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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 147 added, 146 removed, 184 unchanged (61% of the section changed)

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North America, Europe and Asia/Pacific.

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 above market revenue growth through a combination of organic and inorganic opportunities.

In 2021, 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.

These key growth initiatives will focus on the OEM, 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.

Importantly, we currently have existing products, testing results, distribution and manufacturing capabilities for our key growth

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.

Also during the March analyst and investor day, we highlighted our five-year ambitions, which are as follows:

We also highlighted our five-year ambitions in 2021, which are as follows:

• Strengthen our values-based culture;

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

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

Acquisitions and Investments

The Company entered into an agreement to acquire the Etanco Group ("Etanco") for $818 million (1) (approximately €725 million) with an expected close date of April 1, 2022.

Etanco is a leading designer, manufacturer and distributor of fixing and fastening solutions for the building construction market throughout Europe, which includes innovative fasteners, connectors, anchors and safety solutions for roofing, cladding, façade, waterproofing and solar applications.

For the twelve months ended September 30, 2021, Etanco's net sales and operating income margin were approximately $291 million (2) (approximately €258 million) and 19.7% (2) , respectively.

Etanco's primary product applications directly align with the addressable markets in which the Company operates, estimated at over $5.0 billion.

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

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

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

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

The Company would expect

to scale its European net sales and operating income margin performance, resulting in an approximate 500 basis point increase in Europe operating income margins by 2025.

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

Also during 2021

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

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

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

• Expanded its product line thru licensing products and purchasing or acquiring intellectual property.

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

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

As of December 31, 2021, the effects of and responses to the pandemic continue to have a significant impact on worldwide economic activity and on macroeconomic conditions.

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

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

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

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

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

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

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

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

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

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

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

Our supply chain partners have been very supportive and continue to do their part to ensure that service levels to our customers remain strong and, to date, we have not experienced any supply-chain disruptions and continued to meet our customers’ needs despite the challenges presented by the COVID-19 pandemic.

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

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

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

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

Though single-family housing starts increased significantly from prior-year's level, we believe there is uncertainty that demand will increase in the short-term due to supply-chain factors, inflation and possibly interest rate increases affecting new home starts and completions.

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

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

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

A few examples from 2022 were:

• Acquired ETANCO which has resulted in additional scale for our legacy European operations, as well as the opportunity to realize synergies in those operations;

• 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;

• We were awarded a structural steel opportunity In the Commercial market for a healthcare center in which our products will provide a means for bolted attachment of glass façades and temporary guard railings;

• We were awarded a project in the mass timber OEM market for a four-story mixed use building for apartments and retail space;

• Made strategic investments in building technology focused on creating solutions to help our customers be more efficient;

• Achieved product fulfillment rate of 97% in North America;

• Our North America sales volumes grew above housing starts;

• Rolled out over 40 new products during 2022;

• Invested in venture capital funds and other companies focused on the home building industry and related new technologies.

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 2023 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.

Acquisition of ETANCO

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.

Some of these synergies are expected to be delayed due to the current environment in Europe.

Since we announced the transaction back in late December 2021, 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.

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.

We incurred $17.3 million in acquisition and integration related costs, and realized $9.8 million in net interest expense on the financing for the acquisition during 2022.

Corporate Developments

Effective January 1, 2023, Mike Olosky, the Company’s President and Chief Operating Officer ("COO") was promoted to be the Company’s Chief Executive Officer ("CEO") and also appointed to the Company's board of directors.

The Company's former CEO, Karen 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 she steps down at the 2023 annual meeting of stockholders.

Factors Affecting Our Results of Operations

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

Though single-family housing starts increased the prior two years, we have seen demand 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 housing construction, which increased compared to last year.

Decreases in product prices are expected to be partially offset by lower raw material costs for inventory on hand, while a tight labor market could further negatively affect operating margins for 2023.

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 process that follows the construction process.

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.

Our sales also tend to be seasonal, with operating results varying from quarter to quarter.

With some exceptions, 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, as our customers tend to purchase construction materials in the late spring and summer months for the construction season.

Weather conditions, such as extended cold or wet weather, which affect and sometimes delay installation of some of our products, could negatively affect our results of operations.

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

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

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.

Our operations also expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic.

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, volatility in the steel market, stressed product transportation systems and increasing interest rates can also have an effect on our gross and operating profits as well.

Changes in raw material cost could impact the amount of inventory on-hand, and 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.

Our operations also expose us to risks associated with pandemics, epidemics or other public health, such as the

COVID-19 pandemic.

Business Segment Information

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North America sales increased 24.8% for the year ended December 31, 2022 compared to December 31, 2021.

Our wood construction product sales increased 25.2% for the year ended December 31, 2021 compared to December 31, 2020, primarily due to product price increases that took effect throughout 2021 as well as increased sales volumes.

Our concrete construction product sales increased 13.9% for the year ended December 31, 2021 compared to December 31, 2020, mostly due to product price increases that took effect throughout 2021.

North America net sales were positively affected by approximately $4.7 million in foreign currency translation mostly related to a strengthening Canadian dollar.

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

In regards to the product price increases phased in during 2021 relative to 2022, full phased in product price increases for 2022 could result in $300 million in additional net sales compared to 2021.

We currently anticipate additional net sales to be offset by higher priced raw materials and rising average cost of steel on hand significantly compressing gross margin and operating margin in fiscal 2022.

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

Europe sales increased 25.7% for the year ended December 31, 2021 compared to December 31, 2020, due to product priced increases and higher sales volumes in local currency and were positively affected by approximately $8.5 million in foreign currency translation related to Europe's currencies strengthening against the United States Dollar.

Wood construction product sales increased 28.7% for the year ended December 31, 2021 compared to December 31, 2020.

Concrete construction product sales are mostly project based, and sales increased 13.9% for the year ended December 31, 2021 compared to December 31, 2020.

Gross margins decreased slightly, mostly due to higher material and labor costs, partly offset by lower warehouse and shipping costs and factory and tooling costs all as a percentage of sales.

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

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

Our wood construction product sales increased 34.6% for the year ended December 31, 2022 compared to December 31, 2021 and our concrete construction product sales increased 33.9% over the same periods, for both, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs and partly due to increased volumes.

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

Recently announced decreases for pricing on certain of our wood products for 2023 will likely negatively affect 2023 net sales compared to 2022.

We currently anticipate compression of our operating margin for fiscal 2023 compared to 2022 due to the effects of these price decreases, higher average priced steel in cost of sales relative to much of the prior year, and increases in operating expenses.

During 2022, we reviewed the footprint for our U.S.

operations with assistance from a third party.

As a result, we identified facility expansion 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.

Facility investments have already started in 2022 with the announced expansion of the Columbus facility, expected to be completed in 2024 while additional facility expansions are being considered.

Europe sales increased 103.2% for the year ended December 31, 2022 compared to December 31, 2021, primarily due to the acquisition of ETANCO, which contributed $212.6 million in net sales, along with product price increases.

If the Company had not acquired ETANCO, Europe net sales would have declined by $23.5 million as a result of foreign currency translation due to a strengthened United States dollar, and lower sales volumes.

Wood construction product sales increased 101.1% for the year ended December 31, 2022 compared to December 31, 2021 with ETANCO contributing $170.3 million.

Concrete construction product sales increased 112.5% for the year ended December 31, 2022 compared to December 31, 2021 with ETANCO contributing $42.3 million.

Gross profit increased $56.5 million due to the acquisition of ETANCO while gross margins decreased mostly due to ETANCO having a lower gross margin profile, and $13.6 million in non-recurring fair-value adjustments to increase the fair value of acquired inventory as a result of purchase accounting related to the acquisition of ETANCO.

Operating income was negatively impacted by higher operating expenses with $48.7 million attributable to ETANCO including $12.9 million in amortization costs for acquired intangibles, the $13.6 million in non-recurring fair-value adjustments noted above and acquisition and integration costs of $17.3 million.

Fiscal 2023 will include a full year of ETANCO net sales and operating results compared to nine months for 2022.

Operating margins will benefit from the absence of the 2022 non-recurring fair-value adjustments of acquired inventory noted above, as well as less integration costs estimated to be between $6 million to $8 million.

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 December 2020, inventory pounds in North America, which is the bulk of our inventory, decreased 2% while the weighted average cost per pound of total on hand increased approximately 63%.

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

Our gross margins in 2021 reflect an average cost of steel

sourced prior to and during the increasing steel price market.

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

We began to see this sequential margin deceleration occur during the fourth quarter 2021 with gross margin declining by roughly 250 basis points from the third quarter 2021.

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

Business Outlook

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

Based on business trends and conditions, the Company's outlook for the full fiscal year ending December 31, 2023 is as follows:

• Operating margin is estimated to be in the range of 18% to 20%.

• Interest expense on the outstanding Revolving Credit Facility and Term Loans, which have borrowings of $150.0 million and $433.1 million as of December 31, 2022, respectively, is expected to be approximately $9.7 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 estimated to be in the range of 25% to 26%, including both federal and state income tax rates and assuming no tax law changes are enacted.

• Capital expenditures are estimated to be in the range of $65 million to $70 million.

While the magnitude and duration of the COVID-19 pandemic and its impact on general economic conditions remain uncertain, the Company continues to monitor the impact of the pandemic on its operations and financial condition, which was not significantly adversely impacted in fiscal 2021.

Please note that ongoing uncertainties surrounding the impact of the COVID-19 pandemic on the Company’s business, which may include the economic impact on its operations, raw material costs, consumers, suppliers, vendors, and other factors outside of its control, may have a material adverse impact on the Company’s financial outlook.

(1) Reflects EUR to USD exchange rate as of December 22, 2021.

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

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

GAAP accounting standards.

• Capital expenditures are estimated to be in the range of $90.0 million to $95.0 million including the expected spend of $22.0 million to $25.0 million on its previously announced Columbus, Ohio facility expansion, with the balance of that project to be spent in 2024.

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

Plans were developed to realize the Company’s previously identified synergies in the years ahead which resulted in additional costs in 2022 that are expected to continue in 2023.

We believe the Company remains well positioned to capture meaningful benefits from the synergies, subject to changing macroeconomic circumstances, which are expected to delay realization of some of the synergy opportunities.

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

Results of Operations

Our discussion of our results focuses on 2022 and 2021 and year-to-year comparisons between those periods.

Discussions of 2020 results and year-to-ear comparison between 2021 and 2020 results are not included in this Form 10K and can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10K for the fiscal year ended December 31, 2021.

The following table sets forth, for the years indicated, the Company’s operating results as a percentage of net sales for the years ended December 31, 2022, 2021 and 2020, respectively:

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Total operating expense 22.0 % 24.7 % 25.6 %

Acquisition and integration related costs 0.8 % — % — %

Net gain on disposal of assets (0.1) % — % — %

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Interest expense, net and other (0.4) % (0.2) % (0.2) %

Foreign exchange gain (loss), net (0.4) % (0.1) % (0.1) %

Other and foreign exchange loss, net (0.2) % (0.4) % (0.1) %

Income before taxes 21.2 % 22.8 % 19.7 %

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Unless otherwise stated, the results announced 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 year ended December 31, 2022, against the results of operations for the year ended December 31, 2021.

Unless otherwise stated, the results

announced below, when referencing “both years,” refer to the year ended December 31, 2020 and the year ended December 31, 2021.

Unless otherwise stated, the results announced below, when referencing “both years,” refer to the year ended December 31, 2021 and the year ended December 31, 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 and 2020, 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

The following table shows the change in the Company’s operations from 2021 to 2022, and the increases or decreases from the prior year, for each category by segment:

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Net gain (loss) on disposal of assets (324) 97 (1,134) 44 — (1,317)

Impairment of goodwill — — — — — —

Acquisition and integration related costs — — 17,343 — — 17,343

Income from operations 367,793 108,830 (3,039) (470) (14,047) 459,067

Interest expense, net and other (1,386) 1,784 (7,722) (172) (98) (7,594)

Foreign exchange loss (787) (1,292) (1,112) 331 (2,722) (5,582)

Foreign exchange gain (loss) (7,858) (17,652) 1,050 841 20,211 (3,408)

Income before income taxes 358,549 92,962 (9,711) 199 6,066 448,065

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Net income $ 266,447 $ 68,387 $ (7,077) $ (651) $ 6,889 $ 333,995

Net Sales increased 24.1% to $1,573.2 million from $1,267.9 million primarily due to product price increases that took effect throughout 2021 in an effort to offset rising material costs as well as higher sales volumes.

Wood construction product net sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 87% and 85% of the Company’s total net sales for the years ended December 31, 2021 and 2020, respectively.

Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 13% and 15% of the Company’s total net sales for the years ended December 31, 2021 and 2020.

Net Sales increased 34.5% to $2,116.1 million from $1,573.2 million primarily due to product price increases and the acquisition of ETANCO, which contributed $212.6 million in net sales, partly offset by the negative effect of $27.8 million in foreign currency translation related mostly to Europe's currencies weakening against the United States dollar.

Wood construction product net sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 87% of the Company’s total net sales for both years ended December 31, 2022 and 2021.

Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 13% of the Company’s total net sales for both years ended December 31, 2022 and 2021.

Gross profit increased to $941.3 million from $755.0 million.

Gross margins increased to 48.0% from 45.5%, primarily due to product price increases during 2021, lower labor and factory expenses, and offset partly by higher material costs as a percentage of net sales.

Gross margins, including some inter-segment expenses, which were eliminated in consolidation, and excluding certain expenses that are allocated according to product group, increased to 47.9% from 45.5% for wood construction products and increased to 44.4% from 41.6% for concrete construction products, respectively.

Research and development and other engineering expense increased 16.9% to $59.4 million from $50.8 million, primarily due to increases of $5.0 million in personnel costs, $1.3 million in patent and code approval costs, $1.1 million in professional fees, and $1.0 million in cash profit sharing expenses.

Selling expense increased 20.0% to $135.0 million from $112.5 million, primarily due to increases of $13.8 million in personnel costs and sales commissions, $4.6 million in professional fees, $1.3 million in stock-based compensation, $2.0 million cash profit sharing expense, and $1.4 million travel-related expenses, partly offset by decrease of $1.5 million in advertising and promotional expense.

General and administrative expense increased 20.0% to $193.2 million from $161.0 million, primarily due to increases of $10.2 million in professional fees, $9.7 million in personnel costs, $3.3 million in cash profit sharing expenses, $2.3 million in stock-based compensation, $2.0 million of computer and software related costs, and $1.9 million in depreciation and amortization expenses.

Our effective income tax rate increased to 25.7% from 25.1% primarily due to a decrease in tax benefits associated with stock-based compensation.

Gross margins decreased to 44.5% from 48.0%, primarily due to higher material costs realized through cost of sales, and $13.6 million in non-recurring fair-value adjustments for inventory related to the acquisition of ETANCO.

Gross margins, including some inter-segment expenses, which were eliminated in consolidation, and excluding certain expenses that are allocated according to product group, decreased to 44.4% from 47.9% for wood construction products and decreased to 43.9% from 44.4% for concrete construction products.

Research and development and other engineering expense increased 15.1% to $68.4 million from $59.4 million, primarily due to increases of $7.4 million in personnel costs, $1.1 million in professional fees, and $0.9 million in travel costs, partially offset by a decrease of $0.8 million in cash profit sharing expense.

Selling expense increased 25.5% to $169.4 million from $135.0 million, primarily due to increases of $20.3 million in personnel costs, $7.6 million in travel-related expenses, $6.1 million in advertising and promotional expense, $1.4 million in professional fees, and $0.9 million in leasing related costs, partially offset by decreases of $4.9 in commission expense and $0.3 million in stock based compensation expense.

General and administrative expense increased 18.3% to $228.5 million from $193.2 million, primarily due to increases of $12.7 million in depreciation and amortization, $9.5 million in personnel costs, $4.5 million in professional fees, $3.5 million of computer and software related costs, and $1.7 million in travel costs, partially offset by decreases of $2.6 million in stock-based compensation, and $1.9 million in cash profit sharing expense.

Our effective income tax rate de creased to 25.5% from 25.7%.

Net income was $334.0 million compared to $266.4 million.

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• Net sales increased 24.8% primarily due to product price increases that took effect throughout 2021 in an effort to offset rising material costs as well as higher sales volumes.

Canada's sales increased primarily due to increases in sales volume and were positively affected by $4.7 million foreign currency translation in local currency.

• Gross margin increased to 50.0% from 47.0%, primarily due to product price increases implemented during 2021, and decreases in labor, factory, warehouse and freight costs, partly offset by higher material costs, each as a percentage of net sales.

• Research and development and engineering expense increased $7.9 million, primarily due to increases of $3.9 million in personnel costs, $0.9 million cash profit sharing expenses, $0.8 million in professional fees, $0.6 million in patent costs, $0.4 maintenance and supplies expenses and $0.2 million in depreciation.

• Selling expense increased $19.0 million, primarily due to increases of $11.4 million in personnel costs and sales commissions, $2.1 million in professional fees, $1.8 million in travel and trade show events, $1.7 million in cash profit sharing expense, $1.2 million in stock-based compensation, partly offset by decreases of $0.5 million in advertising and depreciation expense.

• General and administrative expense increased $27.0 million, primarily due to increases of $8.4 million in professional fees, including legal fees, $6.9 million in personnel costs, $2.9 million in depreciation and amortization expense, $2.4 million in computer software and hardware costs, and $1.5 million in cash profit sharing expense, as well as, $1.5 million in higher software development expense net of capitalization.

• Income from operations increased $109.9 million, mostly due to increased sales and gross profit, partly offset by higher operating expenses.

• Net sales increased 25.7%, primarily due to higher sales volumes compared to last year’s COVID-19 related slow-down.

Europe's sales were also benefited by positive $8.5 million foreign currency translations resulting from some Europe currencies strengthening against the United States Dollar.

• Gross margin decreased to 35.1% from 35.4%, primarily due to increases in material and labor costs, partly offset by decreases in factory & tooling costs, warehouse and shipping costs, each as a percentage of net sales.

• Selling expense increased $3.0 million primarily due to increases of $2.1 million in personnel costs, $0.5million in professional fees, and $0.3 million in cash profit sharing expenses.

• General and administrative expenses increased $4.2 million primarily due to increases of $2.7 million in professional fees, $1.3 million in personnel costs.

• Income from operations increased $5.8 million, primarily due to higher sales and gross profit, partly offset by higher operating expenses.

Canada's sales increased primarily due to increases in sales volume and were negatively affected by $2.9 million foreign currency translation in local currency.

• Gross margin decreased to 47.7% from 50.0%, primarily due to higher material and factory & tooling costs, each as a percentage of net sales, and were partly offset by decreases in labor, warehouse and freight costs, each as a percentage of net sales.

• Research and development and engineering expense increased $8.1 million, primarily due to increases of $4.5 million in professional fees, $4.1 million in personnel costs, $0.8 million in travel related costs, and $0.2 million in stock-based

compensation, offset by $1.9 million higher software development expenses capitalized and a decrease of $0.8 million cash profit sharing expense.

• Selling expense increased $16.4 million, primarily due to increases of $7.1 million in personnel costs, $5.9 million in advertising and trade show events, $5.5 million in travel related costs, and $1.7 million in professional fees, partly offset by decreases of $4.4 million in sales commission and $0.3 million of stock-based compensation.

• General and administrative expense decreased $3.9 million, primarily due to decreases of $8.3 million in professional fees, including legal fees, $1.6 million in cash profit sharing expense, $1.4 million in depreciation and amortization.

and $0.8 million in stock-based compensation, partially offset by increases of $4.3 million of personal costs, and $2.8 million in computer software and hardware costs.

• Income from operations increased $108.8 million, mostly due to increases in sales and gross profit, partly offset by higher operating expenses.

• Net sales increased 103.2%, primarily due to the acquisition of ETANCO, which contributed $212.6 million in net sales, along with product price increases, partially offset by the negative effect of approximately $23.5 million in foreign currency translation.

• Gross margin decreased to 31.4% from 35.1%, while gross profit increased $56.5 million.

Europe gross profit included $59.5 million from the acquisition of ETANCO, which includes $13.6 million non-recurring fair-value adjustment for inventory costs as a result of purchase accounting.

• Income from operations decreased $3.0 million, primarily due to $7.0 million in professional fees incurred prior to the acquisition of ETANCO.

ETANCO contributed $0.5 million to income from operations, which included charges for $13.6 million in inventory adjustments, $12.4 million of amortization on acquired intangible assets, and $10.3 million of integration costs for a total of $36.9 million.

• For information about the Company’s Asia/Pacific segment, please refer to the table above setting forth changes in our operating results for the years ended December 31, 2022 and 2021.

Administrative and All Other

• General and administrative expense increased $0.9 million, primarily due to increases of $2.3 million in stock-based compensation, $2.0 million in personnel costs, $1.6 million in cash profit sharing expense offset by decreases of $4.5 million in professional fees and $0.5 million in depreciation and amortizations costs.

Comparison of the years ended December 31, 2020 and 2019 are incorporated by reference to For m 10-K 2020 filing .

• General and administrative expense increased $14.2 million, primarily due to increases of $15.8 million in professional and legal fees and $0.6 million insurance related costs offset by decreases of $1.7 million in stock-based compensation expenses, $0.6 million in cash profit sharing expenses.

Critical Accounting Policies and Estimates

The critical accounting policies described below affect the Company’s more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

If the Company’s business conditions change or if it uses different assumptions or estimates in the application of these and other accounting policies, as well as uncertainty in the current economic environment due to the ongoing COVID-19 pandemic, the Company’s future results of operations could be adversely affected.

If the Company’s business conditions change or if it uses different assumptions or estimates in the application of these and other accounting policies, the Company’s future results of operations could be adversely affected.

Inventory Valuation

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Unexpected changes in market demand, building codes or buyer preferences could reduce the rate of inventory turnover and require the Company to recognize more obsolete inventory.

Business Combinations.

Accounting for business combinations requires us to make significant estimates and assumptions.

We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date as well as the useful lives of those acquired intangible assets.

Critical estimates in valuing certain of the intangible assets and goodwill we have acquired are:

• future expected cash flows from operations;

• historical and expected customer attrition rates and anticipated growth in revenue from acquired customers;

• assumptions about the period of time the acquired trade name will continue to be used in our offerings;

• discount rates.

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

Goodwill and Other Intangible Assets

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These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or disposition or relocation of a significant portion of a reporting unit.

The reporting unit level is generally one level below the operating segment, which is at the country level, except for the United States, Australia and S&P Clever reporting units.

During fiscal year 2022, we revised our European reporting units due to the acquisition of ETANCO and changes to the management, product distribution and operations structure of our legacy European operations.

Subsequent to this change, all European reporting units, including the S&P Clever reporting unit, but excluding ETANCO, were consolidated for reporting purposes into one overall Europe reporting unit.

ETANCO will remain its own reporting unit until its integrated into our other European operations, and there are sufficient economic similarities between the ETANCO and the European reporting units.

A qualitative assessment was performed immediately preceding the reporting unit change and determined that it was not more likely than not that any impairment existed prior to the reporting unit change.

For the Company’s remaining reporting units, the reporting unit level is generally one level below the operating segment, which is at the country level, except for the United States and Australia.

During the annual impairment assessment performed in fourth quarter of 2021, we performed a quantitative impairment test over all reporting units.

During the fourth quarter of 2022, we completed our annual impairment assessment by performing a qualitative assessment.

For this qualitative assessment, we assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units as compared to their quantitative fair value measurement determined in the fourth quarter of 2021.

Based on the qualitative assessment performed, the Company concluded that there was no evidence of events or circumstances that would indicate a material change from the Company’s prior year quantitative assessment by reporting unit and therefore, it was more likely than not that the estimated fair value of reporting units exceeded their respective carrying values.

The 2022 and 2021 annual testing of goodwill and intangible assets for impairment did not result in impairment charges.

The S&P reporting unit passed Step 1 of the annual 2021 impairment test by a 7.8% margin indicating an estimated fair value greater than its net book value and was the only reporting unit with a fair value greater than net book value margin of less than 10%.

The S&P reporting unit is sensitive to management’s plans for increasing sales and operating margins.

The S&P reporting unit’s failure to meet management’s objectives could result in future impairment of some or all of the S&P reporting unit’s goodwill, which was $23.1 million at December 31, 2021.

Key assumptions used in Step 1 of the Company's annual goodwill impairment test included discount rates, multiple rates, average annual sales growth rates and average annual pre-tax income before interest, depreciation and amortization expenses during the forecast period starting with fiscal year 2021.

A sensitivity assessment for the key assumptions included in the 2021 goodwill impairment test on the S&P reporting unit is as follows:

• A 90 basis point hypothetical increase in the discount rate, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value, and thus it would not result in the reporting unit failing Step 1 of the goodwill impairment test;

• A 150 basis point hypothetical decrease in the multiple rate applied to forecasted 2022 pre-tax income before interest, depreciation and amortization, holding all other assumptions constant, would not have decreased the fair value of the

reporting unit below its carrying value, and thus it would not result in the reporting unit failing Step 1 of the goodwill impairment test;

• A 5% hypothetical decrease in average annual sales growth rates, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value and

• A 10% hypothetical decrease in average annual pre-tax income before interest, depreciation and amortization expenses, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value.

Revenue from Contracts with Customers

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Liquidity and Capital Resources

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

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

As of December 31, 2021, the full $300.0 million under the Credit Facility was available for borrowing and we remain debt free.

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

The Company has certain contractual obligations, primarily operating leases, purchase obligations and debt interest obligations which include annual facility fees.

Refer to "Note 11 - Leases" (Part II, Item 8) and "Note 14 - Commitment and Contingencies" for details related to the Company's purchase obligations and debt annual facility fees.

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

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

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

The outstanding balances as of December 31, 2022, were $150.0 million and $433.2 million on the Revolving Credit Facility and Term Loans, respectively.

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.

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.

The Company has certain contractual obligations, primarily debt interest, operating leases and purchase obligations, which include annual facility fees.

Refer to "Note 11 - Leases" (Part II, Item 8), "Note 14 - Debt" and "Note 15 - Commitment and Contingencies" for details related to the Company's obligations and debt annual facility fees.

The Company did not have any significant off-balance sheet commitments as of December 31, 2022.

As previously disclosed, the Company is acquiring Etanco.

The acquisition is expected to be funded via a combination of $100 million of existing cash, a $450 million unsecured term loan with committed financing from Wells Fargo Bank and MUFG Union Band and the remainder from borrowings under the Company’s existing Revolving Credit Facility, which will be increased from $300 million to $450 million.

Interest expense will increase from the additional debt incurred to finance the acquisition of Etanco but the Company expects its net debt-to-EBITDA ratio to be below 1.5 times on the closing of the acquisition, maintaining the Company’s conservative leverage profile.

As of December 31, 2022, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions, and includes $77.9 million held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the U.S.

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The following table presents selected financial information as of December 31, 2022, 2021 and 2020, respectively:

At December 31,

As of December 31,

(in thousands) 2022 2021 2020

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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.

In 2021, operating activities provided $151.3 million in cash and cash equivalents, as a result of $266.4 million from net income and $71.3 million from non-cash adjustments to net income which includes depreciation and amortization, stock-based compensation and non-cash lease expense, partially offset by a decrease of $186.5 million for the net change in operating assets and liabilities primarily from increases of $164.2 million in inventory and $68.0 million in trade accounts receivables, partly offset by an increase of $50.5 million in accrued liabilities and other current liabilities.

Cash used in investing activities of $58.8 million during the year ended December 31, 2021 was mainly for capital expenditures and investments, including a venture capital fund.

Our capital spending for the fiscal years 2019, 2020 and 2021 was $32.7 million, $32.6 million and $43.7 million, respectively, which was primarily used for machinery and equipment purchases and software in development.

Based on current information and subject to future events and circumstances, total approved capital spending for 2022 will be in the $65 million to $70 million range.

Capital expenditures outlook, we estimate roughly 20% will be dedicated to maintenance capital expenditures.

In 2022, operating activities provided $399.8 million in cash and cash equivalents as a result of $334.0 million from net income and $83.8 million from non-cash adjustments to net income which includes depreciation and amortization, stock-based compensation and non-recurring inventory fair-value adjustments from the acquisition of ETANCO, partially offset by a decrease of $18.0 million for the net change in operating assets and liabilities.

Cash used in investing activities of $870.2 million during the year ended December 31, 2022, was mostly for the $805.4 million acquisition of ETANCO net of cash acquired, coupled with capital spending of $62.4 million, which was primarily used for machinery and equipment purchases and facility expansion projects.

Based on current information and subject to future events and circumstances, capital expenditures are estimated to be in the range of $90.0 million to $95.0 million for 2023 including the expected spend of $22.0 million to $25.0 million on our previously announced Columbus, Ohio facility expansion, with the balance of that project to be spent in 2024.

Our growth investments will be primarily focused on purchases of new equipment to support increased productivity and efficiencies, enhancements to our existing facilities to expand our manufacturing footprint in-line with increasing customer needs, as well as investments for adjacencies and key growth initiatives .

Cash used in financing activities of $71.6 million during the year ended December 31, 2021, consisted primarily of $41.6 million used to pay cash dividends and $24.1 million for the repurchase of the Company’s common stock.

Cash provided by financing activities of $465.5 million during the year ended December 31, 2022, consisted primarily of $583.2 million in loan proceeds (net of principal payments) used for the acquisition of ETANCO, offset by $78.6 million for the repurchase of the Company’s common stock and $43.9 million used to pay cash dividends.

During 2022, we purchased, received and retired 811,330 shares of the Company’s common stock on the open market at an average price of $96.91 per share, for a total of $78.6 million under a previously announced $100.0 million share repurchase authorization (which expired at the end of 2022).

On December 15, 2022, the Board authorized the Company to repurchase up to $100.0 million of the Company's common stock, effective January 1, 2023 through December 31, 2023.

Further, on January 24, 2023, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share payable on April 27, 2023 to stockholders of record on April 6, 2023, and estimated to be $11.1 million in total.

For the fiscal year ended December 31, 2022, the Company returned $122.5 million to the Company's stockholders, which represents 36.2% of our free cash flow from operations during the same period.

On January 20, 2022, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.25 per share payable on April 28, 2022, to stockholders of record on April 7, 2022 and estimated to be $10.8 million in total.

During 2021, the Board also approved changing our capital return threshold from 50% of our cash flow from operations to 50% of our free cash flow, which is calculated by subtracting capital expenditures from cash flow from operations.

Since the beginning of 2019 to the fiscal year ended December 31, 2021, we have returned $283.3 million to stockholders, which represents 62.2% of our free cash flow and over the same period the Company has repurchased over 2.2 million shares of

the Company's common stock, which represents approximately 5.2% of the outstanding shares of the Company's common stock.

Since the beginning of 2019 to the fiscal year ended December 31, 2022, we have returned $405.9 million to stockholders, which represents 51.9% of our free cash flow and

over the same period the Company has repurchased over 3.1 million shares of the Company's common stock, which represents approximately 6.8% of the outstanding shares of the Company's common stock.

Cash flows from operating activities years ended December 31, 2021 and 2020 are incorporated by reference to Form 10-K 2021 filing.

• For 2021, we purchased and received 222,060 shares of the Company’s common stock on the open market at an average price of $108.64 per share, for a total of $24.1 million under a previously announced $100.0 million share repurchase authorization (which expired at the end of 2021).

• On November 18, 2021, the Board authorized the Company to repurchase up to $100.0 million of the Company's common stock, from January 1, 2022 through December 31, 2022.

Contingencies

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Inflation and Raw Materials

Inflation rates increased significantly during fiscal year 2021, which may negatively effect material costs as well as labor costs and other costs of doing business, and as such may adversely affect our operating profits if we cannot recover the higher costs through price increases.

Inflation rates increased significantly during fiscal year 2022, which have negatively affected material costs as well as labor costs and other costs of doing business, and as such may adversely affect our operating profits if we cannot recover the higher costs through price increases.

Our main raw material is steel, and as such, increases in steel prices may adversely affect our gross margin if we cannot recover the higher costs through price increases.

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It is not possible to determine the maximum potential amount under these indemnities due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

Accordingly, the Company has not recorded any liability for costs related these indemnities through December 31, 2021.

Accordingly, the Company has not recorded any liability for costs related to these indemnities through December 31, 2022.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis