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 In this Quarterly Report on Form 10-Q we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are 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 (the “Exchange Act”). 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. Forward-looking statements are all statements other than those of historical fact and include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations for sales and market growth, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, our ongoing 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. 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 or implied by our forward-looking statements include, the effects of inflation and labor and supply shortages on our operations the operations of our customers, suppliers and business partners, and our ongoing integration of ETANCO and those factors 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, 2023. 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 facilities; restrictions on our business and financial covenants under our credit agreement; reliance on employees subject to collective bargaining agreements; and or our ability to pay dividends and 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. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. 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. 24 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. Within the North America segment, our sales efforts are aligned to customer market teams dedicated to serving the following markets: • Residential; • Commercial; • Original Equipment Manufacturers ("OEM"); • National Retail; and • Component Manufacturers Our organic growth opportunities are focused on expanding our product lines with our current customers while also identifying new market share gain opportunities within our core product and market competencies. 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. We also aspire to leverage 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 Company 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 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 partner of choice; • Be an innovative leader in the markets we operate; • Above market growth relative to the United States housing starts (exceeding our historical average volume performance in North America of approximately 250 basis points above the housing starts market); • An operating income margin within the top quartile of our proxy peers; and • Long-term, return to the top quartile of our proxy peers for return on invested capital. We have made progress towards our key growth initiatives since they were first announced in 2021. A few recent examples include: • The 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; • Continued growing North America sales volumes above United States housing starts growth; • Acquisitions of a software company and a manufacturer of equipment used by component manufacturers to expand our offering of solutions to our component manufacturer customers and potentially accelerate growth in the market; • Formed a new relationship agreement with a large independent co-op serving more than 12,000 retail hardware stores, home centers, and pro lumber dealers, which led to significant conversions of our connectors, fasteners and anchor products; • Recaptured a number of lumber dealers in North America with the opportunity to expand the products lines; • Rolled out 33 new products, globally, during the first two quarters of 2024; • Expansion of our Outdoor Accents® decorative hardware, fasteners and anchors product lines, which contributed to our growth in the do-it-yourself ("DIY") or construction contractor segments of our national retail market; • Converted component manufacturers to using our truss software and purchasing our truss plate and connector solution sets, including a major component manufacture; and • 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. 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 key growth initiatives, we believe we can continue to achieve above market growth in the North America relative to 25 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. We now include consolidated Adjusted EBITDA, a non-GAAP measure. The Company defines adjusted EBITDA as net income (loss) before income taxes, adjusted to exclude depreciation and amortization, integration, acquisition and restructuring costs, goodwill impairment, gain on bargain purchase, net loss or gain on disposal of assets, interest income or expense, and foreign exchange and other expense (income). We use Adjusted EBITDA to provide additional insight into the Company’s operating performance in light of the significant levels of growth investment we are continuing to make in our operations and the effect accelerated depreciation and acquisition and integration costs will have on our operating results. This will also provide a better approximation of our cash flows compared to operating income. 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. Overall housing starts decreased during the second quarter of 2024 compared to the second quarter of 2023, with a significant decrease in multi-family housing starts, which are more sensitive to interest rate increases and inflation. Housing starts have decreased from the current quarter to the prior year quarter six out of the last eight quarters. Lower housing starts in the United States 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. 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. Increasing interest rates, rising energy costs, volatility in the steel market and stressed product transportation systems, as well as political events like elections, can also have an effect on our gross and operating profits as well. 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. 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 any increases in raw material costs. Our operations also expose us to risks associated with pandemics, epidemics or other public health crises. Business Segment Information Historically, our North America segment has generated more revenues from wood construction products compared to concrete construction products. North America net sales decreased slightly for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Our wood construction product net sales decreased 1.3% for the six months ended June 30, 2024 compared to June 30, 2023. Our concrete construction product sales increased 5.6% over the same periods. We believe the United States 2024 housing starts market will be flat to down relative to fiscal year 2023 housing starts. For the year-to-date period, housing starts have decreased in 2024 compared to the same period in 2023, while the Company's North America sales volumes have increased by approximately 4% over that same period. With the investments we have made and continue to make, we believe we will be able to continue to grow above the US housing starts market, one of our company ambitions. Operating income decreased $26.9 million on lower gross profits as well as increased personnel costs, professional fees, and travel expenses . Fiscal 2024 operating margins have and will include anticipated acquisition and integration related costs. We currently anticipate North America 2024 results to be impacted by economic headwinds but also believe in the long term potential given the on-going housing shortage. During 2024, work continued on our Columbus, Ohio facility expansion as well as the building of the replacement of our Gallatin, Tennessee facility. We expect the expansion and replacement of these facilities 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. 26 Europe net sales decrease d 0.9% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, Wood construction product sales decrease d 1.6% f or the six months ended June 30, 2024 compared to June 30, 2023 and concrete construction product sales, which are mostly project based, increased 2.1% over the same periods. Gross profit decrea sed $4.7 million primarily due to increased factory overhead, warehouse and freight costs, as a percentage of net sales . Operating income decreased $7.0 million o n lower gross profits and higher operating expenses, partly offset by lower integration expenses. Fiscal 2024 operating margins will include anticipated acquisition and integration related costs estimated to range between $4.0 million to $5.0 million . We currently anticipate Europe 2024 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. Our Asia/Pacific segment has generated revenues from both wood and concrete construction products. We believe that the Asia/Pacific segment is not significant to our overall performance. Business Outlook The Company updated its financial outlook for the full fiscal year ending December 31, 2024 based on two quarters of actual results, and its latest expectations regarding demand trends, raw material costs and operating expenses as of follow: ◦ Operating margin is estimated to be in the range of 20.0% to 21.0%, including approximately $85.0 million in depreciation and amortization expense. ◦ The effective tax rate is estimated to be in the range of 24.5% to 25.5%, 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 range between $180.0 and $190.0 million, which includes $90.0 to $100.0 million for the Columbus, Ohio facility expansion and the new Gallatin, Tennessee fastener facility construction with the remaining spend carrying over into 2025. Results of Operations for the Three Months Ended June 30, 2024, Compared with the Three Months Ended June 30, 2023 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, 2024, against the results of operations for the three months ended June 30, 2023. Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended June 30, 2023 and the three months ended June 30, 2024. 27 Second Quarter 2024 Consolidated Financial Highlights The following table shows the change in the Company's results of operations from the three months ended June 30, 2023 to the three months ended June 30, 2024, 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) 2023 America Europe Pacific All Other 2024 Net sales $ 597,580 $ (2,445) $ 2,060 $ (217) $ — $ 596,978 Cost of sales 310,114 4,219 3,930 117 51 318,431 Gross profit 287,466 (6,664) (1,870) (334) (51) 278,547 Research and development and other engineering expense 21,538 738 506 (74) — 22,708 Selling expense 50,438 4,528 847 105 — 55,918 General and administrative expense 68,767 (417) (230) 326 (2,063) 66,383 Total operating expenses 140,743 4,849 1,123 357 (2,063) 145,009 Acquisition and integration related costs 1,859 — (1,232) — 963 1,590 Net gain on disposal of assets (157) (138) 68 (10) (1) (238) Income from operations 145,021 (11,375) (1,829) (681) 1,050 132,186 Interest income (expense), net and other (705) 180 124 9 2,484 2,092 Other & foreign exchange gain (loss), net 357 (1,055) (1,689) (262) 1,061 (1,588) Income before income taxes 144,673 (12,250) (3,394) (934) 4,595 132,690 Provision for income taxes 37,462 (1,168) (241) (167) (1,027) 34,859 Net income $ 107,211 $ (11,082) $ (3,153) $ (767) $ 5,622 $ 97,831 Net sales decreased 0.1% to $597.0 million from $597.6 million. Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 84.9% and 86.2% of the Company's total sales in the second quarters of 2024 and 2023, respectively. Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 14.5% and 13.6% of the Company's total sales in the second quarters of 2024 and 2023, respectively. Gross profit decreased 3.1% to $278.5 million from $287.5 million primarily due to higher factory overhead, warehouse and freight costs partially offset by lower raw material costs. As a result, consolidated gross margins were 46.7% compared to 48.1% last year. From a product perspective, gross margin decreased to 46.5% from 48.4% for wood construction products and increased to 47.5% from 45.9% for concrete construction products, respectively. Research and development and engineering expense increased 5.4% to $22.7 million from $21.5 million, primarily due to an increase of $2.1 million and $1.0 million in professional fees and personnel costs, respectively, partially offset by a decrease of $1.5 million in software licensing and IT costs, net of amount capitalized and $0.7 million of variable compensation. Selling expense increased 10.9% to $55.9 million from $50.4 million, primarily due to increases of $4.2 million in personnel costs, $0.9 million in advertising costs, $0.7 million in travel related costs and $0.5 million in software licensing and IT costs net of amount capitalized, offset by a decrease of $1.5 million of variable compensation. General and administrative expense decreased 3.5% to $66.4 million from $68.8 million, primarily due to a decrease of $3.4 million of variable compensation, partially offset by an increase of $1.7 million in personnel costs. Our effective income tax rat e increased to 26.3% from 25.9%. Consolidated net income was $97.8 million compared to $107.2 million. Diluted earnings per share was $2.31 compared to $2.50. 28 Adjusted EBITDA 1 of $152.6 million decreased 7.8% compared to $165.6 million, primarily due to lower gross profits on lower net sales. Net sales The following table shows net sales by segment for the three months ended June 30, 2024 and 2023, respectively: North Asia/ (in thousands) America Europe Pacific Total Three months ended June 30, 2023 $ 465,467 $ 127,817 $ 4,296 $ 597,580 June 30, 2024 463,022 129,877 4,079 596,978 Increase (decrease) $ (2,445) $ 2,060 $ (217) $ (602) Percentage increase (decrease) (0.5) % 1.6 % (5.1) % (0.1) % The following table shows segment net sales as percentages of total net sales for the three months ended June 30, 2024 and 2023, respectively: North America Europe Asia/ Pacific Total Percentage of total 2023 net sales 78 % 21 % 1 % 100 % Percentage of total 2024 net sales 77 % 22 % 1 % 100 % Gross profit The following table shows gross profit (loss) by segment for the three months ended June 30, 2024 and 2023, respectively: North Asia/ Admin & (in thousands) America Europe Pacific All Other Total Three months ended June 30, 2023 $238,245 $47,819 $1,820 $(418) $287,466 June 30, 2024 231,581 45,949 1,486 (469) 278,547 Decrease $(6,664) $(1,870) $(334) $(51) $(8,919) Percentage (decrease) (2.8) % (3.9) % * * (3.1) % * The statistic is not meaningful or material. The following table shows gross margin by segment for the three months ended June 30, 2024 and 2023, respectively: North America Europe Asia/ Pacific Admin & All Other Total 2023 gross margin percentage 51.2 % 37.4 % 42.4 % * 48.1 % 2024 gross margin percentage 50.0 % 35.4 % 36.4 % * 46.7 % * The statistic is not meaningful or material. North America • Net sales decreased 0.5%, primarily due to decreased sales volumes. • Gross margin decreased to 50.0% from 51.2%, primarily due to higher labor, factory overhead, warehouse and freight costs, partially offset by lower material costs, as a percentage of net sales. 29 • Research, development and engineering expense increased 3.8%, primarily due to an increase of $2.1 million in professional fees, partially offset by a decrease of $1.6 million in software licensing and IT costs, net of amount capitalized. • Selling expense increased 12.2% , primarily due to increases of $4.2 million in personnel costs, $0.6 million in advertising and trade shows, and $0.6 million in travel expense, partially offset by the decrease of $1.7 million in variable compensation. • General and administrative expense decreased 1.1%, primarily due to decreases in $1.1 million of variable compensation, $0.6 million in professional fees, partially offset by increases of $1.0 million in personnel costs and $0.5 million of travel related expenses. • Income from operations decreased by $11.4 million due to the factors discussed above. Europe • Net sales increased 1.6%, primarily due to higher sales volumes, partially offset by price decreases in some regions as well as the negative effect of $0.7 million in foreign currency translation. • Gross margin decreased to 35.4% from 37.4% , primarily due to increased labor and factory & tooling costs as well as warehouse and freight costs, partially offset by lower material costs, as a percentage of net sales. • Income from operations decreased by $1.9 million from $14.0 million to $12.1 million due to lower gross margins and high personnel costs, partially offset by lower integration related expenses. 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, 2024 and 2023. 30 Results of Operations for the Six Months Ended June 30, 2024, Compared with the Six Months Ended June 30, 2023 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, 2024, against the results of operations for the six months ended June 30, 2023. Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the six months ended June 30, 2023 and the six months ended June 30, 2024 Year-to-Date (6-month) 2024 Consolidated Financial Highlights The following table illustrates the differences in our operating results for the six months ended June 30, 2024, from the six months ended June 30, 2023, 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) 2023 America Europe Pacific All Other 2024 Net sales $ 1,132,010 $ (2,026) $ (2,217) $ (210) $ — $ 1,127,557 Cost of sales 591,669 9,624 2,445 372 346 604,456 Gross profit 540,341 (11,650) (4,662) (582) (346) 523,101 Research and development and other engineering expense 42,284 1,594 638 110 — 44,626 Selling expense 99,106 10,540 529 242 — 110,417 General and administrative expense 132,474 3,296 1,843 194 (1,230) 136,577 Total operating expenses 273,864 15,430 3,010 546 (1,230) 291,620 Acquisition and integration related costs 3,301 — (627) — 962 3,636 Net gain on disposal of assets (207) (217) (2) (10) — (436) Income from operations 263,383 (26,863) (7,043) (1,118) (78) 228,281 Interest income (expense), net and other (1,274) 381 299 (306) 3,343 2,443 Other & foreign exchange gain (loss), net (42) (4,293) 1,391 290 3,035 381 Income (Loss) before income taxes 262,067 (30,775) (5,353) (1,134) 6,300 231,105 Provision for income taxes 66,903 (5,642) (525) (240) (2,649) 57,847 Net income $ 195,164 $ (25,133) $ (4,828) $ (894) $ 8,949 $ 173,258 Net sales decreased 0.4% to $1,127.6 million from $1,132.0 million driven by lower sales volumes in North America. Wood construction product sales represented 84.8% and 85.7% of the Company's total sales in the first six months of 2024 and 2023. Concrete construction product sales represented 14.6% and 14.0% of the Company's total sales in the first six months of 2024 and 2023. Gross profit decreased 3.2% to $523.1 million from $540.3 million. Gross margins decreased to 46.4% from 47.7%. The decrease is due to higher warehouse and freight costs for the Company overall. Gross margins decreased to 46.3% from 47.8% for wood construction products and increased to 47.1% from 46.5% for concrete construction products . Research and development and engineering expense increased 5.5% to $44.6 million from $42.3 million primarily due to an increase of $2.3 million in personnel costs, $2.3 million in professional fees, $0.7 million in depreciation and amortization expense, partially offset by a decrease of $2.0 million in computer and software, net of amount capitalized and $1.1 million of variable compensation. Selling expense increased to $110.4 million from $99.1 million, primarily due to increases of $8.7 million in personnel costs, $2.2 million in advertising costs, $1.6 million in travel related costs, and $1.1 million in computer and software cost net of amount capitalized, partially offset by a decrease of $2.6 million of variable compensation and $0.9 million of professional fees. 31 General and administrative expense increased to $136.6 million from $132.5 million, primarily due to increases of $5.3 million in personnel costs, $1.6 million in professional costs, and $0.7 million in travel related costs, partially offset by a decrease of $4.8 million of variable compensation. Our effective income tax rate decreased to 25.0% from 25.5%. Consolidated net income was $173.3 million compared to $195.2 million. Diluted earnings per share was $4.07 compared to $4.55. Adjusted EBITDA 1 of $269.9 million decreased 10.8% compared to $302.6 million primarily due to lower gross profits on lower net sales. Net sales The following table represents net sales by segment for the six-month periods ended June 30, 2023 and 2024: North Asia/ (in thousands) America Europe Pacific Total Six Months Ended June 30, 2023 $ 871,797 $ 252,031 $ 8,182 $ 1,132,010 June 30, 2024 869,771 249,814 7,972 1,127,557 Decrease $ (2,026) $ (2,217) $ (210) $ (4,453) Percentage decrease (0.2) % (0.9) % (2.6) % (0.4) % The following table represents segment sales as percentages of total net sales for the six-month periods ended June 30, 2023 and 2024, respectively : North America Europe Asia/ Pacific Total Percentage of total 2023 net sales 77 % 22 % 1 % 100 % Percentage of total 2024 net sales 77 % 22 % 1 % 100 % Gross profit The following table represents gross profit (loss) by segment for the six-month periods ended June 30, 2023 and 2024: North Asia/ Admin & (in thousands) America Europe Pacific All Other Total Six Months Ended June 30, 2023 $ 443,767 $ 94,423 $ 2,744 $ (593) $ 540,341 June 30, 2024 432,117 89,761 2,162 (939) 523,101 Decrease $ (11,650) $ (4,662) $ (582) $ (346) $ (17,240) Percentage decrease (2.6) % (4.9) % * * (3.2) % * The statistic is not meaningful or material 32 The following table represents gross margin by segment for the six-month periods ended June 30, 2023 and 2024: North America Europe Asia/ Pacific Admin & All Other Total 2023 gross margin percentage 50.9 % 37.5 % 33.5 % * 47.7 % 2024 gross margin percentage 49.7 % 35.9 % 27.1 % * 46.4 % * The statistic is not meaningful or material. North America • Net sales decreased 0.2%, primarily due to decreased sales volumes and slightly higher incentives, including an increase in estimated rebates to home builders. • Gross margin decreased to 49.7% from 50.9%, due to higher factory and tooling as well as warehouse and freight costs as a percentage of net sales, offset by lower raw material costs as a percentage of net sales. • Research and development and engineering expense increased 4.1%, primarily due to an increase of $2.2 million in professional costs, partially offset by a decrease of $1.1 million of variable compensation. • Selling expense increased 14.7%, primarily due to increases of $9.1 million in personnel costs, $1.6 million in advertising and trade shows expenses, $1.4 million in travel related expenses, $1.1 million in computer and software expense net of amounts capitalized, partially offset by a decrease of $2.7 million in variable compensation. • General and administrative expense increased 4.4%, primarily due to increases of $3.1 million in personnel costs, $1.5 million in computer and software expenses, net of amounts capitalized, and $0.6 million in travel related expenses, partially offset by a decrease of $1.8 million in variable compensation. • Income from operations decreas ed $26.9 million, du e to higher operating expenses. Europe • Net sales decreased 0.9%, primarily due to lower sales volumes and some regional price decreases, partially offset by the positive effect of $1.6 million in foreign currency translation. • Gross margin decreased to 35.9% from 37.5% while gross profit decreased $4.7 million. • Income from operations decreased $7.0 million, primarily due to lower gross profit. 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, 2024 and 2023. 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 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 33 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. As of June 30, 2024, the Company had borrowings of $75.0 million under the revolving credit facility and $399.4 million under the term loan facility, and has $375.0 million available to borrow under the revolving credit facility. As of June 30, 2024, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions including $101.6 million that are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the U.S. The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outside the United States. On August 1, 2024, the Company completed its acquisition of all of the operating assets and assumed liabilities of Monet DeSauw Inc. and certain properties of Callaway Properties, LLC for a total purchase consideration of approximately $59.0 million before normal working capital adjustments. The following table shows selected financial information as of June 30, 2024, December 31, 2023 and June 30, 2023, respectively: As of June 30, As of December 31, As of June 30, (in thousands) 2024 2023 2023 Cash and cash equivalents $ 354,851 $ 429,822 $ 407,982 Property, plant and equipment, net 459,297 418,612 375,240 Equity investment, goodwill and intangible assets 866,238 883,079 879,386 Working capital excluding cash and cash equivalents 615,900 521,362 567,874 The following table presents the significant categories of cash flows was used or provided during the six-month periods ended June 30, 2024 and 2023, respectively: Six Months Ended June 30, (in thousands) 2024 2023 Net cash provided by (used in): Operating activities $ 119,086 $ 197,240 Investing activities (95,686) (48,049) Financing activities (93,113) (40,996) 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 impacted by prevailing macro-economic conditions and subject to seasonality, which is cyclically associated with the volume and timing of construction project starts. For example, as a result of seasonality our 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, 2024, operating activities provided $119.1 million in cash, as a result of $173.3 million from net income plus $47.2 million non-cash expenses such as depreciation and amortization and stock-based compensation. This amount was partly offset by $101.3 million used for the net change in operating assets and liabilities. The net change in operating assets and liabilities included increases of $95.7 million in trade accounts receivable, $19.3 million in other current assets, partly offset by a decrease of $11.7 million in inventory. Cash used in investing activities of $95.7 million during the six months ended June 30, 2024 was primarily used for facility expansion projects, the acquisition of Calculated Structured Designs, Inc. (CSD), and machinery and equipment purchases. Due 34 to updated forecasts on the timing of the spend and subject to future events and circumstances, capital expenditures are estimated to range between $180.0 million and $190.0 million for 2024 including the expected spend of $100.0 million on our previously announced Columbus, Ohio facility expansion and the construction of a new Gallatin, Tennessee facility, with the remaining spend estimated to range between $55.0 million and $60.0 million carrying over to 2025. The remaining 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 $93.1 million during the six months ended June 30, 2024 consisted primarily of $50.0 million is stock repurchases, $22.9 million used to pay dividends to our stockholders and $13.9 million used for debt repayment. O n July 26, 2024, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.28 per share payable on October 24, 2024, to the Company's stockholders of record on October 3, 2024. Since the beginning of 2021 through June 30, 2024, we have returned $356.4 million to stockholders, which represents 43.3% of our free cash flow from operations during the same period, and over the same period the Company has repurchased over 1.6 million shares of the Company's common stock, which represents approximately 3.9% of the outstanding shares of the Company's common stock at the start of 2021. Reconciliation of Non-GAAP Financial Measures (In thousands) (Unaudited) A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, is set forth below. Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Net Income $ 97,831 $ 107,211 $ 173,258 $ 195,164 Provision for income taxes 34,859 37,462 57,847 66,903 Interest (income) expense, net and other financing costs (2,092) 705 (2,443) 1,274 Depreciation and amortization 19,370 18,680 38,559 36,045 Other* 2,603 1,492 2,629 3,196 Adjusted EBITDA $ 152,571 $ 165,550 $ 269,850 $ 302,582 *Other: Includes acquisition integration and restructuring related expenses, other & foreign exchange loss net, and net loss or gain on disposal of assets. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of June 30, 2024.