Norcraft Companies, Inc. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Norcraft Companies, Inc.	Financial_Report.xls
EX-31.1 - EXHIBIT - Norcraft Companies, Inc.	norcraft9302014exhibit311.htm
EX-32.2 - EXHIBIT - Norcraft Companies, Inc.	norcraft9302014exhibit322.htm
EX-32.1 - EXHIBIT - Norcraft Companies, Inc.	norcraft9302014exhibit321.htm
EX-31.2 - EXHIBIT - Norcraft Companies, Inc.	norcraft9302014exhibit312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

________________________________

FORM 10-Q

________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 333-191607

________________________________

Norcraft Companies, Inc.

(Exact name of registrant as specified in its certificate of limited partnership)

________________________________



Delaware		37-1738347
(State of Incorporation)		(I.R.S. Employer Identification No.)

________________________________

3020 Denmark Avenue, Suite 100

Eagan, MN 55121

(Address of Principal Executive Offices)

________________________________

(800) 297-0661

(Registrant’s Telephone Number, Including Area Code)

________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated Filer	¨	Accelerated Filer	¨

Non-Accelerated Filer	x	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 17,311,573 shares of common stock outstanding as of November 6, 2014.

Norcraft Companies, Inc.

Table of Contents



	Page
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	3
Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013	4
Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2014	5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures of Market Risk	26
Item 4. Controls and Procedures	27

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	28
Item 1A. Risk Factors	28
Item 6. Exhibits	28

SIGNATURES	29

PART I. FINANCIAL INFORMATION

Item 1.

Norcraft Companies, Inc.

Consolidated Balance Sheets

(dollar amounts in thousands, except share and per share data)



	September 30,			December 31,
	2014			2013
	(unaudited)			(audited)
ASSETS
Current assets:
Cash and cash equivalents	$	55,404		$	39,106
Trade accounts receivable, net	28,518			21,449
Inventories	25,961			22,591
Prepaid and other current assets	1,336			2,590
Total current assets	111,219			85,736
Non-current assets:
Property, plant and equipment, net	25,390			25,208
Goodwill	88,459			88,466
Intangible assets, net	56,500			60,108
Display cabinets, net	6,480			5,864
Other assets	161			84
Total non-current assets	176,990			179,730
Total assets	$	288,209		$	265,466
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	1,500		$	1,500
Accounts payable	13,025			8,523
Accrued tax distributions	393			—
Accrued expenses	27,184			21,203
Total current liabilities	42,102			31,226
Non-current liabilities:
Long-term debt	147,375			148,500
Unamortized discount on long-term debt	(665		)	(746		)
Amounts payable under tax receivable agreements	28,629			—
Deferred tax liabilities and other liabilities	19,732			36,560
Total non-current liabilities	195,071			184,314
Total liabilities	237,173			215,540
Commitments and contingencies	—			—
Stockholders' equity:
Common stock, $0.01 par value; 100,000,000 shares authorized; 17,311,573 issued and outstanding at September 30, 2014 and December 31, 2013	173			173
Additional paid-in capital	53,372			51,795
Accumulated deficit	(14,996		)	(13,703		)
Accumulated other comprehensive income	603			845
Total Norcraft Companies, Inc. stockholders' equity	39,152			39,110
Noncontrolling interests	11,884			10,816
Total stockholders' equity	51,036			49,926
Total liabilities and stockholders' equity	$	288,209		$	265,466

See notes to unaudited consolidated financial statements.

Norcraft Companies, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(dollar amounts in thousands, except share and per share data)

(unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Net sales	$	100,424		$	91,570		$	282,055		$	259,202
Cost of sales	72,610			67,708			205,734			191,340
Gross profit	27,814			23,862			76,321			67,862
Selling, general and administrative expenses	15,858			16,844			46,400			45,875
Income from operations	11,956			7,018			29,921			21,987
Other expense:
Interest expense, net	2,269			6,478			6,671			19,395
Amortization of deferred financing costs	151			780			456			2,340
Expense related to tax receivable agreements	33,203			—			37,678			—
Other expense, net	(9		)	5			(22		)	(8		)
Total other expense	35,614			7,263			44,783			21,727
Income (loss) before income taxes	(23,658		)	(245		)	(14,862		)	260
Income tax expense (benefit)	(18,058		)	12			(16,375		)	37
Net income (loss)	(5,600		)	(257		)	1,513			223
Less: net income attributable to noncontrolling interests	1,738			—			2,806			—
Net income (loss) attributable to Norcraft Companies, Inc.	(7,338		)	(257		)	(1,293		)	223

Other comprehensive income (loss):
Foreign currency translation adjustment	(121		)	198			(276		)	(309		)
Less: other comprehensive loss attributable to noncontrolling interests	(15		)	—			(34		)	—
Other comprehensive income (loss) attributable to Norcraft Companies, Inc.	(106		)	198			(242		)	(309		)

Comprehensive income (loss)	(5,721		)	(59		)	1,237			(86		)
Less: comprehensive income attributable to noncontrolling interests	1,723			—			2,772			—
Comprehensive loss attributable to Norcraft Companies, Inc.	$	(7,444	)	$	(59	)	$	(1,535	)	$	(86	)


Net income (loss) per share attributable to Norcraft Companies, Inc.
Basic and diluted	$	(0.42	)				$	(0.07	)

Weighted average number of common shares outstanding
Basic and diluted	17,311,573						17,311,573

See notes to unaudited consolidated financial statements.

Norcraft Companies, Inc.

Consolidated Statement of Changes in Stockholders' Equity

(dollar amounts in thousands, except share data)

(unaudited)



									Accumulated
				Additional					Other
	Common Stock			Paid-in		Accumulated			Comprehensive			Noncontrolling
	Shares	Amount		Capital		Deficit			Income			Interests			Total
Stockholders' equity at January 1, 2014	17,311,573	$	173	$	51,795	$	(13,703	)	$	845		$	10,816		$	49,926
Stock compensation expense	—	—		1,577		—			—			—			1,577
Unpaid tax distributions to noncontrolling interests	—	—		—		—			—			(393		)	(393		)
Distributions to members	—	—		—		—			—			(1,311		)	(1,311		)
Comprehensive income (loss)	—	—		—		(1,293		)	(242		)	2,772			1,237
Stockholders' equity at September 30, 2014	17,311,573	$	173	$	53,372	$	(14,996	)	$	603		$	11,884		$	51,036

See notes to unaudited consolidated financial statements.

Norcraft Companies, Inc.

Consolidated Statements of Cash Flows

(dollar amounts in thousands)

(unaudited)



	Nine Months Ended
	September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	1,513		$	223
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment	2,984			3,302
Amortization:
Customer relationships	3,350			3,350
Deferred financing costs	456			2,340
Display cabinets	3,233			3,159
Discount amortization/accreted interest	81			(30		)
Provision for uncollectible accounts receivable	131			75
Provision for obsolete and excess inventories	438			552
Provision for warranty claims	4,130			3,285
Stock compensation expense	1,577			12
Deferred income tax expense	(16,834		)	—
Change in liability under tax receivable agreements	37,678			—
Gain on disposal of assets	(40		)	(2		)
Change in operating assets and liabilities:
Trade accounts receivable	(7,269		)	(6,279		)
Inventories	(3,855		)	(4,495		)
Prepaid expenses	1,251			(55		)
Other assets	(77		)	198
Accounts payable and accrued expenses	(2,649		)	15,484
Net cash provided by operating activities	26,098			21,119
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment	38			3
Purchase of property, plant and equipment	(3,304		)	(2,894		)
Additions to display cabinets	(3,850		)	(2,919		)
Net cash used in investing activities	(7,116		)	(5,810		)
Cash flows from financing activities:
Payment of financing costs	(198		)	(67		)
Repayment of long-term debt	(1,125		)	—
Repurchase of member interests	—			(30		)
Proceeds from issuance of member interests	—			3
Distributions to members	(1,311		)	—
Net cash used in financing activities	(2,634		)	(94		)
Effect of exchange rates on cash and cash equivalents	(50		)	(29		)
Net increase in cash and cash equivalents	16,298			15,186
Cash and cash equivalents, beginning of the period	39,106			23,019
Cash and cash equivalents, end of period	$	55,404		$	38,205
Supplemental disclosure of cash paid:
Interest	$	6,543		$	12,770
Income taxes	$	398		$	—
Supplemental disclosure of non-cash transactions:
Unpaid tax distributions to noncontrolling interests	$	393		$	—
Deferred costs associated with initial public offering	$	—		$	927

See notes to unaudited consolidated financial statements.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)


1.	Basis of Presentation

The accompanying financial statements are those of Norcraft Companies, Inc. (“Norcraft”). Norcraft and its subsidiaries are collectively referred to as the “Company.” Norcraft was incorporated as a Delaware corporation on July 23, 2013 for the purpose of facilitating an initial public offering of 7,356,634 shares of common stock ("IPO"). Norcraft has income tax related items recorded on its statement of financial condition and statement of comprehensive income (loss) and all other transactions are its direct or indirect interest in Norcraft Holdings Corp. I (formerly known as SKM Norcraft Corp.), Norcraft Holdings Corp. II (formerly known as Trimaran Cabinet Corp.) and Norcraft Companies LLC and its subsidiaries. Norcraft Companies LLC’s subsidiaries, including Norcraft Holdings, L.P. and Norcraft Companies, L.P., are continuing to operate the historical business of the Company.

The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the interim consolidated financial statements and accompanying notes included herein should be read in conjunction with the more detailed information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 include all normal recurring adjustments which management considers necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods.


2.	Noncontrolling Interests

Exchange of LLC Units for Common Stock. Beginning one year after the date of Norcraft's IPO, at the option of the holders, the common units of Norcraft Companies LLC (“LLC Units”), are exchangeable for cash, or, for Norcraft's common shares on a one-for-one basis, at the option of Norcraft. The LLC Units are exchangeable for an amount of cash per LLC Unit equal to the average of the daily per share volume-weighted average price of Norcraft's common stock for the 15 consecutive trading days immediately preceding the date of the exchange. As of September 30, 2014, the aggregate redemption value of the then-outstanding LLC Units owned by Norcraft Companies LLC members was approximately $38.7 million.

The LLC Units owned by the former holders of Buller Norcraft Holdings LLC and MEB Norcraft LLC and certain former and current members of management and the Norcraft's board are considered noncontrolling interests for financial accounting purposes. The amount allocated to noncontrolling interests represents the proportional interest in the consolidated net income (loss) of Norcraft Companies LLC owned by those common unitholders.

Net income attributable to noncontrolling interests is computed as follows:



	Nine Months Ended September 30, 2014
Income (loss) before income taxes	$	(14,862	)
Add: expense related to tax receivable agreements (1)	37,678
	22,816
Noncontrolling interests ownership percentage	12.3		%
Net income attributable to noncontrolling interests	$	2,806
(1) The expense related to tax receivable agreements is related to Norcraft Companies, Inc. and does not affect the LLC Unitholders.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)


3.	Earnings (Loss) Per Share

The following table sets forth the computation of basic and diluted net earnings (loss) per share (in thousands, except share and per share data):



	Three Months Ended September 30, 2014			Nine Months Ended September 30, 2014
Numerator
Numerator for basic earnings per share - Net income (loss) attributable to Norcraft Companies, Inc.	$	(7,338	)	$	(1,293	)
Net income attributable to noncontrolling interests	1,738			2,806
Numerator for diluted earnings (loss) per share	$	(5,600	)	$	1,513
Denominator
Denominator for basic earnings (loss) per share weighted average number of common shares outstanding	17,311,573			17,311,573
Effect of convertible Norcraft Companies LLC units	2,427,414			2,427,414
Denominator for diluted earnings (loss) per share	19,738,987			19,738,987

Basic and diluted net earnings (loss) per share	$	(0.42	)	$	(0.07	)

As of September 30, 2014, there were 2,427,414 of LLC Units outstanding that, subject to certain restrictions, can be exchanged for Company shares. Additionally, there were 1,136,672 options outstanding as of September 30, 2014. Such options were not included in the calculation of diluted earnings per common share because the effect would have been anti-dilutive.


4.	Trade Accounts Receivable

Trade accounts receivable consists of the following:



	September 30, 2014			December 31, 2013
Trade accounts receivable	$	29,161		$	22,044
Less: allowance for uncollectible accounts	(643		)	(595		)
Trade accounts receivable, net	$	28,518		$	21,449


5.	Inventories

Inventories consist of the following:



	September 30, 2014		December 31, 2013
Raw materials and supplies	$	14,931	$	14,340
Work in process	3,293		2,923
Finished goods	7,737		5,328
Inventories	$	25,961	$	22,591

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)


6.	Intangible Assets

Intangible assets consist of the following:



	September 30, 2014
			Subject to Amortization
	Not Subject to Amortization		Gross Carrying Amount		Accumulated Amortization			Total
Goodwill	$	88,459						$	88,459

Brand names	$	35,100						$	35,100
Customer relationships			$	67,000	$	(48,885	)	18,115
Deferred financing costs			3,781		(496		)	3,285
	$	35,100	$	70,781	$	(49,381	)	$	56,500



	December 31, 2013
			Subject to Amortization
	Not Subject to Amortization		Gross Carrying Amount		Accumulated Amortization			Total
Goodwill	$	88,466						$	88,466

Brand names	$	35,100						$	35,100
Customer relationships			$	67,000	$	(45,535	)	21,465
Deferred financing costs			3,583		(40		)	3,543
	$	35,100	$	70,583	$	(45,575	)	$	60,108

There were no events or circumstances during the three or nine months ended September 30, 2014 to indicate that the assets, whether or not subject to amortization, should be evaluated for potential impairment. Under its accounting policy, Norcraft reviews indefinite-lived intangible assets for impairment annually during the fourth quarter of each year or when events or circumstances indicate that potential impairment may exist. The Company reviews finite-lived intangible assets for impairment when events or circumstances indicate the potential that impairment may exist.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)


7.	Accrued Expenses

Accrued expenses consist of the following:



	September 30, 2014		December 31, 2013
Salaries, wages and employee benefits	$	8,381	$	12,115
Commissions, rebates and marketing programs	3,817		3,481
Liability under tax receivable agreements	9,048		—
Workers’ compensation	1,505		1,400
Interest	—		445
Other, including product warranty accruals	4,433		3,762
Accrued expenses	$	27,184	$	21,203

Product warranty accrual activity for the nine months ended is as follows:



	September 30, 2014			September 30, 2013
Beginning balance - December 31	$	1,018		$	733
Accruals for warranties	4,130			3,285
Claims paid	(3,985		)	(3,100		)
Ending balance - September 30	$	1,163		$	918


8.	Stock-Based Compensation

The Company has a management incentive plan, (the “Plan”) which provides for the grants of incentive stock options in Norcraft Companies, Inc. to selected employees of the Company. The Plan authorizes 2,029,413 total options.

Stock options vest with time-based vesting over a three year period for directors and a four year period for employees. Upon vesting, each stock option entitles the option holder the option to purchase one share of Norcraft Companies, Inc. All stock options currently issued under the Plan were issued in 2013 concurrent with the IPO, with the exception of Harvey Wagner's stock options which were issued in connection with his appointment to Norcraft's board of directors in February 2014, and none of these options were vested as of September 30, 2014. All stock options were issued with an exercise price equal to the then fair value of Norcraft Companies, Inc.'s common shares. No awards may be made after 10 years from the date of the Plan's adoption, but previously granted awards may continue beyond that date in accordance with their terms.

The fair value of the stock options granted is based on the Black-Scholes option-pricing model. In accordance with stock compensation guidance, the Company is required to incorporate a volatility factor in the fair value calculation. The volatility factor is developed through the use of a sample of peer group companies consisting of publicly-traded companies that operate in the Company’s same industry. The Company granted 3,812 incentive stock options during the nine months ended September 30, 2014.

Compensation expense related to incentive stock options was $0.5 million and $1.6 million for the three and nine months ended September 30, 2014, respectively.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)



	Nine Months Ended September 30, 2014
Weighted-average fair value of stock options granted	$	8.82
Dividend yield	0.0		%
Risk-free interest rate	1.68		%
Volatility	53.4		%
Expected lives	6.25
Weighted-average period over which the total compensation cost of non-vested options is expected to be recognized (months)	36.9

A summary of stock option activity under the Plan is as follows:



	Nine Months Ended
	September 30, 2014
	Options	Weighted- Average Exercise Price
Beginning balance	1,132,860	$	16.00
Granted	3,812	$	17.49
Ending balance	1,136,672	$	16.00
Exercisable	—	$	—

The intrinsic value of the issued stock options at September 30, 2014 was nil. As of September 30, 2014, none of the options were exercisable.

The total compensation cost of non-vested awards not yet recognized is approximately $6.4 million which will be expensed through October 2017.


9.	Long-Term Debt

Long-term debt consists of the following:



	September 30, 2014		December 31, 2013
Term loan facility (due in 2020 with quarterly interest payments at LIBOR plus a margin of 4.25%)	$	148,875	$	150,000
Less: current portion	1,500		1,500
Long term debt	$	147,375	$	148,500

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)

ABL Facility

In November 2013, in connection with a new senior secured term loan facility, Norcraft Companies, L.P. entered into a senior secured first-lien asset-based revolving credit facility (the “ABL Facility”) pursuant to a credit agreement dated as of November 14, 2013 (the “ABL Credit Agreement”) by and among Norcraft Companies, L.P., as borrower, Norcraft Intermediate Holdings, L.P. and other guarantors party thereto, as guarantors, the lenders party thereto and RBC Capital Markets and Keybank National Association, as joint lead arrangers and joint bookrunners, and Royal Bank of Canada, as swingline lender, as issuing bank, as administrative agent for the lenders and collateral agent for the secured parties. The ABL Facility provides for aggregate commitments of up to $25.0 million, including a letter of credit sub-facility and a swingline loan sub-facility, subject to a borrowing base and has a maturity date of November 14, 2018. As of September 30, 2014, the borrowing base was approximately $25.0 million.

The ABL Credit Agreement contains negative covenants that restrict or limit the ability of Norcraft Intermediate Holdings, L.P. and its subsidiaries from, among other things, (a) selling assets, (b) altering the business, (c) engaging in mergers, acquisitions and other business combinations, (d) declaring dividends or redeeming or repurchasing the Company's equity interests, (e) incurring additional debt or guarantees, (f) making loans and investments, (g) incurring liens, (h) entering into transactions with affiliates, (i) engaging in sale and leaseback transactions, (j) prepaying the Term Loan Facility and any subordinated debt and (k) modifying or waiving certain material agreements and organizational documents. As of September 30, 2014, the Company was in compliance with these provisions.

Indebtedness under the ABL Facility is guaranteed, on a joint and several basis, by Norcraft Intermediate Holdings, L.P., Norcraft Finance Corp., Norcraft Canada Corporation and all of Norcraft's current and future subsidiaries, subject to exceptions for, among other things, any direct or indirect foreign subsidiary. Indebtedness under the ABL Facility is secured, subject to certain exceptions, by the following property and assets of Norcraft Companies, L.P. and such guarantors:

•

On a first priority basis, by all personal property consisting of accounts receivable, inventory, cash, deposit and security accounts (other than any deposit accounts containing solely the proceeds of collateral with respect to which the obligations under the ABL Facility have only a second-priority security interest) and any cash or other assets in such accounts and certain assets related to the foregoing and, in each case, proceeds thereof (such property, the “Current Asset Collateral”); and

•

On a second priority basis, by additional property and assets consisting of (i) all of Norcraft Companies, L.P.’s capital stock directly held by Norcraft Intermediate Holdings, L.P., and all of the capital stock in any wholly-owned subsidiary directly held by Norcraft Companies, L.P., and any subsidiary guarantor (which security interest, in the case of the capital stock of each (a) direct or indirect non-domestic subsidiary and (b) direct indirect domestic subsidiary substantially all of the assets of which consist of equity interests in one or more non-domestic subsidiaries, is limited to 65% of the stock of such subsidiary) and (ii) other than to the extent constituting Current Asset Collateral, substantially all other tangible and intangible assets, including substantially all equipment, general intangibles, intercompany notes, insurance policies, investment property, intellectual property and material owned real property (such property described in clauses (i) and (ii), “Fixed Asset Collateral”).

As of September 30, 2014, there were no borrowings outstanding, approximately $5.4 million of issued letters of credit and unused commitments of $19.6 million under the ABL Facility. The Company has no undrawn letters of credit.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)

Term Loan Facility

In November 2013, Norcraft Companies, L.P. entered into a $150.0 million senior secured term loan facility (the "Term Loan Facility") dated as of November 13, 2013 (the "Term Loan Agreement") by and among Norcraft Companies, L.P., as borrower, Norcraft Intermediate Holdings, L.P. and the other guarantors party thereto, as guarantors, the lenders party thereto from time to time, RBC Capital Markets and Keybank National Association, as joint lead arrangers and joint bookrunners, Royal Bank of Canada, as syndication agent and as administrative agent for the lenders and collateral agent for the secured parties. The term loans under the Term Loan Agreement were issued at a discount on December 13, 2013, for total net proceeds of $149.3 million. Interest accrues at the LIBOR rate (as defined in the Term Loan Agreement which includes a 1.00% floor) plus a margin of 4.25%, which is payable at the end of each fiscal quarter. As of September 30, 2014, the total interest rate on the Term Loan Facility was 5.25%. Minimum required principal repayments are $1.5 million per year and are payable in quarterly installments at the end of each fiscal quarter. The Term Loan Facility has a maturity of December 13, 2020. Proceeds from this Term Loan Facility were used in combination with the proceeds of the Company's IPO to redeem all of the Company's 10.5% senior secured second lien notes and pay related transaction and financing costs.

The Term Loan Facility requires Norcraft Companies, L.P. to prepay outstanding term loans, subject to certain exceptions, with:


•	50% (subject to reduction to 25% and 0% based upon a total net leverage ratio) of the annual excess cash flow (as defined in the Term Loan Facility) of Norcraft Companies, L.P. and its subsidiaries;


•	100% of the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and


•	100% of the net cash proceeds of any incurrence or issuance of certain debt, other than debt permitted under the Term Loan Facility.

Norcraft Companies, L.P. can voluntarily prepay outstanding loans under the Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans, provided, however, that voluntary prepayments of such loans prior to the six-month anniversary of the Effective Date are subject to a call premium of 1.00%.

Additionally, the terms of the Term Loan Facility limit Norcraft Companies, L.P.'s ability to (a) sell assets, (b) alter the business that Norcraft currently conducts, (c) engage in mergers, acquisitions and other business combinations, (d) declare dividends or redeeming or repurchasing the Company's equity interests, (e) incur additional debt or guarantees, (f) make loans and investments, (g) incur liens, (h) enter into transactions with affiliates, (i) engage in sale and leaseback transactions and (j) prepay certain Incremental Equivalent Debt (as defined in the Term Loan Agreement) and unsecured, junior secured and subordinated debt. The terms also include cross-default provisions. As of September 30, 2014, Norcraft Companies, L.P. was in compliance with these provisions.

Indebtedness under the Term Loan Facility is guaranteed by Norcraft Intermediate Holdings, L.P. and each of the present and future subsidiaries of Norcraft Intermediate Holdings, L.P., subject to the same exceptions set forth above regarding guarantors of the ABL Facility. The Term Loan Facility is secured on a first priority basis by the Fixed Asset Collateral and on a second priority basis by the Current Asset Collateral, in each case subject to the qualifications set forth in the intercreditor agreement defining the relative rights and priorities of the ABL Facility secured parties, on the one hand, and the Term Loan Facility secured parties, on the other hand.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)

10. Tax Receivable Agreements and Income Taxes

Tax Receivable Agreements

The Company entered into three tax receivable agreements (“TRAs”), with the former holders of SKM Norcraft Corp, the former holders of Trimaran Cabinet Corp. and the holders of common units of Norcraft Companies LLC:

•

Under the first of these agreements the Company generally is required to pay to the holders of common stock of SKM Norcraft Corp. 85% of the applicable cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes associated with any increase in tax basis attributable to SKM Norcraft Corp.’s original acquisition of interests in Norcraft Holdings, L.P., (ii) the net operating losses of SKM Norcraft Corp. relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of SKM Norcraft Corp. closes on the date of the Reorganization) that are or become available to the Company as a result of the Reorganization, and (iii) tax benefits attributable to payments made under the tax receivable agreement.

•

Under the second of these agreements the Company generally is required to pay to the holders of common stock of Trimaran Cabinet Corp. 85% of the applicable cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes associated with any increase in tax basis attributable to Trimaran Cabinet Corp.’s original acquisition of interests in Norcraft Holdings, L.P., (ii) the net operating losses of Trimaran Cabinet Corp. relating to taxable years ending on or before the date of the Reorganization that are or become available to the Company as a result of the Reorganization, and (iii) tax benefits attributable to payments made under the tax receivable agreement.

•

Under the third of these agreements the Company generally is required to pay to the holders of units of Norcraft Companies LLC (other than units that the Company holds) 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes that are created as a result of the exchanges of their units for restricted shares of Norcraft's common stock or cash, including any basis adjustment relating to the assets of Norcraft Companies LLC and (ii) tax benefits attributable to payments made under the tax receivable agreements.

The payment obligations under the TRAs are obligations of Norcraft Companies, Inc., not Norcraft Companies LLC, and the Company expects that the required payments to be made under the TRAs will be substantial. Potential future reductions in tax payments for us and tax receivable agreement payments by the Company will be calculated using the per share volume-weighted average price of Norcraft's common stock at the time of exchange (or the 15 trading days immediately prior to the effective date of any exchange, where Norcraft elects to pay cash consideration for LLC units) and the prevailing tax rates applicable to Norcraft over the life of the TRAs and will generally be dependent on the Company generating sufficient future taxable income to realize the benefit. Any actual increase in tax basis, as well as the amount and timing of any payments under the TRAs, will vary depending upon a number of factors, including the timing of exchanges by the holders of limited liability company units, the price of Norcraft's common stock at the time of the exchange (or the 15 trading days immediately prior to the effective date of any exchange, where Norcraft elects to pay cash consideration for LLC units), whether such exchanges are taxable, the amount and timing of the taxable income the Company generates in the future and the tax rate then applicable as well as the portion of Norcraft's payments under the TRAs constituting imputed interest.

Under each of the TRAs, Norcraft generally will retain the benefit of the remaining 15% of the applicable tax savings. Payments under each of the TRAs are not conditioned on the pre-IPO owners of Norcraft Holdings, L.P.'s continued ownership of Norcraft.

Payments under some or all of the TRAs are expected to give rise to certain additional tax benefits attributable to either further increases in basis or in the form of deductions for imputed interest, depending on the TRA and the circumstances. Any such benefits are the subject of the TRAs and will increase the amounts due thereunder. In addition, the TRAs will provide for interest, at a rate equal to LIBOR, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the TRAs.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)

Payments under the TRAs will be based on the tax reporting positions that Norcraft determines, consistent with the terms of the TRAs. Norcraft will not be reimbursed for any payments previously made under the TRAs if any basis increases or other benefits (including any net operating losses of SKM Norcraft Corp. and Trimaran Cabinet Corp.) are subsequently disallowed; if it is determined that excess payments have been made to a beneficiary under a TRA, certain future payments, if any, otherwise to be made will be reduced. As a result, in certain circumstances, payments could be made under the TRAs in excess of the benefits that Norcraft actually realizes in respect of the attributes to which the TRAs relate.

During the three months ended September 30, 2014, management concluded that the future payments under the TRA's were probable and the Company recorded the full remaining expense related to the TRA's of $33.2 million. This determination was largely based on recent periods of positive taxable income, recent projections indicating continued positive income in future periods, and recent economic and market conditions. Of the full TRA liability of $37.7 million as of September 30, 2014, $9.0 million is included in current accrued liabilities and $28.6 million is included in long-term liabilities.

Deferred Taxes

The Company's effective income tax rate for the nine months ended September 30, 2014 was a benefit of 110.2%. During the three months ended September 30, 2014, management concluded that the realizability of its deferred tax asset is more likely than not and the Company reversed the full valuation allowance on its net operating loss carryforward amounts of $20.2 million. This determination was based on significant positive evidence, including:


•	Cumulative losses. While the Company has been in a significant negative cumulative loss position, the amount of this cumulative loss was not significant at September 30, 2014 and management expects a position cumulative income position to be generated in the short term.


•	Projected realization of net operating loss carry forward amounts. Projections of future taxable income based on the Company's recent actual performance and current industry data indicate utilization of all net operating loss carry forward amounts, even after giving effect to changes in significant deductible temporary differences between pre-tax earnings and taxable income.

Additionally, income tax expense for the year will be impacted by changes in our long-term deferred tax liability, TRA liability which is not deductible for tax purposes and other permanent differences. Going forward, the Company expects these factors will continue to impact the effective income tax rate, but will eventually diminish and the Company would expect an effective tax rate of 35% to 38%.


11.	Fair Value Measurements

Accounting Standards Codification Topic 820 (“ASC 820”), Fair Value Measurement and Disclosures defines and establishes a framework for measuring fair value. The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels, as follows:

Level 1: Quoted prices in active markets for identical assets

Level 2: Significant other observable inputs

Level 3: Significant unobservable inputs

There were no transfers in and out of Level 1, Level 2 and Level 3 fair value measurements during the nine months ended September 30, 2014. Fair value estimates may be different than the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.

Fair Value Measurements on a Recurring Basis

The Company had no assets or liabilities recorded at fair value on a recurring basis at September 30, 2014 or December 31, 2013.

Norcraft Companies, Inc.

Notes to Consolidated Financial Statements

(dollar amounts in thousands)

(unaudited)

Fair Value Measurements on a Nonrecurring Basis

The Company had no assets or liabilities recorded at fair value on a nonrecurring basis at September 30, 2014 or December 31, 2013.

The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities. The fair values of our financial instruments approximate their carrying amount in our consolidated financial statements except for debt.

Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity.

Accounts Receivable. The carrying amount approximates fair value because of the short maturity.

Long Term Debt Facilities. The fair value of our term loan facility is based on significant other observable inputs (Level 2).

The estimated fair values of the Company's financial instrument as of September 30, 2014 and December 31, 2013 are as follows:



	September 30, 2014				December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Term loan facility (Level 2)	$	148,875	$	144,689	$	150,000	$	148,688

The quoted fair market value of the financial instruments presented may not be indicative of their future values.


11.	Recently Issued Accounting Pronouncements

In May of 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. The standard requires that an entity recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to its customers. In order to achieve this core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for annual and quarterly reporting periods of public entities beginning after December 15, 2016. Early application for public entities is not permitted. The Company is currently evaluating the impact of adoption of this standard on the Company’s consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward-Looking Statements and Information

This report includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “expects,” “may,” “will,” “should,” “seeks,” “projects,” “approximately,” “intends,” “plans,” “estimates” or “anticipates,” or, in each case, their negatives or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this annual report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industries in which we and our partners operate. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to the following:

• the timing and extent of any recovery in the home improvement and home building industries;

• increasing interest rates and reduced availability of financing for home improvements;

• our dependence on senior management and key personnel;

• our inability to maintain strong brands or respond to changing customer preferences for cabinet designs and configurations;

• increased prices for raw materials or finished goods used in our products;

• increased energy costs;

• interruptions in deliveries of raw materials or finished goods;

• the potential risks and costs associated with international sourcing;

• any reduction in availability of mortgage financing;

• volatility or a reduction of liquidity in the financial markets;

• our inability to pass along the effects of inflation or increased costs to our customers;

• our inability to compete effectively in the highly fragmented and very competitive cabinet industry market;

• our inability to increase our manufacturing capacity and sales force to keep up with demand;

• increases in the cost of labor, union organizing activity and work stoppages at our facilities or the facilities of our suppliers;

• potential product liability claims relating to products we manufacture or distribute;

• our ability to comply with government regulation and industry standards;

• our ability to adequately protect our intellectual property rights;

• the loss or deterioration of relationships with our sales representatives;

• disruptions in our relationships with any one of our key customers;

• the effects of a catastrophic loss of one of our key manufacturing facilities;

• adverse weather conditions;

• a write-off of our goodwill and other intangibles;

• the consolidation of our dealers;

• the impact of future acquisitions on our business;

• the impact of third party liabilities or product warranty claims from operations that we may acquire in the future;

• our substantial indebtedness;

• our ability to incur additional indebtedness;

• our ability to generate sufficient cash to fund our indebtedness and run our business;

• the impact of potential future adjustments to our deferred tax asset; and

• other risks and uncertainties inherent in our business.

These factors should not be construed as exhaustive and should be read with the other cautionary statements in this report.

Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate, are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statements or to publicly announce the results of any revisions to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such and should only be viewed as historical data.

Overview

Norcraft Companies, Inc. was incorporated on July 23, 2013 for the purpose of facilitating our initial public offering ("IPO"). Our common stock is listed on the New York Stock Exchange under the symbol "NCFT." Prior to the IPO, we underwent a reorganization (the "Reorganization"). As a result of the Reorganization , the assets and liabilities of Norcraft Holdings, L.P. are included in the financial statements of Norcraft Companies, Inc. at their carrying amounts as of the date of the Reorganization. All of our operations are conducted through Norcraft Companies, L.P. and its subsidiaries. Norcraft Companies, L.P. is an indirect wholly-owned subsidiary of Norcraft Holdings, L.P. The words “Company”, “we”, “us” and “our” refer to Norcraft Companies, Inc. and its subsidiaries.

The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the accompanying notes included elsewhere in this quarterly report. Additionally, the following discussion should be read together with the Selected Financial Data and our consolidated financial statements and the accompanying notes included in our 2013 Annual Report on Form 10-K.

We are a leading manufacturer of kitchen and bathroom cabinetry in the U.S. and Canada. We provide our customers with a single source for a broad range of high-quality cabinetry, including stock, semi-custom and custom cabinets manufactured in both framed and frameless, or full access construction. We market our products through seven main brands: Mid Continent Cabinetry^®, Norcraft Cabinetry^®, UltraCraft^®, StarMark Cabinetry^®, Fieldstone Cabinetry^®, Brookwood^®and Urban Effects^®. With the exception of Norcraft Cabinetry, each of these brands represents a distinct line of cabinetry. The domestic brands have been in operation for over 25 years, with Mid Continent, our original brand, having been established in 1966. In 2008, our Winnipeg, Canada facility completed the transition to the production of cabinets for sale into the Canadian market under the Norcraft Canada and Urban Effects brands. We believe each brand is well recognized and highly respected throughout the industry for its attractive style, flexibility, quality and value.

In 2008 and 2009, we were affected by a significant down-turn in our industry and experienced a significant decrease in sales. In 2010, 2011 and 2012, we experienced some sales stabilization and recovery, but this was coupled with margin pressure associated with a more competitive market place. Our sales increased 17.6% for the year ended December 31, 2013 as

compared with the year ended December 31, 2012. The improved conditions that contributed to the increase in sales in 2013 continued into 2014, but at a more gradual pace and were partially offset by adverse weather conditions in the early part of the year that disrupted demand and production at several of our plants. Our sales increased 8.8% during the nine months ended September 30, 2014, as compared to the same period during the prior year. Net income increased by $1.3 million from $0.2 million for the nine months ended September 30, 2013 compared to $1.5 million for the same period of 2014. Additionally, the contraction in the market caused us to be more aggressive with pricing and sales promotions. In order to gain market share, we continued these pricing and sales promotion efforts in 2010 through September 30, 2014, but at a more subdued pace in the latter portion of 2013 and 2014.

Results of Operations

The following table outlines for the periods indicated, selected operating data as a percentage of net sales.



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	72.3	%	73.9	%	72.9	%	73.8	%
Gross profit	27.7	%	26.1	%	27.1	%	26.2	%
Selling, general and administrative expenses	15.8	%	18.4	%	16.5	%	17.7	%
Income from operations	11.9	%	7.7	%	10.6	%	8.5	%
Other expense:
Interest expense, net	2.3	%	7.1	%	2.4	%	7.5	%
Amortization of deferred financing costs	0.1	%	0.9	%	0.1	%	0.9	%
Expense related to tax receivable agreements	33.1	%	—	%	13.4	%	—	%
Income (loss) before income taxes	(23.6	)%	(0.3	)%	(5.3	)%	0.1	%
Income tax expense (benefit)	(18.0	)%	—	%	(5.8	)%	—	%
Net income (loss)	(5.6	)%	(0.3	)%	0.5	%	0.1	%

Three Months Ended September 30, 2014 Compared with Three Months Ended September 30, 2013

Net Sales. Net sales increased by $8.8 million, or 9.7%, from $91.6 million for the three months ended September 30, 2013 to $100.4 million for the same period of 2014. The increase in sales was primarily attributable to increases in sales in all divisions, with Mid Continent making up over two-thirds of the increase, StarMark making up nearly fifteen percent of the increase, and UltraCraft and the Winnipeg, Canada facility showing modest increases. The overall increase in sales was generally driven by industry growth. Additionally, we believe we continue to increase our sales as a result of our differentiated products across various price points, on-time delivery and high level of customer service. We also believe our promotional sales programs, which consist of discounts, rebates and spiffs, contributed to our increased sales during the period.

Cost of Sales. Cost of sales increased by $4.9 million, or 7.2%, from $67.7 million for the three months ended September 30, 2013 to $72.6 million for same period of 2014. The increase was primarily attributable to the increased sales volume. Cost of sales as a percentage of net sales decreased from 73.9% for the three months ended September 30, 2013 to 72.3% for the same period of 2014.

Gross Profit. Gross profit increased by $3.9 million, or 16.6%, from $23.9 million for the three months ended September 30, 2013 to $27.8 million for the same period of 2014. The increase in gross profit was due to the increased net sales described above. Gross profit as a percentage of net sales increased from 26.1% for the three months ended September 30, 2013 to 27.7% for the same period of 2014. Approximately two-thirds of the improvement in gross profit as a percentage of net sales was due to leverage of fixed manufacturing costs. The remaining improvement was primarily due to improvement in reduced freight costs and labor efficiency.

The timing and severity of the impact of the housing recession in 2007 through 2011 differed among our divisions, causing margins to diverge. Gross profit as a percentage of net sales increased at our Mid Continent, UltraCraft and StarMark divisions during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. As discussed above, this was primarily the result of leverage of fixed manufacturing costs and improvement in labor efficiency, offset by increases in the price of some of the material inputs used in our products. Gross profit as a percentage of net sales decreased at our StarMark division during these same periods. Gross profit as a percentage of net sales for our divisions continued to converge during the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, a trend we expect to continue as our business continues to recover from the housing recession.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased by $1.1 million, or 5.9%, from $16.9 million for the three months ended September 30, 2013 to $15.8 million for the same period of 2014. Selling, general and administrative expenses were lower than the prior-year period because of decreased finance and administration expense which, in the prior year, included $1.1 million in professional fees related to the corporate restructuring done in preparation for our IPO completed in November of 2013. Additionally, there was $0.5 million in stock compensation expense related to the incentive stock options that were issued in connection with our IPO. Selling, general and administrative expenses as a percentage of net sales decreased from 18.4% for the three months ended September 30, 2013 to 15.8% for the same period of 2014.

Income from Operations. Income from operations increased by $5.0 million, or 70.4%, from $7.0 million for the three months ended September 30, 2013 compared to $12.0 million for the same period of 2014. The increase in income from operations was a result of the factors described above. Income from operations as a percentage of net sales increased from 7.7% for the three months ended September 30, 2013 to 11.9% for the same period of 2014.

Total Other Expense. Total other expense, which includes interest, amortization of deferred financing fees, expense related to tax receivable agreements and other expenses, increased by $28.3 million, or 390.3%, from $7.3 million for the three months ended September 30, 2013 compared to $35.6 million for the same period of 2014. Total other expense as a percentage of net sales increased from 8.0% for the three months ended September 30, 2013 to 35.5% for the same period of 2014. The increase primarily resulted from expense related to the TRAs of $33.2 million. During the three months ended September 30, 2014, management concluded that the future payments under the TRA's were probable and the Company recorded the full remaining expense related to the TRA's. This determination was largely based on recent periods of positive taxable income, recent projections indicating continued positive income in future periods, and recent economic and market conditions. Offsetting this was a decrease in interest expense and amortization of deferred financing fees due to the redemption of the outstanding 10.5% senior secured second lien notes in December 2013 using the proceeds of our IPO and the Term Loan Facility.

Income Tax Expense (Benefit). The Company's effective income tax rate for the three months ended September 30, 2014 was a benefit of 76.3%. During the three months ended September 30, 2014, management concluded that the realizability of its deferred tax asset is more likely than not and the Company reversed the full valuation allowance on its net operating loss carryforward amounts of $20.2 million. This determination was based on significant positive evidence, including:


•	Cumulative losses. While the Company has been in a significant negative cumulative loss position, the amount of this cumulative loss was not significant at September 30, 2014 and management expects a position cumulative income position to be generated in the short term.


•	Projected realization of net operating loss carry forward amounts. Projections of future taxable income based on the Company's recent actual performance and current industry data indicate utilization of all net operating loss carry forward amounts, even after giving effect to changes in significant deductible temporary differences between pre-tax earnings and taxable income.

Net Income (Loss). Net loss increased by $5.3 million from a net loss of $0.3 million for the three months ended September 30, 2013 compared to a net loss of $5.6 million for the same period of 2014, for the reasons described above. Net income (loss) as a percentage of net sales changed from (0.3)% for the three months ended September 30, 2013 to (5.6)% for the same period of 2014.

Nine Months Ended September 30, 2014 Compared with Nine Months Ended September 30, 2013

Net Sales. Net sales increased by $22.8 million, or 8.8%, from $259.2 million for the nine months ended September 30, 2013 to $282.0 million for the same period of 2014. The increase in sales was attributable to increases in sales in all of our divisions, with Mid Continent making up over half of the increase, StarMark and UltraCraft making up over 20 percent each and the Winnipeg, Canada facility showing a modest increase. The overall increase in sales was generally driven by industry growth. Additionally, we believe we continue to increase our sales as a result of our differentiated products across various price points, on-time delivery and high level of customer service. We also believe our promotional sales programs, which consist of discounts, rebates and spiffs, contributed to our increased sales during the period.

Cost of Sales. Cost of sales increased by $14.4 million, or 7.5%, from $191.3 million for the nine months ended September 30, 2013 to $205.7 million for same period of 2014. The increase was primarily attributable to the increased sales volume. Cost of sales as a percentage of net sales decreased from 73.8% for the nine months ended September 30, 2013 to 72.9% for the same period of 2014.

Gross Profit. Gross profit increased by $8.4 million, or 12.5%, from $67.9 million for the nine months ended September 30, 2013 to $76.3 million for the same period of 2014. The increase in gross profit was due to the increased net sales described above. Gross profit as a percentage of net sales increased from 26.2% for the nine months ended September 30, 2013 to 27.1% for the same period of 2014. Approximately two-thirds of the improvement in gross profit as a percentage of net sales was due to leverage of fixed manufacturing costs. Improvements in labor efficiency and freight costs contributed in similar proportions to the remaining increase. These improvements were slightly offset by higher prices earlier in the year of some of the material inputs used in our products.

The timing and severity of the impact of the housing recession in 2007 through 2011 differed among our divisions, causing margins to diverge. Gross profit as a percentage of net sales increased at all of our divisions during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. As discussed above, this was primarily the result of improvement in labor efficiency, freight costs, and leverage of fixed manufacturing costs, but was partially offset by an increase in the price of some of the material inputs used in our products. Gross profit as a percentage of net sales for our divisions continued to converge during the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, a trend we expect to continue as our business continues to recover from the housing recession.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $0.5 million, or 1.1%, from $45.9 million for the nine months ended September 30, 2013 to $46.4 million for the same period of 2014. Selling, general and administrative expenses were greater than the prior-year period because of increased sales and marketing expense to generate new customers, market our new products and support our increased sales volume. Approximately two-thirds of this increase was offset by a decrease in finance and administration expense which, in the prior year period, included $1.1 million of professional fees related to the corporate restructuring done in preparation for our IPO completed in November of 2013. Additionally, there was $1.6 million in stock compensation expense related to the incentive stock options that were issued in connection with our IPO. Selling, general and administrative expenses as a percentage of net sales decreased from 17.7% for the nine months ended September 30, 2013 to 16.5% for the same period of 2014.

Income from Operations. Income from operations increased by $7.9 million, or 36.1%, from $22.0 million for the nine months ended September 30, 2013 compared to $29.9 million for the same period of 2014. The increase in income from operations was a result of the factors described above. Income from operations as a percentage of net sales increased from 8.5% for the nine months ended September 30, 2013 to 10.6% for the same period of 2014.

Total Other Expense. Total other expense, which includes interest, amortization of deferred financing fees, expense related to tax receivable agreements and other expenses, increased by $23.0 million, or 106.1%, from $21.8 million for the nine months ended September 30, 2013 compared to $44.8 million for the same period of 2014. Total other expense as a percentage of net sales increased from 8.4% for the nine months ended September 30, 2013 to 15.9% for the same period of 2014. The increase primarily resulted from expense related to the TRAs of $37.7 million. During the nine months ended September 30, 2014, management concluded that the future payments under the TRA's were probable and the Company recorded the full remaining expense related to the TRA's. This determination was largely based on recent periods of positive taxable income, recent projections indicating continued positive income in future periods, and recent economic and market conditions. Offsetting this was a decrease in interest expense and amortization of deferred financing fees due to the redemption of the outstanding 10.5% senior secured second lien notes in December 2013 using the proceeds of our IPO and the Term Loan Facility.

Income Tax Expense (Benefit). The Company's effective income tax rate for the nine months ended September 30, 2014 was a benefit of 110.2%. During the nine months ended September 30, 2014, management concluded that the realizability of its deferred tax asset is more likely than not and the Company reversed the full valuation allowance on its net operating loss carryforward amounts of $20.2 million. This determination was based on significant positive evidence, including:


•	Cumulative losses. While the Company has been in a significant negative cumulative loss position, the amount of this cumulative loss was not significant at September 30, 2014 and management expects a position cumulative income position to be generated in the short term.


•	Projected realization of net operating loss carry forward amounts. Projections of future taxable income based on the Company's recent actual performance and current industry data indicate utilization of all net operating loss carry forward amounts, even after giving effect to changes in significant deductible temporary differences between pre-tax earnings and taxable income.

Net Income (Loss). Net income (loss) improved by $1.3 million from net income of $0.2 million for the nine months ended September 30, 2013 compared to net income of $1.5 million for the same period of 2014, for the reasons described above. Net income (loss) as a percentage of net sales improved from 0.1% for the nine months ended September 30, 2013 to 0.5% for the same period of 2014.

Liquidity and Capital Resources

Cash Flows

Our primary cash needs are working capital, capital expenditures, display cabinets, tax distributions and debt service. We finance these cash requirements through internally-generated cash flow and, if necessary, funds borrowed under the ABL Facility.

Cash provided in operating activities was $26.1 million for the nine months ended September 30, 2014, compared with $21.1 million for the same period of 2013, an increase in cash provided of $5.0 million. This increase was mainly due to the increase in net income of $1.3 million for the nine months ended September 30, 2014, as discussed above, and a non-cash add back due to the change in liability under the TRAs of $37.7 million. This increase was partially offset by a non-cash add back due to the change in deferred income tax expense of $16.8 million and the changes in operating assets and liabilities used of $17.5 million during the nine months ended September 30, 2014 compared to the same period in 2013.

Cash used in investing activities was $7.1 million for the nine months ended September 30, 2014, compared with $5.8 million for the same period of 2013. Capital expenditures were $3.3 million for the nine months ended September 30, 2014, compared with $2.9 million for the same period of 2013, an increase of $0.4 million. Additions to display cabinets were $3.8 million for the nine months ended September 30, 2014, compared with $2.9 million for the same period of 2013, an increase of $0.9 million.

Cash used in financing activities was $2.6 million for the nine months ended September 30, 2014, compared with a nominal amount for the 2013. The $2.6 million of cash used for financing activities for the nine months ended September 30, 2014 included $1.3 million in distributions to members for taxes and $1.1 million for repayment of debt on the senior secured term loan facility.

We generally anticipate that the funds generated by operations and current available cash balances will be sufficient to meet working capital requirements, service out debt, make required tax distributions and to finance capital expenditures over the next twelve to eighteen months. There can be no assurance, however, that our business will generate sufficient cash flow from operations, that anticipated net sales growth and operating improvements will be realized or that future equity or debt financing will be sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

We and our subsidiaries have from time to time repurchased certain of our debt obligations and may in the future, as part of various financing and investment strategies we may elect to pursue, purchase additional outstanding indebtedness of ours or our subsidiaries, in tender offers, open market purchases, privately negotiated transactions or otherwise. We may also sell certain assets or properties and use the proceeds to reduce our indebtedness or the indebtedness of our subsidiaries. These purchases or sales, if any, could have a material positive or negative impact on our liquidity available to repay outstanding debt obligations or on our consolidated results of operations. These transactions could also require or result in amendments to the agreements governing outstanding debt obligations or changes in our leverage or other financial ratios, which could have a material positive or negative impact on our ability to comply with the covenants contained in our debt agreements. These transactions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Debt Structure

ABL Facility. In November 2013, in connection with a new senior secured term loan facility, Norcraft Companies, L.P. entered into a senior secured first-lien asset-based revolving credit facility (the "ABL Facility") pursuant to a credit agreement dated as of November 14, 2013 (the "ABL Credit Agreement") by and among Norcraft Companies, L.P., as borrower, Norcraft Intermediate Holdings, L.P. and other guarantors party thereto, as guarantors, the lenders party thereto and RBC Capital Markets and Keybank National Association, as joint lead arrangers and joint bookrunners, and Royal Bank of Canada, as swingline lender, as issuing bank, as administrative agent for the lenders and collateral agent for the secured parties. The ABL Facility provides for aggregate commitments of up to $25.0 million, including a letter of credit sub-facility and a swingline loan sub-facility, subject to a borrowing base and has a maturity date of November 14, 2018. As of September 30, 2014, the borrowing base was approximately $25.0 million.

The ABL Credit Agreement contains negative covenants that restrict or limit the ability of Norcraft Intermediate Holdings, L.P. and its subsidiaries from, among other things, (a) selling assets, (b) altering the business, (c) engaging in mergers, acquisitions and other business combinations, (d) declaring dividends or redeeming or repurchasing our equity interests, (e) incurring additional debt or guarantees, (f) making loans and investments, (g) incurring liens, (h) entering into transactions with affiliates, (i) engaging in sale and leaseback transactions, (j) prepaying the Term Loan Facility and any subordinated debt and (k) modifying or waiving certain material agreements and organizational documents. As of September 30, 2014, the Company was in compliance with these provisions.

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As of September 30, 2014, there were no borrowings outstanding, approximately $5.4 million outstanding under a letter of credit and unused commitments of $19.6 million under the ABL Facility. The total availability under the ABL Facility as of September 30, 2014 was approximately $19.6 million. We and our subsidiaries have no undrawn letters of credit.

Term Loan Facility. In November 2013, Norcraft Companies, L.P. entered into a $150.0 million senior secured term loan facility (the "Term Loan Facility") dated as of November 13, 2013 (the "Term Loan Agreement"), by and among Norcraft Companies, L.P., as borrower, Norcraft Intermediate Holdings, L.P. and the other guarantors party thereto, as guarantors, the lenders party thereto from time to time, RBC Capital Markets and Keybank National Association, as joint lead arrangers and joint bookrunners, Royal Bank of Canada, as syndication agent and as administrative agent for the lenders and collateral agent for the secured parties. The term loans under the Term Loan Agreement were issued at a discount on December 13, 2013, for total net proceeds of $149.3 million. Interest accrues at the LIBOR rate (as defined in the Term Loan Agreement which includes a 1.0% floor) plus a margin of 4.25%, which is payable at the end of each fiscal quarter. As of September 30, 2014, the total interest rate on the Term Loan Facility was 5.25%. Minimum required principal repayments are $1.5 million per year and are payable in quarterly installments at the end of each fiscal quarter. The Term Loan Facility has a maturity of December 13, 2020. Proceeds from this Term Loan Facility were used in combination with the proceeds of our IPO to redeem all of the Company's 10.5% senior secured second lien notes and pay related transaction and financing costs.

The Term Loan Facility requires Norcraft Companies, L.P. to prepay outstanding term loans, subject to certain exceptions, with:


•	50% (subject to reduction to 25% and 0% based upon a total net leverage ratio) of the annual excess cash flow (as defined in the Term Loan Facility) of Norcraft Companies, L.P. and its subsidiaries;


•	100% of the net cash proceeds of certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and


•	100% of the net cash proceeds of any incurrence or issuance of certain debt, other than debt permitted under the Term Loan Facility.

Additionally, the terms of the Term Loan Facility limit Norcraft Companies, L.P.'s ability to (a) sell assets, (b) alter the business that Norcraft currently conducts, (c) engage in mergers, acquisitions and other business combinations, (d) declare dividends or redeeming or repurchasing our equity interests, (e) incur additional debt or guarantees, (f) make loans and investments, (g) incur liens, (h) enter into transactions with affiliates, (i) engage in sale and leaseback transactions and (j) prepay certain Incremental Equivalent Debt (as defined in the Term Loan Agreement) and unsecured, junior secured and subordinated debt. The terms also include cross-default provisions. As of September 30, 2014, Norcraft Companies, L.P. was in compliance with these provisions.

Off Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, capital expenditures or capital resources that are material to investors.

Contractual Obligations

See PART II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Fiscal 2013 Annual Report on Form 10-K for the details of our contractual obligations. Under the terms of the Term Loan Facility, we are subject to various negative covenants. Additionally, we have contractual obligations related to our operating leases.

Taxes; Distributions to our Limited Partners

Norcraft Companies, Inc., in connection with our Reorganization and IPO, was created and is subject to U.S. federal and state income taxation. Norcraft Holdings, L.P., our predecessor company, and Norcraft Companies, L.P. are limited partnerships. As such, income is allocated to limited partners for inclusion in their respective tax returns. We are subject to various state and local taxes.

Tax Receivable Agreements. The Company indirectly acquired favorable tax attributes in connection with the Reorganization. SKM Norcraft Corp. and Trimaran Cabinet Corp. benefited from basis adjustments arising from the 2003 acquisition transaction, and SKM Norcraft Corp. and Trimaran Cabinet Corp. also reported net operating losses. In addition, the Company's acquisition of units of Norcraft Companies LLC in connection with potential future secondary exchanges of units of Norcraft Companies LLC for restricted shares of the Company's common stock or cash are expected to produce additional favorable tax attributes for us. When the Company acquires in the future units of Norcraft Companies LLC from its members, the anticipated basis adjustments may reduce the amount of tax the Company would otherwise be required to pay in the future. These basis adjustments may also decrease gain (or increase loss) on future dispositions of certain assets to the extent the increased tax basis is allocated to those assets. These tax attributes collectively would not be available to the Company in the absence of the Reorganization and the future secondary exchanges. As part of the Reorganization, the Company entered into three TRAs.

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Under the first of these TRAs the Company generally is required to pay to the holders of common stock of SKM Norcraft Corp. as of immediately prior to the Reorganization 85% of the applicable cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes associated with any increase in tax basis attributable to SKM Norcraft Corp.’s original acquisition of interests in Norcraft Holdings, L.P., (ii) the net operating losses of SKM Norcraft Corp. relating to taxable years ending on or before the date of the Reorganization (calculated by assuming the taxable year of SKM Norcraft Corp. closes on the date of the Reorganization) that are or become available to the Company and the Company's wholly-owned subsidiaries as a result of the Reorganization, and (iii) tax benefits attributable to payments made under the TRA.

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Under the second of these TRAs the Company generally is required to pay to the holders of common stock of Trimaran Cabinet Corp. as of immediately prior to the Reorganization 85% of the applicable cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes associated with any increase in tax basis attributable to Trimaran Cabinet Corp.’s original acquisition of interests in Norcraft Holdings, L.P., (ii) the net operating losses of Trimaran Cabinet Corp. relating to taxable years ending on or before the date of the Reorganization that are or become available to the Company and the Company's wholly-owned subsidiaries as a result of the Reorganization, and (iii) tax benefits attributable to payments made under the TRA.

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Under the third of these TRAs the Company generally is required to pay to the holders of units of Norcraft Companies LLC (other than units that the Company or the Company's wholly-owned subsidiaries hold) 85% of the amount of cash savings, if any, in U.S. federal, state or local tax that the Company actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes that are created as a result of the exchanges of their units for restricted shares of the Company's common stock or cash, including any basis adjustment relating to the assets of Norcraft Companies LLC and (ii) tax benefits attributable to payments made under the TRA.

The payment obligations under the TRAs are obligations of Norcraft Companies, Inc., not Norcraft Companies LLC, and the Company expects that the payments the Company will be required to make under the TRAs will be substantial. Potential future reductions in tax payments for the Company and TRA payments by the Company will be calculated using the market value of the Company's common stock at the time of exchange (or the 15 trading days immediately prior to the effective date of any exchange, where the Company elects to pay cash consideration for units of Norcraft Companies LLC) and the prevailing tax rates applicable to the Company over the life of the TRAs and will generally be dependent on the Company generating sufficient future taxable income to realize the benefit. Any actual increase in tax basis, as well as the amount and timing of any payments under the TRAs, will vary depending upon a number of factors, including the timing of exchanges by the holders of limited liability company units, the price of the Company's common stock at the time of the exchange (or the 15 trading days immediately prior to the effective date of any exchange, where the Company elects to pay cash consideration for units of Norcraft Companies LLC), whether such exchanges are taxable, the amount and timing of the taxable income the Company generates in the future and the tax rate then applicable as well as the portion of the Company's payments under the TRAs constituting imputed interest.

Under all of these TRAs, the Company generally retains the benefit of the remaining 15% of the applicable tax savings.

Payments under the TRAs will be based on the tax reporting positions that the Company determines, consistent with the terms of the TRAs. The Company will not be reimbursed for any payments previously made under the TRAs if any basis increases or other benefits (including any net operating losses of SKM Norcraft Corp. and Trimaran Cabinet Corp. as of the Reorganization) are subsequently disallowed; if it is determined that excess payments have been made to a beneficiary under a TRA, certain future payments, if any, otherwise to be made will be reduced. As a result, in certain circumstances, payments could be made under the TRAs in excess of the benefits that the Company actually realizes in respect of the attributes to which the TRAs relate.

Inflation; Seasonality

Our cost of sales is subject to inflationary pressures and price fluctuations of the raw materials we use. Although generally we are able to recover the effects of inflation and price fluctuations through sales price increases, from time to time inflation and/or price fluctuations increase too much and too quickly for the Company to offset the increases in the period in which they occur. As a result, we may be impacted in the period in which the inflation or price fluctuations increase more substantially than in the following period in which we are able to affect sales price increases.

Our sales have historically been moderately seasonal and have been strongest in April through October which coincides with the construction season.

Critical Accounting Polices

In addition to the other information set forth in this report, including the updated critical accounting policies stated below, we have identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2013. The basis for developing the estimates and assumptions within our critical accounting policies is based on historical information and known current trends and factors. The estimates and assumptions are evaluated on an ongoing basis and actual results have been within the Company’s expectations. Except for the updated critical accounting policies described below, there have been no material changes to the policies from those previously disclosed in our annual report. The information below updates, and should be read in conjunction with, the critical accounting policies and information disclosed in the Form 10-K.

Income Tax Provision

Management judgment is required in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowance that might be required against deferred tax assets. As of September 30, 2014, we have not recorded a valuation allowance on deferred tax assets, which were primarily attributable to net operating loss carryforward amounts. In the event that sufficient taxable income of the same character does not result in future years, among other things, a valuation allowance for certain of our deferred tax assets may be required. Because the determination of our annual income tax provision is subject to judgments and estimates, it is likely that the actual results will vary from those recorded in our financial statements. Hence, we recognize additions to and reductions in income tax expense during a reporting period that pertains to prior period provisions as our estimated liabilities are revised and our actual tax returns and tax audits are completed.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized.

Payments Pursuant to the Tax Receivable Agreement

The Company indirectly acquired favorable tax attributes in connection with the Reorganization. SKM Norcraft Corp. and Trimaran Cabinet Corp. benefited from basis adjustments arising from the 2003 acquisition transaction, and SKM Norcraft Corp. and Trimaran Cabinet Corp. also reported net operating losses. In addition, the Company's acquisition of units of Norcraft Companies LLC in connection with potential future secondary exchanges of units of Norcraft Companies LLC for restricted shares of the Company's common stock or cash are expected to produce additional favorable tax attributes for us. When the Company acquires in the future units of Norcraft Companies LLC from its members, the anticipated basis adjustments may reduce the amount of tax the Company would otherwise be required to pay in the future. These basis adjustments may also decrease gain (or increase loss) on future dispositions of certain assets to the extent the increased tax basis is allocated to those assets. These tax attributes collectively would not be available to the Company in the absence of the Reorganization and the future secondary exchanges.

As of September 30, 2014, the Company recorded a total liability of $37.7 million, representing the future payments under these tax receivable agreements. The amount and timing of any payments may vary based on a number of factors, including material changes in the relevant tax law, and the Company’s ability to earn sufficient taxable income to realize all tax benefits. Depending upon the outcome of these factors, we may be obligated to make substantial payments pursuant to the TRA. The actual payment amounts may differ from these estimated amounts, as the liability will reflect changes in prevailing tax rates as well as the actual benefit it realized on the tax return.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

We currently do not hedge against interest rate movements or foreign currency fluctuations. The risk inherent in our market-sensitive instruments and positions is the potential loss arising from adverse changes to interest rates as discussed below.

Variable Interest Rates

Our earnings could be affected by changes in interest rates due to the impact those changes would have on interest expense from variable rate debt instruments and on interest income generated from our cash and investment balances. At September 30, 2014, we had no borrowings on our variable rate ABL Facility; however future earnings could be affected by changes in interest rates.

Foreign Currency

We have minimal exposure to market risk from changes in foreign currency exchange rates and interest rates that could affect our results of operations and financial condition. Our largest exposure comes from the Canadian dollar, where approximately 7% of our sales during the nine months ended September 30, 2014 were derived from Norcraft Canada and our revenues from such sales were denominated in Canadian dollars.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2014.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their control objectives.

Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2014, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including the principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

During the ordinary course of business, we have become and may in the future become subject to pending and threatened legal actions and proceedings. All of the current legal actions and proceedings that we are a party to are of an ordinary or routine nature incidental to our operations, the resolution of which should not have a material adverse effect on our financial condition, results of operations or cash flows. We are not currently a party to any material product liability claims. The majority of the pending legal proceedings involve claims for workers compensation, which are generally covered by insurance, but there can be no assurance that our insurance coverage will be adequate to cover any resulting liability.

Item 1A. Risk Factors

In addition to the other information set forth in this report, including the updated risk factor stated below, you should carefully consider the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The materialization of any risks and uncertainties identified in Part I, Item 2. Cautionary Note Regarding Forward Looking Statements and Information contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in material adverse effects on our financial condition, results of operations and cash flows. Except for the updated risk factor described below, there have been no material changes from the risk factors described in the Form 10-K. The information below updates, and should be read in conjunction with, the risk factors and information disclosed in the Form 10-K.

Potential Future Adjustment to Deferred Tax Asset

Based on its recent history of earnings and recent projections indicating continued earnings in future periods, the Company reversed the full valuation allowance on its net operating loss carryforward amounts of $20.2 million (the “Deferred Tax Asset”) in its September 30, 2014 consolidated financial statements. In accordance with accounting guidelines this also resulted in an increase of $20.2 million in net income for the three and nine months ended September 30, 2014. The value of this asset is based in part on estimates of future earnings, which are subject to change. In the event that these estimates change in the future, the book value of the Deferred Tax Asset may decrease. In such event, the recorded amount on the consolidated financial statements would go down and earnings for the associated period would be reduced by the same amount. Any such change could adversely affect the market price for the Company’s stock.

Further discussion on the analysis of our Deferred Tax Asset can be found in the Income Tax Expense (Benefit) discussion in the Results of Operations section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 6. Exhibits



31.1	Certification by Mark Buller pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification by Leigh Ginter pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification by Mark Buller pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification by Leigh Ginter pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema

101.CAL	XBRL Taxonomy Extension Calculation Linkbase

101.DEF	XBRL Taxonomy Extension Definition Linkbase

101.LAB	XBRL Taxonomy Extension Label Linkbase

101.PRE	XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		NORCRAFT COMPANIES, INC. (Registrant)

/s/ Mark Buller		/s/ Leigh Ginter
Mark Buller		Leigh Ginter
Chief Executive Officer		Chief Financial Officer

Date:	November 14, 2014	Date:	November 14, 2014
Signing on behalf of the Registrant and as Principal Executive Officer		Signing on behalf of the Registrant and as Principal Financial and Principal Accounting Officer

Norcraft Companies, Inc. - FORM 10-Q - November 14, 2014

Attached files

Norcraft Companies, Inc. Reports