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 29, 2024 within Part I, Item 1A and in this Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2025 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, including risks associated with uncertain trade environments, changes to U.S. tariff policy and retaliatory tariffs imposed by other countries; • 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, 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 of Supreme; • Diversion of management time on acquisition-related issues; 20 Table of Contents • The reaction of customers and other persons to the acquisition of Supreme; 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. Overview Founded over 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. 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, crafted 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. 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) “2025,” or “fiscal 2025” refers to our 2025 fiscal year that is a 52-week period that will end on December 28, 2025; and (2) “2024,” or “fiscal 2024” refers to our 2024 fiscal year that was a 52-week period that ended on December 29, 2024. Furthermore, unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to: (1) “the first quarter of 2025” refers to the thirteen week period that ended on March 30, 2025; and (2) “the first quarter of 2024” refers to the thirteen week period that ended on March 31, 2024. 21 Table of Contents Results of Operations The following discussion of condensed consolidated results of operations refers to the thirteen weeks ended March 30, 2025 compared to the thirteen weeks ended March 31, 2024. Thirteen Weeks Ended March 30, 2025 Compared to the Thirteen Weeks Ended March 31, 2024 Thirteen Weeks Ended (U.S. Dollars presented in millions) March 30, 2025 $ change % change March 31, 2024 NET SALES $ 660.3 $ 22.2 3.5 % $ 638.1 Cost of products sold 458.1 24.7 5.7 % 433.4 GROSS PROFIT 202.2 (2.5) (1.2) % 204.7 Selling, general and administrative expenses 154.0 16.2 11.8 % 137.8 Amortization of intangible assets 6.4 2.7 73.0 % 3.7 Restructuring charges 4.7 4.3 n/m (1) 0.4 OPERATING INCOME 37.1 (25.7) (40.9) % 62.8 Interest expense 19.4 5.3 37.6 % 14.1 Other expense (income), net 0.4 0.7 n/m (1) (0.3) INCOME BEFORE TAXES 17.3 (31.7) (64.7) % 49.0 Income tax expense 4.0 (7.5) (65.2) % 11.5 NET INCOME $ 13.3 $ (24.2) (64.5) % $ 37.5 __________ (1) Not meaningful. Net sales Net sales were $660.3 million for the thirteen weeks ended March 30, 2025 compared to $638.1 million for the thirteen weeks ended March 31, 2024, an increase of $22.2 million, or 3.5 percent. The first quarter of 2025 includes $60.8 million of incremental sales related to the Supreme acquisition. Excluding the impact of Supreme, the $38.6 million decrease in net sales from the thirteen weeks ended March 31, 2024 was driven primarily by lower sales unit volume of $48.2 million, partially offset by the favorable combined net impact of price and mix on our overall average selling price of $10.6 million. Overall end market demand was weaker in the first quarter of 2025 compared to the first quarter of 2024 in the repair and remodel and single-family new construction markets. Foreign currency impact was unfavorable by $1.0 million during the thirteen weeks ended March 30, 2025 as compared to the thirteen weeks ended March 31, 2024. Compared to the thirteen weeks ended March 31, 2024, net sales to dealers, whose end customers include builders, professional trades and home remodelers, increased $38.1 million, or 12.1 percent, and net sales to retailers, including through their respective retail internet website portals, declined $19.4 million, or 8.0 percent. Net sales directly to builders increased $3.5 million, or 4.4 percent. Cost of products sold Cost of products sold increased by $24.7 million, or 5.7 percent, to $458.1 million (69.4 percent of net sales) in the thirteen weeks ended March 30, 2025 as compared to $433.4 million (67.9 percent of net sales) in the thirteen weeks ended March 31, 2024. The inclusion of Supreme in the thirteen weeks ended March 30, 2025 resulted in an incremental $39.4 million of cost of products sold. Excluding the impact of Supreme, the $14.7 million decrease in cost of products sold was driven primarily by lower sales unit volume of $34.1 million, partially offset by the combined net impact of costs and mix of $19.4 million. In the first quarter, realized savings from various cost reduction actions were more than offset by higher manufacturing costs, including unfavorable fixed cost leverage, in the thirteen weeks ended March 30, 2025. 22 Table of Contents Selling, general and administrative expenses Selling, general and administrative expenses increased by $16.2 million, or 11.8 percent, to $154.0 million (23.3 percent of net sales) in the thirteen weeks ended March 30, 2025 compared to $137.8 million (21.6 percent of net sales) in the thirteen weeks ended March 31, 2024. The increase in the thirteen weeks ended March 30, 2025 is primarily due to the inclusion of Supreme ($13.0 million), increased associate-related costs, net of lower variable compensation ($2.7 million) and acquisition-related costs ($1.6 million) associated with the acquisition of Supreme. These increases were partially offset by lower distribution costs ($3.0 million) as a result of the decrease in sales unit volume. Restructuring charges Restructuring charges were $4.7 million in the thirteen weeks ended March 30, 2025, as compared to restructuring charges of $0.4 million in the thirteen weeks ended March 31, 2024. Charges in the thirteen weeks ended March 30, 2025 are largely related to severance 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 $19.4 million in the thirteen weeks ended March 30, 2025 as compared to $14.1 million in the thirteen weeks ended March 31, 2024. The increase in interest expense for the thirteen weeks ended March 30, 2025 is due to the higher outstanding debt balance in 2025 as a result of the debt refinancing transaction in the second quarter of 2024 associated with the acquisition of Supreme. Other income expense, net Other expense, net was $0.4 million in the thirteen weeks ended March 30, 2025, an increase of $0.7 million of expense as compared to other income, net of $0.3 million in the thirteen weeks ended March 31, 2024. The first quarter of 2025 includes transactional foreign currency losses and a pension settlement charge of $0.3 million. Income taxes Our condensed consolidated income before taxes, income tax expense, and effective tax rate for the thirteen week periods ended March 30, 2025 and March 31, 2024 were as follows: Thirteen Weeks Ended (U.S. Dollars presented in millions) March 30, 2025 March 31, 2024 Income before taxes $ 17.3 $ 49.0 Income tax expense 4.0 11.5 Effective tax rate 23.1 % 23.5 % The effective income tax rates for the thirteen weeks ended March 30, 2025 and March 31, 2024, were 23.1 percent and 23.5 percent, respectively. The decrease in effective tax rate between the periods is primarily the result of lower foreign income taxed at higher rates, return-to-provision adjustments, and foreign inclusions net of foreign tax credits, partially offset by an increase in the valuation allowance and a reduction in the stock compensation windfall benefits for shares which vested. The difference between our effective income tax rate for the thirteen weeks ended March 30, 2025 , and the U.S. statutory rate of 21.0 percent is primarily due to the unfavorable impact of net changes in state and local income taxes, nondeductible compensation, foreign income taxed at higher rates, an increase in the valuation allowance and foreign income inclusions net of foreign tax credits. These were partially offset by benefits for return-to-provision adjustments , the stock compensation windfall benefit for shares which vested, tax credits, and foreign exclusions. 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 primarily due to the unfavorable impact of state and local income taxes, foreign income inclusions net of foreign 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. 23 Table of Contents In 2024, certain jurisdictions in which we operate enacted, or announced their intention to enact, legislation consistent with one or more Organization for Economic Co-operation and Development Global Anti-Base Erosion Model Rules (“Pillar Two”). The model rules include qualified domestic minimum top-up taxes, income inclusion rules, and undertaxed profit rules all aimed to ensure that multinationals pay a minimum effective corporate tax rate of 15 percent in each jurisdiction in which they operate, with some rules effective in 2024, 2025 or others becoming effective in 2026. The Pillar Two legislation, as enacted in certain jurisdictions in which we operate, does not materially impact our 2025 annual effective tax rate but is expected to unfavorably impact our annual effective tax rate in 2026. Further changes to our entity structure, enacted local legislation, or changes in jurisdictions in which we operate could also impact our future effective tax rate. Additionally, the new U.S. administration could modify key aspects of the tax code, including the Tax Cuts and Jobs Act of 2017, which could materially affect our tax obligations and effective tax rate. 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 29, 2024. 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 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. 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 is payable semi-annually in arrears on January 15 and July 15, beginning on January 15, 2025. 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 a financial covenant that does not permit the Company to allow its net leverage ratio to exceed, in the case of any fiscal quarter ending on or following March 30, 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 March 30, 2025. 24 Table of Contents As of March 30, 2025, we had $1,058.2 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 30, 2025 and March 31, 2024. Thirteen Weeks Ended (U.S. Dollars presented in millions) March 30, 2025 March 31, 2024 Net cash (used in) provided by operating activities $ (31.4) $ 18.7 Net cash used in investing activities (9.8) (7.0) Net cash provided by (used in) financing activities 33.5 (7.1) Effect of foreign exchange rate changes on cash 0.2 0.4 Net (decrease) increase in cash, cash equivalents and restricted cash $ (7.5) $ 5.0 Net cash used by operating activities was $31.4 million in the first quarter of 2025 as compared to $18.7 million of net cash provided by operating activities in the first quarter of 2024 . Net income contributed $13.3 million to operating cash flow in the first quarter of 2025, down from $37.5 million in the first quarter of 2024. In the first quarter of 2025 , accounts receivable increased $30.0 million from the seasonally lower fiscal 2024 ending balance, compared to an increase of $21.7 million in the first quarter of 2024, reflecting higher sales in the first quarter of fiscal 2025. In the first quarter of 2025 , inventory increased $12.2 million, reflective of the normal seasonal build in inventory from year-end, as compared to a decline in inventory of $1.6 million in the first quarter of 2024. Accounts payable was flat compared to the fiscal 2024 ending balance, while the movement in accounts payable favorably contributed $10.2 million to the first quarter 2024 operating cash flow. Net cash used in investing activities was $9.8 million in the first quarter of 2025 , compared to net cash used in investing activities of $7.0 million in first quarter of 2024 . The year-over-year increase is due to increased capital expenditures as compared to the prior year. Net cash provided by financing activities was $33.5 million in the thirteen weeks ended March 30, 2025 as compared to net cash used of $7.1 million in the thirteen weeks ended March 31, 2024. In the first quarter of 2025 , we borrowed $50 million, net, to fund working capital needs. The first quarter of 2025 also includes $11.4 million of stock repurchases as compared to $1.6 million of purchases in the first quarter of 2024. 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 The condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to make certain estimates and assumptions that affect reported amounts of assets and liabilities and the reported amounts of revenues and expenses for the reporting period. 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 29, 2024. Since the date of the Company’s most recent Annual Report, there have been no material changes in our critical accounting estimates or assumptions. 25 Table of Contents 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 29, 2024.