of 2023 . We believe that our cash and cash equivalent balances, along with available cash from operating cash flows and credit facilities, will be adequate to fund our typical needs, including working capital requirements and projected capital expenditures. We also believe we have access to additional funds from capital markets to fund strategic initiatives. RECENTLY ISSUED ACCOUNTING STANDARDS As discussed in Note 2, "Recently Issued Accounting Standards," of our unaudited condensed consolidated financial statements, there are no recently issued accounting pronouncements that we have adopted and which have had a material effect on our results of operations, cash flows or financial condition. CRITICAL ACCOUNTING ESTIMATES We prepare our condensed consolidated financial statements in conformity with GAAP. This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Our critical accounting estimates requiring significant judgement that could materially impact our results of operations, financial position and cash flows are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Since the date of the Company’s most recent Annual Report, there have been no material changes in our critical accounting estimates or assumptions. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information provided in the section entitled “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. 25 Table of Contents