Notes to Consolidated Financial Statements
1.Operations and Summary of Significant Accounting Policies
Nature of Operations
Simpson Manufacturing Co., Inc., through Simpson Strong-Tie Company Inc. and its other subsidiaries (collectively, the “Company”), focuses on designing, manufacturing, and marketing systems and products to make buildings and structures safe and secure. The Company designs, engineers and is a leading manufacturer of wood construction products, including connectors, truss plates, fastening systems, fasteners and shearwalls, and concrete construction products, including adhesives, specialty chemicals, mechanical anchors, powder actuated tools and fiber reinforcing materials. The Company markets its products to the residential construction, industrial, commercial and infrastructure construction, remodeling and do-it-yourself markets.
The Company operates exclusively in the building products industry. The Company’s products are sold primarily in the U.S., Canada, Europe and Pacific Rim. A significant portion of the Company’s business is dependent on economic activity within the North America segment. The Company's business is also dependent on the availability of steel, its primary raw material.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in 50% or less owned entities are accounted for using either cost or the equity method. All significant intercompany transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that these consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation under GAAP. The Company assessed certain accounting matters that require the use of estimates and assumptions in context with the known and projected future impacts of COVID-19. The Company's actual results could differ materially from those estimates.
Cash Equivalents
The Company classifies investments that are highly liquid and have maturities of three months or less at the date of purchase as cash equivalents. As of December 31, 2021 and 2020, the value of these investments were $26.4 million and $45.4 million, respectively, consisting of U.S. Treasury securities and money market funds. The value of the investments is based on cost, which approximates fair value based on Level 1 inputs.
Current Estimated Credit Loss - Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts receivable for estimated future expected credit losses resulting from customers' failure to make payments on its accounts receivable. The Company determines the estimate of the allowance for doubtful accounts receivable by considering several factors, including (1) specific information on the financial condition and the current creditworthiness of customers, (2) credit rating, (3) payment history and historical experience, (4) aging of the accounts receivable, and (5) reasonable and supportable forecasts about collectability. The Company also reserves 100% of the amounts deemed uncollectible due to a customer's deteriorating financial condition or bankruptcy.
Every quarter, the Company evaluates the customer group using the accounts receivable aging report and its best judgment when considering changes in customers' credit ratings, level of delinquency, customers' historical payments and loss experience, current market and economic conditions, and expectations of future market and economic conditions.
The changes in the allowance for doubtful accounts receivable for the year ended December 31, 2021 are outlined in the table below:
| | | | | | | | | | | | | | |
| Balance at | | | Balance at |
(in thousands) | December 31, 2020 | Expense (Deductions), net | Write-Offs1 | December 31, 2021 |
| | | | |
Allowance for Doubtful Accounts | $ | 2,110 | | $ | 393 | | $ | 570 | | $ | 1,933 | |
1Amount is net of recoveries and the effect of foreign currency fluctuations for the year ended December 31, 2021
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash in banks, short-term investments in money market funds and trade accounts receivable. The Company maintains its cash in demand deposit and money market accounts held in 17 banks, and at times these cash and investments may be in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). However, we have not experienced any losses on these accounts.
Inventory Valuation
Inventories are stated at the lower of cost or net realizable value. Cost includes all costs incurred in bringing each product to its present location and condition, as follows:
•Raw materials and purchased finished goods for resale — principally valued at a cost determined on a weighted average basis; and
•In-process products and finished goods — the cost of direct materials and labor plus attributable overhead based on a normal level of activity.
The Company applies net realizable value and makes estimates for obsolescence to the gross value of the inventory. Estimated net realizable value is based on estimated selling price less further costs to completion and disposal. The Company impairs slow-moving products by comparing inventories on hand to projected demand. If the on-hand supply of a product exceeds projected demand or if the Company believes the product is no longer marketable, the product is considered obsolete inventory. The Company revalues obsolete inventory to its net realizable value and has consistently applied this methodology. When impairments are established, a new cost basis of the inventory is created. An unexpected change in market demand, building codes or buyer preferences could reduce the rate of inventory turnover and require the recognition of more obsolete inventory.
Warranties and recalls
The Company provides product warranties for specific product lines and records estimated expenses in the period in which the recall occurs, none of which has been material to the consolidated financial statements. In a limited number of circumstances, the Company may also agree to indemnify customers against legal claims made against those customers by the end users of the Company’s products. Historically, payments made by the Company, if any, under such agreements have not had a material effect on its consolidated results of operations, cash flows or financial position.
Equity Investments
The Company accounts for investments and ownership interests under equity method accounting when it has the ability to exercise significant influence, but does not have a controlling financial interest. The Company records its interest in the net earnings of its equity method investees, along with adjustments for unrealized profits or losses within earnings or loss from equity interests in the consolidated statements of operations. The investment is reviewed for impairment whenever factors indicate that its carrying amount might not be recoverable and the decrease in value, if any, is recognized in the period the impairment occurs in the consolidated statement of operations.
Fair Value of Financial Instruments
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified under a three-tier fair valuation hierarchy based on the observability of the inputs available in the market: 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. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying amounts of trade accounts receivable, accounts payable, accrued liabilities and other current 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 and equity investment are classified as Level 3 within the fair value hierarchy as it is based on unobserved inputs such as management estimates and entity-specific assumptions and is evaluated on an ongoing basis. The fair value of foreign currency forward contracts, calculated based on Level 1 inputs, was not material as of December 31, 2021.
Derivative Instruments - Foreign Currency Contracts
The Company uses derivative instruments as a risk management tool to mitigate the potential impact of certain market risks. Foreign currency exchange rate risk is the primary market risk the Company manages through the use of derivative instruments, which are accounted for as cash flow hedges under the accounting standards and carried at fair value as other current assets or other current liabilities in the consolidated balance sheets. Net deferred gains and losses related to changes in fair value are included in accumulated other comprehensive loss, a component of shareholders' equity in the consolidated balance sheets, and are reclassified into the line item in the consolidated statement of income in which the hedged items are recorded in the same period the hedged item affects earnings. Changes in fair value of any derivatives that are determined to be ineffective are immediately reclassified from other comprehensive income into earnings. The cash flow impact of the Company's derivative instruments is primarily included in the consolidated statement of cash flows in net cash provided by operating activities. Refer to Note 8.
Business Combinations and Asset Acquisitions
Business combinations are accounted for under the acquisition method in accordance with ASC 805, Business Combinations. The acquisition method requires identifiable assets acquired and liabilities assumed and any noncontrolling interest in the business acquired be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill.
Acquisitions that do not meet the definition of a business under the ASC are accounted for as an acquisition of assets, whereby all of the cost of the individual assets acquired and liabilities assumed, including certain transactions costs, are allocated on a relative fair value basis. Accordingly, goodwill is never recognized in an asset acquisition.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Major renewals and betterments are capitalized while maintenance and repairs are expensed as incurred. When assets are sold or retired, their costs and accumulated depreciation are removed from the accounts, and the resulting gains or losses are reflected in the consolidated statements of operations.
The “Intangibles—Goodwill and Other” topic of the FASB ASC provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company capitalizes qualified external costs and internal costs related to the purchase and implementation of software projects used for business operations and engineering design activities. Capitalized software costs primarily include purchased software, internal costs and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.
Depreciation and Amortization
Software, including amounts capitalized for internally developed software is amortized on a straight-line basis over an estimated useful life of three to five years. Machinery and equipment is depreciated using accelerated methods over an
estimated useful life of three to ten years. Buildings and site improvements are depreciated using the straight-line method over their estimated useful lives, which range from 15 to 45 years. Leasehold improvements are amortized using the straight-line method over the shorter of the expected life or the remaining term of the lease. Purchased intangible assets with finite useful lives are amortized using the straight-line method over the estimated useful lives of the assets. The weighted-average amortization period for all amortizable intangibles on a combined basis is 8.0 years.
Preferred Stock
The Company’s Board of Directors has the authority to issue authorized and unissued preferred stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, redemption, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company’s common stock.
Common Stock
Subject to the rights of holders of any preferred stock that may be issued in the future, holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors out of legally available funds, and in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets available for distribution. The holders of common stock have no preemptive or conversion rights. Subject to the rights of any preferred stock that may be issued in the future, the holders of common stock are entitled to one vote per share on any matter submitted to a vote of the stockholders. A director in an uncontested election is elected if the votes cast “for” such director’s election exceed the votes cast “against” such director’s election, except that, if a stockholder properly nominates a candidate for election to the Board of Directors, the candidates with the highest number of affirmative votes (up to the number of directors to be elected) are elected. There are no redemption or sinking fund provisions applicable to common stock.
Comprehensive Income or Loss
Comprehensive income is defined as net income plus other comprehensive income or loss. Other comprehensive income or loss consists of changes in cumulative translation adjustments, changes in unamortized pension adjustments and changes in the fair value of derivative instruments classified as cash flow hedge instruments, all of which are recorded directly in accumulated other comprehensive income within stockholders’ equity.
Foreign Currency Translation
The local currency is the functional currency for all of the Company’s operations in Europe, Canada, Asia, Australia and New Zealand. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. The translation adjustment resulting from this process is shown separately as a component of stockholders’ equity. Foreign currency transaction gains or losses are presented below operating income.
Revenue Recognition
Generally, the Company's revenue contract with a customer exists when (1) the goods are shipped, services are rendered, and the related invoice is generated, (2) the duration of the contract does not extend beyond the promised goods or services already transferred and (3) 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. Our shipping terms provide the primary indicator of the transfer of control. The Company's general shipping terms are Incoterm C.P.T. (F.O.B. shipping point), where the title, and risk and rewards of ownership transfer at the point when the products are no longer on the Company's premises. Other Incoterms are allowed as exceptions depending on the product or service being sold and the nature of the sale. 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 would not occur when the uncertainty (if any) is resolved (that is, when the total amount of purchases is known). Refer to Note 2 for additional information.
The Company presents taxes collected and remitted to governmental authorities on a net basis in the consolidated statements of operations.
Cost of Sales
Cost of sales includes material, labor, factory and tooling overhead, shipping, and freight costs. Major components of these expenses are steel and other materials, packaging and cartons, personnel costs, and facility costs, such as rent, depreciation and utilities, related to the production and distribution of the Company’s products. Inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and other costs of the Company’s distribution network are also included in cost of sales.
Tool and Die Costs
Tool and die costs are included in product costs in the year incurred.
Product and Software Research and Development Costs
Product research and development costs, which are included in operating expenses and are charged against income as incurred, were $12.3 million, $10.1 million and $10.9 million in 2021, 2020 and 2019, respectively. Product research and development expenses include all related personnel costs including salary, benefits, retirement, stock-based compensation costs, as well as computer and software costs, professional fees, supplies, tools and maintenance costs. In 2021, 2020 and 2019, the Company incurred software development expenses related to its ongoing expansion into the plated truss market and some of the software development costs were capitalized. See "Note 8 — Property, Plant and Equipment." The Company amortizes acquired patents over their remaining lives and performs periodic reviews for impairment. The cost of internally developed patents is expensed as incurred.
Selling Costs
Selling costs include expenses associated with selling, merchandising and marketing the Company’s products. Major components of these expenses are personnel, sales commissions, facility costs such as rent, depreciation and utilities, professional services, information technology costs, sales promotion, advertising, literature and trade shows.
Advertising Costs
Advertising costs are included in selling expenses and were $8.4 million, $8.2 million and $8.2 million in 2021, 2020, and 2019, respectively.
General and Administrative Costs
General and administrative costs include personnel, information technology related costs, facility costs such as rent, depreciation and utilities, professional services, amortization of intangibles and bad debt charges.
Accounting for Leases
The Company has operating and finance leases for certain facilities, equipment, autos and data centers. As an accounting policy for short-term leases, the Company elected to not recognize a right-of-use asset ("ROU asset") and liability if, at the commencement date, the lease (1) has a term of 12 months or less and (2) does not include renewal and purchase options that the Company is reasonably certain to exercise. Monthly payments on short-term leases are recognized on a straight-line basis over the full lease term.
Accounting for Stock-Based Compensation
The Company recognizes stock-based compensation expense related to the estimated fair value of restricted stock 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 four years. Stock-based expense related to performance share grants are measured based on grant date fair value and expensed on a graded basis over the service period of the awards, which is generally a performance period of three years. The performance conditions are based on the Company's achievement of revenue growth and return on invested capital over the performance period, and are evaluated for the probability of vesting at the end of each reporting period with changes in
expected results recognized as an adjustment to expense. The assumptions used to calculate the fair value of restricted stock grants are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.
Income Taxes
Income taxes are calculated using an asset and liability approach. The provision for income taxes includes federal, state and foreign taxes currently payable and deferred taxes, due to temporary differences between the financial statement and tax bases of assets and liabilities. In addition, future tax benefits are recognized to the extent that realization of such benefits is more likely than not. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment.
Net Income per Share
Basic net income per common share is computed based on the weighted average number of common shares outstanding. Potentially dilutive shares are included in the diluted per-share calculations using the treasury stock method for all periods when the effect of their inclusion is dilutive.
Accounting Standards Not Yet Adopted
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”) on December 31, 2021. This ASU allows the option to account for and present a modification that meets the scope of the standard as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination required under the relevant topic or subtopic. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU is only available for a limited time, generally through December 31, 2022. The Company's primary credit facility is the $300 million revolving line of credit (the "Credit Facility") with Wells Fargo Bank, which matures on July 12, 2026. Borrowings under the Credit Facility bear interest using LIBOR plus an applicable margin. The Credit Facility currently includes a provision for the determination of a successor LIBOR rate or an alternative rate of interest.
On March 5, 2021, ICE Benchmark Administration, the administrator of the LIBOR and the Financial Conduct Authority, announced that some United States Dollar LIBOR tenors (overnight, 1 month, 3 month, and 12 month) will continue to be published until June 30, 2023. The Company does not expect a material impact to its consolidated operating results, financial position or cash flow from the transition from LIBOR to alternative reference interest rates, but the Company will continue to monitor the impact of the transition until it is completed.
All other newly issued and effective accounting standards during 2021 were determined to be not relevant or material to the Company.
2.Revenue from Contracts with Customers
Disaggregated revenue
The Company disaggregates net sales into the following major product groups as described in its segment information included in these financial statements under Note 18.
Wood Construction Products Revenue. Wood construction products represented approximately 87%, 85%, 84% and of total net sales in the year ended December 31, 2021, 2020, and 2019 respectively.
Concrete Construction Products Revenue. Concrete construction products represented approximately 13%, 15%, 16% of total net sales in the year ended December 31, 2021, 2020 and 2019, respectively.
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 after the issue date.
Other revenue. Service sales, representing after-market repair and maintenance, engineering activities and software license sales and services were less than 0.1% of net sales for 2021,2020 and 2019 and recognized as the services are completed or by transferring control over a product to a customer at a point in time. 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 when they are distinct within the context of the contract. 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 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 December 31, 2021 and 2020, the Company had no contract assets or contract liabilities from contracts with customers.
Other accounting considerations
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. Estimated rebates are deducted from revenues based on the gross transaction price and 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.
3.Net Income per Share
The following shows a reconciliation of basic earnings per share (“EPS”) to diluted EPS:
| | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, |
(in thousands, except per-share amounts) | 2021 | | 2020 | | 2019 |
Net income available to common stockholders | $ | 266,447 | | | $ | 187,000 | | | $ | 133,982 | |
| | | | | |
Basic weighted average shares outstanding | 43,325 | | | 43,709 | | | 44,735 | |
Dilutive effect of potential common stock equivalents | 207 | | | 132 | | | 186 | |
Diluted weighted average shares outstanding | 43,532 | | | 43,841 | | | 44,921 | |
Net earnings per share: | | | | | |
Basic | $ | 6.15 | | | $ | 4.28 | | | $ | 3.00 | |
Diluted | $ | 6.12 | | | $ | 4.27 | | | $ | 2.98 | |
4.Stockholders' Equity
Stock Repurchases
For the fiscal year ended December 31, 2021, the Company repurchased 222,060 shares of the Company’s common stock in the open market at an average price of $108.64 per share, for a total of $24.1 million. As of December 31, 2021, approximately $75.9 million was not used for repurchase under the previously announced $100.0 million share repurchase authorization (which expired at the end of 2021). On November 18, 2021, the Company’s Board of Directors authorized the Company to repurchase up to $100.0 million of the Company’s common stock from January 1, 2022 through December 31, 2022.
As of December 31, 2021, the Company held zero shares of its common stock as treasury shares and in 2021, retired a total
of 373,034 of its common stock.
Comprehensive Income or Loss
The following shows the components of accumulated other comprehensive income or loss as of December 31, 2021, 2020, and 2019 respectively:
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Pension Benefit | | Cash Flow Hedge | | Total |
(in thousands) | | | |
Balance at January 1, 2019 | $ | (22,965) | | | $ | (1,685) | | | $ | — | | | $ | (24,650) | |
Other comprehensive gain/(loss), net of tax effect | 885 | | | (1,064) | | | — | | | (179) | |
Balance at December 31, 2019 | (22,080) | | | (2,749) | | | — | | | (24,829) | |
Other comprehensive gain/(loss), net of tax effect | 14,172 | | | (161) | | | 390 | | | 14,401 | |
| | | | | | | |
Balance at December 31, 2020 | (7,908) | | | (2,910) | | | 390 | | | (10,428) | |
Other comprehensive gain/(loss), net of tax effect | (7,313) | | | 404 | | | (268) | | | (7,177) | |
| | | | | | | |
Balance at December 31, 2021 | $ | (15,221) | | | $ | (2,506) | | | $ | 122 | | | $ | (17,605) | |
5.Stock-Based Compensation
The Company currently maintains the Simpson Manufacturing Co., Inc. Amended and Restated 2011 Incentive Plan (the “2011 Plan”) as its only equity incentive plan. Under the 2011 Plan, no more than 16.3 million shares of the Company’s common stock in aggregate may be issued, including shares already issued pursuant to prior awards granted under the 2011 Plan. Shares of common stock underlying awards to be issued pursuant to the 2011 Plan are registered under the Securities Act. Under the 2011 Plan, the Company may grant restricted stock and restricted stock units. The Company currently intends to award only performance-based stock units ("PSUs") and/or time-based restricted stock units ("RSUs").
The following table shows the Company’s stock-based compensation activity:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Stock-based compensation expense recognized | $ | 15,036 | | | $ | 11,384 | | | $ | 9,480 | |
Tax benefit of stock-based compensation expense in provision for income taxes | 3,787 | | | 2,859 | | | 2,330 | |
Stock-based compensation expense, net of tax | $ | 11,249 | | | $ | 8,525 | | | $ | 7,150 | |
Fair value of shares vested | $ | 15,701 | | | $ | 21,921 | | | $ | 16,760 | |
The Company allocates stock-based compensation expense amongst 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. Stock-based compensation capitalized in inventory was immaterial for all periods presented.
The following table summarizes the Company’s unvested restricted stock unit activity for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Shares (in thousands) | | Weighted- Average Price | | Aggregate Intrinsic Value * (in thousands) |
Unvested Restricted Stock Units (RSUs) | | |
Outstanding at January 1, 2021 | 351 | | | $ | 66.13 | | | $ | 33,188 | |
Awarded | 168 | | | 93.26 | | | |
Vested | (162) | | | 60.30 | | | |
Forfeited | (13) | | | 81.50 | | | |
Outstanding at December 31, 2021 | 344 | | | $ | 81.33 | | | $ | 47,721 | |
Outstanding and expected to vest at December 31, 2021 | 474 | | | $ | 78.45 | | | $ | 65,984 | |
* The intrinsic value for outstanding and expected to vest is calculated using the closing price per share of $139.07, as reported by the New York Stock Exchange on December 31, 2021.
During the year ended December 31, 2021, the Company granted 161,643 RSUs and PSUs to the Company’s employees, including officers at an estimated weighted average fair value of $100.93 per share, based on the closing price (adjusted for certain market factors primarily the present value of dividends) of the Company’s common stock on the grant date. The RSUs and PSUs granted to the Company’s employees may be time-based, performance-based or time- and performance-based. Certain of the PSUs 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 award 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 granted to the Company’s employees excluding officers and certain key employees, vest ratably over the four year life of the award and through 2019, required the underlying shares of the Company's common stock to be subject to a performance-based adjustment during the first year and starting in 2020, were time-based awards which vest ratable over the four year life of the award.
The Company’s seven non-employee directors are entitled to receive approximately $690 thousand in equity compensation annually. The number of shares ultimately granted are based on the average closing share price for the Company over the 60 day period prior to approval of the award in the second quarter of each year. In May and June 2021, the Company granted 6,601 shares of the Company's common stock to the non-employee directors, based on the average closing price of $100.33 per share and recognized total expense of $756 thousand.
The total intrinsic value of RSUs vested during the years ended December 31, 2021, 2020 and 2019 was $15.7 million, $21.9 million and $16.7 million, respectively, based on the market value on the vest date.
As of December 31, 2021, the Company’s aggregate unamortized stock compensation expense was approximately $17.3 million, which is expected to be recognized in expense over a weighted-average period of approximately 2.2 years.
Stock Bonus Plan
The Company also maintains a stock bonus plan, the Simpson Manufacturing Co., Inc. 1994 Employee Stock Bonus Plan (the “Stock Bonus Plan”), whereby it awards shares of the Company’s common stock to employees, who do not otherwise participate in any of the Company’s equity-based incentive plans and meet minimum service requirements. Shares have generally been awarded under the Stock Bonus Plan following the year in which the respective employee reached his or her tenth, twentieth, thirtieth, fortieth or fiftieth anniversary of employment with the Company or any direct or indirect subsidiary thereof.
The Company awarded shares for service through 2021, 2020, and 2019 as shown below:
| | | | | | | | | | | |
| December 31, |
| 2021 | 2020 | 2019 |
Shares issued | 6,900 | | 7,400 | | 4,000 | |
Shares settled with cash (foreign employees) | 6,500 | | 5,200 | | 3,000 | |
Total award | 13,400 | | 12,600 | | 7,000 | |
As a result, we recorded pre-tax compensation charges of $1.7 million, $1.2 million, and $0.8 million for years ended December 31, 2021, 2020, and 2019, respectively. These charges include cash bonuses to compensate employees for income taxes payable as a result of the stock bonuses.
6. Trade Accounts Receivable, net
Trade accounts receivable consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Trade accounts receivable | $ | 237,312 | | | $ | 170,001 | |
Allowance for doubtful accounts | (1,932) | | | (2,110) | |
Allowance for sales discounts | (4,359) | | | (2,763) | |
| $ | 231,021 | | | $ | 165,128 | |
7.Inventories
The components of inventories are as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Raw materials | $ | 191,174 | | | $ | 95,777 | |
In-process products | 30,309 | | | 21,803 | |
Finished products | 222,273 | | | 166,162 | |
| $ | 443,756 | | | $ | 283,742 | |
8. Derivative Instruments
The Company transacts business in various foreign countries and may therefore be exposed to foreign currency exchange rate risk. The Company has established risk management programs to protect against volatility in the value of non-functional future cash flows caused by changes in foreign currency exchange rates and tries to maintain a partial or fully hedged position for certain transaction exposures when management considers appropriate. The Company enters into short-term foreign currency derivatives contracts, namely forward contracts, to hedge only those currency exposures associated with cash flows denominated in non-functional currencies. Gains and losses on the Company's derivative contracts are designed to offset losses and gains on the transactions hedged, and accordingly, generally do not subject the Company to risk of significant accounting losses. The Company hedges committed exposures and does not engage in speculative transactions. The credit risk of these
derivative contracts is minimized since the contracts are with a large financial institution, and accordingly, fair value adjustments related to the credit risk of the counterparty financial institution are not material.
The Company sources certain materials for its concrete products from a wholly owned subsidiary in China, and as a result is exposed to variability in cash outflows associated with changes in the foreign exchange rate between the U.S. Dollar and the Chinese Yuan (CNY). As of December 31, 2021, the Company had no outstanding foreign currency derivative contracts.
Net deferred gains and losses on these contracts relating to changes in fair value are included in accumulated other comprehensive income or loss ("OCI"), a component of shareholders' equity in the consolidated balance sheets, and are reclassified into the line item in the consolidated statement of income in which the hedged items are recorded in the same period the hedged item affects earnings. For the year ended December 31, 2021, the Company recognized gains of $0.6 million, as a reduction of cost of sales. Changes in fair value of any forward contracts that are determined to be ineffective are immediately reclassified from OCI into earnings. The amounts deferred in OCI are expected to be recognized as a component of cost of sales in the consolidated statement of operations during 2022. There were no amounts recognized due to ineffectiveness during the year ended December 31, 2021.
9. Property, Plant and Equipment, net
Property, plant and equipment consisted of the following:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Land | $ | 28,175 | | | $ | 28,553 | |
Buildings and site improvements | 202,393 | | | 203,421 | |
Leasehold improvements | 5,995 | | | 7,091 | |
Machinery and equipment | 399,079 | | | 372,923 | |
| 635,642 | | | 611,988 | |
Less accumulated depreciation and amortization | (402,246) | | | (377,460) | |
| 233,396 | | | 234,528 | |
Capital projects in progress | 26,473 | | | 20,656 | |
| $ | 259,869 | | | $ | 255,184 | |
Property, plant and equipment as of December 31, 2021 and 2020, includes fully depreciated assets with an original cost of $234.0 million and $200.5 million, respectively, which are still in use in the Company’s operations. The Company capitalizes certain development costs associated with internal use software, including the direct costs of services provided by third-party consultants and payroll for internal employees, both of which are performing development and implementation activities on a software project. As of December 31, 2021 and 2020, the Company had capitalized software development costs net of accumulated amortization of $30.2 million and $29.4 million, respectively, included in Machinery and equipment and as of December 31, 2021 and 2020, $4.8 million and $5.5 million, respectively, was included in capital projects in progress.
Depreciation expense, including depreciation of equipment and amortization of internally developed software and software acquired through capital lease arrangements, was $36.1 million, $32.1 million and $32.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
10. Goodwill and Intangible Assets
Goodwill
The annual changes in the carrying amount of goodwill, by segment, as of December 31, 2020 and 2021, were as follows, respectively:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | North America | | Europe | | Asia Pacific | | Total |
Balance as of January 1, 2020 | $ | 96,244 | | | $ | 34,300 | | | $ | 1,335 | | | $ | 131,879 | |
Goodwill acquired | — | | | 106 | | | — | | | 106 | |
Foreign exchange | 67 | | | 3,661 | | | 139 | | | 3,867 | |
| | | | | | | |
Reclassifications | — | | | (8) | | | — | | (8) | |
Balance as of December 31, 2020 | 96,311 | | | 38,059 | | | 1,474 | | | 135,844 | |
| | | | | | | |
Foreign exchange | (4) | | | (1,622) | | | (90) | | | (1,716) | |
| | | | | | | |
Reclassifications | — | | | (106) | | | — | | | (106) | |
Balance as of December 31, 2021 | $ | 96,307 | | | $ | 36,331 | | | $ | 1,384 | | | $ | 134,022 | |
Goodwill Impairment Testing
The Company tests goodwill for impairment at the reporting unit level on an annual basis (in the fourth quarter). Our goodwill balance is not amortized to expense, and we may assess qualitative factors and quantitative factors to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount as a basis for determining whether it is necessary to complete quantitative impairment assessments. The reporting unit level is generally one level below the operating segment, which is at the country level, except for the U.S., Australia and S&P Clever reporting units.
The Company determined that the U.S. reporting unit includes four components: Northwest United States, Southwest United States, Northeast United States and Southeast United States. The Australia reporting unit includes two components: Australia and New Zealand. The S&P Clever reporting unit includes multiple European countries that are evaluated as one reporting unit. For each of these reporting units, the Company aggregated the components because management concluded that they are economically similar and that the goodwill is recoverable from these components working in concert.
We evaluate the recoverability of goodwill in accordance with Accounting Standard Codification (“ASC”) Topic 350, “Intangibles - Goodwill and Other. In addition, the Company prospectively adopted as part of its review in 2018 the Financial Accounting Standard Board (FASB) issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
We assessed the qualitative factors related to the goodwill of the reporting units to determine whether it is necessary to perform an impairment test. We also considered quantitative factors due to the effects of the COVID-19 pandemic. If the Company judges that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount, including goodwill, no further testing is required. This assessment method was utilized in our 2020 annual goodwill impairment test.
In 2021, the Company applied the ("Step 1") approach where the Company compares the fair value of the reporting unit to its carrying value. The fair value calculation uses both the income approach (discounted cash flow method) and the market approach, equally weighted. If the Company determines that the carrying value of the net assets assigned to the reporting unit, including goodwill, exceeds the fair value of the reporting unit, no further action taken. If the Company determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company would record an impairment charge equal to the difference between the implied fair value of the goodwill and the carrying value.
The 2021 and 2020 annual testing of goodwill for impairment did not result in impairment charges. "See Item 7 - Critical Accounting Policies and Estimates -Goodwill and Other Intangible Assets".
Amortizable Intangible Assets
Intangible assets from acquired businesses or asset purchases are recognized at their estimated fair values on the date of acquisition and consist of patents, unpatented technology, non-compete agreements, trademarks, customer relationships and other intangible assets. Finite-lived intangibles are amortized to expense over the applicable useful lives, ranging from three to twenty-one years, based on the nature of the asset and the underlying pattern of economic benefit as reflected by future net cash inflows. The Company performs an impairment test of finite-lived intangibles whenever events or changes in circumstances indicate their carrying value may be impaired.
The total gross carrying amount and accumulated amortization of definite-lived intangible assets at December 31, 2021 was $73.0 million and $46.7 million, respectively. The aggregate amount of amortization expense of intangible assets for the years ended December 31, 2021, 2020 and 2019 was $6.4 million $6.1 million and $5.5 million, respectively. The weighted-average remaining amortization period for all amortizable intangibles on a combined basis is 8.0 years.
The annual changes in the carrying amounts of patents, unpatented technologies, customer relationships and non-compete agreements and other intangible assets subject to amortization for the years ended December 31, 2021 and 2020 were as follows: | | | | | | | | | | | | | | | | | |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Patents | | |
Balance at January 1, 2020 | $ | 4,659 | | | $ | (561) | | | $ | 4,098 | |
Purchases | 40 | | | — | | | 40 | |
Amortization | — | | | (373) | | | (373) | |
| | | | | |
| | | | | |
| | | | | |
Balance at December 31, 2020 | 4,699 | | | (934) | | | 3,765 | |
Purchases | 6,074 | | | — | | | 6,074 | |
Amortization | — | | | (428) | | | (428) | |
| | | | | |
| | | | | |
| | | | | |
Balance at December 31, 2021 | $ | 10,773 | | | $ | (1,362) | | | $ | 9,411 | |
| | | | | | | | | | | | | | | | | |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Unpatented Technology | | |
Balance at January 1, 2020 | $ | 21,616 | | | $ | (14,361) | | | $ | 7,255 | |
Amortization | — | | | (2,131) | | | (2,131) | |
| | | | | |
| | | | | |
Foreign exchange | 488 | | | — | | | 488 | |
| | | | | |
Balance at December 31, 2020 | 22,104 | | | (16,492) | | | 5,612 | |
| | | | | |
Amortization | — | | | (2,174) | | | (2,174) | |
Reclassifications | 348 | | | — | | | 348 | |
Foreign exchange | (49) | | | — | | | (49) | |
| | | | | |
Balance at December 31, 2021 | $ | 22,403 | | | $ | (18,666) | | | $ | 3,737 | |
| | | | | | | | | | | | | | | | | |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Non-Compete Agreements, Trademarks and Other | | |
| |
Balance at January 1, 2020 | $ | 14,703 | | | $ | (5,529) | | | $ | 9,174 | |
Purchases | 6,700 | | | | | 6,700 | |
| | | | | |
Amortization | — | | | (2,195) | | | (2,195) | |
Foreign exchange | 179 | | | — | | | 179 | |
| | | | | |
| | | | | |
Balance at December 31, 2020 | 21,582 | | | (7,724) | | | 13,858 | |
| | | | | |
| | | | | |
Amortization | — | | | (2,631) | | | (2,631) | |
| | | | | |
Foreign exchange | (148) | | | — | | | (148) | |
| | | | | |
Balance at December 31, 2021 | $ | 21,434 | | | $ | (10,355) | | | $ | 11,079 | |
| | | | | | | | | | | | | | | | | |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Customer Relationships | | |
Balance at January 1, 2020 | $ | 17,660 | | | $ | (13,732) | | | $ | 3,928 | |
Acquisition | 290 | | | — | | | 290 | |
Amortization | — | | | (1,443) | | | (1,443) | |
| | | | | |
Foreign exchange | 173 | | | — | | | 173 | |
| | | | | |
Balance at December 31, 2020 | 18,123 | | | (15,175) | | | 2,948 | |
| | | | | |
Disposal | (217) | | | — | | | (217) | |
Amortization | — | | | (1,186) | | | (1,186) | |
| | | | | |
Foreign exchange | (117) | | | — | | | (117) | |
| | | | | |
Balance at December 31, 2021 | $ | 17,789 | | | $ | (16,361) | | | $ | 1,428 | |
As of December 31, 2021, estimated future amortization of intangible assets was as follows:
(in thousands)
| | | | | |
2022 | $ | 4,767 | |
2023 | 3,807 | |
2024 | 2,859 | |
2025 | 2,612 | |
2026 | 1,884 | |
Thereafter | 9,724 | |
| $ | 25,653 | |
Indefinite-Lived Intangible Assets
As of December 31, 2021, the only indefinite-lived intangible asset was a trade name in the amount of $0.6 million.
Definite-lived and indefinite-lived assets, net, by segment as of December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
(in thousands) | | |
Total Intangible Assets | | |
North America | $ | 40,786 | | | $ | (22,697) | | | $ | 18,089 | |
Europe | 26,341 | | | (17,630) | | | 8,711 | |
Total | $ | 67,127 | | | $ | (40,327) | | | $ | 26,800 | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
(in thousands) | | |
Total Intangible Assets | | |
North America | $ | 46,643 | | | $ | (26,346) | | | $ | 20,297 | |
Europe | 26,371 | | | (20,399) | | | 5,972 | |
Total | $ | 73,014 | | | $ | (46,745) | | | $ | 26,269 | |
11. Leases
The Company has operating leases for certain facilities, equipment and automobiles. The existing operating leases expire at various dates through 2026, some of which include options to extend the leases for up to five years. The Company measured the lease liability at the present value of the lease payments to be made over the lease term. The lease payments are discounted using the Company's incremental borrowing rate. The Company measured the right-of-use ("ROU") assets at the amount at which the lease liability is recognized plus initial direct costs incurred or prepayment amounts. The ROU assets are amortized on a straight-line basis over the lease term.
The following table provides a summary of leases included on the consolidated balance sheets as of December 31, 2021 and 2020, and consolidated statements of earnings and comprehensive income, and consolidated statements of cash flows for the year ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| Consolidated Balance Sheets Line Item | At December 31, |
| | 2021 | 2020 |
(in thousands) | | | |
Operating leases | | | |
Assets | | | |
Operating leases | Operating lease right-of-use assets | $ | 45,438 | | $ | 45,792 | |
Liabilities | | | |
Operating-current | Accrued expenses and other current liabilities | $ | 8,769 | | $ | 9,143 | |
Operating-noncurrent | Operating lease liabilities | 37,091 | | 37,199 | |
Total operating lease liabilities | | $ | 45,860 | | $ | 46,342 | |
Finance leases | | | |
Assets | | | |
Property and equipment, gross | Property, plant and equipment, net | $ | 3,569 | | $ | 3,569 | |
Accumulated amortization | Property, plant and equipment, net | (3,416) | | (3,112) | |
Property and equipment, net | Property, plant and equipment, net | $ | 153 | | $ | 457 | |
Liabilities | | | |
Other current liabilities | Accrued expenses and other current liabilities | 0 | $ | 384 | |
| | | |
Total finance lease liabilities | | $ | 0 | | $ | 384 | |
The components of lease expense were as follows:
| | | | | | | | | | | | |
| Consolidated Statements of Operations Line Item | Years Ended December 31, | |
(in thousands) | | 2021 | 2020 | |
Operating lease cost | General administrative expenses and cost of sales | $ | 11,704 | | $ | 9,804 | | |
Finance lease cost: | | | | |
Amortization of right-of-use assets | General administrative expenses | $ | 324 | | $ | 864 | | |
Interest on lease liabilities | Interest expense, net | 2 | | 30 | | |
Total finance lease cost | | $ | 326 | | $ | 894 | | |
Other information
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | |
| Years Ended December 31, | |
(in thousands) | 2021 | 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 11,443 | | $ | 9,306 | | |
Finance cash flows for finance leases | $ | 437 | | $ | 1,160 | | |
Operating right-of-use assets obtained in exchange for new lease liabilities | | | |
| | | |
Operating leases | $ | 11,530 | | $ | 20,308 | | |
The following is a schedule, by years, of maturities for lease liabilities as of December 31, 2021:
| | | | | |
(in thousands) | Operating Leases |
2022 | $ | 10,887 | |
2023 | 8,579 | |
2024 | 6,821 | |
2025 | 5,861 | |
2026 | 4,994 | |
Thereafter | 16,279 | |
Total lease payments | 53,421 | |
Less: Present value discount | (7,561) | |
Total lease liabilities | $ | 45,860 | |
The following table summarizes the Company’s lease terms and discount rates as of December 31, 2021:
| | | | | | | | | | |
| Years Ended December 31, | | |
| 2021 | 2020 | | |
Weighted-average remaining lease terms (in years): | | | | |
Operating leases | 6.88 | 7.27 | | |
Finance leases | 0.00 | 0.42 | | |
Weighted-average discount rate: | | | | |
Operating leases | 5.22 | % | 5.29 | % | | |
Finance leases | — | % | 3.3 | % | | |
12. Accrued Liabilities and Other Current Liabilities
Accrued liabilities and other current liabilities consisted of the following: | | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Labor related liabilities | $ | 46,821 | | | $ | 41,188 | |
Sales incentives & advertising allowances | 63,702 | | | 42,783 | |
Accrued cash profit sharing and commissions | 24,178 | | | 15,693 | |
Sales tax payable and other | 20,822 | | | 16,832 | |
Dividends payable | 10,806 | | | 9,999 | |
Accrued profit sharing trust contributions | 12,289 | | | 10,152 | |
Operating lease - current portion | 8,769 | | | 9,143 | |
| | | |
| $ | 187,387 | | | $ | 145,790 | |
13.Debt
In July 2021, the Company entered into a fourth amendment to the unsecured credit agreement dated July 27, 2012 with Wells Fargo Bank, National Association, and certain other institutional lenders that provides for a $300.0 million unsecured revolving credit facility (“Credit Facility”). The Amendment extends the term of the Credit Agreement from July 23, 2022, to July 12, 2026. The Company is required to pay an annual facility fee of 0.10 to 0.25 percent on the available commitments under the Credit Agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The fee is included within other expense in the Company's condensed consolidated statement of operations.
Amounts borrowed under the Credit Agreement bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars as published by the ICE Benchmark
Administration Limited, a United Kingdom company, or a comparable or successor quoting service approved by the Administrative Agent (the “LIBOR Rate”), adjusted for any reserve requirement in effect, plus a spread of from 0.65 to 1.50 percent, as determined on a quarterly basis based on the Company’s leverage ratio, or (b) a base rate, plus a spread of 0.00 to 0.50 percent, as determined on a quarterly basis based on the Company’s leverage ratio. In no event shall the LIBOR Rate be less than 0.50 percent. The base rate is defined in a manner such that it will not be less than the LIBOR Rate. The Company will pay fees for standby letters of credit at an annual rate equal to the LIBOR Rate plus the applicable spread described in the preceding clause (a), and will pay market-based fees for commercial letters of credit. The spread applicable to a particular LIBOR Rate loan or base rate loan depends on the consolidated leverage ratio of the Company and its subsidiaries at the time the loan is made. Loans outstanding under the Credit Agreement may be prepaid at any time without penalty except for LIBOR Rate breakage costs and expenses.
As of December 31, 2021, in addition to the Credit Facility, certain of the Company’s domestic subsidiaries are guarantors for a credit agreement between certain of its foreign subsidiaries and institutional lenders. Together, all of its credit facilities provide the Company with a total of $304.4 million in revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.
The Company and its subsidiaries are required to comply with various affirmative and negative covenants. The covenants include provisions that would limit the availability of funds as a result of a material adverse change to the Company’s financial position or results of operations. The Company was in compliance with its financial covenants under the loan agreement as of December 31, 2021.
The Company incurs interest costs, which include interest, maintenance fees and bank charges. The amount of costs incurred, capitalized, and expensed for the years ended December 31, 2021, 2020 and 2019, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
Interest costs incurred | $ | 1,424 | | | $ | 2,796 | | | $ | 2,172 | |
Less: Interest capitalized | (574) | | | (512) | | | (144) | |
Interest expense | $ | 850 | | | $ | 2,284 | | | $ | 2,028 | |
14. Commitments and Contingencies
Purchase Obligations
In addition to the debt and lease obligations described elsewhere in the footnotes, the Company has certain purchase obligations in the ordinary course of business. These purchase obligations are primarily related to the acquisition, construction or expansion of facilities and equipment, and minimum purchase quantities of certain raw materials. The Company is not a party to any long-term supply contracts with respect to the purchase of raw materials or finished goods. As of December 31, 2021, these purchase obligations were $125.4 million, of which $85.9 million is payable in 2022 and the remainder over the following three years. Debt interest obligations include annual facility fees on the Company’s primary line-of-credit facility in the amount of $0.9 million at December 31, 2021.
Employee Relations
As of December 31, 2021, approximately 17% of our employees are represented by labor unions and are covered by collective bargaining agreements in the U.S. The Company has two-facility locations with collective bargaining agreements covering tool and die craftsmen, maintenance workers, and sheet-metal workers. In Stockton, California, two union contracts will expire in September 2023 and June 2023, respectively. Also, the Company has two contracts in San Bernardino County, California that will expire in February 2025 and in June 2022, respectively. Based on current information and subject to future events and circumstances, the Company believes that, even if new agreements are not reached before the existing labor union contracts expire, it is not expected to have a material adverse effect on the Company’s ability to provide products to customers or on the Company’s profitability.
Environmental
The Company’s policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs when information becomes available that indicates that it is probable that the Company is liable for any
related claims and assessments and the amount of the liability is reasonably estimable. The Company does not believe that any such matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Litigation and Potential Claims
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.
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 a federal district court in Hawaii against Simpson Strong-Tie Company Inc. and the Company on November 20, 2017. The Gentry Case is a product of a previous state court class action, Nishimura v. Gentry Homes, Ltd., et al., Civil No. 11-1-1522-07, which is now closed. The Nishimura case concerned alleged corrosion of the Company’s galvanized “hurricane straps” and mudsill anchor products used in a residential project in the Ewa District of Honolulu, Hawaii by Gentry Homes, Ltd. ("Gentry"). In the Gentry Case, Gentry alleges breach of warranty and negligent misrepresentation by the Company related to its “hurricane strap” and mudsill anchor products. The Gentry Case was resolved pursuant to a written settlement agreement ("Settlement") without adjudication or any admission of liability by the Company. The Settlement may not be used as evidence of liability against the party. The case was dismissed with prejudice on January 4, 2022. The Company incurred no uninsured liability to the plaintiff in connection with the Gentry Case, or the Settlement.
15. Income Taxes
The provision for income taxes from operations consisted of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Current | | | | | |
Federal | $ | 65,861 | | | $ | 42,337 | | | $ | 28,314 | |
State | 19,515 | | | 12,571 | | | 7,465 | |
Foreign | 7,641 | | | 4,478 | | | 6,039 | |
Deferred | | | 0 | | |
Federal | 802 | | | 2,330 | | | 3,329 | |
State | (169) | | | 598 | | | 805 | |
Foreign | (1,548) | | | 250 | | | (1,577) | |
| $ | 92,102 | | | $ | 62,564 | | | $ | 44,375 | |
Income and loss from operations before income taxes for the years ended December 31, 2021, 2020, and 2019, respectively, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Domestic | $ | 336,085 | | | $ | 238,320 | | | $ | 163,257 | |
Foreign | 22,464 | | | 11,244 | | | 15,100 | |
| $ | 358,549 | | | $ | 249,564 | | | $ | 178,357 | |
At December 31, 2021, the Company had $41.4 million of pre-tax loss carryforwards in various foreign taxing jurisdictions. All of the tax losses can be carried forward indefinitely.
At December 31, 2021, and 2020, the Company has valuation allowances of $12.0 million and $11.3 million, respectively. The valuation allowance increased $0.7 million and decreased $0.3 million for the years ended December 31, 2021, and December 31, 2020, respectively. The increase in the 2021 valuation allowances was primarily the result of an impairment on a foreign equity investment. The decrease in the 2020 valuation allowances was primarily a result of the release of valuation allowance for foreign losses in Simpson Strong-Tie A/S, a subsidiary in Denmark.
As of December 31, 2021, the Company asserts that its accumulated undistributed earnings generated by our foreign subsidiaries are permanently reinvested and as such, has not recognized a US deferred tax liability on its investment in foreign subsidiaries. The Company will continue to assess its permanent reinvestment assertion on a quarterly basis.
Reconciliations between the statutory federal income tax rates and the Company’s effective income tax rates as a percentage of income before income taxes for its operations were as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Federal tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal benefit | 4.3 | % | | 4.2 | % | | 3.6 | % |
| | | | | |
| | | | | |
| | | | | |
Change in valuation allowance | — | % | | 0.1 | % | | (0.1) | % |
True-up of prior year tax returns to tax provision | (0.1) | % | | (0.4) | % | | (0.3) | % |
Difference between U.S. statutory and foreign local tax rates | 0.4 | % | | 0.4 | % | | 0.8 | % |
Change in uncertain tax position | — | % | | — | % | | 0.1 | % |
Other | 0.1 | % | | (0.2) | % | | (0.2) | % |
Effective income tax rate | 25.7 | % | | 25.1 | % | | 24.9 | % |
The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 2021 and 2020, respectively, were as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Deferred asset taxes | | | |
State tax | $ | 1,490 | | | $ | 1,076 | |
Workers’ compensation | 892 | | | 883 | |
Health claims | 1,351 | | | 1,207 | |
Vacation liability | 376 | | | 374 | |
Allowance for doubtful accounts | 344 | | | 384 | |
Inventories | 7,497 | | | 6,108 | |
Sales incentive and advertising allowances | 1,777 | | | 1,086 | |
Lease obligations | 11,562 | | | 11,631 | |
Stock-based compensation | 2,612 | | | 2,148 | |
Unrealized foreign exchange gain or loss | 378 | | | 344 | |
Foreign tax credit carryforwards | 4,983 | | | 4,744 | |
Uncertain tax positions’ unrecognized tax benefits | 72 | | | 77 | |
Non-United States tax loss carry forward | 7,824 | | | 7,717 | |
Other | 940 | | | — | |
| $ | 42,098 | | | $ | 37,779 | |
Less valuation allowances | (11,992) | | | (11,316) | |
Total deferred asset taxes | $ | 30,106 | | | $ | 26,463 | |
Deferred tax liabilities | | | |
Depreciation | $ | (14,999) | | | $ | (12,933) | |
Goodwill and other intangibles amortization | (16,682) | | | (15,642) | |
Tax effect on cumulative translation adjustment | (504) | | | (568) | |
Right of use assets | (11,453) | | | (11,489) | |
| | | |
Other | — | | | (247) | |
Total deferred tax liabilities | (43,638) | | | (40,879) | |
Total Deferred tax asset/(liability) | $ | (13,532) | | | $ | (14,416) | |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits in 2021, 2020 and 2019, respectively, were as follows, including foreign translation amounts:
| | | | | | | | | | | | | | | | | |
Reconciliation of Unrecognized Tax Benefits | 2021 | | 2020 | | 2019 |
Balance at January 1 | $ | 1,168 | | | $ | 1,706 | | | $ | 1,757 | |
Additions based on tax positions related to prior years | 9 | | | 78 | | | 8 | |
Reductions based on tax positions related to prior years | (47) | | | (7) | | | (30) | |
Additions for tax positions of the current year | 3 | | | 48 | | | 167 | |
| | | | | |
Lapse of statute of limitations | (189) | | | (657) | | | (196) | |
Balance at December 31 | $ | 944 | | | $ | 1,168 | | | $ | 1,706 | |
Tax positions of $0.3, $0.3, and $0.2 million are included in the balance of unrecognized tax benefits at December 31, 2021, 2020, and 2019, respectively, which if recognized, would reduce the effective tax rate.
The Company accrues interest and penalties related to unrecognized tax benefits in income tax expense in accordance with the Company’s historical accounting policy. During the year ended December 31, 2021, 2020 and 2019, accrued interest decreased by $39 thousand and $108 thousand and $20 thousand, respectively. The Company had accrued $0.2 million for fiscal year ended 2021, $0.3 million for fiscal year ended 2020 and $0.4 million for fiscal year ended 2019, for the potential payment of interest before income tax benefits. The Company does not expect any material changes in unrecognized tax benefits within the next 12 months.
At December 31, 2021, the Company remained subject to federal income tax examinations in the U.S. for the tax years 2018 through 2021. In addition, tax years 2016 through 2021 remain open to examination in states, local and foreign jurisdictions.
16. Retirement Plans
The Company has six defined contribution retirement plans covering substantially all salaried employees and nonunion hourly employees. The Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan (the "Plan") covers U.S. employees and provides for quarterly safe harbor contributions, limited to 3% of the employees' quarterly eligible compensation and for annual discretionary contributions, subject to certain limitations. The discretionary amounts for 2021, 2020 and 2019 were equal to 7% of qualifying salaries or wages of the covered employees. The other five defined contribution plans, covering the Company’s European and Canadian employees, require the Company to make contributions ranging from 3% to 15% of the employees’ compensation. The total cost for these retirement plans for the years ended December 31, 2021, 2020 and 2019, was $20.7 million, $17.7 million, and $16.8 million, respectively.
We participate in various multiemployer benefit plans that cover some of our employees who are represented by labor unions. We make periodic contributions to these plans in accordance with the terms of applicable collective bargaining agreements and laws but do not sponsor or administer these plans. We do not participate in any multiemployer benefit plans for which we consider our contributions to be individually significant. If we withdraw from participation in any of these plans, the applicable law would require us to fund our allocable share of the unfunded vested benefits, which is known as a withdrawal liability. As of December 31, 2021, we believe that there was no probable withdrawal liability under the multiemployer benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees.
Our total contribution to various industry-wide, union-sponsored pension funds and a statutorily required pension fund for employees in the U.S. and Europe were $5.0 million for the year ended December 31, 2021 and $5.1 million, $4.5 million for the years ended 2020 and 2019, respectively.
17. Related Party Transactions
During 2021, the Company identified certain purchases of goods and services from companies where the Chief Executive Officer of the Company serves as a director on the respective company's board providing the goods or services. The amount of goods and services purchased by the Company pursuant to these arrangements was not material to the Company’s consolidated statement of income and cash flows for the year ended December 31, 2021.
18. Segment Information
The Company is organized into three reporting segments 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 (comprised primarily of the Company’s operations in the U.S. and Canada), the Europe segment and the Asia/Pacific segment (comprised of the Company’s operations in Asia, the South Pacific, and the Middle East). These segments are similar in several ways, including the types of materials used, the production processes, the distribution channels and the product applications.
The Administrative & All Other column primarily includes expenses such as self-insured workers compensation claims for employees, stock-based compensation for certain members of management, interest expense, foreign exchange gains or losses and income tax expense, as well as revenues and expenses related to real estate activities.
The following table shows certain measurements used by management to assess the performance of the segments described above as of December 31, 2021, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | North America | | Europe | | Asia/ Pacific | | Administrative & All Other | | Total |
2021 | | | | |
Net sales | $ | 1,362,941 | | | $ | 196,996 | | | $ | 13,280 | | | $ | — | | | $ | 1,573,217 | |
Sales to other segments * | 2,237 | | | 5,696 | | | 27,109 | | | — | | | 35,042 | |
Income from operations | 359,140 | | | 14,160 | | | 1,193 | | | (6,700) | | | 367,793 | |
Depreciation and amortization | 33,950 | | | 6,172 | | | 1,844 | | | 511 | | | 42,477 | |
Significant non-cash charges | 8,173 | | | 1,943 | | | 166 | | | 7,607 | | | 17,889 | |
Provision for income taxes | 87,962 | | | 3,826 | | | 241 | | | 73 | | | 92,102 | |
Capital expenditures, asset acquisition, and equity investments, net of cash acquired | 45,817 | | | 2,403 | | | 603 | | | 988 | | | 49,811 | |
Total assets | 1,352,988 | | | 202,631 | | | 31,832 | | | (103,326) | | | 1,484,125 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | North America | | Europe | | Asia/ Pacific | | Administrative & All Other | | Total |
2020 | | | | |
Net sales | $ | 1,101,891 | | | $ | 156,713 | | | $ | 9,341 | | | $ | — | | | $ | 1,267,945 | |
Sales to other segments * | 2,554 | | | 5,576 | | | 25,320 | | | — | | | 33,450 | |
Income (loss) from operations | 249,252 | | | 8,396 | | | 308 | | | (5,593) | | | 252,363 | |
Depreciation and amortization | 30,218 | | | 5,856 | | | 1,709 | | | 984 | | | 38,767 | |
| | | | | | | | | |
Significant non-cash charges | 6,929 | | | 1,226 | | | 376 | | | 4,975 | | | 13,506 | |
Provision for income taxes | 58,201 | | | 3,817 | | | 613 | | | (67) | | | 62,564 | |
Capital expenditures, including purchases of intangible assets, and business combination, net of cash acquired | 29,937 | | | 4,248 | | | 705 | | | 5,816 | | | 40,706 | |
Total assets | 1,001,168 | | | 198,647 | | | 32,754 | | | — | | | 1,232,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | North America | | Europe | | Asia/ Pacific | | Administrative & All Other | | Total |
2019 | | | | |
Net sales | $ | 972,849 | | | $ | 155,144 | | | $ | 8,546 | | | $ | — | | | $ | 1,136,539 | |
Sales to other segments * | 1,977 | | | 2,068 | | | 26,764 | | | — | | | 30,809 | |
Income (loss) from operations | 176,329 | | | 6,817 | | | (731) | | | (1,161) | | | 181,254 | |
Depreciation and amortization | 30,652 | | | 5,457 | | | 1,698 | | | 595 | | | 38,402 | |
| | | | | | | | | |
Significant non-cash charges | 5,273 | | | 1,141 | | | 211 | | | 4,157 | | | 10,782 | |
Provision for income taxes | 40,452 | | | 1,934 | | | 577 | | | 1,412 | | | 44,375 | |
Capital expenditures and business acquisitions, net of cash acquired | 31,695 | | | 8,245 | | | 236 | | | — | | | 40,176 | |
Total assets | 1,269,545 | | | 169,785 | | | 30,055 | | | (374,019) | | | 1,095,366 | |
* Sales to other segments are eliminated in consolidation.
Cash collected by the Company’s U.S. subsidiaries is routinely transferred into the Company’s cash management accounts, and therefore is in the total assets of "Administrative & All Other." Cash and cash equivalent balances in "Administrative & All Other" were $223.5 million, $199.8 million and $161.4 million as of December 31, 2021, 2020 and 2019, respectively. As of December 31, 2021, the Company had $75.8 million, or 25.2%, of its cash and cash equivalents held outside the U.S. in accounts belonging to the Company’s various foreign operating entities. The majority of this balance is held in foreign currencies and could be subject to additional taxation if repatriated to the U.S.
The significant non-cash charges comprise compensation related to equity awards under the Company’s stock-based incentive plans and the Company’s employee stock bonus plan. The Company’s measure of profit or loss for its reportable segments is income (loss) from operations. The reconciling amounts between consolidated income before tax and consolidated income from operations are net interest income (expense), net and other, foreign exchange gain (loss), certain legal and professional fees associated with the acquisition of the Etanco Group, refer to Note 19 " Subsequent Events," and loss on disposal of a business. Interest income (expense) is primarily attributed to “Administrative & All Other.”
The following table shows the geographic distribution of the Company’s net sales and long-lived assets as of December 31, 2021, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
(in thousands) | Net Sales | | Long-Lived Assets | | Net Sales | | Long-Lived Assets | | Net Sales | | Long-Lived Assets |
United States | $ | 1,287,085 | | | $ | 228,623 | | | $ | 1,045,509 | | | $ | 215,082 | | | $ | 921,703 | | | $ | 210,349 | |
Canada | 70,401 | | | 2,861 | | | 52,889 | | | 3,059 | | | 47,948 | | | 1,181 | |
United Kingdom | 37,408 | | | 1,851 | | | 24,290 | | | 2,073 | | | 26,376 | | | 1,683 | |
Germany | 29,970 | | | 9,999 | | | 24,069 | | | 11,163 | | | 22,357 | | | 10,529 | |
France | 50,445 | | | 5,988 | | | 40,672 | | | 7,095 | | | 39,969 | | | 7,010 | |
Poland | 13,909 | | | 2,496 | | | 11,648 | | | 2,779 | | | 11,826 | | | 2,770 | |
Sweden | 17,003 | | | 2,664 | | | 15,241 | | | 2,986 | | | 13,792 | | | 1,762 | |
Denmark | 13,964 | | | 2,281 | | | 11,931 | | | 2,445 | | | 10,761 | | | 2,235 | |
Norway | 12,736 | | | — | | | 11,138 | | | — | | | 11,238 | | | — | |
Switzerland | 5,928 | | | 6,784 | | | 5,246 | | | 8,172 | | | 5,600 | | | 7,781 | |
Australia | 8,120 | | | 201 | | | 5,749 | | | 134 | | | 4,939 | | | 110 | |
Belgium | 6,818 | | | 2,349 | | | 5,311 | | | 2,268 | | | 5,605 | | | 1,913 | |
The Netherlands | 4,834 | | | 39 | | | 4,526 | | | 61 | | | 4,019 | | | 93 | |
New Zealand | 5,160 | | | 160 | | | 3,593 | | | 167 | | | 3,606 | | | 166 | |
Chile | 5,455 | | | 31 | | | 3,493 | | | 49 | | | 3,198 | | | 28 | |
Other countries | 3,981 | | | 8,463 | | | 2,640 | | | 9,797 | | | 3,602 | | | 10,647 | |
| $ | 1,573,217 | | | $ | 274,790 | | | $ | 1,267,945 | | | $ | 267,330 | | | $ | 1,136,539 | | | $ | 258,257 | |
Net sales and long-lived assets, excluding intangible assets, are attributable to the country where the sales or manufacturing operations are located.
The Company’s 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. Its concrete construction products include adhesives, specialty chemicals, mechanical anchors, carbide drill bits, powder actuated tools and reinforcing fiber materials and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction. The following table shows the distribution of the Company’s net sales by product for the years ended December 31, 2021, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Wood Construction | $ | 1,361,113 | | | $ | 1,082,877 | | | $ | 948,768 | |
Concrete Construction | 210,780 | | | 184,631 | | | 187,462 | |
Other | 1,324 | | | 437 | | | 309 | |
Total | $ | 1,573,217 | | | $ | 1,267,945 | | | $ | 1,136,539 | |
No customers accounted for at least 10% of net sales for the years ended 2021, 2020 and 2019.
19. Subsequent Events
On January 20, 2022, the Company's Board of Directors declared a cash dividend of $0.25 per share of our common stock, estimated to be $10.8 million in total. The record date for the dividend will be April 7, 2022, and will be paid on April 28, 2022.
Effective January 20, 2022, Mike Olosky, the Company’s Chief Operating Officer ("COO") was promoted to President and COO. Karen Colonias, who previously served as the Company’s President and Chief Executive Officer ("CEO") will continue to serve as CEO.
On January 26, 2022, the Company signed a securities purchase agreement to acquire Etanco Group for a purchase price of $818 million(1) (€725 million). The acquisition is expected to close on April 1, 2022.
Footnotes
(1) Reflects EUR to USD exchange rate based on binding offer agreed upon as of December 22, 2021.