Simpson(SSD) - 2020 Q4 - Annual Report

PART I Business Overview Simpson Manufacturing Co., Inc. designs, engineers, and manufactures wood and concrete construction products for residential, commercial, and DIY markets, with operations dependent on the construction industry and steel as a primary raw material - The company is a leading manufacturer of wood and concrete construction products, marketing them to residential, light industrial, commercial, remodeling, and DIY markets[18] - A key distribution strategy includes expanding product offerings through home centers. The company successfully brought back Lowe's as a customer in Q2 2020, completing a rollout to over 1,700 stores by year-end[25][33] - The company's primary raw material is steel. It faces uncertainty regarding steel prices due to factors like import tariffs and international trade disputes[38][39] - The business is seasonal and cyclical, with sales historically lower in the first and fourth quarters, and is highly dependent on the North American residential construction market[43] Employee Count by Region as of Dec 31, 2020 | Region | Employee Count | | :--- | :--- | | North America | 2,591 | | Europe | 670 | | Asia Pacific | 301 | | Total | 3,562 | Risk Factors The company faces various material risks including the impact of the COVID-19 pandemic, dependency on the cyclical housing market, reliance on large customers, raw material price volatility, product liability, cybersecurity threats, and international operational challenges Risks Related to the COVID-19 Pandemic The COVID-19 pandemic poses significant risks to the company's operations, supply chain, and customer demand, potentially leading to economic downturns, operational disruptions, and increased compliance costs with uncertain full impact - The COVID-19 pandemic could negatively impact operations, supply chains, and customer demand, potentially compressing margins and being adversely affected by a resulting economic downturn[58] - Compliance with new health and safety regulations, such as those from the COVID-19 pandemic, may require altering manufacturing processes and could increase capital expenditures and other expenses[61] Risks Related To Our Business And Our Industry The company's business faces industry-specific risks including dependence on cyclical housing markets, potential loss of large customers, challenges in new product development, intense competition, raw material price volatility, and reliance on third-party transportation - A significant portion of product sales depends on housing starts, making the business vulnerable to economic cycles, interest rates, and consumer confidence[63] - The company has a few large customers, and the loss of any one could materially reduce net sales and income. Customer consolidation increases this risk[65][67] - Steel is the principal raw material, and its price fluctuates due to factors beyond the company's control, including import tariffs. The inability to pass cost increases to customers could adversely affect profitability[76][77] Product, Services and Sales Risks The company faces product and service risks including potential product liability claims, design or manufacturing defects, and recalls, which could harm its reputation and financial results, alongside significant liabilities from errors in engineering services or design software - The company is exposed to product liability claims, and while insured above a certain amount, it bears the costs of defense and damages up to the retention amount. A major claim could exceed insurance coverage[80][81] - Defects in products, if not discovered before installation, could lead to unsafe structures, property damage, or personal injury, potentially resulting in significant liability for the company[82][83] - Errors in the company's planning/design software or engineering services could lead to litigation and liability for correcting deficiencies or compensating for damages[86] Risks Related to Our Intellectual Property and Information Technology The company faces significant technology and intellectual property risks, including the commercial success of new software, IP protection, cybersecurity threats, and operational disruptions from complex IT system upgrades and failures - The company is investing heavily in software and applications, but may not be able to create commercially successful products or keep up with rapid technological changes[87][88] - The company is subject to cybersecurity risks, and a security breach could lead to misappropriation of confidential information, negative publicity, and significant costs. Compliance with data privacy regulations like GDPR and CCPA is also a challenge[92][93] - The company is increasingly dependent on complex software systems like SAP and Workday. System updates or conversions are costly, complex, and time-consuming, and any failures or delays could disrupt business operations[95] Risks Related to International Operations With 17.5% of 2020 sales from outside the U.S., the company is exposed to international risks including currency fluctuations, political instability, complex legal and tax environments, compliance with regulations, and potential disruptions at its China manufacturing facility - In 2020, international sales were $222.4 million, or 17.5% of consolidated sales. The business is subject to risks like currency exchange rate fluctuations, changing laws, and political conditions[117] - The company's manufacturing facility in Jiangsu, China, creates supply chain risks. An event like the COVID-19 pandemic could interfere with commercial activity and require seeking alternative, potentially more costly, supply sources[125] - Significant tariffs or other restrictions on imports, particularly from China, could increase costs, require price hikes that may lose customers, or force a costly shift in production[126] Unresolved Staff Comments The company reports no unresolved staff comments - None[135] Properties The company operates 53 properties globally, totaling approximately 4.2 million square feet, with 3.0 million owned and 1.2 million leased, including its headquarters and principal manufacturing facilities in the U.S., Europe, and China Owned and Leased Facilities by Region (as of Feb 25, 2021) | Region | Number of Properties | Owned (sq. ft. in thousands) | Leased (sq. ft. in thousands) | Total (sq. ft. in thousands) | | :--- | :--- | :--- | :--- | :--- | | North America | 25 | 2,235 | 821 | 3,056 | | Europe | 17 | 533 | 342 | 875 | | Asia/Pacific | 10 | 175 | 41 | 216 | | Administrative and all other | 1 | 89 | — | 89 | | Total | 53 | 3,032 | 1,204 | 4,236 | - The company owns its headquarters in Pleasanton, CA, and principal U.S. manufacturing facilities in California, Texas, Illinois, Ohio, and Tennessee. It also owns major facilities in France, Denmark, Germany, Poland, Switzerland, Sweden, Portugal, and China[136] Legal Proceedings The company is involved in various legal proceedings arising in the normal course of business, with further details provided in Note 14 of the Consolidated Financial Statements - The company is involved in various legal proceedings arising in the normal course of business. Further details are provided in Note 14 of the Consolidated Financial Statements[139] Mine Safety Disclosures This item is not applicable to the company - Not applicable[140] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "SSD"; in 2020, it paid $40.3 million in dividends and repurchased $13.5 million in shares, with a new $100.0 million repurchase program authorized for 2021 - The company's common stock is listed on the New York Stock Exchange (NYSE) under the symbol "SSD"[142] - In 2020, the company paid a total of $40.3 million in cash dividends. A quarterly dividend of $0.23 per share was declared in January 2021[143] Share Repurchases in Q4 2020 | Period | Total Shares Purchased | Average Price Paid per Share | Total Value (approx. in millions) | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2020 | 55,624 | $88.97 | $4.9 | | Nov 1 - Nov 30, 2020 | 32,630 | $89.86 | $2.9 | | Dec 1 - Dec 31, 2020 | 63,344 | $89.74 | $5.7 | | Total | 151,598 | | $13.5 | - On December 16, 2020, the Board authorized a new share repurchase program of up to $100.0 million, effective from January 1, 2021, through December 31, 2021[146] Selected Financial Data This section presents a five-year summary of key financial data, highlighting $1.27 billion in net sales, $252.4 million in income from operations, $187.0 million in net income, and $4.27 diluted EPS for fiscal year 2020 Selected Financial Data (2016-2020) | (in thousands, except per-share data) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Statement of Operations Data: | | | | | | | Net sales | $1,267,945 | $1,136,539 | $1,078,809 | $977,025 | $860,661 | | Income from operations | $252,363 | $181,254 | $172,625 | $138,273 | $141,670 | | Net income | $187,000 | $133,982 | $126,633 | $92,617 | $89,734 | | Diluted EPS | $4.27 | $2.98 | $2.72 | $1.94 | $1.86 | | Cash dividends declared per share | $0.92 | $0.91 | $0.87 | $0.81 | $0.70 | | Balance Sheet Data (End of Year): | | | | | | | Total assets | $1,232,569 | $1,095,366 | $1,021,663 | $1,037,523 | $979,974 | | Total stockholders' equity | $980,943 | $891,957 | $855,514 | $884,778 | $865,842 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's strong 2020 financial performance, with net sales increasing 11.6% to $1.27 billion and net income rising to $187.0 million, driven by market factors and improved gross margin, alongside its strong liquidity and 2021 outlook - The company withdrew its 2020 guidance and financial targets for its '2020 Plan' in April 2020 due to uncertainties from the COVID-19 pandemic[154] - Despite initial concerns, 2020 sales increased compared to 2019, driven by the return of Lowe's, increased housing starts, and a strong home repair and remodel market[160] - The company is continuing its multi-year implementation of an SAP ERP system, with North American operations completed and a company-wide rollout targeted for 2022, contingent on the lifting of travel restrictions[170] 2021 Business Outlook | Metric | 2021 Estimate | | :--- | :--- | | Operating margin | 16.5% to 18.5% | | Depreciation and amortization | $44 million to $48 million | | Effective tax rate | 25.0% to 26.0% | | Capital expenditures | $50 million to $55 million | Results of Operations For 2020, net sales increased 11.6% to $1.27 billion, gross profit grew 17.1% to $576.4 million with margin expanding to 45.5%, and income from operations surged 39.2% to $252.4 million, leading to $187.0 million in net income Comparison of Operations (2020 vs. 2019) | (in thousands) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,267,945 | $1,136,539 | 11.6% | | Gross profit | $576,384 | $492,130 | 17.1% | | Income from operations | $252,363 | $181,254 | 39.2% | | Net income | $187,000 | $133,982 | 39.6% | | Diluted EPS | $4.27 | $2.98 | 43.3% | - Gross profit margin increased to 45.5% in 2020 from 43.3% in 2019, mainly due to lower material costs[180] - Wood construction products constituted 85% of total net sales in 2020, up from 84% in 2019, while concrete products made up the remaining 15%[179] Net Sales by Segment (2020 vs. 2019) | (in thousands) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | North America | $1,101,891 | $972,849 | 13.3% | | Europe | $156,713 | $155,144 | 1.0% | | Asia/Pacific | $9,341 | $8,546 | 9.3% | | Total | $1,267,945 | $1,136,539 | 11.6% | Liquidity and Sources of Capital The company maintains strong liquidity with $274.6 million in cash and an undrawn $300 million credit facility, supported by $207.6 million in cash from operations, while allocating capital to $37.9 million in capital expenditures, $76.2 million in share repurchases, and $40.4 million in dividends - Primary liquidity sources are cash on hand, cash flow from operations, and a $300.0 million credit facility expiring in July 2022. As of Dec 31, 2020, there were no amounts outstanding under this facility[207] Cash Flow Summary | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $207,572 | $205,662 | $160,080 | | Net cash used in investing activities | $(39,853) | $(28,021) | $(10,249) | | Net cash used in financing activities | $(126,777) | $(108,154) | $(155,393) | - In 2020, the company used $76.2 million for common stock repurchases and $40.4 million for cash dividends[211] Contractual Obligations as of Dec 31, 2020 | Contractual Obligation (in thousands) | Total | Less than 1 year | 1 — 3 years | 3 — 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Primary line-of credit annual facility fees | $900 | $600 | $300 | $— | $— | | Operating lease obligations | $46,342 | $10,696 | $15,613 | $10,348 | $9,685 | | Purchase obligations | $38,119 | $37,536 | $583 | $— | $— | | Total | $85,361 | $48,832 | $16,496 | $10,348 | $9,685 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily foreign currency exchange rate risk from international operations, which it hedges with forward contracts, and interest rate risk, which is not material due to no variable interest-rate debt outstanding as of year-end 2020 - The company is exposed to foreign currency exchange rate risk from its international operations. In 2020, it entered into forward contracts to hedge risks associated with the Chinese Yuan[223][224] - The company has no variable interest-rate debt outstanding, and estimates that a 100 basis point change in U.S. interest rates would not have a material impact[225] Consolidated Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2020, including balance sheets, statements of operations, equity, and cash flows, along with the independent auditor's unqualified opinions on both financial statements and internal controls, noting inventory valuation as a critical audit matter Reports of Independent Registered Public Accounting Firm Grant Thornton LLP issued an unqualified opinion on Simpson Manufacturing's consolidated financial statements for the three years ended December 31, 2020, and on the effectiveness of internal control over financial reporting, identifying inventory valuation as a critical audit matter - The auditor, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements[230] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[231][243] - Inventory valuation was identified as a critical audit matter due to the significant management judgment and estimation uncertainty involved in forecasting future demand and assessing market conditions for slow-moving and obsolete inventory[235][236] Consolidated Financial Statements The consolidated financial statements present the company's financial position and results for 2020, showing total assets of $1.23 billion, total liabilities of $251.6 million, total stockholders' equity of $980.9 million, and net income of $187.0 million on net sales of $1.27 billion Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $274,639 | $230,210 | | Total current assets | $753,139 | $640,907 | | Total assets | $1,232,569 | $1,095,366 | | Liabilities & Equity | | | | Total current liabilities | $194,061 | $158,907 | | Total liabilities | $251,626 | $203,409 | | Total stockholders' equity | $980,943 | $891,957 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net sales | $1,267,945 | $1,136,539 | $1,078,809 | | Gross profit | $576,384 | $492,130 | $480,287 | | Income from operations | $252,363 | $181,254 | $172,625 | | Net income | $187,000 | $133,982 | $126,633 | Notes to Consolidated Financial Statements The notes detail accounting policies including revenue recognition and inventory valuation, provide segment information showing North America as the largest with $1.1 billion in 2020 net sales, discuss contingencies like the Gentry Homes lawsuit, and detail $76.2 million in 2020 stock repurchases - The company recognizes revenue when control transfers to the customer, which is generally F.O.B. shipping point[283] - In 2020, the company repurchased 1,053,314 shares for $76.2 million. A new $100.0 million repurchase authorization was approved for 2021[311] - The company is a defendant in a lawsuit, Gentry Homes, Ltd. v. Simpson Strong-Tie, related to alleged corrosion of its products. The company admits no liability and cannot reasonably ascertain the likelihood or amount of a potential loss[361][362] Net Sales by Product Group | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Wood Construction | $1,082,877 | $948,768 | $913,202 | | Concrete Construction | $184,631 | $187,462 | $165,317 | | Other | $437 | $309 | $290 | | Total | $1,267,945 | $1,136,539 | $1,078,809 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial statement disclosures - None[389] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, while continuing to monitor changes from the ongoing SAP ERP system implementation - As of December 31, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[390] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[391] - The company is in the process of a multi-year implementation of an SAP ERP platform, which is resulting in changes to its internal control over financial reporting. Management believes necessary steps have been taken to maintain appropriate controls during this transition[393][394] Other Information The company reports no other information for this item - None[397] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders[400] Executive Compensation Information concerning executive compensation is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders[401] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders[402] Certain Relationship and Related Transactions, and Director Independence Information concerning certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders[403] Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement for its 2021 Annual Meeting of Stockholders - Information is incorporated by reference from the company's proxy statement for the 2021 Annual Meeting of Stockholders[404] PART IV Exhibits and Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including consolidated financial statements, Schedule II, and various exhibits such as governance documents, credit agreements, and required certifications - The consolidated financial statements and Schedule II (Valuation and Qualifying Accounts) are filed as part of the report[406][407] - Exhibits filed include governance documents, credit agreements, employee compensation plans, a list of subsidiaries, consent of the auditor, and CEO/CFO certifications[409][411] Form 10-K Summary The company reports no summary for this item - None[412]