SIMPSON MANUFACTURING CO., INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See "Note About Forward-Looking Statements" and "Item 1A-Risk Factors" for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements.
Overview
We design, engineer and are a leading manufacturer of high quality wood and concrete building construction products designed to make structures safer and more secure that perform at high levels and are easy to use and cost-effective for customers. We operate in three business segments determined by geographic region:North America ,Europe andAsia/Pacific . Our strategic plan for growth includes increasing our market share and profitability in ourEurope segment; 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 our strategic plan and financial objectives. We updated certain of these goals in 2019 to reflect changes in the macro-economic landscape. 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. 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 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 pandemic on its 26 -------------------------------------------------------------------------------- financial condition, liquidity, operations, suppliers, industry, and workforce. The extent to which COVID-19 may adversely impact our business depends on future developments, which are highly uncertain and unpredictable, including new information concerning the severity of the outbreak and the effectiveness of actions globally to contain or mitigate its effects and we are unable to predict the potential future impact that the COVID19 pandemic will have on our business, financial condition or results of operations. 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 ofJanuary 31, 2021 , the virus continues to spread infecting over 46 million people worldwide. Vaccines are available in various countries and distribution of the vaccine also varies by country and in theU.S. by state. 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 lateMarch 2020 , 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. And since then, 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 its credit facility, suspending its stock repurchase program, implementing a hiring freeze and adjusting employee hours to meet production requirements. Based on updated expectations in mid-2020, the Company had resumed hiring to meet increased demand levels that it has experienced. The Company repaid the amount outstanding on its credit facility and resumed its stock repurchase program. As a result of COVID-19 and in support of continuing its manufacturing efforts, the Company has undertaken 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 Crisis Management Team, which includes members of senior management, meets regularly to review and assess the status of the Company's operations and the health and safety of its employees. A significant portion of the Company's total product sales is dependent onU.S. 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 Lowe's, increased housing starts and a strong home repair and remodel market, sales for the fiscal year 2020 sales increased compared to the fiscal year 2019. Whether this trend continues at the same pace or decline for the year 2021 is not known. Our first 2020 Plan objective was a continued focus on organic growth with the goal of achieving a compounded annual growth rate in net sales of approximately 8% from 2016 through 2020. Since 2016 net sales has grown 47.3% or at a compound annual growth rate of 10.2%. Milestones that helped support this goal included a price increase for the majority of ourU.S. wood connector products in the third quarter of 2018, the signing of one of the largestU.S. homebuilding companies onto our builder program, resulting in 23 of the top 25 U.S. builders now engaged on our program, strong repair and remodel trends associated with the COVID-19 pandemic, as well as the return of Lowe's in mid-2020. Our second objective involved rationalizing our cost structure to improve company-wide profitability. Our goal was to reduce total operating expenses as a percent of net sales to a range of 26% to 27% by the end of 2020 through a combination of zero-based budgeting, lowering our indirect procurement costs and taking other cost reduction measures in bothEurope and our concrete business. Specifically in 2020 we also experienced cost savings from our expense management practices as well as one-time benefits from reduced travel and trade show costs as a result of COVID-19 restrictions. These factors, combined with 27 -------------------------------------------------------------------------------- strong sales growth, resulted in operating expenses as a percentage of net sales improving 570 basis points lowering to 25.6% for the year endedDecember 31, 2020 from 31.3% for the year endedDecember 31, 2016 . Our third objective was to improve company-wide operating margins to a range of 16% to 17% by the end of 2020. This goal was going to be largely affected by another profitability goal to improve operating margins inEurope by rolling out our fastener lines in theNordic Region andFrance , the consolidation of our European management team to create efficiencies, and through other cost cutting initiatives. Further, in late 2017 we implemented a new concrete strategy, which narrowed our concentration to six distinct product categories to improve gross margins. As a result of these initiatives, favorable raw material prices in 2020, as well as limited spending on certain operating expenses due to COVID-19 restrictions during 2020, operating margins improved 340 basis points increasing to 19.9% for the year endedDecember 31, 2020 from 16.5% for the year endedDecember 31, 2016 . Our fourth objective focused on improving our working capital management and overall balance sheet discipline. Since the onset of the 2020 Plan we've implemented lean principles in our factories. We also completed a 3-phased SKU reduction program, eliminating over 12,000 non-moving or slow-removing SKUs and converting our customers over to replacement products. In addition, we carried out rapid improvement events in ourU.S. production facilities resulting in efficiency enhancements as well as improved management of inventory and purchasing practices. The final element of our 2020 Plan was focused on maximizing stockholder value, with the goal of improving our return on invested capital from 10.5% in 2016 to a range of 15% to 16% by year end 2020. Through our operational execution, combined with the enactment of theU.S. Tax Cuts and Jobs Act of 2017, which lowered our effective income tax rate beginning in 2018, return on invested capital (1) increased to 20.0% for the year endedDecember 31, 2020 .
Factors Affecting Our Results of Operations
Unlike lumber or other products that have a more direct correlation to housing starts, our products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. Our products are generally used in a sequential manner that follows the construction process. Residential, light industrial and commercial construction begins with the foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules. Our sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year, as our customers tend to purchase construction materials in the late spring and summer months for the construction season. Weather conditions, such as extended cold or wet weather, which affect and sometimes delay installation of some of our products, could negatively affect our results of operations. Political, economic events such as tariffs and the possibility of additional tariffs on imported raw materials or finished goods or such as labor disputes can also have an effect on our gross and operating profits as well as the amount of inventory on-hand. 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 including theU.S. See "Item IA-Risk Factors."
ERP Integration
InJuly 2016 , our Board of Directors approved a plan to replace our current in-house enterprise resource planning ("ERP") and externally sourced accounting platforms with a fully integrated ERP platform fromSAP America, Inc. ("SAP") in multiple phases by location at all facilities plus our headquarters, with a focus on configuring, instead of customizing, the standard SAP modules. We went live with our first wave of the SAP implementation project in February of 2018, and we implemented SAP at five additional locations in 2019, 2020 and early 2021, completing ourNorth America operations. We are tracking toward rolling out SAP technology with a company-wide completion 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 ofDecember 31, 2020 , we have capitalized$21.4 million and expensed$39.1 million of the costs, including$5.9 million in amortization expense of capitalized costs. 28 --------------------------------------------------------------------------------
Business Segment Information
Historically ourNorth America segment has generated more revenues from wood construction products compared to concrete construction products. During 2020, the return of Lowe's, favorable weather conditions, 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. Wood construction product sales volume increased 15.6% for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to increased sales volumes in connection with the return of Lowe's and increased housing starts and repair and remodel activity, which resulted in increased sales to some of our other sales distributor channels.Net sales of our concrete construction product increased slightly for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 mostly due to increased sales volumes. Operating profits increased due to higher sales, and lower cost of goods sold mostly due to lower material costs. 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 due to approximately$2.2 million of positive foreign currency translations resulting from someEurope currencies strengthening against theU.S. dollar. In local currency,Europe net sales decreased primarily due to lower sales volume. InU.S. dollars, wood construction product sales increased 4.3% for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Concrete construction product sales are mostly project based, and net sales decreased 9.9% for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Operating profits increased due to lower material costs, and lower operating expenses as well as benefiting from foreign currency translation from mostEurope currencies strengthening against theU.S. dollar. See "Europe" below.
Our
(1)When referred to above, the Company's return on invested capital ("ROIC") for
a fiscal year is calculated based on (i) the net income of that year as
presented in the Company's consolidated statements of operations prepared
pursuant to generally accepted accounting principles in the U.S. ("GAAP"), as
divided by (ii) the average of the sum of total stockholders' equity and total
long-term interest bearing liabilities, (which for the Company are long-term
capital lease obligations), at the beginning of and at the end of such year, as
presented in the Company's consolidated balance sheets prepared pursuant to GAAP
for that applicable year. As such, the Company's ROIC, a ratio or statistical
measure, is calculated using exclusively GAAP financial measures.
Business Outlook
Based on current information and subject to future events and circumstances the Company estimates that its full year 2021:
•Operating margin will be between approximately 16.5% and 18.5%.
•Depreciation and amortization expense will be approximately
•Effective tax rate will be approximately 25.0% to 26.0%, including both federal and state income tax rates.
•Capital expenditures for the full year are estimated to be in the range of
Results of Operations The following table sets forth, for the years indicated, the Company's operating results as a percentage of net sales for the years endedDecember 31, 2020 , 2019 and 2018, respectively: 29 -------------------------------------------------------------------------------- Years Ended December 31, 2020 2019 2018 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 54.5 % 56.7 % 55.5 % Gross profit 45.5 % 43.3 % 44.5 % Research and development and other engineering 4.0 % 4.1 % 4.0 % Selling expense 8.9 % 9.9 % 10.2 % General and administrative expense 12.7 % 13.9 % 14.7 % Total operating expense 25.6 % 27.9 % 28.9 % Net gain on disposal of assets - % (0.5) % (1.0) % Impairment of goodwill - % - % 0.6 % Income from operations 19.9 % 15.9 % 16.0 % Interest expense, net and other (0.2) % (0.2) % - % Foreign exchange gain (loss), net (0.1) % (0.1) % - % Income before taxes 19.7 % 15.7 % 15.9 % Provision for income taxes 4.9 % 3.9 % 4.2 % Net income 14.8 % 11.8 % 11.7 %
Comparison of the Years Ended
Unless otherwise stated, the below results, when providing comparisons (which are generally indicated by words such as "increased," "decreased," "unchanged" or "compared to"), compare the results of operations for the year endedDecember 31, 2020 , against the results of operations for the year endedDecember 31, 2019 . Unless otherwise stated, the results announced below, when referencing "both years," refer to the year endedDecember 31, 2019 and the year endedDecember 31, 2020 .
The following table shows the change in the Company's operations from 2019 to 2020, and the increases or decreases for each category by segment:
Increase (Decrease) in Operating Segment
Asia/ Admin &
(in thousands) 2019 North America Europe Pacific All Other 2020
Net sales $ 1,136,539 $ 129,042 $ 1,569 $ 795 $ - $ 1,267,945
Cost of sales 644,409 47,400 (66) 10 (192) 691,561
Gross profit 492,130 $ 81,642 $ 1,635 $ 785 $ 192 576,384
Operating expenses:
Research and development and other
engineering expense 47,058 3,635 85 13 16 50,807
Selling expense 112,568 648 (469) (260) 30 112,517
General and administrative expense 157,274 (927) 69 34 4,579 161,029
Operating expenses 316,900 3,356 (315) (213) 4,625 324,353
Net gain (loss) on disposal of assets (6,024) 5,363 371 (42) - (332)
Impairment of goodwill - - - - - -
Income from operations 181,254 72,923 1,579 1,040 (4,433) 252,363
Interest expense, net and other (1,730) 1,388 59 75 (1,804) (2,012)
Foreign exchange loss (1,167) 2,592 385 (906) (1,691) (787)
Income before income taxes 178,357 76,903 2,023 209 (7,928) 249,564
Provision for income taxes 44,375 17,749 1,883 - (1,443) 62,564 Net income$ 133,982 $ 59,154 $ 140 $ 209 $ (6,485) $ 187,000 Net Sales increased 11.6% to$1,267.9 million from$1,136.5 million . Net sales to home centers, lumber dealers and dealer distributors increased due to higher sales volumes while net sales to contractor distributors decreased due to lower sales 30 -------------------------------------------------------------------------------- volumes. 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 for the years endedDecember 31, 2020 and 2019, respectively. Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 15% and 16% of the Company's total net sales for the years endedDecember 31, 2020 and 2019. Gross profit increased to$576.4 million from$492.1 million . Gross profit margins increased to 45.5% from 43.3%, mostly due to lower material costs. The gross profit margins, including some intersegment expenses eliminated in consolidation, and excluding other expenses that are allocated according to product group, increased to 45.5% from 42.9% for wood construction products and decreased to 41.6% from 42.2% for concrete construction products. Research and development and other engineering expense increased 8.0% to$50.8 million from$47.1 million , primarily due to increases of$2.1 million in cash profit sharing expense,$1.4 million in personnel costs,$0.4 million for computer, software and phone expense and$0.3 million in in stock-based compensation, partly offset by a decrease of$0.8 million in travel and entertainment expense. Selling expense decreased slightly to$112.5 million from$112.6 million , primarily due to decreases of$4.7 million in travel and entertainment expenses,$2.4 million in marketing, promotion and advertising expenses,$0.6 million in professional fees,$0.6 million in lease expense and$0.6 million in royalty expense, which was partly offset by increases of$3.8 million in cash profit sharing expense,$3.5 million in personnel costs,$1.3 million in sales commissions and$0.4 million in stock-based compensation expense. General and administrative expense increased 2.4% to$161.0 million from$157.3 million , primarily due to increases of$7.0 million in cash profit sharing expense,$3.2 million in personnel costs,$1.8 million in computer costs including software subscription and licensing fees,$1.6 million in depreciation and amortization expense$0.8 million in insurance expense, and$0.7 million in stock-based compensation, which was partly offset by decreases of$5.6 million in consulting and other professional fees,$3.0 million in travel and entertainment expense,$1.1 million in bad debt expense,$1.0 million in legal fees and$0.5 million in facilities expense. Costs associated with the SAP, including implementation and support costs of$13.2 million were the same in both years. These expenses were primarily for professional fees and 2020 and 2019 included$2.2 million and$2.1 million , respectively, in incremental related amortization expense. Gain on sale of assets - InNovember 2019 , the Company sold a facility that was used for selling and distributing. The Company received net proceeds of$9.4 million , which resulted in a pre-tax gain of$5.6 million .
Our effective income tax rate increased to 25.1% from 24.9%.
Net income was
The following table shows net sales by segment for the years ended
North Asia/
(in thousands) America Europe Pacific Total
December 31, 2019 $ 972,849 $ 155,144 $ 8,546 $ 1,136,539
December 31, 2020 1,101,891 156,713 9,341 1,267,945
Increase $ 129,042 $ 1,569 $ 795 $ 131,406
Percentage increase 13.3 % 1.0 % 9.3 % 11.6 %
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The following table shows segment net sales as percentages of total net sales
for the years ended
North Asia/
America Europe Pacific Total
Percentage of total 2019 net sales 86 % 14 % - %
100 % Percentage of total 2020 net sales 87 % 12 % 1 % 100 % Gross Profit
The following table shows gross profit by segment for the years ended
North Asia/ Admin &
(in thousands) America Europe Pacific All Other Total
December 31, 2019 $ 435,738 $ 53,906 $ 2,692 $ (206) $ 492,130
December 31, 2020 517,380 55,541 3,477 (14) 576,384
Increase $ 81,642 $ 1,635 $ 785 $ 192 $ 84,254
Percentage increase 18.7 % 3.0 % * * 17.1 %
* The statistic is not meaningful or material.
The following table shows gross profit margins by segment for the years ended
North Asia/ Admin &
America Europe Pacific All Other Total
2019 gross profit margin 44.8 % 34.7 % 31.5 % * 43.3 %
2020 gross profit margin 47.0 % 35.4 % 37.2 % * 45.5 %
* The statistic is not meaningful or material.
•Net sales increased 13.3% primarily due to increased sales volume.
•Gross profit margin increased to 47.0% from 44.8%, primarily due to decreases in raw material costs, partly offset by increased labor, factory overhead and warehouse costs. •Research and development and engineering expense increased$3.6 million , primarily due to increases of$2.1 million in cash profit sharing expense,$1.0 million in personnel costs,$0.3 million in stock-based compensation and$0.3 million in computer, software and phone expense, partly offset by a decrease of$0.7 million in travel and entertainment expenses. •Selling expense increased$0.6 million , primarily due to increases of$3.7 million in cash profit sharing expense,$3.1 million in personnel costs,$1.2 million in sales commissions and$0.4 million in stock-based compensation expense, partly offset by decreases of$3.8 million in travel and entertainment expenses,$1.9 million in marketing, promotion and advertising expenses,$0.5 million in professional fees,$0.6 million in royalty expense and$0.5 million in lease expense. •General and administrative expense decreased$0.9 million , primarily due to decreases of$5.4 million in consulting and other professional fees,$2.1 million in travel and entertainment expense,$1.0 million in legal fees,$0.9 million in bad debt expense and$0.5 million in facilities expense, partly offset by increases of$3.8 million in cash profit sharing expense,$1.9 million in personnel costs,$1.8 million in computer costs including software subscription and licensing fees,$1.0 million in depreciation and amortization expense and$0.3 million in stock-based compensation. Costs associated with SAP implementation and support of$10.5 million were the same in both years.
•Gain on sale of assets - In
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•Income from operations increased
•Net sales increased 1.0%, primarily due to approximately
•Gross profit margin increased to 35.4% from 34.7%, primarily due to decreases in material costs, partly offset by increases in labor, warehouse and shipping costs. •Selling expense decreased$0.5 million primarily due to decreases of$0.8 million in travel and entertainment costs and$0.3 million in marketing, promotion and advertising expenses, partly offset by an increase of$0.5 million in personnel costs.
•General and administrative expenses include costs associated with SAP
implementation and support of
•Income from operations increased
•For information about the Company'sAsia/Pacific segment, please refer to the table above setting forth changes in our operating results for the years endedDecember 31, 2020 and 2019.
Administrative and All Other
•General and administrative expense increased$4.6 million , primarily due to increases of$3.0 million in cash profit sharing expense,$0.7 million in insurance expense,$0.3 million in stock-based compensation and$0.2 million in personnel expense.
Comparison of the years ended
Critical Accounting Policies and Estimates
The critical accounting policies described below affect the Company's more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements. If the Company's business conditions change or if it uses different assumptions or estimates in the application of these and other accounting policies, the Company's future results of operations could be adversely affected. Inventory Valuation
Inventories are stated at the lower of cost or net realizable value (market). Cost includes all costs incurred in bringing each product to its present location and condition, as follows:
•Raw materials and purchased finished goods - principally valued at cost
determined on a weighted average basis; and
•In-process products and finished goods - cost of direct materials and labor
plus attributable overhead based on a normal level of activity.
The Company applies net realizable value and makes estimates for obsolescence to
the gross value of inventory. The Company estimates net realizable value based
on estimated selling price less further costs through completion and disposal.
The Company impairs slow-moving products by comparing inventories on hand to
projected demand. If on-hand supply of a product exceeds projected demand or if
the Company believes the product is no longer marketable, the product is
considered obsolete inventory. The Company revalues obsolete inventory to its
net realizable value and has consistently applied this methodology. The
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Company believes that this approach is suitable for impairments of slow-moving
and obsolete inventory. When impairments are established, a new cost basis of
the inventory is created. Unexpected changes in market demand, building codes or
buyer preferences could reduce the rate of inventory turnover and require the
Company to recognize more obsolete inventory.
Our goodwill balance is not amortized to expense, and we may assess qualitative
factors to determine whether it is more likely than not that the fair value of
each reporting unit is less than its carrying amount as a basis for determining
whether it is necessary to complete quantitative impairment assessments. The
Company evaluates the recoverability of goodwill in accordance with Accounting
Standard Codification ("ASC") Topic 350, "Intangibles - Goodwill and Other,"
annually, or more frequently if an event occurs or circumstances change in the
interim that would more likely than not reduce the fair value of the asset below
its carrying amount.
The Company identified a reporting unit whereby the fair value was less than its
carrying amount using quantitative methods during its annual review in 2018, and
as a result, recognized an impairment of all associated goodwill in the fourth
quarter of fiscal 2018. In 2020 and 2019, we performed qualitative assessments,
taking into consideration the current market value of the company, any changes
in management, key personnel, strategy and any relevant macroeconomic conditions
(e.g. general economic conditions, limiting access to capital). Based on our
qualitative assessments we concluded that the fair value of the reporting units
substantially exceeded the respective reporting unit's carrying value, including
goodwill.
Intangible assets acquired are recognized at their fair value at the date of
acquisition. Finite-lived intangibles are amortized over their applicable useful
lives. We monitor conditions related to these assets to determine whether events
and circumstances warrant a revision to the remaining amortization or
depreciation period. We test these assets for potential impairment annually and
whenever management concludes events or changes in circumstances indicate that
the carrying amount may not be recoverable.
Revenue from Contracts with Customers
The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer at a point in time. The Company's shipping terms provide the primary indicator of the transfer of control. The Company's general shipping terms are F.O.B. shipping point, where title and risk and rewards of ownership transfer at the point when the products leave the Company's warehouse. The Company recognizes revenue based on the consideration specified in the invoice with a customer, excluding any sales incentives, discounts, and amounts collected on behalf of third parties (i.e., governmental tax authorities). Volume rebates, discounts and rights of return are accounted for as variable considerations because the transaction price is either uncertain until the customer completes or fails the specified volumes or returned product are not returned by the return period. The Company estimates allowances based on historical experience from prior periods and the customer's historical purchasing pattern. These estimates are deducted from revenues and are reevaluated periodically during the reporting period. Effect of New Accounting Standards
See "Note 1 - Recently Adopted Accounting Standards" and "Note 1 - Recently Issued Accounting Standards Not Yet Adopted" to the Company's Consolidated Financial Statements.
Liquidity and Sources of Capital
Our primary sources of liquidity are cash and cash equivalents on hand, our cash flow from operations and our$300.0 million credit facility that expires onJuly 23, 2022 . See "Note 13 - Debt" to the Company's Consolidated Financial Statements. As ofDecember 31, 2020 , there were no amounts outstanding under this facility. Our principal uses of liquidity include the costs and expenses associated with our operations, including financing working capital requirements and continuing our capital allocation strategy, which includes supporting capital expenditures, repurchasing our common stock, paying cash dividends, and financing other investment opportunities over the next twelve months. As ofDecember 31, 2020 , our cash and cash equivalents consisted of deposits and money market funds held with established national financial institutions, and includes$74.6 million held in the local currencies of our foreign operations and could be subject to additional taxation if repatriated to theU.S. The Company maintains a permanent reinvestment assertion on its foreign earnings relative to remaining cash held outside theU.S. 34 --------------------------------------------------------------------------------
The following table presents selected financial information as of
At December 31,
(in thousands) 2020 2019 2018
Cash and cash equivalents $ 274,639 $ 230,210 $ 160,180
Property, plant and equipment, net 255,184 249,012 254,597
Equity investment, goodwill and intangible assets 165,110 159,430 157,139 Working capital 559,078 482,000 447,949
The following table presents the significant categories of cash flows for the
twelve months ended
Years Ended
(in thousands) 2020 2019 2018
Net cash provided by (used in):
Operating activities $ 207,572 $ 205,662 $ 160,080
Investing activities (39,853) (28,021) (10,249)
Financing activities (126,777) (108,154) (155,393)
Cash flows from operating activities result primarily from our earnings or
losses before depreciation and amortization, and are also affected by changes in
operating assets and liabilities which consist primarily of working capital
balances. As a building materials manufacturer, our operating cash flows are
subject to seasonality and are cyclically associated with the volume and timing
of construction project starts. For example, trade accounts receivable, net is
generally at its lowest at the end of the fourth quarter and increases during
the first, second and third quarters.
In 2020, operating activities provided $207.6 million in cash and cash
equivalents, as a result of $187.0 million from net income and $62.0 million
from non-cash adjustments to net income which includes depreciation and
amortization, stock-based compensation and non-cash lease expense, partially
offset by a decrease of $41.4 million for the net change in operating assets and
liabilities primarily from increases of $27.2 million in inventory and $22.1
million in trade accounts receivables, partly offset by an increase of $11.4
million in trade accounts payable. Cash used in investing activities of $39.9
million during the year ended December 31, 2020 , consisted primarily of $37.9
million for machinery and equipment, software development and office equipment,
as well as the purchase of an intangible asset for $5.3 million in cash. Cash
used in financing activities of $126.8 million during the year ended
December 31, 2020 , consisted primarily of $76.2 million for the repurchase of
the Company's common stock and $40.4 million used to pay cash dividends.
Cash flows from operating activities years ended
Capital Allocation Strategy We have a strong cash position and remain committed to seeking growth opportunities in our lines of building products where we can leverage our expertise in engineering, testing, manufacturing and distribution to invest in and grow our business. Those opportunities include internal improvements or acquisitions that fit within our strategic growth plan. Additionally, we have financial flexibility and are committed to providing returns to our stockholders. Below are highlights of our execution on our capital allocation strategy, first announced inAugust 2015 and updated inAugust 2016 . •Our capital spending in 2018, 2019 and 2020 was$29.3 million ,$37.5 million and$37.9 million , respectively, which was primarily used for real estate improvements, machinery and equipment purchases and software in development. Also in 2020, we purchased an intangible asset of$6.7 million , including$1.7 million in deferred payments to be made over the next couple of years. Based on current information and subject to future events and circumstances, we estimate that our full-year 2021 capital spending will be approximately$50 million to$55 million , including capital projects postponed in 2021 out of liquidity concerns from the COVID-19 pandemic and$10 to$13 million in maintenance type capital expenditures, assuming all such projects will be completed by the end of 2021. 35 -------------------------------------------------------------------------------- •For 2020, we purchased and received 1,053,314 shares of the Company's common stock on the open market at an average price of$72.33 per share, for a total of$76.2 million under a previously announced$100.0 million share repurchase authorization (which expired at the end of 2020). •In total, as illustrated in the table below, we have repurchased over seven million shares of the Company's common stock, which represents approximately 15.7% of our shares of common stock outstanding at the beginning of 2015. Including dividends, we have returned cash of$637.8 million , which represents 70.2% of our total cash flow from operations during the same period.
•On
•OnJanuary 22, 2021 , the Board of Directors declared a cash dividend of$0.23 per share, estimated to be$10.0 million in total. Such dividend is scheduled to be paid onApril 22, 2021 , to stockholders of record onApril 1, 2021 . The following table presents our dividends paid and share repurchases for the period fromJanuary 1, 2015 throughDecember 31, 2020 , in aggregated amounts: Number of Shares Cash Paid for Cash Paid for (in thousands) Repurchased Repurchases Dividends Total January 1 - December 31, 2020 1,053 $ 76,189 40,400$ 116,589 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 7,701 $ 418,191$ 219,593 $ 637,784 Contractual Obligations
The following table summarizes our known material contractual obligations and
commitments as of
Payments Due by Period
Total Less More
all than 1 1 - 3 3 - 5 than 5
Contractual Obligation (in thousands) periods year years years years
Primary line-of credit annual facility fees (1) $ 900 $
600
Purchase obligations (3) 38,119 37,536 583 - Total$ 85,361 $ 48,832 $ 16,496 $ 10,348 $ 9,685 (1)Includes annual facility fees on the Company's primary line-of-credit facility. The Company's primary line-of-credit facility requires the Company pay an annual facility fee from 0.20% to 0.35%, depending on the Company's leverage ratio, on the unused portion of the facilities. (2)Refer to Note 111 - Leases of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) (3)Consists of other purchase commitments related to facility equipment, consulting services, and minimum quantities of certain raw materials. The Company currently is not a party to any long-term supply contracts with respect to the purchase of raw materials or finished goods.
Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements as of
36
--------------------------------------------------------------------------------Contingencies
From time to time, we are subject to various claims, lawsuits, legal proceedings (including litigation, arbitration or regulatory actions) and other matters arising in the ordinary course of business. Periodically, we evaluate the status of each matter and assess our potential financial exposure. The Company records a liability when we believe that it is both probable that a loss has been incurred, and the amount is reasonably estimable. Significant judgment is required to determine both probability of a loss and the estimated amount. The outcomes of claims, lawsuits, legal proceedings and other matters brought against the Company are subject to significant uncertainty, some of which are inherently unpredictable and/or beyond our control. Therefore, although management considers the likelihood of such an outcome to be remote, if one or more of these matters were resolved against the Company for amounts in excess of management's expectations, they could have a material adverse impact on our business, results of operations, financial position and liquidity.
See "Item 3 - Legal Proceedings" above and "Note 14 - Commitments and Contingencies" to the Company's Consolidated Financial Statements.
Inflation and Raw Materials
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, and as such, increases in steel prices may adversely affect our gross profit margin if we cannot recover the higher costs through price increases. See "Item 1 - Raw Materials" and "Item 1A - Risk Factors."
Indemnification
In the normal course of business, to facilitate transactions of services and products, we have agreed to indemnify certain parties with respect to certain matters. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, we have entered into indemnification agreements with our officers and directors, and the Company's bylaws as permitted by the Company's certificate of incorporation require the Company to indemnify corporate servants, including our officers and directors, to the fullest extent permitted by law. The Company maintains directors and officers liability insurance coverage to reduce its exposure to such obligations. The Company has not incurred significant obligations under indemnification provisions historically, and does not expect to incur significant obligations in the future. It is not possible to determine the maximum potential amount under these indemnities due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Accordingly, the Company has not recorded any liability for costs related these indemnities throughDecember 31, 2020 .
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