Company Quick10K Filing
Quick10K
Simpson Manufacturing
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$61.38 45 $2,790
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-04 Earnings, Exhibits
8-K 2019-01-10 Regulation FD, Exhibits
8-K 2019-01-08 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Regulation FD, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-04-24 Shareholder Vote
8-K 2018-02-15 Officers, Other Events
8-K 2018-02-05 Earnings, Exhibits
KEYS Keysight Technologies
WSO Watsco
ENR Energizer Holdings
ORBK Orbotech
CUB Cubic
IMAX IMAX
BE Bloom Energy
KRNT Kornit Digital
VJET Voxeljet Ag
SEII Sharing Economy International
SSD 2018-09-30
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 exhibit311_9302018.htm
EX-31.2 exhibit312_9302018.htm
EX-32.0 exhibit320_9302018.htm

Simpson Manufacturing Earnings 2018-09-30

SSD 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 ssd930201810-q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  September 30, 2018
 
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                           to                           
 
Commission file number:  1-13429
 
Simpson Manufacturing Co., Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
94-3196943
(State or other jurisdiction of incorporation
 
(I.R.S. Employer
or organization)
 
Identification No.)
 
5956 W. Las Positas Blvd., Pleasanton, CA 94588
(Address of principal executive offices) 
(Registrant’s telephone number, including area code):  (925) 560-9000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
 
Accelerated filer
o
 
 
 
 
 
 
 
 
Non-accelerated filer
o
 
 
Smaller reporting company
o
 
 
 
 
 
Emerging growth company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

The number of shares of the registrant’s common stock outstanding as of September 30, 2018:   45,967,842.




NOTE ABOUT FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements relating to events or results that may occur in the future are forward-looking statements, including but not limited to, statements regarding our plans, sales, sales trends, sales growth rates, revenues, profits, costs, working capital, balance sheet, inventories, products (including truss and concrete products as well as software offerings), relationships with contractors and partners (including our collaboration with The Home Depot, Inc.), market strategies, market share, expenses (including operating expenses and research, development and engineering investments), inventory turn rates, cost savings or reduction measures, repatriation of funds, results of operations, tax liabilities, losses, capital spending, housing starts, price changes (including product and raw material prices, such as steel prices), profitability, profit margins, operating income, operating expenses as a percentage of net sales, effective tax rates, depreciation or amortization expenses, amortization periods, capital return, stock repurchases, dividends, compensation arrangements, prospective adoption of new accounting standards, effects of changes in accounting standards, effects and expenses of (including eventual gains or losses related to) mergers and acquisitions and related integrations, effects and expenses of equity investments, effects of changes in foreign exchange rates or interest rates, effects and costs of SAP and other software program implementations (including related expenses, such as capital expenditures, and savings), effects and costs of credit facilities and capital lease obligations, headcount, engagement of consultants, the Company’s 2020 Plan and other operating initiatives (discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below), the Company’s efforts and costs to implement the 2020 Plan and initiatives, the targets and assumptions under the 2020 Plan and such other initiatives (including targets associated with organic compound annual growth rate in consolidated net sales, operating income, operating expenses as a percentage of net sales, cost structure rationalization, improved working capital management, and overall balance sheet discipline) and the projected effects and impact of any of the foregoing on our business, financial condition and results of operations. Forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “target,” “continue,” “predict,” “project,” “change,” “result,” “future,” “will,” “could,” “can,” “may,” “likely,” “potentially,” or similar expressions. Forward-looking statements are necessarily speculative in nature, are based on numerous assumptions, and involve known and unknown risks, uncertainties and other factors (some of which are beyond our control) that could significantly affect our operations and may cause our actual actions, results, financial condition, performance or achievements to be substantially different from any future actions, results, financial condition, performance or achievements expressed or implied by any such forward-looking statements. Those factors include, but are not limited to: (i) 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; (ii) general economic cycles and construction business conditions including changes in U.S. housing starts; (iii) customer acceptance of our products; (iv) product liability claims, contractual liability, engineering and design liability and similar liabilities or claims, (v) relationships with partners, suppliers and customers and their financial condition; (vi) materials and manufacturing costs; (vii) technological developments, including system updates and conversions; (viii) increased competition; (ix) changes in laws or industry practices; (x) litigation risks and actions by activist shareholders; (xi) changes in market conditions; (xii) governmental and business conditions in countries where our products are manufactured and sold; (xiii) natural disasters and other factors that are beyond the Company’s reasonable control; (xiv) 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; (xv) effects of merger or acquisition activities; (xvi) actual or potential takeover or other change-of-control threats; (xvii) changes in our plans, strategies, objectives, expectations or intentions; and (xviii) other risks and uncertainties indicated from time to time in our filings with the U.S. Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K under the heading “Item 1A - Risk Factors.” See below “Part I, Item 1A - Risk Factors.” Each forward-looking statement contained in this Quarterly Report on Form 10-Q is specifically qualified in its entirety by the aforementioned factors. In light of the foregoing, investors are advised to carefully read this Quarterly Report on Form 10-Q in connection with the important disclaimers set forth above and are urged not to rely on any forward-looking statements in reaching any conclusions or making any investment decisions about us or our securities. All forward-looking statements hereunder are made as of the date of this Quarterly Report on Form 10-Q and are subject to change. Except as required by law, we do not intend and undertake no obligation to update, revise or publicly release any updates or revisions to any forward-looking statements hereunder, whether as a result of the receipt of new information, the occurrence of future events, the change of circumstances or otherwise. We further do not accept any responsibility for any projections or reports published by analysts, investors or other third parties.

Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation and its wholly-owned subsidiaries, including Simpson Strong-Tie Company Inc., unless otherwise stated.


2


“Strong-Tie” and our other trademarks appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companies.

3


PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
 
 
September 30,
 
December 31,
 
2018
 
2017
 
2017
ASSETS
 

 
 

 
 

Current assets
 

 
 

 
 

Cash and cash equivalents
$
166,961

 
$
204,171

 
$
168,514

Trade accounts receivable, net
192,981

 
159,571

 
135,958

Inventories
279,503

 
244,476

 
252,996

Assets held-for-sale
9,251

 

 

Other current assets
12,220

 
13,276

 
26,473

Total current assets
660,916

 
621,494

 
583,941

 
 
 
 
 
 
Property, plant and equipment, net
257,679

 
265,178

 
273,020

Goodwill
136,459

 
137,313

 
137,140

Equity investment
2,498

 
2,582

 
2,549

Intangible assets, net
25,457

 
30,050

 
29,326

Other noncurrent assets
11,604

 
11,766

 
11,547

Total assets
$
1,094,613

 
$
1,068,383

 
$
1,037,523

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current liabilities
 

 
 

 
 

Capital lease obligations - current portion
$
1,081

 
$
1,047

 
$
1,055

Trade accounts payable
42,734

 
30,857

 
31,536

Accrued liabilities
103,979

 
91,854

 
87,430

Accrued profit sharing trust contributions
6,565

 
5,652

 
7,054

Accrued cash profit sharing and commissions
13,092

 
13,123

 
9,416

Total current liabilities
167,451

 
142,533

 
136,491

 
 
 
 
 
 
Other long-term liabilities - net of current portion
13,743

 
9,808

 
16,254

Total liabilities
181,194

 
152,341

 
152,745

Commitments and contingencies (see Note 11)


 


 


Stockholders’ equity
 

 
 

 
 

Common stock, at par value
462

 
476

 
473

Additional paid-in capital
274,126

 
265,490

 
260,157

Retained Earnings
686,351

 
683,554

 
676,644

Treasury stock
(24,491
)
 
(20,000
)
 
(40,000
)
Accumulated other comprehensive loss
(23,029
)
 
(13,478
)
 
(12,496
)
Total stockholders’ equity
913,419

 
916,042

 
884,778

Total liabilities and stockholders’ equity
$
1,094,613

 
$
1,068,383

 
$
1,037,523



The accompanying notes are an integral part of these condensed consolidated financial statements
4


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands except per-share amounts, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net sales
$
284,178

 
$
262,476

 
$
836,964

 
$
745,345

Cost of sales
150,282

 
143,338

 
454,881

 
403,866

Gross profit
133,896

 
119,138

 
382,083

 
341,479

Operating expenses:
 
 
 
 
 
 
 
Research and development and other engineering
10,441

 
11,265

 
32,840

 
35,051

Selling
26,879

 
27,867

 
83,653

 
86,150

General and administrative
36,114

 
33,457

 
112,897

 
105,962

Net gain on disposal of assets
(460
)
 
(147
)
 
(1,769
)
 
(147
)
 
72,974

 
72,442

 
227,621

 
227,016

Income from operations
60,922

 
46,696

 
154,462

 
114,463

Loss in equity method investment, before tax
(30
)
 
(13
)
 
(52
)
 
(53
)
Interest expense, net
(58
)
 
(296
)
 
(332
)
 
(685
)
Gain (adjustment) on bargain purchase of a business

 
(2,052
)
 

 
6,336

Gain on disposal of a business

 
443

 

 
443

Income before taxes
60,834

 
44,778

 
154,078

 
120,504

Provision for income taxes
16,473

 
16,581

 
40,202

 
40,972

Net income
$
44,361

 
$
28,197

 
$
113,876

 
$
79,532

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.96

 
$
0.60

 
$
2.46

 
$
1.67

Diluted
$
0.95

 
$
0.59

 
$
2.43

 
$
1.66

 
 
 
 
 
 
 
 
Number of shares outstanding
 

 
 

 
 
 
 
Basic
46,192

 
47,367

 
46,375

 
47,544

Diluted
46,622

 
47,686

 
46,770

 
47,843

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.22

 
$
0.42

 
$
0.65

 
$
0.81

 


The accompanying notes are an integral part of these condensed consolidated financial statements
5


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
44,361

 
$
28,197

 
$
113,876

 
$
79,532

Other comprehensive income:
 
 
 
 
 
 
 
Translation adjustment
(2,950
)
 
5,543

 
(10,533
)
 
19,492

Comprehensive income
$
41,411

 
$
33,740

 
$
103,343

 
$
99,024

 


The accompanying notes are an integral part of these condensed consolidated financial statements
6


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
At September 30, 2017 and 2018, and December 31, 2017
(In thousands except per-share amounts, unaudited)
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Treasury
 
 
 
Shares
 
Par Value
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Total
Balance at January 1, 2017
47,437

 
$
473

 
$
255,917

 
$
642,422

 
$
(32,970
)
 
$

 
$
865,842

Net income

 

 

 
79,532

 

 

 
79,532

Translation adjustment, net of tax

 

 

 

 
19,492

 

 
19,492

Options exercised
120

 
1

 
3,565

 

 

 

 
3,566

Stock-based compensation

 

 
10,764

 

 

 

 
10,764

Shares issued from release of Restricted Stock Units
210

 
2

 
(5,168
)
 

 

 

 
(5,166
)
Repurchase of common stock
(461
)
 

 


 

 

 
(20,000
)
 
(20,000
)
Cash dividends declared on common stock, $0.81 per share

 

 

 
(38,400
)
 

 

 
(38,400
)
Common stock issued at $44.26 per share for stock bonus
9

 

 
412

 

 

 

 
412

Balance, at September 30, 2017
47,315

 
476

 
265,490

 
683,554

 
(13,478
)
 
(20,000
)
 
916,042

Net income

 

 

 
13,085

 

 
 

 
13,085

Translation adjustment, net of tax

 

 

 

 
1,926

 

 
1,926

Pension adjustment, net of tax

 

 

 

 
(944
)
 

 
(944
)
Options exercised
103

 
2

 
3,042

 

 

 

 
3,044

Stock-based compensation

 

 
1,801

 

 

 

 
1,801

Shares issued from release of Restricted Stock Units
4

 

 
(176
)
 

 

 

 
(176
)
Repurchase of common stock
(677
)
 

 
(10,000
)
 

 

 
(40,000
)
 
(50,000
)
Retirement of common stock

 
(5
)
 

 
(19,995
)
 

 
20,000

 

Balance at December 31, 2017
46,745

 
473

 
260,157

 
676,644

 
(12,496
)
 
(40,000
)
 
884,778

Net income

 

 

 
113,876

 

 

 
113,876

Translation adjustment, net of tax

 

 

 

 
(10,533
)
 

 
(10,533
)
Options exercised
23

 

 
695

 

 

 

 
695

Stock-based compensation

 

 
7,939

 

 

 

 
7,939

Adoption of ASC 606, net of tax

 

 

 
791

 

 

 
791

Shares issued from release of Restricted Stock Units
177

 
2

 
(5,130
)
 

 

 

 
(5,128
)
Repurchase of common stock
(985
)
 

 
10,000

 

 

 
(59,490
)
 
(49,490
)
Retirement of treasury stock

 
(13
)
 

 
(74,986
)
 

 
74,999

 

Cash dividends declared on common stock, $0.65 per share

 

 

 
(29,974
)
 

 

 
(29,974
)
Common stock issued at $57.41 per share for stock bonus
8

 

 
465

 

 

 

 
465

Balance at September 30, 2018
45,968

 
$
462

 
$
274,126

 
$
686,351

 
$
(23,029
)
 
$
(24,491
)
 
$
913,419



The accompanying notes are an integral part of these condensed consolidated financial statements
7


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
 
Nine Months Ended
 
September 30,
 
2018
 
2017
Cash flows from operating activities
 

 
 

Net income
$
113,876

 
$
79,532

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Gain on sale of assets
(1,768
)
 
(147
)
Depreciation and amortization
29,049

 
26,881

Loss in equity method investment, before tax
52

 
53

Gain on bargain purchase of a business

 
(6,336
)
Gain on disposal of a business

 
(443
)
Deferred income taxes
2,061

 
2,552

Noncash compensation related to stock plans
8,773

 
11,816

Provision of doubtful accounts
361

 
79

Foreign exchange gain on capital repatriation
(1,604
)
 

 
 
 
 
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Trade accounts receivable
(58,678
)
 
(40,607
)
Inventories
(29,233
)
 
1,813

Trade accounts payable
14,254

 
698

Income taxes payable
9,801

 
1,686

Accrued profit sharing trust contributions
(486
)
 
(902
)
Accrued cash profit sharing and commissions
3,716

 
2,468

Other current assets
5,099

 
132

Accrued liabilities
13,464

 
5,291

Long-term liabilities
(373
)
 
(234
)
Accrued workers’ compensation
(139
)
 
(21
)
Other noncurrent assets
(256
)
 
280

Net cash provided by operating activities
107,969

 
84,591

Cash flows from investing activities
 

 
 

Capital expenditures
(24,714
)
 
(45,106
)
Asset acquisitions, net of cash acquired

 
(27,921
)
Proceeds from sale of property and equipment
3,539

 
617

Proceeds from sale of a business

 
9,613

Net cash used in investing activities
(21,175
)

(62,797
)
Cash flows from financing activities
 

 
 

Deferred and contingent consideration paid for asset acquisitions

 
(205
)
Repurchase of common stock
(49,490
)
 
(20,000
)
Repayment of long-term borrowings and capital leases
(702
)
 
(360
)
Repayment of debt and line of credit borrowings

 
(133
)
Issuance of common stock
695

 
3,566

Dividends paid
(29,738
)
 
(27,044
)
Cash paid on behalf of employees for shares withheld
(5,128
)
 
(5,166
)
Net cash used in financing activities
(84,363
)
 
(49,342
)
Effect of exchange rate changes on cash and cash equivalents
(3,984
)
 
5,182

Net decrease in cash and cash equivalents
(1,553
)
 
(22,366
)
Cash and cash equivalents at beginning of period
168,514

 
226,537

Cash and cash equivalents at end of period
$
166,961

 
$
204,171

Noncash activity during the period
 

 
 

Noncash capital expenditures
$
212

 
$
892

Dividends declared but not paid
10,134

 
19,891

Contingent consideration for acquisition

 
1,314

Issuance of Company’s common stock for compensation
465

 
412


The accompanying notes are an integral part of these condensed consolidated financial statements
8

Simpson Manufacturing Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)



1.    Basis of Presentation
 
 Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (collectively, the “Company”). There were no investments in affiliates that would render such affiliates to be considered variable interest entities. All significant intercompany transactions have been eliminated.

Interim Reporting Period
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These interim statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
 
The unaudited quarterly condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial information set forth therein, in accordance with GAAP. Certain prior period amounts in the condensed consolidated financial statements and the accompanying notes have been reclassified to conform to the current period’s presentation. The year-end condensed consolidated balance sheet data provided herein were derived from audited financial statements, but do not include all disclosures required by GAAP. The Company’s quarterly results fluctuate. As a result, the Company believes the results of operations for this interim period presented are not indicative of the results to be expected for any future periods.

Prior Year and Interim Reporting Period Reclassification

In the third quarter of 2017, the Company reclassified year-to-date expenses associated with a recent acquisition. The 2017 first and second quarter financial results were revised to reflect these changes with $2.6 million of costs reclassified from research and development and engineering expense to general and administrative expense ($2.3 million) and selling expense ($0.3 million). The 2017 third quarter financial results were revised to reflect the changes made to the 2017 first and second quarter results. No reclassifications were made with respect to the 2017 year-to-date (9-month) financial results.

In the third quarter of 2018, the Company recorded an out-of-period adjustment for the third quarter of 2017, which increased cost of sales by $0.7 million and decreased general and administrative expenses by $0.7 million. Furthermore, the Company recorded an out-of-period adjustment for the nine months ended September 30, 2018 and for the nine months ended September 30, 2017, which also increased cost of sales and decreased general and administrative expenses both by $1.8 million for the nine months ended September 30, 2018 and increased cost of sales and decreased general and administrative expenses both by $2.1 million for the nine months ended September 30, 2017. Such adjustments only applied to the North America segment, which resulted from recording certain depreciation expense on company–owned real estate as general and administrative expense rather than cost of goods sold. Income from operations and net income for the three and nine months ended September 30, 2018 and 2017 were not affected by the adjustments.

Revenue Recognition
 
Generally, the Company's revenue contract with a customer exists when the goods are shipped, and services are rendered; and its related invoice is generated. The duration of the contract does not extend beyond the promised goods or services already transferred. The transaction price of each distinct promised product or service specified in the invoice is based on its relative stated standalone selling price. 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). Based on historical experience with the customer, the customer's purchasing pattern and its significant experience selling products, the Company concluded that a significant reversal in the cumulative amount of revenue recognized

9


will not occur when the uncertainty (if any) is resolved (that is, when the total amount of purchases is known).Refer to Note 2 for revenue disaggregation disclosure.

Net Earnings Per Common Share
 
Basic earnings per common share are calculated based on the weighted-average number of common shares outstanding during the period. Potentially dilutive securities are included in the diluted per-share calculations using the treasury stock method for all periods when the effect is dilutive.
 
The following is a reconciliation of basic earnings per common share to diluted earnings per share for the three months and nine months ended September 30, 2018 and 2017, respectively:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
2018
 
2017
 
2018
 
2017
Net income available to common stockholders
$
44,361

 
$
28,197

 
$
113,876

 
$
79,532

Basic weighted-average shares outstanding
46,192

 
47,367

 
46,375

 
47,544

Dilutive effect of potential common stock equivalents — stock options and restricted stock units
430

 
319

 
395

 
299

Diluted weighted-average shares outstanding
46,622

 
47,686

 
46,770

 
47,843

Earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.96

 
$
0.60

 
$
2.46

 
$
1.67

Diluted
$
0.95

 
$
0.59

 
$
2.43

 
$
1.66


Share Repurchases

During the first quarter of 2018, the Company received 182,171 shares of the Company's common stock pursuant to its $50.0 million accelerated share repurchase program with Wells Fargo Bank, National Association, initiated in December 2017 which constituted the final delivery thereunder. For the nine-months ended September 30, 2018, the Company repurchased 802,565 additional shares of its common stock in the open market at an average price of $61.67 per share, for a total of $49.5 million.

Accounting for Stock-Based Compensation
 
The Company recognizes stock-based expense related to stock options and restricted stock unit awards on a straight-line basis, net of estimated forfeitures, over the requisite service period of the awards, which is generally the vesting term of three or four years. These awards are measured at fair value as of the grant date and the assumptions used to calculate the fair value of options or restricted stock units are evaluated and revised, as necessary, to reflect market conditions and the Company's experience.

Fair Value of Financial Instruments
 
The “Fair Value Measurements and Disclosures.” topic of the FASB Accounting Standards Codification ("ASC") defines fair value and establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.


10


As of September 30, 2018 and 2017 and December 31, 2017, the Company’s primary financial instrument classified as cash equivalents is money market funds, which are carried at cost, approximating fair value, based on Level 1 inputs. The balances of the Company's primary financial instruments at the dates indicated were as follows:
 
At September 30,
 
At December 31,
(in thousands)
2018
 
2017
 
2017
Money market funds
$
7,618

 
$
5,409

 
$
5,293

 
The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s contingent consideration related to acquisitions is classified as Level 3 within the fair value hierarchy as it is based on unobserved inputs, management estimates and entity-specific assumptions and is evaluated on an ongoing basis. As of September 30, 2018, the estimated fair value of the Company's contingent consideration was approximately $1.1 million.

Income Taxes

The Company uses an estimated annual tax rate to measure the tax benefit or tax expense recognized in each interim period.

Acquisitions
 
Under the business combinations topic ASC 805, the Company accounts for acquisitions as business combinations and ascribes acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements are made at the time of the acquisitions. Adjustments to those measurements may be made in subsequent periods, up to one year from the acquisition date, as information necessary to complete the analysis is obtained. The fair value of intangible assets are generally based on Level 3 inputs.

CG Visions, Inc.

In January 2017, the Company acquired CG Visions, Inc. ("CG Visions") for up to approximately $20.8 million, including contingent consideration. CG Visions provides scalable technologies and services in building information modeling ("BIM") technologies, estimation tools and software solutions to a number of the top 100 mid-sized to large builders in the United States, which are expected to complement and support the Company's sales in North America. During the third quarter of 2017, the Company finalized its fair value measurement of assets acquired and liabilities assumed in this acquisition. CG Visions assets and liabilities included other current assets of $0.5 million, noncurrent assets of $20.4 million, and current liabilities and contingent consideration of $1.1 million. Included in noncurrent assets was goodwill of $10.1 million, which was assigned to the North America segment, and intangible assets of $10.3 million, both of which are subject to tax-deductible amortization. The estimated weighted-average amortization period for the intangible assets is 7 years.

Gbo Fastening Systems AB

In January 2017, the Company acquired Gbo Fastening Systems AB ("Gbo Fastening Systems"), a Sweden limited company, for approximately $10.2 million. Gbo Fastening Systems manufactures and sells a complete line of CE-marked structural fasteners as well as fastener dimensioning software for wood construction applications, currently sold mostly in northern and eastern Europe, which are expected to complement the Company's line of wood construction products in Europe.

Gain (Adjustment) on Bargain Purchase of a Business

In the first quarter of 2017, the Company recorded a preliminary nontaxable bargain purchase gain of $8.4 million, which was included in the condensed consolidated statements of operations. During the third quarter of 2017, the Company reevaluated the fair value of the assets acquired and liabilities assumed in the Gbo Fastening Systems acquisition and the estimated fair value of the assets acquired net of liabilities assumed was approximately $16.5 million. Consequently, a bargain purchase adjustment of $2.1 million was recorded resulting in a $6.3 million adjusted gain on bargain purchase of a business for the 2017 fiscal year.

The following table represents the final allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed in the Gbo Fastening Systems acquisition:


11


(In thousands)
 
Assets *
 
 
Cash and cash equivalents
$
3,956

 
Accounts receivable
4,914

 
Inventory
13,591

 
Other current assets
760

 
Property, plant, equipment and noncurrent assets
3,929

 
 
27,150

Liabilities
 
 
Accounts payable
4,500

 
Other current liabilities
6,146

 
 
10,646

 
 
 
Total net assets
16,504

 
Gain (adjustment) on bargain purchase of a business
(6,336
)
 
Total purchase price
$
10,168

*
Intangible assets acquired were determined to have little to no value, thus were not recognized.

Recently Adopted Accounting Standards

In October 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"), which requires companies to account for the income tax effects of intercompany sales and transfers of assets other than inventory when the transfer occurs. Current guidance requires companies to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized. On January 1, 2018, the Company adopted ASU 2016-16 using a modified retrospective approach. Adoption of ASU 2016-16 had no material effect on the Company's consolidated financial statements and footnote disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge or Step 2 of the goodwill impairment analysis. Instead, an impairment charge will be recorded based on the excess of a reporting unit's carrying amount over its fair value using Step 1 of the goodwill impairment analysis. On January 1, 2018, the Company prospectively adopted ASU 2017-04. Adoption of ASU 2017-04 had no material effect on the Company's consolidated financial statements and footnote disclosures.

Recently Issued Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, (Topic 842), Leases (“ASU 2016-02”). ASU 2016-02 core requirement is to recognize the assets and liabilities that arise from leases including those leases classified as operating leases. The amendments require a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term in the statement of financial position. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.

Optional transition method - ASC 2018-11, Topic 842, Targeted Improvements (issued in July 2018) provide entities with an additional (and optional) transition method to adopt the new leases standard. This additional transition method allows a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. This method allows the Company to apply ASC 840 in the comparative periods and provide disclosures required by ASC 840 for the comparative periods. In contrast, the Company would not restate comparative periods for the effects of applying ASC 842 and provide disclosures required by ASC

12


842 for the comparative periods. On January 1, 2019, the Company will adopt the new lease standard using the optional transition method.

The Company has developed a project team for the process of adopting this ASU 2016-02 and is currently reviewing the detail of the Company’s leasing arrangements, which consist primarily of building, auto and equipment leases. As of December 31, 2017, the Company had approximately $25.2 million operating lease commitments primarily related to lease arrangements for approximately 39 facilities globally, which are under review and will likely be recognized as operating lease liabilities with a corresponding recognition of right-of-use assets on the Company's balance sheets.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 allows a reclassification from Accumulated other Comprehensive Income to Retained Earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. Early adoption of ASU 2018-02 is permitted. The Company is evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.

In March 2018, the FASB issued ASU 2018-15) "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract; Disclosures for Implementation Costs Incurred for Internal-Use Software and Cloud Computing Arrangements," ASC 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software under ASC 350-40 (and hosting arrangement that include an internal-use software license). ASU 2018-15 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019, and can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company is evaluating the impact of the adoption of this new accounting guidance on its consolidated financial statements.

All other issued and effective accounting standards during the third quarter of 2018 were determined to be not relevant or material to the Company.

2.    Revenue from Contracts with Customers

On January 1, 2018, the Company adopted the New Revenue Standard ("Topic 606") using the modified retrospective method and recorded $0.8 million, net of tax, increase to opening retained earnings on January 1, 2018 as the cumulative effect of adopting Topic 606 for estimated rights of return assets on product sales.

Disaggregated revenue

In accordance with Topic 606, the Company disaggregates net sales into the following major product groups as noted in Note 12 segment information of these interim financial statements.

Wood Construction Products Revenue. Wood construction products represented almost 85% of total net sales in the nine months ended September 30, 2018, refer to Note 12 for products description.

Concrete Construction Products Revenue. Concrete construction products represented 15% of total net sales in the nine months ended September 30, 2018, refer to Note 12 for products description.

Customer acceptance criteria. Generally, there are no customer acceptance criteria included in the Company's standard sales agreement with customers. When an arrangement with the customer does not meet the criteria to be accounted for as a revenue contract under the standard, the Company recognizes revenue in the amount of nonrefundable consideration received when the Company has transferred control of the goods or services and has stopped transferring (and has no obligation to transfer) additional goods or services. The Company offers certain customers discounts for paying invoices ahead of the due date, which are generally 30 to 60 days.

Other revenue. Service sales, representing after-market repair and maintenance, engineering activities and software license sales and services are less than 1.0% of net sales and recognized as the services are completed or the software products and services are delivered. Services may be sold separately or in bundled packages. The typical contract length for service is generally less than one year. For bundled packages, the Company accounts for individual services separately if they are distinct. A distinct service is separately identifiable from other items in the bundled package if a customer can benefit from it on its own or with other resources

13


that are readily available to the customer. The consideration (including any discounts) is allocated between separate services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the services.

Reconciliation of contract balances

Contract assets are the rights to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional on something other than the passage of time. Contract liabilities are recorded for any services billed to customers and not yet recognizable if the contract period has commenced or for the amount collected from customers in advance of the contract period commencing. As of January 1, 2018, the Company had no contract assets or contract liabilities from contracts with customers.

Other accounting issues

Volume discounts. Volume discounts are accounted for as variable consideration because the transaction price is uncertain until the customer completes or fails to purchase the specified volume of purchases (consideration is contingent on a future outcome - occurrence or nonoccurrence). In addition, the Company applies the volume rebate or discount retrospectively, because the final price of each products or services sold depends on the customer's total purchases subject to the rebate program. The estimated rebates are deducted from the transaction price revenues based on the historical experience with the customer.

Rights of return and other allowances. Rights of return creates variability in the transaction price. The Company accounts for returned product during the return period as a refund to customer and not a performance obligation. The estimated allowance for returns is based on historical percentage of returns and allowance from prior periods and the customer's historical purchasing pattern. This estimate is deducted from revenues based on the gross transaction price.

Principal versus Agent. The Company considered the principal versus agent guidance of the new revenue recognition standard and concluded that the Company is the principal in a third-party transaction. The Company manufactures its products and has control over transfer of its products to Dealer Distributors, Contract Distributors, and end customers.

Costs to obtain or fulfill a contract. Costs incurred to obtain a contract are immaterial. Commission cost is not an incremental cost directly related to obtaining a contract.

Shipping costs. The Company recognizes shipping and handling activities that occur after the customer has obtained control of goods as a fulfillment cost rather than as an additional promised service. Therefore, the Company recognizes revenue and accrues shipping and handling costs when the control of goods transfers to the customer upon shipment.

Advertising costs. Cooperative advertising and partnership discounts are consideration payable to a customer and not a payment in exchange for a distinct product or service at fair value. Estimated cooperative advertising and partnership discounts are reductions to the transaction price.

Practical Expedients. The Company did not use either the practical expedient for the existence of a significant financing component or, the practical expedient for expensing certain costs of obtaining a contract.


3.     Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed, which includes a broad range of tax reform proposals affecting businesses, including corporate tax rates, business deductions, and international tax provisions.

On April 2, 2018, the Internal Revenue Service issued Notice 2018-26 ("Notice 2018-26") which provides guidance on how to determine, report and pay the repatriation tax on deemed repatriated earnings of foreign subsidiaries provided in the Tax Reform Act and included in the consolidated financial statements for the year ended December 31, 2017. Notice 2018-26 is not expected to have a significant impact on the Company’s consolidated financial statements.


14


Income tax expense
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except percentages)
2018
 
2017
 
2018
 
2017
Effective tax rate
27.1
%
 
37.0
%
 
26.1
%
 
34.0
%
Provision for income taxes
$
16,473

 
$
16,581

 
$
40,202

 
$
40,972


Income tax expense decreased $0.1 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the U.S. Tax Cuts and Jobs Act of 2017, which reduced the United States statutory federal corporate tax rate from 35% to 21% on a 36% increase in income before taxes. Income tax expense decreased $0.8 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to the U.S. Tax Cuts and Jobs Act of 2017, which reduced the United States statutory federal tax rate from 35% to 21% on a 28% increase in income before taxes. In addition, the effective income tax rate for the nine months ended September 30, 2017 was reduced by a nonrecurring bargain purchase gain related to the Gbo Fastening Systems acquisition (see Note 1), which was not taxable.


4.    Stock-Based Compensation
 
The Company allocates stock-based compensation expense related to equity plans for employees and non-employee directors among cost of sales, research and development and other engineering expense, selling expense, or general and administrative expense based on the job functions performed by the employees to whom the stock-based compensation is awarded. The Company recognized stock-based compensation expense related to its equity plans for employees of $2.8 million and $0.6 million for the three months ended September 30, 2018 and 2017, respectively, and $8.8 million and $11.8 million, respectively for the nine months ended September 30, 2018 and 2017, respectively. Stock-based compensation cost capitalized in inventory was immaterial for all periods presented.

During the nine months ended September 30, 2018, the Company granted 188,942 restricted stock units ("RSUs") to the Company's employees, including officers, and eight non-employee directors at an estimated weighted average fair value of $54.99 per share, based on the closing price (adjusted for certain market factors, and to a lesser extent, the present value of dividends) of the Company's common stock on the grant date. The RSUs granted to the Company's employees may be time-based, performance-based or time- and performance-based. Certain of the performance-based RSUs are granted to officers and key employees, where the number of performance-based awards to be issued is based on the achievement of certain Company performance criteria established in the RSU agreement over a cumulative three year period. These awards cliff vest after three years. In addition, these same officers and key employees also receive time-based RSUs, which vest pursuant to a three-year graded vesting schedule. Time- and performance based RSUs are granted to the Company's employees excluding officers and certain key employees, vest ratably over the four year life of the award, and require the underlying shares of the Company's common stock to be subject to a performance-based adjustment during the first year.

As of September 30, 2018, the Company's aggregate unamortized stock compensation expense was approximately $12.4 million, which is entirely attributable to unvested RSUs and is expected to be recognized in expense over a weighted-average period of 2.2 years.


5.    Trade Accounts Receivable, Net
 
Trade accounts receivable at the dates indicated consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2018
 
2017
 
2017
Trade accounts receivable
$
197,378

 
$
165,101

 
$
139,910

Allowance for doubtful accounts
(1,312
)
 
(1,166
)
 
(996
)
Allowance for sales discounts and returns
(3,085
)
 
(4,364
)
 
(2,956
)
 
$
192,981

 
$
159,571

 
$
135,958

 

15


The Company adopted ASC 606 effective January 1, 2018, resulting in the reclassification of an estimated refund liability of $1.1 million from allowance for sales discounts and returns to other current liabilities as of September 30, 2018.

6.    Inventories
 
Inventories at the dates indicated consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2018
 
2017
 
2017
Raw materials
$
114,075

 
$
87,100

 
$
91,022

In-process products
28,251

 
26,248

 
26,849

Finished products
137,177

 
131,128

 
135,125

 
$
279,503

 
$
244,476

 
$
252,996



7.    Property, Plant and Equipment, Net
 
Property, plant and equipment, net, at the dates indicated consisted of the following: 

 
At September 30,
 
At December 31,
(in thousands)
2018
 
2017
 
2017
Land
$
30,173

 
$
33,030

 
$
33,087

Buildings and site improvements
203,323

 
201,877

 
212,817

Leasehold improvements
4,694

 
5,911

 
4,684

Machinery, equipment, and software
323,091

 
289,970

 
300,334

 
561,281

 
530,788

 
550,922

Less accumulated depreciation and amortization
(316,768
)
 
(297,321
)
 
(299,907
)
 
244,513

 
233,467

 
251,015

Capital projects in progress
13,166

 
31,711

 
22,005

 
$
257,679

 
$
265,178

 
$
273,020


Assets held-for sale

During the nine months ended September 30, 2018, the Company decided to sell its two properties located in Edenton, North Carolina, and Vacaville, California, respectively. The Company determined that these long-lived assets meet the criteria to be classified as held for sale in its financial statements in accordance with ASC 360-10, and reported the total assets' carrying value of approximately $9.3 million in the Company's consolidated balance sheets
 
In September 2018, the Company contracted to sell its Vacaville, California facility with a cost basis of $8.6 million, which is expected to close in November 2018 for estimated proceeds of approximately $18.0 million, after closing costs and sales price adjustments.


8.    Goodwill and Intangible Assets, Net
 
Goodwill at the dates indicated was as follows: 

16


 
At September 30,
 
At December 31,
(in thousands)
2018
 
2017
 
2017
North America
$
95,677

 
$
95,781

 
$
95,755

Europe
39,404

 
40,038

 
39,896

Asia/Pacific
1,378

 
1,494

 
1,489

Total
$
136,459

 
$
137,313

 
$
137,140

 
Intangible assets, net, at the dates indicated were as follows: 
 
At September 30, 2018
 
Gross
 
 
 
Net
 
Carrying
 
Accumulated
 
Carrying
(in thousands)
Amount
 
Amortization
 
Amount
North America
$
30,715

 
$
(15,993
)
 
$
14,722

Europe
23,935

 
(13,200
)
 
10,735

Total
$
54,650

 
$
(29,193
)
 
$
25,457

 
 
At September 30, 2017
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
33,923

 
$
(16,728
)
 
$
17,195

Europe
29,430

 
(16,575
)
 
12,855

Total
$
63,353

 
$
(33,303
)
 
$
30,050

 
 
At December 31, 2017
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
30,775

 
$
(13,732
)
 
$
17,043

Europe
23,762

 
(11,479
)
 
12,283

Total
$
54,537

 
$
(25,211
)
 
$
29,326

 
Intangible assets consist of definite-lived and indefinite-lived assets. Definite-lived intangible assets include customer relationships, patents, unpatented technology and non-compete agreements. Amortization expense of definite-lived intangible assets during the three months ended September 30, 2018 and 2017 was $1.4 million and $1.5 million, respectively, and was $4.0 million and $4.7 million, during the nine months ended September 30, 2018 and 2017, respectively. The only indefinite-lived intangible asset, consisting of a trade name, totaled $0.6 million at September 30, 2018.


17


At September 30, 2018, the estimated future amortization of definite-lived intangible assets was as follows: 
(in thousands)
 
 
 
Remaining three months of 2018
$
1,321

2019
5,278

2020
5,248

2021
4,768

2022
2,886

2023
2,082

Thereafter
3,258

 
$
24,841

 
The changes in the carrying amount of goodwill and intangible assets for the nine months ended September 30, 2018, were as follows: 
 
 
 
Intangible
(in thousands)
Goodwill
 
Assets
Balance at December 31, 2017
$
137,140

 
$
29,326

Reclassifications

 
220

Amortization

 
(3,981
)
Foreign exchange
(681
)
 
(108
)
Balance at September 30, 2018
$
136,459

 
$
25,457



9.    Debt
 
Credit Facilities

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at September 30, 2018, was $304.1 million including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles. The Company had no outstanding debt balance as of September 30, 2018 and 2017, and December 31, 2017, respectively. The Company was in compliance with its financial covenants at September 30, 2018.


10.    Commitments and Contingencies

Litigation

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. Corrosion, hydrogen embrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, labeling defects, product formula defects, inaccurate chemical mixes, adulteration, environmental conditions, or other factors can contribute to failure of fasteners, connectors, anchors, adhesives, specialty chemicals, such as fiber reinforced polymers, and tool products. In addition, inaccuracies may occur in product information, descriptions and instructions found in catalogs, packaging, data sheets, and the Company’s website.

As of the date of this Quarterly Report on Form 10-Q, the Company is not a party to any legal proceedings, which the Company expects individually or in the aggregate to have a material adverse effect on the Company’s financial condition, cash flows or results of operations. Nonetheless, the resolution of any claim or litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

Gentry Homes, Ltd. v. Simpson Strong-Tie Company, Inc., et al., Case No. 17-cv-00566, was filed in federal district court in Hawaii against Simpson Strong-Tie Company, Inc. and Simpson Manufacturing, Inc. on November 20, 2017.  The Gentry case is a product of a previous state court class action, Nishimura v. Gentry Homes, Ltd., et al. which is now closed.  The Nishimura case concerned

18


alleged corrosion of the Company’s galvanized strap-tie holdowns and mudsill anchor products used in a residential project in Honolulu, Hawaii, Ewa by Gentry.  In the Nishimura case, the plaintiff homeowners and the developer, Gentry, arbitrated their dispute and agreed on a settlement in the amount of $90 million, with $54 million going to repair costs and $36 million going to attorney's fees.  In the Gentry case, Gentry alleges breach of warranty and negligent misrepresentation related to the Company’s “hurricane strap” and mudsill anchor products. Gentry is demanding general, special, and consequential damages from the Company in an amount to be proven at trial.  Gentry also seeks pre-judgment and post-judgment interest, attorneys’ fees and costs, and other relief.  The Company admits no liability and will vigorously defend the claims bought against it.  At this time, the Company cannot reasonably ascertain the likelihood that it will be found responsible for substantial damages to Gentry.  Based on the facts currently known, and subject to future events and circumstances, the Company believes that all or part of the claims may be covered by its insurance policies.

Potential Third-Party Claims

Charles Vitale, et al. v. D.R. Horton, Inc. and D.R. Horton-Schuler Homes, LLC, Civil No. 15-1-1347-07, a putative class action lawsuit, was filed in the Hawaii First Circuit on July 13, 2015, in which homeowner plaintiffs allege that all homes built by D.R Horton/D.R. Horton-Schuler Homes (collectively "Horton Homes") in the State of Hawaii have strap-tie holdowns that are suffering premature corrosion. The complaint alleges that various manufacturers make strap-tie holdowns that suffer from such corrosion, but does not identify the Company’s products specifically. The court has denied a motion for statewide class certification.
The Company is not currently a party to the Vitale lawsuit, but the lawsuit in the future could potentially involve the Company’s strap-tie holdowns.

If claims are asserted against the Company in the Vitale case, it will vigorously defend any such claims, whether brought by the plaintiff homeowners, or third party claims by Horton Homes. Based on facts currently known to the Company and subject to future events and circumstances, the Company believes that all or part of any claims that any party might seek to allege against it related to the Vitale case may be covered by its insurance policies.

Given the nature and the complexities involved in the Vitale proceeding the Company is unable to estimate reasonably a likelihood of possible loss or range of possible loss until the Company knows, among other factors, (i) whether it will be named in the lawsuit by any party; (ii) the specific claims and the legal theories on which they are based (iii) what claims, if any, might be dismissed without trial, (iv) the extent of the claims, including the size of any potential class, particularly as damages are not specified or are indeterminate, (v) how the discovery process will affect the litigation, (vi) the settlement posture of the other parties to the litigation, (vii) the extent to which the Company’s insurance policies will cover the claims or any part thereof, if at all, (viii) whether class treatment is appropriate; and (ix) any other factors that may have a material effect on the litigation.

While it is not feasible to predict the outcome of proceedings to which the Company is not currently a party, or reasonably estimate a possible loss or range of possible loss for the Company related to such matters, in the opinion of the Company, either the likelihood of loss from such proceedings is remote or any reasonably possible loss associated with the resolution of such proceedings is not expected to be material to the Company’s financial position, results of operations or cash flows either individually or in the aggregate. Nonetheless, the resolution of any claim or litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.


11.    Segment Information
 
The Company is organized into three reportable segments, which are defined by the regions where the Company’s products are manufactured, marketed and distributed to the Company’s customers. The three regional segments are the North America segment, comprising primarily the United States and Canada; the Europe segment, comprising continental Europe and the United Kingdom; and the Asia/Pacific segment, comprising the Company’s operations in China, Hong Kong, the South Pacific and the Middle East. The Company's China and Hong Kong operations are manufacturing and administrative support locations, respectively. These three reportable segments are similar in several ways, including the types of materials used in production, production processes, distribution channels and product applications. The Company’s measure of profit or loss for its reportable segments is income (loss) from operations.

The following tables illustrate certain measurements used by management to assess the performance of its reportable segments as of or for the following periods: 

19


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
Net Sales
 

 
 

 
 

 
 

North America
$
239,898

 
$
213,254

 
$
705,932

 
$
612,765

Europe
42,020

 
47,137

 
124,096

 
126,752

Asia/Pacific
2,260

 
2,085

 
6,936

 
5,828

Total
$
284,178

 
$
262,476

 
$
836,964

 
$
745,345

Sales to Other Segments*
 

 
 

 
 

 
 

North America
$
683

 
$
625

 
$
1,889

 
$
2,403

Europe
140

 
175

 
740

 
424

Asia/Pacific
7,586

 
4,088

 
20,907

 
14,657

Total
$
8,409

 
$
4,888

 
$
23,536

 
$
17,484

Income (Loss) from Operations
 

 
 

 
 

 
 

North America
$
56,873

 
$
41,775

 
$
151,323

 
$
110,521

Europe
3,584

 
5,139

 
4,783

 
7,443

Asia/Pacific
1,132

 
(218
)
 
1,826

 
(341
)
Administrative and all other
(667
)
 

 
(3,470
)
 
(3,160
)
Total
$
60,922

 
$
46,696

 
$
154,462

 
$
114,463

            
* Sales to other segments are eliminated in consolidation.
 
 
 
 
 
 
At
 
At September 30,
 
December 31,
(in thousands)
2018
 
2017
 
2017
Total Assets
 

 
 

 
 

North America
$
1,080,910

 
$
946,180

 
$
953,033

Europe
208,888

 
211,083

 
208,640

Asia/Pacific
28,448

 
26,006

 
26,820

Administrative and all other
(223,633
)
 
(114,886
)
 
(150,970
)
Total
$
1,094,613

 
$
1,068,383

 
$
1,037,523

 
Cash collected by the Company’s United States subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of “Administrative and all other.” Cash and cash equivalent balances in the “Administrative and all other” segment were $87.5 million, $116.0 million, and $80.2 million, as of September 30, 2018 and 2017, and December 31, 2017, respectively. Total "Administrative and all other" assets are net of inter-segment due to and from accounts eliminated in consolidation.

While the Company manages its business by geographic segment, the following table illustrates the distribution of the Company’s net sales by product group as additional information for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
Wood construction products
$
238,230

 
$
224,317

 
$
710,880

 
$
639,207

Concrete construction products
45,832

 
38,051

 
125,847

 
105,785

Other
116

 
108

 
237

 
353

Total
$
284,178

 
$
262,476

 
$
836,964

 
$
745,345


Wood construction products include connectors, truss plates, fastening systems, fasteners and pre-fabricated shearwalls, and are used for connecting and strengthening wood-based construction primarily in the residential construction market. Concrete

20


construction products include adhesives, chemicals, mechanical anchors, carbide drill bits, powder actuated tools and fiber reinforcing materials, and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction.

The Company’s largest customer, attributable mostly to the North America segment, accounted for 10.5% of net sales for nine months ending September 30, 2018. No customer accounted for as much as 10% of net sales for the three months ended September 30, 2018 or the three months and nine months ended September 30, 2017.


12.    Subsequent Events

Dividend Declaration

In October 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.22 per share, estimated to be $10.0 million in total. The dividend will be payable on January 24, 2019, to stockholders of record on January 3, 2019.

Share Repurchases

From October 1, 2018 to October 29, 2018, the Company repurchased an additional 528,100 shares of the Company’s common stock in the open market at an average price of $68.26 per share, for a total of $36.0 million. As a result, as of October 29, 2018, approximately $65.4 million remained available for share repurchase through December 31, 2018 under the Company’s previously announced $275.0 million share repurchase authorization.


21


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following is a discussion and analysis of the consolidated financial condition and results of operations for the Company for the three months and nine months ended September 30, 2018. The following discussion and analysis should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes included in Part I, Item 1, "Financial Statements” of this Quarterly Report on Form 10-Q. The following discussion and analysis contain forward-looking statements that reflect our plans, estimates, and beliefs as discussed in the “Note About Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q. Our actual results could differ materially from those plans, estimates, and beliefs. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q as well as the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017.
 
Business Overview
 
We design, manufacture and sell building construction products that are of high quality and performance, easy to use and cost-effective for customers. We operate in three business segments determined by geographic region: North America, Europe and Asia/Pacific.

Our primary business strategy is to grow through increasing our market share and profitability in Europe; growing our share in the truss and concrete spaces; and continuing to build a software platform 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 cyclicality of the U.S. housing market.

On October 30, 2017, we announced the 2020 Plan to provide additional transparency into our strategic plan and financial objectives. We remain on track to substantially achieve our aggressive financial targets under the 2020 Plan, assuming that (i) there are mid-single digit growth in U.S. housing starts and in the repair and remodel market, (ii) we can increase our market share and profitability in Europe, and (iii) we can gain market share for both our truss and concrete product offerings. Subject to future events and circumstances, our 2020 Plan is centered on three key aggressive operational objectives as further described below.

First, a continued focus on organic growth with a goal to achieve a net sales compound annual growth rate of approximately 8% (from $860.7 million reported in fiscal 2016) through fiscal 2020.
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 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 and a commitment to remaining headcount neutral (except in the production and sales departments to meet demands from sales growth). Offsetting these reductions will be the Company’s ongoing investment in its software initiatives as well as the expenses associated with our ongoing SAP implementation.
Third, improving our working capital management and overall balance sheet discipline primarily through the reduction of inventory levels by aggressively eliminating 25 to 30% of the Company’s product SKUs as well as implementing Lean principles in many factories. With these efforts, we believe we could achieve an additional 30% reduction of our raw materials and finished goods inventory through 2020 without impacting day-to-day production and shipping procedures.

Many of our key operating initiatives stem from the 2020 Plan, including those focused on rationalizing our cost structure to drive improved profitability without sacrificing our competitive edge, on growing our market share and on improving our technologies and systems to provide best-in-class services to our customers.

Operating expenses as a percentage of net sales were 25.7% and 27.7% for the quarters ended September 30, 2018 and 2017, respectively and 27.2% and 30.5% for the nine months ended September 30, 2018 and 2017, respectively. Based on our current efforts, we believe operating expenses as a percentage of net sales for the full year 2018 will be in the mid-28% range. This will be approximately 2% to 3% above our operating expenses for the year ending December 31, 2017, which is due to increased sales and sales agent commissions on increased sales volumes, severance expenses, other professional fees and SAP implementation expenses. In addition to these efforts, we hired a leading management consultant to perform an independent in-depth analysis of our operations, which could potentially result in initiatives that reduce expenses beyond the 2020 Plan as well as improvements to net working capital. We will incur additional consulting expenses in 2018 and 2019 due to these initiatives, which we expect will have a one-year or less pay back. We believe our efforts to achieve the 2020 Plan will contribute to improved business performance and operating results, improve returns on invested capital and allow us to be more aggressive in repurchasing shares of our stock in the near-term. Through execution on the 2020 Plan, we expect by the end of fiscal year 2020 to achieve a return on invested capital (1) target within the range of 17% to 18% from 10.5% in 2016.

22



We believe our ability to achieve industry-leading margins from a gross profit and operating income standpoint is due to the high level of value-added services that we provide to our customers. Aside from our strong brand recognition and trusted reputation, Simpson is unique due to our extensive product testing capabilities and our state-of-the-art test lab; strong customer support and education for engineers, builders and contractors; deep 40-plus year relationships with engineers that get our products specified on the blueprint and pulled through to the job site; product availability with delivery in typically 24 hours to 48 hours; and an active involvement with code officials to improve building codes and construction practices. Based on current information, we expect the competitive environment to be relatively stable. We also expect U.S. single-family housing starts to continue to grow as a percentage in the mid to high single digits on average through fiscal year 2020, which should support a sustainable organic revenue growth outlook in North America for many of our products.

We have invested in our strategic initiative to sell engineered product solutions, to help us perform throughout all industry cycles, which we estimate supports approximately 40% of our connector and truss plate sales. In support of this effort, we acquired CG Visions, Inc. (“CG Visions”) in 2017, and completed our purchase of the LotSpec software asset and entered into a strategic software partnership with Hyphen Solutions ("Hyphen"), in 2018.

The LotSpec software asset is a suite of software applications that facilitate builders’ abilities to complete complex designs and do full take-offs in collaboration with our CG Visions software. Hyphen offers integrated information exchange between its software and our existing CG Visions' take-off platform to more efficiently create detailed plan estimates, designs and production specifications to automatically flow through to purchasing systems. We believe that the LotSpec software purchase and the Hyphen strategic partnership align well with our strategy to continue strengthening our value proposition by being the industry's trusted partner in construction solutions and building systems software.

While acquisitions were part of a dual-fold approach to growth in the past, our go-forward strategy will primarily focus on organic growth, supported by strategic capital investments in the business. As such, we will de-emphasize acquisitions activities going forward, especially in the concrete repair space. An exception may occur if the right opportunity were to arise in other areas of our business, such as in our core fastener space, which is the particular area where we believe it would be beneficial to gain additional production capacity to support our wood business or to enhance our wood and concrete product portfolio with additional value–added products.

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 process that follows the construction process. Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules.

Our sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year, as our customers tend to purchase construction materials in the late spring and summer months for the construction season. In addition, 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 and economic events, such as tariffs and other trade barriers, can also affect our sales, raw material costs and profitability.

ERP Integration

In July 2016, our Board of Directors (the "Board") approved a plan to replace our current in-house enterprise resource planning ("ERP") and externally sourced accounting platforms with a fully integrated ERP platform from SAP America, Inc. ("SAP") in multiple phases by location over a period of four years 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. The first wave of the SAP implementation has taken longer than expected to stabilize. As a result, we now believe the SAP implementation will be completed by the end of 2021. We anticipate the costs to implement SAP will increase approximately 15% to $38 million to $40 million through 2021, including capital expenditures. Annual operating expenses will increase from 2017 to 2024 as a result of the ERP project, partly due to the amortization of related capitalized costs. As of September 30, 2018, we have capitalized $15.7 million and expensed $10.5 million of the costs associated with the ERP project. During 2018, we have been spending more time and resources on training our staff on the new platform, as opposed to configuring the SAP modules, and have recorded the cost associated with

23


such training as expense. For 2018, we incurred approximately $1.0 million more costs than anticipated and revised our estimated 2018 ERP project costs to be approximately $9 to $10 million, including the amortization of capitalized SAP costs.

Business Segment Information

Our North America segment has generated revenues primarily from wood construction products compared to concrete construction products. Due to improved economic conditions, net sales in regions of the segment have trended up, including increases in housing starts, particularly in the north-western, south-western and south-eastern regions of the United States. Net sales in the third quarter of 2018 increased 12.5% compared to the third quarter of 2017, primarily due to increased sales volumes on improved economic conditions. Our concrete construction product sales increased 28.6% in the third quarter of 2018 mostly due to increased sales volumes and unit sales prices. Our truss sales increased in the third quarter of 2018 due to increased sales volumes from customer conversions and unit sales prices. Our truss specialists are focusing on converting medium size truss customers to our design and management software in 2018, while continuing to support our smaller truss customers. To improve truss plate gross profit margins, we've relocated our truss manufacturing into our wood connector plants, which will increase efficiency and plant utilization in the wood connector plants.

In late 2016, we collaborated with The Home Depot, Inc. (“The Home Depot”) to make available our mechanical anchor line of products at The Home Depot. This collaboration increased a portion of our finished goods inventory and we expect to continue to introduce our mechanical anchor line of products through approximately 1,900 of The Home Depot store locations by 2020. As of September 30, 2018, the product line had rolled out to 345 The Home Depot locations. The roll-out is occurring a much slower rate than expected due to space restrictions at The Home Depot stores. This slower roll-out; however, is not expected to affect our 2020 Plan target for compound annual sales growth. See “North America” below.

Our Europe segment generates more revenues from wood construction products than concrete construction products. Wood construction product sales decreased 14.7% in the third quarter 2018 compared to the third quarter of 2017. Third quarter 2017 net sales included $5.3 million of net sales provided by Gbo Fastening Systems' Poland and Romania, both of which were sold during the latter part of 2017. Concrete construction product sales are mostly project based, and net sales increased slightly in the third quarter of 2018 compared to the third quarter of 2017, primarily due to increased sales volumes. By the end of 2018, our Western European locations are expected to introduce a complete line of Gbo fastener products to its customers, which partially replaced third-party suppliers and improved related profit margins. Operating expenses decreased in the third quarter of 2018 compared to the third quarter of 2017, primarily due to the sale of Gbo Fastening Systems' Poland and Romania subsidiaries. See “Europe” below.

Our Asia/Pacific segment has generated revenues from both wood and concrete construction products. We believe that the Asia/Pacific segment is not significant to our overall performance.

 
(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 the total stockholders’ equity and the total long-term liabilities 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 financial measures presented in accordance with GAAP.

Business Outlook

Effective July 1, 2018, the Company increased sales prices on most of its wood connector products sold in the United States by an average of 11.5% in an effort to offset rising raw materials costs.

Based on current information and subject to future events and circumstances:

The Company currently believes, due to uncertainty related to steel tariffs, the market price for steel may continue to be volatile during the fourth quarter of 2018.

The Company is updating its 2018 full-year gross profit margin estimate to be in the range of approximately 45.5% to 46.0% from its previous estimate of 45.0% to 46.0%.


24


The Company currently believes its 2018 full year operating expenses as a percentage of net sales to be in the mid-28% range.

The Company estimates that its full-year 2018 effective tax rate will be between approximately 26% to 27%, including both federal and state income tax rates. The ultimate impact of the Tax Cuts and Jobs Act of 2017 and the Company's 2018 effective tax rate may differ materially from the Company’s estimates due to changes in the interpretations and assumptions made by the Company as well as additional regulatory guidance that may be issued and actions the Company may take as a result of the Tax Cuts and Jobs Act, such as cash repatriation to the United States, if any. The Company will continue to assess the expected impact of the new tax law and provide additional disclosures at appropriate times.


Results of Operations for the Three Months Ended September 30, 2018, Compared with the Three Months Ended September 30, 2017
 
Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the three months ended September 30, 2018, against the results of operations for the three months ended September 30, 2017. Unless otherwise stated, the results announced below, when referencing “both quarters,” refer to the three months ended September 30, 2017 and the three months ended September 30, 2018. In the third quarter of 2017, the Company reclassified year to date expenses associated with a recent acquisition from engineering and research and development to general and administrative and sales and marketing. The 2017 first and second quarter financial results were revised to reflect these changes with $2.6 million of costs being reclassified from research and development and engineering expense to general and administrative expense ($2.3 million) and selling expense ($0.3 million). The 2017 third quarter financial results were revised to reflect the changes made to the first and second quarter 2017 results. In the third quarter of 2018, the Company recorded an out-of-period adjustment, which increased cost of sales by $0.7 million and decreased general and administrative expenses by $0.7 million for the 2017 third quarter and only applied to the North America segment. Income from operations and net income for the 2017 third quarter were not affected by the adjustment. The adjustment resulted from under-stating depreciation expense in cost of sales and over-stating depreciation expense in general and administrative expense.

Third Quarter 2018 Consolidated Financial Highlights

The following table illustrates the differences in our operating results for the three months ended September 30, 2018, from the three months ended September 30, 2017, and the increases or decreases for each category by segment:
 

25


 
Three Months Ended
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Increase (Decrease) in Operating Segment
 
 
September 30,
 
North
 
 
 
Asia/
 
Admin &
 
September 30,
(in thousands)
2017
 
America
 
Europe
 
Pacific
 
All Other
 
2018
Net sales
$
262,476

 
$
26,644

 
$
(5,117
)
 
$
175

 
$

 
$
284,178

Cost of sales
143,338

 
10,537

 
(3,083
)
 
(510
)
 

 
150,282

Gross profit
119,138

 
16,107

 
(2,034
)
 
685

 

 
133,896

Research and development and other engineering expense
11,265

 
(609
)
 
(142
)
 
(73
)
 

 
10,441

Selling expense
27,867

 
(489
)
 
(537
)
 
38

 

 
26,879

General and administrative expense
33,457

 
2,591

 
153

 
(634
)
 
547

 
36,114

Gain on sale of assets
(147
)
 
(364
)
 
47

 
4

 

 
(460
)
Income from operations
46,696


14,978


(1,555
)

1,350


(547
)
 
60,922

Loss in equity method investment, before tax
(13
)
 
(17
)
 

 

 

 
(30
)
Interest expense, net
(296
)
 
(129
)
 
117

 
(23
)
 
273

 
(58
)
Gain (adjustment) on bargain purchase of a business
(2,052
)
 

 
2,052

 

 

 

Gain on disposal of a business
443

 

 
(443
)
 

 

 

Income before income taxes
44,778

 
14,832

 
171

 
1,327

 
(274
)
 
60,834

Provision for income taxes
16,581

 
566

 
(319
)
 
218

 
(573
)
 
16,473

Net income
$
28,197

 
$
14,266

 
$
490

 
$
1,109

 
$
299

 
$
44,361

 
Net sales increased 8.3% to $284.2 million from $262.5 million. Net sales to contractor distributors, lumber dealers, dealer distributors and home centers increased primarily due to price increases. Wood construction product net sales, including sales of connectors, truss plates, fastening systems, fasteners and shearwalls, represented 84% and 86% of the Company's total net sales in the third quarters of 2018 and 2017, respectively. Concrete construction product net sales, including sales of adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 16% and 14% of the Company's total net sales in the third quarters of 2018 and 2017, respectively.

Gross profit increased 12.4% to $133.9 million from $119.1 million. Gross profit margins increased to 47.1% from 45.4%, primarily due to an increase in average product prices, which decreased both material and factory and overhead costs as a percentage of net sales. The gross profit margins, including some inter-segment expenses, which were eliminated in consolidation, and excluding other expenses that are allocated according to product group, increased to 47.3% from 46.3% for wood construction products and increased to 43.4% from 35.4% for concrete construction products, respectively.

Research and development and engineering expense decreased 7.3% to $10.4 million from $11.3 million, primarily due to decreases of $0.7 million in personnel costs and $0.3 million in cash profit sharing expense.

Selling expense decreased 3.5% to $26.9 million from $27.9 million primarily due to decreases of $1.3 million in personnel costs, $0.9 million in advertising and promotional costs and $0.5 million in depreciation expense, partly offset by increases of $0.9 million in sales and sales agents commission expense mostly related to increased net sales, $0.5 million in stock-based compensation expense and $0.4 million in professional fees.

General and administrative expense increased 7.9% to $36.1 million from $33.5 million, primarily due to increases of $3.1 million in professional fees, $0.9 million in stock-based compensation expense, $0.5 million in legal fees, $0.4 million in software, hardware, data processing and hosting related expenses and $0.2 million in severance expenses, partly offset by decreases of $0.4 million in personnel costs and $0.3 million in facility expense, as well as a $1.3 million increase in favorable net foreign currency translations. The net increase in foreign currency gains included a $1.6 million foreign currency gain on the return of capital from an investment in a foreign subsidiary. Included in general and administrative expense are costs associated with the SAP implementation of $0.9 million, an increase of $0.2 million over the prior year quarter. These expenses were primarily for professional fees.

Our effective income tax rate decreased to 27.1% from 37.0%, primarily due to the U.S. Tax Cuts and Jobs Act of 2017, which reduced the United States statutory federal corporate tax from 35% to 21%.

26




Consolidated net income was $44.4 million compared to $28.2 million. Diluted net income per common share was $0.95 compared to $0.59. The $28.2 million consolidated net income for the three months ended September 30, 2017 was negatively impacted by a nonrecurring $2.1 million reduction of a gain on a bargain purchase of a business, which decreased diluted earnings per share for the same period by $0.04.

Net sales
 
The following table represents net sales by segment for the three-month periods ended September 30, 2017 and 2018, respectively:
 
North
 
 
 
Asia/
 
 
(in thousands)
America
 
Europe
 
Pacific
 
Total
Three months ended
 

 
 

 
 

 
 

September 30, 2017
$
213,254

 
$
47,137

 
$
2,085

 
$
262,476

September 30, 2018
239,898

 
42,020

 
2,260

 
284,178

Increase (decrease)
$
26,644

 
$
(5,117
)
 
$
175

 
$
21,702

Percentage increase (decrease)
12.5
%
 
(10.9
)%
 
8.4
%
 
8.3
%

The following table represents segment net sales as percentages of total net sales for the three-month periods ended September 30, 2017 and 2018, respectively:
 
 
North
America
 
Europe
 
Asia/
Pacific
 
Total
Percentage of total 2017 net sales
81
%
 
18
%
 
1
%
 
100
%
Percentage of total 2018 net sales
84
%
 
15
%
 
1
%
 
100
%
 
Gross profit
 
The following table represents gross profit by segment for the three-month periods ended September 30, 2017 and 2018, respectively:
 
 
North
 
 
 
Asia/
 
Admin &
 
 
(in thousands)
America
 
Europe
 
Pacific
 
All Other
 
Total
Three months ended
 

 
 

 
 

 
 

 
 

September 30, 2017
$
100,861

 
$
18,068

 
$
209

 
$

 
$
119,138

September 30, 2018
116,968

 
16,034

 
894

 

 
133,896

Increase (decrease)
$
16,107

 
$
(2,034
)
 
$
685

 
$

 
$
14,758

Percentage increase (decrease)
16.0
%
 
(11.3
)%
 
*

 
*

 
12.4
%
                         
* The statistic is not meaningful or material.
 
The following table represents gross profit as a percentage of sales by segment for the three months ended September 30, 2017 and 2018, respectively:
 
(in thousand)
North
America
 
Europe
 
Asia/
Pacific
 
Admin &
All Other
 
Total
2017 gross profit percentage
47.3
%
 
38.3
%
 
10.0
%
 
*
 
45.4
%
2018 gross profit percentage
48.8
%
 
38.2
%
 
39.6
%
 
*
 
47.1
%
                         
* The statistic is not meaningful or material.

North America


27



Net sales increased 12.5% primarily due to increases in average net sales prices and sales volume. Canada's net sales were negatively affected by foreign currency translation.

Gross profit as a percentage of net sales increased to 48.8% from 47.3% primarily due to an increase in average product prices, which decreased both material and factory and tooling costs as a percentage of net sales.

Research and development and engineering expense decreased $0.6 million, primarily due to decreases of $0.7 million in personnel costs and $0.2 million in cash profit sharing expense.

Selling expense decreased $0.5 million, primarily due to decreases of $0.9 million in advertising and promotional costs $0.6 million in personnel costs and $0.4 million in depreciation expense, partly offset by increases of $0.5 million in stock-based compensation expense, $0.5 million in sales and sales agents commission expense, mostly related to increased net sales and $0.4 million in professional fees.

General and administrative expense increased $2.6 million, primarily due to increases of $3.5 million in professional fees, $0.6 million in legal fees, $0.6 million in software, hardware, data processing and hosting related expenses and $0.3 million in stock-based compensation expense, partly offset by a decrease of $0.3 million in facility expense, as well as a $1.6 million foreign currency gain on the return of capital from an investment in a foreign subsidiary. Included in general and administrative expense are costs associated with the SAP implementation of $0.9 million, an increase of $0.4 million over the prior year quarter. These expenses were primarily professional fees.

Income from operations increased $15.0 million mostly due to increased gross profit, partly offset by a slight increase in operating expenses.

Europe

Net sales decreased 10.9%, primarily for reduced sales volumes due to the late 2017 sale of Gbo Fastening Systems' Poland and Romania subsidiaries (acquired January 2017), which subsidiaries contributed $5.3 million in net sales for the third quarter of 2017. Europe net sales were negatively affected by approximately $0.7 million of foreign currency translations resulting from Europe currencies weakening against the United States dollar. In local currency, Europe net sales increased primarily due to increases in average net sales unit prices.

Gross profit as a percentage of net sales were flat, with higher factory and overhead and warehouse costs as a percentage of net sales, offset by lower material costs and labor costs as a percentage of net sales.

Selling expense decreased $0.5 million primarily due to a decrease of $0.7 million in personnel costs mostly due to headcount reductions, partly offset by an increase of $0.4 million in sales agent commissions.

General and administrative expense increased $0.2 million, primarily due to an increase of $0.3 million in severance expenses, as well as a decrease of $0.7 million in favorable net foreign currency translations, partly offset by decreases of $0.5 million in professional fees and $0.2 million in software, hardware, data processing and hosting related expenses.

Income from operations decreased $1.6 million. Europe income from operations for the third quarter of 2018 was negatively impacted by the late 2017 sale of Gbo Fastening Systems' Poland and Romania subsidiaries (acquired in January 2017), which subsidiaries contributed $0.6 million in income from operations for the third quarter of 2017.

Asia/Pacific

For information about the Company's Asia/Pacific segment, please refer to the tables above setting forth changes in our operating results for the three months ended September 30, 2018 and 2017, respectively.

Results of Operations for the Nine Months Ended September 30, 2018, Compared with the Nine Months Ended September 30, 2017
 
Unless otherwise stated, the results announced below, when providing comparisons (which are generally indicated by words such as “increased,” “decreased,” “unchanged” or “compared to”), compare the results of operations for the nine months ended September 30, 2018, against the results of operations for the nine months ended September 30, 2017. Unless otherwise stated, the results announced below refer to the nine months ended September 30, 2017 and the nine months ended September 30, 2018. In the third quarter of 2018, the Company recorded an out-of period adjustment, which increased cost of sales and decreased general

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and administrative expenses both by $1.8 million for the nine months ended September 30, 2018 and increased cost of sales and decreased general and administrative expenses both by $2.1 million for the nine months ended September 30, 2017. The adjustment was only applied to the North America segment. Income from operations and net income for the nine months ended September 30, 2018 and 2017 were not affected by the adjustments. The adjustments resulted from under-stating depreciation expense in cost of sales and over-stating depreciation expense in general and administrative expense.

Year-to-Date (9-month) 2018 Consolidated Financial Highlights

The following table illustrates the differences in our operating results for the nine months ended September 30, 2018, from the nine months ended September 30, 2017, and the increases or decreases for each category by segment:
 
 
Nine Months Ended
 
Increase (Decrease) in Operating Segment
 
Nine Months Ended
 
September 30,
 
North
 
 
 
Asia/
 
Admin &
 
September 30,
(in thousands)
2017
 
America
 
Europe
 
Pacific
 
All Other
 
2018
Net sales
745,345

 
$
93,167

 
$
(2,656
)
 
$
1,108

 
$

 
$
836,964

Cost of sales
403,866

 
52,625

 
(1,805
)
 
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