Simpson(SSD) - 2022 Q4 - Annual Report

Part I Business Simpson Manufacturing is a leading global manufacturer of wood and concrete construction products, expanding its European presence via ETANCO acquisition - The company designs, engineers, and manufactures high-quality wood and concrete construction products to make structures safer and more secure, with strong brand recognition for its Simpson Strong-Tie® brand[18] - On April 1, 2022, the company acquired ETANCO, a leading European manufacturer of fixing and fastening solutions, to expand its product portfolio and market presence across Europe[19] - The company's strategy includes increasing market share by maintaining high service levels, sponsoring training seminars, investing in digital tools, and diversifying product offerings[21] Products and Services The company offers extensive wood and concrete construction product lines, including connectors, fasteners, and anchors, with engineering support - Wood Construction Products: Over 15,000 standard and custom products including connectors, fasteners (Quik Drive system), and lateral resistive systems to strengthen wood applications[24][26] - Concrete Construction Products: Over 3,000 products including mechanical and adhesive anchors, tools, and repair/strengthening systems for concrete, masonry, and steel applications[25][26] - The company provides engineering support services, assisting customers with product selection, design, and proper installation, which serves as a competitive differentiator[25][39] Distribution Channels and Markets The company distributes products globally across North America, Europe, and Asia/Pacific, with Europe's market expanded by ETANCO - Key distribution channels include distributors, home centers, lumber dealers, contractors, and OEM relationships[27][33] - The company's sales to home centers increased year-over-year in 2022, 2021, and 2020, and it brought back Lowe's as a customer in Q2 2020[28] - The company's three operating segments are North America (U.S., Canada), Europe (France, UK, Germany, etc.), and Asia/Pacific (Australia, China, etc.)[29] Human Capital Resources As of December 31, 2022, the company employed 5,158 people globally, focusing on diversity, talent development, and safety Employee Count by Region (as of Dec 31, 2022) | Region | Employees | | :--- | :--- | | North America | 3,035 | | Europe | 1,579 | | Asia Pacific | 544 | | Total | 5,158 | Global Gender Demographics (as of Dec 31, 2022) | Level | Women | Men | Not Disclosed | | :--- | :--- | :--- | :--- | | All employees | 19% | 64% | 17% | | Senior Leadership | 27% | 73% | 0% | - Approximately 9% of the company's employees are represented by labor unions. Two union contracts in Stockton, CA are set to expire in 2023, and two in San Bernardino County, CA will expire in 2025 and 2026[58] Risk Factors The company faces risks from global economic conditions, housing market cyclicality, raw material price volatility, acquisition integration, and regulatory compliance - Global economic conditions, including inflation and supply chain disruptions, could adversely affect operations, demand, and costs[63] - The business is highly dependent on the housing market and residential construction, with the North America Segment accounting for approximately 80% of net sales in fiscal year 2022[68] - The integration of the ETANCO acquisition presents risks, including failure to achieve anticipated synergies, significant integration expenses, and diversion of management's attention[115] - Increases in the price of steel, the principal raw material, could negatively affect sales and profits if the company cannot pass these costs to customers[76] Properties The company operates 74 global facilities, primarily owned, totaling over 6 million square feet, with headquarters in Pleasanton, CA Owned and Leased Facilities by Region (as of Feb 28, 2023) | Region | Number Of Properties | Owned (sq. ft. in thousands) | Leased (sq. ft. in thousands) | Total (sq. ft. in thousands) | | :--- | :--- | :--- | :--- | :--- | | North America | 28 | 2,235 | 1,031 | 3,266 | | Europe | 36 | 1,749 | 725 | 2,474 | | Asia/Pacific | 9 | 175 | 40 | 215 | | Total | 74 | 4,248 | 1,796 | 6,044 | - The company owns its headquarters in Pleasanton, California, and its principal U.S. manufacturing facilities. The majority of its principal manufacturing facilities outside the U.S. are also owned[144][145] Legal Proceedings The company is involved in routine legal proceedings, none of which are currently expected to materially impact its financial condition or operations - The Company is not currently a party to any legal proceedings that it expects to have a material adverse effect on its financial condition, cash flows, or results of operations[147] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE under 'SSD', with $43.9 million in 2022 dividends and a new $100.0 million share repurchase program - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol 'SSD'[150] - In 2022, the company paid a total of $43.9 million in cash dividends. A quarterly dividend of $0.26 per share was declared on January 24, 2023[151] - In 2022, 811,330 shares were repurchased for $78.6 million. The Board authorized a new repurchase program of up to $100.0 million for the period of January 1, 2023, through December 31, 2023[157] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, net sales increased 34.5% to $2.12 billion, driven by price increases and ETANCO acquisition, with gross margin at 44.5% 2022 vs 2021 Financial Highlights | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,116.1M | $1,573.2M | +34.5% | | Gross Profit | $941.3M | $755.0M | +24.7% | | Gross Margin | 44.5% | 48.0% | -3.5 p.p. | | Income from Operations | $459.1M | $367.8M | +24.8% | | Net Income | $334.0M | $266.4M | +25.4% | | Diluted EPS | $7.76 | $6.12 | +26.8% | - The acquisition of ETANCO on April 1, 2022, contributed $212.6 million in net sales for the nine months it was part of the company[177][325] - For fiscal year 2023, the company expects operating margin to be between 18% and 20%, and capital expenditures to be between $90.0 million and $95.0 million[179] Results of Operations In 2022, net sales grew 34.5% to $2.12 billion due to price increases and ETANCO acquisition, with gross margin at 44.5% due to higher costs Net Sales by Segment (in thousands) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | North America | $1,701,041 | $1,362,941 | 24.8% | | Europe | $400,303 | $196,996 | 103.2% | | Asia/Pacific | $14,743 | $13,280 | 11.0% | | Total | $2,116,087 | $1,573,217 | 34.5% | Gross Margin by Segment | Segment | 2022 | 2021 | | :--- | :--- | :--- | | North America | 47.7% | 50.0% | | Europe | 31.4% | 35.1% | | Asia/Pacific | 33.3% | 36.9% | | Total | 44.5% | 48.0% | - Europe's income from operations decreased by $3.0 million, primarily due to $17.3 million in acquisition and integration costs, a $13.6 million inventory fair-value adjustment, and $12.4 million in amortization related to the ETANCO acquisition[177][200] Liquidity and Capital Resources As of December 31, 2022, the company maintained $300.7 million in cash, with operating cash flow of $399.8 million, funding ETANCO acquisition through debt Cash Flow Summary (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash from Operating activities | $399,821 | $151,295 | | Net cash used in Investing activities | ($870,244) | ($58,805) | | Net cash from (used in) Financing activities | $465,526 | ($71,616) | - To finance the ETANCO acquisition, the company borrowed $250.0 million under its revolving credit facility and $450.0 million under a term loan facility[214] - In 2022, the company returned $122.5 million to stockholders through $78.6 million in share repurchases and $43.9 million in dividends[221][223] Quantitative and Qualitative Disclosures About Market Risk The company manages foreign exchange and interest rate risks through derivatives, while steel commodity price risk is mitigated by price adjustments - The company is exposed to foreign exchange risk from its international operations. It uses foreign currency forward contracts to hedge some of this exposure[231][232] - Interest rate risk exists due to $583.2 million in outstanding variable-rate debt as of Dec 31, 2022. The company uses interest rate swaps to convert this to a fixed rate, mitigating cash flow variability[235][236] - The company faces commodity price risk from steel, its primary raw material. It does not use derivatives to hedge this risk but attempts to pass on cost increases to customers[237] Consolidated Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2022, including an unqualified audit opinion and detailed notes, highlighting ETANCO intangible asset valuation - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements and internal control over financial reporting[242][253] - The valuation of the acquired customer relationships intangible asset from the ETANCO acquisition was identified as a critical audit matter due to the complex and subjective judgments involved[247][248] Key Balance Sheet Figures (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,179,250 | $998,835 | | Total Assets | $2,503,971 | $1,484,125 | | Total Current Liabilities | $348,563 | $244,602 | | Total Liabilities | $1,090,592 | $300,127 | | Total Stockholders' Equity | $1,413,379 | $1,183,998 | Note 3. Acquisition On April 1, 2022, the company acquired ETANCO for $805.4 million, recognizing $365.6 million goodwill and $357.3 million intangible assets, contributing $212.6 million in net sales - The company acquired 100% of ETANCO on April 1, 2022, for a total purchase consideration of $805.4 million, net of cash acquired[323] ETANCO Purchase Price Allocation (in thousands) | Asset/Liability | Fair Value | | :--- | :--- | | Goodwill | $365,591 | | Intangible assets, net | $357,327 | | Property and equipment, net | $89,695 | | Inventory | $107,185 | | Total Purchase Price | $824,405 | - The acquisition resulted in $17.3 million of acquisition and integration related costs in fiscal year 2022[335] Note 14. Debt On March 30, 2022, the company secured a $450.0 million revolving credit and $450.0 million term loan, totaling $583.2 million outstanding debt as of December 31, 2022 - The company entered into an Amended and Restated Credit Facility on March 30, 2022, consisting of a $450.0 million revolving credit facility and a $450.0 million term loan facility[388] - As of December 31, 2022, the company had $150.0 million outstanding on the revolving credit facility and $433.1 million outstanding on the term loan[388][393] Note 19. Segment Information The company operates in North America, Europe, and Asia/Pacific segments, with North America dominating sales and assets, and Wood Construction products comprising 87% of 2022 net sales 2022 Net Sales and Total Assets by Segment (in thousands) | Segment | Net Sales | Total Assets | | :--- | :--- | :--- | | North America | $1,701,041 | $1,393,968 | | Europe | $400,303 | $675,634 | | Asia/Pacific | $14,743 | $34,599 | 2022 Net Sales by Product (in thousands) | Product Line | 2022 Net Sales | | :--- | :--- | | Wood Construction | $1,831,580 | | Concrete Construction | $282,205 | | Other | $2,302 | | Total | $2,116,087 | - No single customer accounted for 10% or more of net sales in 2022, 2021, or 2020[420] Controls and Procedures As of December 31, 2022, management deemed disclosure controls and internal control over financial reporting effective, excluding ETANCO operations - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[427] - Management's assessment of internal control over financial reporting concluded it was effective, but excluded the operations of ETANCO, which was acquired on April 1, 2022[431][432] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10-14, including directors, executive compensation, and security ownership, is incorporated by reference from the 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees (Item 14) is incorporated by reference from the company's 2023 Proxy Statement[437][438][439][440][441] Part IV Exhibits, Financial Statement Schedules This section details all documents filed with the Form 10-K, including consolidated financial statements, schedules, and various corporate and legal exhibits - This section includes the consolidated financial statements and Schedule II - Valuation and Qualifying Accounts[443][445] - Exhibits filed include key corporate documents, the Amended and Restated Credit Agreement, the ETANCO Securities Purchase Agreement, and various management compensation plans[447][449]