SIMPSON MANUFACTURING CO., INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended: June 30, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number: 1-13429
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation | (I.R.S. Employer | |||||||
| or organization) | Identification No.) | |||||||
(Address of principal executive offices, including zip code)
(925 ) 560-9000
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
The number of shares of the registrant’s common stock outstanding as of August 8, 2022: 43,166,203
Simpson Manufacturing Co., Inc. and Subsidiaries
TABLE OF CONTENTS
Part I - Financial Information
| Item 1 - Financial Statements | ||||||||
| Page No. | ||||||||
| Part II - Other Information | ||||||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
| June 30, | December 31, | ||||||||||||||||
| 2022 | 2021 | 2021 | |||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Trade accounts receivable, net | |||||||||||||||||
| Inventories | |||||||||||||||||
| Other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Property, plant and equipment, net | |||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Intangible assets, net | |||||||||||||||||
| Other noncurrent assets | |||||||||||||||||
| Total assets | $ | $ | $ | ||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||||
| Current liabilities | |||||||||||||||||
| Trade accounts payable | $ | $ | $ | ||||||||||||||
| Accrued liabilities and other current liabilities | |||||||||||||||||
| Long-term debt, current portion | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Operating lease liabilities | |||||||||||||||||
| Long term debt, net of issuance costs | |||||||||||||||||
| Deferred income tax and other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
| Commitments and contingencies (see Note 14) | |||||||||||||||||
| Stockholders’ equity | |||||||||||||||||
| Common stock, at par value | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Retained earnings | |||||||||||||||||
| Treasury stock | ( | ( | |||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | ||||||||||||||
| Total stockholders’ equity | |||||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | $ | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
4
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings and Comprehensive Income
(In thousands except per-share amounts, unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development and other engineering | |||||||||||||||||||||||
| Selling | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Acquisition and integration related costs | |||||||||||||||||||||||
| Net gain on disposal of assets | ( | ( | ( | ( | |||||||||||||||||||
| Income from operations | |||||||||||||||||||||||
| Interest expense, net and other finance costs | ( | ( | ( | ( | |||||||||||||||||||
Other & foreign exchange loss, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income | |||||||||||||||||||||||
| Translation adjustment | ( | ( | ( | ||||||||||||||||||||
| Unamortized pension adjustments | ( | ||||||||||||||||||||||
| Cash flow hedge adjustment, net of tax | ( | ||||||||||||||||||||||
| Comprehensive net income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Number of shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Cash dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
5
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands except per-share data, unaudited)
Three Months Ended June 30, 2022 and 2021
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury | |||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Translation adjustment, net of tax | — | — | — | — | ( | — | ( | ||||||||||||||||
| Pension adjustment and other, net of tax | — | — | — | — | — | ||||||||||||||||||
| Cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||
| Shares issued from release of Restricted Stock Units | — | — | — | ||||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | ( | ( | ||||||||||||||||
| Cash dividends declared on common stock, $0.26 per share | — | — | — | ( | — | — | ( | ||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Translation adjustment and other, net of tax | — | — | — | — | — | ||||||||||||||||||
| Pension adjustment and other, net of tax | — | — | — | — | ( | — | ( | ||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||
| Cash dividends declared on common stock, $0.25 per share | — | — | — | ( | — | — | ( | ||||||||||||||||
| Balance, at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
6
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands except per-share data, unaudited)
Six Months Ended June 30, 2022 and 2021
| Common Stock | Additional Paid-in | Retained | Accumulated Other Comprehensive | Treasury | |||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||
| Translation adjustment, net of tax | — | — | — | — | ( | — | ( | ||||||||||||||||
| Pension adjustment and other, net of tax | — | — | — | — | — | ||||||||||||||||||
| Cash flow hedges, net of tax | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||
| Shares issued from release of Restricted Stock Units | ( | — | — | — | ( | ||||||||||||||||||
| Repurchase of common stock | ( | — | — | — | — | ( | ( | ||||||||||||||||
| Cash dividends declared on common stock, $0.51 per share | — | — | — | ( | — | — | ( | ||||||||||||||||
| Common stock issued at $139.07 per share for stock bonus | — | — | — | ||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||
| Translation adjustment, net of tax | — | — | — | — | ( | — | ( | ||||||||||||||||
| Pension adjustment and other, net of tax | — | — | — | — | — | ||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | ||||||||||||||||||
| Shares issued from release of Restricted Stock Units | ( | — | — | — | ( | ||||||||||||||||||
| Cash dividends declared on common stock, $0.48 per share | — | — | — | ( | — | — | ( | ||||||||||||||||
| Common stock issued at $93.45 per share for stock bonus | — | — | — | ||||||||||||||||||||
| Balance, at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
7
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Loss/(gain) on sale of assets and other | ( | ||||||||||
| Depreciation and amortization | |||||||||||
| Noncash lease expense | |||||||||||
| Inventory step-up expense | |||||||||||
| Loss/(gain) in equity method investment, before tax | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Noncash compensation related to stock plans | |||||||||||
| Provision of doubtful accounts | ( | ||||||||||
| Deferred hedge gain | ( | ||||||||||
| Changes in operating assets and liabilities (net of amounts acquired from ETANCO. see Note 3) | |||||||||||
| Trade accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Trade accounts payable | |||||||||||
| Other current assets | ( | ( | |||||||||
| Accrued liabilities and other current liabilities | |||||||||||
| Other noncurrent assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions, net of cash (see Note 3) | ( | ( | |||||||||
| Equity method investments | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Terminated forward contract | |||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities | |||||||||||
| Termination of cash flow hedge | |||||||||||
| Repurchase of common stock | ( | ||||||||||
| Proceeds from borrowing under lines of credit and term loan | |||||||||||
| Repayments of lines of credit and capital leases | ( | ( | |||||||||
| Debt issuance costs | ( | ||||||||||
| Dividends paid | ( | ( | |||||||||
| Cash paid on behalf of employees for shares withheld | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
| Noncash activity during the period | |||||||||||
| Noncash capital expenditures | $ | $ | |||||||||
| Dividends declared but not paid | |||||||||||
| Issuance of Company’s common stock for compensation | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
8
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (collectively, the “Company”). Investments in 50% or less owned entities are accounted for using either cost or the equity method. All significant intercompany transactions have been eliminated.
Use of Estimates
The preparation of the condensed financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation under GAAP. The Company assessed certain accounting matters that require the use of estimates and assumptions in context with the known and projected future impacts of COVID-19. The Company's actual results could differ materially from those estimates.
Interim Reporting Period
The accompanying unaudited quarterly condensed consolidated financial statements have been prepared in accordance with GAAP pursuant to the rules and regulations for reporting interim financial information and instructions on Form 10-Q. Accordingly, certain information and footnotes required by GAAP have been condensed or omitted. These interim statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 Form 10-K”).
The unaudited quarterly condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial information set forth therein in accordance with GAAP. Certain prior period amounts in the condensed consolidated financial statements and the accompanying notes have been reclassified to conform to the current period’s presentation. The year-end condensed consolidated balance sheet data provided herein were derived from audited financial statements included in the 2021 Form 10-K, but do not include all disclosures required by GAAP. The Company’s quarterly results fluctuate. As a result, the Company believes the results of operations for this interim period presented are not indicative of the results to be expected for any future periods.
Revenue Recognition
9
Net Income Per Common Share
The Company calculates net income per common share based on the weighted-average number of shares of the Company's common stock outstanding during the period. Potentially dilutive securities are included in the diluted per-share calculations using the treasury stock method for all periods when the effect of their inclusion is dilutive.
Accounting for Leases
The Company has operating and finance leases for certain facilities, equipment, autos and data centers. As an accounting policy for short-term leases, the Company elected to not recognize a right-of-use asset ("ROU asset") and liability if, at the commencement date, the lease (1) has a term of 12 months or less and (2) does not include renewal and purchase options that the Company is reasonably certain to exercise. Monthly payments on short-term leases are recognized on a straight-line basis over the full lease term.
Accounting for Stock-Based Compensation
The Company recognizes stock-based compensation expense related to the estimated fair value of restricted stock awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of four years . Stock-based expense related to performance share grants are measured based on grant date fair value and expensed on a graded basis over the service period of the awards, which is generally a performance period of three years . The performance conditions are based on the Company's achievement of revenue growth and return on invested capital over the performance period, and are evaluated for the probability of vesting at the end of each reporting period with changes in expected results recognized as an adjustment to expense. The assumptions used to calculate the fair value of restricted stock grants are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.
Derivative Instruments
The Company uses derivative instruments as a risk management tool to mitigate the potential impact of certain market risks. Foreign currency and interest rate risk are the primary market risks the Company manages through the use of derivative instruments, which are accounted for as cash flow hedges or net investment hedges under the accounting standards and carried at fair value as other current or noncurrent assets or as other current or other long-term liabilities in the condensed consolidated balance sheets. Assets and liabilities with the legal right of offset are not offset in the condensed consolidated balance sheets. Net deferred gains and losses related to changes in fair value of cash flow hedges are included in accumulated other comprehensive income/loss ("OCI"), a component of stockholders' equity in the condensed consolidated balance sheets, and are reclassified into the line item in the condensed consolidated statement of earnings and comprehensive income in which the hedged items are recorded in the same period the hedged item affects earnings. The effective portion of gains and losses attributable to net investment hedges is recorded net of tax to OCI to offset the change in the carrying value of the net investment being hedged. Recognition in earnings of amounts previously recorded to OCI are limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged foreign operation. Changes in fair value of any derivatives that are determined to be ineffective are immediately reclassified from OCI into earnings.
10
Current Estimated Credit Loss - Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers' failure to make payments on its accounts receivable. The Company determines the estimate of the allowance for doubtful accounts receivable by considering several factors, including (1) specific information on the financial condition and the current creditworthiness of customers, (2) credit rating, (3) payment history and historical experience, (4) aging of the accounts receivable, and (5) reasonable and supportable forecasts about collectability. The Company also reserves 100 % of the amounts deemed uncollectible due to a customer's deteriorating financial condition or bankruptcy.
Every quarter, the Company evaluates the customer group using the accounts receivable aging report and its best judgment when considering changes in customers' credit ratings, level of delinquency, customers' historical payments and loss experience, current market and economic conditions, and expectations of future market and economic conditions.
The changes in the allowance for doubtful accounts receivable for the six months ended June 30, 2022 are outlined in the table below:
Balance at | Balance at | |||||||||||||
(in thousands) | December 31, 2021 | Expense (Deductions), net | Write-Offs1 | June 30, 2022 | ||||||||||
Allowance for Doubtful Accounts | $ | ( | $ | |||||||||||
1Amount is net of recoveries and the effect of foreign currency fluctuations.
Income Taxes
Income taxes are calculated using an asset and liability approach. The provision for income taxes includes federal, state and foreign taxes currently payable and deferred taxes, due to temporary differences between the financial statement and tax bases of assets and liabilities. In addition, future tax benefits are recognized to the extent that realization of such benefits is more likely than not. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment.
The Company uses an estimated annual tax rate to measure the tax benefit or tax expense recognized in each interim period.
Accounting Standards Not Yet Adopted
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the market transition from the London Interbank Offered Rate (“LIBOR”). The Company's primary credit facility, which was amended and restated on March 30, 2022, is composed of $450.0 million revolving line of credit and a $450.0 million term loan (the "Amended and Restated Credit Facility"), which matures on March 30, 2027. Borrowings under the Amended and Restated Credit Facility bear interest using Secured Overnight Financing Rate ("SOFR") plus an applicable margin in lieu of LIBOR.
All other newly issued and effective accounting standards during the second quarter of 2022 were determined to be not relevant or material to the Company.
11
2. Revenue from Contracts with Customers
Disaggregated Revenue
The Company disaggregates net sales into the following major product groups as described in its segment information included in these interim financial statements under Note 15.
Wood Construction Products Revenue. Wood construction products represented 87
Concrete Construction Products Revenue. Concrete construction products represented 13
Customer Acceptance Criteria. Generally, there are no customer acceptance criteria included in the Company's standard sales agreement with customers. When an arrangement with the customer does not meet the criteria to be accounted for as a revenue contract under the standard, the Company recognizes revenue in the amount of nonrefundable consideration received when the Company has transferred control of the goods or services and has stopped transferring (and has no obligation to transfer) additional goods or services. The Company offers certain customers discounts for paying invoices ahead of the due date, which are generally 30 to 60 days after the issue date.
Other Revenue. Service sales, representing after-market repair and maintenance, engineering activities and software license sales and services were less than 0.1 % of net sales and recognized as the services are completed or by transferring control over a product to a customer at a point in time. Services may be sold separately or in bundled packages. The typical contract length for a service is generally less than one year. For bundled packages, the Company accounts for individual services separately when they are distinct within the context of the contract. A distinct service is separately identifiable from other items in the bundled package if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the services.
Reconciliation of Contract Balances
Contract assets are the rights to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional on something other than the passage of time. Contract liabilities are recorded for any services billed to customers and not yet recognizable if the contract period has commenced or for the amount collected from customers in advance of the contract period commencing. As of June 30, 2022, the Company had no contract assets or contract liabilities from contracts with customers.
3. Acquisition
On April 1, 2022, the Company completed its acquisition of 100 % of the outstanding equity interest of FIXCO Invest S.A.S. (together with its subsidiaries, "ETANCO") for total purchase consideration of $805.4 million, net of cash acquired (the "Acquisition"). The Acquisition was completed pursuant to the securities purchase agreement dated January 26, 2022, as amended (the “SPA”), by and among the Company, Fastco Investment, Fastco Financing, LRLUX and certain other security holders. The purchase price for the Acquisition was paid using cash on hand and borrowings in the amount of $250.0 million under the revolving credit facility and $450.0 million under the term loan facility. See Note 13 for further information on the Amended and Restated Credit Facility.
ETANCO is a manufacturer and distributor of fastener and fixing products headquartered in France and its primary product applications directly align with the addressable markets in which the Company operates. The Acquisition will allow the Company to enter into new commercial building markets such as façades, waterproofing, safety and solar, as well as grow its share of direct business sales in Europe.
ETANCO’s results of operations were included in the Company's consolidated financial statements from the date of acquisition. For the period subsequent to the acquisition that is included in both the three months and six months ended June 30, 2022, ETANCO had net sales of $80.3 million and a net loss of $2.0 million, which includes costs related to fair-value adjustments for acquired inventory, amortization of acquired intangible assets, and expenses incurred for integration. The allocation of the
12
purchase price is preliminary and subject to change, including any costs and expenses already recognized, as the Company refines its estimates over the measurement period, which is expected to be finalized by the end of the 2022 fiscal year.
Purchase price allocation
The Acquisition was accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”) which requires, among other things, that assets acquired and liabilities assumed in a business combination be recorded at fair value as of the acquisition date with limited exceptions.
Preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations as of April 1, 2022. Due to the timing and significance of the Acquisition, the estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, contingent liabilities, goodwill and useful lives of intangible assets are subject to change as the Company obtains additional information during the measurement period of up to 12 months from the acquisition date.
The preliminary allocation of the $824.4 million purchase price to the estimated fair values of the tangible and intangible assets acquired and liabilities assumed is as follows:
| (in thousands) | Amount | ||||
| Cash and cash equivalents | $ | ||||
| Trade accounts receivable, net | |||||
| Inventory | |||||
| Other current assets | |||||
| Property and equipment, net | |||||
| Operating lease right-of-use assets | |||||
| Goodwill | |||||
| Intangible assets, net | |||||
| Other noncurrent assets | |||||
| Total assets | |||||
| Trade accounts payable | |||||
| Accrued liabilities and other current liabilities | |||||
| Operating lease liabilities | |||||
| Deferred income tax and other long-term liabilities | |||||
| Total purchase price | $ | ||||
Trade accounts receivable, net
The gross amount of trade receivables acquired was approximately $67.4 million, of which $63.6 million is estimated to be recoverable based on ETANCO's historical trend for collections.
Inventory
Acquired inventory primarily consists of raw materials and finished goods consisting of building and construction materials products. The Company adjusted acquired finished goods higher by $10.9 million to estimated fair value based on expected selling prices less a reasonable amount for selling efforts. The fair value adjustment is recognized as a component of cost of sales over the inventory’s expected turnover period, and as a result, $9.2 million of the adjustment was recognized during the three months ended June 30, 2022. The balance of the adjustment will be recognized in the quarter ended September 30, 2022.
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Property and equipment, net
Acquired property and equipment includes land of $22.3 million, buildings and site improvements of $29.4 million, and machinery, equipment, and software of $35.5 million. The estimated fair value of property and equipment was determined primarily using market and/or or cost approach methodologies. The acquired fair value for buildings and site improvements will depreciate on a straight-line basis over the estimated useful lives of the assets for a period of up to thirty years , Machinery, equipment and software will depreciate on an accelerated basis over an estimated useful life of to ten years . Depreciation expense associated with the acquired property and equipment amounted to $1.4 million for three months ended June 30, 2022.
Goodwill
The excess of purchase price over the net assets acquired is recognized as goodwill and relates to the value that is expected from the acquired assembled workforce as well as the increased scale and synergies resulting from the integration of both businesses. The goodwill recognized from the Acquisition is not deductible for local income tax purposes. Goodwill will be allocated to reporting units within the European reporting segment when the purchase price allocation is finalized during the measurement period.
Intangible assets, net
The estimated fair value of intangible assets acquired was determined primarily using income approach methodologies. The preliminary values allocated to intangible assets and the useful lives are as follows:
| (in thousands except useful lives) | Weighted-average useful life (in years) | Amount | ||||||
| Customer relationships | $ | |||||||
| Trade names | Indefinite | |||||||
| Developed technology | ||||||||
| $ | ||||||||
The acquired definite-lived intangible assets will be amortized on a straight-line basis over estimated useful lives, which approximates the pattern in which these assets are utilized. The Company recognized $4.2 million of amortization expense on these assets during the three months ended June 30, 2022.
Deferred taxes
As a result of the increase in fair value of inventory, property and equipment, and intangible assets, deferred tax liabilities of $104.5 million were recognized, primarily due to intangible assets.
Acquisition and integration related costs
During the three and six months ended June 30, 2022 and the year ended December 31, 2021, the Company incurred acquisition and integration related expenses of $5.9 million, $12.8 million and $2.3 million, respectively. The fiscal 2022 amounts have been included in Acquisition and integration related costs in the Company’s income from operations, while the 2021 amounts were included in Interest expense, net and other. These acquisition and integration related costs consisted of investment banking, legal, accounting, advisory, and consulting fees.
Unaudited pro forma results
The following unaudited pro forma combined financial information presents estimated results as if the Company acquired ETANCO on January 1, 2021. The unaudited pro forma financial information as presented below is for informational purposes only and does not purport to actually represent what the Company’s combined results of operations would have been had the Acquisition occurred on January 1, 2021, or what those results will be for any future periods.
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| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Pro forma earnings per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The unaudited pro forma results above includes the following non-recurring charges to net income:
1) Acquisition and integration related costs of $5.9 million, $6.9 million, and $2.3 million, which were incurred during the three months ended June 30, 2022, March 31, 2022, and December 31, 2021, respectively, were adjusted as if such costs were incurred during the three months ended March 31, 2021.
2) The $9.2 million of amortization related to the fair value adjustment for inventory and recognized during the three months ended June 30, 2022 was adjusted as if incurred during the three months ended March 31, 2021. The unamortized balance is included as an adjustment recognized during the three months ended June 30, 2021.
3) Net income for ETANCO includes adjustments of $0.5 million and $1.8 million to conform ETANCO’s historical financial results prepared under French GAAP to U.S. GAAP for the three and six months ended June 30, 2021, respectively. In addition, $0.4
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4. Net Income Per Share
The following shows a reconciliation of basic net earnings ("EPS") per share to diluted EPS:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (in thousands, except per share amounts) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Net income available to common stockholders | $ | $ | $ | $ | |||||||||||||||||||
| Basic weighted-average shares outstanding | |||||||||||||||||||||||
| Dilutive effect of potential common stock equivalents — restricted stock units | |||||||||||||||||||||||
| Diluted weighted-average shares outstanding | |||||||||||||||||||||||
| Net income per common share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
5. Stockholders' Equity
Treasury Shares
As of June 30, 2022, the Company held 455,030 shares of its common stock as treasury shares.
During the six months ended June 30, 2022, the Company repurchased 455,030 shares of the Company's common stock in the open market at an average price of $101.71 per share, for a total of $46.3 million. As of June 30, 2022, approximately $53.7 million remains available for repurchase of shares of the Company's common stock under the previously announced $100.0 million share repurchase authorization (which expires at the end of 2022).
6. Stock-Based Compensation
The Company allocates stock-based compensation expense amongst cost of sales, research and development and other engineering expense, selling expense, or general and administrative expense based on the job functions performed by the employees to whom the stock-based compensation is awarded. Stock-based compensation capitalized in inventory was immaterial for all periods presented. The Company recognized stock-based compensation expense related to its equity plans for employees of $4.7 million and $3.3 million for the three months ended June 30, 2022 and 2021, respectively, and $9.5 million and $9.8 million for the six months ended June 30, 2022 and 2021, respectively.
During the six months ended June 30, 2022, the Company granted 112,963 RSUs and PSUs to the Company's employees, including officers at an estimated weighted average fair value of $119.60 per share based on the closing price (adjusted for the present value of dividends) of the Company's common stock on the grant date. The RSUs and PSUs granted to the Company's employees may be time-based, performance-based or time- and performance-based. Certain of the PSUs are granted to officers and key employees, where the number of performance-based awards to be issued is based on the achievement of certain Company performance criteria established in the award agreement over a cumulative three year period. These awards cliff vest after three years . In addition, these same officers and key employees also receive time-based RSUs, which vest pursuant to a three-year graded vesting schedule. Time-based RSUs that are granted to the Company's employees excluding officers and certain key employees, vest ratably over the four year vesting-term of the award.
The Company’s seven non-employee directors are entitled to receive approximately $704 thousand in equity compensation annually. The number of shares ultimately granted are based on the average closing share price for the Company over the 60 day period prior to approval of the award in the second quarter of each year. In May 2022, the Company granted 6,206 shares of the Company's common stock to the non-employee directors, based on the average closing price of $105.50 per share and recognized $655 thousand of expense.
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7. Trade Accounts Receivable, Net
Trade accounts receivable consisted of the following:
| At June 30, | At December 31, | ||||||||||||||||
(in thousands) | 2022 | 2021 | 2021 | ||||||||||||||
Trade accounts receivable | $ | $ | $ | ||||||||||||||
Allowance for doubtful accounts | ( | ( | ( | ||||||||||||||
Allowance for sales discounts and returns | ( | ( | ( | ||||||||||||||
| $ | $ | $ | |||||||||||||||
8. Inventories
The components of inventories are as follows:
| At June 30, | At December 31, | ||||||||||||||||
(in thousands) | 2022 | 2021 | 2021 | ||||||||||||||
Raw materials | $ | $ | $ | ||||||||||||||
In-process products | |||||||||||||||||
Finished products | |||||||||||||||||
| $ | $ | $ | |||||||||||||||
9. Derivative Instruments
The Company enters into derivative instrument agreements, including forward foreign currency exchange contracts, interest rate swaps, and cross currency swaps to manage risk in connection with changes in foreign currency and interest rates. The Company hedges committed exposures and does not engage in speculative transactions. The Company only enters into derivative instrument agreements with counterparties who have highly rated credit.
Beginning in March 2022, the Company entered into a forward foreign currency contract expiring in March 2029 to hedge its exposure to adverse foreign currency exchange rate movements for its operations in Europe and elected the spot method for designating this contract as a net investment hedge with the excluded forward point amortized to interest expense. During May 2022, the Company settled the March 2022 forward foreign currency contract for $3.9 million in cash, which included $0.4 million in recognized forward points, terminated the hedge accounting treatment and simultaneously entered into a new forward foreign currency contract expiring in March 2029 with the same notional amount at a new forward rate. The Company also elected the spot method for designating the May 2022 contract as a net investment hedge. The $3.5 million gain recognized on the March 2022 contract excluding recognized forward points is deferred in OCI and will remain in OCI until either the sale or substantially complete liquidation of the hedged subsidiaries.
Beginning in March 2022, the Company also converted a Euro-denominated ("EUR"), fixed rate obligation into a U.S. Dollar fixed rate obligation using a receive fixed, pay fixed cross currency swap, which was designated as a cash flow hedge. During May 2022, the Company settled the March 2022 cross currency swap for $22.4 million in cash, which was comprised of $21.3 million gain on the swap excluding accrued interest and $1.1 million of net interest income accrued according to the terms of the swap. The Company terminated the hedge accounting treatment and simultaneously entered into a new cross currency swap expiring in March 2029 with a lower notional amount for the US dollar denominated leg at a new US dollar interest rate. An amount of $28.3 million was reclassified out of OCI into earnings to offset the currency loss on the underlying security being hedged resulting in a net $7.0 million hedge accounting reserve balance within OCI, which is being amortized to interest expense in the Condensed Consolidated Statement of Earnings and Comprehensive Income through the termination of the underlying hedged intercompany debt in March 2029.
In addition, the Company has converted its domestic U.S. variable rate debt to fixed rate debt using a receive variable, pay fixed interest rate swap expiring March 2027. The interest rate swap contract is also designated as a cash flow hedge.
17
As of June 30, 2022, the aggregate notional amount of the Company's outstanding interest rate contracts, cross currency swap contracts and forward contract were $694.4 million, $465.9 million and $271.9 million, respectively. As of June 30, 2021, the aggregate notional amount of the Company's outstanding forward contracts used to hedge variability in cash flows on its Chinese Yuan denominated purchases were $5.4 million, all of which expired by December 31, 2021. As of June 30, 2022 there were no outstanding forward contracts on its Chinese Yuan denominated purchases.
Changes in fair value of any forward contracts that are determined to be ineffective are immediately reclassified from OCI into earnings. There were no amounts recognized due to ineffectiveness during the six-months ended June 30, 2022.
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The effects of fair value and cash flow hedge accounting on the Condensed Consolidated Statement of Earnings and Comprehensive Income for the period ended June 30, 2022 was as follows:
| 2022 | 2021 | ||||||||||||||||||||||||||||
| (in thousands) | Cost of sales | Interest expense, net | Other & foreign exchange loss, net | Cost of sales | |||||||||||||||||||||||||
| Total amounts of income and expense line items presented in the Condensed Consolidated Statement of Earnings in which the effects of fair value or cash flow hedges are recorded | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| The effects of fair value and cash flow hedging | |||||||||||||||||||||||||||||
| Gain or (loss) on cash flow hedging relationships | |||||||||||||||||||||||||||||
| Interest contracts: | |||||||||||||||||||||||||||||
| Amount of gain or (loss) reclassified from OCI to earnings | — | ( | |||||||||||||||||||||||||||
| Cross currency swap contract | |||||||||||||||||||||||||||||
| Amount of gain or (loss) reclassified from OCI to earnings | — | ||||||||||||||||||||||||||||
| Forward contract | |||||||||||||||||||||||||||||
| Amount of gain or (loss) reclassified from OCI to earnings | |||||||||||||||||||||||||||||
The effects of derivative instruments on the Condensed Consolidated Statement of Earnings and Comprehensive Income for the three months ended June 30 were as follow:
| Cash Flow Hedging Relationships | Gain (Loss) Recognized in OCI | Location of Gain (Loss) Reclassified from OCI into Earnings | Gain (Loss) Reclassified from OCI into Earnings | |||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Interest rate contracts | $ | $ | Interest expense | $ | ( | $ | ||||||||||||||
| Cross currency contracts | Interest expense | |||||||||||||||||||
| FX gain (loss) | ||||||||||||||||||||
| Forward contracts | $ | $ | Cost of goods sold | |||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
The effects of derivative instruments on the Condensed Consolidated Statement of Earnings and Comprehensive Income for the six months ended June 30 were as follow:
| Cash Flow Hedging Relationships | Gain (Loss) Recognized in OCI | Location of Gain (Loss) Reclassified from OCI into Earnings | Gain (Loss) Reclassified from OCI into Earnings | |||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||
| Interest rate contracts | $ | $ | Interest expense | $ | ( | $ | ||||||||||||||
| Cross currency contracts | Interest expense | |||||||||||||||||||
| FX gain (loss) | ||||||||||||||||||||
| Forward contracts | Cost of goods sold | |||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
For the three and six months ending June 30, 2022, gains on the net investment hedge of $18.1 million and $11.3 million were included in OCI, respectively. For both the three and six months ending June 30, 2022, excluded gains of $1.1
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10. Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following:
| At June 30, | At December 31, | ||||||||||||||||
| (in thousands) | 2022 | 2021 | 2021 | ||||||||||||||
Land | $ | $ | $ | ||||||||||||||
Buildings and site improvements | |||||||||||||||||
Leasehold improvements | |||||||||||||||||
Machinery, equipment, and software | |||||||||||||||||
Less accumulated depreciation and amortization | ( | ( | ( | ||||||||||||||
Capital projects in progress | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
11. Goodwill and Intangible Assets
Goodwill consisted of the following:
| At June 30, | At December 31, | ||||||||||||||||
| (in thousands) | 2022 | 2021 | 2021 | ||||||||||||||
| North America | $ | $ | $ | ||||||||||||||
| Europe | |||||||||||||||||
| Asia/Pacific | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Goodwill totaled $492.3 million as of June 30, 2022, including $360.3 million attributable to the ETANCO acquisition.
Amortizable intangible assets, net, consisted of the following:
| At June 30, 2022 | |||||||||||||||||
| Gross | Accumulated | Net | |||||||||||||||
| Carrying | Amortization | Carrying | |||||||||||||||
(in thousands) | Amount | & FX change | Amount | ||||||||||||||
North America | $ | $ | ( | $ | |||||||||||||
Europe | ( | ||||||||||||||||
Total | $ | $ | ( | $ | |||||||||||||
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| At June 30, 2021 | |||||||||||||||||
| Gross | Net | ||||||||||||||||
(in thousands) | Carrying Amount | Accumulated Amortization | Carrying Amount | ||||||||||||||
North America | $ | $ | ( | $ | |||||||||||||
Europe | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
| At December 31, 2021 | |||||||||||||||||
| Gross | Net | ||||||||||||||||
(in thousands) | Carrying Amount | Accumulated Amortization | Carrying Amount | ||||||||||||||
North America | $ | $ | ( | $ | |||||||||||||
Europe | ( | ||||||||||||||||
Total | $ | $ | ( | $ | |||||||||||||
Intangible assets consist of definite-lived and indefinite-lived assets. Definite-lived intangible assets include customer relationships, patents, unpatented technology, and non-compete agreements. Amortization expense of definite-lived intangible assets was $5.3 million and $1.7 million for the three months ended June 30, 2022 and 2021, respectively and was $6.4 million and $3.4 million for the six months ended June 30, 2022 and 2021, respectively. The weighted-average amortization period for all amortizable intangibles on a combined basis is 9.5 years.
Indefinite-lived intangible assets totaled $88.9 million as of June 30, 2022, including $88.3 million attributable to trade names acquired in the ETANCO acquisition.
At June 30, 2022, the estimated future amortization of definite-lived intangible assets was as follows:
| (in thousands) | |||||
| Remaining six months of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| $ | |||||
The changes in the carrying amount of goodwill and intangible assets for the six months ended June 30, 2022, were as follows:
| Intangible | |||||||||||
| (in thousands) | Goodwill | Assets | |||||||||
| Balance at December 31, 2021 | $ | $ | |||||||||
| Acquisition of ETANCO | |||||||||||
| Amortization | — | ( | |||||||||
| Foreign exchange | ( | ( | |||||||||
| Balance at June 30, 2022 | $ | $ | |||||||||
21
12. Leases
The Company has operating leases for certain facilities, equipment and automobiles. The existing operating leases expire at various dates through 2026, some of which include options to extend the leases for up to 5 years. The Company measured the lease liability at the present value of the lease payments to be made over the lease term. The lease payments are discounted using the Company's incremental borrowing rate. The Company measured the right-of-use ("ROU") assets at the amount at which the lease liability is recognized plus initial direct costs incurred or prepayment amounts. The ROU assets are amortized on a straight-line basis over the lease term.
The following table provides a summary of leases included on the condensed consolidated balance sheets as of June 30, 2022 and 2021 and December 31, 2021, condensed consolidated statements of earnings and comprehensive income, and condensed consolidated statements of cash flows for the six months ended June 30, 2022 and 2021, respectively:
| Condensed Consolidated Balance Sheets Line Item | June 30, | December 31, | ||||||||||||
| (in thousands) | 2022 | 2021 | 2021 | |||||||||||
| Operating leases | ||||||||||||||
| Assets | ||||||||||||||
| Operating leases | Operating lease right-of-use assets | $ | $ | $ | ||||||||||
| Liabilities | ||||||||||||||
| Operating - current | Accrued expenses and other current liabilities | $ | $ | |||||||||||
| Operating - noncurrent | Operating lease liabilities | |||||||||||||
| Total operating lease liabilities | $ | $ | $ | |||||||||||
| Finance leases | ||||||||||||||
| Assets | ||||||||||||||
| Property and equipment, gross | Property, plant and equipment, net | $ | $ | $ | ||||||||||
| Accumulated amortization | Property, plant and equipment, net | ( | ( | ( | ||||||||||
| Property and equipment, net | Property, plant and equipment, net | $ | $ | $ | ||||||||||
| Liabilities | ||||||||||||||
| Other current liabilities | Accrued expenses and other current liabilities | $ | $ | $ | ||||||||||
| Total finance lease liabilities | $ | $ | $ | |||||||||||
The components of lease expense were as follows:
| Condensed Consolidated Statements of Earnings and Comprehensive Income Line Item | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| Operating lease cost | General administrative expenses and cost of sales | $ | $ | $ | $ | ||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | General administrative expenses | $ | $ | $ | $ | ||||||||||||||||||
| Interest on lease liabilities | Interest expense, net | ||||||||||||||||||||||
| Total finance lease | $ | $ | $ | $ | |||||||||||||||||||
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Other Information
Supplemental cash flow information related to leases is as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows for operating leases | $ | $ | $ | $ | |||||||||||||
| Finance cash flows for finance leases | |||||||||||||||||
| Operating right-of-use assets obtained in exchange for lease obligations during the current period | |||||||||||||||||
The following is a schedule, by years, of maturities of lease liabilities as of June 30, 2022:
| (in thousands) | Operating Leases | ||||
| Remaining six months of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less: Present value discount | ( | ||||
| Total lease liabilities | $ | ||||
The following table summarizes the Company's lease terms and discount rates as of June 30, 2022 and 2021:
| Weighted-average remaining lease terms (in years): | 2022 | 2021 | |||||||||
| Operating leases | |||||||||||
| Weighted-average discount rate: | |||||||||||
| Operating leases | % | % | |||||||||
13. Debt
On March 30, 2022, the Company entered into the Amended and Restated Credit Facility, which amends and restates the Company's previous Credit Agreement, dated as of July 27, 2012. The Amended and Restated Credit Facility provides for a 5-year revolving credit facility of $450.0 million revolving line of credit, which includes a letter of credit-sub-facility up to $50.0 million, and 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 Acquisition. In addition, the Company incurred $6.8 million of debt issuance costs, which are classified in long-term debt on the condensed consolidating balance sheet, that have been deferred and will amortize over the 5-year terms of the Amended and Restated Credit Facility.
The Company is required to pay an annual revolving credit facility fee of 0.10 % to 0.25 % per annum on the available commitments under the terms of the Amended and Restated Revolving Credit Facility, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s net leverage ratio. The fee is included within Interest expense, net and other in the Company's Condensed Consolidated Statement of Operations.
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Amounts borrowed under the Amended and Restated Credit Facility will bear interest from time to time at either the Base Rate, Spread Adjusted Daily Simple SOFR, Spread Adjusted Term SOFR, Adjusted Eurocurrency Rate or Daily Simple RFR, in each case, as calculated under and as in effect from time to time under the Amended and Restated Credit Facility, plus the Applicable Margin, as defined in the Amended and Restated Credit Facility. The Applicable Margin is determined based on the Company’s net leverage ratio, and ranges (i) from 0.00 % to 0.75 % per annum for amounts borrowed under the term loan facility that bear interest at Base Rate, (ii) from 0.75 % to 1.75 % per annum for amounts borrowed under the term loan facility that bear interest at Adjusted Eurocurrency Rate, Spread Adjusted Daily Simple SOFR or Spread Adjusted Term SOFR, (iii) from 0.00 % to 0.50 % per annum for amounts borrowed under the revolving credit facility that bear interest at Base Rate, (iv) from 0.68 % to 1.53 % per annum for amounts borrowed under the revolving credit facility that bear interest at Daily Simple RFR (solely to the extent denominated in pound sterling) and (v) from 0.65 % to 1.50 % per annum for amounts borrowed under the revolving credit facility that bear interest at Daily Simple RFR (other than loans denominated in pound sterling) or Adjusted Eurocurrency Rate. Loans outstanding under the Amended and Restated Credit Facility may be prepaid at any time without penalty except for customary breakage costs and expenses. Based on current principle payment expectations, the annual interest rate on the outstanding debt will be approximately 2.00 % over the life of the debt including the effects of the interest rate swap and other derivatives noted above.
As of June 30, 2022, in addition to the Amended and Restated Credit Facility, certain of the Company’s domestic subsidiaries are guarantors for a credit agreement between certain of its foreign subsidiaries and institutional lenders. Together, all of its credit facilities provide the Company with a total of $203.1 million in available revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.
The Company has $694.4 million, excluding deferred financing costs, outstanding under the Amended and Restated Credit Facility, which is the estimated the fair value as of June 30, 2022. There were no outstanding balances under the Amended and Restated Credit Facility as of June 30, 2021, and December 31, 2021.
The following is a schedule, by years, of maturities for the remaining term loan facility as of June 30, 2022:
| (in thousands) | 5-Year Term Loan | ||||
| Remaining six months of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Total loan outstanding | $ | ||||
The $250.0 million borrowed under the revolving credit facility is due on March 31, 2027.
The Company was in compliance with its financial covenants under the Amended and Restated Credit Facility as of June 30, 2022.
14. Commitments and Contingencies
Environmental
The Company’s policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs when information becomes available that indicates that it is probable that the Company is liable for any related claims and assessments and the amount of the liability is reasonably estimable. The Company does not believe that any such matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Litigation and Potential Claims
From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. Corrosion, hydrogen embrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations,
24
misuse, design and assembly flaws, manufacturing defects, labeling defects, product formula defects, inaccurate chemical mixes, adulteration, environmental conditions, or other factors can contribute to failure of fasteners, connectors, anchors, adhesives, specialty chemicals, such as fiber reinforced polymers, and tool products. In addition, inaccuracies may occur in product information, descriptions and instructions found in catalogs, packaging, data sheets, and the Company’s website.
The resolution of any claim or litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
15. Segment Information
The Company is organized into three reporting segments defined by the regions where the Company’s products are manufactured, marketed and distributed to the Company’s customers. The three reporting segments are the North America segment (comprised primarily of the Company’s operations in the U.S. and Canada), the Europe segment, which includes ETANCO, and the Asia/Pacific segment (comprised of the Company’s operations in Asia, the South Pacific, and the Middle East). These segments are similar in several ways, including the types of materials used, the production processes, the distribution channels and the product applications.
The Administrative & All Other column primarily includes expenses such as self-insured workers compensation claims for employees, stock-based compensation for certain members of management, interest expense, foreign exchange gains or losses and income tax expense, as well as revenues and expenses related to real estate activities.
The following tables illustrate certain measurements used by management to assess the performance of its reportable segments as of or the following periods:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||
| Net Sales | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| Asia/Pacific | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
| Sales to Other Segments* | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| Asia/Pacific | ||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||
| Income (Loss) from Operations ** | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| Asia/Pacific | ||||||||||||||
| Administrative and all other | ( | ( | ( | ( | ||||||||||
| Total | $ | $ | $ | $ | ||||||||||
* Sales to other segments are eliminated in consolidation.
** Beginning in 2022, the Company changed its presentation of its North America and Administrative and all other segment's statement of operations to display allocated expenses and management fees as a separate item below income from operations. During 2021, allocated expenses and management fees between the two segments were previously included in gross profit, operating expenses and in income from operations and been adjusted herein to conform to 2022 presentation. Consolidated income of operations, income before tax and net income for all periods presented below are not affected by the change of operations.
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| At | |||||||||||
| At June 30, | December 31, | ||||||||||
| (in thousands) | 2022 | 2021 | 2021 | ||||||||
| Total Assets | |||||||||||
| North America | $ | $ | $ | ||||||||
| Europe | |||||||||||
| Asia/Pacific | |||||||||||
| Administrative and all other | ( | ( | |||||||||
| Total | $ | $ | $ | ||||||||
Cash collected by the Company’s U.S. subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore is in the total assets of “Administrative and all other.” Cash and cash equivalent balances in the “Administrative and all other” segment were $167.4 million, $238.3 million, and $223.5 million, as of June 30, 2022 and 2021, and December 31, 2021, respectively.
The Company’s wood construction products include connectors, truss plates, fastening systems, fasteners and pre-fabricated shearwalls and are used for connecting and strengthening wood-based construction primarily in residential and commercial construction. Its concrete construction products include adhesives, specialty chemicals, mechanical anchors, carbide drill bits, powder actuated tools and reinforcing fiber materials and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction. The table below illustrates the distribution of the Company’s sales by product group as additional information for the following periods:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||
| Wood construction products | $ | $ | $ | $ | ||||||||||||||||
| Concrete construction products | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||
16. Subsequent Events
Dividend Declared
On July 27, 2022, the Company’s Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share, estimated to be $11.2 million in total. The dividend will be payable on October 27, 2022, to the Company's stockholders of record on October 6, 2022.
.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation, and its wholly-owned subsidiaries, including Simpson Strong-Tie Company Inc., unless otherwise stated. The Company regularly uses its website to post information regarding its business and governance. The Company encourages investors to use http://www.simpsonmfg.com as a source of information about the Company. The information on our website is not incorporated by reference into this report or other material we file with or furnish to the Securities and Exchange Commission (the "SEC"), except as explicitly noted or as required by law.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s consolidated financial condition and results of operations. This discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto included in this report.
“Strong-Tie” and our other trademarks appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “target,” “continue,” “predict,” “project,” “change,” “result,” “future,” “will,” “could,” “can,” “may,” “likely,” “potentially,” or similar expressions that concern our strategy, plans, expectations or intentions. Forward-looking statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, the integration of the acquisition of ETANCO, our strategic initiatives, including the impact of these initiatives, on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts. Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.
Forward-looking statements are subject to inherent uncertainties, risks and other factors that are difficult to predict and could cause our actual results to vary in material respects from what we have expressed or implied by these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed in our forward looking statements include, among others, the impact of the COVID-19 pandemic on our operations and supply chain, the operations of our customers, suppliers and business partners, and the successful integration of ETANCO and those discussed under Item 1A. Risk Factors and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Additional risks include: the cyclicality and impact of general economic conditions; changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions; the impact of pandemics, epidemics or other public health emergencies; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and borrowings under our existing credit agreement; restrictions on our business and financial covenants under our credit agreement; reliance on employees subject to collective bargaining agreements; and or ability to repurchase shares of our common stock and the amounts and timing of repurchases, if any. To the extent that the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of such risks and other factors.
We caution that you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws or the rules and regulations of the SEC, we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.
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Overview
We design, manufacture and sell building construction products that are of high quality and performance, easy to use and cost-effective for customers. We operate in three business segments determined by geographic region: North America, Europe and Asia/Pacific.
Recent Developments
On April 1, 2022, the Company successfully completed the acquisition of ETANCO, a manufacturer of fixing and fastener products headquartered in France, for $805.4 million (730 million euros(1)) net of cash.
ETANCO's primary product applications directly align with the addressable markets in which the Company operates. Leveraging ETANCO's leading market position in Europe, following the acquisition, the Company would expand its portfolio of solutions, including mechanical anchors, fasteners and commercial building envelope solutions, as well as significantly increase its market presence across Europe. The acquisition of ETANCO has provided the Company access into new commercial building markets such as façades, waterproofing, safety and solar, as well as grow its share of direct business sales in Europe.
Upon announcing the acquisition, the Company expected to realize operating income synergies of approximately $30.0 million, on an annual run rate basis following integration efforts. We continue to expect that these synergies will be achieved through expanding the Company's market share by selling its products into new markets and channels, incorporating ETANCO's products into the Company's existing channels, as well as procurement optimization, manufacturing and operating expense efficiencies. Finally, interest expense has and will continue to increase as a result of the incurrence of debt to finance the acquisition of ETANCO.
Since we announced the transaction back in late December, planning for and initiating the integration of ETANCO has been our primary focus and we believe it has been progressing according to plan. We assembled a project management office that includes a leading globally recognized external advisory consulting group together with a multi-disciplinary team of key management from both Simpson and ETANCO. Because of our complementary cultures and values, our combined team has been working extremely well together as we develop detailed plans for each of our specific integration tracks. We believe our approach has contributed to a high employee retention rate throughout the transition. After several months, we have found no material adjustments to our previously identified synergy opportunities, although the realization of the full amount is subject to change based on the current environment in Europe. With the groundwork we have laid so far, we believe we are still well positioned to capture meaningful benefits from those synergies in the coming years.
At our March 23, 2021 analyst and investor day, we unveiled several key growth initiatives that we believe will help us continue our track record of achieving above market revenue growth through a combination of organic and inorganic opportunities. Our organic opportunities are focused on expansion into new markets within our core competencies of wood and concrete products. These key growth initiatives will focus on the original equipment manufacturers, repair and remodel or do-it-yourself, mass timber, concrete and structural steel markets.
In order to grow in these markets, we aspire to be among the leaders in engineered load-rated construction building products and systems and building technology while leveraging our engineering expertise, deep-rooted relationships with top builders, engineers, contractors, code officials and distributors, along with our ongoing commitment to testing, research and innovation. Importantly, we currently have existing products, testing results, distribution and manufacturing capabilities for our key growth initiatives. Although these initiatives are all currently in different stages of development, our successful growth in these areas will ultimately be a function of expanding our sales and/or marketing functions to promote our products to different end users and distribution channels, expanding our customer base, and potentially introducing new products in the future.
We also highlighted our five-year ambitions during the March 2021 analyst and investor day, which are as follows:
•Strengthen our values-based culture;
•Be the business partner of choice;
•Strive to be an innovative leader in the markets we operate;
•Continue above market growth relative to the United States housing starts;
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•Remain within the top quartile of our proxy peers for operating income margin; and
•Remain in the top quartile of our proxy peers for return on invested capital.
We have executed on several key milestones since we first announced our key strategic initiatives back in 2021. Here are a few examples:
•We acquired ETANCO and are already seeing tangible results in our actual operations, as well as for the future including the use of Simpson and ETANCO branded commercial concrete products in the construction of certain venues for the upcoming Olympic games in Paris.
•Realigned our sales teams to more specifically focus on five end use markets – Residential, Commercial, OEM, National Retail and Building Technology, which has led to new customer and project wins within five of our key growth initiatives.
•Invested in a venture capital fund focused on the home building industry and related new technologies.
•Entered into a joint indirect investment in the North America Hundegger equipment sales and service representative partner, Hundegger USA, LLC to increase each parties' sales in the mass timber and component manufacturing markets by offering North America customers end-to-end solutions, including integrated software from a single source.
•Formed a strategic alliance with Structural Technologies that will allow both parties jointly deliver complete end-to-end strengthening solutions to engineering professionals, contractors and owners across multiple construction and repair markets,
•In the OEM market, we were recently awarded the opportunity to supply our complete wood solutions, including specialty fasteners and other products, for the construction of custom wood base crates. We accomplished some key project wins within the Mass Timber space including our solutions are now being specified to construct mock-up structures from coast to coast to serve as a mass timber training course for union carpenters and are also being utilized in the construction of a new home office for a large U.S.-based company.
•Within the National Retail market, we focused on growth in the repair and remodel and do-it-yourself markets by completing a reset of some of our fastener sets with one of our key customers, and increased our publicity for Outdoor Accents in both The Home Depot and Lowe’s.
•Within the Commercial market, we expanded our offerings, including the expansion of our structural steel product line and our concrete solutions are being used in the construction of new graduate housing.
As we make progress on our growth initiatives, we believe we can continue our above market growth relative to U.S. housing starts in fiscal 2022 and beyond. These select key examples further emulate our Founder, Barclay Simpson’s, nine principles of doing business, and more specifically the focus and obsession on customers and users.
Factors Affecting Our Results of Operations
The COVID-19 pandemic and Russia’s invasion of Ukraine has severely affected global economic conditions, resulting in substantial volatility in the financial markets, increased unemployment, and considerable operational challenges. The Company’s management team continues to monitor and manage its ability to operate effectively and, to date, the Company has not experienced any significant disruptions within its supply chain. Our supply chain partners are supportive, and continue to do their part to ensure that service levels to our customers remain strong. To date, we have not experienced any supply-chain disruptions and continued to meet our customers’ needs despite the challenges. We will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels.
The Company’s business, financial condition and results of operations depends in part on the level of United States, housing starts and residential construction activity. Though single-family housing starts increased significantly over the past twelve months, we have seen demand begin to decline during the past quarter due to supply-chain factors, inflation and interest rate increases affecting new home starts and completions. With almost a full year of recent sales price increase in effect, we believe sales will likely increase during the 3rd quarter over the prior year comparable period even if demand decreases. These increased sales prices are expected to be offset by increasing raw material costs, sourcing logistics complications and a tight labor market, which could negatively affect operating margins for 2022.
Management continues to monitor the impact of rising material input and product logistics costs on the Company's financial condition, liquidity, operations, suppliers, industry, and workforce.
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
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foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules.
In prior years, our sales were heavily seasonal with operating results varying from quarter to quarter depending on weather conditions that could delay construction starts. Our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year. Due to efforts in diversifying our global footprint, most notably with our acquisition of ETANCO, sales from our product line, customer base and customer purchases are becoming less seasonal. Political and economic events such as rising energy costs, volatile steel market, stressed product transportation systems and increasing interest rates can also have an effect on our gross and operating profits as well as the amount of inventory on-hand. Changes in raw material cost could negatively affect our gross profit and operating margins depending on the timing of raw material purchases or how much sales prices can be increased to offset higher raw material costs. Delays in receiving products or shipping sales orders, as well as increased transportation costs, could negatively impact sales and operating profits.
Business Segment Information
Historically our North America segment has generated more revenues from wood construction products compared to concrete construction products. Our wood construction product sales increased 35.2% for the quarter ended June 30, 2022 compared to June 30, 2021, and our concrete construction product sales increased 24.0% over the same periods, due to product price increases throughout 2021 in an effort to offset rising raw material costs. These product price increases were also the primary contributor to gross profits and operating profits increasing over the same comparable periods. As a result of the product price increases phased in during 2021, full phased in product price increases for 2022 could result in $300.0 million in additional net sales compared to 2021. We currently anticipate further gross margin and operating margin compression beginning in the latter half of 2022 compared to 2021 as higher priced raw materials and rising average cost of steel on hand offset the product price increases.
During 2022, we have been reviewing the footprint for our U.S. operations with assistance from a third party. As a result, we identified facility expansions in the U.S. that 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. We recently announced an expansion of our Ohio facility and the project has commenced. These investments reinforce our core business model differentiators to remain the partner of choice as we continue to produce products locally and ensure superior levels of customer service. Investments in these expansions have already started this year and will continue into 2024.
Europe sales increased 136.1% for the quarter ended June 30, 2022 compared to June 30, 2021, primarily due to the acquisition of ETANCO, which contributed $80.3 million in net sales, along with product price increases, mostly offset by lower volumes and the negative effect of approximately $6.9 million in foreign currency translation due a strengthening United States dollar. Wood construction product sales increased 135.3% for the quarter ended June 30, 2022 compared to June 30, 2021 with ETANCO contributing $64.9 million in wood construction product sales. Concrete construction product sales are mostly project based, and sales increased 139.2% for the quarter ended June 30, 2022 compared to June 30, 2021 with ETANCO contributing $15.4 million in concrete construction product sales. The Company, including ETANCO, have suspended all sales and distribution activity to Russia and Belarus. We estimate annual sales to these countries would have been less than $5.0 million. Europe gross profit of $39.0 million included $19.2 million from the acquisition of ETANCO, net of $9.2 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge. The Company expects there will be an additional nominal amount recognized in the third quarter of 2022 for a fiscal year total of $10.5 million in fair value adjustments. Europe reported operating income of $5.6 million, including ETANCO's operating loss of $1.6 million which was net of $9.2 million in inventory adjustments as noted above, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million. The Company expects to incur additional costs in 2022 as it continues to integrate ETANCO into its European operations. The Company has not realized any synergies from the combination to date.
Our Asia/Pacific segment has generated revenues from both wood and concrete construction products. We believe that the Asia/Pacific segment is not significant to our overall performance.
Since June 2021, inventory pounds in North America, which is the bulk of our inventory, increased 14% while the weighted average cost per pound of total on hand increased approximately 31%. Based on our current expectations, we are anticipating continued raw material cost pressure for fiscal 2022. As we work through our on hand inventory and continue to buy raw material at these much higher prices, our costs of goods sold are expected to continue increasing modestly during the second
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half of fiscal 2022, even if prices for raw material decline, as the impact from averaging raw material costs typically lags our product price increases. We began to see this accelerating increase in raw material costs occur beginning in the third quarter 2021.
Business Outlook
The Company updated its 2022 financial outlook to include the acquisition of ETANCO, two quarters of actual results, and its latest expectations regarding demand trends, raw material costs and operating expenses as of July 25, 2022. Based on business trends and conditions, the Company's current outlook for the full fiscal year ending December 31, 2022 is as follows:
•Operating margin is expected to be in the range of 19.0% to 21.0%, in-line with its more recent historical average as the Company has better visibility on raw material costs and expected results from its acquisition of ETANCO. The revised outlook includes $20.0 to $25.0 million in expected integration and transaction costs for the acquisition.
•Interest expense on the outstanding $250.0 million Revolving Credit Facility and Term Loans, which had initial borrowings of $450.0 million, is expected to be approximately $10.4 million, including the benefit from interest rate and cross currency swaps mitigating substantially all of the volatility from changes in interest rates.
•The effective tax rate is expected to be in the range of 25.5% to 26.5%.
•Capital expenditures are expected to be in the range of $80.0 million to $90.0 million including amounts attributable to ETANCO and expansion of the Ohio facility.
Footnotes
(1) Reflects EUR to USD exchange rate as of April 1, 2022.
Results of Operations for the Three Months Ended June 30, 2022, Compared with the Three Months Ended June 30, 2021
Unless otherwise stated, the below results, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the three months ended June 30, 2022, against the results of operations for the three months ended June 30, 2021. Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended June 30, 2021 and the three months ended June 30, 2022.
Beginning in 2022, the Company changed its presentation for both the North America and the Administrative and all other segment's statement of operations to display allocated expenses and management fees as a separate item below income from operations. During 2021, allocated expenses and management fees between the two segments were previously included in gross profit, operating expenses and in income from operations and have been adjusted herein to conform to the 2022 presentation. Consolidated income from operations, income before tax and net income for all periods presented below are not affected by the change in presentation
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Second Quarter 2022 Consolidated Financial Highlights
The following table shows the change in the Company's operations from the three months ended June 30, 2021 to the three months ended June 30, 2022, 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) | 2021 | America | Europe | Pacific | All Other | 2022 | ||||||||||||||
| Net sales | $ | 410,281 | $ | 105,853 | $ | 76,800 | $ | 298 | $ | — | $ | 593,232 | ||||||||
| Cost of sales | 213,835 | 61,538 | 58,075 | 407 | 44 | 333,899 | ||||||||||||||
| Gross profit | 196,446 | 44,315 | 18,725 | (109) | (44) | 259,333 | ||||||||||||||
| Research and development and other engineering expense | 14,169 | 2,506 | 225 | 44 | (1) | 16,943 | ||||||||||||||
| Selling expense | 33,167 | 5,190 | 6,690 | 26 | 1 | 45,074 | ||||||||||||||
| General and administrative expense | 47,410 | 534 | 6,259 | (75) | 4,291 | 58,419 | ||||||||||||||
| Total operating expenses | 94,746 | 8,230 | 13,174 | (5) | 4,291 | 120,436 | ||||||||||||||
| Acquisition and integration related costs | — | — | 5,864 | — | — | 5,864 | ||||||||||||||
| Net loss (gain) on disposal of assets | (28) | (15) | — | — | — | (43) | ||||||||||||||
| Income from operations | 101,728 | 36,100 | (313) | (104) | (4,335) | 133,076 | ||||||||||||||
| Interest income (expense), net and other | (420) | 7 | (3,524) | 1 | 564 | (3,372) | ||||||||||||||
Other & foreign exchange loss, net | (2,216) | (3,123) | (329) | 713 | 3,065 | (1,890) | ||||||||||||||
| Income (loss) before income taxes | 99,092 | 32,984 | (4,166) | 610 | (706) | 127,814 | ||||||||||||||
| Provision for income taxes | 26,609 | 9,109 | (2,579) | 228 | 877 | 34,244 | ||||||||||||||
| Net income (loss) | $ | 72,483 | $ | 23,875 | $ | (1,587) | $ | 382 | $ | (1,583) | $ | 93,570 | ||||||||
Net sales increased 44.6% to $593.2 million from $410.3 million primarily driven by the four product price increases we implemented in 2021 to offset rising raw material costs, and the acquisition of ETANCO which contributed $80.3 million in net sales. Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 87% of the Company's total sales in both the second quarters of 2022 and 2021, respectively. Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 13% of the Company's total sales in both the second quarters of 2022 and 2021, respectively.
Gross profit increased 32.0% to $259.3 million from $196.4 million. Gross margins decreased to 43.7% from 47.9%, primarily due to the acquisition of ETANCO, which has a lower gross margin profile relative to the Company overall, and higher raw material costs overall. Gross margins decreased to 43.7% from 47.4% for wood construction products and decreased to 43.2% from 47.5% for concrete construction products, respectively.
Research and development and engineering expense increased 19.6% to $16.9 million from $14.2 million, primarily due to increases of $2.4 million in personnel costs and $0.4 million in material and supplies consumption.
Selling expense increased 35.9% to $45.1 million from $33.2 million, primarily due to increases of $5.5 million in personnel costs, $1.7 million in advertising & trade shows, $1.0 million in travel related costs, and $0.5 million in professional fees.
General and administrative expense increased 23.2% to $58.4 million from $47.4 million, primarily due to increases of $4.1 million in depreciation and amortization, $3.4 million in personnel costs, $1.4 million in professional and legal fees, $0.6 million in travel related costs and $0.4 million in stock compensation expense, offset by a decrease of $0.8 million in cash profit sharing expense.
Our effective income tax rate decreased to 26.8% from 26.9%.
Consolidated net income was $93.6 million, which includes a $2.0 million loss from ETANCO, compared to $72.5 million. Diluted earnings per share was $2.16 compared to $1.66.
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Net sales
The following table shows net sales by segment for the three months ended June 30, 2022 and 2021, respectively:
| North | Asia/ | ||||||||||||||||||||||||||||
| (in thousands) | America | Europe | Pacific | Total | |||||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||||||||
| June 30, 2021 | $ | 350,557 | $ | 56,438 | $ | 3,286 | $ | 410,281 | |||||||||||||||||||||
| June 30, 2022 | 456,410 | 133,238 | 3,584 | 593,232 | |||||||||||||||||||||||||
| Increase | $ | 105,853 | $ | 76,800 | $ | 298 | $ | 182,951 | |||||||||||||||||||||
| Percentage increase | 30.2 | % | 136.1 | % | 9.1 | % | 44.6 | % | |||||||||||||||||||||
The following table shows segment net sales as percentages of total net sales for the three months ended June 30, 2022 and 2021, respectively:
| North America | Europe | Asia/ Pacific | Total | ||||||||||||||||||||
| Percentage of total 2021 net sales | 85 | % | 14 | % | 1 | % | 100 | % | |||||||||||||||
| Percentage of total 2022 net sales | 77 | % | 22 | % | 1 | % | 100 | % | |||||||||||||||
Gross profit
The following table shows gross profit by segment for the three months ended June 30, 2022 and 2021, respectively:
| North | Asia/ | Admin & | |||||||||||||||||||||||||||
| (in thousands) | America | Europe | Pacific | All Other | Total | ||||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||||||||
| June 30, 2021 | $174,984 | $20,298 | $1,207 | $(43) | $196,446 | ||||||||||||||||||||||||
| June 30, 2022 | 219,299 | 39,023 | 1,098 | (87) | 259,333 | ||||||||||||||||||||||||
| Increase (decrease) | $44,315 | $18,725 | $(109) | $(44) | $62,887 | ||||||||||||||||||||||||
| Percentage Increase (decrease) | 25.3 | % | 92.3 | % | * | * | 32.0 | % | |||||||||||||||||||||
* The statistic is not meaningful or material.
The following table shows gross margin by segment for the three months ended June 30, 2022 and 2021, respectively:
| North America | Europe | Asia/ Pacific | Admin & All Other | Total | |||||||||||||||||||||||||
| 2021 gross margin percentage | 49.9 | % | 36.0 | % | 36.7 | % | * | 47.9 | % | ||||||||||||||||||||
| 2022 gross margin percentage | 48.0 | % | 29.3 | % | 30.6 | % | * | 43.7 | % | ||||||||||||||||||||
* The statistic is not meaningful or material.
North America
•Net sales increased 30.2%, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs on relatively flat volumes.
•Gross margin decreased to 48.0% from 49.9%, primarily from higher material costs, as a percentage of net sales, partly offset by product price increases throughout 2021.
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•Research, development and engineering expenses increased 19.5%, primarily due to increases of $1.2 million in personnel costs, $0.7 in million professional fees, $0.3 million in material and supplies consumption and $0.2 million in travel rated costs, partly offset by $0.6 higher software development expenses capitalized.
•Selling expense increased 19.3%, primarily due to increases of $2.0 million in personnel cost, $1.7 million in advertising & trade show costs, $2.0 million in personnel costs, $1.5 million in travel–associated expenses and $0.5 million in professional fees, offset by a decrease $0.8 million in sales commissions.
•General and administrative expense increased 1.6%, primarily due to $1.1 million in personnel costs offset by $0.5 million for cash profit sharing expense.
•Income from operations increased by $36.1 million. The increase was primarily due to higher gross profit, partly offset by higher operating expenses including travel, entertainment and personnel costs.
Europe
•Net sales increased 136.1%, primarily due to the acquisition of ETANCO, which contributed $80.3 million in net sales along with product price increases, mostly offset by lower volumes and the negative effect of approximately $6.9 million in foreign currency translation.
•Gross margin decreased to 29.3% from 36.0%. Europe gross profit of $39.0 million included $19.2 million from the acquisition of ETANCO, which is net of $9.2 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge. The Company expects there will be an additional nominal amount recognized in the third quarter of 2022 for a fiscal year total of $10.5 million in fair value adjustments.
•Income from operations decreased by $0.3 million. This includes ETANCO's operating loss of $1.6 million which is net of $9.2 million in inventory adjustments as noted above, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million. The Company expects to incur additional costs in 2022 as it continues to integrate ETANCO into its European operations. The Company has not realized any synergies from the combination to date.
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, 2022 and 2021.
Results of Operations for the Six Months Ended June 30, 2022, Compared with the Six Months Ended June 30, 2021
Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the six months ended June 30, 2022, against the results of operations for the six months ended June 30, 2021. Unless otherwise stated, the results announced below, when referencing “both periods,” refer to the six months ended June 30, 2021 and the six months ended June 30, 2022
Beginning in 2022, the Company changed its presentation for both the North America and the Administrative and all other segment's statement of operations to display allocated expenses and management fees as a separate item below income from operations. During 2021, allocated expenses and management fees between the two segments were previously included in gross profit, operating expenses and in income from operations and have been adjusted herein to conform to the 2022 presentation. Consolidated income from operations, income before tax and net income for all periods presented below are not affected by the change in presentation.
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Year-to-Date (6-month) 2022 Consolidated Financial Highlights
The following table illustrates the differences in our operating results for the six months ended June 30, 2022, from the six months ended June 30, 2021, 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) | 2021 | America | Europe | Pacific | All Other | 2022 | |||||||||||||||||||||||||||||
| Net sales | $ | 757,922 | $ | 244,020 | $ | 83,955 | $ | 905 | $ | — | $ | 1,086,802 | |||||||||||||||||||||||
| Cost of sales | 399,195 | 124,214 | 63,027 | 810 | 3,442 | 590,688 | |||||||||||||||||||||||||||||
| Gross profit | 358,727 | 119,806 | 20,928 | 95 | (3,442) | 496,114 | |||||||||||||||||||||||||||||
| Research and development and other engineering expense | 28,758 | 3,895 | 116 | 38 | 2 | 32,809 | |||||||||||||||||||||||||||||
| Selling expense | 63,990 | 10,844 | 6,954 | 108 | 14 | 81,910 | |||||||||||||||||||||||||||||
| General and administrative expense | 95,975 | 2,867 | 6,101 | (156) | 7,405 | 112,192 | |||||||||||||||||||||||||||||
| 188,723 | 17,606 | 13,171 | (10) | 7,421 | 226,911 | ||||||||||||||||||||||||||||||
| Acquisition and integration related costs | — | — | 12,815 | — | — | 12,815 | |||||||||||||||||||||||||||||
| Net gain on disposal of assets | (108) | (3) | (1,084) | 69 | — | (1,126) | |||||||||||||||||||||||||||||
| Income (loss) from operations | 170,112 | 102,203 | (3,974) | 36 | (10,863) | 257,514 | |||||||||||||||||||||||||||||
| Interest income (expense), net and other | (765) | 25 | (3,553) | (6) | 714 | (3,585) | |||||||||||||||||||||||||||||
Other & foreign exchange loss, net | (3,648) | (7,158) | (1,243) | 874 | 9,068 | (2,107) | |||||||||||||||||||||||||||||
| Income (loss) before income taxes | 165,699 | — | 95,070 | — | (8,770) | 904 | — | (1,081) | 251,822 | ||||||||||||||||||||||||||
| Provision for income taxes | 42,827 | 23,599 | (4,249) | 375 | 1,125 | 63,677 | |||||||||||||||||||||||||||||
| Net income | $ | 122,872 | $ | 71,471 | $ | (4,521) | $ | 529 | $ | (2,206) | $ | 188,145 | |||||||||||||||||||||||
Net sales increased 43.4% to $1,086.8 million from $757.9 million due to the implementation of product price increases at various times during 2021, and revenues from the acquisition of ETANCO. Wood construction product sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 87% of the Company's total sales in the first six months of 2022 and 2021. Concrete construction product sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 13% of the Company's total sales in the first six months of 2022 and 2021.
Gross profit increased 38.3% to $496.1 million from $358.7 million. Gross margins decreased to 45.6% from 47.3%, primarily due to the acquisition of ETANCO, which has a lower gross margin profile relative to the Company overall, and higher raw material costs overall. Gross margins decreased to 45.7% from 47.0% for wood construction products and decreased to 44.8% from 45.2% for concrete construction products.
Research and development and engineering expense increased 14.1% to $32.8 million from $28.8 million primarily due to increases of $3.9 million in personnel costs, $0.4 million in material and supplies consumption, and $0.2 million in professional fees.
Selling expense increased to $81.9 million from $64.0 million, primarily due to increases of $6.9 million in personnel costs and sales commissions, $2.7 million in advertising & trade shows, $1.6 million in travel related costs, $0.7 million in professional fees, and $0.7 million cash profit sharing expense.
General and administrative expense increased to $112.2 million from $96.0 million, primarily due to increases of $5.9 million in professional fees, $4.7 million in personnel costs, $3.4 million in depreciation and amortization expenses, and $1.1 million in travel related costs, offset by decreases of $1.6 million in stock-based compensation, $0.5 million in cash profit sharing expenses.
Our effective income tax rate decreased to 25.3% from 25.8%.
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Consolidated net income was $188.1 million compared to $122.9 million. Diluted earnings per share was $4.34 compared to $2.82.
Net sales
The following table represents net sales by segment for the six-month periods ended June 30, 2021 and 2022:
| North | Asia/ | ||||||||||||||||||||||
| (in thousands) | America | Europe | Pacific | Total | |||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||
| June 30, 2021 | $ | 651,120 | $ | 100,734 | $ | 6,068 | $ | 757,922 | |||||||||||||||
| June 30, 2022 | 895,140 | 184,689 | 6,973 | 1,086,802 | |||||||||||||||||||
| Increase | $ | 244,020 | $ | 83,955 | $ | 905 | $ | 328,880 | |||||||||||||||
| Percentage increase | 37.5 | % | 83.3 | % | 14.9 | % | 43.4 | % | |||||||||||||||
The following table represents segment sales as percentages of total net sales for the six-month periods ended June 30, 2021 and 2022, respectively:
| North America | Europe | Asia/ Pacific | Total | ||||||||||||||||||||
| Percentage of total 2020 net sales | 86 | % | 13 | % | 1 | % | 100 | % | |||||||||||||||
| Percentage of total 2021 net sales | 82 | % | 17 | % | 1 | % | 100 | % | |||||||||||||||
Gross profit
The following table represents gross profit by segment for the six-month periods ended June 30, 2021 and 2022:
| North | Asia/ | Admin & | |||||||||||||||||||||||||||
| (in thousands) | America | Europe | Pacific | All Other | Total | ||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||
| June 30, 2021 | $ | 317,369 | $ | 35,548 | $ | 2,451 | $ | 3,359 | $ | 358,727 | |||||||||||||||||||
| June 30, 2022 | 437,175 | 56,476 | 2,546 | (83) | 496,114 | ||||||||||||||||||||||||
| Increase (decrease) | $ | 119,806 | $ | 20,928 | $ | 95 | $ | (3,442) | $ | 137,387 | |||||||||||||||||||
| Percentage increase | 37.7 | % | 58.9 | % | * | * | 38.3 | % | |||||||||||||||||||||
* The statistic is not meaningful or material
The following table represents gross margin by segment for the six-month periods ended June 30, 2021 and 2022:
| (in thousand) | North America | Europe | Asia/ Pacific | Admin & All Other | Total | ||||||||||||||||||||||||
| 2021 gross margin percentage | 48.7 | % | 35.3 | % | 40.4 | % | * | 47.3 | % | ||||||||||||||||||||
| 2022 gross margin percentage | 48.8 | % | 30.6 | % | 36.5 | % | * | 45.6 | % | ||||||||||||||||||||
* The statistic is not meaningful or material.
North America
•Net sales increased 37.5%, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs on small an increase in sales volume.
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•Gross margin increased slightly to 48.8% from 48.7%, due to product price increases implemented during 2021, and lower labor, factory, freight and warehouse costs as a percentage of net sales, partly offset by higher material costs, as a percentage of net sales.
•Research and development and engineering expense increased $3.9 million, primarily due to increases of $2.3 million in personnel costs, $1.6 million in professional fees, $0.5 million in travel rated costs, $0.3 million in material and supplies consumption, $0.2 million in stock-based compensation, and offset by $1.4 million higher software development expenses capitalized.
•Selling expense increased $10.8 million, primarily due to increases of $3.9 million in travel related costs, $3.2 million in personnel costs, $2.7 million in advertising & trade show costs, $0.6 million in cash profit sharing expenses, and $0.4 million in professional fees, partly offset by decreases of $1.0 million in sales commissions.
•General and administrative expense increased $2.9 million, primarily due to increases of $1.9 million in personnel costs, $1.2 million of bad debt expense, and $0.9 in travel related costs offset by decreases of $0.5 in stock-based compensation, and $0.2 million cash profit sharing expense.
•Income from operations increased $102.2 million, mostly due to increased sales and gross profit, partly offset by higher operating expenses.
Europe
•Net sales increased 83.3%, primarily due to the acquisition of ETANCO, which contributed $80.3 million in net sales along with product price increases, offset by the negative effect of approximately $10.3 million in foreign currency translation.
•Gross margin decreased to 30.6% from 35.3% while gross profit increased $20.9 million. Europe gross profit included $19.2 million from the acquisition of ETANCO, which is net of $9.2 million in fair-value adjustments for inventory costs as a result of purchase accounting, most of which is a non-recurring charge.
•Income from operations decreased $4.0 million, primarily due to $7.0 million of first quarter 2022 acquisition costs as well as ETANCO's second quarter 2022 operating loss of $1.6 million which is net of $9.2 million in inventory adjustments, $4.2 million of amortization expense on acquired intangible assets and $5.9 million for integration costs for a total of $19.3 million.
Asia/Pacific
•For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the six months ended June 30, 2022 and 2021.
Effect of New Accounting Standards
See "Note 1 Basis of Presentation — Accounting Standards Not Yet Adopted ” to the accompanying unaudited interim condensed consolidated financial statements.
Liquidity and Sources of Capital
We have historically met our capital needs through a combination of cash flows from operating activities and, when necessary borrowings under our credit agreements.
Our principal uses of capital include the costs and expenses associated with our operations, including financing working capital requirements and continuing our capital allocation strategy, which includes supporting capital expenditures, paying cash dividends, repurchasing the Company's common stock, and financing other investment opportunities over the next twelve months. On March 30, 2022, the Company entered into an Amended and Restated Credit Agreement, which provides for a 5-year revolving credit facility of $450.0 million, and for a 5-year term loan facility of $450.0 million. The Company borrowed $250.0 million, under the revolving credit facility and $450.0 million under the term loan facility to finance a portion of the
37
purchase price of the Company’s acquisition of ETANCO. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.
As of June 30, 2022, our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Cash and cash equivalents of $76.9 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to the United States. The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outside the United States.
The following table shows selected financial information as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively:
| At June 30, | At December 31, | At June 30, | ||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2021 | |||||||||||||||||
| Cash and cash equivalents | $ | 246,134 | $ | 301,155 | $ | 305,796 | ||||||||||||||
| Property, plant and equipment, net | 346,184 | 259,869 | 255,353 | |||||||||||||||||
| Goodwill, intangible assets and other | 862,055 | 170,309 | 164,511 | |||||||||||||||||
| Working capital less cash and cash equivalents | 597,079 | 453,078 | 363,453 | |||||||||||||||||
The following table provides cash flow indicators for the six-month periods ended June 30, 2022 and 2021, respectively:
| Six Months Ended June 30, | ||||||||||||||
| (in thousands) | 2022 | 2021 | ||||||||||||
| Net cash provided by (used in): | ||||||||||||||
| Operating activities | $ | 138,451 | $ | 81,632 | ||||||||||
| Investing activities | (833,552) | (26,214) | ||||||||||||
| Financing activities | 631,531 | (25,603) | ||||||||||||
Cash flows from operating activities result primarily from our earnings, and are also affected by changes in operating assets and liabilities which consist primarily of working capital balances. Our revenues are derived from manufacturing and sales of building construction materials. Our operating cash flows are subject to seasonality and are cyclically associated with the volume and timing of construction project starts. For example, trade accounts receivable is generally at its lowest at the end of the fourth quarter and increases during the first, second and third quarters.
During the six months ended June 30, 2022, operating activities provided $138.5 million in cash and cash equivalents, as a result of $188.1 million from net income and $46.1 million from non-cash expenses from net income, which included depreciation and amortization expense, stock-based compensation expense and the inventory fair value expense adjustment. Cash provided from net income was partly offset by a decrease of $95.8 million in the net change in operating assets and liabilities, including increases of $88.6 million in trade accounts receivable, partly offset by increases of $21.9 million in other current liabilities and $15.7 million in trade accounts payable.
Cash used in investing activities of $833.6 million during the six months ended June 30, 2022 was mainly for the $805.4 million acquisition of ETANCO. Our capital spending for the six months ended June 30, 2022 and June 30, 2021 was $31.8 million and $19.3 million, respectively, which was primarily used for a land purchase, machinery and equipment purchases and software in development. Based on current information and subject to future events and circumstances, total approved capital spending for 2022, will be in the $80.0 million to $90.0 million range compared to the previous estimate of $65.0 to $70.0 million, primarily due to ETANCO and expansion of our Ohio facility. Other capital spending is earmarked for both maintenance and growth to maximize efficiencies and invest in our key initiatives.
Cash provided by financing activities of $631.5 million during the six months ended June 30, 2022 consisted primarily of $700.0 million in loan proceeds used for the acquisition of ETANCO, offset by $46.3 million used to repurchase 455,030 shares of the Company's common stock at an average price of $101.71 per share and $21.6 million used to pay dividends to our stockholders.
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On July 27, 2022, the Company's Board of Directors (the "Board") declared a quarterly cash dividend of $0.26 per share payable on October 27, 2022, to the Company's stockholders of record on October 6, 2022.
Since the beginning of 2019 to the quarter ended June 30, 2022, we have returned $351.3 million to stockholders, which represents 64.3% of our free cash flow and over the same period the Company has repurchased over 2.7 million shares of the Company's common stock, which represents approximately 6.0% of the outstanding shares of the Company's common stock at the start of 2019. During 2022, after the acquisition of ETANCO, we changed our capital return target to 35% of our free cash flow from 50%.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of June 30, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have operations both within the United States and internationally, and are exposed to market risks in the ordinary course of our business.
Foreign Exchange Risk
We have foreign exchange rate risk in our international operations, and through purchases from foreign vendors. Changes in the values of currencies of foreign countries affect our financial position, income statement and cash flows when translated into U.S. Dollars. We estimate that if the exchange rate were to change by 10% in any one country where we have our operations, the change in net income would not be material to our operations taken as a whole.
We may manage our exposure to transactional exposures by entering into foreign currency forward contracts for forecasted transactions and projected cash flows for foreign currencies in future periods. In 2021 and 2022, we entered into financial contracts to hedge the risk of fluctuations associated with the Euro and the Chinese Yuan.
Interest Rate Risk
Our primary exposure to interest rate risk results from outstanding borrowings under the Amended and Restated Credit Agreement, which bears interest at variable rates. As of June 30, 2022, the outstanding debt under the Amended and Restated Credit Agreement subject to interest rate fluctuations was $694.4 million. The variable interest rates on the Credit Agreement fluctuate and expose us to short-term changes in market interest rates as our interest obligation on this instrument is based on prevailing market interest rates. Interest rates fluctuate as a result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
We have entered into an interest rate swap agreement to convert the variable interest rate on our revolver and term loan to fixed interest rates. The objective of the interest rate swap agreement is to eliminate the variability of the interest payment cash flows associated with the variable interest rate outstanding under the borrowings. We designated the interest rate swaps as cash flow hedges. Refer to Note 9, "Derivatives and Hedging Instruments", for further information on our interest rate swap contracts in effect as of June 30, 2022.
Commodity Price Risk
In the normal course of business, we are exposed to market risk related to our purchase of steel, a significant raw material upon which our manufacturing depends. Steel cost increased in 2021 when compared to 2020 and historical levels due to the worldwide raw material shortage stemming from the COVID-19 pandemic. While steel is typically available from numerous suppliers, the price of steel is a commodity subject to fluctuations that apply across broad spectrums of the steel market. We do not use any derivative or hedging instruments to manage steel price risk. If the price of steel increases, our variable costs would also increase. While historically we have successfully mitigated these increased costs through the implementation of price increases, in the future we may not be able to successfully mitigate these costs, which could cause our operating margins to decline. As noted above, higher steel prices not mitigated by price increases will result in a decline in operating margins for the full year of 2022 compared to operating margins for the full year of 2021.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures. As of June 30, 2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the chief executive officer the (“CEO”) and the chief financial officer (the “CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act). Based on this evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. Disclosure controls and procedures are controls and other procedures designed reasonably to assure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed reasonably to assure that this information is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, including the CEO and the CFO, does not, however, expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will prevent all fraud and material errors. Internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the facts that there are resource constraints and that the benefits of controls must be considered relative to their costs. The inherent limitations in internal control over financial reporting include the realities that judgments can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of internal control is also based in part on assumptions about the likelihood of future events, and there can be only reasonable, not absolute assurance that any design will succeed in achieving its stated goals under all potential events and conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.
Changes in Internal Control over Financial Reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2022, using the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that the Company’s internal control over financial reporting was effective as of June 30, 2022.
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the three months ended June 30, 2022, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting except that on April 1, 2022, the Company acquired ETANCO. As a result, the Company is currently integrating ETANCO's operations into its overall internal controls over financial reporting. Under the guidelines established by the Securities and Exchange Commission, companies are permitted to exclude acquisitions from their assessment of internal controls over financial reporting during the first year of an acquisition. Accordingly, we expect to exclude ETANCO from the assessment of internal control over financial reporting for 2022.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. Corrosion, hydrogen embrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, labeling defects, product formula defects, inaccurate chemical mixes, adulteration, environmental conditions, or other factors can contribute to failure of fasteners, connectors, anchors, adhesives, specialty chemicals, such as fiber reinforced polymers, and tool products. In addition, inaccuracies may occur in product information, descriptions and instructions found in catalogs, packaging, data sheets, and the Company’s website.
The Company currently is not a party to any legal proceedings which the Company expects individually or in the aggregate to have a material adverse effect on the Company’s financial condition, cash flows or results of operations. Nonetheless, the resolution of any claim or litigation is subject to inherent uncertainty and we could in the future, incur judgments, enter into settlements of claims or revise our expectations regarding the outcome of the various legal proceedings and other matters we are currently involved in, which could materially impact our financial condition, cash flows or results of operations. See “Note 14
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— Commitments and Contingencies” to the accompanying unaudited interim condensed consolidated financial statements for certain potential third-party claims.
Item 1A. Risk Factors.
There have been no material changes to our risk factors reported or new risk factors identified since the filing of our Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The table below shows the monthly repurchases of shares of the Company's common stock in the second quarter of 2022.
| (a) | (b) | (c) | (d) | |||||||||||||||||||||||
| Period | Total Number of Shares Purchased [1][2] | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs [2] | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs [2] | ||||||||||||||||||||||
| April 1 - April 30, 2022 | — | — | $ | 78,719,058 | ||||||||||||||||||||||
| May 1 - May 31, 2022 | 10 | 110.38 | — | 78,719,058 | ||||||||||||||||||||||
| June 1 - June 30, 2022 | 260,285 | 96.05 | 260,285 | $ | 53,719,063 | |||||||||||||||||||||
| Total | 260,295 | |||||||||||||||||||||||||
[1] Total number of shares purchased includes shares withheld for settlement of payroll taxes from stock-based compensation awards vested and for retirement eligible employees who retired during the second quarter of 2022.
[2] Pursuant to the Board’s $100.0 million repurchase authorization that was publicly announced on November 18, 2021, which authorization is scheduled to expire on December 31, 2022.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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Item 6. Exhibits.
| EXHIBIT INDEX | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32 | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Schema Linkbase Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Labels Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Simpson Manufacturing Co., Inc. | ||||||||||||||
| (Registrant) | ||||||||||||||
| DATE: | August 9, 2022 | By /s/Brian J. Magstadt | ||||||||||||
| Brian J. Magstadt | ||||||||||||||
| Chief Financial Officer | ||||||||||||||
| (principal accounting and financial officer) | ||||||||||||||
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits