SIMPSON MANUFACTURING CO., INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear in this Annual Report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and in this Annual Report, particularly in "Part I - Item 1A. Risk Factors."
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:
At ourMarch 23, 2021 analyst and investor day, we unveiled several key growth initiatives that we believe will help us continue our track record of 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.
Also during the March analyst and investor day, we highlighted our five-year ambitions, which are as follows:
1.Strengthen our values-based culture; 2.Be the business partner of choice; 3.Strive to be an innovative leader in the markets we operate; 4.Continue above market growth relative tothe United States housing starts; 5.Remain within the top quartile of our proxy peers for operating income margin; and 6.Remain in the top quartile of our proxy peers for return on invested capital.
We will make periodic updates related to material developments to our key growth initiatives and with our five-year ambitions.
Acquisitions and Investments
The Company entered into an agreement to acquire theEtanco Group ("Etanco") for$818 million (1) (approximately €725 million) with an expected close date ofApril 1, 2022 . Etanco is a leading designer, manufacturer and distributor of fixing and fastening solutions for the building construction market throughoutEurope , which includes innovative fasteners, connectors, anchors and safety solutions for roofing, cladding, façade, waterproofing and solar applications. For the twelve months endedSeptember 30, 2021 , Etanco's net sales and operating income margin were approximately$291 million (2) (approximately €258 million) and 19.7%(2), respectively. Etanco's primary product applications directly align with the addressable markets in which the Company operates, estimated at over$5.0 billion . Leveraging Etanco's leading market position inEurope , following the proposed 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 acrossEurope . The transaction would 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. The Company expects to realize operating income synergies of approximately$30 million , on an annual run rate basis, within 36 months following the proposed acquisition. These synergies would 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. The Company would expect 26 --------------------------------------------------------------------------------
to scale its European net sales and operating income margin performance,
resulting in an approximate 500 basis point increase in
Also during 2021 •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 , LC to increase each parties' sales in the mass timber and component manufacturing markets by offeringNorth America customers end-to-end solutions, including integrated software from a single source. •Formed an 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, and •Expanded its product line thru licensing products and purchasing or acquiring intellectual property. COVID-19 surfaced in late 2019 and has spread around the world, including tothe United States . InMarch 2020 , theWorld Health Organization declared COVID-19 a worldwide pandemic and the President ofthe United States declared the COVID-19 outbreak a national emergency. As ofDecember 31, 2021 , the effects of and responses to the pandemic continue to have a significant impact on worldwide economic activity and on macroeconomic conditions. Although vaccines are available in numerous countries the vaccination level varies by country and inthe United States by state. The duration and severity of the effects of the pandemic are still unknown and cannot be predicted with any certainty. Despite this lessening impact throughout 2021, we continue to monitor the COVID-19 pandemic for potential impact on our business and take precautions to provide a safe environment for our employees and customers. Notwithstanding the Company's continued efforts to promote the health and safety of our employees, suppliers and customers, as the COVID-19 pandemic continues, health concern risks remain. It also remains unclear how various national, state, and local governments will react if new variants of the virus become more prevalent. In response to the pandemic, government authorities in the countries and states where we operate issued various and differing shelter in place and stay at home orders, social distancing guidelines, mask mandates and other measures in response to the COVID-19 pandemic. In many of those locations our operations are classified as an "essential business" and we continue to operate our business in compliance with applicable state and local laws and are observing recommendedCenters for Disease Control and Prevention guidelines to minimize the risk of spreading the COVID-19 virus. We have undertaken numerous steps and instituted additional precautions to comply with health and safety guidelines and to protect our employees, suppliers and customers, as their safety and well-being is one of our top priorities, and to comply with health and safety guidelines. These steps and precautions include enhanced deep cleaning, staggered shifts, temperature checking, use of face masks, practicing social distancing and limiting non-employees at our locations, amongst other safety related policies and procedures. Although vaccines are available where we operate, health concern risks remain and it is possible the COVID-19 pandemic could further impact our operations and the operations of our suppliers and vendors, particularly in light of variant strains of COVID-19 that may cause a resumption of high levels of infection and hospitalization. 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 have been very supportive and continue to do their part to ensure that service levels to our customers remain strong and, to date, we have not experienced any supply-chain disruptions and continued to meet our customers' needs despite the challenges presented by the COVID-19 pandemic. We will continue to communicate with our supply chain partners to identify and mitigate risk and to manage inventory levels. In response to the COVID-19 pandemic the Company proactively took measures to maintain and preserve its strong financial position and flexibility. The Company's Crisis Management Team, which includes members of senior management, meets regularly to review and assess the status of the Company's operations and the health and safety of its employees. The Company's business, financial condition and results of operations depends significantly on the level ofUnited States , housing starts and residential construction activity. Though single-family housing starts increased significantly from prior-year's level, we believe there is uncertainty that demand will increase in the short-term due to supply-chain factors, inflation and possibly interest rate increases affecting new home starts and completions. With recent sales price increases, we believe sales will likely increase in future periods even if demand does not decrease. However, increased selling prices are expected to be offset by increasing material costs, sourcing logistics complications and a tight labor market, which could negatively affect operating margins for 2022. 27 -------------------------------------------------------------------------------- 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.
Factors Affecting Our Results of Operations
Unlike lumber or other products that have a more direct correlation toUnited 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 process that follows the construction process. Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules. Our sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, 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, as our customers tend to purchase construction materials in the late spring and summer months for the construction season. Weather conditions, such as extended cold or wet weather, which affect and sometimes delay installation of some of our products, could negatively affect our results of operations. Political and economic events such as tariffs and the possibility of additional tariffs on imported raw materials or finished goods or such as labor disputes can also have an effect on our gross and operating profits as well as the amount of inventory on-hand. Our operations can also be affected by a volatile steel market and stressed product transportation systems. 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.
Our operations also expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic.
Business Segment Information
Historically ourNorth America segment has generated more revenues from wood construction products compared to concrete construction products.North America sales increased 23.7% for the year endedDecember 31, 2021 compared toDecember 31, 2020 . Our wood construction product sales increased 25.2% for the year endedDecember 31, 2021 compared toDecember 31, 2020 , primarily due to product price increases that took effect throughout 2021 as well as increased sales volumes. Our concrete construction product sales increased 13.9% for the year endedDecember 31, 2021 compared toDecember 31, 2020 , mostly due to product price increases that took effect throughout 2021.North America net sales were positively affected by approximately$4.7 million in foreign currency translation mostly related to a strengthening Canadian dollar. Each product price percentage increase ranged from mid-single digits to mid-teens depending on the product mix, for certain of our wood connector, fastener and concrete products inthe United States . In regards to the product price increases phased in during 2021 relative to 2022, full phased in product price increases for 2022 could result in$300 million in additional net sales compared to 2021. . We currently anticipate additional net sales to be offset by higher priced raw materials and rising average cost of steel on hand significantly compressing gross margin and operating margin in fiscal 2022. OurEurope segment also generates more revenues from wood construction products than concrete construction products.Europe sales increased 25.7% for the year endedDecember 31, 2021 compared toDecember 31, 2020 , due to product priced increases and higher sales volumes in local currency and were positively affected by approximately$8.5 million in foreign currency translation related toEurope's currencies strengthening against the United States Dollar. Wood construction product sales increased 28.7% for the year endedDecember 31, 2021 compared toDecember 31, 2020 . Concrete construction product sales are mostly project based, and sales increased 13.9% for the year endedDecember 31, 2021 compared toDecember 31, 2020 . Gross margins decreased slightly, mostly due to higher material and labor costs, partly offset by lower warehouse and shipping costs and factory and tooling costs all as a percentage of sales. Operating expenses increased, primarily due to increased professional fees and personnel costs. For fiscal 2022, increased steel costs and product sourcing complications could offset increased sales and negatively affect operating margins.
Our
SinceDecember 2020 , inventory pounds inNorth America , which is the bulk of our inventory, decreased 2% while the weighted average cost per pound of total on hand increased approximately 63%. Based on our current expectations, we are anticipating continued raw material cost pressure for fiscal 2022. Our gross margins in 2021 reflect an average cost of steel 28 -------------------------------------------------------------------------------- sourced prior to and during the increasing steel price market. As we work through our on hand inventory and continue to buy raw material at these much higher prices, our anticipated costs of goods sold are expected to increase significantly for fiscal 2022, even if prices for raw material begin to decline, as the impact from averaging raw material costs typically lags our price increases. We began to see this sequential margin deceleration occur during the fourth quarter 2021 with gross margin declining by roughly 250 basis points from the third quarter 2021. As a result, and based on our fiscal 2022 operating margin outlook, we currently expect our operating margin for the full year of 2022 will decline by approximately 500 basis points year-over-year.
Business Outlook
Based on business trends and conditions, the Company's outlook (excluding
Etanco) for the full fiscal year ending
•Operating margin is estimated to be in the range of 17.5% to 19.0%.
•The effective tax rate is estimated to be in the range of 25.5% to 26.5%, including both federal and state income tax rates and assuming no tax law changes are enacted.
•Capital expenditures are estimated to be in the range of
While the magnitude and duration of the COVID-19 pandemic and its impact on general economic conditions remain uncertain, the Company continues to monitor the impact of the pandemic on its operations and financial condition, which was not significantly adversely impacted in fiscal 2021. Please note that ongoing uncertainties surrounding the impact of the COVID-19 pandemic on the Company's business, which may include the economic impact on its operations, raw material costs, consumers, suppliers, vendors, and other factors outside of its control, may have a material adverse impact on the Company's financial outlook.
(1) Reflects EUR to USD exchange rate as of
Results of Operations
The following table sets forth, for the years indicated, the Company's operating results as a percentage of net sales for the years endedDecember 31, 2021 , 2020 and 2019, respectively: Years Ended December 31, 2021 2020 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 52.0 % 54.5 % 56.7 % Gross profit 48.0 % 45.5 % 43.3 % Research and development and other engineering 3.8 % 4.0 % 4.1 % Selling expense 8.6 % 8.9 % 9.9 % General and administrative expense 12.3 % 12.7 % 13.9 % Total operating expense 24.7 % 25.6 % 27.9 % Net gain on disposal of assets - % - % (0.5) % Income from operations 23.3 % 19.9 % 15.9 % Interest expense, net and other (0.2) % (0.2) % (0.2) % Foreign exchange gain (loss), net (0.4) % (0.1) % (0.1) % Income before taxes 22.8 % 19.7 % 15.7 % Provision for income taxes 5.9 % 4.9 % 3.9 % Net income 16.9 % 14.8 % 11.8 %
Comparison of the Years Ended
Unless otherwise stated, the results announced below results, when providing comparisons (which are generally indicated by words such as "increased," "decreased," "unchanged" or "compared to"), compare the results of operations for the year endedDecember 31, 2021 , against the results of operations for the year endedDecember 31, 2020 . Unless otherwise stated, the results 29 --------------------------------------------------------------------------------
announced below, when referencing "both years," refer to the year ended
The following table shows the change in the Company's operations from 2020 to
2021, and the increases or decreases from the prior year, for each category by
segment:
Increase (Decrease) in Operating Segment
Asia/ Admin &
(in thousands) 2020 North America Europe Pacific All Other 2021
Net sales $ 1,267,945 $ 261,050 $ 40,283 $ 3,939 $ - $ 1,573,217
Cost of sales 691,561 97,293 26,660 2,514 159 818,187
Gross profit 576,384 $ 163,757 $ 13,623 $ 1,425 $ (158) 755,030
Operating expenses:
Research and development and other
engineering expense 50,807 7,919 625 30 - 59,381
Selling expense 112,517 19,019 2,950 518 - 135,004
General and administrative expense 161,029 27,025 4,172 4 946 193,176
Operating expenses 324,353 53,963 7,747 552 946 387,561
Net gain (loss) on disposal of assets (332) (95) 113 (10) - (324)
Impairment of goodwill - - - - - -
Income from operations 252,363 109,889 5,763 883 (1,105) 367,793
Interest expense, net and other (2,012) (2,990) (1,841) 239 2,942 (3,662)
Foreign exchange loss (787) (1,292) (1,112) 331 (2,722) (5,582)
Income before income taxes 249,564 105,607 2,810 1,453 (885) 358,549
Provision for income taxes 62,564 29,760 9 (371) 140 92,102
Net income $ 187,000 $ 75,847 $ 2,801 $ 1,824 $ (1,025) $ 266,447
Net Sales increased 24.1% to $1,573.2 million from $1,267.9 million primarily
due to product price increases that took effect throughout 2021 in an effort to
offset rising material costs as well as higher sales volumes. Wood construction
product net sales, including sales of connectors, truss plates, fastening
systems, fasteners and shearwalls, represented 87% and 85% of the Company's
total net sales for the years ended December 31, 2021 and 2020, respectively.
Concrete construction product net sales, including sales of adhesives,
chemicals, mechanical anchors, powder actuated tools and reinforcing fiber
materials, represented 13% and 15% of the Company's total net sales for the
years ended December 31, 2021 and 2020.
Gross profit increased to $755.0 million from $576.4 million . Gross margins
increased to 48.0% from 45.5%, primarily due to product price increases during
2021, lower labor and factory expenses, and offset partly by higher material
costs as a percentage of net sales. Gross margins, including some inter-segment
expenses, which were eliminated in consolidation, and excluding certain expenses
that are allocated according to product group, increased to 47.9% from 45.5% for
wood construction products and increased to 44.4% from 41.6% for concrete
construction products, respectively.
Research and development and other engineering expense increased 16.9% to $59.4
million from $50.8 million , primarily due to increases of $5.0 million in
personnel costs, $1.3 million in patent and code approval costs, $1.1 million in
professional fees, and $1.0 million in cash profit sharing expenses.
Selling expense increased 20.0% to $135.0 million from $112.5 million , primarily
due to increases of $13.8 million in personnel costs and sales commissions, $4.6
million in professional fees, $1.3 million in stock-based compensation, $2.0
million cash profit sharing expense, and $1.4 million travel-related expenses,
partly offset by decrease of $1.5 million in advertising and promotional
expense.
General and administrative expense increased 20.0% to $193.2 million from $161.0
million , primarily due to increases of $10.2 million in professional fees, $9.7
million in personnel costs, $3.3 million in cash profit sharing expenses, $2.3
million in stock-based compensation, $2.0 million of computer and software
related costs, and $1.9 million in depreciation and amortization expenses.
30
--------------------------------------------------------------------------------Our effective income tax rate increased to 25.7% from 25.1% primarily due to a decrease in tax benefits associated with stock-based compensation.
Net income was
The following table shows net sales by segment for the years ended
North Asia/
(in thousands) America Europe Pacific Total
December 31, 2020 $ 1,101,891 $ 156,713 $ 9,341 $ 1,267,945
December 31, 2021 1,362,941 196,996 13,280 1,573,217
Increase $ 261,050 $ 40,283 $ 3,939 $ 305,272
Percentage increase 23.7 % 25.7 % 42.2 % 24.1 %
The following table shows segment net sales as percentages of total net sales
for the years ended
North Asia/
America Europe Pacific Total
Percentage of total 2020 net sales 87 % 12 % 1 %
100 % Percentage of total 2021 net sales 87 % 13 % - % 100 % Gross Profit
The following table shows gross profit by segment for the years ended
North Asia/ Admin &
(in thousands) America Europe Pacific All Other Total
December 31, 2020 $ 517,380 $ 55,541 $ 3,477 $ (14) $ 576,384
December 31, 2021 681,137 69,164 4,902 (172) 755,031
Increase $ 163,757 $ 13,623 $ 1,425 $ (158) $ 178,647
Percentage increase 31.7 % 24.5 % * * 31.0 %
* The statistic is not meaningful or material.
The following table shows gross margins by segment for the years ended
North Asia/ Admin &
America Europe Pacific All Other Total
2020 gross margin 47.0 % 35.4 % 37.2 % * 45.5 %
2021 gross margin 50.0 % 35.1 % 36.9 % * 48.0 %
* The statistic is not meaningful or material.
•Net sales increased 23.7% primarily due to product price increases that took effect throughout 2021 in an effort to offset rising material costs as well as higher sales volumes.Canada's sales increased primarily due to increases in sales volume and were positively affected by$4.7 million foreign currency translation in local currency. •Gross margin increased to 50.0% from 47.0%, primarily due to product price increases implemented during 2021, and decreases in labor, factory, warehouse and freight costs, partly offset by higher material costs, each as a percentage of net sales. 31 --------------------------------------------------------------------------------
•Research and development and engineering expense increased
•Selling expense increased$19.0 million , primarily due to increases of$11.4 million in personnel costs and sales commissions,$2.1 million in professional fees,$1.8 million in travel and trade show events,$1.7 million in cash profit sharing expense,$1.2 million in stock-based compensation, partly offset by decreases of$0.5 million in advertising and depreciation expense. •General and administrative expense increased$27.0 million , primarily due to increases of$8.4 million in professional fees, including legal fees,$6.9 million in personnel costs,$2.9 million in depreciation and amortization expense,$2.4 million in computer software and hardware costs, and$1.5 million in cash profit sharing expense, as well as,$1.5 million in higher software development expense net of capitalization.
•Income from operations increased
•Net sales increased 25.7%, primarily due to higher sales volumes compared to last year's COVID-19 related slow-down.Europe's sales were also benefited by positive$8.5 million foreign currency translations resulting from someEurope currencies strengthening against the United States Dollar. •Gross margin decreased to 35.1% from 35.4%, primarily due to increases in material and labor costs, partly offset by decreases in factory & tooling costs, warehouse and shipping costs, each as a percentage of net sales. •Selling expense increased$3.0 million primarily due to increases of$2.1 million in personnel costs,$0.5million in professional fees, and$0.3 million in cash profit sharing expenses.
•General and administrative expenses increased
•Income from operations increased
•For information about the Company'sAsia/Pacific segment, please refer to the table above setting forth changes in our operating results for the years endedDecember 31, 2021 and 2020.
Administrative and All Other
•General and administrative expense increased$0.9 million , primarily due to increases of$2.3 million in stock-based compensation,$2.0 million in personnel costs,$1.6 million in cash profit sharing expense offset by decreases of$4.5 million in professional fees and$0.5 million in depreciation and amortizations costs.
Comparison of the years ended
Critical Accounting Policies and Estimates
The critical accounting policies described below affect the Company's more
significant judgments and estimates used in the preparation of the Company's
Consolidated Financial Statements. If the Company's business conditions change
or if it uses different assumptions or estimates in the application of these and
other accounting policies, as well as uncertainty in the current economic
environment due to the ongoing COVID-19 pandemic, the Company's future results
of operations could be adversely affected.
32
--------------------------------------------------------------------------------Inventory Valuation
Inventories are stated at the lower of cost or net realizable value (market). Cost includes all costs incurred in bringing each product to its present location and condition, as follows:
•Raw materials and purchased finished goods - principally valued at cost determined on a weighted average basis; and •In-process products and finished goods - cost of direct materials and labor plus attributable overhead based on a normal level of activity. The Company applies net realizable value and makes estimates for obsolescence to the gross value of inventory. The Company estimates net realizable value based on estimated selling price less further costs through completion and disposal. The Company impairs slow-moving products by comparing inventories on hand to projected demand. If on-hand supply of a product exceeds projected demand or if the Company believes the product is no longer marketable, the product is considered obsolete inventory. The Company revalues obsolete inventory to its net realizable value and has consistently applied this methodology. The Company believes that this approach is suitable for impairments of slow-moving and obsolete inventory. When impairments are established, a new cost basis of the inventory is created. Unexpected changes in market demand, building codes or buyer preferences could reduce the rate of inventory turnover and require the Company to recognize more obsolete inventory.
Our goodwill balance is not amortized to expense, and we may assess quantitative
or qualitative factors to determine whether it is more likely than not that the
fair value of each reporting unit is less than its carrying amount as a basis
for determining whether it is necessary to complete quantitative impairment
assessments. The Company evaluates the recoverability of goodwill in accordance
with Accounting Standard Codification ("ASC") Topic 350, "Intangibles - Goodwill
and Other," annually, or more frequently if an event occurs or circumstances
change in the interim that would more likely than not reduce the fair value of
the asset below its carrying amount.
Intangible assets acquired are recognized at their fair value at the date of
acquisition. Finite-lived intangibles are amortized over their applicable useful
lives. We monitor conditions related to these assets to determine whether events
and circumstances warrant a revision to the remaining amortization or
depreciation period. We test these assets for potential impairment annually and
whenever management concludes events or changes in circumstances indicate that
the carrying amount may not be recoverable.
The Company tests goodwill for impairment at the reporting unit level on an
annual basis (in the fourth quarter for the Company). The Company also reviews
goodwill for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable. These events or circumstances
could include a significant change in the business climate, legal factors,
operating performance indicators, competition, or disposition or relocation of a
significant portion of a reporting unit. The reporting unit level is generally
one level below the operating segment, which is at the country level, except for
the United States , Australia and S&P Clever reporting units.
The 2021and 2020 annual testing of goodwill and intangible assets for impairment did not result in impairment charges.
The S&P reporting unit passed Step 1 of the annual 2021 impairment test by a 7.8% margin indicating an estimated fair value greater than its net book value and was the only reporting unit with a fair value greater than net book value margin of less than 10%. The S&P reporting unit is sensitive to management's plans for increasing sales and operating margins. The S&P reporting unit's failure to meet management's objectives could result in future impairment of some or all of the S&P reporting unit's goodwill, which was$23.1 million atDecember 31, 2021 . Key assumptions used in Step 1 of the Company's annual goodwill impairment test included discount rates, multiple rates, average annual sales growth rates and average annual pre-tax income before interest, depreciation and amortization expenses during the forecast period starting with fiscal year 2021. A sensitivity assessment for the key assumptions included in the 2021 goodwill impairment test on the S&P reporting unit is as follows: •A 90 basis point hypothetical increase in the discount rate, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value, and thus it would not result in the reporting unit failing Step 1 of the goodwill impairment test; •A 150 basis point hypothetical decrease in the multiple rate applied to forecasted 2022 pre-tax income before interest, depreciation and amortization, holding all other assumptions constant, would not have decreased the fair value of the 33 -------------------------------------------------------------------------------- reporting unit below its carrying value, and thus it would not result in the reporting unit failing Step 1 of the goodwill impairment test; •A 5% hypothetical decrease in average annual sales growth rates, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value and •A 10% hypothetical decrease in average annual pre-tax income before interest, depreciation and amortization expenses, holding all other assumptions constant, would not have decreased the fair value of the reporting unit below its carrying value.
Revenue from Contracts with Customers
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer at a point in time. The Company's general shipping terms are Incoterm C.P.T. (F.O.B. shipping point), where the title, and risk and rewards of ownership transfer at the point when the products are no longer on the Company's premises. Other Incoterms are allowed as exceptions depending on the product or service being sold and the nature of the sale. The Company recognizes revenue based on the consideration specified in the invoice with a customer, excluding any sales incentives, discounts, and amounts collected on behalf of third parties (i.e., governmental tax authorities). Volume rebates, discounts and rights of return are accounted for as variable considerations because the transaction price is either uncertain until the customer completes or fails the specified volumes or returned product are not returned by the return period. The Company estimates allowances based on historical experience from prior periods and the customer's historical purchasing pattern. These estimates are deducted from revenues and are reevaluated periodically during the reporting period.
Effect of New Accounting Standards
See "Note 1 - Recently Adopted Accounting Standards" and "Note 1 - Recently Issued Accounting Standards Not Yet Adopted" to the Company's Consolidated Financial Statements.
Liquidity and Capital Resources
InJuly 2021 , the Company entered into a fourth amendment to the unsecured credit agreement datedJuly 27, 2012 withWells Fargo Bank, National Association , and certain other institutional lenders that provides for a$300.0 million unsecured revolving credit facility (the "Credit Facility"). The amendment extends the term of the Credit Facility fromJuly 23, 2022 , toJuly 12, 2026 and modified certain covenants to provide us with additional flexibility. As ofDecember 31, 2021 , the full$300.0 million under the Credit Facility was available for borrowing and we remain debt free. Our principal uses of liquidity 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, repurchasing the Company's common stock, paying cash dividends, and financing other investment opportunities over the next twelve months. The Company has certain contractual obligations, primarily operating leases, purchase obligations and debt interest obligations which include annual facility fees. Refer to "Note 11 - Leases" (Part II, Item 8) and "Note 14 - Commitment and Contingencies" for details related to the Company's purchase obligations and debt annual facility fees. The Company did not have any significant off-balance sheet commitments as ofDecember 31, 2021 . As previously disclosed, the Company is acquiring Etanco. The acquisition is expected to be funded via a combination of$100 million of existing cash, a$450 million unsecured term loan with committed financing fromWells Fargo Bank andMUFG Union Band and the remainder from borrowings under the Company's existing Revolving Credit Facility, which will be increased from$300 million to$450 million . Interest expense will increase from the additional debt incurred to finance the acquisition of Etanco but the Company expects its net debt-to-EBITDA ratio to be below 1.5 times on the closing of the acquisition, maintaining the Company's conservative leverage profile. As ofDecember 31, 2021 , our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions, and includes$75.8 million held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to theU.S. The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outsidethe United States . 34 --------------------------------------------------------------------------------
The following table presents selected financial information as of
At December 31,
(in thousands) 2021 2020 2019
Cash and cash equivalents $ 301,155 $ 274,639 $ 230,210
Property, plant and equipment, net 259,869 255,184 249,012
Equity investment, goodwill and intangible assets 170,309 165,110 159,430 Working capital 754,233 559,078 482,000
The following table presents the significant categories of cash flows for the
twelve months ended
Years Ended
(in thousands) 2021 2020 2019
Net cash provided by (used in):
Operating activities $ 151,295 $ 207,572 $ 205,662
Investing activities (58,805) (39,853) (28,021)
Financing activities (71,616) (126,777) (108,154)
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.
In 2021, operating activities provided $151.3 million in cash and cash
equivalents, as a result of $266.4 million from net income and $71.3 million
from non-cash adjustments to net income which includes depreciation and
amortization, stock-based compensation and non-cash lease expense, partially
offset by a decrease of $186.5 million for the net change in operating assets
and liabilities primarily from increases of $164.2 million in inventory and
$68.0 million in trade accounts receivables, partly offset by an increase of
$50.5 million in accrued liabilities and other current liabilities.
Cash used in investing activities of $58.8 million during the year ended
December 31, 2021 was mainly for capital expenditures and investments, including
a venture capital fund. Our capital spending for the fiscal years 2019, 2020 and
2021 was $32.7 million , $32.6 million and $43.7 million , respectively, which was
primarily used for 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 $65
million to $70 million range. Capital expenditures outlook, we estimate roughly
20% will be dedicated to maintenance capital expenditures. Our growth
investments will be primarily focused on purchases of new equipment to support
increased productivity and efficiencies, enhancements to our existing facilities
to expand our manufacturing footprint in-line with increasing customer needs, as
well as investments for adjacencies and key growth initiatives.
Cash used in financing activities of $71.6 million during the year ended
December 31, 2021 , consisted primarily of $41.6 million used to pay cash
dividends and $24.1 million for the repurchase of the Company's common stock.
For the fiscal year ended December 31, 2021 , the Company returned $65.7 million
to the Company's stockholders, which represents 61.1% of our free cash flow from
operations during the same period.
On January 20, 2022 , the Company's Board of Directors (the "Board") declared a
quarterly cash dividend of $0.25 per share payable on April 28, 2022 , to
stockholders of record on April 7, 2022 and estimated to be $10.8 million in
total. During 2021, the Board also approved changing our capital return
threshold from 50% of our cash flow from operations to 50% of our free cash
flow, which is calculated by subtracting capital expenditures from cash flow
from operations.
Since the beginning of 2019 to the fiscal year ended December 31, 2021 , we have
returned $283.3 million to stockholders, which represents 62.2% of our free cash
flow and over the same period the Company has repurchased over 2.2 million
shares of
35
--------------------------------------------------------------------------------the Company's common stock, which represents approximately 5.2% of the outstanding shares of the Company's common stock.
Cash flows from operating activities years ended
•For 2021, we purchased and received 222,060 shares of the Company's common stock on the open market at an average price of$108.64 per share, for a total of$24.1 million under a previously announced$100.0 million share repurchase authorization (which expired at the end of 2021).
•On
Contingencies
From time to time, we are subject to various claims, lawsuits, legal proceedings (including litigation, arbitration or regulatory actions) and other matters arising in the ordinary course of business. Periodically, we evaluate the status of each matter and assess our potential financial exposure. The Company records a liability when we believe that it is both probable that a loss has been incurred, and the amount is reasonably estimable. Significant judgment is required to determine both probability of a loss and the estimated amount. The outcomes of claims, lawsuits, legal proceedings and other matters brought against the Company are subject to significant uncertainty, some of which are inherently unpredictable and/or beyond our control. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these matters were resolved against the Company for amounts in excess of management's expectations, they could have a material adverse impact on our business, results of operations, financial position and liquidity.
See "Item 3 - Legal Proceedings" above and "Note 14 - Commitments and Contingencies" to the Company's Consolidated Financial Statements.
Inflation and Raw Materials
Inflation rates increased significantly during fiscal year 2021, which may negatively effect material costs as well as labor costs and other costs of doing business, and as such may adversely affect our operating profits if we cannot recover the higher costs through price increases. Our main raw material is steel, and as such, increases in steel prices may adversely affect our gross margin if we cannot recover the higher costs through price increases. See "Item 1 - Raw Materials" and "Item 1A - Risk Factors."
Indemnification
In the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties with respect to certain matters. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and the Company's bylaws as permitted by the Company's certificate of incorporation require the Company to indemnify corporate servants, including our officers and directors, to the fullest extent permitted by law. The Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations. The Company has not incurred significant obligations under indemnification provisions historically, and does not expect to incur significant obligations in the future. It is not possible to determine the maximum potential amount under these indemnities due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Accordingly, the Company has not recorded any liability for costs related these indemnities throughDecember 31, 2021 .
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