Simpson(SSD) - 2022 Q2 - Quarterly Report

Part I - Financial Information This section presents the company's financial statements, management's analysis, market risk exposures, and internal control effectiveness Financial Statements The financial statements show substantial growth in assets, liabilities, and revenue, primarily due to the ETANCO acquisition Condensed Consolidated Financial Statements This section presents the company's balance sheet, income statement, and cash flow highlights for the reporting period Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | Change | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $2,485,468 | $1,484,125 | +67.5% | ETANCO acquisition | | Goodwill | $492,338 | $134,022 | +267.4% | Acquisition-related goodwill | | Intangible assets, net | $357,698 | $26,269 | +1261.9% | Acquisition-related intangibles | | Inventories | $539,844 | $443,756 | +21.7% | ETANCO inventory & higher costs | | Total Liabilities | $1,200,830 | $300,127 | +300.1% | New debt for acquisition | | Long term debt, net | $665,449 | $— | N/A | Debt incurred for ETANCO acquisition | Condensed Consolidated Statement of Earnings Highlights (in thousands) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,086,802 | $757,922 | +43.4% | | Gross Profit | $496,114 | $358,727 | +38.3% | | Gross Margin | 45.6% | 47.3% | -170 bps | | Income from Operations | $257,514 | $170,112 | +51.4% | | Net Income | $188,145 | $122,872 | +53.1% | | Diluted EPS | $4.34 | $2.82 | +53.9% | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $138,451 | $81,632 | | Net cash used in investing activities | ($833,552) | ($26,214) | | Net cash provided by (used in) financing activities | $631,531 | ($25,603) | | Net decrease in cash | ($55,021) | $31,157 | Notes to Condensed Consolidated Financial Statements Detailed notes provide context on the ETANCO acquisition, segment performance, and financing arrangements - On April 1, 2022, the Company acquired ETANCO for a total purchase consideration of $805.4 million, net of cash acquired. For the period from acquisition to June 30, 2022, ETANCO contributed $80.3 million in net sales and a net loss of $2.0 million, which includes costs for fair-value inventory adjustments and amortization[44][46] Preliminary Purchase Price Allocation for ETANCO (in thousands) | Assets Acquired & Liabilities Assumed | Amount | | :--- | :--- | | Goodwill | $376,908 | | Intangible assets, net | $358,761 | | Inventory | $102,608 | | Property and equipment, net | $87,156 | | Deferred income tax and other long-term liabilities | ($121,360) | | Total purchase price | $824,405 | Net Sales by Product Group (in thousands) | Product Group | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | | Wood construction products | $950,191 | $657,365 | | Concrete construction products | $136,185 | $99,828 | | Total | $1,086,802 | $757,922 | Segment Performance - Six Months Ended June 30 (in thousands) | Segment | Net Sales 2022 | Net Sales 2021 | Income from Ops 2022 | Income from Ops 2021 | | :--- | :--- | :--- | :--- | :--- | | North America | $895,140 | $651,120 | $273,064 | $174,215 | | Europe | $184,689 | $100,734 | $4,189 | $8,164 | | Asia/Pacific | $6,973 | $6,068 | $664 | $628 | - To finance the ETANCO acquisition, the company entered into an Amended and Restated Credit Facility on March 30, 2022, consisting of a $450.0 million revolving line of credit and a $450.0 million term loan. The company borrowed $250.0 million from the revolver and the full $450.0 million from the term loan[90] Management's Discussion and Analysis (MD&A) Management discusses financial performance, strategic initiatives, and future outlook, emphasizing the ETANCO acquisition's impact Overview and Strategic Initiatives This section outlines the company's strategic focus, including the ETANCO acquisition and key growth initiatives - The acquisition of ETANCO for $805.4 million is a key strategic development, expected to expand the company's European market presence and product portfolio. The company anticipates realizing approximately $30.0 million in annual run-rate operating income synergies from the integration[116][117] - The company is executing on key growth initiatives announced in March 2021, focusing on organic growth in markets such as original equipment manufacturers (OEM), repair/remodel, mass timber, concrete, and structural steel[119] - Recent strategic actions include realigning sales teams to five end-use markets, investing in a home building technology venture fund, and forming alliances with Hundegger USA and Structural Technologies to enhance offerings in mass timber and concrete strengthening solutions[122][126] Results of Operations This section details the consolidated and segment-specific financial performance for the current reporting periods Consolidated Results - Q2 2022 vs. Q2 2021 (in thousands) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $593,232 | $410,281 | +44.6% | | Gross Profit | $259,333 | $196,446 | +32.0% | | Gross Margin | 43.7% | 47.9% | -420 bps | | Income from Operations | $133,076 | $101,728 | +30.8% | | Net Income | $93,570 | $72,483 | +29.1% | - North America (Q2): Net sales grew 30.2% to $456.4 million, primarily due to price increases offsetting rising material costs, on relatively flat volumes. Gross margin decreased to 48.0% from 49.9% due to higher material costs[143][147] - Europe (Q2): Net sales surged 136.1% to $133.2 million, driven by the ETANCO acquisition ($80.3 million in sales). Gross margin fell to 29.3% from 36.0%, impacted by a $9.2 million inventory fair-value adjustment from the acquisition. The segment reported an operating loss due to $19.3 million in acquisition-related costs (inventory adjustment, amortization, integration costs)[131][148] Consolidated Results - Six Months 2022 vs. 2021 (in thousands) | Metric | H1 2022 | H1 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,086,802 | $757,922 | +43.4% | | Gross Profit | $496,114 | $358,727 | +38.3% | | Gross Margin | 45.6% | 47.3% | -170 bps | | Income from Operations | $257,514 | $170,112 | +51.4% | | Net Income | $188,145 | $122,872 | +53.1% | Business Outlook This section provides the company's updated financial projections and key assumptions for the full year 2022 Updated Full-Year 2022 Financial Outlook | Metric | Outlook | | :--- | :--- | | Operating Margin | 19.0% to 21.0% | | Interest Expense | Approx. $10.4 million | | Effective Tax Rate | 25.5% to 26.5% | | Capital Expenditures | $80.0 million to $90.0 million | Liquidity and Capital Resources This section discusses the company's cash flow, financing activities, and capital allocation strategies - The company's primary uses of capital include operations, working capital, capital expenditures, dividends, and stock repurchases. The acquisition of ETANCO was financed with cash on hand and borrowings of $700 million under a new credit facility[165][171] Cash Flow Summary - Six Months Ended June 30 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operations | $138,451 | $81,632 | | Cash from Investing | ($833,552) | ($26,214) | | Cash from Financing | $631,531 | ($25,603) | - During the first six months of 2022, the company used $46.3 million to repurchase 455,030 shares of common stock and paid $21.6 million in dividends[171] - Following the ETANCO acquisition, the company has revised its capital return target from 50% of free cash flow to 35%[173] Market Risk Disclosures The company faces market risks from foreign exchange rates, interest rates, and commodity price fluctuations - Foreign Exchange Risk: The company has exposure from international operations and purchases from foreign vendors. It uses foreign currency forward contracts to hedge some transactional exposures[176][177] - Interest Rate Risk: Exposure results from $694.4 million in outstanding variable-rate debt under the new credit agreement. The company uses interest rate swap agreements to convert this to a fixed rate, mitigating cash flow variability[178][179] - Commodity Price Risk: The company is exposed to fluctuations in the price of steel, a significant raw material. It does not use derivatives to hedge this risk and relies on price increases to mitigate cost pressures, which may not always be successful[180] Controls and Procedures Management confirmed the effectiveness of disclosure controls, with ETANCO's integration into internal controls ongoing - The CEO and CFO concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective[181] - Due to the acquisition of ETANCO on April 1, 2022, the company is integrating its operations. As permitted by SEC guidelines, management will exclude ETANCO from its assessment of internal control over financial reporting for the year 2022[184] Part II - Other Information This section covers legal proceedings, risk factors, share repurchases, and a list of filed exhibits Legal Proceedings The company is involved in routine legal proceedings, none of which are expected to have a material adverse effect - The Company is not currently a party to any legal proceedings that it expects, individually or in the aggregate, to have a material adverse effect on its financial condition or results of operations[186] Risk Factors No material changes to risk factors have been identified since the last Annual Report on Form 10-K - No material changes to risk factors have been identified since the last Annual Report on Form 10-K[188] Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 260,285 shares in Q2 2022, with $53.7 million remaining under authorization Common Stock Repurchases - Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Program | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | :--- | | April 2022 | — | — | — | $78,719,058 | | May 2022 | 10 | $110.38 | — | $78,719,058 | | June 2022 | 260,285 | $96.05 | 260,285 | $53,719,063 | Exhibits This section lists key exhibits filed with the Form 10-Q, including credit agreements and certifications - Key exhibits filed include the Amended and Restated Credit Agreement (10.1), the Securities Purchase Agreement for the ETANCO acquisition (10.2), and CEO/CFO certifications (31.1, 31.2)[195]