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MarketScreener Homepage  >  Equities  >  Nyse  >  Simpson Manufacturing Co., Inc.    SSD

SIMPSON MANUFACTURING CO., INC.

(SSD)
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SIMPSON MANUFACTURING : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/06/2020 | 09:23am EST
Each of the terms the "Company," "we," "our," "us" and similar terms used herein
refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation
and its wholly-owned subsidiaries, including Simpson 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 ended March 31, 2020 and June 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
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by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.

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: North America, Europe and Asia/Pacific.


Our strategic plan for growth includes increasing our market share and
profitability in Europe; 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 the U.S. housing market.

On October 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, on April 27, 2020, we
withdrew our prior full year 2020 guidance originally issued on February 3,
2020, as well as the financial targets associated with the 2020 Plan.

In December 2019, COVID-19 was first identified in Wuhan, China. Over the next
several months, COVID-19 quickly spread across the world. In March 2020, the WHO
declared COVID-19 a worldwide pandemic based on the rapid increase in exposure
globally, and the President of the United States declared the COVID-19 outbreak
a national emergency. As of October 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 the United Kingdom and France 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 our North 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 to October 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
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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 the North
America segment and Europe 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 to U.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 from China
to many other countries including the 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 of September 30, 2020. Events and changes in circumstances
arising after September 30, 2020, including those resulting from the impacts of
COVID-19 pandemic, will be reflected in management's estimates for future
periods.

ERP Integration


In July 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 from SAP America, Inc.
("SAP") in
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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 remaining North 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 of
September 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 our North 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 ended September 30, 2020
compared to September 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 ended September 30, 2020
compared to September 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.

Our Europe segment also generates more revenues from wood construction products
than concrete construction products. Europe net sales increased for the quarter
ended September 30, 2020 compared to September 30, 2019, primarily due to
benefiting from approximately $2.1 million of foreign currency translations for
some Europe currencies strengthening against the United States dollar. In local
currency, Europe net sales increased due to higher volumes. Wood construction
product sales increased 14.2% for the quarter ended September 30, 2020 compared
to September 30, 2019. Concrete construction product sales are mostly project
based, and net sales decreased 15.2% for the quarter ended September 30, 2020
compared to September 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 Asia/Pacific segment has generated revenues from both wood and concrete construction products. We believe that the Asia/Pacific segment is not significant to our overall performance.

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. On July 27,
2020, the Company reinstated its 2020 full-year outlook originally provided on
February 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 ending December 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 December 31, 2019.

•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 September 30, 2020, Compared with the Three Months Ended September 30, 2019


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 ended
September 30, 2020, against the results of operations for the three months ended
September 30, 2019. Unless otherwise stated, the results announced below, when
referencing "both quarters," refer to the three months ended September 30, 2019
and the three months ended September 30, 2020.

Third Quarter 2020 Consolidated Financial Highlights


The following table illustrates the differences in our operating results for the
three months ended September 30, 2020, from the three months ended September 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
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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 $67.1 million compared to $43.7 million. Diluted net income per common share was $1.54 compared to $0.97.

Net sales

The following table represents net sales by segment for the three-month periods ended September 30, 2020 and 2019, respectively:

                         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      Total

Percentage 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 September 30, 2020 and 2019, respectively:

                                    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 September 30, 2020 and 2019, respectively:

                                   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.

North America


•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 $30.5 million, primarily due to increased gross profit, partly offset by higher operating expenses.

                                       27

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Europe


•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 some Europe currencies strengthening against the 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 $0.7 million, primarily due to higher gross profits.


Asia/Pacific

•For information about the Company's Asia/Pacific segment, please refer to the
tables above setting forth changes in our operating results for the three months
ended September 30, 2020 and 2019, respectively.

Admin & All Other

•General and administrative expense increased $1.7 million, primarily due to increases of $1.3 million in cash profit sharing expense.

Results of Operations for the Nine Months Ended September 30, 2020, Compared with the Nine Months Ended September 30, 2019


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 ended September 30, 2020, against the results of operations for the nine
months ended September 30, 2019. Unless otherwise stated, the results announced
below, when referencing "both periods," refer to the nine months ended
September 30, 2019 and the nine months ended September 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 ended September 30, 2020, from the nine months ended September 30,
2019, and the increases or decreases for each category by segment:

                                       28

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                                          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 $84.8 million from $84.5 million, primarily due to increases of $4.0 million in cash profit sharing and sales commissions and $2.4 million in personnel costs, partly offset by decreases of $3.2 million in travel-associated expenses, $1.1 million in advertising and promotional expense, $0.8 million in professional fees and $0.5 million in royalty expense.


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 $157.4 million compared to $105.9 million. Diluted net income per common share was $3.59 compared to $2.35.

                                       29

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Net sales

The following table represents net sales by segment for the nine-month periods ended September 30, 2019 and 2020, respectively:

                                    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 September 30, 2019 and 2020, respectively:

                                         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 September 30, 2019 and 2020, respectively:

                                    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 September 30, 2019 and 2020, respectively:

                                   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.

North America


•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 $2.5 million, primarily due to increases of $1.9 million in cash profit sharing expense.


•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 $73.6 million, mostly due to increased sales, gross profit margins, partly offset by higher operating expenses.

Europe


•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 some Europe
currencies weakening against the 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 $0.5 million, primarily due to a decrease of $0.6 million in travel-associated expenses.


•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 $2.5 million, primarily due to lower sales and gross profit margins, partly offset by lower operating expenses.

Asia/Pacific


•For information about the Company's Asia/Pacific segment, please refer to the
tables above setting forth changes in our operating results for the nine months
ended September 30, 2020 and 2019, respectively.

Admin & All Other

•General and administrative expense increased $3.5 million, primarily due to increases of $1.5 million in cash profit sharing expense, $0.7 million in stock-based compensation, and $0.6 million in insurance expense.

                                       31

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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 with Wells 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.

In May 2020, the Company entered into a third amendment to the unsecured credit
agreement dated July 27, 2012, which extends the term of the Credit Agreement
from July 23, 2021, to July 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 of September 30, 2020, the Company repaid $75.0 million of the
borrowed funds and repaid an additional $25.0 million on October 30, 2020. Total
available credit as of September 30, 2020, was $227.5 million, including the
Credit Facility and other revolving credit lines.

As of September 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 to the United States. The Company is maintaining a permanent
reinvestment assertion on its foreign earnings relative to remaining cash held
outside the United States.

The following table presents selected financial information as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively:

                                        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

Goodwill, intangible assets and

 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 September 30, 2020 and 2019, respectively:

                                                  Nine Months Ended 

September 30,

    (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

--------------------------------------------------------------------------------

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 September 30, 2020, approximately $37.3 million remained available under the $100.0 million repurchase authorization, which expires December 31, 2020.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of September 30, 2020.

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.

© Edgar Online, source Glimpses

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