Simpson Manufacturing Co., Inc. - Annual Report: 2019 (Form 10-K)

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•	the impact, execution and effectiveness of the Company’s current strategic plan, the 2020 Plan, and initiatives the realization of the assumptions made under the plan and the efforts and costs to implement the plan and initiatives;

•	general economic cycles and construction business conditions including changes in U.S. housing starts;

•	customer acceptance of our products;

•	product liability claims, contractual liability, engineering and design liability and similar liabilities or claims,

•	relationships with partners, suppliers and customers and their financial condition;

•	materials and manufacturing costs;

•	technological developments, including system updates and conversions;

•	increased competition;

•	changes in laws or industry practices;

•	litigation risks and actions by activist shareholders;

•	changes in market conditions;

•	governmental and business conditions in countries where our products are manufactured and sold;

•	natural disasters and other factors that are beyond the Company’s reasonable control;

•	changes in trade regulations, treaties or agreements or in U.S. and international taxes, tariffs and duties including those imposed on the Company’s income, imports, exports and repatriation of funds;

•	effects of merger or acquisition activities;

•	actual or potential takeover or other change-of-control threats; and

•	changes in our plans, strategies, objectives, expectations or intentions.

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•	maintaining frequent customer contacts and service levels;

•	continuing to sponsor seminars to inform architects, engineers, contractors and building officials on appropriate use, proper installation and identification of the Company’s products;

•	continuing to invest in mobile, web and software applications for customers to help them do their jobs more efficiently and connect with customers utilizing social media, blog posts and videos;

•	continuing to invest in Building Information Modeling ("BIM") software services and solutions for home builders and lumber-building material suppliers; and

•	continuing to innovate and diversify our product offerings.

•	complement the Company’s existing product lines;

•	can be marketed through the Company’s existing distribution channels;

•	might benefit from use of the Company’s brand names and expertise;

•	are responsive to needs of the Company’s customers;

•	expand the Company’s markets geographically; and

•	reduce the Company’s dependence on the United States residential construction market.

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•	new connectors and lateral products for wood framing applications;

•	new connectors for timber & offsite constructions;

•	new steel connections for mid-rise steel construction;

•	new connectors for cold formed steel applications;

•	new fastener products for wood construction; and

•	new mechanical anchors for concrete and masonry construction.

•	Distributors. The Company regularly evaluates its distribution coverage and the service levels provided by its distributors, and from time to time implements changes. The Company evaluates distributor product mix and conducts promotions to encourage distributors to add the Company’s products that complement the mix of product offerings in their markets.

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Home Centers. The Company intends to increase penetration of the DIY markets by continuing to expand its product offerings through home centers. The Company’s sales force maintains on-going contact with home centers to work with them in a broad range of areas, including inventory levels, retail display maintenance and product knowledge training. The Company’s strategy is to ensure that the home center retail stores are fully stocked with adequate supplies of the Company’s products carried by those stores. The Company has further developed extensive bar coding and merchandising aids and has devoted a portion of its research and development efforts to DIY products. The Company’s sales to home centers increased year-over-year in 2019, 2018 and 2017.

•	Dealers. In some markets, the Company sells its products directly to lumber dealers and cooperatives.

•	OEM Relationships. The Company works closely with manufacturers of engineered wood, Composite Laminated Timber and OEMs for off-site construction to develop and expand the application and sales of its engineered wood connector, fastener, anchor and truss products. The Company has relationships with many of the leaders in these industries.

•	International Sales. The Company has established a presence in the European Community through acquisition of companies with existing customer bases and through servicing United States-based customers operating in Europe. The Company also distributes connector, anchor and epoxy products in Mexico, Chile, Australia, New Zealand, and the Middle East.

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•	Connectors - Connectors are prefabricated metal products that attach wood, concrete, masonry or steel together and are essential for tying wood construction elements together and create safer and stronger buildings;

•	Truss Connector Plates - Truss connector plates are toothed metal plates that join wood members together to form a truss and are marketed under the name Integrated Component Systems. The Company continues to develop software to assist truss and component manufacturers in modeling, designing trusses and selecting the appropriate truss plates for the applicable jobs;

•	Fastening Line - The fastening line includes various nails, screws and staples, which are complemented by the Company's Quik Drive auto-feed screw driving system, which is used in numerous applications such as decking, subfloors, drywall and roofing; and

•	Lateral Resistive System - Lateral resistive systems are assemblies used to resist earthquake or wind forces and include steel and wood shearwalls, Anchor Tiedown Systems and steel moment frames.

•	Anchor Products - Anchor products include adhesives, mechanical anchors, carbide drill bits and powder-actuated pins and tools used for numerous applications of anchoring or attaching elements onto concrete, brick, masonry and steel; and

•	Construction, Repair, Protection and Strengthening Products - Concrete construction repair, protection and strengthening products include grouts, coatings, sealers, mortars, fiberglass and fiber-reinforced polymer systems and asphalt products.

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•	uncertainty about the housing and residential construction and home improvement markets;

•	changes in economic conditions or the political climate that adversely impact our customers’ confidence or financial condition;

•	unemployment and foreclosure rates;

•	inventory loss;

•	interest rate fluctuations;

•	raw material and energy costs;

•	labor and healthcare costs;

•	the availability of financing, or lack thereof, to builders, developers, and consumers;

•	the state of the credit markets, including mortgages and home equity loans;

•	weather; natural disasters; and

•	acts of terrorism.

◦	Eliminate at least 25% to 30% of our product SKUs, implement Lean principles in our factories, and achieve an additional 30% reduction of our raw materials and finished goods inventory by fiscal 2020.

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•	changes in duties, taxes, tariffs and other charges on imports;

•	requirements as to where products and/or inputs are manufactured or sourced;

•	creation of export licensing requirements, imposition of restrictions on export quantities or specifications of minimum export pricing/and or export prices or duties;

•	limitations on foreign owned business; or

•	government actions to cancel contracts, re-denominate the official currency, renounce or default on obligations, renegotiate terms unilaterally or expropriate assets.

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•	increasing our market share and profitability in Europe;

•	increasing our market share in the concrete space; and

•	continuing to develop our software to support our core wood products offering while leveraging our strengths in engineering, sales and distribution, and our strong brand name.

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•	First, a continued focus on organic growth with a goal to achieve a net sales compounded annual growth rate of approximately 8% (from $860.7 million reported in fiscal 2016) through fiscal 2020.

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Second, rationalizing our cost structure to improve company-wide profitability by reducing total operating expenses as a percentage of net sales from 31.8% in fiscal 2016 to a range of 26.0% to 27.0% by the end of fiscal 2020. We expect to achieve this initiative, aside from top-line growth, through cost reduction measures in Europe and our concrete product line, zero-based budgeting for certain expense categories, a SKU reduction program to right-size our product offering and a commitment to remaining headcount neutral (except in the production and sales departments to meet demands from sales growth). These reductions were to be offset by the Company’s ongoing investment in its software initiatives as well as the expenses associated with our ongoing SAP implementation, which includes increasing headcount when necessary.

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Third, improving our working capital management and overall balance sheet discipline primarily through the reduction of inventory levels in connection with the implementation of Lean principles in many of our factories. This included improving our inventory turn rate from two-times a year for fiscal 2016 to four-times by the end of 2020. With these efforts, we believed we could achieve an additional 25% to 30% reduction of our raw materials and finished goods inventory through 2020 without adversely impacting day-to-day production and shipping procedures.

•	we pro-actively increased our anchor inventory in anticipation of potential tariffs on our mechanical anchor finished goods from China, as well as in anticipation of additional demand related to The Home Depot, Inc. (“Home Depot”) rollout;

•	we bought an additional allotment of steel in order to mitigate the potential impact of availability; and

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•	we have inventory levels to ensure we can meet our customer needs as we continue our SAP roll-out.

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•	Gross margin will be between approximately 43.5% and 44.5%.

•	Effective tax rate will be approximately 25.0% and 26.0%, including both federal and state income tax rates.

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•	Net sales increased 6.8% primarily due to increased sales volume and average unit price in the United States. Canada's net sales were negatively affected by approximately $1.2 million due to foreign currency translation. In local currency, Canada net sales increased primarily due to increases in sales volume.

•	Gross profit margin decreased to 44.8% from 46.3%, primarily due to increased raw material and labor costs.

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Research and development and engineering expense increased $4.5 million, primarily due to increases of $5.0 million in personnel costs, which was mostly due to moving certain employees, whose primary responsibilities changed during 2019, from general and administrative to research and development and engineering. This was partly offset by decreases of $0.5 million in cash profit sharing expense and $0.3 million in stock-based compensation.

•	Selling expense increased $4.0 million, primarily due to increases of $5.5 million in personnel costs, $0.6 million in advertising and promotional costs and $0.5 million in professional fees, which was partly offset by decreases of $1.7 million in sales and agent commissions.

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General and administrative expense increased $1.6 million, primarily due to increases of $1.7 million in personnel costs, $1.0 million in computer costs including software subscription and licensing fees, $0.9 million in facilities expense and $0.5 million in bad debt expense, which was partly offset by decreases of $1.8 million in consulting and legal expenses and $0.9 million in cash profit sharing expense. Included in general and administrative expense are costs associated with the SAP implementation of $10.5 million, an increase of $2.9 million over the prior year.

•	Gain on sale of assets - In November 2019, the Company sold a sales and distribution facility. The Company received proceeds net of closing costs of $9.4 million, which resulted in a gain of $5.6 million.

•	Income from operations increased $8.2 million, mostly due to higher net sales and a gain on sale of assets, which was partially offset by higher operating expenses.

•	Net sales decreased 2.4%, primarily due to approximately $9.2 million of negative foreign currency translations resulting from some Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in both sales volume and average product prices.

•	Gross profit margin decreased to 34.7% from 35.3%, primarily due to increased factory and overhead, labor and warehouse costs.

•	Selling expense decreased $1.0 million primarily due to decreases of $0.4 million in personnel costs, $0.4 million in cash profit sharing expense and $0.2 million in sales and agent commission expense.

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General and administrative expense decreased $4.0 million, primarily due to decreases of $1.9 million in severance expense, $1.1 million in personnel expense, $0.4 million in cash profit sharing expense and $0.3 million in consulting and legal expenses. Included in general and administrative expense are costs associated with the SAP implementation of $2.4 million, an increase of $0.5 million over the prior year quarter. These expenses were primarily for professional fees.

•	Impairment of goodwill - The impairment charge of $6.7 million taken in 2018 was associated with assets acquired in Denmark in 2001, and as a result, the goodwill of the Denmark reporting unit was fully impaired. See “Critical Accounting Policies and Estimates — Goodwill Impairment Testing."

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•	Income from operations increased $9.5 million, mostly due to a non-recurring $6.7 million impairment of goodwill taken in 2018 and decreased operating expenses.

•	For information about the Company’s Asia/Pacific segment, please refer to the table above setting forth changes in our operating results for the years ended December 31, 2019 and 2018.

•	General and administrative expense increased $1.0 million, primarily due to increases of $1.5 million in personal expense as well as a $0.6 million reduction of rental income, net of expenses, which was partly offset by a decrease of $0.7 million in cash profit sharing expense.

•	Gain on sale of assets - In November 2018, the Company sold a facility that was previously leased exclusively to a third party. The Company received net proceeds of $17.5 million, which resulted in a gain of $8.8 million.

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•	Net sales increased 13.3% primarily due to higher sales volume and average unit price in the United States. Canada's net sales increased primarily due to increased sales volumes and were not significantly affected by foreign currency translation.

•	Gross profit margin decreased to 46.3% from 47.7%, primarily due to increased material, labor and shipping costs, as a percentage of net sales, partly offset by decreased factory and overhead costs as a percentage of net sales.

•	Research and development and engineering expense decreased $3.7 million primarily due to decreases of $2.1 million in personnel costs, $0.5 million in severance expense, $0.5 million in cash profit sharing expense and $0.4 million in professional fees.

•	Selling expense decreased $1.4 million, primarily due to decreases of $1.7 million in advertising expense, $0.8 million in stock-based compensation expense, $0.8 million in severance expense and $0.3 million in personnel costs, partly offset by an increase of $1.6 million in sales and agent commissions.

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General and administrative expense increased $12.9 million, primarily due to increases of $13.9 million in consulting and legal expenses, $3.3 million in depreciation expense, $1.1 million mostly in software subscription, licensing, maintenance and hosting fees and $0.2 million in bad debt expense, partly offset by decreases of $1.8 million in severance expense, $1.7 million in stock-based compensation and $1.1 million in personnel costs. Included in general and administrative expense are costs associated with the SAP implementation of $6.4 million, an increase of $4.1 million over the prior year quarter. These expenses were primarily for professional fees.

•	Income from operations increased $31.5 million, mostly due to increased gross profit, which were partially offset by higher operating expenses. Severance expenses of $3.6 million were recorded in 2017.

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Net sales decreased 3.7% primarily due to reduced sales volume as a result of the late 2017 sale of Gbo Fastening Systems' Poland and Romania subsidiaries (acquired in January 2017), which contributed $12.8 million in net sales for the year ended December 31, 2017. Net sales were positively affected by approximately $4.9 million in foreign currency translations, primarily related to the strengthening of the Euro, British pound, Danish Kroner and Polish zloty against the United States dollar.

•	Gross profit margin decreased to 35.3% from 35.7% primarily due to increased factory and overhead and warehousing costs, partly offset by decreased material and labor costs.

•	Research and development and engineering expense decreased $1.2 million primarily due to decreases of $0.5 million in personnel costs and $0.5 million in severance expenses, partly offset by an increase of $0.2 million in professional fees.

•	Selling expense decreased $3.9 million primarily due to decreases of $2.2 million in personnel costs, $1.2 million in severance expenses, $0.4 million mostly for advertising costs and $0.2 million in stock-based compensation expense.

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General and administrative expense increased $1.9 million primarily due to increases of $2.5 million in personnel costs, including $1.7 million in severance expense, $0.5 million in amortization expenses and $0.2 million in bad debt expense, partly offset by decreases of $1.1 million of consulting fees and $0.5 million mostly for software subscription, licensing, maintenance and hosting fees. Included in general and administrative expense are costs associated with the SAP implementation of $1.9 million, an increase of $0.8 million over the prior year quarter. These expenses were primarily for professional fees.

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Impairment of goodwill - The impairment charge of $6.7 million taken in the fourth quarter of 2018 was associated with assets acquired in Denmark in 2001, and as a result, the goodwill of the Denmark reporting unit was fully impaired. The impairment resulted from a reduction in expected future operating profits of the reporting unit, but not for Europe as a whole. The Company’s 2018 annual goodwill impairment analysis did not result in additional impairment of goodwill for other reporting units. See “Critical Accounting Policies and Estimates — Goodwill Impairment Testing."

•	Income from operations decreased $5.8 million, mostly due to a $6.7 million impairment of goodwill.

•	For information about the Company’s Asia/Pacific segment, please refer to the table above setting forth changes in our operating results for the years ended December 31, 2018 and 2017.

•	Gain on sale of assets - In November 2018, the Company sold a facility that was previously leased exclusively to a third party. The Company received net proceeds of $17.5 million, which resulted in a gain of $8.8 million.

•	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.

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Our asset acquisitions, net of cash acquired and proceeds from sales of businesses, in 2017, 2018 and 2019 were $27.9 million, $2.0 million and $2.7 million, respectively. In January 2017, we acquired Gbo Fastening Systems for approximately $10.2 million, and sold two of its subsidiaries in late 2017 for approximately $9.5 million, retaining the Gbo Fastening Systems operations in Sweden and Norway for less than $1.0 million in cash. Also in January 2017, we acquired CG Visions for approximately $20.8 million. The acquisitions in 2018 and 2019 were to extend product lines and acquire intellectual property.

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Our capital spending in 2017, 2018 and 2019 was $58.0 million, $29.3 million and $32.7 million, respectively, which was primarily used for real estate improvements, machinery and equipment purchases and software in development. Also in 2019, we purchased intellectual property of $4.8 million. Based on current information and subject to future events and circumstances, we estimate that our full-year 2020 capital spending will be approximately $40 million to $43 million, including $7 to $10 million on maintenance type capital expenditures, assuming all such projects will be completed by the end of 2020. Based on current information and subject to future events and circumstances, we estimate that our full-year 2020 depreciation and amortization expense to be approximately $39 million to $41 million, of which approximately $33 million to $35 million is related to depreciation.

•	In April 2019, our Board of Directors raised the quarterly cash dividend by 4.5% to $0.23 per share. On January 21, 2020, the Board declared a cash dividend of $0.23 per share, estimated to be $10.1 million in total. Such dividend is scheduled to be paid on April 23, 2020, to stockholders of record on April 2, 2020.

•	For 2019, we purchased and received 972,337 shares of the Company’s common stock on the open market at an average price of $62.55 per share, for a total of $60.8 million under a previously announced $100.0 million share repurchase authorization (which expired at the end of 2019).

•	In total, as illustrated in the table below, we have repurchased over six million shares of the Company’s common stock, which represents approximately 13.6% of our shares of common stock outstanding at the beginning of 2015. Including dividends, we have returned cash of $521.2 million, which represents 74.3% of our total cash flow from operations during the same period.

•	On December 9, 2019, our Board of Directors authorized the Company to repurchase up to $100.0 million of the Company’s common stock. The authorization is in effect from January 1, 2019 through December 31, in 2019.

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•	We tested the design and operating effectiveness of controls related to the calculation of the net realizable value of inventory, including controls over the review of the demand forecast.

•	We tested the completeness and accuracy of the underlying data used in the calculation of net realizable value.

•	We evaluated the reasonableness of management’s demand forecasts by performing the following:

◦	Compared prior year forecasts with actual results to evaluate management’s ability to estimate future demand.

◦	Assessed forecasted demand for consistency with evidence obtained in other areas of the audit.

◦	Performed a sensitivity analysis on demand assumptions to determine the impact on the net realizable value.

•	We recalculated and assessed the appropriateness of the formulaic calculation and management adjustments by making inquiries of management and various individuals outside of the accounting team to obtain support for selected adjustments and obtain supporting documentation when applicable.

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1.	Operations and Summary of Significant Accounting Policies

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•	Raw materials and purchased finished goods for resale — principally valued at a cost determined on a weighted average basis; and

•	In-process products and finished goods — the cost of direct materials and labor plus attributable overhead based on a normal level of activity.

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2.	Revenue from Contracts with Customers

•	Wood Construction Products Revenue. Wood construction products represented almost 84% and 85% of total net sales in the year ended December 31, 2019 and 2018.

•	Concrete Construction Products Revenue. Concrete construction products represented 16% and 15% of total net sales in the year ended December 31, 2019 and 2018.

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3.	Net Income per Share

4.	Stockholders' Equity

5.	Stock-Based Compensation

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6.	Trade Accounts Receivable, net

7.	Inventories

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8.	Property, Plant and Equipment, net

9.	Goodwill and Intangible Assets

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10.	Leases

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11.	Acquisitions and Dispositions

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12.	Accrued Liabilities

13.	Debt

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14.	Commitments and Contingencies

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15.	Income Taxes

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16.	Retirement Plans

17.	Related Party Transactions

18.	Segment Information

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19.	Subsequent Events

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20.	Selected Quarterly Financial Data (Unaudited)

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3.2	Certificate of Amendment of Certificate of Incorporation of Simpson Manufacturing Co., Inc. is incorporated by reference to Exhibit 3.1 of its Current Report on Form 8-K dated March 28, 2017.

3.3	Amended and Restated Bylaws of Simpson Manufacturing Co., Inc., as amended, are incorporated by reference to Exhibit 3.2 of its Current Report on Form 8-K dated March 28, 2017.

4.1	Description of Securities Registered under Section 12 of the Exchange Act is filed herewith.

10.1*	Form of Indemnification Agreement between Simpson Manufacturing Co., Inc. and its directors and executive officers, as well as the officers of Simpson Strong-Tie Company Inc., is incorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

10.2

Credit Agreement, dated as of July 27, 2012 (the “2012 Credit Agreement”), among Simpson Manufacturing Co., Inc., as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), MUFG Union Bank, N.A. (f/k/a Union Bank, N.A.), HSBC Bank USA, N.A., and Bank of Montreal, as Lenders, Wells Fargo in its separate capacities as Swing Line Lender and L/C issuer and as Administrative Agent, and Simpson Strong-Tie Company Inc., and Simpson Strong-Tie International, Inc. as Guarantors, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.’s Current Report on Form 8-K dated August 1, 2012.

10.3

Second Amendment to the 2012 Credit Agreement, dated as of July 25, 2016, among the Company, as Borrower, Wells Fargo Bank, National Association (“Wells Fargo”), MUFG Union Bank, N.A. (f/k/a Union Bank, N.A.), HSBC Bank USA, N.A., and Bank of Montreal, as Lenders, Wells Fargo in its separate capacities as Swing Line Lender and L/C issuer and as Administrative Agent, and Simpson Strong-Tie Company Inc., and Simpson Strong-Tie International, Inc. as Guarantors, which Second Amendment incorporates and supersedes the First Amendment to the Credit Agreement dated December 8, 2015, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.’s Current Report on Form 8-K dated July 25, 2016.

10.4*	Simpson Manufacturing Co., Inc. Executive Officer Cash Profit Sharing Plan, as amended through March 17, 2017, is incorporated by reference to Exhibit 10.4 of its Annual Report on Form 10-K dated February 28, 2018.

10.5*	Simpson Manufacturing Co., Inc. Amended and Restated 2011 Incentive Plan is incorporated by reference to Exhibit A of Simpson Manufacturing Co., Inc.’s Schedule 14A Proxy Statement dated March 9, 2015.

10.6*	Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan is incorporated by reference to Exhibit 4.5 of Simpson Manufacturing Co., Inc.’s Registration Statement on Form S-8, File Number 333-173811, dated December 15, 2015.

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10.7*	Form of Simpson Manufacturing Co., Inc. Director Time Based Restricted Stock Unit Agreement is filed herewith. *Management contract or compensatory plan or arrangement.

10.8*	Form of Simpson Manufacturing Co., Inc. Performance Based Restricted Stock Unit Agreement is filed herewith.

10.9*	Form of Simpson Manufacturing Co., Inc. Time Based Restricted Stock Unit Agreement is filed herewith.

21.	List of Subsidiaries of the Registrant is filed herewith.

23	Consent of Grant Thornton LLP is filed herewith.

31.1	Chief Executive Officer’s Rule 13a-14(a)/15d-14(a) Certification is filed herewith.

31.2	Chief Financial Officer’s Rule 13a-14(a)/15d-14(a) Certification is filed herewith.

32.	Section 1350 Certifications are furnished herewith.

101

Financial statements from the annual report on Form 10-K of Simpson Manufacturing Co., Inc. for the year ended December 31, 2019, formatted in XBRL, are filed herewith and include: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Statement of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

104	Cover Page Interactive Data File (embedded within the Inline XBRL document).

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