What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-04 · 124 added, 184 removed, 120 unchanged (72% of the section changed)

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The Company encourages investors to use http://www.simpsonmfg.com as a source of information about the Company.

The information on our website is not incorporated by reference into other material we file with or furnish to the Securities and Exchange Commission, except as explicitly noted or as required by law.

The information on our website is not incorporated by reference into this report or other material we file with or furnish to the Securities and Exchange Commission (the "SEC"), except as explicitly noted or as required by law.

The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s consolidated financial condition and results of operations.

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Forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “target,” “continue,” “predict,” “project,” “change,” “result,” “future,” “will,” “could,” “can,” “may,” “likely,” “potentially,” or similar expressions that concern our strategy, plans, expectations or intentions.

Forward-looking statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, our strategic initiatives, including the impact of these initiatives on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts.

Forward-looking statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, our strategic initiatives, including the impact of these initiatives, such as the acquisition of ETANCO, on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts.

Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct.

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Forward-looking statements are subject to inherent uncertainties, risks and other factors that are difficult to predict and could cause our actual results to vary in material respects from what we have expressed or implied by these forward-looking statements.

Important factors that could cause our actual results and financial condition to differ materially from those expressed in our forward looking statements include, among others, those discussed under Item 1A.

Risk Factors and Item 7.

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Additional risks include:

the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; the impact of pandemics, epidemics or other public health emergencies, such as the recent outbreak of a novel strain of coronavirus (COVID-19); volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; reliance on employees subject to collective bargaining agreements;

restrictions on our business and financial covenants under our credit agreement; reliance on employees subject to collective bargaining agreements;

and or ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any.

We caution that you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report.

Except as required under the federal securities laws or the rules and regulations of the Securities and Exchange Commission (the "SEC"), we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Except as required under the federal securities laws or the rules and regulations of the SEC, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.

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• Be the business partner of choice;

Strive to be an innovative leader in our product categories;

• Strive to be an innovative leader in the markets we operate;

• Continue above market growth relative to the United States housing starts;

Remain within the top quartile of our proxy peers for operating income margins;

• Remain within the top quartile of our proxy peers for operating income margin;

• Remain in the top quartile of our proxy peers for return on invested capital.

As with our key growth initiatives, we expect to make periodic updates related to material developments with our five-year ambitions.

COVID-19 surfaced in late 2019 and has spread around the world, including to the United States.

In March 2020, the World Health Organization declared COVID-19 a worldwide pandemic and the President of the United States declared the COVID-19 outbreak a national emergency.

As of September 30, 2021, the effects of and responses to the pandemic continue to have a significant impact on worldwide economic activity and on macroeconomic conditions.

Although vaccines are available in numerous countries the vaccination level varies by country and in the United States by state.

The duration and severity of the effects of the pandemic are still unknown and cannot be predicted with any certainty.

Despite this lessening impact throughout 2021, we continue to monitor the COVID-19 pandemic for potential impact on our business and take precautions to provide a safe environment for our employees and customers.

Notwithstanding the Company's continued efforts to promote the health and safety of our employees, suppliers and customers, as the COVID-19 pandemic continues, health concern risks remain.

It also remains unclear how various national, state, and local governments will react if new variants of the virus become more prevalent.

In response to the pandemic, government authorities in the countries and states where we operate issued various and differing shelter in place and stay at home orders, social distancing guidelines, mask mandates and other measures in response to the COVID-19 pandemic.

In many of those locations our operations are classified as an "essential business" and we continue to operate our business in compliance with applicable state and local laws and are observing recommended Centers for Disease Control and Prevention guidelines to minimize the risk of spreading the COVID-19 virus.

We will make periodic updates related to material developments to our key growth initiatives and with our five-year ambitions.

Acquisitions and Investments

On April 1, 2022, the Company successfully completed the acquisition of ETANCO, a manufacturer of fastener products headquartered in France, for $800.0 million (725 million euros (1) ) net of cash.

For the 12 months ending September 30, 2021, ETANCO's net sales and operating income margin were approximately $291.0 million (approximately €258 million (2) ) and 19.7% (2) , respectively.

ETANCO's primary product applications directly align with the addressable markets in which the Company operates.

Leveraging ETANCO's leading market position in Europe, following the proposed acquisition, the Company would expand its portfolio of solutions, including mechanical anchors, fasteners and commercial building envelope solutions, as well as significantly increase its market presence across Europe.

The transaction would allow the Company to enter into new commercial building markets such as façades, waterproofing, safety and solar, as well as grow its share of direct business sales in Europe.

The Company expects to realize operating income synergies of approximately $30 million, on an annual run rate basis, within 36 months following the proposed acquisition.

These synergies would be achieved through expanding the Company's market share by selling its products into new markets and channels, incorporating ETANCO's products into the Company's existing channels, as well as procurement optimization, manufacturing and operating expense efficiencies.

The Company expects to scale its European net sales and operating income margin performance, which is anticipated to result in an approximate 500 basis point increase in Europe operating income margins by 2025.

Additionally, the Company also expects that its interest expense will increase as a result of the incurrence of debt to finance the acquisition of ETANCO.

Other accomplishments over the past year included the following:

• Realigned our sales teams to more specifically focus on five end use markets – Residential, Commercial, OEM, National Retail and Building Technology, which has led to new customer and project wins within five of our key growth initiatives.

• Invested in a venture capital fund focused on the home building industry and related new technologies.

• Entered into a joint indirect investment in the North America Hundegger equipment sales and service representative partner, Hundegger USA, LC to increase each parties' sales in the mass timber and component manufacturing markets by offering North America customers end-to-end solutions, including integrated software from a single source.

• Formed an strategic alliance with Structural Technologies that will allow both parties jointly deliver complete end-to-end strengthening solutions to engineering professionals, contractors and owners across multiple construction and repair markets,

• Within the National Retail market, we focused on growth in the repair and remodel and do-it-yourself markets by completing a reset of some of our fastener sets with one of our key customers, and

• Within the Commercial market, we expanded our offerings, including the expansion of our structural steel product line.

The COVID-19 pandemic has severely impacted global economic conditions, resulting in substantial volatility in the financial markets, increased unemployment, and operational challenges resulting from measures that governments have imposed to control its spread.

We continue to monitor the COVID-19 pandemic for potential impact on our business.

We have undertaken numerous steps and instituted additional precautions to comply with health and safety guidelines and to protect our employees, suppliers and customers, as their safety and well-being is one of our top priorities, and to comply with health and safety guidelines.

These steps and precautions include enhanced deep cleaning, staggered shifts, temperature checking, use of face masks, practicing social distancing and limiting non-employees at our locations, amongst other safety related policies and procedures.

Although vaccines are available where we operate, health concern risks remain and it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of variant strains of COVID-19 that may cause a resumption of high levels of infection and hospitalization.

The Company’s management team continues to monitor and manage its ability to operate effectively and, to date, the Company has not experienced any significant disruptions within its supply chain.

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We will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels.

In response to the COVID-19 pandemic the Company proactively took measures to maintain and preserve its strong financial position and flexibility.

The Company's Crisis Management Team, which includes members of senior management, meets regularly to review and assess the status of the Company's operations and the health and safety of its employees.

The Company’s business, financial condition and results of operations depends significantly on the level of United States.

housing starts and residential construction activity.

Though single-family housing starts increased significantly from prior-year's level, we believe there is uncertainty that demand will increase in the short-term due to a number of supply-chain factors affecting new home completion.

The Company's Crisis Management Team, which includes members of senior management, meets periodically to review and assess the status of the Company's operations and the health and safety of its employees.

The Company’s business, financial condition and results of operations depends in part on the level of United States, housing starts and residential construction activity.

Though single-family housing starts increased significantly in the last year, we believe there is uncertainty current demand will remain at the current level due to supply-chain factors, inflation and interest rate increases affecting new home starts and completions.

With recent sales price increases, we believe sales will likely increase in future periods even if demand does not decrease.

However, increased selling prices are expected to be offset by increasing material costs, sourcing logistics complications and a tight labor market, which could negatively affect operating margins for the remainder of 2021.

Management continues to monitor the impact of rising material input and product logistics costs on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce.

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Political and economic events such as tariffs and the possibility of additional tariffs on imported raw materials or finished goods or such as labor disputes can also have an effect on our gross and operating profits as well as the amount of inventory on-hand.

Our operations can also be affected by a volatile steel market and stressed product transportation systems.

Our operations can also be affected by a volatile steel market and stressed product

transportation systems.

Changes in raw material cost could negatively affect our gross profit and operating margins depending on the timing of raw material purchases or how much sales prices can be increased to offset higher raw material costs.

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Historically our North America segment has generated more revenues from wood construction products compared to concrete construction products.

Our wood construction product sales increased 8.9% for the quarter ended September 30, 2021 compared to September 30, 2020, and our concrete construction product sales also increased 8.7% for the quarter ended September 30, 2021 compared to September 30, 2020.

To date we have implemented four product price increases in 2021, in early April, mid-June, mid-August and our fourth in mid-October.

These product price percentage increases ranged from mid-single digits to mid-teens depending on the product mix, for certain of our wood connector, fastener and concrete products in the United States.

Our third quarter sales benefited primarily from a full quarter of the first two price increases.

The increase in sales for the quarter ended September 30, 2021 compared to September 30, 2020 was predominately due to these price increases and was partly offset by decreases in sales volumes from our home center channel.

Our wood construction product sales increased 49.0% for the quarter ended March 31, 2022 compared to March 31, 2021, and our concrete construction product sales increased 27.5% for the quarter ended March 31, 2022 compared to March 31, 2021, due to product price increases throughout 2021 in an effort to offset rising raw material costs.

These price increases were also the primary contributor to gross profits and operating profits increasing over the same comparable periods.

We currently anticipate significant gross margin and operating margin compression beginning in fiscal year 2022 as higher priced raw materials and rising average cost of steel on hand offset the four 2021 price increases.

As a result of the product price increases phased in during 2021, full phased in product price increases for 2022 could result in $300 million in additional net sales compared to 2021.

We currently anticipate gross margin and operating margin compression beginning in the latter half of 2022 as higher priced raw materials and rising average cost of steel on hand offset the price increases.

Our Europe segment also generates more revenues from wood construction products than concrete construction products.

Europe sales increased for the quarter ended September 30, 2021 compared to September 30, 2020, primarily due to higher sales volumes in local currency and were positively affected by approximately $0.9 million in foreign currency translation related to Europe's currencies strengthening against the United States Dollar.

Wood construction product sales increased 24.7% for the quarter ended September 30, 2021 compared to September 30, 2020.

Concrete construction product sales are mostly project based, and sales increased 14.9% for the quarter ended September 30, 2021 compared to September 30, 2020.

Gross margins decreased, mostly due to higher factory costs, partly offset by lower material, warehouse and shipping costs.

Operating expenses increased, primarily due to increased professional fees and personnel costs.

If current economic conditions continue and factoring in recently announced sales price increases, we believe Europe operating margins will be higher in 2021 compared to 2020.

However, increased steel costs and product sourcing complications could offset increased sales and negatively affect operating margins in fiscal year 2022.

Europe sales increased 16.2% for the quarter ended March 31, 2022 compared to March 31, 2021, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs, partly offset by the negative effect of approximately $3.7 million in foreign currency translation due a strengthening United States dollar.

Wood construction product sales increased 14.7% for the quarter ended March 31, 2022 compared to March 31, 2021.

Concrete construction product sales are mostly project based, and sales increased 26.2% for the quarter ended March 31, 2022 compared to March 31, 2021.

The Company, including ETANCO, have suspended all sales and distribution activity to Russia and Belarus.

We estimate annual sales to these countries are less $5.0 million.

Gross margins decreased, primarily due to higher factory & tooling costs, as a percentage of net sales.

Europe reported an operating loss of $1.4 million, primarily due to professional fees of $7.0 million associated with the ETANCO acquisition, offset by a $1.1 million gain on the sale of a property and increased gross profits.

We anticipate incurring approximately $15 million to $17 million in integration and transaction costs related to the ETANCO acquisition, of which $8 million to $10 million are incremental.

Including increased steel costs, product sourcing complications with the Ukraine conflict, Europe's net sales and operating margins for the full year 2022 will likely be negatively impacted.

Our Asia/Pacific segment has generated revenues from both wood and concrete construction products.

We believe that the Asia/Pacific segment is not significant to our overall performance.

Since September 2020, inventory pounds in North America, which is the bulk of our inventory, decreased 5% while the weighted average cost per pound of total on hand increased approximately 61%.

Based on our current expectations, we are anticipating continued raw material cost pressure for the remainder of 2021 and into fiscal 2022.

Our gross margins thus far in 2021 reflect an average cost of steel sourced prior to and during the increasing steel price market.

As we work through our on hand inventory and continue to buy raw material at these much higher prices, our anticipated costs of goods sold are expected to increase significantly in late 2021 and into 2022, even if prices for raw material begin to decline, which will adversely affect our margins as the impact from averaging raw material costs typically lags our price increases.

As a result, and based on our updated fiscal 2021 operating margin outlook, we currently expect our operating margin for the full year of 2022 will decline by approximately 400 to 500 basis points year-over-year.

Since March 2021, inventory pounds in North America, which is the bulk of our inventory, remained flat while the weighted average cost per pound of total on hand increased approximately 56%.

Based on our current expectations, we are anticipating continued raw material cost pressure for fiscal 2022.

As we work through our on hand inventory and continue to buy raw material at these much higher prices, our anticipated costs of goods sold are expected to increase during fiscal 2022, even if prices for raw material decline, as the impact from averaging raw material costs typically lags our price increases.

We began to see this sequential accelerating increase in material costs occur beginning in the third quarter 2021.

Business Outlook

On October 25, 2021, the Company updated certain elements of its full year outlook, primarily reflecting actual results of the third quarter, as well as the Company's latest views on raw material input costs and demand trends.

The Company's outlook for fiscal year 2021 is as follows:

• Operating margin is estimated to be in the range of 20.0% to 22.0%.

• The effective tax rate is estimated to be in the range of 25.0% to 26.0%, including both federal and state income tax rates.

• Capital expenditures are estimated to be in the range of $55 million to $60 million.

Results of Operations for the Three Months Ended September 30, 2021, Compared with the Three Months Ended September 30, 2020

Unless otherwise stated, the below results, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the three months ended September 30, 2021, against the results of operations for the three months ended September 30, 2020.

Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended September 30, 2020 and the three months ended September 30, 2021.

Third Quarter 2021 Consolidated Financial Highlights

The following table illustrates the differences in our operating results for the three months ended September 30, 2021, from the three months ended September 30, 2020, and the increases or decreases for each category by segment:

The Company updated its 2022 financial outlook to include the acquisition of ETANCO, which closed on April 1, 2022, one quarter of actual results, and its latest expectations regarding demand trends, raw material costs and operating expenses.

Based on business trends and conditions as of April 25, 2022, the Company's outlook for the full fiscal year ending December 31, 2022 is as follows:

• Operating margin is expected to be in the range of 19.0% to 20.0%, mostly attributable to an improved outlook for the overall market and Simpson.

In addition, the revised outlook includes projected results for ETANCO, including $15.0 to $17.0 million in integration and transaction costs.

• Interest expense on the outstanding borrowings of $250.0 million on the Revolving Credit Facility and $450.0 million Term Loan is expected to be approximately $12.0 million, including the effect of interest hedges and bank fee amortizations.

• The effective tax rate is expected to be in the range of 25.5% to 26.5%.

• Capital expenditures are expected to be in the range of $65.0 million to $70.0 million.

As part of the integration process for ETANCO, Simpson management is in the process of assessing additional capital expenditures in support of ETANCO's operations.

(1) Reflects EUR to USD exchange rate as of March 21, 2022.

(2) For the last 12 months ending September 30, 2021, in accordance with French GAAP.

Subject to change following conversion to IFRS or U.S.

GAAP accounting standards and reflects EUR to USD exchange rate as of December 22, 2021.

Results of Operations for the Three Months Ended March 31, 2022, Compared with the Three Months Ended March 31, 2021

Unless otherwise stated, the below results, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the three months ended March 31, 2022, against the results of operations for the three months ended March 31, 2021.

Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended March 31, 2021 and the three months ended March 31, 2022.

The Company changed its presentation of its North America and Administrative and all other segment statement of operations to account for allocated expenses and management fees as a separate item below income from operations.

Allocated expenses and management fees between the two segments were previously included in operating expenses and in income from operations.

Income from operations for the North America and Administrative and all other segments for the quarter ended March 31, 2022 presented below was not affected by the change in presentation.

Consolidated income from operations, income before tax and net income for the quarters ended March 31, 2022 and March 31, 2021 presented below were not affected by the change in presentation.

First Quarter 2022 Consolidated Financial Highlights

The following table shows the change in the Company's operations from the three months ended March 31, 2021 to the three months ended March 31, 2022, and the increases or decreases for each category by segment:

Three Months Ended Three Months Ended

Increase (Decrease) in Operating Segment

September 30, North Asia/ Admin & September 30,

March 31, North Asia/ Admin & March 31,

(in thousands) 2021 America Europe Pacific All Other 2022

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Total operating expenses 93,979 9,376 (3) (4) 3,128 106,476

Acquisition related costs — 6,951 — 6,951

Net loss (gain) on disposal of assets (80) 11 (1,084) 69 1 (1,083)

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Net income $ 50,387 $ 44,196 $ (2,934) $ 146 $ 2,781 $ 94,576

Net sales increased 8.9% to $396.7 million from $364.3 million primarily by the implementation of two product price increases during the second quarter along with a marginal increase in sales volume .

Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% of the Company's total sales in both the third quarters of 2021 and 2020.

Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 15% of the Company's total sales in both the third quarters of 2021 and 2020.

Net sales increased 42.0% to $493.6 million from $347.6 million primarily driven by the four product price increases we implemented in 2021 to offset rising raw material costs.

Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 88% and 87% of the Company's total sales in both the first quarters of 2022 and 2021, respectively.

Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 12% and 13% of the Company's total sales in both the first quarters of 2022 and 2021, respectively.

Gross profit increased 45.9% to $236.8 million from $162.3 million.

Gross margins increased to 49.9% from 47.6%, primarily due to product price increases partially offset by marginal increases in average material costs.

Gross margins, including some inter-segment expenses, which were eliminated in consolidation, and excluding certain expenses that are allocated according to product group, increased to 50.2% from 48.0% for wood construction products and increased to 44.6% from 42.1% for concrete construction products, respectively.

Research and development and engineering expense increased 18.5% to $14.6 million from $12.3 million, primarily due to increases of $1.4 million in personnel costs and $0.3 million in patent expense,

Selling expense increased 19.3% to $35.1 million from $29.4 million, primarily due to increases of $2.0 million in personnel costs, $1.1 million in travel related costs, $0.9 million in professional fees, $0.8 million in commissions, and a $0.4 million new charitable donation.

General and administrative expense increased 18.6% to $47.8 million from $40.3 million, primarily due to increases of $3.9 million in personnel costs, $3.0 million in professional fees, and $0.6 million in cash profit sharing expense, partly offset by a decrease of $0.8 million in stock-based compensation expense.

Gross margins increased to 48.0% from 46.7%, primarily due to product price increases contributing to lower costs, each as a percentage of sales, in warehouse/freight, factory & tooling, and labor costs, which were negatively offset by higher raw material costs.

Gross margins increased to 48.1% from 46.6% for wood construction products and increased to 46.9% from 42.5% for concrete construction products, respectively.

Research and development and engineering expense increased 8.7% to $15.9 million from $14.6 million, primarily due to increases of $1.6 million in personnel costs and $0.4 million in professional fees, offset by $0.9 higher software development expenses capitalized.

Selling expense increased 19.5% to $36.8 million from $30.8 million, primarily due to increases of $2.4 million in travel related costs, $1.6 million in personnel costs, $0.9 million in advertising & trade shows, and $0.6 million in cash profit sharing expense.

General and administrative expense increased 10.7% to $53.8 million from $48.6 million, primarily due to increases of $3.5 million in professional fees, $2.6 million in personnel costs, $0.4 in travel related costs, and $0.3 million in cash profit sharing expense, offset by a decrease of $1.9 million in stock-based compensation expense.

Our effective income tax rate decreased to 23.7% from 24.3%.

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Diluted earnings per share was $2.18 compared to $1.16.

The following table represents sales by segment for the three-month periods ended September 30, 2021 and 2020:

The following table shows net sales by segment for the three months ended March 31, 2022 and 2021, respectively:

(in thousands) America Europe Pacific Total

Three months ended

September 30, 2020 $ 316,902 $ 44,766 $ 2,636 $ 364,304

September 30, 2021 338,591 54,832 3,315 396,738

March 31, 2021 $ 300,564 $ 44,296 $ 2,782 $ 347,642

March 31, 2022 438,731 51,451 3,388 493,570

Increase $ 138,167 $ 7,155 $ 606 $ 145,928

Percentage increase 46.0 % 16.2 % 21.8 % 42.0 %

The following table represents segment sales as percentages of total sales for the three-month periods ended September 30, 2021 and 2020:

The following table shows segment net sales as percentages of total net sales for the three months ended March 31, 2022 and 2021, respectively:

America Europe Asia/

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Percentage of total 2022 net sales 89 % 10 % 1 % 100 %

The following table represents gross profit by segment for the three-month periods ended September 30, 2021 and 2020:

The following table shows gross profit by segment for the three months ended March 31, 2022 and 2021, respectively:

North Asia/ Admin &

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Three months ended

September 30, 2020 $155,061 $16,980 $1,376 $(174) $173,243

September 30, 2021 176,256 20,680 1,139 (43) 198,032

Increase (decrease) $21,195 $3,700 $(237) $131 $24,789

Percentage Increase 13.7 % 21.8 % * * 14.3 %

* The statistic is not meaningful or material.

The following table represents gross margin by segment for the three months ended September 30, 2021 and 2020:

America Europe Asia/

Pacific Admin &

All Other Total

2020 gross margin percentage 48.9 % 37.9 % 52.2 % * 47.6 %

2021 gross margin percentage 52.1 % 37.7 % 34.4 % * 49.9 %

* The statistic is not meaningful or material.

North America

• Net sales increased 6.8%, due primarily to product price increases that took effect at various times through the year, in an effort to offset rising material costs, and were partly offset by a decline in sales volumes primarily in our home center channel.

Canada's sales also increased primarily due to higher sales volumes and were positively impacted by approximately $1.0 million in foreign currency translation.

• Gross margin increased to 52.1% from 48.9%, primarily due to the aforementioned product price increases in the second and third quarters of 2021.

• Research, development and engineering expenses increased 21.2%, primarily due to increases of $1.3 million in personnel costs and $0.3 million in professional fees, and $0.3 million in patent costs.

• Selling expense increased 18.9%, primarily due to increases of $2.1 million in personnel costs and commissions, $1.1 million in travel–associated expenses, $0.4 million in donations, and $0.3 million in advertising costs.

• General and administrative expense increased 14.5%, primarily due to increases of $2.8 million in personnel costs, $1.0 million for cash profit sharing expense, $0.4 million in professional fees, $0.2 million for depreciation expense, partly offset by a decrease of $0.3 million in stock-based compensation.

• Income from operations increased by $9.6 million, primarily due to increased gross profit, partly offset by higher operating expenses due to higher personnel costs and professional fees.

• Net sales increased 22.5%, primarily due to higher sales volumes compared to last year’s COVID-19 related slow-down.

Europe's sales also benefited by approximately $0.9 million in foreign currency translation related to Europe's currencies strengthening against the United States Dollar.

• Gross margin decreased slightly to 37.7% from 37.9%, primarily due to higher factory costs, partly offset by lower material, warehouse and shipping costs, each as a percentage of net sales.

• Income from operations increased by $1.4 million, primarily due to the increase in sales volumes and gross profit, partly offset by higher operating expenses.

• For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the three months ended September 30, 2021 and 2020.

Results of Operations for the Nine Months Ended September 30, 2021, Compared with the Nine Months Ended September 30, 2020

Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the nine months ended September 30, 2021, against the results of operations for the nine months ended September 30, 2020.

Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the nine months ended September 30, 2020 and the nine months ended September 30, 2021

Year-to-Date (9-month) 2021 Consolidated Financial Highlights

The following table illustrates the differences in our operating results for the nine months ended September 30, 2021, from the nine months ended September 30, 2020, and the increases or decreases for each category by segment:

Nine Months Ended Increase (Decrease) in Operating Segment Nine Months Ended

September 30, North Asia/ Admin & September 30,

(in thousands) 2020 America Europe Pacific All Other 2021

Net sales $ 974,048 $ 136,952 $ 40,690 $ 2,971 $ — $ 1,154,661

Cost of sales 521,339 49,745 25,249 1,407 161 597,901

Gross profit 452,709 87,207 15,441 1,564 (161) 556,760

Research and development and other engineering

expense 37,860 5,102 351 7 1 43,321

Selling expense 84,757 11,235 2,646 413 2 99,053

General and administrative expense 117,396 22,440 3,810 75 46 143,767

240,013 38,777 6,807 495 49 286,141

Net gain on disposal of assets (209) 77 53 -0.922 (33) — (112)

Income from operations 212,905 48,353 8,581 1,102 (210) 270,731

Interest expense, net and other (3,202) (2,636) 421 (208) 366 (5,259)

Income before income taxes 209,703 45,717 9,002 894 156 265,472

Provision for income taxes 52,341 14,668 1,537 10 266 68,822

Net income $ 157,362 $ 31,049 $ 7,465 $ 884 $ (110) $ 196,650

Net sales increased 18.5% to $1,154.7 million from $974.0 million due to increases in sales volumes as well as the implementation of product price increases at various times during the first nine months of 2021.

Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 86% of the Company's total sales in the first nine months of 2021 and 2020.

Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 14% of the Company's total sales in the first nine months of 2021 and 2020.

Gross profit increased 23.0% to $556.8 million from $452.7 million.

Gross margins increased to 48.2% from 46.5%, primarily due to product price increases, lower labor and factory expenses, and offset partly by higher material costs, warehouse, and shipping expense each as a percentage of net sales.

The gross margins, including certain inter-segment expenses, which were eliminated in consolidation, and excluding other expenses that are allocated according to product group, increased to 48.1% from 46.6% for wood construction products and increased to 45.0% from 42.3% for concrete construction products.

Research and development and engineering expense increased 14.4% to $43.3 million from $37.9 million primarily due to increases of $2.9 million in personnel costs, $1.1 million in patent and code approval costs, and $0.9 million in professional fees.

Selling expense increased to $99.1 million from $84.8 million, primarily due to increases of $9.3 million in personnel costs and sales commissions, $3.7 million in professional fees, $1.0 million in stock-based compensation, $0.8 million cash profit sharing expense, and $0.6 million travel-related expenses, partly offset by decreases of $0.6 million in advertising and promotional expense, and $0.6 million of higher software development costs being capitalized.

General and administrative expense increased to $143.8 million from $117.4 million, primarily due to increases of $8.1 million in personnel costs, $7.2 million in professional fees, $3.0 million in stock-based compensation, $3.0 million in cash profit sharing expenses, $2.1 million in depreciation and amortization expenses, as well as, $1.0 million in higher software development expenses net of capitalization.

Our effective income tax rate increased to 25.9% from 25.0%.

Consolidated net income was $196.7 million compared to $157.4 million.

Diluted earnings per share was $4.52 compared to $3.59.

The following table represents net sales by segment for the nine-month periods ended September 30, 2020 and 2021:

(in thousands) America Europe Pacific Total

Nine Months Ended

September 30, 2020 $ 852,759 $ 114,877 $ 6,412 $ 974,048

September 30, 2021 989,711 155,567 9,383 1,154,661

March 31, 2021 $145,830 $15,250 $1,244 $(42) $162,282

March 31, 2022 217,919 17,453 1,448 (39) 236,781

Increase $72,089 $2,203 $204 $3 $74,499

Percentage Increase 49.4 % 14.4 % * * 45.9 %

The following table represents segment sales as percentages of total net sales for the nine-month periods ended September 30, 2020 and 2021, respectively:

America Europe Asia/

Pacific Total

Percentage of total 2020 net sales 88 % 12 % — % 100 %

Percentage of total 2021 net sales 86 % 14 % — % 100 %

The following table represents gross profit by segment for the nine-month periods ended September 30, 2020 and 2021:

North Asia/ Admin &

(in thousands) America Europe Pacific All Other Total

Nine Months Ended

September 30, 2020 $ 409,863 $ 40,787 $ 2,026 $ 33 $ 452,709

September 30, 2021 497,070 56,228 3,590 (128) 556,760

Increase (decrease) $ 87,207 $ 15,441 $ 1,564 $ (161) $ 104,051

Percentage increase 21.3 % 37.9 % * * 23.0 %

* The statistic is not meaningful or material.

The following table represents gross margin by segment for the nine-month periods ended September 30, 2020 and 2021:

(in thousand) North

The following table shows gross margin by segment for the three months ended March 31, 2022 and 2021, respectively:

America Europe Asia/

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North America

• Net sales increased 16.1%, primarily due to higher sales volumes from most of our distribution channels, partly offset by lower sales volumes from home center channel, and product price increases implemented during the second and third quarters of 2021.

Canada's sales increased primarily due to increases in sales volume and were positively affected by $4.2 million foreign currency translation in local currency.

• Gross margin increased to 50.2% from 48.1%, primarily due to product price increases implemented during the second and third quarters, and decreases in labor, factory and freight costs, partly offset by higher material costs, each as a percentage of net sales.

• Research and development and engineering expense increased $5.1 million, primarily due to increases of $2.5 million in personnel costs, $1.3 million in professional fees, $0.6 million in patent costs, and $0.2 million in depreciation.

• Selling expense increased $11.2 million, primarily due to increases of $6.2 million in personnel costs and sales commissions, $1.6 million in professional fees, $0.9 million in stock-based compensation, $0.6 million in donation expense, and $0.5 million in cash profit sharing expense, partly offset by decreases of $0.2 million in depreciation expense.

• General and administrative expense increased $22.4 million, primarily due to increases of $8.1 million in professional fees, including legal fees, $5.6 million in personnel costs, $2.2 million in depreciation and amortization expense, $1.5 million in computer software and hardware costs, and $0.7 million in cash profit sharing expense, as well as, $1.0 million in higher software development expense net of capitalization.

• Income from operations increased $48.4 million, mostly due to increased sales and gross profit, partly offset by higher operating expenses.

• Net sales increased 35.4%, primarily due to higher sales volumes compared to last year’s COVID-19 related slow-down.

Europe's sales were also benefited by positive $9.9 million foreign currency translations resulting from some Europe currencies strengthening against the United States Dollar.

• Gross margin increased to 36.1% from 35.5%, primarily due to lower labor, factory, shipping and warehouse costs, partly offset by higher material costs each as a percentage of net sales.

• Selling expense increased $2.6 million, primarily due to increases of $1.9 million in personnel costs, $0.4 million in professional fees, and $0.4 million in cash profit sharing expenses.

• General and administrative expense increased $3.8 million, primarily due to increases of $4.1 million in professional fees, $1.2 million in personnel costs, and $0.4 million in cash profit sharing.

• Income from operations increased $8.6 million, primarily due to higher sales and gross profit, partly offset by higher operating expenses.

• For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the nine months ended September 30, 2021 and 2020.

• Net sales increased 46.0%,primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs.

Canada's net sales increased primarily due to product price increases offset by lower sales volumes.

• Gross margin increased to 49.7% from 48.5%, primarily due to product price increases throughout 2021, contributing to lower costs, each as a percentage of sales, in warehouse/freight, factory & tooling, and labor costs, which were negatively offset by higher raw material costs.

• Research, development and engineering expenses increased 10.3%, primarily due to increases of $1.3 million in personnel costs and $0.9 million in professional fees, offset by $0.9 higher software development expenses capitalized.

• Selling expense increased 22.5%, primarily due to increases of $2.2 million in travel–associated expenses, $1.8 million in personnel costs, $0.9 million in advertising & trade show costs, $0.6 million in cash profit sharing expense, offset by a decrease $0.3 million in stock-based compensation expense.

• General and administrative expense increased 6.8%, primarily due to increases of $2.7 million in professional fees,$1.0 million in personnel costs, $0.4 million for cash profit sharing expense, partly offset by decreases of $0.7 million in stock-based compensation and $0.6 million in depreciation and amortization.

• Income from operations increased by $62.7 million, primarily due to higher gross profit, partly offset by higher operating expenses

• Net sales increased 16.2%, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs, partly offset by the negative effect of approximately $3.7 million in foreign currency translation.

• Gross margin decreased slightly to 33.9% from 34.4%, primarily due to higher factory & tooling costs, as a percentage of net sales.

• Income from operations decreased by $3.7 million, primarily due to professional fees of $7.0 million associated with the ETANCO acquisition, offset by a $1.1 million gain on the sale of a property and increased gross profits.

• For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the three months ended March 31, 2022 and 2021.

Effect of New Accounting Standards

1 unchanged sentence

Liquidity and Sources of Capital

In July 2021, the Company entered into a fourth amendment to the unsecured credit agreement dated July 27, 2012 with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for a $300.0 million unsecured revolving credit facility (the “Credit Facility”).

The amendment extends the term of the Credit Facility from July 23, 2022, to July 12, 2026 and modified certain covenants to provide us with additional flexibility.

As of September 30, 2021, the full $300 million under the Credit Facility was available for borrowing and we remain debt free.

Our principal uses of liquidity include the costs and expenses associated with our operations, including financing working capital requirements and continuing our capital allocation strategy, which includes supporting capital expenditures, repurchasing the Company's common stock, paying cash dividends, and financing other investment opportunities over the next twelve months.

As of September 30, 2021, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions.

On March 30, 2022, the Company entered into an Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement provides for a 5-year revolving credit facility of $450.0 million, which includes a letter of credit-sub-facility up to $50.0 million, and for a 5-year term loan facility of $450.0 million.

The Company borrowed $250.0 million, under the revolving credit facility and $450.0 million under the term loan facility to finance a portion of the purchase price of the Company’s acquisition of ETANCO.

Our principal uses of capital include the costs and expenses associated with our operations, including financing working capital requirements and continuing our capital allocation strategy, which includes supporting capital expenditures, paying cash dividends, repurchasing the Company's common stock, and financing other investment opportunities over the next twelve months.

As of March 31, 2022, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions.

Cash and cash equivalents of $889.2 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the United States.

On April 1, 2022, the Company used approximately $800 million of the funds held in our foreign operations to acquire ETANCO.

The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outside the United States.

The following table presents selected financial information as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively:

At September 30, At December 31, At September 30,

The following table shows selected financial information as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively:

At March 31, At December 31, At March 31,

(in thousands) 2022 2021 2021

3 unchanged sentences

Working capital less cash and cash equivalents 496,659 453,078 336,759

The following table provides cash flow indicators for the nine-month periods ended September 30, 2021 and 2020:

Nine Months Ended September 30,

The following table provides cash flow indicators for the three-month periods ended March 31, 2022 and 2021, respectively:

Three Months Ended March 31,

(in thousands) 2022 2021

4 unchanged sentences

Cash flows from operating activities result primarily from our earnings, and are also affected by changes in operating assets and liabilities which consist primarily of working capital balances.

Our revenues are derived from manufacturing and sales of building construction materials.

Our revenues are derived from manufacturing and sales of

building construction materials.

Our operating cash flows are subject to seasonality and are cyclically associated with the volume and timing of construction project starts.

For example, trade accounts receivable is generally at its lowest at the end of the fourth quarter and increases during the first, second and third quarters.

During the nine months ended September 30, 2021, operating activities provided $122.1 million in cash and cash equivalents, as a result of $196.7 million from net income and $57.3 million from non-cash expenses from net income, which included depreciation and amortization expense and stock-based compensation expense.

Cash provided from net income was partly offset by a decrease of $131.9 million in the net change in operating assets and liabilities, including increases of $104.2 million in inventory and $73.2 million in trade accounts receivable, partly offset by increases of $45.9 million in other current liabilities and $15.5 million in trade accounts payable.

Cash used in investing activities of $41.2 million during the nine months ended September 30, 2021 was mainly for capital expenditures and investments, including a venture capital fund.

Our capital spending in 2019, 2020 and the nine months ended September 30, 2021 was $32.7 million, $20.9 million and $31.3 million, respectively, which was primarily used for machinery and equipment purchases and software in development.

Based on current information and subject to future events and circumstances, total approved capital spending for 2021, which will carry over into 2022, will be in the $50 million to $60 million range.

Capital spending will be primarily for safety needs, equipment replacement and productivity improvements.

At this time only a small amount of capital spending is related to our key growth initiatives.

Cash used in financing activities of $61.3 million during the nine months ended September 30, 2021 consisted primarily of $30.8 million used to pay dividends to our stockholders and $24.1 million used to repurchase 222,060 shares of common stock at an average price of $108.64 per share.

On October 19, 2021, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.25 per share payable on January 27, 2022, to the Company's stockholders of record on January 6, 2022.

The Board also approved changing our capital return threshold from 50% of our cash flow from operations to 50% of our free cash flow, which is calculated by subtracting capital expenditures from cash flow from operations.

Since the beginning of 2019 to the nine months ended September 30, 2021, we have returned $272.6 million to stockholders, which represents 63.6% of our free cash flow.

The Company has repurchased over 2.2 million shares of the Company's common stock since the beginning of 2019, which represents approximately 5.0% of the outstanding shares of the Company's common stock.

During the three months ended March 31, 2022, operating activities provided $44.7 million in cash and cash equivalents, as a result of $94.6 million from net income and $14.9 million from non-cash expenses from net income, which included depreciation and amortization expense and stock-based compensation expense.

Cash provided from net income was partly offset by a decrease of $64.8 million in the net change in operating assets and liabilities, including increases of $89.8 million in trade accounts receivable, partly offset by increases of $21.7 million in other current liabilities and $17.9 million in trade accounts payable.

Cash used in investing activities of $17.1 million during the three months ended March 31, 2022 was mainly for capital expenditures, offset by proceeds from the sale of a property.

Our capital spending for the three months ended March 31, 2021 and the three months ended March 31, 2022 was $10.5 million and $17.8 million, respectively, which was primarily used for a land purchase, machinery and equipment purchases and software in development.

Based on current information and subject to future events and circumstances, total approved capital spending for 2022, will be in the $65.0 million to $70.0 million range.

Capital spending will be dedicated to maintenance with the remainder focused on growth to maximize efficiencies, expand our manufacturing footprint and invest in our key growth initiatives.

As part of the integration process for ETANCO, Simpson management is in the process of assessing additional capital expenditures in support of ETANCO's operations.

Cash provided by financing activities of $650.6 million during the three months ended March 31, 2022 consisted primarily of $700.0 million loan proceeds used for the acquisition of ETANCO, offset by $21.3 million used to repurchase 194,745 shares of common stock at an average price of $109.28 per share, $10.8 million used to pay dividends to our stockholders, $9.5 million used to pay income taxes on behalf of the employees for shares withheld with respect to their vested restricted stock units, and $6.8 million in bank fees paid in connection with the Amended and Restated Credit Agreement.

On May 4, 2022, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share payable on July 28, 2022, to the Company's stockholders of record on July 7, 2022.

During 2022, the Board also approved changing our capital return target to 35% of our free cash flow from 50%.

Since the beginning of 2019 to the quarter ended March 31, 2022, we have returned $315.5 million to stockholders, which represents 67.7% of our free cash flow and over the same period the Company has repurchased over 2,442,456 shares of the Company's common stock, which represents approximately 5.4% of the outstanding shares of the Company's common stock at the start of 2019.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2021.

We did not have any off-balance sheet arrangements as of March 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis