Simpson Manufacturing Co., Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation, and its wholly-owned subsidiaries, including Simpson Strong-Tie Company Inc., unless otherwise stated. The Company regularly uses its website to post information regarding its business and governance. 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 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. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto included in this report. “Strong-Tie” and our other trademarks appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 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. Actual results may differ materially from those expressed or implied in such statements. 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 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 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; 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 borrowings under our existing credit agreement; 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 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. 27 Overview We design, manufacture and sell building construction products that are of high quality and performance, easy to use and cost-effective for customers. We operate in three business segments determined by geographic region: North America, Europe and Asia/Pacific. Recent Developments On April 1, 2022, the Company successfully completed the acquisition of ETANCO, a manufacturer of fixing and fastener products headquartered in France, for $805.4 million (730 million euros (1) ) net of cash. 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 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 acquisition of ETANCO has provided the Company access into new commercial building markets such as façades, waterproofing, safety and solar, as well as grow its share of direct business sales in Europe. Upon announcing the acquisition, the Company expected to realize operating income synergies of approximately $30.0 million, on an annual run rate basis following integration efforts. We continue to expect that these synergies will 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. Finally, interest expense has and will continue to increase as a result of the incurrence of debt to finance the acquisition of ETANCO. Since we announced the transaction back in late December, planning for and initiating the integration of ETANCO has been our primary focus and we believe it has been progressing according to plan. We assembled a project management office that includes a leading globally recognized external advisory consulting group together with a multi-disciplinary team of key management from both Simpson and ETANCO. Because of our complementary cultures and values, our combined team has been working extremely well together as we develop detailed plans for each of our specific integration tracks. We believe our approach has contributed to a high employee retention rate throughout the transition. After several months, we have found no material adjustments to our previously identified synergy opportunities, although the realization of the full amount is subject to change based on the current environment in Europe. With the groundwork we have laid so far, we believe we are still well positioned to capture meaningful benefits from those synergies in the coming years. At our March 23, 2021 analyst and investor day, we unveiled several key growth initiatives that we believe will help us continue our track record of achieving above market revenue growth through a combination of organic and inorganic opportunities. Our organic opportunities are focused on expansion into new markets within our core competencies of wood and concrete products. These key growth initiatives will focus on the original equipment manufacturers, repair and remodel or do-it-yourself, mass timber, concrete and structural steel markets. In order to grow in these markets, we aspire to be among the leaders in engineered load-rated construction building products and systems and building technology while leveraging our engineering expertise, deep-rooted relationships with top builders, engineers, contractors, code officials and distributors, along with our ongoing commitment to testing, research and innovation. Importantly, we currently have existing products, testing results, distribution and manufacturing capabilities for our key growth initiatives. Although these initiatives are all currently in different stages of development, our successful growth in these areas will ultimately be a function of expanding our sales and/or marketing functions to promote our products to different end users and distribution channels, expanding our customer base, and potentially introducing new products in the future. We also highlighted our five-year ambitions during the March 2021 analyst and investor day, which are as follows: • Strengthen our values-based culture; • Be the business partner of choice; • 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 margin; and • Remain in the top quartile of our proxy peers for return on invested capital. 28 We have made progress towards our key growth initiatives since they were first announced in 2021. Here are a few examples: • We acquired ETANCO and are already seeing tangible results in our actual operations, as well as for the future including the use of Simpson and ETANCO branded commercial concrete products in the construction of certain venues for the upcoming Olympic games in Paris. • 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. • 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 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. • 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 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. Ms. Colonias will remain employed as an Executive Advisor to assist with a smooth and orderly transition until her retirement on June 30, 2023. Ms. 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 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. 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 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. 29 Unlike lumber or other products that have a more direct correlation to United States housing starts, our products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. 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. 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. Our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year. Due to efforts in diversifying our global footprint, most notably with our acquisition of ETANCO, sales from our product line, customer base and customer purchases are becoming less seasonal. Political and economic events such as rising energy costs, volatile steel market, stressed product transportation systems and increasing interest rates can also have an effect on our gross and operating profits as well as the amount of inventory on-hand. 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. Delays in receiving products or shipping sales orders, as well as increased transportation costs, could negatively impact sales and operating profits. Business Segment Information Historically our North America segment has generated more revenues from wood construction products compared to concrete construction products. 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 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. operations with assistance from a third party. As a result, we identified facility expansions in the U.S. 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 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. We estimate annual sales to these countries would have been less than $5.0 million. 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. 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 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. 30 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, 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, 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: • Operating margin is expected to be in the range of 20.0% to 21.0%, in-line with its more recent historical average as the Company has better visibility on raw material costs and expected results from its acquisition of ETANCO. The revised outlook includes $16.0 to $18.0 million in expected integration and transaction costs for the acquisition. • Interest expense on the outstanding $250.0 million Revolving Credit Facility and Term Loans, which had initial borrowings of $450.0 million, is expected to be approximately $9.8 million, including the benefit from interest rate and cross currency swaps mitigating substantially all of the volatility from changes in interest rates. • 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 $55.0 million to $65.0 million. Footnotes (1) Reflects EUR to USD exchange rate as of April 1, 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. 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. Consolidated income from operations, income before tax and net income for all periods presented below are not affected by the change in presentation 31 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 September 30, North Asia/ Admin & September 30, (in thousands) 2021 America Europe Pacific All Other 2022 Net sales $ 396,738 $ 99,179 $ 57,071 $ 674 $ — $ 553,662 Cost of sales 198,706 67,487 42,536 411 (1) 309,139 Gross profit 198,032 31,692 14,535 263 1 244,523 Research and development and other engineering expense 14,562 2,080 386 56 — 17,084 Selling expense 35,063 2,921 4,427 128 — 42,539 General and administrative expense 47,792 (343) 9,251 172 3,447 60,319 Total operating expenses 97,417 4,658 14,064 356 3,447 119,942 Acquisition and integration related costs — — 1,866 — — 1,866 Net loss (gain) on disposal of assets (4) (56) (27) (14) 1 (100) Income from operations 100,619 27,090 (1,368) (79) (3,447) 122,815 Interest income (expense), net and other (314) 730 (2,637) 1 (763) (2,983) Other & foreign exchange loss, net (532) (7,925) 205 512 6,033 (1,707) Income (loss) before income taxes 99,773 19,895 (3,800) 434 1,823 118,125 Provision for income taxes 25,995 5,119 502 106 (1,840) 29,882 Net income (loss) $ 73,778 $ 14,776 $ (4,302) $ 328 $ 3,663 $ 88,243 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 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 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 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. 32 Our effective income tax rate decreased to 25.3% from 26.1%. Consolidated net income was $88.2 million, which includes a $1.8 million loss from ETANCO, compared to $73.8 million. Diluted earnings per share was $2.06 compared to $1.70. Net sales The following table shows net sales by segment for the three months ended September 30, 2022 and 2021, respectively: North Asia/ (in thousands) America Europe Pacific Total Three months ended 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 September 30, 2022 and 2021, respectively: North America Europe Asia/ Pacific Total Percentage of total 2021 net sales 85 % 14 % 1 % 100 % Percentage of total 2022 net sales 79 % 20 % 1 % 100 % Gross profit The following table shows gross profit by segment for the three months ended September 30, 2022 and 2021, respectively: North Asia/ Admin & (in thousands) America Europe Pacific All Other Total Three months ended 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 September 30, 2022 and 2021, respectively: North America Europe Asia/ Pacific Admin & All Other Total 2021 gross margin percentage 52.1 % 37.7 % 34.4 % * 49.9 % 2022 gross margin percentage 47.5 % 31.5 % 35.1 % * 44.2 % * The statistic is not meaningful or material. North America • Net sales increased 29.3%, primarily due to product price increases we implemented last year, along with higher sales volumes. 33 • 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. Europe • 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 $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 $1.8 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 benefitted to some extent from synergies from the combination. Asia/Pacific • 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 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 34 operations. 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. Consolidated income from operations, income before tax and net income for all periods presented below are not affected by the change in presentation. Year-to-Date (9-month) 2022 Consolidated Financial Highlights 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 Net sales $ 1,154,661 $ 343,200 $ 141,025 $ 1,578 $ — $ 1,640,464 Cost of sales 597,901 195,104 105,562 1,220 41 899,828 Gross profit 556,760 148,096 35,463 358 (42) 740,636 Research and development and other engineering expense 43,321 5,975 502 94 — 49,892 Selling expense 99,053 13,765 11,381 236 14 124,449 General and administrative expense 143,767 2,523 15,352 15 10,854 172,511 286,141 22,263 27,235 345 10,868 346,852 Acquisition and integration related costs — — 14,681 — — 14,681 Net gain on disposal of assets (112) (59) (1,111) 55 — (1,227) Income (loss) from operations 270,731 125,892 (5,342) (42) (10,910) 380,330 Interest income (expense), net and other (1,079) 755 (6,190) (5) (49) (6,568) Other & foreign exchange loss, net (4,180) (15,083) (1,038) 1,387 15,100 (3,814) Income (loss) before income taxes 265,472 — 111,564 — (12,570) 1,340 — 4,141 369,948 Provision for income taxes 68,822 28,719 (3,747) 482 (717) 93,559 Net income $ 196,650 $ 82,845 $ (8,823) $ 858 $ 4,858 $ 276,389 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. 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 nine months of 2022 and 2021. 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 the first nine months of 2022 and 2021. Gross profit increased 33.0% to $740.6 million from $556.8 million. 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 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. 35 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%. Consolidated net income was $276.4 million compared to $196.7 million. Diluted earnings per share was $6.40 compared to $4.52. Net sales The following table represents net sales by segment for the nine-month periods ended September 30, 2021 and 2022: North Asia/ (in thousands) America Europe Pacific Total 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 nine-month periods ended September 30, 2021 and 2022, respectively: North America Europe Asia/ Pacific Total Percentage of total 2021 net sales 86 % 14 % 1 % 100 % Percentage of total 2022 net sales 81 % 18 % 1 % 100 % Gross profit 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 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 Percentage increase 29.8 % 63.1 % * * 33.0 % * The statistic is not meaningful or material The following table represents gross margin by segment for the nine-month periods ended September 30, 2021 and 2022: (in thousand) North America Europe Asia/ Pacific Admin & All Other Total 2021 gross margin percentage 50.2 % 36.1 % 38.3 % * 48.2 % 2022 gross margin percentage 48.4 % 30.9 % 36.0 % * 45.1 % * The statistic is not meaningful or material. 36 North America • 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. Europe • Net sales increased 90.7%, primarily due to the acquisition of ETANCO, which contributed $147.8 million in net sales along with product price increases, offset by the negative effect of approximately $18.1 million in foreign currency translation. • Gross margin decreased to 30.9% from 36.1% while gross profit increased $35.5 million. 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. Asia/Pacific • 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 See "Note 1 Basis of Presentation — Accounting Standards Not Yet Adopted ” to the accompanying unaudited interim condensed consolidated financial statements. Liquidity and Sources of Capital We have historically met our capital needs through a combination of cash flows from operating activities and, when necessary, borrowings under our credit agreements. 37 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. 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. 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 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 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 Cash and cash equivalents $ 309,262 $ 301,155 $ 294,180 Property, plant and equipment, net 341,233 259,869 255,547 Goodwill, intangible assets and other 798,523 170,309 165,577 Working capital less cash and cash equivalents 576,719 453,078 409,997 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 Net cash provided by (used in): Operating activities $ 263,396 $ 122,098 Investing activities (845,514) (41,200) Financing activities 586,449 (61,258) 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 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, 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. 38 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 September 30, 2022.