SIMPSON MANUFACTURING CO., INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Note About Forward-Looking Statements" and "Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.
Overview
We design, engineer and are a leading manufacturer of high quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels and are easy to use and cost-effective for customers. We operate in three business segments determined by geographic region:North America ,Europe andAsia/Pacific .
Our primary business strategy is to grow through:
• increasing our market share and profitability in
• increasing our market share in the concrete space; and
• continuing to develop our software to support our core wood products
offering while leveraging our strengths in engineering, sales and
distribution, and our strong brand name.
26-------------------------------------------------------------------------------- We believe these initiatives and objectives are crucial to not only offer a more complete solution to our customers and bolster our sales of core wood connector products, but also to mitigate the cyclicality of theU.S. housing market. OnOctober 30, 2017 , we announced the 2020 Plan to provide additional transparency into the execution of our strategic plan and financial objectives. Under the 2020 Plan, we initially assumed (i) housing starts growing as a percentage in the mid-single digit, (ii) increasing our market share and profitability inEurope , and (iii) gaining market share in both our truss and concrete product offerings. At the time of the announcement, our 2020 Plan was centered on the following three key operational objectives.
• First, a continued focus on organic growth with a goal to achieve a net
sales compounded annual growth rate of approximately 8% (from $860.7
million reported in fiscal 2016) through fiscal 2020.
• Second, rationalizing our cost structure to improve company-wideprofitability by reducing total operating expenses as a percentage of net
sales from 31.8% in fiscal 2016 to a range of 26.0% to 27.0% by the end of
fiscal 2020. We expect to achieve this initiative, aside from top-line
growth, through cost reduction measures in
line, zero-based budgeting for certain expense categories, a SKU reduction
program to right-size our product offering and a commitment to remaining
headcount neutral (except in the production and sales departments to meet
demands from sales growth). These reductions were to be offset by the
Company's ongoing investment in its software initiatives as well as theexpenses associated with our ongoing SAP implementation, which includes
increasing headcount when necessary.
• Third, improving our working capital management and overall balance sheet
discipline primarily through the reduction of inventory levels in
connection with the implementation of Lean principles in many of our
factories. This included improving our inventory turn rate from two-times
a year for fiscal 2016 to four-times by the end of 2020. With these
efforts, we believed we could achieve an additional 25% to 30% reduction
of our raw materials and finished goods inventory through 2020 without
adversely impacting day-to-day production and shipping procedures.
Since 2016, organic net sales has grown at a compound annual growth rate of 9.7%. Based on current trends and conditions, we expect to achieve our 8% net sales goal stated in our 2020 Plan.
We are continuing to work towards reducing our operating expenses to a range of 26% to 27% of net sales by the end of 2020. Operating expenses as a percentage of net sales were 27.9%, 28.9% and 31.3% for the years endedDecember 31, 2019 ,December 31, 2018 andDecember 31, 2017 , respectively. In dollars, operating expenses increased$5.3 million or 1.7% from the year endedDecember 31, 2018 to the year endedDecember 31, 2019 (mostly due to increased personnel costs) and increased$6.3 million or 2.1% from the year endedDecember 31, 2017 to the year endedDecember 31, 2018 (mostly due to increased consulting fees and legal fees, sales commissions and SAP implementation costs). In late 2017 and throughout 2018, we engaged a leading management consultant to perform an independent in-depth analysis of our operations, which contributed towards a reduction of expenses in 2018 and could result in initiatives that reduce expenses beyond the 2020 Plan as well as improvements to net working capital. We incurred additional success-based consulting expenses in 2018 and 2019 due to these initiatives. These fees concluded as of the end ofSeptember 30, 2019 . We expect these related consulting fees incurred in 2018 and 2019 will have a one-year or less pay back. When we initiated our 2020 Plan inOctober 2017 , it did not factor in macro events out of our control such as a volatile steel market as well as steel tariffs and other trade events. Given increases in raw material cost and resulting degradation on our gross profit margins from 48% in 2016, we revised our 2020 target for improving our operating income margin to a range of 16% to 17% by the end of 2020. This is revised down from our initial 2020 target range of 21% to 22%, and in-line to slightly up compared to our operating margin of 16.4% in 2016. While these macro events have caused us to revise this goal, it's important to note that rationalizing our cost structure has helped mitigate further downward pressure on our operating margins. We also revised operating margins forEurope from a target of 10% by the end of 2020, which includes approximately 2% of net sales in costs associated with the SAP implementation, to a range of 6% to 7%, including the same 2% of SAP implementation costs. Higher material costs have also contributed to this revision yet it still reflects a 700-800 basis point improvement from 2016 and substantial progress towards this target. Since 2016, we have reduced our inventory inNorth America , which is the bulk of our total inventory, by nearly 8% in pounds on hand, including an approximate 17% reduction in finished goods, while total dollars on hand increased by over 5%.
We accomplished this reduction in inventory in pounds on hand even as three particular factors have transpired since October of 2017 when we released the 2020 Plan that have required us to build more inventory than expected:
• we pro-actively increased our anchor inventory in anticipation of
potential tariffs on our mechanical anchor finished goods from
well as in anticipation of additional demand related to The Home Depot,
Inc. ("Home Depot") rollout;
• we bought an additional allotment of steel in order to mitigate the
potential impact of availability; and
27--------------------------------------------------------------------------------
• we have inventory levels to ensure we can meet our customer needs as we
continue our SAP roll-out.
Since 2016, our weighted average cost per pound of total inventory on hand and raw materials on hand inNorth America , which we cannot control, increased. As a result, there has not been a marked improvement in our inventory turns based on dollars and we no longer believe we can achieve a targeted inventory turn rate of four-times per year by the end of 2020. We continue to strive to effectively manage our inventory as a way of improving our use of working capital. Through execution on the 2020 Plan, we target to achieve a return on invested capital (1) by the end of fiscal 2020 within the range of 17% to 18% from 10.5% in 2016. Given the pressure on gross margins, we updated our expectation for return on invested capital to be in a range of 15% to 16% by 2020. The Company's return on invested capital was 15.3% for the last four quarters endedDecember 31, 2019 . Meeting the targeted return on invested capital is dependent on the Company's ability to return capital to our stockholders, usually in the form of cash dividends or share repurchases of the Company's common stock, which may or may not occur at the same levels as prior years. Nonetheless, we remain committed to returning 50% of our cash flows from operations through the end of fiscal 2020. We believe our ability to achieve industry-leading gross profit margins and operating income margins is due to the high level of value-added services that we provide to our customers. Aside from our strong brand recognition and trusted reputation, the Company is unique due to our extensive product testing capabilities and our state-of-the-art test lab; strong customer support and education for engineers, builders and contractors; a deep 40-plus year relationships with engineers that get our products specified on the blueprint and pulled through to the job site; product availability with delivery, typically, in 24 hours to 48 hours; and an active involvement with code officials to improve building codes and construction practices. Based on current information, we expect the competitive environment to be relatively stable withU.S. single-family housing starts to grow in the low single digits for 2020 compared to 2019. For the purposes of re-defining our 2020 Plan objectives, during years 2017 to 2020 we assumeU.S. single-family housing starts growing, as a percentage, in the low-single digits on average. Prior to the 2020 Plan, acquisitions were part of a dual-fold approach to growth. Our strategy since has primarily focused on organic growth, supported by strategic capital investments in the business. As such, we have and will continue to focus less on acquisitions activities, especially in the concrete repair space. However, we will from time to time evaluate acquisition opportunities and if the right opportunity arises we are open to acquisitions in other areas of our business, such as in our core fastener space, which is an area where we believe it would be beneficial to gain additional production capacity to support our wood business or to enhance our wood and concrete product portfolio with additional value-added products, we may pursue the opportunities.
Factors Affecting Our Results of Operations
Unlike lumber or other products that have a more direct correlation to 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, light industrial 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, 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.
ERP Integration
InJuly 2016 , our Board of Directors (the "Board") approved a plan to replace our current in-house enterprise resource planning ("ERP") and externally sourced accounting platforms with a fully integrated ERP platform fromSAP America, Inc. ("SAP") in multiple phases by location at all facilities plus our headquarters, with a focus on configuring, instead of customizing, the standard SAP modules. We went live with our first wave of the SAP implementation project in February of 2018, and we implemented SAP at two additional locations in 2019. We are tracking toward rolling out SAP technology in our remainingU.S. branches by mid-2020, and company-wide completion of the SAP roll-out is currently targeted for the end of 2021. While we believe the SAP implementation will be beneficial to the Company over time, annual operating expenses have and are expected to continue to increase through 2024 as a 28 -------------------------------------------------------------------------------- result of the SAP implementation, primarily due to increases in training costs and the depreciation of previously capitalized costs. As ofDecember 31, 2019 , we have capitalized$19.3 million and expensed$25.8 million of the costs, including depreciation of capitalized costs associated with the SAP implementation.
Business Segment Information
Historically ourNorth America segment has generated more revenues from wood construction products compared to concrete construction products. During 2019, economic conditions and wet weather resulted in lower than projected single-family housing starts in the first half of the year, which decreased wood construction product sales volumes over the same time period. Wood construction product sales volume increased slightly compared to the year endedDecember 31, 2018 , partly due to increased housing starts in the second half of 2019. Concrete construction product sales volume increased compared to 2018, which was primarily due to increased sales volumes. Our wood construction product net sales increased 5% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to both increased sales volumes and higher average sales prices. Our concrete construction product net sales increased 18% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 also mostly due to increased sales volumes and higher average prices. OurEurope segment also generates more revenues from wood construction products than concrete construction products. In local currency,Europe net sales increased primarily due to increases in average product prices. InUnited States dollars, wood construction product sales decreased 3.3% for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 . Concrete construction product sales are mostly project based, and net sales increased nearly 1.0% for the year ended 2019 compared to the year ended 2018.Europe net sales were negatively affected by foreign currency translations resulting fromEurope currencies weakening againstthe United States dollar. Operating expenses decreased$4.8 million for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , which was partly due the negative affect by foreign currency translations. See "Europe" below.
Our
(1)When referred to above, the Company's return on invested capital ("ROIC") for
a fiscal year is calculated based on (i) the net income of that year as
presented in the Company's consolidated statements of operations prepared
pursuant to generally accepted accounting principles in the U.S. ("GAAP"), as
divided by (ii) the average of the sum of total stockholders' equity and total
long-term interest bearing liabilities, (which for the Company are long-term
capital lease obligations), at the beginning of and at the end of such year, as
presented in the Company's consolidated balance sheets prepared pursuant to GAAP
for that applicable year. As such, the Company's ROIC, a ratio or statistical
measure, is calculated using exclusively financial measures presented in
accordance with GAAP.
Business Outlook
Based on current information and subject to future events and circumstances the Company estimates that its full year 2020:
• Gross margin will be between approximately 43.5% and 44.5%.
• Effective tax rate will be approximately 25.0% and 26.0%, including both
federal and state income tax rates.
29--------------------------------------------------------------------------------
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, 2019 , 2018 and 2017, respectively: Years Ended December 31, 2019 2018 2017 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 56.7 % 55.5 % 54.6 % Gross profit 43.3 % 44.5 % 45.4 %
Research and development and other engineering 4.1 % 4.0 % 4.9
%
Selling expense 9.9 % 10.2 % 11.8
%
General and administrative expense 13.9 % 14.7 % 14.6
%
Total operating expense 27.9 % 28.9 % 31.3
%
Net gain on disposal of assets (0.5 )% (1.0 )% - % Impairment of goodwill - % 0.6 % - % Income from operations 15.9 % 16.0 % 14.1 % Loss in equity investment, before tax (0.2 )% - % -
%
Foreign exchange gain (loss) (0.1 )% - % 0.1
%
Interest expense, net (0.2 )% (0.1 )% (0.1
)%
Gain on bargain purchase of a business - % - % 0.6
%
Income before taxes 15.7 % 15.9 % 14.8
%
Provision for income taxes 3.9 % 4.2 % 5.3 % Net income 11.8 % 11.7 % 9.5 %
Comparison of the Years Ended
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 year endedDecember 31, 2019 , against the results of operations for the year endedDecember 31, 2018 . Unless otherwise stated, the results announced below, when referencing "both years," refer to the year endedDecember 31, 2018 and the year endedDecember 31, 2019 . The Company changed its presentation of its consolidated statement of operations to display non-operating activities, including foreign exchange gain (loss), and certain other income or expenses as a separate item below income from operations. Foreign exchange gain (loss), and other income or expenses were previously included in general and administrative expenses, and in income from operations, respectively. Income before tax and net income for the year endedDecember 31, 2018 presented below were not affected by the change in presentation. 30 --------------------------------------------------------------------------------
The following table shows the change in the Company's operations from 2018 to 2019, and the increases or decreases for each category by segment:
Increase (Decrease) in Operating Segment
(in thousands) 2018 North America Europe Pacific All Other 2019 Net sales$ 1,078,809 $ 62,262 $ (3,883 ) $ (649 ) $ -$ 1,136,539 Cost of sales 598,522 48,344 (1,638 ) (1,256 ) 437 644,409 Gross profit 480,287 13,918 (2,245 ) 607 (437 ) 492,130 Operating expenses: Research and development and other engineering expense 43,056 4,546 (191 ) (340 ) (13 ) 47,058 Selling expense 109,931 4,006 (1,044 ) (391 ) 66 112,568 General and administrative expense 158,568 1,624 (3,995 )
52 1,025 157,274
Operating expenses 311,555 10,176 (5,230 ) (679 ) 1,078 316,900 Net gain (loss) on disposal of assets (10,579 ) (4,448 ) 198 (12 ) 8,817 (6,024 ) Impairment of goodwill 6,686 - (6,686 ) - - - Income from operations 172,625 8,190 9,473 1,298 (10,332 ) 181,254 Interest expense, net and other (634 ) (1,451 ) (123 ) 169 302 (1,737 ) Foreign exchange gain 137 (1,576 ) 844 (1,041 ) 476 (1,160 ) Income before income taxes 172,128 5,163 10,194 426 (9,554 ) 178,357 Provision for income taxes 45,495 814 (1,013 ) 463 (1,384 ) 44,375 Net income$ 126,633 $ 4,349 $ 11,207 $ (37 ) $ (8,170 ) $ 133,982 Net Sales increased 5.4% to$1,136.5 million from$1,078.8 million . Net sales to home centers, dealer distributors, lumber dealers and contractor distributors increased average net sales unit prices. Wood construction product net sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 84% of the Company's total net sales in both years. Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 16% of the Company's total net sales in both years. Gross profit increased to$492.1 million from$480.3 million . Gross profit margins decreased to 43.3% from 44.5%, which was lower than our expected gross profit margins of 43.5% to 44.0%. This was due to a shortfall in expected net sales and increased warehousing costs during the quarter endedDecember 31, 2019 . The gross profit margins, including some intersegment expenses, which were eliminated in consolidation, and excluding other expenses that are allocated according to product group, decreased to 42.9% from 45.2% for wood construction products and increased to 42.2% from 37.2% for concrete construction products. Research and development and other engineering expense increased 9.3% to$47.1 million from$43.1 million , primarily due to increases of$5.1 million in personnel costs, which was mostly due to reclassifying certain employees from general and administrative to research and development and engineering. This was partly offset by decreases of$0.6 million in supply expense,$0.5 million in cash profit sharing expense and$0.3 million in stock-based compensation. Selling expense increased 2.4% to$112.6 million from$109.9 million , primarily due to increases of$4.9 million in personnel costs,$0.5 million in advertising and promotional costs and$0.5 million in professional fees, which was partly offset by decreases of$2.0 million in sales and agent commissions and$0.6 million in cash profit sharing expense. General and administrative expense decreased 0.8% to$157.3 million from$158.6 million , primarily due to decreases of$2.1 million in consulting and legal expenses mostly due to a$3.8 million legal settlement reported in 2018,$2.1 million in cash profit sharing expense and$1.8 million in severance expense, which was partly offset by increases of$2.1 million in personnel costs,$1.4 million in facilities expense including a reduction of rental income, net of expenses,$0.8 million in computer costs including software subscription and licensing fees and$0.4 million in bad debt expense. Included in general and administrative expense are costs associated with the SAP implementation of$13.2 million , an increase of$3.8 million over the prior year. These expenses were primarily for professional fees and 2019 and 2018 included$2.1 million and$1.6 million , respectively, in incremental related amortization expense. 31 -------------------------------------------------------------------------------- Gain on sale of assets - InNovember 2019 , the Company sold a facility that was used for selling and distributing. The Company received net proceeds of$9.4 million , which resulted in a pre-tax gain of$5.6 million . InNovember 2018 , the Company sold a facility that was previously leased exclusively to a third party. The Company received net proceeds of$17.5 million , which resulted in a pre-tax gain of$8.8 million . Impairment of goodwill - The Company completed its 2018 annual goodwill impairment analysis in the fourth quarter of 2018 and it resulted in the impairment charge of$6.7 million associated with assets acquired inDenmark in 2001. The impairment was due to a reduction in expected future operating profits for the reporting unit alone, and not for the Company as a whole, and as a result, the goodwill of theDenmark reporting unit was fully impaired. The Company's 2018 annual goodwill impairment analysis did not result in additional impairment of goodwill. See "Critical Accounting Policies and Estimates - Goodwill Impairment Testing." Our effective income tax rate decreased to 24.9% from 26.4%. The effective income tax rate for the year endedDecember 31, 2019 decreased compared to the prior year due to a nonrecurring impairment of goodwill in 2018 related to theEurope segment which was not deductible, as well as a release of valuation allowances in 2019, also related to theEurope segment.
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, 2018 $ 910,587 $ 159,027 $ 9,195 $ 1,078,809
December 31, 2019 972,849 155,144 8,546 1,136,539
Increase (decrease) $ 62,262 $ (3,883 ) $ (649 ) $ 57,730 Percentage increase (decrease) 6.8 % (2.4 )% (7.1 )%
5.4 %
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 2018 net sales 84 % 15 % 1 % 100 % Percentage of total 2019 net sales 86 % 14 % - % 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, 2018 $ 421,820 $ 56,151 $ 2,085 $ 231 $ 480,287
December 31, 2019 435,738 53,906 2,692 (206 ) 492,130
Increase (decrease) $ 13,918 $ (2,245 ) $ 607 $ (437 ) $ 11,843
Percentage increase (decrease) 3.3 % (4.0 )% * * 2.5 %
* The statistic is not meaningful or material.
32
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The following table shows gross profit percentages by segment for the years
ended
North Asia/ Admin &
America Europe Pacific All Other Total
2018 gross profit percentage 46.3 % 35.3 % 22.7 % * 44.5 %
2019 gross profit percentage 44.8 % 34.7 % 31.5 % * 43.3 %
* The statistic is not meaningful or material.
• Net sales increased 6.8% primarily due to increased sales volume and average
unit price in
by approximately
currency,
volume.
• Gross profit margin decreased to 44.8% from 46.3%, primarily due to
increased raw material and labor costs.
• Research and development and engineering expense increased
primarily due to increases of
mostly due to moving certain employees, whose primary responsibilities
changed during 2019, from general and administrative to research and
development and engineering. This was partly offset by decreases of
million in cash profit sharing expense and $0.3 million in stock-based
compensation.
• Selling expense increased
million in personnel costs,
costs and
decreases of
• General and administrative expense increased
increases of
including software subscription and licensing fees,
facilities expense and
offset by decreases of
administrative expense are costs associated with the SAP implementation of
$10.5 million , an increase of$2.9 million over the prior year. • Gain on sale of assets - InNovember 2019 , the Company sold a sales and
distribution facility. The Company received proceeds net of closing costs of
$9.4 million , which resulted in a gain of$5.6 million . • Income from operations increased$8.2 million , mostly due to higher net
sales and a gain on sale of assets, which was partially offset by higher
operating expenses.
Europe • Net sales decreased 2.4%, primarily due to approximately
negative foreign currency translations resulting from some
weakening against
sales increased primarily due to increases in both sales volume and average
product prices.
• Gross profit margin decreased to 34.7% from 35.3%, primarily due to
increased factory and overhead, labor and warehouse costs.
• Selling expense decreased
million in personnel costs,
• General and administrative expense decreased
decreases of
expense,
consulting and legal expenses. Included in general and administrative
expense are costs associated with the SAP implementation of
increase of
primarily for professional fees.
• Impairment of goodwill - The impairment charge of
was associated with assets acquired in
goodwill of the
Accounting Policies and Estimates - Goodwill Impairment Testing."
33--------------------------------------------------------------------------------
• Income from operations increased
expenses.
Asia/Pacific • For information about the Company's
the table above setting forth changes in our operating results for the years
ended
Administrative and All Other
• General and administrative expense increased
increases of
reduction of rental income, net of expenses, which was partly offset by a
decrease of
• Gain on sale of assets - In
was previously leased exclusively to a third party. The Company received net
proceeds of
Comparison of the Years Ended
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 year endedDecember 31, 2018 , against the results of operations for the year endedDecember 31, 2017 . Unless otherwise stated, the results announced below, when referencing "both years," refer to the year endedDecember 31, 2017 and the year endedDecember 31, 2018 . The Company changed its presentation of its consolidated statement of operations to display non-operating activities, including foreign exchange gain (loss), and certain other income or expenses as a separate item below income from operations. Foreign exchange gain (loss), and other income or expenses were previously included in general and administrative expenses, and in income from operations, respectively. Income before tax and net income for the three months and nine months endedSeptember 30, 2018 presented below were not affected by the change in presentation. 34
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The following table shows the change in the Company's operations from 2017 to 2018, and the increases or decreases for each category by segment:
Increase (Decrease) in Operating Segment
Asia/ Admin &
(in thousands) 2017 North America Europe Pacific All Other 2018
Net sales $ 977,025 $ 106,891 $ (6,128 ) $ 1,021 $ - $ 1,078,809
Cost of sales 533,644 68,352 (3,307 ) (93 ) (74 ) 598,522
Gross profit 443,381 38,539 (2,821 ) 1,115 74 480,287
Operating expenses:
Research and
development and other
engineering expense 47,616 (3,728 ) (1,167 ) 244 91 43,056
Selling expense 114,903 (1,418 ) (3,917 ) 169 194 109,931
General and
administrative expense 142,749 12,919 2,195 187 518 158,568
Operating expenses 305,268 7,773 (2,889 ) 600 803 311,555
Net gain (loss) on
disposal of assets (160 ) (1,009 ) (624 ) 32 (8,818 ) (10,579 )
Impairment of goodwill - - 6,686 - - 6,686
Income from operations 138,273 31,775 (5,994 ) 482 8,089 172,625
Interest income
(expense), net and
other (874 ) (318 ) 126 (185 ) 617 (634 )
Foreign exchange gain
(loss), net 894 2,042 (2,781 ) 424 (442 ) 137
Gain on bargain
purchase of a business 6,336 - (6,336 ) - - -
Loss on disposal of a
business (211 ) - 211 - - -
Income before income
taxes 144,418 33,499 (14,774 ) 721 8,264 172,128
Provision for income
taxes 51,801 (7,796 ) 822 (305 ) 973 45,495
Net income $ 92,617 $ 41,295 $ (15,596 ) $ 1,026 $ 7,291 $ 126,633
Net Sales increased 10.4% to $1,078.8 million from $977.0 million . Net sales to
contractor distributors, dealer distributors, home centers and lumber dealers
increased primarily due to increased home construction activity and average net
sales unit prices. Wood construction product net sales, including sales of
connectors, truss plates, fastening systems, fasteners and shearwalls,
represented 85% of the Company's total net sales in both years. Concrete
construction product net sales, including sales of adhesives, chemicals,
mechanical anchors, powder actuated tools and reinforcing fiber materials,
represented 15% of the Company's total net sales in both years.
Gross profit increased to $480.5 million from $443.4 million . Gross profit
margins decreased to 44.5% from 45.4%, which was lower than our expected gross
profit margins of 45.5% to 46.5%. This was due to an unexpected sharp decline in
net sales and increased labor and factory and tooling costs during December 2018
resulting in increases in factory, material and labor costs as a percentage of
net sales. The gross profit margins, including some intersegment expenses, which
were eliminated in consolidation, and excluding other expenses that are
allocated according to product group, decreased to 45.2% from 46.5% for wood
construction products and increased to 37.1% from 34.7%, respectively.
Research and development and engineering expense decreased 9.6% to $43.1 million
from $47.6 million , primarily due to decreases of $2.1 million in personnel
costs, $1.0 million in severance expenses, $0.6 million in cash profit sharing
on lower operating income and $0.2 million in professional fees.
Selling expense decreased 4.3% to $109.9 million from $114.9 million primarily
due to decreases of $2.4 million in personnel costs, $2.1 million in advertising
and promotional costs, $1.9 million in severance expense and $1.0 million in
stock-based compensation expense, which was partly offset by an increase of $2.6
million in sales and agent commissions.
General and administrative expense increased 11.1% to $158.6 million from $142.7
million , primarily due to increases of $13.2 million in consulting and legal
expenses, $3.3 million in depreciation expense, $0.5 million in bad debt expense
and $0.4 million in subscription, licensing, maintenance and hosting fees, which
was partly offset by decreases of $1.0 million in personnel costs and $0.6
million in stock-based compensation. Included in general and administrative
expense are costs associated with the SAP
35
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implementation of
Gain on sale of assets - InNovember 2018 , the Company sold a facility that was previously leased exclusively to a third party. The Company received net proceeds of$17.5 million , which resulted in a gain of$8.8 million . In 2016, an eminent domain claim was exercised on land owned by the Company and included an offer for loss of property. The Company challenged the offer, which resulted in the Company receiving an additional$1.0 million in the first quarter of 2018 for the taking of the land, which occurred in 2016.
Impairment of goodwill - The Company completed its 2018 annual goodwill
impairment analysis in the fourth quarter of 2018 and it resulted in the
impairment charge of
Our effective income tax rate decreased to 26.4% from 35.9%, primarily due to the Tax Reform Act, which reducedthe United States statutory federal corporate tax rate from 35% to 21%. The effective income tax rate for the year endedDecember 31, 2017 was also reduced by a nonrecurring gain on a bargain purchase related to the Gbo Fastening Systems acquisition, which was not taxable. The effective income tax rate for the year endedDecember 31, 2018 was increased by a nonrecurring impairment of goodwill related to theEurope segment, which was also not deductible. Net income was$126.6 million compared to$92.6 million . Diluted net income per share of common stock was$2.72 compared to$1.94 . The$92.6 million consolidated net income for the year endedDecember 31, 2017 included a$6.3 million nonrecurring gain on a bargain purchase of a business, which increased diluted earnings per share for the same period by$0.13 .
The following table shows net sales by segment for the years ended
North Asia/
(in thousands) America Europe Pacific Total
December 31, 2017 $ 803,697 $ 165,155 $ 8,173 $ 977,025
December 31, 2018 910,588 159,027 9,195 1,078,809
Increase (decrease) $ 106,891 $ (6,128 ) $ 1,022 $ 101,784 Percentage increase (decrease) 13.3 % (3.7 )% 12.5 %
10.4 %
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 2017 net sales 82 % 17 % 1 % 100 % Percentage of total 2018 net sales 84 % 15 % 1 % 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, 2017 $ 383,282 $ 58,973 $ 971 $ 155 $ 443,381
December 31, 2018 421,821 56,152 2,085 229 480,287
Increase (decrease) $ 38,539 $ (2,821 ) $ 1,114 $ 74 $ 36,906
Percentage increase (decrease) 10.1 % (4.8 )% * * 8.3 %
* The statistic is not meaningful or material.
36
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The following table shows gross profit percentages by segment for the years
ended
North Asia/ Admin &
America Europe Pacific All Other Total
2017 gross profit percentage 47.7 % 35.7 % 11.9 % * 45.4 %
2018 gross profit percentage 46.3 % 35.3 % 22.7 % * 44.5 %
* The statistic is not meaningful or material.
• Net sales increased 13.3% primarily due to higher sales volume and average
unit price in
to increased sales volumes and were not significantly affected by foreign
currency translation.
• Gross profit margin decreased to 46.3% from 47.7%, primarily due toincreased material, labor and shipping costs, as a percentage of net sales,
partly offset by decreased factory and overhead costs as a percentage of net
sales.
• Research and development and engineering expense decreased
primarily due to decreases of
in severance expense,
million in professional fees.
• Selling expense decreased
million in advertising expense,
expense,
costs, partly offset by an increase of $1.6 million in sales and agent
commissions.
• General and administrative expense increased
increases of
depreciation expense,
licensing, maintenance and hosting fees and
expense, partly offset by decreases of
costs. Included in general and administrative expense are costs associated
with the SAP implementation of
over the prior year quarter. These expenses were primarily for professional
fees.
• Income from operations increased
gross profit, which were partially offset by higher operating expenses.
Severance expenses of
• Net sales decreased 3.7% primarily due to reduced sales volume as a result
of the late 2017 sale of Gbo Fastening Systems'
subsidiaries (acquired in
net sales for the year ended
affected by approximately
primarily related to the strengthening of the Euro, British pound, Danish
Kroner and Polish zloty against the United States dollar.
• Gross profit margin decreased to 35.3% from 35.7% primarily due to increased
factory and overhead and warehousing costs, partly offset by decreased
material and labor costs.
• Research and development and engineering expense decreased
primarily due to decreases of
million in severance expenses, partly offset by an increase of
in professional fees.
• Selling expense decreased
million in personnel costs,
mostly for advertising costs and
expense.
• General and administrative expense increased
increases of
severance expense,
bad debt expense, partly offset by decreases of
fees and
maintenance and hosting fees. Included in general and administrative expense
are costs associated with the SAP implementation of
increase of
primarily for professional fees.
37--------------------------------------------------------------------------------
• Impairment of goodwill - The impairment charge of
fourth quarter of 2018 was associated with assets acquired in
2001, and as a result, the goodwill of the
impaired. The impairment resulted from a reduction in expected future
operating profits of the reporting unit, but not for
Company's 2018 annual goodwill impairment analysis did not result in
additional impairment of goodwill for other reporting units. See "Critical
Accounting Policies and Estimates - Goodwill Impairment Testing."
• Income from operations decreased
impairment of goodwill.
• For information about the Company's
the table above setting forth changes in our operating results for the years
ended
Administrative and All Other
• Gain on sale of assets - In
was previously leased exclusively to a third party. The Company received net
proceeds of
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, the Company's future results of operations could be adversely affected. 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 andlabor plus attributable overhead based on a normal level of activity.
The Company applies net realizable value and obsolescence to the gross value of inventory. The Company estimates net realizable value based on estimated selling price less further costs to 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. The Company has consistently applied this methodology. The Company believes that this approach is prudent and makes suitable impairments for slow-moving and obsolete inventory. When impairments are established, a new cost basis of the inventory is created. Unexpected change in market demand, building codes or buyer preferences could reduce the rate of inventory turnover and require the Company to recognize more obsolete inventory.
Business Combinations and Asset Acquisitions
The assets acquired and liabilities assumed in a business combination are
recorded at their estimated fair values at the date of acquisition. The excess
purchase price over the fair value of net assets acquired is recognized as
goodwill. The fair values of the assets acquired and the liabilities assumed are
determined based on significant estimates and assumptions, including projected
timing and amount of future cash flows and discount rates reflecting risk
inherent in future market prices. In some cases, the Company engages independent
third-party valuation firms to assist in determining the fair values. While the
Company uses its best estimates and assumptions as a part of the purchase price
allocation process to value assets acquired and liabilities assumed at the
acquisition date, the Company's estimates are inherently uncertain and subject
to refinement.
Although the Company believes that the assumptions and estimates it has made in
the past have been reasonable and appropriate, they are based in part on
historical experience and information obtained from the management of the
acquired companies and are inherently uncertain. Unanticipated events and
circumstances may affect the accuracy or validity of such assumptions, estimates
or actual results.
38
--------------------------------------------------------------------------------
As a result, during the measurement period, which may be up to one year from the
acquisition date, the Company records adjustments to the assets acquired and
liabilities assumed, with the corresponding offset to goodwill. At the
conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, the Company
records subsequent adjustments. None of the subsequent adjustments for the
fiscal years ended 2017, 2018 and 2019 were material.
Our goodwill balance is not amortized to expense, and we may assess 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. In addition, Federal Accounting Standard Board (FASB)
issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which eliminates
the requirement to calculate the implied fair value of goodwill to measure a
goodwill impairment charge or Step 2 of the goodwill impairment analysis.
The Company prospectively adopted as part of its review in 2018 and identified
an impairment in one of our reporting units using quantitative methods. In 2019,
we performed qualitative assessments, taking into consideration the current
market value of the company, any changes in management, key personnel, strategy
and any relevant macroeconomic conditions (e.g. general economic conditions,
limiting access to capital). Based on our qualitative assessments we concluded
that the fair value of the reporting units substantially exceeded the respective
reporting unit's carrying value, including goodwill.
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
Revenue from Contracts with Customers
OnJanuary 1, 2018 , the Company adopted the New Revenue Standard ASC ("Topic 606") "Revenue from Contracts with Customers" using the modified retrospective method and recorded an$0.8 million , net of tax, increase to opening retained earnings onJanuary 1, 2018 as the cumulative effect of adopting Topic 606 for estimated rights of return assets on product sales. Generally, the Company's revenue contract with a customer exists when the goods are shipped, and services are rendered; and its related invoice is generated. The duration of the contract does not extend beyond the promised goods or services already transferred. The transaction price of each distinct promised product or service specified in the invoice is based on its relative stated standalone selling price. 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 shipping terms provide the primary indicator of the transfer of control. The Company's general shipping terms are F.O.B. shipping point, where title and risk and rewards of ownership transfer at the point when the products leave the Company's warehouse. 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. Estimated 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 a fiscal year. 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 Sources of Capital
Our primary sources of liquidity are cash and cash equivalents, our cash flow from operation and our$300.0 million credit facility that expires onJuly 23, 2021 . As ofDecember 31, 2019 , there were no amounts outstanding under this facility. 39 -------------------------------------------------------------------------------- Our principal uses of liquidity include the costs and expenses associated with our operations, continuing our capital allocation strategy, which includes growing our business by internal improvements, repurchasing our common stock, paying cash dividends, and meeting other liquidity requirements for the next twelve months. As ofDecember 31, 2019 , our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Cash and cash equivalents of$71.2 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated tothe United States . Due to changes resulting from the Tax Reform Act, the Company repatriated$63.5 million in cash held outside ofthe United States in 2018. We are maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outsidethe United States after completion of the repatriation plan.
The following table presents selected financial information as of
At December 31,
(in thousands) 2019 2018 2017
Cash and cash equivalents $ 230,210 $ 160,180 $ 168,514
Property, plant and equipment, net 249,012 254,597 273,020
Equity investment, goodwill and intangible assets 159,430 157,139
169,015
Working capital 482,000 447,949 447,450
The following table provides cash flow indicators for the twelve months ended
Years Ended December 31,
(in thousands) 2019 2018 2017
Net cash provided by (used in):
Operating activities$ 205,662 $ 160,080 $ 119,065 Investing activities (28,021 ) (10,249 ) (75,815 ) Financing activities (108,154 ) (155,393 ) (106,671 ) Cash flows from operating activities result primarily from our earnings or losses, and are also affected by changes in operating assets and liabilities which consist primarily of working capital balances. As a building materials manufacturer, 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, net, is generally at its lowest at the end of the fourth quarter and increases during the first, second and third quarters. In 2019, operating activities provided$205.7 million in cash and cash equivalents, as a result of$134.0 million from net income and$53.5 million from non-cash adjustments to net income which includes depreciation and amortization expense, stock-based compensation expense and non-cash lease expense, as well as an increase of$18.2 million in the net change in operating assets and liabilities due to decreases of$23.7 million in inventory and$6.1 million in trade accounts receivable, net, partly offset by a decrease of$6.8 million in accrued liabilities. Cash used in investing activities of$28.0 million during the year endedDecember 31, 2019 , consisted primarily of$32.7 million for real estate improvements, machinery and equipment and software development, partly offset by$12.2 million in proceeds, mostly from the sale of real estate including theNovember 2019 sale of our selling and distribution facility inCanada for a net amount of$9.4 million . Cash used in financing activities of$108.2 million during the year endedDecember 31, 2019 , consisted primarily of$60.8 million for the repurchase of the Company's common stock and$40.2 million used to pay cash dividends. In 2018, operating activities provided$160.1 million in cash and cash equivalents, as a result of$126.6 million from net income and$50.4 million from non-cash adjustments to net income which includes depreciation and amortization expense and stock-based compensation expense, partly offset by a decrease of$17.0 million in the net change in operating assets and liabilities due to increases of$26.4 million in inventory and$12.6 million in trade accounts receivable, net, partly offset by a decrease of$5.3 million in other current assets and increases of$9.1 million in accrued liabilities and$4.7 million in trade accounts payable. Cash used in investing activities of$10.2 million during the year endedDecember 31, 2018 , consisted primarily of$29.3 million for ERP software, property, plant and equipment expenditures, primarily related to machinery and equipment purchases, and software 40 -------------------------------------------------------------------------------- in development, partly offset by$21.1 million in proceeds, mostly the sale of real estate including theNovember 2018 sale of our commercial rental property inCalifornia a net amount of$17.5 million . Cash used in financing activities of$155.4 million during the year endedDecember 31, 2018 , consisted primarily of$110.5 million for the repurchase of the Company's common stock and$39.9 million used to pay cash dividends. In 2017, operating activities provided$119.1 million in cash and cash equivalents, as a result of$92.6 million from net income and$48.5 million from non-cash adjustments to net income which includes depreciation and amortization expenses and stock-based compensation expenses, partly offset by a decrease of$22.0 million in the net change in operating assets and liabilities due to increases of$17.8 million in trade accounts receivable, net,$6.6 million in inventory and$5.6 million in income tax receivable, partly offset by an increase of$10.1 million in accrued liabilities. Cash used in investing activities of$75.8 million during the year endedDecember 31, 2017 , consisted primarily of$58.0 million for property, plant and equipment expenditures, primarily related to real estate improvements, ERP software, machinery and equipment purchases, and software in development, and$27.9 million , net of acquired cash of$4.0 million , for the acquisitions of CG Visions and Gbo Fastening Systems, which was partly offset by$9.5 million , net of delivered cash of$0.8 million , for the sale of Gbo Poland and Gbo Romania (see "Note 10 - Acquisitions and Dispositions" to the Company's Consolidated Financial Statements). Cash used in financing activities of$106.7 million during the year endedDecember 31, 2017 , consisted primarily of$70.0 million for the repurchase of the Company's common stock (see "Note 3 - Net Income per Share" to the Company's Consolidated Financial Statements) and$37.0 million used to pay cash dividends. Capital Allocation Strategy We have a strong cash position and remain committed to seeking growth opportunities in our lines of building products where we can leverage our expertise in engineering, testing, manufacturing and distribution to invest in and grow our business. Those opportunities include internal improvements or acquisitions that fit within our strategic growth plan. Additionally, we have financial flexibility and are committed to providing returns to our stockholders. Below are highlights of our execution on our capital allocation strategy, first announced inAugust 2015 and updated inAugust 2016 .
• Our asset acquisitions, net of cash acquired and proceeds from sales of
businesses, in 2017, 2018 and 2019 were
million, respectively. In
for approximately
2017 for approximately
operations in
acquisitions in 2018 and 2019 were to extend product lines and acquire
intellectual property.
• Our capital spending in 2017, 2018 and 2019 was
and
improvements, machinery and equipment purchases and software in development.
Also in 2019, we purchased intellectual property of
current information and subject to future events and circumstances, we
estimate that our full-year 2020 capital spending will be approximately
million to
capital expenditures, assuming all such projects will be completed by the
end of 2020. Based on current information and subject to future events and
circumstances, we estimate that our full-year 2020 depreciation and
amortization expense to be approximately
which approximately
• In
4.5% to
dividend of
dividend is scheduled to be paid on April 23, 2020 , to stockholders of
record on April 2, 2020 .
• For 2019, we purchased and received 972,337 shares of the Company's common
stock on the open market at an average price of
total of
repurchase authorization (which expired at the end of 2019).
• In total, as illustrated in the table below, we have repurchased over six
million shares of the Company's common stock, which represents approximately
13.6% of our shares of common stock outstanding at the beginning of 2015.
Including dividends, we have returned cash of
represents 74.3% of our total cash flow from operations during the same
period.
• On
repurchase up to
authorization is in effect from
2019.
41-------------------------------------------------------------------------------- The following table presents our dividends paid and share repurchases for the period fromJanuary 1, 2015 throughDecember 31, 2019 , in aggregated amounts: Number of Shares Cash Paid for Cash Paid for (in thousands) Repurchased Repurchases Dividends Total January 1 - December 31, 2019 972 $ 60,816 $ 40,258$ 101,074 January 1 - December 31, 2018 1,955 110,540 39,891 150,431 January 1 - December 31, 2017 1,138 70,000 36,981 106,981 January 1 - December 31, 2016 1,244 53,502 32,711 86,213 January 1 - December 31, 2015 1,339 47,144 29,352 76,496 Total 6,648 $ 342,002$ 179,193 $ 521,195 Contractual Obligations
The following table summarizes our known material contractual obligations and
commitments as of
Payments Due by Period
Total Less More
all than 1 1 - 3 3 - 5 than 5
Contractual Obligation (in thousands) periods year years years years
Long-term debt interest obligations (1) $ 675 $ 450 $ 225 $ - $ -
Operating lease obligations, including
imputed interest (2) 35,322 9,425 13,812 7,254 4,831
Capital lease obligations, including
imputed interest(3) 1,511 1,160 351 - -
Purchase obligations (4) 51,449 50,187 1,262 -
Total $ 88,957 $ 61,222 $ 15,650 $ 7,254 $ 4,831
(1)Includes interest payments on fixed-term debt, line-of-credit borrowings and
annual facility fees on the Company's primary line-of-credit facility. Interest
on line-of-credit facilities was estimated based on historical borrowings and
repayment patterns. The Company's primary line-of-credit facility requires the
Company pay an annual facility fee from 0.15% to 0.30%, depending on the
Company's leverage ratio, on the unused portion of the facilities.
(2)Refer to Note 10 - Leases of the Notes to Consolidated Financial Statements
(Part II, Item 8 of this Form 10-K)
(3)Refer to Note 10 - Leases of the Notes to Consolidated Financial Statements
(Part II, Item 8 of this Form 10-K)
(4)Consists of other purchase commitments related to facility equipment,
consulting services, minimum quantities of certain raw materials. The Company
currently is not a party to any long-term supply contracts with respect to the
purchase of raw materials or finished goods.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of
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 provision for a liability when we believe that (a) it is probable that a loss has been incurred, and (b) the amount is reasonably estimable. Significant judgment is required to determine both probability 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 and the Company's Consolidated Financial Statements could be materially adversely affected.
See "Item 3 - Legal Proceedings" above and "Note 14 - Commitments and Contingencies" to the Company's Consolidated Financial Statements.
42
--------------------------------------------------------------------------------Inflation
The Company believes that the effect of inflation on the Company has not been material in the three most recent fiscal years endedDecember 31, 2019 , 2018 and 2017, respectively, as general inflation rates have remained relatively low. The Company's main raw material is steel. Increases in steel prices may adversely affect the Company's gross profit margin if it cannot recover the higher costs through price increases of its products. 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, 2019 .
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