What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-08 compared with 2022-08-10 · 124 added, 115 removed, 225 unchanged (52% of the section changed)

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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, the integration of the acquisition of ETANCO, 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 and market growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, the integration of the acquisition of ETANCO, 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.

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, the impact of the COVID-19 pandemic on our operations and supply chain, the operations of our customers, suppliers and business partners, and the successful integration of ETANCO and those discussed under Item 1A.

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, the prolonged impact of the COVID-19 pandemic on our operations and supply chain, the operations of our customers, suppliers and business partners, and the successful integration of ETANCO and those discussed under Item 1A.

Risk Factors and Item 7.

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

To the extent that the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of such risks and other factors.

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

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

We have executed on several key milestones since we first announced our key strategic initiatives back in 2021.

We have made progress towards our key growth initiatives since they were first announced in 2021.

Here are a few examples:

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• 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, LLC 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 a 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,

• In the OEM market, we were recently awarded the opportunity to supply our complete wood solutions, including specialty fasteners and other products, for the construction of custom wood base crates.

We accomplished some key project wins within the Mass Timber space including our solutions are now being specified to construct mock-up structures from coast to coast to serve as a mass timber training course for union carpenters and are also being utilized in the construction of a new home office for a large U.S.-based company.

We accomplished more key project wins within the Mass Timber space including specifying our products in the construction of manufacturing facilities in Austria and the state of Washington.

• 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 increased our publicity for Outdoor Accents in both The Home Depot and Lowe’s.

• Within the Commercial market, we expanded our offerings, including the expansion of our structural steel product line and our concrete solutions are being used in the construction of new graduate housing.

As we make progress on our growth initiatives, we believe we can continue our above market growth relative to U.S.

• Within Building Technology market, we updated our customer portal enabling online ordering of our products.

We were selected by a building supply company based in the Southeast region of the United States to provide their customers and sales associates with the ability to design decks, pergolas and fences using Simpson’s full Outdoor Living Solutions (OLS) software platform where customers can obtain a complete bill of materials for purchase at the local store.

Our building technology platform was adopted by a highly regarded regional builder during the quarter to help them automate workflows, options and automatic pricing management for broad changes and to transition away from inefficient paper processes.

As we make progress on our key growth initiatives, we believe we can continue our above market growth relative to U.S.

housing starts in fiscal 2022 and beyond.

These select key examples further emulate our Founder, Barclay Simpson’s, nine principles of doing business, and more specifically the focus and obsession on customers and users.

These examples further emulate our Founder, Barclay Simpson’s, nine principles of doing business, and more specifically the focus and obsession on customers and users.

On September 8, 2022, the Company announced that Karen Colonias will step down from her position as Chief Executive Officer as part of Simpson's planned leadership succession, effective December 31, 2022.

Simpson's Board of Directors unanimously elected Michael Olosky, 54, current President and Chief Operating Officer, to succeed Ms.

Colonias as Chief Executive Officer, effective January 1, 2023.

In connection with his promotion, Mr.

Olosky will also join the Company's board of directors on January 1, 2023.

Colonias will remain employed as an Executive Advisor to assist with a smooth and orderly transition until her retirement on June 30, 2023.

Colonias will continue to serve as a member of Simpson's board of directors until the 2023 annual meeting of stockholders.

Factors Affecting Our Results of Operations

The COVID-19 pandemic and Russia’s invasion of Ukraine has severely affected global economic conditions, resulting in substantial volatility in the financial markets, increased unemployment, and considerable operational challenges.

The prolonged COVID-19 pandemic and Russia’s invasion of Ukraine has severely affected global economic conditions, resulting in substantial volatility in the financial markets, increased unemployment, and considerable operational challenges.

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.

Our supply chain partners are supportive, and continue to do their part to ensure that service levels to our customers remain strong.

To date, we have not experienced any supply-chain disruptions and continued to meet our customers’ needs despite the challenges.

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

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 over the past twelve months, we have seen demand begin to decline during the past quarter due to supply-chain factors, inflation and interest rate increases affecting new home starts and completions.

With almost a full year of recent sales price increase in effect, we believe sales will likely increase during the 3rd quarter over the prior year comparable period even if demand decreases.

These increased sales prices are expected to be offset by increasing raw material costs, sourcing logistics complications and a tight labor market, which could negatively affect operating margins for 2022.

Though single-family housing starts increased significantly over the past fifteen months, we have seen demand begin to decline recently due to supply-chain factors, inflation and interest rate increases affecting new home starts and completions.

However, the Company also supplies product used in multifamily construction.

Multifamily starts are higher this year compared to last year, which could offset some of the decline in single-family housing starts.

With the addition of ETANCO, we believe net sales will likely increase during the remainder of fiscal year 2022 even if demand decreases.

Increased product prices are expected to be offset by increasing raw material costs, sourcing logistics complications and a tight labor market, which could negatively affect operating margins for 2022.

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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Our products are generally used in a sequential progression that follows the construction process.

Residential and commercial construction begins with the

foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules.

Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules.

In prior years, our sales were heavily seasonal with operating results varying from quarter to quarter depending on weather conditions that could delay construction starts.

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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 35.2% for the quarter ended June 30, 2022 compared to June 30, 2021, and our concrete construction product sales increased 24.0% over the same periods, due to product price increases throughout 2021 in an effort to offset rising raw material costs.

Our wood construction product sales increased 32.1% for the quarter ended September 30, 2022 compared to September 30, 2021, and our concrete construction product sales increased 11.4% over the same periods, due to product price increases throughout 2021 in an effort to offset rising raw material costs.

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

As a result of the product price increases phased in during 2021, full phased in product price increases for 2022 could result in $300.0 million in additional net sales compared to 2021.

We currently anticipate further gross margin and operating margin compression beginning in the latter half of 2022 compared to 2021 as higher priced raw materials and rising average cost of steel on hand offset the product price increases.

We currently anticipate gross margin and operating margin compression for the remainder of fiscal year 2022 compared to 2021 as higher priced raw materials and rising average cost of steel on hand offset the product price increases.

During 2022, we have been reviewing the footprint for our U.S.

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As a result, we identified facility expansions in the U.S.

that will improve our overall service, production efficiencies and safety in the workplace, as well as reduce our reliance on certain outsourced, finished goods and component products and continue to ensure we have ample capacity to meet our customer needs.

We recently announced an expansion of our Ohio facility and the project has commenced.

that we expect will improve our overall service, production efficiencies and safety in the workplace, as well as reduce our reliance on certain outsourced, finished goods and component products and continue to ensure we have ample capacity to meet our customer needs.

These investments reinforce our core business model differentiators to remain the partner of choice as we continue to produce products locally and ensure superior levels of customer service.

Investments in these expansions have already started this year and will continue into 2024.

Europe sales increased 136.1% for the quarter ended June 30, 2022 compared to June 30, 2021, primarily due to the acquisition of ETANCO, which contributed $80.3 million in net sales, along with product price increases, mostly offset by lower volumes and the negative effect of approximately $6.9 million in foreign currency translation due a strengthening United States dollar.

Wood construction product sales increased 135.3% for the quarter ended June 30, 2022 compared to June 30, 2021 with ETANCO contributing $64.9 million in wood construction product sales.

Concrete construction product sales are mostly project based, and sales increased 139.2% for the quarter ended June 30, 2022 compared to June 30, 2021 with ETANCO contributing $15.4 million in concrete construction product sales.

Europe sales increased 104.1% for the quarter ended September 30, 2022 compared to September 30, 2021, primarily due to the acquisition of ETANCO, which contributed $67.5 million in net sales, along with product price increases, offset by lower volumes and the negative effect of approximately $7.9 million in foreign currency translation due a strengthening United States dollar.

Wood construction product sales increased 103.8% for the quarter ended September 30, 2022 compared to September 30, 2021 with ETANCO contributing $53.7 million in wood construction product sales.

Concrete construction product sales are mostly project based, and sales increased 105.2% for the quarter ended September 30, 2022 compared to September 30, 2021 with ETANCO contributing $13.8 million in concrete construction product sales.

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

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Europe gross profit of $39.0 million included $19.4 million from the acquisition of ETANCO, net of $2.9 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge.

The Company expects there will be an additional nominal amount recognized in the third quarter of 2022 for a fiscal year total of $10.5 million in fair value adjustments.

Europe reported operating income of $5.6 million, including ETANCO's operating loss of $1.6 million which was net of $9.2 million in inventory adjustments as noted above, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million.

Europe reported income from operations of $6.1 million, including ETANCO's operating income of $1.8 million which was net of $2.9 million in inventory adjustments as noted above, $4.2 million of amortization expense on acquired intangible assets and $1.9 million for integration costs for a total of $9.0 million.

The Company expects to incur additional costs in 2022 as it continues to integrate ETANCO into its European operations.

The Company has not realized any synergies from the combination to date.

The Company has not achieved significant synergies from the combination to date.

The Company continues to work on integrating ETANCO into its operations.

Plans have been developed to realize the Company’s previously identified synergies in the years ahead which will result in additional costs in 2022 and 2023.

The Company remains well positioned to capture meaningful benefits from the synergies, subject to changing macroeconomic circumstances, which will delay some of the synergy opportunities.

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 June 2021, inventory pounds in North America, which is the bulk of our inventory, increased 14% while the weighted average cost per pound of total on hand increased approximately 31%.

Since September 2021, inventory pounds in North America, which is the bulk of our inventory, increased 3% while the weighted average cost per pound of total on hand increased approximately 12%.

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 costs of goods sold are expected to continue increasing modestly during the second

half of fiscal 2022, even if prices for raw material decline, as the impact from averaging raw material costs typically lags our product price increases.

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

As we work through our on-hand inventory, our costs of goods sold are expected to continue increasing modestly during the remainder of fiscal year 2022, even if prices for raw material decline, as the impact from averaging raw material costs typically lags our product price increases.

Business Outlook

The Company updated its 2022 financial outlook to include the acquisition of ETANCO, two quarters of actual results, and its latest expectations regarding demand trends, raw material costs and operating expenses as of July 25, 2022.

The Company updated its 2022 financial outlook to include the acquisition of ETANCO, three quarters of actual results, and its latest expectations regarding demand trends, raw material costs and operating expenses as of October 24, 2022.

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

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• The effective tax rate is expected to be in the range of 25.0% to 26.0%.

• Capital expenditures are expected to be in the range of $80.0 million to $90.0 million including amounts attributable to ETANCO and expansion of the Ohio facility.

• Capital expenditures are expected to be in the range of $55.0 million to $65.0 million.

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

Results of Operations for the Three Months Ended June 30, 2022, Compared with the Three Months Ended June 30, 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 June 30, 2022, against the results of operations for the three months ended June 30, 2021.

Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended June 30, 2021 and the three months ended June 30, 2022.

Results of Operations for the Three Months Ended September 30, 2022, Compared with the Three Months Ended September 30, 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 September 30, 2022, against the results of operations for the three months ended September 30, 2021.

Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended September 30, 2021 and the three months ended September 30, 2022.

Beginning in 2022, the Company changed its presentation for both the North America and the Administrative and all other segment's statement of operations to display allocated expenses and management fees as a separate item below income from operations.

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Consolidated income from operations, income before tax and net income for all periods presented below are not affected by the change in presentation

Second Quarter 2022 Consolidated Financial Highlights

The following table shows the change in the Company's operations from the three months ended June 30, 2021 to the three months ended June 30, 2022, and the increases or decreases for each category by segment:

Third Quarter 2022 Consolidated Financial Highlights

The following table shows the change in the Company's operations from the three months ended September 30, 2021 to the three months ended September 30, 2022, and the increases or decreases for each category by segment:

Three Months Ended Three Months Ended

Increase (Decrease) in Operating Segment

June 30, North Asia/ Admin & June 30,

September 30, North Asia/ Admin & September 30,

(in thousands) 2021 America Europe Pacific All Other 2022

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Net sales increased 39.6% to $553.7 million from $396.7 million primarily driven by the four product price increases we implemented in 2021 to offset rising raw material costs, and the acquisition of ETANCO which contributed $67.5 million in net sales.

Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 87% of the Company's total sales in both the second 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 13% of the Company's total sales in both the second quarters of 2022 and 2021, respectively.

Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 86% and 85% of the Company's total sales in both the third 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 14% and 15% of the Company's total sales in both the third quarters of 2022 and 2021, respectively.

Gross profit increased 23.5% to $244.5 million from $198.0 million.

Gross margins decreased to 43.7% from 47.9%, primarily due to the acquisition of ETANCO, which has a lower gross margin profile relative to the Company overall, and higher raw material costs overall.

Gross margins decreased to 44.2% from 49.9%, primarily due to the acquisition of ETANCO, which in general has a lower gross margin profile relative to the Company but also includes $2.9 million of non-recurring inventory fair value step-up costs, as well as higher raw material costs for the Company overall.

Gross margins decreased to 44.2% from 50.2% for wood construction products and decreased to 43.8% from 44.6% for concrete construction products, respectively.

Research and development and engineering expense increased 19.6% to $16.9 million from $14.2 million, primarily due to increases of $2.4 million in personnel costs and $0.4 million in material and supplies consumption.

Selling expense increased 35.9% to $45.1 million from $33.2 million, primarily due to increases of $5.5 million in personnel costs, $1.7 million in advertising & trade shows, $1.0 million in travel related costs, and $0.5 million in professional fees.

General and administrative expense increased 23.2% to $58.4 million from $47.4 million, primarily due to increases of $4.1 million in depreciation and amortization, $3.4 million in personnel costs, $1.4 million in professional and legal fees, $0.6 million in travel related costs and $0.4 million in stock compensation expense, offset by a decrease of $0.8 million in cash profit sharing expense.

Research and development and engineering expense increased 17.3% to $17.1 million from $14.6 million, primarily due to increases of $1.6 million in personnel costs, and $1.2 million in professional services offset by decrease of $0.3 million for cash profit sharing expenses.

Selling expense increased 21.3% to $42.5 million from $35.1 million, primarily due to increases of $5.3 million in personnel costs, $1.2 million in travel related costs, and $0.7 million in professional fees, and $0.4 million in advertising & trade shows offset by a decrease of $1.1 million in commissions.

General and administrative expense increased 26.2% to $60.3 million from $47.8 million, primarily due to increases of $4.3 million in depreciation and amortization, $2.5 million in professional and legal fees, $2.2 million in personnel costs, $1.6 million in computer/software expenses, $0.9 million in travel related costs, $0.7 million in lower software development expenses capitalized, and $0.3 million in stock compensation expense, offset by a decrease of $0.9 million in cash profit sharing expense.

Our effective income tax rate decreased to 25.3% from 26.1%.

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Diluted earnings per share was $2.06 compared to $1.70.

The following table shows net sales by segment for the three months ended June 30, 2022 and 2021, respectively:

The following table shows net sales by segment for the three months ended September 30, 2022 and 2021, respectively:

(in thousands) America Europe Pacific Total

Three months ended

June 30, 2021 $ 350,557 $ 56,438 $ 3,286 $ 410,281

June 30, 2022 456,410 133,238 3,584 593,232

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

September 30, 2022 437,770 111,903 3,989 553,662

Increase $ 99,179 $ 57,071 $ 674 $ 156,924

Percentage increase 29.3 % 104.1 % 20.3 % 39.6 %

The following table shows segment net sales as percentages of total net sales for the three months ended June 30, 2022 and 2021, respectively:

The following table shows segment net sales as percentages of total net sales for the three months ended September 30, 2022 and 2021, respectively:

America Europe Asia/

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Percentage of total 2022 net sales 79 % 20 % 1 % 100 %

The following table shows gross profit by segment for the three months ended June 30, 2022 and 2021, respectively:

The following table shows gross profit by segment for the three months ended September 30, 2022 and 2021, respectively:

North Asia/ Admin &

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Three months ended

June 30, 2021 $174,984 $20,298 $1,207 $(43) $196,446

June 30, 2022 219,299 39,023 1,098 (87) 259,333

Increase (decrease) $44,315 $18,725 $(109) $(44) $62,887

Percentage Increase (decrease) 25.3 % 92.3 % * * 32.0 %

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

September 30, 2022 207,948 35,215 1,402 (42) 244,523

Increase $31,692 $14,535 $263 $1 $46,491

Percentage Increase 18.0 % 70.3 % * * 23.5 %

* The statistic is not meaningful or material.

The following table shows gross margin by segment for the three months ended June 30, 2022 and 2021, respectively:

The following table shows gross margin by segment for the three months ended September 30, 2022 and 2021, respectively:

America Europe Asia/

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North America

• Net sales increased 30.2%, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs on relatively flat volumes.

• Gross margin decreased to 48.0% from 49.9%, primarily from higher material costs, as a percentage of net sales, partly offset by product price increases throughout 2021.

• Research, development and engineering expenses increased 19.5%, primarily due to increases of $1.2 million in personnel costs, $0.7 in million professional fees, $0.3 million in material and supplies consumption and $0.2 million in travel rated costs, partly offset by $0.6 higher software development expenses capitalized.

• Selling expense increased 19.3%, primarily due to increases of $2.0 million in personnel cost, $1.7 million in advertising & trade show costs, $2.0 million in personnel costs, $1.5 million in travel–associated expenses and $0.5 million in professional fees, offset by a decrease $0.8 million in sales commissions.

• General and administrative expense increased 1.6%, primarily due to $1.1 million in personnel costs offset by $0.5 million for cash profit sharing expense.

• Net sales increased 29.3%, primarily due to product price increases we implemented last year, along with higher sales volumes.

• Gross margin decreased to 47.5% from 52.1%, primarily due to higher raw material, factory and overhead and labor costs, each as a percentage of net sales, which were partially offset by the product price increases we implemented in 2021.

• Research, development and engineering expenses increased 15.3%, primarily due to increases of $1.4 million in professional fees, and $0.9 million in personnel costs, offset by $0.5 million higher software development expenses capitalized.

• Selling expense increased 10.1%, primarily due to increases of $2.0 million in personnel costs, $0.9 million in travel–associated expenses, $0.6 million in professional fees, and $0.5 million in advertising & trade show costs, offset by a decrease $1.0 million in sales commissions.

• General and administrative expense decreased 1.0%, primarily due to decreases of $2.9 million professional fees, $0.8 million for cash profit sharing expense and $0.8 million in depreciation/amortization expenses offset by increases of $1.5 million in computer/software expenses, $0.7 million in personnel costs, $0.7 million in travel rated costs, $0.5 million in rent expense and $0.5 million in lower software development expenses capitalized.

• Income from operations increased by $27.1 million.

The increase was primarily due to higher gross profit, partly offset by higher operating expenses including travel, entertainment and personnel costs.

• Net sales increased 136.1%, primarily due to the acquisition of ETANCO, which contributed $80.3 million in net sales along with product price increases, mostly offset by lower volumes and the negative effect of approximately $6.9 million in foreign currency translation.

The increase was primarily due to higher gross profit, partly offset by higher operating expenses.

• Net sales increased 104.1%, primarily due to the acquisition of ETANCO, which contributed $67.5 million in net sales and to a lesser extent, price increases intended to offset higher material costs abroad.

Europe’s volumes without ETANCO were down compared to the prior year quarter and the negative effect of approximately $7.9 million in foreign currency translation.

• Gross margin decreased to 31.5% from 37.7%.

Europe gross profit of $39.0 million included $19.2 million from the acquisition of ETANCO, which is net of $9.2 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge.

The Company expects there will be an additional nominal amount recognized in the third quarter of 2022 for a fiscal year total of $10.5 million in fair value adjustments.

Europe gross profit of $35.2 million included $19.4 million from the acquisition of ETANCO, which is net of a $2.9 million non-recurring fair-value adjustment for inventory costs as a result of purchase accounting.

This adjustment was a factor as to why gross margins declined in Europe

• Income from operations decreased by $1.4 million.

This includes ETANCO's operating loss of $1.6 million which is net of $9.2 million in inventory adjustments as noted above, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million.

This includes ETANCO's operating loss of $1.8 million which is net of $2.9 million non-recurring fair-value inventory adjustment, $4.2 million of amortization expense on acquired intangible assets;

and $1.9 million in integration costs for a total of $9.0 million.

The Company expects to incur additional costs in 2022 as it continues to integrate ETANCO into its European operations.

The Company has not realized any synergies from the combination to date.

• 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 June 30, 2022 and 2021.

Results of Operations for the Six Months Ended June 30, 2022, Compared with the Six Months Ended June 30, 2021

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 six months ended June 30, 2022, against the results of operations for the six months ended June 30, 2021.

Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the six months ended June 30, 2021 and the six months ended June 30, 2022

The Company benefitted to some extent from synergies from the combination.

• 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, 2022 and 2021.

Results of Operations for the Nine Months Ended September 30, 2022, Compared with the Nine Months Ended September 30, 2021

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, 2022, against the results of operations for the nine months ended September 30, 2021.

Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the nine months ended September 30, 2021 and the nine months ended September 30, 2022

During 2021, allocated expenses and management fees between the two segments were previously included in gross profit, operating expenses and in income from operations and have been adjusted herein to conform to the 2022 presentation.

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Year-to-Date (9-month) 2022 Consolidated Financial Highlights

The following table illustrates the differences in our operating results for the six months ended June 30, 2022, from the six months ended June 30, 2021, and the increases or decreases for each category by segmen t:

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

June 30, North Asia/ Admin & June 30,

The following table illustrates the differences in our operating results for the nine months ended September 30, 2022, from the nine months ended September 30, 2021, 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) 2021 America Europe Pacific All Other 2022

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Net income $ 196,650 $ 82,845 $ (8,823) $ 858 $ 4,858 $ 276,389

Net sales increased 43.4% to $1,086.8 million from $757.9 million due to the implementation of product price increases at various times during 2021, and revenues from the acquisition of ETANCO.

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

Net sales increased 42.1% to $1,640.5 million from $1,154.7 million driven by the four product price increases that were implemented in 2021 to offset rising raw material costs, and the acquisition of ETANCO which contributed $147.8 million in net sales.

Gross profit increased 33.0% to $740.6 million from $556.8 million.

Gross margins decreased to 45.6% from 47.3%, primarily due to the acquisition of ETANCO, which has a lower gross margin profile relative to the Company overall, and higher raw material costs overall.

Gross margins decreased to 45.1% from 48.2%, primarily due to the acquisition of ETANCO, which in general has a lower gross margin profile relative to the Company but also includes $12.2 million of non-recurring inventory fair value step-up costs, as well as higher raw material costs for the Company overall.

Gross margins decreased to 45.2% from 48.1% for wood construction products and decreased to 44.5% from 45.0% for concrete construction products.

Research and development and engineering expense increased 14.1% to $32.8 million from $28.8 million primarily due to increases of $3.9 million in personnel costs, $0.4 million in material and supplies consumption, and $0.2 million in professional fees.

Selling expense increased to $81.9 million from $64.0 million, primarily due to increases of $6.9 million in personnel costs and sales commissions, $2.7 million in advertising & trade shows, $1.6 million in travel related costs, $0.7 million in professional fees, and $0.7 million cash profit sharing expense.

General and administrative expense increased to $112.2 million from $96.0 million, primarily due to increases of $5.9 million in professional fees, $4.7 million in personnel costs, $3.4 million in depreciation and amortization expenses, and $1.1 million in travel related costs, offset by decreases of $1.6 million in stock-based compensation, $0.5 million in cash profit sharing expenses.

Research and development and engineering expense increased 15.2% to $49.9 million from $43.3 million primarily due to increases of $5.2 million in personnel costs, and $2.7 million in professional fees offset by $1.9 million higher software development expenses capitalized.

Selling expense increased to $124.4 million from $99.1 million, primarily due to increases of $14.2 million in personnel costs, $5.3 million in travel related costs, $3.2 million in advertising & trade shows, $1.5 million in professional fees, and $0.7 million cash profit sharing expense offset by $2.3 million in lower commissions.

These increases above were mainly due to the ETANCO acquisition that added $12.7 million in selling expenses.

General and administrative expense increased to $172.5 million from $143.8 million, primarily due to increases of $7.7 million in depreciation and amortization expenses, $7.2 million in personnel costs, $6.7 million in professional and legal fees, $2.7 million in computer/software expenses, and $2.5 million in travel related costs, and $0.6 million in lower software development expenses capitalized, offset by decreases of $1.5 million in stock-based compensation, $1.2 million in cash profit sharing expenses.

These increases above were mainly due to the ETANCO acquisition that added $17.0 million in general and administrative expenses.

Our effective income tax rate decreased to 25.3% from 25.9%.

1 unchanged sentence

Diluted earnings per share was $6.40 compared to $4.52.

The following table represents net sales by segment for the six-month periods ended June 30, 2021 and 2022:

The following table represents net sales by segment for the nine-month periods ended September 30, 2021 and 2022:

(in thousands) America Europe Pacific Total

Six Months Ended

June 30, 2021 $ 651,120 $ 100,734 $ 6,068 $ 757,922

June 30, 2022 895,140 184,689 6,973 1,086,802

Nine Months Ended

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

September 30, 2022 1,332,911 296,592 10,961 1,640,464

Increase $ 343,200 $ 141,025 $ 1,578 $ 485,803

Percentage increase 34.7 % 90.7 % 16.8 % 42.1 %

The following table represents segment sales as percentages of total net sales for the six-month periods ended June 30, 2021 and 2022, respectively:

The following table represents segment sales as percentages of total net sales for the nine-month periods ended September 30, 2021 and 2022, respectively:

America Europe Asia/

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Percentage of total 2022 net sales 81 % 18 % 1 % 100 %

The following table represents gross profit by segment for the six-month periods ended June 30, 2021 and 2022:

The following table represents gross profit by segment for the nine-month periods ended September 30, 2021 and 2022:

North Asia/ Admin &

(in thousands) America Europe Pacific All Other Total

Six Months Ended

June 30, 2021 $ 317,369 $ 35,548 $ 2,451 $ 3,359 $ 358,727

June 30, 2022 437,175 56,476 2,546 (83) 496,114

Nine Months Ended

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

September 30, 2022 645,166 91,691 3,948 (169) 740,636

Increase (decrease) $ 148,096 $ 35,463 $ 358 $ (41) $ 183,876

1 unchanged sentence

* The statistic is not meaningful or material

The following table represents gross margin by segment for the six-month periods ended June 30, 2021 and 2022:

The following table represents gross margin by segment for the nine-month periods ended September 30, 2021 and 2022:

(in thousand) North

6 unchanged sentences

North America

• Net sales increased 37.5%, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs on small an increase in sales volume.

• Gross margin increased slightly to 48.8% from 48.7%, due to product price increases implemented during 2021, and lower labor, factory, freight and warehouse costs as a percentage of net sales, partly offset by higher material costs, as a percentage of net sales.

• Research and development and engineering expense increased $3.9 million, primarily due to increases of $2.3 million in personnel costs, $1.6 million in professional fees, $0.5 million in travel rated costs, $0.3 million in material and supplies consumption, $0.2 million in stock-based compensation, and offset by $1.4 million higher software development expenses capitalized.

• Selling expense increased $10.8 million, primarily due to increases of $3.9 million in travel related costs, $3.2 million in personnel costs, $2.7 million in advertising & trade show costs, $0.6 million in cash profit sharing expenses, and $0.4 million in professional fees, partly offset by decreases of $1.0 million in sales commissions.

• General and administrative expense increased $2.9 million, primarily due to increases of $1.9 million in personnel costs, $1.2 million of bad debt expense, and $0.9 in travel related costs offset by decreases of $0.5 in stock-based compensation, and $0.2 million cash profit sharing expense.

• Net sales increased 34.7%, primarily due to product price increases we implemented last year, along with slightly higher sales volumes.

• Gross margin decreased slightly to 48.4% from 50.2%, due to higher raw material costs as a percentage of net sales, which were partially offset by the product price increases we implemented in 2021.

• Research and development and engineering expense increased 15.0%, primarily due to increases of $3.6 million in personnel costs, $3.0 million in professional fees and $0.7 million in travel rated costs, offset by $1.8 million higher software development expenses capitalized and decrease of $0.3 million in cash profit sharing expense.

• Selling expense increased17.0%, primarily due to increases of $5.7 million in personnel costs, $4.8 million in travel related costs, $3.1 million in advertising & trade show costs, $1.0 million in professional fees, $0.4 million in cash profit sharing expenses, and $0.4 million in professional fees, partly offset by decreases of $1.9 million in sales commissions.

• General and administrative expense increased 2.5%, primarily due to increases of $3.4 million in personnel costs, $2.1 million in computer/software expenses, $1.6 in travel related costs, and $1.0 million of bad debt expense, offset by decreases of $8.7 million of professional fees, $1.0 million cash profit sharing expense, $0.9 million in depreciation and amortization expenses, and $0.4 million in stock-based compensation.

• Income from operations increased $125.9 million, mostly due to increased sales and gross profit, partly offset by higher operating expenses.

1 unchanged sentence

• Gross margin decreased to 30.9% from 36.1% while gross profit increased $35.5 million.

Europe gross profit included $19.2 million from the acquisition of ETANCO, which is net of $9.2 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge.

• Income from operations decreased $4.0 million, primarily due to $7.0 million of first quarter 2022 acquisition costs as well as ETANCO's second quarter 2022 operating loss of $1.6 million which is net of $9.2 million in inventory adjustments, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million.

• For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the six months ended June 30, 2022 and 2021.

Europe gross profit included $38.6 million from the acquisition of ETANCO, which includes $12.2 million non-recurring fair-value adjustment for inventory costs as a result of purchase accounting.

• Income from operations decreased $5.3 million, primarily due to $7.0 million in professional fees incurred prior to the acquisition of ETANCO.

Included in income from operations was ETANCO's profit of $0.2 million which included $12.2 million in inventory adjustments, $8.4 million of amortization expense on acquired intangible assets, and $7.7 million for integration costs for a total of $28.3 million.

• 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, 2022 and 2021.

Effect of New Accounting Standards

4 unchanged sentences

On March 30, 2022, the Company entered into an Amended and Restated Credit Agreement, which provides for a 5-year revolving credit facility of $450.0 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.

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.

We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.

As of June 30, 2022, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions.

As of September 30, 2022, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions.

Cash and cash equivalents of $74.0 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the United States.

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

The following table shows selected financial information as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively :

At June 30, At December 31, At June 30,

The following table shows selected financial information as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively:

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

(in thousands) 2022 2021 2021

3 unchanged sentences

Working capital less cash and cash equivalents 576,719 453,078 409,997

The following table provides cash flow indicators for the six-month periods ended June 30, 2022 and 2021, respectively:

Six Months Ended June 30,

The following table provides cash flow indicators for the nine-month periods ended September 30, 2022 and 2021, respectively:

Nine Months Ended September 30,

(in thousands) 2022 2021

7 unchanged sentences

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 six months ended June 30, 2022, operating activities provided $138.5 million in cash and cash equivalents, as a result of $188.1 million from net income and $46.1 million from non-cash expenses from net income, which included depreciation and amortization expense, stock-based compensation expense and the inventory fair value expense adjustment.

Cash provided from net income was partly offset by a decrease of $95.8 million in the net change in operating assets and liabilities, including increases of $88.6 million in trade accounts receivable, partly offset by increases of $21.9 million in other current liabilities and $15.7 million in trade accounts payable.

Cash used in investing activities of $833.6 million during the six months ended June 30, 2022 was mainly for the $805.4 million acquisition of ETANCO.

Our capital spending for the six months ended June 30, 2022 and June 30, 2021 was $31.8 million and $19.3 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 $80.0 million to $90.0 million range compared to the previous estimate of $65.0 to $70.0 million, primarily due to ETANCO and expansion of our Ohio facility.

During the nine months ended September 30, 2022, operating activities provided $263.4 million in cash and cash equivalents, as a result of $276.4 million from net income and $62.6 million from non-cash expenses from net income, which included depreciation and amortization expense, stock-based compensation expense and the inventory fair value expense adjustment.

Cash provided from net income was partly offset by a decrease of $75.6 million in the net change in operating assets and liabilities, including increases of $55.0 million in trade accounts receivable, $27.7 million in inventory and $17.4 million in other non-current assets and liabilities, partly offset by an increase of $25.3 million in other current liabilities.

Cash used in investing activities of $845.5 million during the nine months ended September 30, 2022 was mainly for the $805.4 million acquisition of ETANCO.

Our capital spending for the nine months ended September 30, 2022 and September 30, 2021 was $41.6 million and $31.3 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 $55.0 million to $65.0 million range compared to the previous estimate of $80.0 to $90.0 million, primarily due to long lead times on equipment orders.

Other capital spending is earmarked for both maintenance and growth to maximize efficiencies and invest in our key initiatives.

Cash provided by financing activities of $631.5 million during the six months ended June 30, 2022 consisted primarily of $700.0 million in loan proceeds used for the acquisition of ETANCO, offset by $46.3 million used to repurchase 455,030 shares of the Company's common stock at an average price of $101.71 per share and $21.6 million used to pay dividends to our stockholders.

On July 27, 2022, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share payable on October 27, 2022, to the Company's stockholders of record on October 6, 2022.

Since the beginning of 2019 to the quarter ended June 30, 2022, we have returned $351.3 million to stockholders, which represents 64.3% of our free cash flow and over the same period the Company has repurchased over 2.7 million shares of the Company's common stock, which represents approximately 6.0% of the outstanding shares of the Company's common stock at the start of 2019.

Cash provided by financing activities of $586.4 million during the nine months ended September 30, 2022 consisted primarily of $694.0 million in loan proceeds (net of principal payments) used for the acquisition of ETANCO, offset by $74.6 million used to repurchase 763,530 shares of the Company's common stock at an average price of $97.65 per share and $32.8 million used to pay dividends to our stockholders.

On October 21, 2022, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share payable on January 26, 2023, to the Company's stockholders of record on January 5, 2023.

Since the beginning of 2019 to the quarter ended September 30, 2022, we have returned $390.8 million to stockholders, which represents 59.1% of our free cash flow and includes the repurchasing of over 3.0 million shares of the Company's common stock, which represents approximately 6.7% of the outstanding shares of the Company's common stock at the start of 2019.

During 2022, after the acquisition of ETANCO, we changed our capital return target to 35% of our free cash flow from 50%.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of June 30, 2022.

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