SIMPSON MANUFACTURING CO., INC. Each of the terms the "Company," "we," "our," "us" and similar terms used herein refer collectively toSimpson Manufacturing Co., Inc. , aDelaware corporation and its wholly-owned subsidiaries, includingSimpson Strong-Tie Company Inc. , unless otherwise stated. The Company regularly uses its website to post information regarding its business and governance. The Company encourages investors to use http://www.simpsonmfg.com as a source of information about the Company. "Strong-Tie" and our other trademarks appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies' trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies. CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements generally can be identified by words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "target," "continue," "predict," "project," "change," "result," "future," "will," "could," "can," "may," "likely," "potentially," or similar expressions that concern our strategy, plans, expectations or intentions. Forward-looking statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, our strategic initiatives, including the impact of these initiatives on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts. Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct. Actual results may differ materially from those expressed or implied in such statements. Forward-looking statements are subject to inherent uncertainties, risk and other factors that are difficult to predict and could cause our actual results to vary in material respects from what we have expressed or implied by these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed in our forward looking statements include, among others, those discussed under the Item 1A. Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2019 Form 10-K and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II Item 1A Risk Factors in the Quarterly Report on Form 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 . Additional risks include: the cyclicality and impact of general economic conditions? changing conditions in global markets including the impact of sanctions and tariffs, quotas and other trade actions and import restrictions? the impact of pandemics, epidemics or other public health emergencies, such as the recent outbreak of coronavirus disease 2019 (COVID-19)? volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase? the impact of foreign currency fluctuations? potential limitations on our ability to access capital resources and existing credit facilities? restrictions on our business and financial covenants under our bank credit agreement? and reliance on employees subject to collective bargaining agreements. We caution that you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. Readers are urged to carefully review and consider the various disclosures made 21 --------------------------------------------------------------------------------
by us in this report and in our other reports filed with the
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:
Our strategic plan for growth includes increasing our market share and profitability inEurope ; growing 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. 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 effect of 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. During the first quarter of 2020, the execution of our 2020 Plan continued to deliver financial and operational efficiencies. However, given the uncertainties surrounding the impact of COVID-19 on our business, onApril 27, 2020 , we withdrew our prior full year 2020 guidance originally issued onFebruary 3, 2020 , as well as the financial targets associated with the 2020 Plan. InDecember 2019 , COVID-19 was first identified inWuhan, China . Over the next several months, COVID-19 quickly spread across the world. InMarch 2020 , the WHO declared COVID-19 a worldwide pandemic based on the rapid increase in exposure globally, and the President ofthe United States declared the COVID-19 outbreak a national emergency. As ofOctober 31, 2020 , the virus continues to spread infecting over 46 million people worldwide. No vaccine is currently available for COVID-19 and the duration and severity of its effects are still unknown. Government authorities in the countries and states where we operate have issued various and differing shelter in place, stay at home, social distancing guidelines and other measures in response to the COVID-19 pandemic. In many of those locations our operations are classified as an essential business and all of our manufacturing and distribution facilities continue to operate in accordance with those orders. In late March, two of our larger European manufacturing facilities in theUnited Kingdom andFrance were ordered to cease nearly all operations. Those two facilities have since re-opened. To date, there have been no orders to close any of our manufacturing or distribution facilities. 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 related to COVID-19 and have been able to meet our customers' needs. 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, including drawing down on the Credit Facility, implementing a hiring freeze and adjusting employee hours to meet production requirements, although during the year the Company has resumed hiring to meet increased demand levels that it has experienced. The Company will continue to be conservative in its capital allocation approach but does project to repay the draw down on its Credit Facility by the end of the 2020 fiscal year and has resumed the stock repurchase program in the fourth quarter 2020. As a result of COVID-19 and in support of continuing its manufacturing efforts, the Company has undertaken a number of steps to protect its employees, suppliers and customers, as their safety and well-being is one of our top priorities. We have instituted additional precautions in our manufacturing and distribution facilities to comply with health and safety guidelines and to protect our employees, including 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. Many of our office workers in our manufacturing and distribution facilities, as well as the corporate headquarters, continue to work remotely, where possible. The senior management team meets regularly to review and assess the status of the Company's operations and the health and safety of its employees. A significant portion of the Company's total product sales is dependent on US housing starts and its business, financial condition, and results of operations depends significantly on the level of housing and residential construction activity. We anticipated previously that the effects of responses to the pandemic would have a negative effect on ourNorth America operations. However, single-family housing starts increased from April's and May's lower levels and increased from prior-year's level of starts. Due to the return of a nationwide home center customer, increased housing starts and a strong home repair and remodel market,October 2020 sales were up compared toOctober 2019 and on pace for a 3% increase in the fourth quarter of 2020 compared to the fourth quarter of 2019. Whether this trend continues at the same pace or decline for the remainder of the 22 -------------------------------------------------------------------------------- year is not known. Declines in housing and residential construction, such as housing starts and home improvement projects, which generally occur during economic downturns, have in the past significantly reduced, and in the future may reduce, the demand for, and net sales, of the Company's products. The magnitude and duration of the pandemic including its impact on our operations, supply chain partners and general economic conditions, is uncertain and we continue to monitor the impact of the pandemic on our operations and financial condition, which was not significantly adversely impacted in the first nine months of 2020. We are uncertain of the long-term effects on theNorth America segment andEurope segment at this time.
Management continues to monitor the impact of the global situation on its 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 toU.S. 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, 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 expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic which spread fromChina to many other countries includingthe United States . The pandemic resulted in governments around the world implementing stringent measures to help control the spread of the virus, including quarantines, social distancing guidelines, "shelter in place" and "stay at home" orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world had enacted fiscal and monetary stimulus measures to counteract the impacts of the pandemic. Notwithstanding our continued operations and third quarter performance, the COVID-19 pandemic may have negative impacts on our operations, supply chain, transportation networks and customers, which may compress our margins, including as a result of preventative and precautionary measures that we, other businesses and governments are taking. Any resulting economic downturn could adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials. The progression of this matter could also negatively impact our business or results of operations through the temporary closure of our operating locations or those of our customers or suppliers, among others. In addition, the ability of our employees and our suppliers' and customers' employees to work may be significantly impacted by individuals contracting or being exposed to COVID-19, or as a result of the control measures noted above, which may significantly hamper our production throughout the supply chain and constrict sales channels. The extent to which COVID-19 pandemic may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the pandemic and the effectiveness of actions globally to contain or mitigate its effects. Our consolidated financial statements and discussion and analysis of financial condition and results of operations reflect estimates and assumptions made by management as ofSeptember 30, 2020 . Events and changes in circumstances arising afterSeptember 30, 2020 , including those resulting from the impacts of COVID-19 pandemic, will be reflected in management's estimates for future periods.
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 23 --------------------------------------------------------------------------------
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 five additional locations in 2019 and 2020. We are tracking toward rolling out SAP technology in our remainingNorth America branches by 2021, and company-wide completion of the SAP roll-out is currently targeted for 2022. Meeting the 2022 goal is highly dependent on the lifting of current travel restrictions, which are the result of the COVID-19 pandemic. 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 result of the SAP implementation, primarily due to increases in training costs and the depreciation of previously capitalized costs. As ofSeptember 30, 2020 , we have capitalized$19.4 million and expensed$34.9 million of the costs, including$5.3 million in depreciation expense of capitalized costs.
Business Segment Information
Historically ourNorth America segment has generated more revenues from wood construction products compared to concrete construction products. During the first nine months of 2020, the return of a nationwide home center customer, favorable weather, increased home improvement activity and increased housing starts resulted in higher sales volumes over the same time period of 2019, which had extremely wet weather in the first half of the year. Our wood construction product net sales increased 22.6% for the quarter endedSeptember 30, 2020 compared toSeptember 30, 2019 , primarily due to increased sales volumes in connection with the return of a nationwide home center customer and increased housing starts and repair and remodel activity, which resulted in increased sales to some of our other sales distributor channels. Our concrete construction product net sales increased 1.9% for the quarter endedSeptember 30, 2020 compared toSeptember 30, 2019 , primarily due to higher sales volumes. Operating profits increased due to higher sales, lower cost of goods sold, mostly due to lower material, and lower operating expenses. In operating expenses, increases in cash profit sharing and stock-based compensation expense were partially offset by reductions in consulting fees and travel related expense. OurEurope segment also generates more revenues from wood construction products than concrete construction products.Europe net sales increased for the quarter endedSeptember 30, 2020 compared toSeptember 30, 2019 , primarily due to benefiting from approximately$2.1 million of foreign currency translations for someEurope currencies strengthening againstthe United States dollar. In local currency,Europe net sales increased due to higher volumes. Wood construction product sales increased 14.2% for the quarter endedSeptember 30, 2020 compared toSeptember 30, 2019 . Concrete construction product sales are mostly project based, and net sales decreased 15.2% for the quarter endedSeptember 30, 2020 compared toSeptember 30, 2019 . Gross margins decreased, mostly due to higher labor, warehouse and shipping costs, partly offset by lower material and factory and overhead costs. Operating expenses increased, primarily due to higher cash profit sharing and stock-based compensation expense.
Our
Business Outlook
At the time the Company withdrew its outlook it was unable to forecast its full-year outlook with reasonable accuracy given the uncertainty surrounding the COVID-19 pandemic and the related impact on the Company's business. OnJuly 27, 2020 , the Company reinstated its 2020 full-year outlook originally provided onFebruary 3, 2020 and is again updating its full year outlook, primarily reflecting three quarters of actual results, as well as improved visibility on the progression of pandemic-related restrictions and the impact of those restrictions on the Company's operations. Based on business trends and conditions as of the day we announced our third quarter earnings, the Company's outlook for the full fiscal year endingDecember 31, 2020 is as follows:
•Net sales are estimated to increase in the range of 9.0% to 10.0% compared to
the full year ended
•Gross margin is estimated to be in the range of approximately 45.0% to 46.0%.
•Operating expenses, as a percentage of net sales, are estimated to be in the range of approximately 25.0% to 26.5%.
•The effective tax rate is estimated to be in the range of 24.5% to 26.0%, including both federal and state income tax rates.
24
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Additionally, we believe the Company's gross margins and operating margins for
the 2021 fiscal year will pull back from our expectations for the full year 2020
as we anticipate costs directly related to materials, production headcount,
customer engagement and investments in business growth will increase in 2021.
While the magnitude and duration of the COVID-19 pandemic and its impact on
general economic conditions remains uncertain, the Company is continuing to
monitor the impact of the pandemic on its operations and financial condition,
which was not significantly adversely impacted in the third quarter of 2020,
primarily due to the return of a nationwide home center customer, and increased
housing starts and home improvement activity. Please note that ongoing
uncertainties surrounding the impact of the pandemic on Simpson'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.
Results of Operations for the Three Months 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 three months endedSeptember 30, 2020 , against the results of operations for the three months endedSeptember 30, 2019 . Unless otherwise stated, the results announced below, when referencing "both quarters," refer to the three months endedSeptember 30, 2019 and the three months endedSeptember 30, 2020 .
Third Quarter 2020 Consolidated Financial Highlights
The following table illustrates the differences in our operating results for the three months endedSeptember 30, 2020 , from the three months endedSeptember 30, 2019 , and the increases or decreases for each category by segment: Three Months Three Months Ended Increase (Decrease) in Operating Segment Ended September 30, North Asia/ Admin & September 30, (in thousands) 2019 America Europe Pacific All Other 2020 Net sales$ 309,932 $ 51,397 $ 2,547 $ 428 $ -$ 364,304 Cost of sales 172,288 17,310 1,781 (493) 175 191,061 Gross profit 137,644 34,087 766 921 (175) 173,243 Research and development and other engineering expense 11,972 181 72 62 - 12,287 Selling expense 27,672 1,649 45 30 - 29,396 General and administrative expense 37,047 1,725 (16) (138) 1,671 40,289 Total operating expenses 76,691 3,555 101 (46) 1,671 81,972 Net loss (gain) on disposal of assets (14) (1) (23) (34) - (72) Income from operations 60,967 30,533 688 1,001 (1,846) 91,343 Interest income (expense), net and other (1,778) 894 956 (137) (453) (518) Income before income taxes 59,189 31,427 1,644 864 (2,299) 90,825 Provision for income taxes 15,503 7,970 545 266 (516) 23,768 Net income$ 43,686 $ 23,457 $ 1,099 $ 598 $ (1,783) $ 67,057 Net sales increased 17.5% to$364.3 million from$309.9 million . Net sales to home centers, dealer distributors and lumber dealers increased primarily due to increases in sales volumes from the return of a nationwide home center customer. Net sales to contractor distributors decreased. Wood construction product net sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% and 84% of the Company's total net sales in the third quarters of 2020 and 2019, respectively. Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, 25 --------------------------------------------------------------------------------
powder actuated tools and reinforcing fiber materials, represented 15% and 16% of the Company's total net sales in the third quarters of 2020 and 2019, respectively.
Gross profit increased 25.9% to$173.2 million from$137.6 million . Gross margins increased to 47.6% from 44.0%, primarily due to lower material costs and factory and overhead expense (on higher production), partly offset by higher warehouse, shipping and labor expense each as a percentage of net sales. Gross margins, including some inter-segment expenses, which were eliminated in consolidation, and excluding other expenses that are allocated according to product group, increased to 48.0% from 44.4% for wood construction products and increased to 42.1% from 41.6% for concrete construction products, respectively. Research and development and engineering expense increased 2.6% to$12.3 million from$12.0 million , primarily due to increases of$0.6 million in cash profit sharing expense and$0.2 million in stock-based compensation expense on our performance based awards, partly offset by decreased software development costs. Selling expense increased 6.2% to$29.4 million from$27.7 million , primarily due to increases of$1.7 million in cash profit sharing and sales commissions,$0.8 million in personnel costs,$0.4 million in stock-based compensation and$0.4 million in professional fees, partly offset by decreases of$1.3 million in travel-associated expenses, and$0.4 million in promotional and advertising expense. General and administrative expense increased 8.8% to$40.3 million from$37.0 million , primarily due to increases of$2.0 million in cash profit sharing expense,$1.1 million in stock-based compensation expense on our performance based awards,$0.9 million in depreciation and amortization expense and$0.6 million in insurance expense, partly offset by a decrease of$1.1 million in travel-associated expenses. Included in general and administrative expense are SAP implementation and support costs of$3.2 million , which decreased$0.4 million from the prior quarter.
Our effective income tax rate was 26.2% for both periods.
Consolidated net income was
Net sales
The following table represents net sales by segment for the three-month periods
ended
North Asia/
(in thousands) America Europe Pacific Total
Three months ended
September 30, 2019 $ 265,505 $ 42,219 $ 2,208 $ 309,932
September 30, 2020 316,902 44,766 2,636 364,304
Increase $ 51,397 $ 2,547 $ 428 $ 54,372
Percentage increase 19.4 % 6.0 % 19.4 % 17.5 %
The following table represents segment net sales as percentages of total net
sales for the three-month periods ended September 30, 2020 and 2019,
respectively:
North Asia/
America Europe Pacific TotalPercentage of total 2019 net sales 86 % 14 % 1 %
100 %
Percentage of total 2020 net sales 87 % 12 % 1 % 100 %
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Gross profit
The following table represents gross profit by segment for the three-month
periods ended
North Asia/ Admin &
(in thousands) America Europe Pacific All Other Total
Three months ended
September 30, 2019 $ 120,974 $ 16,214 $ 455 $ 1 $ 137,644
September 30, 2020 155,061 16,980 1,376 (174) 173,243
Increase (decrease) $ 34,087 $ 766 $ 921 $ (175) $ 35,599
Percentage Increase (decrease) 28.2 % 4.7 % * * 25.9 %
* The statistic is not meaningful or material.
The following table represents gross profit as a percentage of sales by segment
for the three months ended
North Asia/ Admin &
America Europe Pacific All Other Total
2019 gross profit percentage 45.6 % 38.4 % 20.6 % * 44.4 %
2020 gross profit percentage 48.9 % 37.9 % 52.2 % * 47.6 %
* The statistic is not meaningful or material.
•Net sales increased 19.4%, primarily due to higher sales volumes from the return of a nationwide home center customer and increased repair and remodel activity, as well as from other sales distributor channels, which experienced increased new housing starts and repair and remodel activity.Canada's net sales increased but were negatively affected by foreign currency translation.
•Gross profit as a percentage of net sales increased to 48.9% from 45.6% primarily due to decreases in material and labor costs, partly offset by higher warehouse and shipping costs, each as a percentage of net sales.
•Research and development and engineering expense increased$0.2 million , primarily due to increases of$0.6 million in cash profit sharing expense and$0.2 million in stock-based compensation, partly offset by decreased software development costs. •Selling expense increased$1.6 million , primarily due to increases of$1.5 million in cash profit sharing and sales commissions,$0.6 million in personnel expense,$0.5 million in professional fees, and$0.3 million in stock-based compensation for our performance based awards, partly offset by decreases of$1.1 million in travel-associated expenses and$0.2 million in promotional and advertising expense. •General and administrative expense increased$1.7 million , primarily due to increases of$1.1 million in stock-based compensation expense for our performance based awards,$0.6 million in depreciation and amortization,$0.3 million in rent expense, and$0.2 million in cash profit sharing expense, partly offset by a decrease of$0.8 million in travel-related expenses. Included in general and administrative expense are SAP implementation and support costs of$2.5 million , which decreased$0.4 million from the prior quarter.
•Income from operations increased by
27
--------------------------------------------------------------------------------•Net sales increased 6.0%, primarily due to higher sales volumes along with the positive impact of foreign currency translation of approximately$2.1 million from someEurope currencies strengthening againstthe United States dollar. In local currency,Europe net sales increased due to higher sales volumes.
•Gross profit as a percentage of net sales decreased to 37.9% from 38.4%, primarily due to increased labor, warehouse and shipping costs, partly offset by lower material and factory and overhead cost.
•Income from operations increased by
Asia/Pacific •For information about the Company'sAsia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the three months endedSeptember 30, 2020 and 2019, respectively.
Admin & All Other
•General and administrative expense increased
Results of Operations for the Nine Months Ended
Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as "increased," "decreased," "unchanged" or "compared to"), compare the results of operations for the nine months endedSeptember 30, 2020 , against the results of operations for the nine months endedSeptember 30, 2019 . Unless otherwise stated, the results announced below, when referencing "both periods," refer to the nine months endedSeptember 30, 2019 and the nine months endedSeptember 30, 2020
Year-to-Date (9-month) 2020 Consolidated Financial Highlights
The following table illustrates the differences in our operating results for the nine months endedSeptember 30, 2020 , from the nine months endedSeptember 30, 2019 , and the increases or decreases for each category by segment: 28 -------------------------------------------------------------------------------- Nine Months
Nine Months
Ended Increase (Decrease) in Operating Segment
Ended
September 30, North Asia/ Admin & September 30,
(in thousands) 2019 America Europe Pacific All Other 2020
Net sales 874,029 $ 106,750 $ (6,770) $ 39 $ - $ 974,048
Cost of sales 491,952 33,138 (3,657) (63) (31) 521,339
Gross profit 382,077 73,612 (3,113) 102 31 452,709
Research and development and other
engineering expense 35,287 2,503 50 20 - 37,860
Selling expense 84,471 1,108 (495) (327) - 84,757
General and administrative expense 117,941 (3,341) (523) (227) 3,546 117,396
237,699 270 (968) (534) 3,546 240,013
Net gain on disposal of assets (265) (304) 399 (39) - (209)
Income from operations 144,643 73,646 (2,544) 675 (3,515) 212,905
Interest expense, net and other (2,394) 1,108 66 (282) (1,700) (3,202)
Income before income taxes 142,249 74,754 (2,478) 393 (5,215) 209,703
Provision for income taxes 36,324 17,169 (136) 46 (1,062) 52,341
Net income $ 105,925 $ 57,585 $ (2,342) $ 347 $ (4,153) $ 157,362
Net sales increased 11.4% to $974.0 million from $874.0 million . Net sales to
home centers, lumber dealers and dealer distributors increased, primarily due to
increases in product sales volumes from the return of a nationwide home center
customer. Net sales to contractor distributors decreased. Wood construction
product net sales, including sales of connectors, truss plates, fastening
systems, fasteners and shearwalls, represented 86% and 84% of the Company's
total net sales in the first nine months of 2020 and 2019, respectively.
Concrete construction product net sales, including sales of adhesives,
chemicals, mechanical anchors, powder actuated tools and reinforcing fiber
materials, represented 14% and 16% of the Company's total net sales in the first
nine months of 2020 and 2019, respectively.
Gross profit increased 18.5% to $452.7 million from $382.1 million . Gross profit
margins increased to 46.5% from 43.3%, primarily due to lower material costs and
factory and overhead expense (on higher production), partly offset by higher
warehouse, labor and shipping expense each as a percentage of net sales. The
gross profit margins, including some inter-segment expenses, which were
eliminated in consolidation, and excluding other expenses that are allocated
according to product group, increased to 46.6% from 43.4% for wood construction
products and increased to 42.3% from 41.6% for concrete construction products.
Research and development and engineering expense increased 7.3% to $37.9 million
from $35.3 million primarily due to increases of $1.9 million in cash profit
sharing expense and $0.3 million in personnel costs.
Selling expense increased slightly to
General and administrative expense decreased slightly to$117.4 million from$117.9 million , primarily due to decreases of$7.1 million in professional fees, including consulting fees,$2.1 million in travel-associated expenses and$0.3 million in lower bad debt expenses, partly offset by increases of$4.6 million in cash profit sharing expense,$1.7 million in personnel related expense,$1.7 million in depreciation and amortization expense,$0.7 million in insurance expense, and$0.6 million in computer software and hardware costs. Included in general and administrative expense are costs associated with the SAP implementation and support of$9.1 million , a decrease of$0.3 million over the first nine-months of 2019.
Our effective income tax rate decreased to 25.0% from 25.1%.
Consolidated net income was
29
--------------------------------------------------------------------------------Net sales
The following table represents net sales by segment for the nine-month periods
ended
North Asia/
(in thousands) America Europe Pacific Total
Nine Months Ended
September 30, 2019 $ 746,009 $ 121,647 $ 6,373 $ 874,029
September 30, 2020 852,759 114,877 6,412 974,048
Increase (decrease) $ 106,750 $ (6,770) $ 39 $ 100,019
Percentage increase (decrease) 14.3 % (5.6) % 0.6 % 11.4 %
The following table represents segment net sales as percentages of total net
sales for the nine-month periods ended
North Asia/
America Europe Pacific Total
Percentage of total 2019 net sales 85 % 14 % 1 %
100 % Percentage of total 2020 net sales 88 % 12 % - % 100 % Gross profit
The following table represents gross profit by segment for the nine-month
periods ended
North Asia/ Admin &
(in thousands) America Europe Pacific All Other Total
Nine Months Ended
September 30, 2019 $ 336,251 $ 43,900 $ 1,924 $ 2 $ 382,077
September 30, 2020 409,863 40,787 2,026 33 452,709
Increase (decrease) $ 73,612 $ (3,113) $ 102 $ 31 $ 70,632
Percentage increase (decrease) 21.9 % (7.1) % * * 18.5 %
* The statistic is not meaningful or material
The following table represents gross profit as a percentage of sales by segment
for the nine-month periods ended
North Asia/ Admin &
(in thousand) America Europe Pacific All Other Total
2019 gross profit percentage 45.1 % 36.1 % 30.2 % * 43.7 %
2020 gross profit percentage 48.1 % 35.5 % 31.6 % * 46.5 %
* The statistic is not meaningful or material.
•Net sales increased 14.3%, primarily due to higher sales volumes from the return of a nationwide home center customer.Canada's net sales were negatively affected by foreign currency translation. In local currency,Canada net sales increased primarily due to increases in sales volume. 30 -------------------------------------------------------------------------------- •Gross profit margin increased to 48.1% from 45.1%, primarily due to decreases in material costs and factory and overhead costs (on higher production), partly offset by higher warehouse, labor and shipping costs, each as a percentage of net sales.
•Research and development and engineering expense increased
•Selling expense increased$1.1 million , primarily due to increases of$4.1 million in cash profit sharing and sales commissions and$2.2 million in personnel costs, partly offset by decreases of$2.6 million in travel-associated expenses,$1.0 million in advertising and promotional expense,$0.7 million in professional fees and$0.6 million in royalty expense. •General and administrative expense decreased$3.3 million , primarily due to decreases of$6.9 million in professional fees, including consulting fees,$1.5 million in travel-associated expenses and$0.2 million in stock-based compensation, partly offset by increases of$3.4 million in cash profit sharing expense,$1.2 million in depreciation and amortization expense,$1.0 million in personnel related expense and$0.6 million in computer software and hardware costs. Included in general and administrative expense are costs associated with the SAP implementation and support of$7.2 million , a decrease of$0.3 million over the first nine-months of 2019.
•Income from operations increased
•Net sales decreased 5.6%, primarily due to lower sales volumes, that resulted from lower production related to COVID-19 plant closures.Europe sales were impacted by negative foreign currency translations resulting from someEurope currencies weakening againstthe United States dollar. In local currency,Europe net sales decreased primarily due to lower sales volumes.
•Gross profit margins decreased to 35.5% from 36.1%, primarily due to increases in labor, shipping and warehouse costs, partly offset by lower material and factory overhead, each cost as a percentage of net sales.
•Selling expense decreased
•General and administrative expense decreased$0.5 million , primarily due to decreases of$0.4 million in travel and entertainment expense and$0.3 million in cash profit sharing. Included in general and administrative expense are costs associated with the SAP implementation of$1.8 million , a decrease of$0.1 million over the first nine-months of 2019.
•Income from operations decreased
•For information about the Company'sAsia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the nine months endedSeptember 30, 2020 and 2019, respectively.
Admin & All Other
•General and administrative expense increased
31
--------------------------------------------------------------------------------Effect of New Accounting Standards
See "Note 1 Basis of Presentation - Recently Adopted Accounting Standards" to the accompanying unaudited interim condensed consolidated financial statements.
Liquidity and Sources of Capital
The Company is a borrower, and certain domestic subsidiaries are guarantors, under a revolving credit agreement withWells Fargo Bank, N.A . as administrative agent, and certain other lenders, which provides the Company with a$300.0 million revolving line of credit (the "Credit Facility"), and an irrevocable standby letter of credit in support of various insurance deductibles. InMay 2020 , the Company entered into a third amendment to the unsecured credit agreement datedJuly 27, 2012 , which extends the term of the Credit Agreement fromJuly 23, 2021 , toJuly 23, 2022 As previously disclosed, as a proactive measure, the Company elected to draw down$150.0 million from the Credit Facility to increase its cash position and preserve financial flexibility in light of the uncertainty resulting from the COVID-19 pandemic. The proceeds from the borrowings are available to be used for working capital, general corporate or other purposes permitted by the Credit Facility. As ofSeptember 30, 2020 , the Company repaid$75.0 million of the borrowed funds and repaid an additional$25.0 million onOctober 30, 2020 . Total available credit as ofSeptember 30, 2020 , was$227.5 million , including the Credit Facility and other revolving credit lines. As ofSeptember 30, 2020 , our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions. Cash and cash equivalents of$67.0 million are held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated tothe United States . The Company is maintaining a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outsidethe United States .
The following table presents selected financial information as of
At September 30, At December 31, At September 30,
(in thousands) 2020 2019 2019
Cash and cash equivalents $ 311,465 $ 230,210 $ 194,061
Property, plant and equipment, net 246,472 249,012 250,950
equity investment 157,173 159,430 155,492 Working capital 629,244 482,000 469,387
The following table provides cash flow indicators for the nine-month periods
ended
Nine Months Ended
(in thousands) 2020 2019
Net cash provided by (used in):
Operating activities $ 129,618 $ 149,235
Investing activities (21,554) (25,526)
Financing activities (26,153) (88,371)
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. As a significant portion of our revenues
are derived from manufacturing building construction materials. Our operating
cash flows are subject to seasonality and are cyclically associated with the
volume and timing of construction project starts. For example, trade accounts
receivable is generally at its lowest at the end of the fourth quarter and
increases during the first, second and third quarters.
During the nine months ended September 30, 2020 , operating activities provided
$129.6 million in cash and cash equivalents, as a result of $157.4 million from
net income and $47.5 million from non-cash adjustments to net income, which
included
32
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depreciation and amortization expense and stock-based compensation expense. Cash
provided from net income was partly offset by a decrease of $75.2 million in the
net change in operating assets and liabilities, including increases of $87.2
million in trade accounts receivable and $7.2 million in inventory, partly
offset by increases of $21.8 million in other current liabilities and $7.8
million in trade accounts payable.
Cash used in investing activities of $21.6 million during the nine months ended
September 30, 2020 was mainly for capital expenditures. Our capital spending in
2018, 2019 and the nine months ended September 30, 2020 was $29.3 million , $32.7
million and $20.9 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, new capital spending
for fiscal year 2020 will be primarily for safety and equipment replacement,
but may be for other capital projects, including those that provide cost savings
or enable future growth.
Cash used in financing activities of $26.2 million during the nine months ended
September 30, 2020 was primarily due to the Company borrowing $150.0 million on
its credit facility, of which $75.0 million was repaid in the third quarter of
2020, $62.7 million to purchase 902,340 shares of the Company's common stock on
the open market at an average price of $69.46 per share and $30.2 million to pay
dividends to our stockholders.
On October 23, 2020 , the Board declared a quarterly cash dividend of $0.23 per
share, estimated to be $10.0 million in total. The dividend will be payable on
January 28, 2021 , to the Company's stockholders of record on January 7, 2021 .
As illustrated in the table below, since 2015, the Company has repurchased over
seven-and-a-half million shares of the Company's common stock, which represents
approximately 15.4% of our shares of common stock outstanding at the beginning
of 2015. Including dividends, we have returned cash of $614.3 million , which
represents 73.9% of our total cash flow from operations during the same period.
Number of Shares Cash Paid for Share Cash paid for
(in thousands) Repurchased Repurchases Dividends Total
January 1 -
September 30, 2020 902 $ 62,679 $ 30,399 $ 93,078
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 7,550 $ 404,681 $ 209,592 $ 614,273 The Company intends to resume its stock repurchase program in the fourth quarter
of 2020. As of
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Inflation and Raw Materials
We believe that the effect of inflation has not been material in recent years, as general inflation rates have remained relatively low. Our main raw material is steel. As such, increases in steel prices may adversely affect our gross profit margin if we cannot recover the higher costs through price increases.
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