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 FIXCO Invest S.A.S ("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 or the effects of similar pandemics or widespread public health crises and their effects on the global economy, including inflation and labor and supply shortages, on our operations, 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, 2022. 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 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 expanding the markets for wood and concrete structural connections and solutions. 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. 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 have continued to make progress towards our key growth initiatives that were first announced in 2021. Select highlights that include both organic and inorganic growth from 2022 and 2023 were: • Acquiring ETANCO which has resulted in additional scale for our European operations and was accretive to earnings in the first half of 2023; • Increasing our number of commercial market customers including the specification of our solutions for our first ventilated façade application on a building in New York city; • Growing our OEM business across many opportunities, while continuing to develop the market for mass timber, such as designing, building and installing many critical connections in the construction of a 112-foot wood building that was used for the successful testing of the world’s tallest shake table test; • Expanding our wood product and concrete product lines by acquiring intellectual property; • Expanding our product line and off-shelf merchandising efforts within the home center channel, including our Outdoor Accents decorative hardware line; • 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; and • As part of our partner of choice initiative, we anticipate completing our path-to-market customer transition by the end of this year. We also highlighted our core Company ambitions, which were previously referred to as our five-year ambitions in 2021, 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. As we make progress on our key growth initiatives and ambitions, 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. During 2022, we reviewed the footprint for our U.S. operations with assistance from a third party. As a result, we identified opportunities to expand our facilities in the U.S. We believe that these expansions will improve our overall service, production 28 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 started in 2022 with the expansion of the Columbus facility expected to be completed in late 2024, and recently announced greenfield opportunity to replace our facility in Gallatin, Tennessee. 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 in prior years, we have seen demand decline from 2022, though not as much as initially projected entering the year. The decline in demand is attributed to unfavorable economic conditions, including rising interest rates, inflation, recession fears and supply-chain factors, resulting in lower new home starts and completions. However, the Company also supplies product used in multifamily housing construction, which decreased less then single-family housing starts through the first half of 2023. During 2021, we increased prices to offset significantly higher raw material costs arising from supply constraints related to the COVID 19 pandemic. During the first half of 2023, we reduced prices for our customers in response to marginally lower raw material costs, while a tight labor market and unusually wet winter in the western region of the United States did negatively affect housing starts and operating margins for 2023 compared to 2022. Future 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. 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, 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. 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 1.0% for the quarter ended June 30, 2023 compared to June 30, 2022, mostly due to higher sales volumes, partly offset by lower sales prices, and our concrete construction product sales increased 8.2% over the same periods, due to product price increases in an effort to offset rising raw material costs and by higher volumes. Previously announced price decreases on certain wood products lines will likely negatively affect 2023 net sales compared to 2022. We currently anticipate flat to slight compression of our operating margin for fiscal 2023 compared to 2022 due to the effects of our product price decreases and increases in operating expenses including amortization, partly offset by lower average priced steel in cost of sales relative to much of the prior year, and lower purchase accounting adjustments and integration expenses from our acquisition of ETANCO. Europe sales decreased 4.1% for the quarter ended June 30, 2023 compared to June 30, 2022, primarily due to lower sales volumes. Wood construction product sales decreased 4.0% for the quarter ended June 30, 2023 compared to June 30, 2022 and concrete construction product sales, which are mostly project based, decreased 4.2% for the quarter ended June 30, 2023 compared to June 30, 2022. Europe reported income from operations of $14.0 million for the quarter ended June 30, 2023 compared to $5.6 million for the quarter ended June 30, 2022, which included a $9.2 million inventory fair-value adjustment as a result of purchase accounting with respect to the acquisition of ETANCO and acquisition and integration costs of $4.0 million. We currently anticipate 2023 results to be impacted by economic headwinds but also believe in the long term potential given Europe's on-going housing shortage (with an increasing use of wood construction) and new environmental regulations for which we have products and solutions. In addition, we expect to incur additional costs in 2023 as originally planned, to continue integrating ETANCO. 29 Our Asia/Pacific segment has generated revenues from both wood and concrete construction products, which we believe is not significant to our overall performance. Business Outlook The Company has updated its financial outlook for the full fiscal year ending December 31, 2023 based on two quarters of performance to reflect its latest expectations regarding demand trends, raw material costs and operating expense as of July 24, 2023 as follows: • Operating margin is now estimated to be in the range of 20.5% to 21.5%. • 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 $105.0 million to $115.0 million. • The Company continues to make progress on its efforts to integrate ETANCO into its operations and to realize previously identified offensive and defensive synergies in the years ahead. However, these efforts will continue to result in additional costs in 2023 that have been planned since the Company announced the transaction. Management continues to believe the Company remains well positioned to capture meaningful benefits from these synergies, subject to macroeconomic changes, which are expected to delay realization of some of the offensive synergy opportunities. Results of Operations for the Three Months Ended June 30, 2023, Compared with the Three Months Ended June 30, 2022 Unless otherwise stated, the below results, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the three months ended June 30, 2023, against the results of operations for the three months ended June 30, 2022. Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended June 30, 2022 and the three months ended June 30, 2023. 30 Second Quarter 2023 Consolidated Financial Highlights The following table shows the change in the Company's operations from the three months ended June 30, 2022 to the three months ended June 30, 2023, and the increases or decreases for each category by segment: Three Months Ended Three Months Ended Increase (Decrease) in Operating Segment June 30, North Asia/ Admin & June 30, (in thousands) 2022 America Europe Pacific All Other 2023 Net sales $ 593,232 $ 9,057 $ (5,421) $ 712 $ — $ 597,580 Cost of sales 333,899 (9,889) (14,217) (10) 331 310,114 Gross profit 259,333 18,946 8,796 722 (331) 287,466 Research and development and other engineering expense 16,943 4,125 378 81 11 21,538 Selling expense 45,074 5,007 260 95 2 50,438 General and administrative expense 58,419 3,719 3,894 267 2,468 68,767 Total operating expenses 120,436 12,851 4,532 443 2,481 140,743 Acquisition and integration related costs 5,864 — (4,005) — — 1,859 Net loss (gain) on disposal of assets (43) 32 (146) — — (157) Income from operations 133,076 6,063 8,415 279 (2,812) 145,021 Interest income (expense), net and other (3,372) 1,310 756 (5) 606 (705) Other & foreign exchange gain (loss), net (1,890) 2,195 636 453 (1,037) 357 Income (loss) before income taxes 127,814 9,568 9,807 727 (3,243) 144,673 Provision for income taxes 34,244 (795) 4,338 131 (456) 37,462 Net income (loss) $ 93,570 $ 10,363 $ 5,469 $ 596 $ (2,787) $ 107,211 Net sales increased 0.7% to $597.6 million from $593.2 million primarily due to higher sales volumes in North America which offset Europe's lower sales volumes. Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 86% and 87% of the Company's total sales in the second quarters of 2023 and 2022, respectively. Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 14% and 13% of the Company's total sales in the second quarters of 2023 and 2022, respectively. Gross profit increased 10.8% to $287.5 million from $259.3 million primarily due to ETANCO gross margin improvement of 38.1% from 23.9% last year, which in prior year included an inventory fair-value adjustment of $9.2 million, which resulted in a consolidated gross margin of 48.1% compared to 43.7% last year. From a product perspective, gross margin increased to 48.4% from 43.7% for wood construction products and increased to 45.9% from 43.2% for concrete construction products, respectively. Research and development and engineering expense increased 27.1% to $21.5 million from $16.9 million, primarily due to increases of $2.9 million in personnel costs, $1.0 million for variable compensation and $0.3 million in depreciation and amortization. Selling expense increased 11.9% to $50.4 million from $45.1 million, primarily due to increases of $2.4 million of variable compensation, $2.1 million in personnel costs and $0.4 million in professional fees. General and administrative expense increased 17.7% to $68.8 million from $58.4 million, primarily due to increases of $3.3 million in personnel costs, $2.1 million in computer and software expenses net of amounts capitalized, $1.8 million in variable compensation, $0.9 million in depreciation and amortization, $0.7 million in professional fees, $0.3 million in travel related costs, offset by a decrease of $1.3 million for bad debt expenses . Acquisition and integration costs related to ETANCO were $4.0 million lower. 31 Our effective income tax rat e decreased to 25.9% from 26.8%. Consolidated net income was $107.2 million compared to $93.6 million. Diluted earnings per share was $2.50 compared to $2.16. Net sales The following table shows net sales by segment for the three months ended June 30, 2023 and 2022, respectively: North Asia/ (in thousands) America Europe Pacific Total Three months ended June 30, 2022 $ 456,410 $ 133,238 $ 3,584 $ 593,232 June 30, 2023 465,467 127,817 4,296 597,580 Increase (decrease) $ 9,057 $ (5,421) $ 712 $ 4,348 Percentage increase (decrease) 2.0 % (4.1) % 19.9 % 0.7 % The following table shows segment net sales as percentages of total net sales for the three months ended June 30, 2023 and 2022, respectively: North America Europe Asia/ Pacific Total Percentage of total 2022 net sales 77 % 22 % 1 % 100 % Percentage of total 2023 net sales 78 % 21 % 1 % 100 % Gross profit The following table shows gross profit by segment for the three months ended June 30, 2023 and 2022, respectively: North Asia/ Admin & (in thousands) America Europe Pacific All Other Total Three months ended June 30, 2022 $219,299 $39,023 $1,098 $(87) $259,333 June 30, 2023 238,245 47,819 1,820 (418) 287,466 Increase (decrease) $18,946 $8,796 $722 $(331) $28,133 Percentage Increase 8.6 % 22.5 % * * 10.8 % * The statistic is not meaningful or material. The following table shows gross margin by segment for the three months ended June 30, 2023 and 2022, respectively: North America Europe Asia/ Pacific Admin & All Other Total 2022 gross margin percentage 48.0 % 29.3 % 30.6 % * 43.7 % 2023 gross margin percentage 51.2 % 37.4 % 42.4 % * 48.1 % * The statistic is not meaningful or material. 32 North America • Net sales increased 2.0%, primarily due to higher volumes. • Gross margin increased to 51.2% from 48.0%, primarily from lower raw material costs, partially offset by higher factory and tooling, warehouse and freight costs, as a percentage of net sales. • Research, development and engineering expenses increased 26.8%, primarily due to increases of $1.6 million in personnel costs, $0.9 million in variable compensation, $0.4 million in professional fees, and $0.2 million depreciation and amortization. • Selling expense increased 15.6%, primarily due to increases of $2.5 million in personnel costs, $1.8 million in variable compensation, and $0.2 million in professional fees. • General and administrative expense increased 10.8%, primarily due to increases of $2.5 million in personnel cost and $2.2 million in computer and software expense net of amounts capitalized, offset by decreases of $2.2 million in professional fees and $1.4 million in bad debt expense. • Income from operations increased by $6.1 million due to the factors discussed above. Europe • Net sales decreased 4.1%, primarily by lower sales volumes. • Gross margin increased to 37.4% from 29.3%. Europe gross profit of $47.8 million included $30.3 million from ETANCO which contributed 38.1% gross margin compared to last year of 23.9%, which included the fair value adjustment of $9.2 million. • Income from operations increased by $8.4 million, which includes ETANCO's operating income of $7.6 million which is net of $4.3 million of amortization expense on acquired intangible assets, and $1.9 million in integration costs. 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 June 30, 2023 and 2022. Results of Operations for the Six Months Ended June 30, 2023, Compared with the Six Months Ended June 30, 2022 Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the six months ended June 30, 2023, against the results of operations for the six months ended June 30, 2022. Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the six months ended June 30, 2022 and the six months ended June 30, 2023 On April 1, 2022, the Company acquired ETANCO (Note 3) and subsequently began recording and reporting its financial operation results through the second quarter of 2022 and future quarters. Due to the date we acquired ETANCO, 2023 results for our Financial Highlights include two quarters of ETANCO whereas 2022 included one quarter, and the year to date results between 2023 and 2022 for our Financial Highlights impacts only our Consolidated and Europe segment. As a result, all financial and margin changes for our Consolidated and Europe segment may reflect large financial and percentage increases through the 2023 year-to-date reporting cycle. 33 Year-to-Date (6-month) 2023 Consolidated Financial Highlights The following table illustrates the differences in our operating results for the six months ended June 30, 2023, from the six months ended June 30, 2022, and the increases or decreases for each category by segment: Six Months Ended Increase (Decrease) in Operating Segment Six Months Ended June 30, North Asia/ Admin & June 30, (in thousands) 2022 America Europe Pacific All Other 2023 Net sales $ 1,086,802 $ (23,343) $ 67,342 $ 1,209 $ — $ 1,132,010 Cost of sales 590,688 (29,936) 29,395 1,011 511 591,669 Gross profit 496,114 6,593 37,947 198 (511) 540,341 Research and development and other engineering expense 32,809 8,234 1,253 (32) 20 42,284 Selling expense 81,910 8,959 8,087 160 (10) 99,106 General and administrative expense 112,192 4,632 13,961 488 1,201 132,474 226,911 21,825 23,301 616 1,211 273,864 Acquisition and integration related costs 12,815 — (9,514) — — 3,301 Net gain on disposal of assets (1,126) 7 906 5 1 (207) Income (loss) from operations 257,514 (15,239) 23,254 (423) (1,723) 263,383 Interest income (expense), net and other (3,585) 1,525 (1,994) — 2,780 (1,274) Other & foreign exchange gain (loss), net (2,107) 3,931 539 (111) (2,294) (42) Income (loss) before income taxes 251,822 (9,783) 21,799 (534) (1,237) 262,067 Provision for income taxes 63,677 (4,720) 8,387 (219) (222) 66,903 Net income $ 188,145 $ (5,063) $ 13,412 $ (315) $ (1,015) $ 195,164 Net sales increased 4.2% to $1,132.0 million from $1,086.8 million driven by ETANCO's extra quarter of net sales in 2023 vs. 2022 offset by lower sales volumes in North America. Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 86% of the Company's total sales in the first six months of 2023 and 2022. Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 14% of the Company's total sales in the first six months of 2023 and 2022. Gross profit increased 8.9% to $540.3 million from $496.1 million. Gross margins increased to 47.7% from 45.6%, The increase includes a 2022 non-recurring charge of $9.2 million for the fair value step-up of inventory acquired from ETANCO, which did not occur in 2023, as well as lower raw material costs for the Company overall. Gross margins increased to 47.8% from 45.7% for wood construction products and increased to 46.5% from 44.8% for concrete construction products. Research and development and engineering expense increased 28.9% to $42.3 million from $32.8 million primarily due to increases of $5.7 million in personnel costs, $1.3 million in variable compensation, $0.7 million in professional fees, $0.6 million in depreciation and amortization and $0.5 million in travel related costs. Selling expense increased to $99.1 million from $81.9 million, primarily due to increases of $8.0 million in personnel costs, $3.2 million in variable compensation, $1.8 million in travel related costs, $1.5 million in professional fees, and $0.6 million in advertising and trade shows. General and administrative expense increased to $132.5 million from $112.2 million, primarily due to increases of $6.3 million in personnel costs, $6.2 million in depreciation and amortization expenses, $3.2 million computer and software expenses net of amounts capitalized and $1.1 million in travel related costs. Acquisition and integration costs related to ETANCO were $9.5 million lower. Our effective income tax rate increased to 25.5% from 25.3%. 34 Consolidated net income was $195.2 million compared to $188.1 million. Diluted earnings per share was $4.55 compared to $4.34. Net sales The following table represents net sales by segment for the six-month periods ended June 30, 2022 and 2023: North Asia/ (in thousands) America Europe Pacific Total Six Months Ended June 30, 2022 $ 895,140 $ 184,689 $ 6,973 $ 1,086,802 June 30, 2023 871,797 252,031 8,182 1,132,010 Increase (decrease) $ (23,343) $ 67,342 $ 1,209 $ 45,208 Percentage increase (decrease) (2.6) % 36.5 % 17.3 % 4.2 % The following table represents segment sales as percentages of total net sales for the six-month periods ended June 30, 2022 and 2023, respectively: North America Europe Asia/ Pacific Total Percentage of total 2022 net sales 82 % 17 % 1 % 100 % Percentage of total 2023 net sales 77 % 22 % 1 % 100 % Gross profit The following table represents gross profit by segment for the six-month periods ended June 30, 2022 and 2023: North Asia/ Admin & (in thousands) America Europe Pacific All Other Total Six Months Ended June 30, 2022 $ 437,175 $ 56,476 $ 2,546 $ (83) $ 496,114 June 30, 2023 443,767 94,423 2,744 (593) 540,341 Increase (decrease) $ 6,592 $ 37,947 $ 198 $ (510) $ 44,227 Percentage increase 1.5 % 67.2 % * * 8.9 % * The statistic is not meaningful or material The following table represents gross margin by segment for the six-month periods ended June 30, 2022 and 2023: (in thousand) North America Europe Asia/ Pacific Admin & All Other Total 2022 gross margin percentage 48.8 % 30.6 % 36.5 % * 45.6 % 2023 gross margin percentage 50.9 % 37.5 % 33.5 % * 47.7 % * The statistic is not meaningful or material. 35 North America • Net sales decreased 2.6%, primarily due to lower volumes. • Gross margin increased to 50.9% from 48.8%, due to lower raw material costs as a percentage of net sales, which were partially offset by higher labor, factory & tooling and warehouse costs as a percentage of net sales. • Research and development and engineering expense increased 27.3%, primarily due to increases of $3.1 million in personnel costs, $1.2 million in variable compensation, $0.9 million in professional fees, $0.5 million in depreciation and amortizations and $0.4 million in travel related costs. • Selling expense increased 14.2%, primarily due to increases of $4.0 million in personnel costs, $1.7 million in variable compensation, $1.2 million in professional fees and $1.1 million in travel related costs. • General and administrative expense increased 6.5%, primarily due to increases of $3.3 million in personnel costs, $2.4 million in computer and software expenses net of amounts capitalized, and $0.6 million in travel related costs offset by $3.3 million in professional fees. • Income from operations decreased $15.2 million, due to decreased gross profit and higher operating expenses. Europe • Net sales increased 36.5%, primarily due to the ETANCO acquisition providing one quarter of sales year to date in 2022 compared with two quarters of sales year to date in 2023. The increase in sales were partly offset by the negative effect of approximately $3.1 million in foreign currency translation. • Gross margin increased to 37.5% from 30.6% while gross profit increased $37.9 million. Europe's gross profit included ETANCO's increased profit of $41.8 million. ETANCO gross margin increased from 23.9% to 38.2% with the non-recurring inventory adjustment of $9.2 million reflected in 2022. • Income from operations increased $23.3 million, primarily due to higher gross profit. Included in income from operations was ETANCO's increased profit of $17.7 million, which included $8.5 million of amortization expense on acquired intangible assets, and $3.3 million for integration costs for a total of $11.7 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 six months ended June 30, 2023 and 2022. 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. 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. On March 30, 2022, the Company entered into an Amended and Restated Credit Agreement to finance a portion of its acquisition of ETANCO, 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. As of June 30, 2023, the Company had borrowings of $150.0 million under the revolving credit facility and $421.9 million under the term loan facility, and has $300.0 million available to borrow under the revolving credit 36 facility. We believe that our cash position and cash flows from operating activities are sufficient to meet our cash flow needs for the next twelve months and the foreseeable future, including repayments of amounts of outstanding debt under the Amended and Restated Credit Agreement. As of June 30, 2023, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Cash and cash equivalents of $80.3 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the United States. The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outside the United States. The following table shows selected financial information as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively: As of June 30, As of December 31, As of June 30, (in thousands) 2023 2022 2022 Cash and cash equivalents $ 407,982 $ 300,742 $ 246,134 Property, plant and equipment, net 375,240 361,555 346,184 Equity investment, goodwill and intangible assets 879,386 872,699 862,055 Working capital excluding cash and cash equivalents 567,874 529,945 597,079 The following table provides information on how cash was used or provided during the six-month periods ended June 30, 2023 and 2022, respectively: Six Months Ended June 30, (in thousands) 2023 2022 Net cash provided by (used in): Operating activities $ 197,240 $ 138,451 Investing activities (48,049) (833,552) Financing activities (40,996) 631,531 Cash flows from operating activities result primarily from our earnings before non-cash items such as depreciation, amortization and stock-based compensation, 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 are generally lowest at the end of the fourth quarter and increases during the first, second and third quarters as construction activity ramps in markets we serve. During the six months ended June 30, 2023, operating activities provided $197.2 million in cash, as a result of $195.2 million from net income plus $45.2 million non-cash expenses such as depreciation, amortization, and stock-based compensation. This amount was partly offset by $43.1 million used for the net change in operating assets and liabilities, including an increase of $118.9 million in trade accounts receivable and decreases of $49.0 million in other current liabilities and $34.9 million in inventory. Cash used in investing activities of $48.0 million during the six months ended June 30, 2023 was mainly for capital expenditures and acquisition related activities. Our capital spending for the six months ended June 30, 2023 and June 30, 2022 was $37.9 million and $31.8 million, respectively, which was primarily used for machinery and equipment purchases and real estate improvements. Based on current information and subject to future events and circumstances, total approved capital spending for 2023 will be in the $105.0 million to $115.0 million range, compared to the previous estimate of $85.0 to $95.0 million, primarily due to the recently announced greenfield opportunity to replace our facility in Gallatin, Tennessee for both maintenance and growth to maximize efficiencies and invest in our key initiatives. Our acquisition activities were primarily for expanding our product line. Cash used in financing activities of $41.0 million during the six months ended June 30, 2023 consisted primarily of $22.2 million used to pay dividends to our stockholders, $11.7 million used for debt repayment and $7.4 million used to pay income taxes on behalf of employees for shares withheld with respect to their vested restricted stock units. 37 On July 28, 2023, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.27 per share payable on October 26, 2023, to the Company's stockholders of record on October 5, 2023. Since the beginning of 2019 to the quarter ended June 30, 2023, we have returned $428.1 million to stockholders, which represents 46.7% of our free cash flow and includes repurchasing 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 at the start of 2019. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of June 30, 2023.