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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-02-28 · 125 added, 136 removed, 195 unchanged (57% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this Annual Report.

In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.

Our actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause or contribute to these differences include those discussed below and in this Annual Report, particularly in "Part I - Item 1A.

Risk Factors."

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 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.

We design, manufacture and sell building construction products that are of high quality and performance, easy to use and cost-effective for customers.

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North America, Europe and Asia/Pacific.

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 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

Although these initiatives are all currently in different stages of development, our successful growth in these areas will ultimately be a function of expanding our sales and/or marketing functions to promote our products to different end users and distribution channels, expanding our customer base, and potentially introducing new products in the future.

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

In 2021, we shared our strategy for continuing to achieve above market revenue growth through a combination of organic and inorganic opportunities.

Our organic opportunities focused on expanding our product line with our current customers while also identifying new opportunities within our core competencies of wood and concrete products.

These new growth opportunities focused on gaining share with OEM customers, DIY and construction contractors, and providing more solutions for mass timber, concrete and structural steel construction.

In order to grow in these markets, we aspire to be among the leaders in engineered load-rated construction building products and systems and digital product offerings 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 to support our growth ambitions.

This 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.

Our commitment to continuous improvement has fostered our core Company ambitions, which we continue to pursue including:

• 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;

• Be the partner of choice;

• Be an innovative leader in the markets we operate;

• Above market growth relative to the United States housing starts;

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

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

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

• Integrate ETANCO and restoring our return on invested capital to be within the top quartile of our proxy peers.

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;

A few recent examples include:

• The acquisition and integration of ETANCO which has resulted in additional scale for our legacy European operations, as well as the opportunity to realize synergies in those operations;

• Converted component manufacturers to using our truss software and purchasing our truss plate and connectors solution sets, including a major component manufacturer;

• Our announced alliance with Structural Technologies drove record revenue of our concrete strengthening solutions, while our field support and strong industry relationships continued to drive specifications of our anchors, fasteners, cold-formed steel, and structural steel products on commercial projects;

• Expansion of our Outdoor Accents® decorative hardware, fasteners and anchors product lines, which contributed to our growth in the DIY or construction contractor segments of our national retail market;

• Designed, manufactured, and installed many critical connections in the construction of a 112-foot wood building that was used for the world’s tallest shake table test;

• Completed strategic asset acquisitions to accelerate the expansion of our product line to meet our customer needs;

• Made strategic investments in software development critical to the component manufacturing market segment as well as other digital product offerings to support customers in our residential and national retail markets;

• Achieved an industry-leading product fulfillment rate and increased our same day delivery service in North America;

• Completed our path-to-market shift away from two-step distribution in North America, enabling us to sell our complete product line and drive additional market share gains;

• Continued growing United States sales volumes above United States housing starts growth;

• Rolled out over 50 new products during 2023 (a Company record);

• Re-aligned our North America sales team to be customer market focused with the five groups:

residential, commercial, OEM, national retail and component manufacturers;

• 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.

We believe this progress is the result of our high service levels, increasingly diverse portfolio of products and software as well as our commitment to innovation and developing complete solutions for the markets we serve.

As we continue to make progress on our growth initiatives, we believe we can continue to achieve above market growth in the United States relative to United States housing starts for fiscal 2024 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.

Both single-family and multi-family housing starts decreased during 2023 compared to the prior two years, primarily due to interest rate increases and inflation.

Lower housing starts could result in lower demand, which would affect the Company's sales and possibly operating profit,

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.

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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.

Due to efforts in diversifying our global footprint with the acquisition of ETANCO and changing our path to market in the United States, 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.

Our operations also expose us to risks associated with pandemics, epidemics or other public health crises.

Business Segment Information

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North America sales increased 0.9% for the year ended December 31, 2023 compared to December 31, 2022.

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 wood construction product sales decreased 0.9% for the year ended December 31, 2023 compared to December 31, 2022, primarily due to product price decreases implemented during the first quarter of 2023, partly offset by increased sales volumes.

Our concrete construction product sales increased 9.9% over the same periods due to product price increases to offset rising raw material costs and higher sales volumes.

Over the last several years, our historical average volume growth in North America has exceeded the housing starts market growth by approximately 250 basis points.

We believe 2024 North America sales volumes will continue to outpace the housing starts market with 2024 housing starts projected to grow in the low single digits relative to fiscal year 2023 housing starts.

During 2023, work continued on the Columbus facility expansion and work commenced on replacing our Gallatin facility.

We expect the expansion and replacement facility 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.

Europe's operating results for the fiscal year ending December 31, 2023 includes twelve months of ETANCO operating results, while fiscal year ending December 31, 2022 includes the results of ETANCO as of the April 1, 2022 acquisition date.

Europe sales increased 20.1% for the year ended December 31, 2023 compared to December 31, 2022, primarily due to ETANCO as well as the positive effect of $12.7 million in foreign currency translation related mostly to Europe's currencies strengthening against the United States dollar.

Gross profit increased $51.4 million primarily due to the acquisition of ETANCO as well as due to lower material costs.

Cost of sales in the prior year period included a $13.6 million inventory fair-value adjustment as a result of purchase accounting with respect to the acquisition of ETANCO.

Operating income increased $34.9 million, primarily due to ETANCO.

Operating income in the prior period was negatively impacted by the $13.6 million in non-recurring fair-value adjustments noted above and $12.7 million in higher acquisition and integration costs.

Fiscal 2024 operating margins will include anticipated integration costs estimated to range between $4.0 million to $5.0 million.

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

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Based on business trends and conditions, the Company's outlook for the full fiscal year ending December 31, 2024 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 $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.

• Operating margin is estimated to be in the range of 20.0% to 21.5%, including $86.1 million in depreciation and amortization expense.

• The effective tax rate is estimated to be in the range of 25.0% to 26.0%, including both federal and state income tax rates as well as international income tax rates, and assuming no tax law changes are enacted.

• Capital expenditures are estimated to be approximately $200.0 million, which includes $120.0 million for the Columbus, Ohio facility expansion and the new Gallatin, Tennessee fastener facility construction, some of which may carry over to fiscal year 2025.

Results of Operations

Our discussion of our results focuses on 2023 and 2022 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.

Discussions of 2021 results and year-to-year comparison between 2022 and 2021 results are not included in this Annual Report on Form 10-K 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 10-K for the fiscal year ended December 31, 2022.

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, 2023, 2022 and 2021, respectively:

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Gross profit 47.1 % 44.5 % 48.0 %

Research and development and other engineering 3.2 % 3.8 % 4.0 %

Research and development and other engineering expenses

4.2 % 3.2 % 3.8 %

Selling expense 9.2 % 8.0 % 8.6 %

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Comparison of the Years Ended December 31, 2023 and 2022

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 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, 2023, against the results of operations for the year ended December 31, 2022 and include the results of the acquisition of FIXCO Invest S.A.S ("ETANCO") on April 1, 2022.

2023 full year comparisons include twelve months of ETANCO operating results for the fiscal year ending December 31, 2023 compared to nine months for the fiscal year ending December 31, 2022.

Unless otherwise stated, the results announced below, when referencing “both years,” refer to the year ended December 31, 2022 and the year ended December 31, 2023.

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.

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

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

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Income from operations 459,067 (12,670) 34,876 (190) (5,934) 475,149

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

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

Interest income (expense), net and other financing costs (7,594) (639) (3,354) 239 14,739 3,391

Other & foreign exchange gain (loss), net (3,408) 4,729 2,306 (98) (5,522) (1,993)

Income before taxes

448,065 (8,580) 33,828 (49) 3,283 476,547

Provision for income taxes 114,070 (2,815) 10,243 222 840 122,560

Net income $ 333,995 $ (5,765) $ 23,585 $ (271) $ 2,443 $ 353,987

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 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 Sales increased 4.6% to $2,213.8 million from $2,116.1 million primarily due to the acquisition and integration of ETANCO as well as the positive effect of $12.7 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 85% and 87% of the Company’s total net sales for the years ended December 31, 2023 and 2022, respectively.

Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 15% and 13% of the Company’s total net sales for the years ended December 31, 2023 and 2022, respectively.

Gross profit increased to $1,043.8 million from $941.3 million, primarily due to the acquisition and integration of ETANCO.

Gross margins increased to 47.1% from 44.5%, primarily due to lower material costs.

Cost of sales in the prior year period included a $13.6 million inventory fair-value adjustment as a result of purchase accounting with respect to the acquisition of ETANCO.

Gross margins, including some inter-segment expenses, which were eliminated upon consolidation, and excluding certain expenses that are allocated according to product group, increased from 44.4% to 47.2% for wood construction products and increased from 43.9% to 46.0% for concrete construction products.

Research and development and other engineering expense increased 34.8% to $92.2 million from $68.4 million, primarily due increased personnel costs of $11.7 million and professional fees of $5.7 million associated with our strategic growth initiatives and to further our Building Technologies offering, $3.2 million in variable compensation, and $1.2 million in depreciation and amortization.

Selling expense increased 20.4% to $204.0 million from $169.4 million, primarily due to increases of $14.0 million in personnel costs, $7.3 million in sales commission expense, $2.8 million in travel-related expenses, $2.8 million in professional fees, and $2.5 million in other variable compensation.

General and administrative expense increased 17.3% to $268.1 million from $228.5 million, primarily due to increases of $12.5 million in personnel costs, $7.6 million in depreciation and amortization, $6.0 million in variable compensation, and $1.6 million in travel costs.

Our effective income tax rate increased to 25.7% from 25.5%.

Net income was $354.0 million compared to $334.0 million.

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North America

• 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 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.

• Net sales increased 0.9% primarily due to higher sales volumes, partly offset by price decreases implemented during the first quarter of 2023.

• Gross margin increased to 50.3% from 47.7%, primarily due to lower raw material and labor costs as a percentage of net sales.

• Research and development and engineering expense increased $21.9 million, primarily due increased personnel costs of $7.0 million and professional fees of $5.8 million associated with our strategic growth initiatives and to further our Building Technologies offering, $3.1 million in variable compensation, and $1.0 million in depreciation and amortization.

• Selling expense increased $23.6 million, primarily due to increases of $10.5 million in personnel costs, $5.0 million in sales commission expense, $2.2 million in professional fees, $2.1 million in travel-related expenses, and $1.6 million in other variable compensation.

• General and administrative expense increased $18.9 million, primarily due to increases of $6.9 million in personnel costs, $4.3 million in computer software and hardware costs, $2.7 million in variable compensation, and $1.4 million in depreciation and amortization.

• Income from operations decreased $12.7 million , primarily due to higher operating expenses including personnel costs, professional fees, variable compensation, sales commission expense, and computer software and hardware costs.

• Net sales increased 20.1%, primarily due to the acquisition and integration of ETANCO as well as the positive effect of $12.7 million in foreign currency translation related mostly to Europe's currencies strengthening against the United States dollar.

• Gross margin increased to 36.8% from 31.4% resulting in an increase in gross profit of $51.4 million, primarily due to lower raw material costs as a percentage of net sales.

Cost of sales in the prior year included a $13.6 million non-recurring fair-value adjustment for inventory costs as a result of purchase accounting with respect to the acquisition of ETANCO.

• Income from operations increased $34.9 million , primarily due to higher gross profit and lower acquisition and integration costs.

Prior year costs included a $13.6 million non-recurring fair-value adjustment for inventory costs as a result of purchase accounting with respect to the acquisition of ETANCO.

• 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, 2023 and 2022.

Administrative and All Other

• 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.

• General and administrative expense increased $4.4 million, primarily due to increases of $1.2 million in variable compensation, $1.0 million in personnel costs, and $1.0 million professional and legal fees.

Critical Accounting Policies and Estimates

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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.

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.

During fiscal year 2023, we re-evaluated our European reporting units after a full year of operations from our acquisition of ETANCO as it has become further integrated into our other European operations resulting in changes to the management, product distribution, and operations structure of our European operations.

As a result of this re-evaluation, all European reporting units were consolidated for reporting purposes into one overall Europe reporting unit.

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.

We determined that the U.S.

reporting unit includes four components:

Northwest United States, Southwest United States, Northeast United States and Southeast United States.

The Australia reporting unit includes two components:

Australia and New Zealand.

For each of these reporting units, the Company aggregated the components because management concluded that they are economically similar, and that the goodwill is recoverable from these components working in concert.

We applied the ("Step 1") approach where the Company compares the fair value of the reporting unit to its carrying value during the annual impairment assessment performed in the fourth quarter of 2023.

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 2023.

The fair value calculation uses both the income approach (discounted cash flow method) and the market approach, equally weighted.

If the Company determines that the carrying value of the net assets assigned to the reporting unit, including goodwill, exceeds the fair value of the reporting unit, no further action is taken.

If the Company determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company will record an impairment charge equal to the difference between the implied fair value of the goodwill and the carrying value.

We completed our annual impairment assessment by performing a qualitative assessment during the annual impairment assessment performed in the fourth quarter of 2022.

For this qualitative assessment, we assessed various assumptions, events and circumstances that would have affected the estimated fair value of the reporting units.

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 2023 and 2022 annual testing of goodwill for impairment did not result in impairment charges.

Revenue from Contracts with Customers

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Effect of New Accounting Standards

See "Note 1 — Recently Adopted Accounting Standards" and "Note 1 — Recently Issued Accounting Standards Not Yet Adopted" to the Company’s consolidated financial statements.

See "Note 1 — Operations and Summary of Significant Accounting Policies" for effects of new accounting standards on the Company’s consolidated financial statements.

Liquidity and Capital Resources

We have historically met our capital needs through a combination of cash flows from operating activities and, when necessary, borrowings under our credit facilities.

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 from time to time.

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.

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

As of December 31, 2023, the Company had borrowings of $75.0 million under the revolving credit facility and $410.6 million under the term loan facility, and has $375.0 million available to borrow under the revolving credit facility.

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.

Refer to "Note 12 - Leases", "Note 14 - Debt" and "Note 15 - Commitment and Contingencies" in Part II, Item 8 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, 2023.

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Equity investment, goodwill and intangible assets 883,079 872,699 170,309

Working capital 529,945 453,078 559,078

Net working capital

521,362 529,945 453,078

The following table presents the significant categories of cash flows for the twelve months ended December 31, 2023, 2022 and 2021, respectively:

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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 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 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.

In 2023, operating activities provided $427.0 million in cash and cash equivalents as a result of $354.0 million from net income and adding back $101.8 million for non-cash adjustments from net income which includes depreciation and amortization, stock-based compensation and non-cash lease expense, partially offset by a decrease of $28.8 million for the net change in operating assets and liabilities.

Cash used in investing activities of $103.3 million during the year ended December 31, 2023, was mostly for capital spending of $88.8 million, which was primarily used for machinery and equipment purchases and facility expansion projects including a land purchase.

Based on current information and subject to future events and circumstances, capital expenditures are estimated to be approximately $200.0 million for 2024 including the expected spend of $120.0 million on our previously announced Columbus, Ohio facility expansion and replacement of Gallatin, Tennessee facility, with some spend potentially may carrying over to 2025.

The remaining $80.0 million in capital expenditures 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 $199.0 million during the year ended December 31, 2023, consisted primarily of $98.7 million in loan principal payments, $50.0 million for the repurchase of the Company’s common stock and $45.2 million used to pay cash dividends.

During 2023, we purchased and received approximately 361 thousand shares of the Company’s common stock on the open market at an average price of $138.60 per share, for a total of $50.0 million under a previously announced $100.0 million share repurchase authorization (which expired at the end of 2023).

On October 19, 2023, the Company's Board of Directors (the "Board") authorized the Company to repurchase up to $100.0 million of the Company's common stock, effective January 1, 2024 through December 31, 2024.

Further, on January 19, 2024, the Board declared a quarterly cash dividend of $0.27 per share payable on April 25, 2024 to stockholders of record on April 4, 2024, and estimated to be $11.5 million in total.

For the fiscal year ended December 31, 2023, the Company returned $95.2 million to the Company's stockholders, which represents 28.1% of our free cash flow from operations during the same period.

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Inflation and Raw Materials

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.

Inflation rates increased during fiscal year 2023, which have negatively affected 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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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