Item 2. Management’s Discussion and Analysis
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 and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 within Part II, 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;
◦ The inability to recognize, or delays in obtaining, anticipated benefits of the acquisition of Supreme Cabinetry Brands, Inc. (the “Acquisition”), including synergies, which may be affected by, among other things, competition, the ability of the combined company to grow and manage growth profitably, maintain relationships with customers and suppliers and retain key employees;
◦ The impact of our current and any additional future debt obligations on our business, current and future operations, profitability and our ability to meet other obligations;
◦ Business disruption following the Acquisition;
◦ Diversion of management time on Acquisition-related issues;
◦ The reaction of customers and other persons to the Acquisition; and
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◦ 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.
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 and thirty-nine weeks ended September 29, 2024 as compared to September 24, 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 third quarter of 2024” refers to the thirteen week period that ended on September 29, 2024; (2) “the third quarter of 2023” refers to the thirteen week period that ended on September 24, 2023; (3) “the first three quarters of 2024” refers to the thirty-nine weeks ended September 29, 2024; and (4) “the first three quarters of 2023” refers to the thirty-nine weeks ended September 24, 2023.
• Liquidity and Capital Resources : This section provides a discussion of our financial condition and an analysis of our cash flows for our thirty-nine week period that ended on September 29, 2024 as compared to our thirty-nine week period that ended on September 24, 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 ~ 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.
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On July 10, 2024, we acquired all of the issued and outstanding limited liability interests of Dura Investment Holdings LLC, parent company of Supreme, a cabinetry company, from GHK Capital Partners LP. Supreme is a domestic manufacturer of residential cabinetry with a portfolio of product lines significantly focused on premium products. Supreme, with manufacturing facilities located in Minnesota, Iowa and North Carolina, and its two brands, Dura Supreme and Bertch cabinetry, crafts framed and frameless cabinetry for a nationwide network of dealers. The combined company is reaching more customers, through its highly complementary dealer networks, with greater efficiency and effectiveness. Through this transaction, MasterBrand broadened its portfolio of premium cabinetry in the resilient and attractive kitchen and bath categories, further diversifying its channel distribution and adding to its strategically located facility footprint. The acquisition was funded with a combination of cash on hand and proceeds from our revolving credit facility.
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.
Results of Operations
The following discussion of condensed consolidated results of operations refers to the thirteen weeks ended September 29, 2024 compared to the thirteen weeks ended September 24, 2023.
Thirteen Weeks Ended September 29, 2024 Compared to the Thirteen Weeks Ended September 24, 2023
Thirteen Weeks Ended
(U.S. Dollars presented in millions) September 29,
2024 $ change % change September 24,
2023
NET SALES $ 718.1 $ 40.8 6.0 % $ 677.3
Cost of products sold 480.1 40.3 9.2 % 439.8
GROSS PROFIT 238.0 0.5 0.2 % 237.5
Selling, general and administrative expenses 166.3 26.0 18.5 % 140.3
Amortization of intangible assets 6.3 2.7 75.0 % 3.6
Restructuring charges 7.8 6.4 457.1 % 1.4
OPERATING INCOME 57.6 (34.6) (37.5) % 92.2
Interest expense 20.0 4.7 30.7 % 15.3
Other income, net (1.8) (0.8) 80.0 % (1.0)
INCOME BEFORE TAXES 39.4 (38.5) (49.4) % 77.9
Income tax expense 10.3 (7.9) (43.4) % 18.2
NET INCOME $ 29.1 $ (30.6) (51.3) % $ 59.7
Net sales
Net sales were $718.1 million for the thirteen weeks ended September 29, 2024 compared to $677.3 million for the thirteen weeks ended September 24, 2023, an increase of $40.8 million, or 6.0 percent. The higher net sales, compared to the thirteen weeks ended September 24, 2023, were primarily driven by the acquisition of Supreme, which contributed $60.8 million of incremental net sales. Excluding the impact of Supreme, the $20.0 million decrease in net sales from the third quarter of 2023 was driven primarily by the combined net impact of price and mix on our overall average selling price, which accounted for 14.0 percent of the $20.0 million decrease. Sales unit volume was essentially flat year over year. Overall end-market demand was softer in the third quarter of 2024 as compared to the third quarter of 2023 in the repair and remodel markets, while single-family new construction was stronger in the third quarter of 2024 as compared to the third quarter of 2023.
Compared to the thirteen weeks ended September 24, 2023, net sales to dealers, whose end customers include builders, professional trades and home remodelers, increased $25.1 million, or 6.8 percent, net sales to retailers, including through their respective retail internet website portals, increased $0.8 million, or 0.3 percent, and net sales directly to builders increased $14.9 million, or 18.9 percent.
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Foreign currency impact was unfavorable by $0.4 million during the thirteen weeks ended September 29, 2024 as compared to the thirteen weeks ended September 24, 2023.
Cost of products sold
Cost of products sold increased by $40.3 million, or 9.2 percent, to $480.1 million (66.9 percent of net sales) in the thirteen weeks ended September 29, 2024 as compared to $439.8 million (64.9 percent of net sales) in the thirteen weeks ended September 24, 2023. The $40.3 million increase in cost of products sold is due primarily to the acquisition of Supreme, which contributed $40.6 million of incremental cost of products sold, includi ng recognition of $2.2 million of cost of products sold related to the fair value step-up in inventory value at the date of acquisition. Excluding the impact of Supreme, cost of products sold for the thirteen weeks ended September 29, 2024 was comparable to our cost of products sold during the thirteen weeks ended September 24, 2023, as the year-over-year increase in realized savings from various cost reduction actions and lower variable compensation was offset by the combined net impact of price and mix and inflation in inbound transportation and labor costs. Additionally, the third quarter of 2023 was favorably impacted by $2.0 million of insurance recoveries related to the tornado at our Jackson, Georgia facility and $3.0 million of accumulated medical rebates related to the favorable renegotiation of our health insurance program that did not recur in the current year.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $26.0 million, or 18.5 percent, to $166.3 million (23.2 percent of net sales) in the thirteen weeks ended September 29, 2024 compared to $140.3 million (20.7 percent of net sales) in the thirteen weeks ended September 24, 2023. The increase in the third quarter of 2024 is primarily due to acquisition-related costs ($15.0 million) associated with the acquisition of Supreme , the inclusion of Supreme ($12.1 million) and increased associate-related costs, net of lower variable compensation ($2.4 million).
Restructuring charges
Restructuring charges were $7.8 million in the thirteen weeks ended September 29, 2024, compared to restructuring charges of $1.4 million in the thirteen weeks ended September 24, 2023. Charges in the third quarter of 2024 include severance costs, facility closure costs and other employee-related costs in order to better align our workforce with our forecasted demand within our manufacturing footprint.
Interest expense
Interest expense was $20.0 million in the thirteen weeks ended September 29, 2024 as compared to $15.3 million in the thirteen weeks ended September 24, 2023. The increase in the third quarter of 2024 is due primarily to the unfavorable impact of higher outstanding debt in the third quarter of 2024, as compared to the third quarter of 2023, in connection with the funding of the Supreme acquisition.
Other income, net
Other income, net was $1.8 million in the thirteen weeks ended September 29, 2024, an increase of $0.8 million as compared to other expense, net of $1.0 million in the thirteen weeks ended September 24, 2023. This increase was due primarily to transactional foreign currency gains in the third quarter of 2024.
Income taxes
Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the thirteen weeks ended September 29, 2024 and September 24, 2023 were as follows:
Thirteen Weeks Ended
(U.S. Dollars presented in millions, except percentages) September 29,
2024 September 24,
2023
Income before taxes $ 39.4 $ 77.9
Income tax expense 10.3 18.2
Effective tax rate 26.1 % 23.4 %
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The effective income tax rates for the thirteen weeks ended September 29, 2024 and September 24, 2023, were 26.1 percent and 23.4 percent , respectively. The net increase in the effective tax rate between the periods is primarily due to nondeductible acquisition-related transaction costs, an increase in nondeductible stock compensation and changes in foreign income inclusions with offsetting foreign tax credits, partially offset by favorable return-to-provision adjustments and a decrease in the deferred tax liability for foreign earnings.
The difference between our effective income tax rate for the thirteen weeks ended September 29, 2024 , and the U.S. statutory rate of 21.0 percent is due to the unfavorable impact of state and local income taxes, nondeductible compensation, nondeductible acquisition-related transaction costs and foreign income inclusions with offsetting tax credits, partially offset by favorable return-to-provision adjustments and the mix of earnings in jurisdictions with differing tax rates.
The difference between our effective income tax rate for the thirteen weeks ended September 24, 2023, and the U.S. statutory rate of 21.0 percent is due to the unfavorable changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits and recognition of a deferred tax liability for foreign earnings, partially offset by the mix of earnings in jurisdictions with differing tax rates.
The following discussion of condensed consolidated results of operations refers to the thirty-nine weeks ended September 29, 2024 compared to the thirty-nine weeks ended September 24, 2023.
Thirty-Nine Weeks Ended September 29, 2024 Compared to the Thirty-Nine Weeks Ended September 24, 2023
Thirty-Nine Weeks Ended
(U.S. Dollars presented in millions) September 29,
2024 $ change % change September 24,
2023
NET SALES $ 2,032.7 $ (16.4) (0.8) % $ 2,049.1
Cost of products sold 1,359.0 (11.8) (0.9) % 1,370.8
GROSS PROFIT 673.7 (4.6) (0.7) % 678.3
Selling, general and administrative expenses 450.8 33.5 8.0 % 417.3
Amortization of intangible assets 13.7 2.1 18.1 % 11.6
Restructuring charges 11.0 6.9 168.3 % 4.1
OPERATING INCOME 198.2 (47.1) (19.2) % 245.3
Interest expense 54.7 4.8 9.6 % 49.9
Other income, net (5.0) (4.9) n/m (1)
(0.1)
INCOME BEFORE TAXES 148.5 (47.0) (24.0) % 195.5
Income tax expense 36.6 (13.0) (26.2) % 49.6
NET INCOME $ 111.9 $ (34.0) (23.3) % $ 145.9
___________
(1) Not meaningful.
Net sales
Net sales were $2,032.7 million for the thirty-nine weeks ended September 29, 2024 compared to $2,049.1 million for the thirty-nine weeks ended September 24, 2023, a decrease of $16.4 million, or 0.8 percent. The lower net sales, compared to the thirty-nine weeks ended September 24, 2023, were driven by the combined net impact of price and mix on our overall average selling price, partially offset by an increase in sales unit volume. Excluding the $60.8 million of incremental sales in the third quarter of 2024 related to the Supreme acquisition, the increased sales unit volume offset 9.0 percent of the gross year over year decrease in net sales. Overall end-market demand was softer in the first three quarters of 2024 as compared to the first three quarters of 2023 in the repair and remodel markets, while single-family new construction strengthened in the first three quarters of 2024.
Compared to the thirty-nine weeks ended September 24, 2023, net sales to dealers, whose end customers include builders, professional trades and home remodelers, declined $32.7 million, or 3.0 percent, and net sales to retailers, including through their respective retail internet website portals, declined $21.1 million, or 2.9 percent. Net sales directly to builders increased $37.4 million, or 16.4 percent.
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Foreign currency impact was unfavorable by $0.7 million during the thirty-nine weeks ended September 29, 2024 as compared to the thirty-nine weeks ended September 24, 2023.
Cost of products sold
Cost of products sold decreased by $11.8 million, or 0.9 percent, to $1,359.0 million (66.9 percent of net sales) in the thirty-nine weeks ended September 29, 2024 as compared to $1,370.8 million (66.9 percent of net sales) in the thirty-nine weeks ended September 24, 2023. The $11.8 million decrease in cost of products sold in the first three quarters of 2024 is due primarily to the combined net impact of price and mix. This overall decrease was also a function of a year-over-year increase in realized savings from various cost reduction actions, carry over deflation in commodity costs and inbound transportation, and $5.2 million of net incremental costs in the first three quarters of 2023 ( $9.4 million of gross costs, less $4.2 million of insurance recoveries) related to the tornado at the Jackson, Georgia facility that did not recur in the current year . This overall decrease was partially offset by the impact of increased sales unit volume, which offset 8.9 percent of the gross year-over-year decrease in cost of products sold, the acquisition of Supreme, which contributed to $40.6 million of cost of products sold and $3.0 million of accumulated medical rebates in 2023 related to the favorable renegotiation of our health insurance program that did not recur in the current year.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $33.5 million, or 8.0 percent, to $450.8 million (22.2 percent of net sales) in the thirty-nine weeks ended September 29, 2024 compared to $417.3 million (20.4 percent of net sales) in the thirty-nine weeks ended September 24, 2023. The increase in the first three quarters of 2024 is primarily due to increased acquisition-related costs ($19.4 million) associated with the acquisition of Supreme, the inclusion of Supreme ($12.1 million) and associate-related costs ($12.8 million), including salaries and incentive compensation, and professional support fees ($5.8 million). These increases are partially offset by lower distribution and commission costs ($9.5 million), as a result of the decrease in net sales. The first three quarters of 2023 included $2.3 million of costs directly related to the separation from Fortune Brands, which did not recur in 2024.
Restructuring charges
Restructuring charges were $11.0 million in the thirty-nine weeks ended September 29, 2024, as compared to restructuring charges of $4.1 million in the thirty-nine weeks ended September 24, 2023. Charges in the thirty-nine weeks ended September 29, 2024 are largely related to severance costs, facility closure costs and other employee-related costs in order to better align our workforce with our forecasted demand within our manufacturing footprint.
Interest expense
Interest expense was $54.7 million in the thirty-nine weeks ended September 29, 2024 as compared to $49.9 million in the thirty-nine weeks ended September 24, 2023. The first three quarters of 2024 include $6.5 million of nonrecurring interest expense incurred in connection with the debt refinancing transaction, including the write-off of deferred financing fees. This increase was partially offset by the favorable impact of lower average outstanding debt in the first half of 2024 as compared to the first half of 2023, as strong cash from operations throughout fiscal 2023 was used, in part, to pay down our revolving credit facility and term loan included as part of the 2022 Credit Agreement.
Other income expense, net
Other income, net was $5.0 million in the thirty-nine weeks ended September 29, 2024, an increase of $4.9 million as compared to other expense, net of $0.1 million in the thirty-nine weeks ended September 24, 2023. This increase was due primarily to transactional foreign currency gains recorded in the first three quarters of 2024.
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Income taxes
Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the thirty-nine week periods ended September 29, 2024 and September 24, 2023 were as follows:
Thirty-Nine Weeks Ended
(U.S. Dollars presented in millions, except percentages) September 29,
2024 September 24,
2023
Income before taxes $ 148.5 $ 195.5
Income tax expense 36.6 49.6
Effective tax rate 24.6 % 25.4 %
The effective income tax rates for the thirty-nine weeks ended September 29, 2024 and September 24, 2023, were 24.6 percent and 25.4 percent, respectively. The net decrease in the effective tax rate between the periods is primarily related to favorable return-to-provision adjustments, the stock compensation windfall benefit for shares which vested and a decrease in the deferred tax liability for foreign earnings, partially offset by nondeductible acquisition-related transaction costs and nondeductible compensation.
The difference between our effective income tax rate for the thirty-nine weeks ended September 29, 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, nondeductible compensation and nondeductible acquisition-related transaction costs, partially offset by favorable return-to-provision adjustments , 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 thirty-nine weeks ended September 24, 2023, and the U.S. statutory rate of 21.0 percent is due to unfavorable changes in state and local income taxes, nondeductible compensation, foreign income inclusions with offsetting foreign tax credits, recognition of a deferred tax liability for foreign earnings and changes due to foreign tax return filings, partially offset by 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 and in the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 within Part II, Item 1A.
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 was secured by certain assets as well as the guarantee of certain of our subsidiaries.
On June 27, 2024, the Company refinanced this debt by completing the Offering of $700.0 million aggregate principal amount of the Senior Notes and entered into the 2024 Credit Agreement. The Company used the funds from the refinancing transaction, and cash on-hand, to: 1) refinance the 2022 Credit Agreement (including repaying all amounts outstanding under the existing term loan, inclusive of accrued and unpaid interest), 2) fund the previously announced acquisition of Supreme on July 10, 2024, and 3) to pay all fees and expenses related to the foregoing transactions. In July 2024, upon closing, we funded the acquisition with a combination of cash on hand and $430.0 million of proceeds from the revolving credit facility provided for by the 2024 Credit Agreement (see Note 10, "Debt," for further details).
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The Senior Notes will mature on July 15, 2032. Interest on the Senior Notes will accrue at a rate of 7.00 percent per annum and will be payable semi-annually in arrears on January 15 and July 15, beginning on January 15, 2025.
The Indenture contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its restricted subsidiaries (as defined in the Indenture) to (i) incur additional indebtedness and guarantee indebtedness, (ii) make restricted payments, (iii) create, incur or assume liens or use assets as security in other transactions, (iv) merge, consolidate, or sell, transfer, lease or dispose of substantially all of their assets, (v) sell or transfer certain assets, (vi) enter into or conduct transactions with affiliates of the Company and (vii) agree to certain restrictions or encumbrances on the ability of restricted subsidiaries to pay dividends, make loans or advances, or to otherwise transfer property or assets to the Company or other restricted subsidiaries. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations. The Indenture also includes customary events of default. Certain of the foregoing covenants will be suspended in the event that (i) the Senior Notes receive investment grade ratings from any two of Fitch Ratings Inc., Moody’s Investors Service, Inc. or S&P Global Ratings and (ii) no default or event of default has occurred and is continuing under the Indenture. The Company was in compliance with all of its debt covenants under the Indenture as of September 29, 2024.
The revolving credit facility under the 2024 Credit Agreement is not subject to amortization and will mature in June 2029. The 2024 Credit Agreement is secured by certain assets as well as the guarantee of certain of our subsidiaries.
Interest rates on the revolving credit facility are variable based on the SOFR, or, at the Company’s option, at a base reference rate equal to the highest of (i) the federal funds rate plus 0.50 percent, (ii) the rate of interest last quoted by the Administrative Agent (as defined in the 2024 Credit Agreement) as its “prime rate” and (iii) the one-month SOFR rate plus 1.00 percent (the “Base Rate”), plus, as applicable, a margin ranging from 1.625 percent to 2.25 percent per annum for SOFR-based loans and ranging from 0.625 percent to 1.25 percent per annum for Base Rate-based loans, in each case, depending on the Company’s net leverage ratio. The Company will also pay customary agency fees and a commitment fee based on the daily unused portion of the revolving credit facility ranging from 0.20 percent to 0.30 percent per annum, depending on its net leverage ratio.
The 2024 Credit Agreement contains customary representations and warranties, affirmative covenants, and restrictive covenants. The restrictive covenants limit the Company and its subsidiaries’ ability to, among other things, (i) incur indebtedness, (ii) create liens on the Company’s or such subsidiaries’ assets, (iii) engage in fundamental changes, (iv) make investments, (v) sell or otherwise dispose of assets, (vi) engage in sale-leaseback transactions, (vii) make restricted payments, (viii) engage in certain transactions with affiliates and (ix) enter into agreements restricting the ability of the Company’s subsidiaries to make distributions to the Company or incur liens on their assets.
The 2024 Credit Agreement also contains a financial covenant that does not permit the Company to allow its net leverage ratio to exceed (i) in the case of any fiscal quarter ending on or prior to December 31, 2024, 3.50 to 1:00 and (ii) in the case of any fiscal quarter ending on or following March 31, 2025, 3.25 to 1:00 or, if the Company consummates any material acquisition, then the Company’s net leverage ratio shall not exceed 3.75 to 1.00 for the applicable fiscal quarter in which such acquisition is consummated and the three consecutive fiscal quarters thereafter. The Company is also required to maintain a minimum interest coverage ratio of 3.00 to 1.00. The 2024 Credit Agreement also contains customary events of default. The occurrence of an event of default could result in the termination of commitments under the revolving credit facility, the acceleration of all outstanding amounts thereunder and the requirement to cash collateralize outstanding letters of credit. The Company was in compliance with all of its debt covenants under the 2024 Credit Agreement as of September 29, 2024.
As of September 29, 2024, we had $1,062.3 million outstanding in third-party borrowings, net of deferred financing fees. We may also incur additional indebtedness in the future.
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Cash Flows
Below is a summary of cash flows for the thirty-nine weeks ended September 29, 2024 and September 24, 2023.
Thirty-Nine Weeks Ended
(U.S. Dollars presented in millions)
September 29,
2024 September 24,
2023
Net cash provided by operating activities
$ 176.9 $ 336.5
Net cash used in investing activities
(541.9) (21.1)
Net cash provided by (used in) financing activities
331.3 (292.1)
Effect of foreign exchange rate changes on cash and cash equivalents
(5.6) (1.9)
Net (decrease) increase in cash, cash equivalents and restricted cash
$ (39.3) $ 21.4
Net cash provided by operating activities was $176.9 million in the first three quarters of 2024 as compared to $336.5 million in the first three quarters of 2023. In the first three quarters of 2024, the movement in accounts receivable was $2.3 million unfavorable. In the first three quarters of 2023, our accounts receivable decreased $60.1 million as a result of improvements in our collection processes throughout 2023. In the first three quarters of 2024, the movement in inventory was $32.5 million unfavorable, reflective of the normal seasonal build in inventory from year-end. The first three quarters of 2023 had favorable movement in inventory of $103.9 million. In 2022, we executed an intentional build in inventory in the first three quarters 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 three quarters of 2023 reflected our efforts to more efficiently manage our inventory levels in the supply chain environment, which have continued through the first three quarters of 2024. Accounts payable was $18.0 million favorable in the first three quarters of 2024, reflective of the increased purchasing associated with the higher inventory balance from year-end, as compared to unfavorable accounts payable movement of $42.8 million in the first three quarters of 2023 as a result of decreased purchasing levels aligned with our inventory management. Restructuring charges, net of cash payments, was $4.3 million favorable in the first three quarters of 2024 as compared to $13.9 million unfavorable in the first three quarters of 2023.
Net cash used in investing activities was $541.9 million in the first three quarters of 2024, compared to net cash used in investing activities of $21.1 million in first three quarters of 2023. The year-over-year increase is due to the acquisition of Supreme, net of cash acquired, of $515.7 million and increased capital expenditures as compared to the prior year. These increases were partially offset by the proceeds from the sale of a former manufacturing facility site in the second quarter of 2024.
Net cash provided by financing activities was $331.3 million in the thirty-nine weeks ended September 29, 2024 as compared to net cash used of $292.1 million in the thirty-nine weeks ended September 24, 2023. In the first three quarters of 2023, we used strong cash flows from operations to pay down $272.5 million of debt. In the first three quarters of 2024, our $712.5 million term loan was repaid, and replaced with $700.0 million of Senior Notes as a result of the refinancing transaction completed in the second quarter. In the first three quarters of 2024, we used $430.0 million of proceeds from the revolving credit facility provided for by the 2024 Credit Agreement to fund the Supreme acquisition. We have subsequently paid down $55.0 million on the revolving credit facility through the usage of cash flow from operations. The first three quarters of 2024 also included the payment of $17.8 million of financing fees.
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.
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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, except as set forth below.
Business Combinations
We allocate the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the purchase price for an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results. We use a variety of information sources to determine the fair value of acquired assets and liabilities including: third-party appraisers for the values and lives of property, identifiable intangibles and inventories; and actuaries and other third-party specialists, workers' compensation and general and product liabilities, as necessary. Transaction costs related to the acquisition of a business are expensed as incurred.
We estimate the fair value of acquired customer relationships using the multi-period excess earnings method. Fair value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the returns required on the investment in contributory assets which are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated earnings from contributory assets. Assumptions used in these calculations are considered from a market participant perspective and include revenue growth rates, estimated earnings, customer attrition rates, royalty rates and discount rates.
We estimate the fair value of tradenames using the relief from royalty method, which calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings. Assumptions used in the determination of the fair value of a trade name include revenue growth rates, the royalty rate and the discount rate.
While we use our best estimates and assumptions, fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of operations.
Future changes in the judgments, assumptions and estimates that are used in our acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect our financial statements in any given year.
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.