In this filing we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are 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”).amended. 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.expressions that concern our strategy, plans, expectations or intentions. Forward-looking statements include, but are not limited to, statements about future financial and operating results, our plans, objectives, business outlook, priorities, expectations and intentions, expectations for sales and market growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, the integration of the acquisition of FIXCO Invest S.A.S ("ETANCO"), our strategic initiatives, including the impact of these initiatives, on our strategic and operational plans and financial results, and any statement of an assumption underlying any of the foregoing and other statements that are not historical facts. Although we believe that the expectations, opinions, projections and comments reflected in these forward-looking statements and the underlying assumptions are reasonable, such statements involve risks and uncertainties and we cannot assure youcan give no assurance that theysuch statements will prove to be correct.
PART I
Item 1. Business.
Company Background
We,Simpson Manufacturing Co., Inc. ("Simpson," the "Company," "we," "us," or "our,") through our wholly-owned subsidiary,its subsidiaries, including, Simpson Strong-Tie Company Inc. ("SST"), design, engineerdesigns, engineers and areis a leading manufacturer of high quality wood and concrete building construction products designed to make structures safer and more secure thatsecure. Our products are designed to perform at high levels and arebe easy to use and cost-effective for customers. Our wood construction products are used in light-frame construction and include connectors, truss plates, fastening systems, fasteners and pre-fabricated lateral resistive systems. Our concrete construction products are used in concrete, masonry and steel construction and include adhesives, chemicals, mechanical anchors, carbide drill bits, powder actuated tools, fiber reinforced materials and other repair products used for protection and strengthening. We market our products to the residential construction, light industrial and commercial construction, remodeling and do-it-yourself (“DIY”) markets.markets domestically in North America, primarily in the United States, and Europe internationally. We also provide engineering services in support of some of our products and increasingly offer design and other software that facilitates the specification, selection and use of our products. The Company has continuously manufactured structural connectors since 1956 and believes that the Simpson Strong-TieStrong-Tie® brand benefits from strong brand name recognition in residential, light industrial and commercial applications among architects and engineers who frequently request the use of our products.
Business StrategyRecent Acquisition
As previously disclosed, on April 1, 2022, the Company successfully completed the acquisition of ETANCO. ETANCO is a leading designer, manufacturer and distributor of fixing and fastening solutions for the European building and construction market. ETANCO's primary product applications directly align with the addressable markets in which the Company operates, expands our portfolio of solutions, including mechanical anchors, fasteners and commercial building envelope solutions, and significantly increase our market presence across Europe. We continue to believe that the acquisition of ETANCO will support continued growth in our European business, including expansion into new geographies, sales channels and commercial building offerings. For more information, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Sales
The Company attracts and retains customers by designing, manufacturing and selling high quality products that perform well, are easy to use and cost-effective for customers. The Company manufactures and warehouses its products in geographic proximity to its markets to providehelp ensure availability and rapidfacilitate timely delivery of products to customers, and prompt responsewhich enables us to promptly respond to customer requests for specially designed products and services. The Company maintains levels of inventory intended to operate with littleminimum backlog and fill most customer orders within a few days. High levels of manufacturing automation and flexibility allow the Company to maintain its high quality standards while continuing to provide prompt delivery.delivery to meet our customers' needs.
The Company intends to continue efforts to increase market share in both the wood construction and concrete construction product groups by:
•maintaining frequent customer contacts and service levels;
•continuing to sponsor seminars to inform architects, engineers, contractors and building officials on appropriate use, proper installation and identification of the Company’s products;
•continuing to invest in mobile, web and software applications for customers to both help them do their jobs more efficiently and allow us to connect with customersthem utilizing social media, blog posts and videos;
•continuing to invest in Building Information Modeling ("BIM") software services and solutions for home builders and lumber-building material suppliers; and
•continuing to innovate, advance and diversify our product offerings.
The Company’s long-term strategy is to develop, acquire or invest in product lines or businesses that have the potential to increase the Company’s earnings per share and return on invested capital over time and that:
complement the Company’s existing product lines;
can be marketed through the Company’s existing distribution channels;
might benefit from use of the Company’s brand names and expertise;
are responsive to needs of the Company’s customers;
expand the Company’s markets geographically; and
reduce the Company’s dependence on the United States residential construction market.
New Products.
The Company commits substantial resources to new product development. The majority of SST’s products have been developed through its internal research and development program. The Company believes it is the only United States manufacturer with the capability to internally test multi-story wall systems, thus enabling full scale testing rather than analysis alone to prove system performance. The Company’s engineering, sales, product management, and marketing teams work together with architects, engineers, building inspectors, code officials, builders and customers in the new product development process.
The Company’s product research and development is based largely on products or solutions that are identified within the Company, feedback or requests from customers for new or specialty products and in connection with the Company’s strategic initiatives to expand into new markets and/or develop new product lines. The Company’s strategy is to develop new products on a proprietary
basis, to seek patents when appropriate and to rely on trade secret protection for others. The Company typically develops 15 to 25 new products each year.
In 2019, through our research and development efforts, the Company expanded its product offerings by adding:
new connectors and lateral products for wood framing applications;
new connectors for timber & offsite constructions;
new steel connections for mid-rise steel construction;
new connectors for cold formed steel applications;
new fastener products for wood construction; and
new mechanical anchors for concrete and masonry construction.
The Company intends to continue to expand its product offering.
Distribution channels. The Company seeks to expand its product and distribution coverage through several channels:
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• | Distributors. The Company regularly evaluates its distribution coverage and the service levels provided by its distributors, and from time to time implements changes. The Company evaluates distributor product mix and conducts promotions to encourage distributors to add the Company’s products that complement the mix of product offerings in their markets.
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• | Home Centers. The Company intends to increase penetration of the DIY markets by continuing to expand its product offerings through home centers. The Company’s sales force maintains on-going contact with home centers to work with them in a broad range of areas, including inventory levels, retail display maintenance and product knowledge training. The Company’s strategy is to ensure that the home center retail stores are fully stocked with adequate supplies of the Company’s products carried by those stores. The Company has further developed extensive bar coding and merchandising aids and has devoted a portion of its research and development efforts to DIY products. The Company’s sales to home centers increased year-over-year in 2019, 2018 and 2017.
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• | Dealers. In some markets, the Company sells its products directly to lumber dealers and cooperatives.
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• | OEM Relationships. The Company works closely with manufacturers of engineered wood, Composite Laminated Timber and OEMs for off-site construction to develop and expand the application and sales of its engineered wood connector, fastener, anchor and truss products. The Company has relationships with many of the leaders in these industries.
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• | International Sales. The Company has established a presence in the European Community through acquisition of companies with existing customer bases and through servicing United States-based customers operating in Europe. The Company also distributes connector, anchor and epoxy products in Mexico, Chile, Australia, New Zealand, and the Middle East.
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See “Item 1A — Risk Factors,” “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Note 18 — Segment Information” to the accompanying audited consolidated financial statements included in Part II, Item 8 — "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K (the "Company’s Consolidated Financial Statements").
Operating Segments and Geographic Areas
The Company is organized into three operating segments consisting of the North America, Europe and Asia/Pacific segments. The North America segment includes operations primarily in the United States and Canada. The Europe segment includes operations primarily in France, the United Kingdom, Germany, Denmark, Switzerland, Portugal, Poland, The Netherlands, Belgium, Spain, Sweden and Norway. The Asia/Pacific segment includes operations primarily in Australia, New Zealand, China, Taiwan, and Vietnam. These segments are similar in several ways, including similarities in the products manufactured and distributed, the types of materials used, the production processes, the distribution channels and the product applications.
Products and Services
Historically, the Company’s product lines historically have encompassed connectors, anchors, fasteners, lateral resistive systems, and truss plates, as well as repair and strengthening product lines for the marine, industrial and transportation markets. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Note 1819 — Segment Information” to the Company’s Consolidated Financial Statementsconsolidated financial statements for financial information regarding revenues by product category.
category. Through, the acquisition of ETANCO, the Company expanded its product portfolio to include commercial building envelope solutions and significantly increased its market presence across Europe.
Many of the Company’s products are approved by building code evaluation agencies. To achieve these approvals, the Company conducts extensive product testing, which is witnessed and certified by independent testing laboratories. TheThese tests also provide
the basis of load ratings for the Company’s structural products. This test and load information is used by architects, engineers, contractors, building officials, and homeowners in selecting our products and comparing them to those of competitors, and is useful across all applications of the Company’s products, ranging from the deck constructed by a homeowner to a multi-story structure designed by an architect or engineer.
Wood Construction Products. The Company produces and markets over 15,000 standard and custom wood construction products. These products are used primarily to strengthen, support and connect wood applications in residential and commercial construction and DIY projects. The Company’s wood construction products contribute to structural integrity and resistance to seismic, wind and gravitygravitational forces. As described below, the Company’s wood construction products include:
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• | •Connectors - Connectors are prefabricated metal products that attach wood, concrete, masonry or steel together and are essential for tying wood construction elements together and create safer and stronger buildings. Included in this category are connectors, holddowns, and truss connector plates. •Fasteners - The fastening line includes various nails, screws and staples, which are complemented by the Company's Quik Drive auto-feed screw driving system, which is used in numerous applications such as building envelope applications, decking, subfloors, drywall and roofing; and •Lateral Resistive Systems - Lateral resistive systems are assemblies used to resist earthquake or wind forces and include steel and wood shearwalls, Anchor Tiedown Systems (ATS), and steel moment frames.
- Connectors are prefabricated metal products that attach wood, concrete, masonry or steel together and are essential for tying wood construction elements together and create safer and stronger buildings;
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• | Truss Connector Plates - Truss connector plates are toothed metal plates that join wood members together to form a truss and are marketed under the name Integrated Component Systems. The Company continues to develop software to assist truss and component manufacturers in modeling, designing trusses and selecting the appropriate truss plates for the applicable jobs;
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• | Fastening Line - The fastening line includes various nails, screws and staples, which are complemented by the Company's Quik Drive auto-feed screw driving system, which is used in numerous applications such as decking, subfloors, drywall and roofing; and
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• | Lateral Resistive System - Lateral resistive systems are assemblies used to resist earthquake or wind forces and include steel and wood shearwalls, Anchor Tiedown Systems and steel moment frames.
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Concrete Construction Products.The Company produces and markets over 1,0003,000 standard and custom concrete construction products. The Company’s concrete construction products are composed of various materials including steel, chemicals and carbon fiber. They are used primarily to anchor, protect and strengthen concrete, brick and masonry applications in industrial, infrastructure, residential, commercial and DYIDIY projects. The Company’s concrete construction products contribute to structural integrity and resistance to seismic, wind and gravitygravitational forces. These products are sold in all segments of the Company. As described below, the Company’s concrete construction products include:
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• | •Anchor Products - Anchor products include adhesives, mechanical anchors, carbide drill bits and powder-actuated pins and tools used for numerous applications of anchoring or attaching elements onto concrete, brick, masonry and steel; and •Construction, Repair, Protection and Strengthening Products - Concrete construction repair, protection and strengthening products include grouts, coatings, sealers, mortars, fiberglass and fiber-reinforced polymer systems and asphalt products.
- Anchor products include adhesives, mechanical anchors, carbide drill bits and powder-actuated pins and tools used for numerous applications of anchoring or attaching elements onto concrete, brick, masonry and steel; and
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• | Construction, Repair, Protection and Strengthening Products - Concrete construction repair, protection and strengthening products include grouts, coatings, sealers, mortars, fiberglass and fiber-reinforced polymer systems and asphalt products.
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Engineering and Design Services. The Company’s engineers not only design and test products, but also provide engineering support for customers in connection with a number of products that the Company manufactures and sells. This support might range from the discussion of a load value in a catalog to testing the suitability of an existing product in a unique application. For the truss product line, the Company’s engineers review the output of the Company’s software to assist customers in ensuring that trusses are properly designed and specified, and in some instances seal design diagrams. Generally, in connection with any engineering services the Company provides, the Company’s engineers serve as a point of reference and support for the customer’s engineers and other service professionals, who ultimately determine and are responsible for the engineering approach and design loads tofor any project.
Sales, MarketingDistribution Channels and CustomersMarkets
The Company seeks to expand its product and distribution coverage through several channels:
•Distributors. The Company regularly evaluates its distribution coverage and the service levels provided by its distributors, and from time to time implements changes. The Company evaluates distributor product mix and conducts promotions to encourage distributors to add the Company’s products that complement the mix of product offerings in their markets.
•Home Centers. The Company intends to increase penetration of the DIY markets by continuing to expand its product offerings through home centers. The Company’s sales force maintains ongoing contact with home centers to work with them in a broad range of areas, including inventory levels, retail display maintenance and marketing programsproduct knowledge training. The Company’s strategy is to ensure that the home center retail stores are implemented through its branch system.fully stocked with adequate supplies of the
Company’s products carried by those stores. The Company currently maintains brancheshas further developed extensive bar coding and merchandising aids and has devoted a portion of its research and development efforts to DIY products. The Company’s sales to home centers increased year-over-year in California, Texas, Ohio, Canada, England, France, Germany, Denmark, Switzerland, Poland, Portugal,2022, 2021 and 2020. The Netherlands, Ireland, Belgium, Sweden, Norway, Spain, Australia, New Zealand, and Chile. Each branch is served by its own sales force, warehouse and office facilities, while some branches have their own manufacturing facilities. Each branch is responsible for setting and executing sales and marketing strategies that are consistent both with the marketsCompany brought back Lowe's as a home center customer in the geographic area thatsecond quarter of 2020.
•Dealers. In some markets, the branch servesCompany sells its products directly to lumber dealers and cooperatives.
•Contractors. In some markets, the Company sells to a wide-range of end-customers mainly through direct sales.
•Wood Component Manufacturers. The company works directly with the goals of the Company. Branchwood component manufacturer customers. We continue to develop our software solutions and provide better technology solutions increasing our truss connector plate sales forces in North America are supported by marketing managers in the home office in Pleasanton, California. The home office also coordinates issues affecting customers that operate in multiple regions. The sales force maintains close working relationships with customers, develops new business, calls on architects, engineers and building officials and participates in a range of educational seminars.
The Company dedicates substantial resources to customer service. The Company produces numerous publications and point-of-sale marketing aids to serve specifiers, distributors, retailers and users for the various markets that it serves. These publications include general catalogs, as well as various specific catalogs, such as those for its fastener products. The catalogs and publications describeother Simpson Strong-Tie core products sales within the products and provide load and installation information.component industry.
•OEM Relationships. The Company also maintains several linked websites centered on www.strongtie.com, which include catalogs, productworks closely with manufacturers of engineered wood, composite laminated timber and technical information, code reports, installation videos, web
applicationsoriginal equipment manufacturers ("OEMs") for off-site construction to develop and other general information related toexpand the Company,application and sales of its product linesengineered wood connector, fastener, anchor, and promotional programs. We include our website addresses throughout this report for reference only. The information contained on our websites is not incorporated by reference into this report.
We market our products to the residential construction, light industrial and commercial construction, remodeling and DIY markets through distributors, dealers, OEMs and home centers and have developed long-standing relationships with numerous customers domestically in the United States and internationally. Overall, we believe that in the long-term we are not dependent on any single customer. However, The Home Depot, Inc. (“Home Depot”) accounted for approximately 11.1% percent of our total consolidated net sales in fiscal 2019. No other customer accounted for 10 percent or more of our total sales in fiscal year 2019.
While the loss of any substantial customer, including Home Depot, could have a material short-term impact on our business, we believe that our diverse distribution channels and customer base should reduce the long-term impact of any such loss.
Manufacturing Process
The Company designs and manufactures most of itstruss products. The Company has developed and uses automated manufacturing processes forrelationships with many of its products. The Company’s innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company’s development of specialized manufacturing processes has also permitted increased operating flexibility and enhanced product design innovation. As part of ongoing continuous improvement processesthe leaders in its factories, the Company’s major North American and European manufacturing facilities initiated Lean manufacturing practices to improve efficiency and customer service. The Company sources some products from third-party vendors, both domestically and internationally.these industries.
•International Sales. The Company has 13 major manufacturing locationsestablished a presence in Europe through acquisition of companies with existing customer bases and through servicing U.S.-based customers operating in Europe. The Company also distributes connector, anchor and epoxy products in Canada, Mexico, Chile, Australia and New Zealand.
The Company seeks to expand existing and identify new distributions channels in the markets we serve, and expand into new markets. Presently, we primarily serve three markets, which are also our operating segments, consisting of the North America, Europe and Asia/Pacific segments. The North America segment includes operations primarily in the U.S. and Canada. The Europe segment includes operations primarily in France, the United States, Canada, France,Kingdom, Germany, Denmark, Germany, Switzerland, Portugal, Poland, Portugal,The Netherlands, Belgium, Spain, Sweden, Norway, Italy and Romania. The Asia/Pacific segment includes operations primarily in Australia, New Zealand, China, EnglandTaiwan, and The Netherlands.
Quality Control. The Company has developed a quality system that manages defined procedures to ensure consistent product qualityVietnam. These segments are similar in several ways, including similarities in the products manufactured and also meetsdistributed, the requirementstypes of product evaluation reports such asmaterials used, the International Code Council Evaluation Services (ICC-ES)production processes, the distribution channels and the International Associationproduct applications.
New Products
In order to innovate, advance and diversify our product offerings, the Company commits substantial resources to new product development. The majority of PlumbersSST’s products have been developed through its internal research and Mechanical Officials Uniform Evaluation Services (IAPMO-UES). Since 1996, the Company’s quality system has been registered under ISO 9001, an internationally recognized set of quality-assurance standards.development program. The Company believes it is the only U.S. manufacturer with the capability to internally test multi-story wall systems, thus enabling full scale testing rather than analysis alone to prove system performance. The Company’s engineering, sales, product management, and marketing teams work together with architects, engineers, building inspectors, code officials, builders and customers in the new product development process.
The Company’s product research and development is based largely on products or solutions that ISO registration is a valuable tool for maintaining and promoting its high quality standards. Asare identified within the Company, establishesfeedback or requests from customers for new business locations through expansion or acquisitions, projects are established to integratespecialty products and in connection with the Company’s quality systemsstrategic initiatives to expand into new markets and/or develop new product lines. The Company’s strategy is to develop new products on a proprietary basis, to seek patents when appropriate and achieve ISO 9001 registration. In addition,to rely on trade secret protection for others or depending on availability and circumstances, the Company has six testing laboratories accreditedwill acquire products or solutions meeting our strategic initiatives.
Since at least 2006, the Company generally develops 15 to ISO standard 17025, an internationally accepted standard that35 new products each year. In 2022, through our research and development efforts, the Company, including ETANCO, developed over 40 new products expanding its product offerings by adding:
•new connectors and lateral products for wood framing applications;
•new connectors and fasteners for mass timber & offsite constructions;
•connections for structural steel construction;
•new connectors for cold formed steel applications;
•new fastener products and tools for wood construction;
•new mechanical and adhesive anchors for concrete and masonry construction; and
•new repair and strengthening systems for concrete, masonry and wood pile applications.
By executing on its research and development strategy, the Company intends to continue to expand its product offerings.
The Company provides requirementsexpertise and resources to offer software solutions and services to builders and lumber building material dealers, and supports efforts to further develop integrated software component solutions for the competence of testing and the further specialized accreditation for various Acceptance Criteria.building industry. The Company implements testing requirements through systematic control of its processes, enhancing the Company’s standard for quality products, whether produced by the Company or purchased from others.
Wood Construction Products Manufacturing. Most of the Company’s wood construction products are produced with a high level of automation. The Company has significant press capacity and has multiple dies for some of its high volume products to enable production of these products close to the customer and to provide back-up capacity. The balance of production is accomplished through a combination of manual, blanking and numerically controlled (NC) processes that include robotic welders, lasers and turret punches. This capability allows the Company to produce products with little redesign or set-up time, facilitating rapid turnaround for customers. The Company also has smaller specialty production facilities, which primarily use batch productionongoing development of truss software for the design, modeling and truss plate selection for its integrated component manufacturing customers.
Competition
Simpson is a category creator in the building products space. Our mission is to provide solutions that help people design and build safer, stronger structures. Our products improve the performance and integrity of the structures they are installed in, helping to make those structures more sustainable, and often helping to save lives in times of natural disasters and catastrophe.
We sell our products through multiple channels including contractor distributors, home centers and co-ops, lumber dealers and OEMs. Currently, 26 of the top 30 U.S. builders (based on number of housing starts per year) are engaged in our builder program. In terms of home centers, we were pleased to welcome back Lowe’s as a home center customer in 2020, where we had successfully completed the rollout of our product sets in over 1,700 Lowe’s stores.
We encounter a variety of competitors that vary by product line, end market and geographic area. The Company's competitors include many regional or specialized companies, as well as large U.S. and non-U.S. companies or divisions of large companies. While we do not believe that any single company competes with some automated lines.us across all of our product lines and distribution channels, certain companies compete in one or more product categories and/or distribution channels.
Concrete Construction Products Manufacturing. Mechanical anchor products are producedFor over 65 years, through SST, we have led the industry with a high levelmajority market share in the wood connectors products space and a growing presence in both the concrete and fastener markets in the U.S. and Europe. We’ve successfully increased our market share over the years through:
•designing and marketing end-to-end construction product systems;
•product availability with delivery in typically 24 hours to 48 hours;
•strong customer support and education for engineers, builders, contractors and building officials;
•extensive product testing capabilities at our state-of-the-art test lab;
•strong relationships with engineers that get our products specified on the blueprint and pulled through to the job site; and
•active involvement with code officials to improve building codes and construction practices.
We believe these value-added services are competitive differentiators for us and provide us with a competitive advantage, helping us to achieve industry-leading margins, strong brand recognition and a trusted reputation. We also provide engineering services in support of automation. Somesome of our products and increasingly offer design and other software that facilitates the specification, selection and use of our products. We are also investing in software technology, such as 3D visualization software tools, truss design and specification software and BIM software, in order to drive increased specification and use of our building material products with homeowners, truss component manufacturers, builders and distributors as well as to support our customers with additional solutions and services.
In an effort to help mitigate our exposure to the cyclicality of the U.S. housing market, as well as to respond to the needs of our customers, we’ve made investments over the years in adjacent products such as epoxyanchors, fasteners and adhesive anchors, are mixed in batchessoftware solutions and are then loadedexpanded operations into one-part or two-part dispensers, which mix the product on the job site because set-up times are usually very short. In addition, the Company purchases a number of products, powder actuated pins, tools and accessories and certain of its mechanical anchoring products, from various sources around the world. These purchased products undergo inspections on a sample basis for conformance with ordered specifications and tolerances before being distributed.
Regulation
Environmental Regulation. The Company itself is subject to environmental laws and regulations governing emissions into the air, discharges into water, and generation, handling, storage, transportation, treatment and disposal of waste materials. The Company is also subject to other federal and state laws and regulations regarding health and safety matters. The Company believes that it has obtained all material licenses and permits required by environmental, health and safety laws and regulations in connection
with the Company’s operations and that its policies and procedures comply in all material respects with existing environmental, health and safety laws and regulations. See “Item 1A — Risk Factors.”
Other. The Company’s product lines are subject to federal, state, county, municipal and other governmental and quasi-governmental regulations that affect product development, design, testing, analysis, load rating, application, marketing, sales, exportation, installation and use.
The Company considers product evaluation, recognition and listing to the building code as a significant tool that facilitates and expedites the use of the Company’s products by design professionals, building officials, inspectors, builders, home centers and contractors. Industry members are more likely to use building products that have the appropriate recognition and listing than products that lack this acceptance. The Company devotes considerable time and testing resources to obtaining and maintaining appropriate listings for its products. The Company actively participates in industry related professional associations and building code committees both to keep abreast of regulatory changes and to provide comments and expertise to these regulatory agencies.
A substantial portion of the Company’s products have been evaluated and are recognized by governmental and product evaluation agencies. Some of the entities that recognize the Company’s products include the ICC-ES, IAPMO-UES, the City of Los Angeles Research Reports (LARR’s), California Division of the State Architect Interpretation of Regulations (DSA IR’s), the State of Florida, Underwriters Laboratory (UL), Factory Mutual (FM) and state departments of transportation. In Europe the Company’s structural products meet European Technical Agreement (ETA) regulations.
Competition
The Company faces a variety of competition in all of the markets in which it participates. This competition ranges from subsidiaries of large national or international corporations to small regional manufacturers. While price is an important factor, the Company also competes on the basis of quality, breadth of product line, proprietary technology, technical support, availability of inventory, service (including custom design and manufacturing), field support and product innovation.through acquisitions. As a result, of differences in structural design and building practices and codes, the Company’s markets tend to differ by region. Within these regions, the Company competes with companiesis less dependent on U.S. housing starts, though they are still a leading indicator for a portion of varying size, several of which also distribute their products nationally or internationally. See “Item 1A — Risk Factors.”our business.
Resources
Raw Materials
The principal raw material used by the Company is steel, including stainless steel. The Company also uses materials such as carbon fiber, fiberglass, mortars, grouts, epoxies and acrylics in the manufacture of its chemical anchoring and reinforcing products. The Company purchases raw materials from a variety of commercial sources. The Company’s practice is to seek cost savings and enhanced quality by developing business relationships with and purchasing from a limited number of suppliers.
We purchase steel at market prices, which fluctuate as a result of supply and demand driven by economic conditions in the marketplace. The steel industry is highly cyclical and prices for the Company’s raw materials are influenced by numerous factors beyond the Company’s control.control including geopolitical and macroeconomic factors, supply constraints and supply chain disruptions, foreign currency fluctuations, import tariffs and duties, and unsettled international trade disputes. The steel market continues to be dynamic, with a high degree of uncertainty about future pricing trends. Given current conditions, including significant import tariffs and duties, and unsettled international trade disputes, the Company currently expects that the high degree of uncertainty regarding steel prices will continue.raw material costs may continue to increase. Numerous factors may cause steel prices to increaseremain high in the future. In addition to increases in steel prices, steel mills may add surcharges for zinc, energy and freight in response to increases in their costs. See “Item 1A — Risk Factors” and “Item 7 — Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” The Company historically has not attempted to hedge against changes in prices of steel or other raw materials. However, the Company may purchase and carry more steel or other raw materials in inventory to meet projected sales demand in a tight raw materials market.
Patents, Trademarks and Proprietary RightsIntellectual Property
Generally, the Company seeks statutory protection for strategic or financially important intellectual property developed in connection with its business. Certain intellectual property, where appropriate, is protected by contracts, licenses, confidentiality or other agreements. From time to time, the Company takes action to protect its businesses by asserting its intellectual property rights against third-party infringers.
The Company’s trademarks are registered or otherwise legally protected in the U.S. and many non-U.S. countries where products and services of the Company are sold. The Company may, from time to time, becomes involved in trademark licensing transactions. Most works of authorship produced for the Company, such as computer programs, catalogs and sales literature, carry appropriate notices indicating the Company's claim to copyright protection under U.S. law and appropriate international treaties.
The Company has United StatesU.S. and foreign patents, the majority of which cover products that the Company currently manufactures and markets. These patents, and applications for new patents, cover various design aspects of the Company’s products, as well as processes used in their manufacture. The Company continues to develop new potentially patentable products, product enhancements and product designs.designs as well as acquire patented product. Although the Company does not intend to apply for additional foreign patents covering existing products, the Company has developed an international patent program to protect new products that it may develop. In addition to seeking patent protection, the Company relies on unpatented proprietary technology to maintain its competitive position. See “Item 1A — Risk Factors.”
Acquisitions and Expansion into New Markets
Approximately 40% of our connector and truss plate sales are derived from selling wood engineered product solutions. In support of this effort, in 2017, we acquired CG Visions, Inc. (“CG Visions”),While the Company believes its intellectual property portfolio is important to its business operations and in 2018 completed our purchasethe aggregate constitutes a valuable asset, no single patent, trademark, license or other intellectual property, or group of such intellectual property, is critical to the success of the LotSpec software asset and entered into a strategic software partnership with Hyphen Solutions ("Hyphen").
business or any segment.
The combination of these software applications, services and partnerships provide solutions to Builders and suppliers to efficiently manage and determine material takeoffs and estimates. Solutions typically utilize BIM technology to model a structure based on open platforms customized for the customer’s needs. We believe this direction aligns well with our strategy to continue strengthening our value proposition by being the industry's trusted partner in construction solutions and building systems software.
In January 2017, the Company acquired Gbo Fastening Systems AB ("Gbo Fastening Systems"), a Sweden limited company, for $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.
As part of our current strategy, we will continue to develop new products and technology that allow us to expand our product offerings and enter into new markets. In the past, we have grown acquisitively and may, in the future, evaluate potential acquisitions and other transactions that align with our strategic objectives.
Seasonality and Cyclicality
The Company’s sales arehave been seasonal and cyclical.cyclical, 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 the Company's customers tend to purchase construction materials in the late spring and summer months for the construction season. Weather conditions, such as extended cold or wet weather, which affected and sometimes delayed installation of some of our products, would negatively affect our results of operations. Operating results vary from quarter to quarter and with economic cycles. The Company’s sales are also dependent, to a large degree, on the North American residential home construction industry. As noted above, the same efforts to mitigate the Company's reliance on housing starts have also softened the effects of seasons and adverse weather on the Company's quarterly results. See “Item 1A — Risk Factors” and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
EmployeesHuman Capital Resources
Successful execution of our strategy is largely dependent on attracting, developing and Labor Relationsretaining key employees and leaders. The skills, experience, industry knowledge, and contributions of our employees significantly benefit our operations and performance. We continuously evaluate, modify, and enhance our internal programs, processes and technologies to increase employee engagement, productivity, and efficiency and provide the opportunities, skills, and resources they need to be successful.
As of December 31, 2019,2022, our employees, including those employed by consolidated subsidiaries, by region were approximately:
| | | | | |
Asia Pacific | 544 | |
Europe | 1,579 | |
North America | 3,035 | |
| |
| 5,158 | |
Inclusion & Diversity
Our commitment to diversity and inclusion starts at the Company had 3,337 full-timetop with a highly skilled and diverse board. We strive to have a diverse culture of employees of whom 1,646 were hourly employeesrepresenting different genders, ages, ethnicities and 1,691 were salaried employees. The Company believes that its overall compensationabilities by implementing thoughtful, customized solutions and benefits for the most part meet or exceed industry averages and that its relations with its employees are good.programs.
As of December 31, 2019,2022, we had the following global gender demographics:
| | | | | | | | | | | |
| Women | Men | Not Disclosed |
All employees | 19% | 64% | 17% |
Individual Contributors | 19% | 63% | 18% |
Middle Management | 17% | 68% | 15% |
Senior Leadership | 27% | 73% | —% |
As of December 31, 2022, our U.S. employees had the following race and ethnicity demographics:
| | | | | | | | | | | | | | |
| All U.S. Employees | Individual Contributors | Middle Management | Senior Leadership |
American Indian or Alaska Native | 1 | % | 1 | % | — | % | — | % |
Asian | 10 | % | 10 | % | 8 | % | 8 | % |
Black or African American | 10 | % | 12 | % | 3 | % | 4 | % |
Hispanic or Latino | 18 | % | 19 | % | 9 | % | — | % |
Native Hawaiian or Other Pacific Islander | — | % | — | % | — | % | — | % |
Two or More Races | 2 | % | 2 | % | 2 | % | — | % |
White | 54 | % | 51 | % | 77 | % | 88 | % |
Not disclosed | 5 | % | 5 | % | 2 | % | — | % |
Talent Development
Talent development underpins our efforts to execute our strategy and continue to develop, manufacture and market innovative products and services. The opportunity to grow and develop skills and abilities, regardless of job role, division, or geographical location is critical to the success of the Company as a global organization and we continually invest in our employees’ career growth and provide employees access to a wide variety of learning and development resources, including a suite of online courses for developing both soft and technical skills. Our extraordinary leadership development programs provide employees with training, tools and experiences that are targeted to develop their full leadership potential.
Pay Equity
The Company’s compensation philosophy is to attract, retain, motivate, and differentiate employees through its rewards programs. We believe people should be paid for what they do and how they do it, regardless of their gender, race, or other personal characteristics and are committed to internal pay equity. Our Board of Directors, through its Compensation and Leadership Development Committee, monitors the relationship between the pay received by our executive officers, and Human Resources monitors the relationship of pay received by all other employees. We believe our compensation philosophy and strategy are strongly aligned with our corporate strategic priorities and our vision for stockholder value creation.
In addition to financial compensation we offer a health and wellness package to our employees, which is designed to provide a range of options that are customizable to suit their individual and/or family needs. In addition, in an effort to continue to attract, retain, and motivate our workforce, in the U.S., we offer remote and flexible work packages for positions which allow for remote work. We continue to engage our partners and benefits consultants to ensure our health and wellness package continues to meet the needs of our diverse workforce today and into the future.
Workplace Safety and Health
A vital part of our business is providing our workforce with a safe, healthy and sustainable working environment. Our Environmental, Health and Safety program focuses on implementing change through employee observation feedback channels to recognize risk and continuously improve our processes, as well as conducting regular risk reviews and self-audits at our
manufacturing facilities around the world to explore new opportunities to reduce potential employee exposure to occupational injuries.
Our continuous focus on workplace safety has enabled us to preserve business continuity without sacrificing our commitment to keeping our colleagues and workplace visitors safe since the COVID-19 outbreak.
Labor Relations
As of December 31, 2022, approximately 14%9% of the Company’s employees are represented by labor unions and are covered by collective bargaining agreements. We have two-facilitytwo 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 June 2023 and September 2023, respectively. Also, we have two union contracts in San Bernardino County, California that will expire in February 2025 and in June 2022 and February 2021, respectively.2026. Based on current information and subject to future events and circumstances, we believe 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. See “Item 1A — Risk Factors.”
Available Information
The Company's website address is www.simpsonmfg.com. We file or furnish annual, quarterly and current reports, proxy statements and other information with the Unites States Securities and Exchange Commission (the “SEC”).SEC. You may obtain a copy of any of these reports, free of charge, on the "Investor Relations""Financials - SEC Filling" page of our website, as soon as reasonably practicable after we file such material with, or furnish it to the SEC. Printed copies of any of these materials will also be provided free of charge on request.
Through the "Governance" page of our website, it is also possible to access copies of the charters for our Audit and Finance Committee, Compensation and Leadership Development Committee, Corporate Strategy and Acquisitions Committee and Nominating and ESG Committee, Sustainability Reports, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics. Each of these documents is made available free of charge. We intend to disclose on our website any amendment to, or waiver of, any provisions of our Code of Business Conduct and Ethics that apply to any of our directors, executive officers or senior financial officers that would otherwise be required to be disclosed under the rules of the SEC or the NYSE. The foregoing information regarding our website and its content is for your convenience only. The information contained in or connected to our website is not deemed to be incorporated by reference in this Annual Report or filed with the SEC.
In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, where you may obtain a copy of all information we file publicly with the SEC. The SEC maintains an Internet site that also contains these reports atwebsite address is www.sec.gov.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully review the following discussion of the risks that may affect our business, results of operations and financial condition, as well as our consolidated financial statements and notes thereto and the other information appearing in this report, for important information regarding risks that affect us. Current global economic events and conditions may amplify many of these risks. These risks are not the only risks that may affect us. Additional risks that we are not aware of or do not believe are material at the time of this filing, may also become important factors that adversely affect our business.
Global and Economic Risks
Global economic conditions, including inflation and supply chain disruptions, could continue to adversely affect our operations
General global economic downturns and macroeconomic trends, including heightened inflation, capital market volatility, interest rate and currency rate fluctuations, and economic slowdown or recession, may result in unfavorable conditions that could negatively affect demand for our products due to customers decreasing their inventories in the near-term or long-term, reduction in sales due to raw material shortages, reduction in research and development efforts, our inability to sufficiently hedge our currency and raw material costs, insolvency of suppliers and customers and exacerbate some of the other risks that affect our business, financial condition and results of operations. Both domestic and international markets experienced significant inflationary pressures in fiscal year 2022 and inflation rates in the U.S., as well as in other countries in which we
operate, are currently expected to continue at elevated levels for the near-term. We may be adversely affected during periods of high inflation, mainly from raw material and labor costs. Inflation could increase our cost of financing, raw materials and labor and could cause our financial results and profitability to decline. In addition, the Federal Reserve in the U.S. and other central banks in various countries have raised, and may again raise, interest rates in response to concerns about inflation, which, coupled with reduced government spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks. Interest rate increases or other government actions taken to reduce inflation could also result in recessionary pressures in many parts of the world.
The impact of public health crises, could have a significant effect on supply and/or demand for our products and services and have a negative impact on our business, financial condition and results of operations.
COVID-19 was identified in late 2019 and spread globally. Our operations expose us to risks associated with a pandemic, or outbreak of contagious diseases in the human population, including the COVID‑19 pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, disrupted the labor market, created significant volatility and disruption of financial markets and has resulted in governments around the world implementing stringent measures to help control the spread of the virus. These economic uncertainties could adversely affect our business, financial condition, demand for our products, services, and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products, services and raw materials.
Changes in government and industry regulatory standards pertaining to health and safety could have a material adverse effect on our business, financial condition or results of operations.
We are subject to risks associated with public health crises, such as pandemics and epidemics, including the COVID-19 pandemic. The nature and extent of future impacts are highly uncertain and unpredictable. While many countries around the world have removed or reduced the restrictions taken in response to the COVID-19 pandemic, the emergence of new variants of the SARS-CoV-2 virus may result in new governmental lockdowns, quarantine requirements or other restrictions to slow the spread of the virus. Any such measures could also impact the global economy more broadly, for example by leading to further economic slowdowns. The global outlook remains uncertain as case counts fluctuate and vaccination and booster rates remain relatively low in many parts of the world.
The scope and duration of any future public health crisis, including the potential emergence of new variants of the SARS-CoV-2 virus, the pace at which government restrictions, including, but not limited to, quarantines, “shelter in place” and “stay at home” order, travel restrictions and other similar measures, are imposed and lifted, the scope of additional actions taken to mitigate the spread of disease, global vaccination and booster rates, may significantly impact our production throughout the supply chain and constrict distribution channels. We are unable to predict the potential future impact that these factors will have on our business, financial condition or results of operations.
Risks Related to Our Business Risksand Our Industry
Business cycles and uncertainty regarding the housing market, economic conditions, political climate and other factors beyond our control could adversely affect demand for our products and services, and our costs of doing business, andany of which may harm our business, financial condition and results of operations.
A significant portionOur North America Segment accounted for approximately 80% of our total productnet sales is dependent onfor the fiscal year ended December 31, 2022. The primary drivers of our North America segment are residential remodeling, replacement activities and housing starts. Accordingly, our business, financial condition and results of operations dependsdepend significantly on the stability of the housing and residential construction and home improvement markets, which are affected by general economicconditions and other factors that are beyond our control. These conditions include, but are not limited to, the following:to:
•uncertainty about the housing and residential construction and home improvement markets;
changes in economic conditions or the political climate that adversely impact our customers’•consumer confidence or financial condition;and spending;
•unemployment and levels;
•foreclosure rates;
inventory loss;•interest rates;
interest rate fluctuations;
•raw material, logistics and energy costs;
•labor and healthcare costs;
the•capital availability, of financing, or lack thereof, to builders, developers and consumers;
the state of the credit markets, including mortgages•unfavorable weather conditions and home equity loans;
weather; natural disasters; and
•political or social instability, such as war, or acts of terrorism.terrorism or other international incidents.
These factors could adversely affect demand for our products and services, and our costs of doing business, and our business, financial condition and results of operations.operations may be harmed. Further, many of our customers in the construction industry are small and medium-sized businesses that are more likely to be adversely affected by economic downturns than larger, more established businesses. Uncertainty about current global economic conditions may cause these consumers to postpone or refrain from spending or may cause them to switch to lower-cost alternative products, which could reduce demand for our products and materially and adversely affect our financial condition and operating results.results of operations.
Additionally, declines in commercial and residential construction, such as housing starts and home improvement projects, which generally occur during economic downturns, have in the past significantly reduced, and in the future can be expected to reduce, the demand for our products and our stock price.
We may not be effective in achieving our stated strategic and operating objectives under our 2020 Plan.
We have been implementing a strategic plan,few large customers, the 2020 Plan, centeredloss of any one of which could negatively affect our sales and profits.
Our largest customers accounted for a significant portion of net sales for the years ended December 31, 2022, 2021, and 2020. A reduction in, or elimination of, our sales to any of these customers would at least temporarily, and possibly on focusing on our organic growth, rationalizing our cost structure to improve profitability, improving our working capital management primarily through thea longer term basis, cause a material reduction of inventory levels and other working capital items such as accounts payable and accounts receivable. While the strategy calls for increased emphasis on certain operational targets, such as growingin our net sales, reducingincome from operations and net income. Such a reduction in or elimination of our company-wide operating expenses as a percentagesales to any of netour largest customers would also increase our relative dependence on our remaining large customers.
In addition, our distributor customers and builders have increasingly consolidated over time, which has increased the material adverse effect risk of losing any one of them and may increase their bargaining power in negotiations with us. These trends could negatively affect our sales and decreasingprofitability.
Our growth may depend on our inventory levels, it moderates focus on other aspectsability to develop new products and services and penetrate new markets, which could reduce our profitability.
Our continued growth depends upon our ability to develop additional products, services and technologies that meet our customers’ expectations of our operationsbrand and quality and that usedallow us to enter into new markets. Expansion into new markets and the development of new products and services may involve considerable costs and may not generate sufficient revenue to be profitable or cover the costs of development. We might not be able to penetrate these product markets and any market penetration that occurs might not be timely or profitable. We may be unable to recoup part or all of the investments we make in attempting to develop new products and technologies and penetrate new markets. Any of these events could reduce our prior strategy, such as acquisitive growth (especiallyprofitability.
We face significant competition in the concrete space).
There can be no guarantee that the 2020 Plan will yield the results thatmarkets we currently anticipate or results that will exceed those that might have been obtained under our prior strategy if we fail to successfully execute on one or more prongs of the 2020 Plan, even if we successfully implement one or more other prongs.
The successful execution of the 2020 Plan depends on, among other things, our ability to:
•Maintain our top-line growthserve and achieve a net sales compound annual growth rate of approximately 8%
from fiscal 2016 through the end of fiscal 2020 by gaining market share in certain products lines;
•Carry out effective cost reduction measures in Europe and our concrete product line and by fiscal 2020,
reduce our company-wide operating expenses as a percent of net sales to be below or at 27%;
| |
◦ | Eliminate at least 25% to 30% of our product SKUs, implement Lean principles in our factories, and achieve an additional 30% reduction of our raw materials and finished goods inventory by fiscal 2020. |
Although we have made progress on meeting 2020 Plan targets, we may not be able to achieve allcompete successfully.
In order to compete effectively we must continue to develop enhancements to our existing products, new products and services on a timely basis that meet changing consumer preferences and successfully develop, manufacture and market these new products, product enhancements and services. There can be no assurance that we will be successful in developing and marketing new products, product enhancements, additional technologies and services. Many of our goalscompetitors are dedicating increasing resources to competing with us, especially as our products and services become more affected by technological advances and software innovations. Our inability to effectively compete could reduce the sales of our products and services, which could have a material adverse impact on our business, financial condition and results of operations.
Additionally, our ability to compete effectively depends, to a significant extent, on the 2020 Plan duespecification or approval of our products by architects, engineers, building inspectors, building code officials and customers and their acceptance of our premium brand. If a significant portion of those communities were to decide that the design, materials, manufacturing, testing or quality control of our products is inferior to that of any number of reasons. our competitors or the cost differences between our products and any competitors are not justifiable, our sales and profits could be materially reduced.
Increases in prices of raw materials and energy could negatively affect our sales and profits.
Steel is the principal raw material used in the manufacture of many of our products. The price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which we have no control including general economic conditions and currency exchange rates. Import tariffs and/or other mandates also could significantly increase the prices on raw materials that are critical to our business, such as steel. The cost of producing our products is also sensitive to the price of energy.
The selling prices of our products have not always increased in response to raw material, energy or other cost increases, and we are unable to determine to what extent, if any, we will be able to pass future cost increases through to our customers. Increases in prices of raw materials and energy, our inability or unwillingness to pass increased costs through to our customers could materially and adversely affect our financial condition or results of operations.
We revised several objectivesdepend on third parties for transportation services and the lack of availability of transportation and/or increases in cost could materially and adversely affect our business and operations.
Our business depends on the 2020 Plantransportation of both our products to our customers and distributors and the transportation of raw materials to us. We rely on third parties for transportation services of these items, which services are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations. Damage or disruption to our Quarterly Report on Form 10-Q forsupply chain, including transportation and distribution capabilities, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the quarter ended June 30, 2019. Going forward,likelihood or potential impact of disruptions, or to effectively manage such events if they occur could adversely affect our business or financial results.
If the required supply of transportation services is unavailable when needed, our manufacturing processes may be interrupted if we are not able to receive raw materials or we may choosebe unable to sell our products at full value, or at all. This could harm our reputation, negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, a material increase in transportation rates or fuel surcharges could have a material adverse effect on our profitability.
Expectations relating to environmental, social and governance considerations expose the Company to potential liabilities, increased costs, reputational harm and other adverse effects on the Company’s business.
Many governments, regulators, investors, employees, customers and other stakeholders are increasingly focused on environmental, social and governance considerations relating to businesses, including climate change and greenhouse gas emissions, human capital and diversity, equity and inclusion. We make statements about our environmental, social and governance goals and initiatives through information provided on our website, press statements and other communications, including through our Environmental, Social and Governance Report. Responding to these environmental, social and governance considerations and implementation of these goals and initiatives involves risks and uncertainties, including those described under “Forward-Looking Statements,” requires investments and are impacted by factors that may be outside our control. In addition, some stakeholders may disagree with our goals and initiatives and the focus of stakeholders may change and evolve over time. Stakeholders also may have very different views on where environmental, social and governance focus should be placed, including differing views of regulators in various jurisdictions in which we operate. Any failure, or perceived failure, by us to achieve our goals, further refine our strategicinitiatives, adhere to our public statements, comply with federal, state or international environmental, social and operating objectives, update our current strategic goals under the 2020 Plan,governance laws and pursue strategies outside the 2020 Plan that we believe represent great opportunities due to changesregulations, or meet evolving and varied stakeholder expectations and standards could result in legal and regulatory proceedings against us and materially adversely affect our business, reputation, results of operations, financial condition and stock price.
Risks Related to Seasonality and Weather Conditions
Seasonality and weather-related conditions and other factors beyondmay have a significant impact on our control.financial condition from period to period.
Our sales are seasonal and we have little control over the timing of customer purchases. If we miss seasonal forecasts or customers purchaseThe demand for our products in different quarters than we or analysts expect, our stock price could materially decline.
Our sales areand services is heavily correlated to both seasonal changes, with operating results varying from quarter to quarter. With some exceptions, ourquarter, and unpredictable weather patterns. Our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters, as customers tend to purchase construction materials in the late spring and summer months for the construction season. In addition, weather conditions, such as unseasonably warm, cold or wet weather, which affect, and sometimes delay or accelerate installation of some of our products, may significantly affect our results of operations. Sales that we anticipate in one quarter may occur in another quarter, affecting both quarters’ results and potentially our stock price.
In addition, we typically ship orders as we receive them and maintain inventory levels to allow us to operate with littleminimum backlog. The efficiency of our inventory system, and our ability to avoid backlogs and potential loss of customers, is closely tied to our ability to accurately predict seasonal and quarterly variances. Further, our planned expenditures are also based primarily on sales forecasts. When sales do not meet our expectations, our operating results will be reduced for the relevant quarters, as we will have already incurred expenses based on those expectations. This could result in a material decline in our stock price.
We operate inClimate change, drought, weather conditions and storm activity could have a competitive industry, and if we fail to anticipate and react appropriately to competitors, technological changes, changing industry trends and other competitive forces,material adverse impact on our sales and profit margins will decline.results of operations.
In order to effectively compete, we must be able to meet changing marketNorth America, weather conditions and develop enhancements to our existing products or new products on a timely basis in order to maintain our competitive advantage. Our continued growth depends upon our ability to develop additional products, services and technologies that meet our customers’ expectation of our brand and quality. There can be no assurance that we will be successful in developing and marketing new products, product enhancements and additional technologies, that we will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that our new products and product enhancements will adequately meet the requirements of the marketplace or will achieve market acceptance.
Further, one of the core elements of our strategy is to provide high quality products and a high level of customer services. Manysevere storms can have a significant impact on the markets for residential construction and home improvement. As a result, climate change that results in altered weather conditions or storm activity could have a significant impact on our business by:
•depressing or reversing economic development;
•reducing the demand for construction;
•increasing the cost and reducing the availability of wood products used in construction;
•increasing the cost and reducing the availability of raw materials and energy;
•increasing the cost and reducing the availability of insurance covering damage from natural disasters; and
•lead to new laws and regulations that increase our competitors are dedicating increasing resources to competing with us, especially asexpenses and reduce our sales.
Generally, any weather conditions that slow or limit residential or construction activity can adversely impact demand for our products and services.
Lower demand for our products or services become more affected by technological advancesas a result of this scenario could adversely impact our business, financial condition and software innovations. results of operations. Additionally, severely low temperatures may lead to significant and immediate spikes in costs of natural gas, electricity and other commodities that could negatively affect our results of operation.
Natural disasters or other catastrophes could decrease our manufacturing capacity or harm our business and financial condition.
Some of our competitorsmanufacturing facilities are located in geographic regions that have moreexperienced, or may experience producing softwarein the future, major natural disasters and other technology-driven solutions. As a result,catastrophes, such as fires, earthquakes, floods and hurricanes. Our disaster recovery plan may not be adequate or effective to respond in such events. Further, although we are dedicating increasing resourcesmaintain various form and levels of insurance to research and development in new and changing technologies in order to stay competitive and provide high quality and innovative products and services. These increased expenditures could reduce our operating results.
Additionally, our ability to compete effectively depends, to a significant extent, onprotect us against potential loss exposures, the specification or approvalscope of our products by architects, engineers, building inspectors, building code officialsavailable insurance coverage may not be adequate to protect us against all potential risks. For example, we do not carry earthquake insurance and customersother insurance that we carry is limited in the risks covered and their acceptancethe amount of coverage. Our insurance may not be adequate to cover all of our premium brand. Ifresulting costs, business interruption and lost profits when a significant segment of those communities were to decide that the design, materials, manufacturing, testingmajor natural disaster or quality controlcatastrophe occurs. A natural disaster rendering one or more of our products is inferior to that of any ofmanufacturing facilities totally or partially inoperable, whether or not covered by insurance, would materially and adversely affect our competitors or the cost differences between our productsbusiness and any competitors are not justifiable, our sales and profits would be materially reduced.financial condition.
Our future growth may depend on our ability to develop new products and penetrate new markets, which could reduce our profitability.
Our future success depends upon our continued investment in research and development and our ability to continue to develop new products that allow us to expand our product offerings and enter into new markets. Expansion into new markets and the development of new products may involve considerable costs and may not generate sufficient revenue to be profitable or cover the costs of development. We might not be able to penetrate these product markets and any market penetration that occurs might not be timely or profitable. We may be unable to recoup part or all of the significant investments we make in attempting to develop new products and penetrate new markets.
Product, Services and Sales Risks
Product liability claims and litigation could affect our business, reputation, financial condition, results of operations and cash flows.
TheIn the ordinary course of business, the products that we design and/or manufacture, and/or the services we provide, can leadhave led to product liability claims or other legal claims being filed against us. To the extent that plaintiffs are successful in showing that a defect in a product’s design, manufacture or warnings led to personal injury or property damage, or that our provision of services resulted in similar injury or damage, we may be subject to claims for damages. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages up to the insurance retention amount. The insurance that we carry is limited in the amount of coverage and may not be adequate to cover all of our resulting costs, business interruption and lost profits if we are subject to product liability claims. We might also face increases in premiums and reductions in the availability of insurance covering product liability, which could have a significant impact on our business. In addition to claims concerning individual products, as a manufacturer, we can be subject to costs, potential negative publicity and lawsuits related to product recalls, which could adversely impact our results of operations and damage our reputation.
Design defects, labeling defects, product formula defects, inaccurate chemical mixes, product recalls and/or product liability claims could harm our business, reputation, financial condition and results of operations.
WeMany of our products are integral to the structural soundness or safety of the structures in which they are used and we have on occasion found flaws and deficiencies in the design, manufacturing, assembling, labeling, product formulations, chemical mixes or testing of our products. We also have on occasion found flaws and deficiencies in raw materials and finished goods produced by others and used with or incorporated into our products. Some flaws and deficiencies have not been apparent until after the products were installed or used by customers.
Many of our products are integral to the structural soundness or safety of the structures in which they are used. If any flaws or deficiencies exist in our products and if such flaws or deficiencies are not discovered and corrected before our products are incorporated into structures, the structures could be unsafe or could suffer severe damage, such as collapse or fire, and personal injury or death could result. Errors in the installation of our products, even if the products are free of flaws and deficiencies, could also cause personal injury or death and unsafe structural conditions. To the extent that such damage or injury is not covered by our product liability
insurance and we are held to be liable, we could be required to correct such damage and to compensate persons who might have suffered injury or death, and our business, reputation, financial condition, results of operations and cash flows could be materially and adversely affected.
Even if a flaw or deficiency is discovered before any damage or injury occurs, we may need to refund customers and/or repair or recall products (to the extent possible), and we may be liable for any costs necessary to replace recalled products or retrofit or remedy the affected structures. Any such recall, retrofit or other remedy could entail substantial costs and adversely affect our reputation, sales and financial condition. We do not carry insurance against recall costs or the adverse business effect of a recall, and our product liability insurance may not cover retrofit or other remedy costs.
As a result of the nature of many of our products and their use in construction projects, claims (including product warranty claims and claims resulting from a natural disaster) may be made against us with regard to damage or destruction of structures incorporating our products whether or not our products failed. Any such claims, if asserted, could require us to expend material time and efforts defending the claim and may materially and adversely affect our business, reputation, financial condition and results of operations and cash flows.operations. Costs associated with resolving such claims (such as repair or replacement of the affected parts) could be material and may exceed any amounts reserved in our consolidated financial statements.
While we generally attempt to limit our contractual liability and our exposure to price or expense increases, we may have uncapped liabilities or significant exposure under some contracts, and could suffer material losses under such contracts.
We enter into many types of contracts with our customers, suppliers and other third parties, including in connection with our expansion into new markets and new product lines. Under some of these contracts, our overall liability may not be limited to a specified maximum amount or we may have significant potential exposure to price or expense increases. If we receive claims under these contracts or experience significant price increases or comparable expense increases, we may incur liabilities significantly in excess of the revenues associated with such contracts, which could have a material adverse effect on our results of operations.
Some of our technology offerings provide planning and design functions to customers, and we are involved both in product sales and engineering services. Any software errors or deficiencies or failures in our engineering services could have material adverse effects on our business, reputation, financial condition, results of operations and cash flows
.
Our planning/design software applications facilitate the creation by customers of complex construction and building designs. Our softwaredesigns and is extremely complex and is continually being modified and improved. As a result, it maycomplex. If our software applications contain defects or errors, and new versionsour engineers prepare, approve or seal drawings that contain defects or we are otherwise involved in any design or construction that contains flaws, regardless of whether we caused such flaws, we may introduce new defects and errors. While we have attempted to limit our potential liability for the failure of any planning/designs created with the use of our software applications, as a result of defects in our software, the structures could be unsafe or could suffer severe damage, such as collapse or fire, and personal injury or death could result. Errors in construction not related to the plans/designs created with the use of our software applications could also cause personal injury or death and unsafe structural conditions, even if our software functioned properly. To the extent that a structure designed by our software suffers any failure or deficiency, we could be required to correct deficiencies and may become involved in litigation, even if our software was not the cause of such deficiency.litigation. Further, if any damage or injury is not covered by our insurance and we are held to be liable, we could be required to correct such damage and to compensate persons who might have suffered injury, and our business, reputation, financial condition, results of operations and cash flows could be materially and adversely affected.
While we engage in testing and upgrades, there can be no assurance that, despite our testing and upgrades, errors will not be found in new and existing products resulting in loss of revenues or delay in market acceptance, diversion of development resources, damageRisks Related to our reputation, adverse litigation, or increased service and warranty costs, any of which would have a material adverse effect upon our business, operating results and financial condition.
We are also involved in providing engineering solutions to our clients. The risks associated with providing these services are materially different than the risks we historically faced when we only manufactured products. If our engineers prepare, approve or seal drawings that contain defects or otherwise are involved in any design or construction that contains flaws, regardless of whether our engineers caused such flaws, we may be held liable for professional negligence or other damages, which could involve material claims. Although we are insured for damages above a certain amount, we bear the costs and expenses associated with defending claims, including frivolous lawsuits, and are responsible for damages up to the insurance retention amount. In addition to claims concerning individual engineering solutions, as a service provider, we can be subject to costs, potential negative publicity and lawsuits related to construction design or engineering defects, which could adversely impact our results of operations and damage our reputation.
We have a few large customers, the loss of any one of which could negatively affect our sales and profits.
Our largest customers accounted for a significant portion of net sales for the years ended December 31, 2019, 2018, and 2017. Any reduction in, or termination of, our sales to these customers would at least temporarily, and possibly on a longer term basis, cause a material reduction in our net sales, income from operations and net income. Such a reduction in or elimination of our sales to any of our largest customers would increase our relative dependence on our remaining large customers.
In addition, our distributor customers and builders have increasingly consolidated over time, which has increased the material adverse effect of losing any one of them and may increase their bargaining power in negotiations with us. These trends could negatively affect our sales and profitability.
Increases in prices of raw materials and energy could negatively affect our sales and profits.
Steel is the principal raw material used in the manufacture of our products. Import tariffs and/or other mandates imposed by the current presidential administration could potentially lead to a trade war with other foreign governments, and could significantly increase the prices on raw materials that are critical to our business, such as steel. In addition, even in the absence of the current tariffs the price of steel has historically fluctuated on a cyclical basis and has often depended on a variety of factors over which we have no control. The cost of producing our products is also sensitive to the price of energy. The selling prices of our products have not always increased in response to raw material, energy or other cost increases, and we are unable to determine to what extent, if any, we will be able to pass future cost increases through our customers. Our inability to pass increased costs through to our customers could materially and adversely affect our financial condition or results of operations.
We depend on third parties for transportation services and the lack of availability of transportation and/or increases in cost could materially and adversely affect our business and operations.
Our business depends on the transportation of both finished goods to our customers and distributors and the transportation of raw materials to us. We rely on third parties for transportation services of these items, which services are occasionally in high demand (especially at the end of calendar quarters) and/or subject to price fluctuations.
If the required supply of transportation services is unavailable when needed, our manufacturing processes may be interrupted if we are not able to receive raw materials or we may be unable to sell our products at full value, or at all. This could harm our reputation,
negatively impact our customer relationships and have a material adverse effect on our financial condition and results of operations. In addition, a material increase in transportation rates or fuel surcharges could have a material adverse effect on our profitability.
Technological and Intellectual Property Risksand Information Technology
Our recent efforts to increase our technology offerings and integrate new software and application offerings may prove unsuccessful and may affect our future prospects.
OurIn North America the residential construction industry has experienced increased complexity in some home design and builders are more aggressively trying to reduce their costs. One of our responses has been to develop and market sophisticated software and applications to facilitate the specification, selection and marketinguse of our product systems. We have continued to commit substantial resources to our software development endeavors in recent years and expect that trend to continue in 2020.continue.
We have a limited operating history in the technology space and may not be able to create and further develop commercially successful software and applications. Even if we are able to create and develop initially successful ideas, the technology industry is subject to rapid changes. We may not be able to adapt quickly enough to keep up with changing demands, and our software may become obsolete.
While we see having a software interface with the construction industry as a potential growth area, we also face competition from other companies that are focused solely or primarily on the development of software and applications. These companies may have significantly greater expertise and resources to devote to software development, and we may be unable to compete with them in that space.
If we cannot protect our technology,intellectual property, we will not be able to compete effectively.
Our ability to compete effectively with other companies depends in part onWe monitor and protect against activities that might infringe, dilute, or otherwise harm our ability to maintain the proprietary nature of our technology, in part through patents, copyrights, trade secretstrademarks and other intellectual property protections. We mightand rely on the patent, trademark and other laws of the U.S. and other countries. However, we may be unable to prevent third parties from using our intellectual property without our authorization. To the extent we cannot protect our intellectual property, unauthorized use and misuse of our intellectual property could harm our competitive position and have a material adverse impact on our business, financial condition and results of operations. In addition, the laws of some non-U.S.
jurisdictions provide less protection for our proprietary rights than the laws of the U.S. and we therefore may not be able to protect or rely oneffectively enforce our patents and copyrights. Patents might not issue pursuant to pending patent applications. Our software copyright and other protections might not be adequate to protect our software and application code. Others might independently develop the same or similar technology, develop around the patented aspects of any of our products or proposed products, or otherwise obtain access to or circumvent our proprietary technology. We also rely on unpatented proprietary technology to maintain our competitive position. We might not be able to protect our trade secrets, our know-how or other proprietary information.intellectual property rights in these jurisdictions. If we are unable to maintain the proprietary naturecertain exclusive licenses, our brand recognition and sales could be adversely impacted. Current employees, contractors and suppliers have, and former employees, contractors and suppliers may have, access to trade secrets and confidential information regarding our operations which could be disclosed improperly and in breach of contract to our intellectual property, our sales and profits are likelycompetitors or otherwise used to be materially reduced.harm us.
In attempting to protect our intellectual property, we sometimes initiate lawsuits against competitors and othersThird parties may also claim that we believe have infringed or are infringing our intellectual property rights. In such an event, the defendant may assert counterclaims to complicate or delay the litigation or for other reasons. Litigation may be very costly and may result in adverse judgments that affect our sales and profits materially and adversely.
Claims that we infringe intellectual property rights of others may materially increase our expenses and reduce our profits.
Other parties have in the past and may in the future claim that our products or processes infringeupon their intellectual property rights. We may incur substantial costs and liabilities in investigating,If we are unable to successfully defend or license such alleged infringing intellectual property or if we are required to substitute similar technology from another source, our operations could be adversely affected. Even if we believe that such intellectual property claims are without merit, defending and resolving such claims whether or not they are meritorious, which may materially reduce our profitability and materially and adversely affect our business and financial condition. Litigation can be disruptivecostly, time consuming and require significant resources. Claims of intellectual property infringement also might require us to normal business operations and may result in adverse rulingsredesign affected products, pay costly damage awards, or decisions. If any such infringement claim is asserted againstface injunctions prohibiting us from manufacturing, importing, marketing or selling certain of our products. Even if we have agreements to indemnify us, indemnifying parties may be requiredunable or unwilling to obtain a license or cross-license, modify our existing technology or design a new non-infringing technology, any of which could be costly and time-consuming. A ruling against us in an infringement lawsuit could include an injunction barring our production or sale of any infringing product. A damages award against us could include an award of royalties or lost profits and, if the court finds willful infringement, treble damages and attorneys’ fees.do so.
We are subject to cyber security risks and may incur increasing costs in efforts to minimize those risks and to comply with regulatory standards.
We employ information technology systems and operate websites which allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees and others. We make significant efforts to secure our computer network to mitigate the risk of possible cyber-attacks, including, but not limited to, data breaches, and are continuously working to upgrade our existing information technology systems to ensure that we are protected, to the greatest extent possible, against cyber risks and security breaches. Despite these efforts security of our computer networks could be compromised which could impact operations and
confidential information could be misappropriated, which could lead to negative publicity, loss of sales and profits or cause us to incur significant costs to reimburse third- parties for damages, which could adversely impact profits.
Additionally, we mustWe strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection, to the extent possible. However, we continue to see increasingly complex, rigorous and rigorousmore stringent state and national regulatory standards enacted to protect businesses and personal data, including the General Data Protection Regulation (“GDPR”) and the California Consumer Privacy Act.Act of 2018 ("CCPA"). GDPR is a comprehensive European Union privacy and data protection reform, effective in 2018, which applies to companies that are organized in the European Union or otherwise provide services to consumers who reside in the European Union, and imposes strict standards regarding the sharing, storage, use, disclosure and protection of end user data and significant penalties (monetary and otherwise) for non-compliance. The California Consumer Privacy Act createsCCPA, which became effective in 2022 established a new privacy framework for covered businesses by, among other things, creating an expanded definition of personal information, establishing new data privacy rights effectivefor consumers in 2020.the State of California and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. More recently, on November 3, 2020, California enacted the California Privacy Rights Act (the “CPRA”). The CPRA, which went into effect on January 1, 2023, expands upon the protections provided by the CCPA, including new limitations on the sale or sharing of consumers' personal information, and the creation of a new state agency to enforce the CPRA’s protections. Any failure to comply with GDPR, the California Consumer Privacy Act,CCPA, the CPRA, or other state or regulatory standards, could subject the Company to legal and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental entities or others, damage to our reputation and credibility, and could have a material adverse effect on our business and results of operations.
We have experienced and may in the future experience delays, outages, cyber-based attacks or security breaches in relation to our information systems and computer networks, which have disrupted and may in the future disrupt our operations and may result in data corruption. As a result, our profitability, financial condition and reputation could be negatively affected. In addition, data privacy statements and laws could subject us to liability.
We depend on information technology networks and systems, including the Internet, to process, transmit and store electronic information. We depend on our information technology infrastructure for electronic communications among our locations around the world and between our personnel and our subsidiaries, customers and suppliers. We collect and retain large volumes of internal and customer, vendor and supplier data, including some personally identifiable information, for business purposes. We also maintain personally identifiable information about our employees. The integrity and protection of our customer, vendor, supplier, employee and other Company data is critical to our business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs or adversely affect our business operations.
Despite the security and maintenance measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third-parties with which we do business, we remain vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, malware, data corruption, delays, disruptions, programming and/or human errors or other similar events, such as those accomplished through fraud, trickery or other forms of deceiving our employees, contractors or other agents or representatives and those due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or similar events. Such incidents have occurred, continue to occur, and may occur in the future.
Security breaches of our infrastructure could create system disruptions, shutdowns or unauthorized disclosures of confidential information. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third parties with which we do business, we may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Such incidents may involve misappropriation, loss or other unauthorized disclosure of confidential data, materials or information, including those concerning our customers, employees or suppliers, whether by us or by the retailers, dealers, licensees and other third-party distributors with which we do business, disrupt our operations, result in losses, damage our reputation, and expose us to the risks of litigation and liability (including regulatory liability); and may have a material adverse effect on our business, results of operations and financial condition.
We publicly post our privacy policies and practices concerning our processing, use, and disclosure of personally identifiable information on our website.websites. If we fail to adhere to our privacy policy and other published statements or applicable laws concerning our processing, use, transmission and disclosure of protected information, or if our statements or practices are found to be deceptive or misrepresentative, we could face regulatory actions, fines and other liability.
We may experience delays or outages in our information technology system and computer networks.
We may be subject to information technology system failures and network disruptions. These may be caused by delays or disruptions due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or similar events or disruptions.
Despite our security measures, our systems could be vulnerable to disruption, and any such disruption could negatively affect our business, reputation, financial condition, results of operations and cash flows.
Some of our agreements for software and software-as-services products have limited terms, and we may be unable to renew such agreements and may lose access to such products.
We have various agreements with a number of third parties that provide software and software-as-service products to us. These agreements often require reoccurring payments for online access to the products and have limited terms. In the future, we will be required to renegotiate the terms of these agreements, and may be unable to renew such agreements on favorable terms. If any such agreement cannot be renewed or can only be renewed on terms that are materially worse for us, we may be unable to access the applicable software, and our business and operating results may be adversely affected.
Regulatory Risks
Failure to comply with industry regulations could result in reduced sales and increased costs.
We are subject to environmental laws and regulations governing emissions into the air, discharges into water, and generation, handling, storage, transportation, treatment and disposal of waste materials. We are also subject to other federal and state laws and regulations regarding health and safety matters.
Our manufacturing operations involve the use of solvents, chemicals, oils and other materials that are regarded as hazardous or toxic. We also use complex and heavy machinery and equipment that can pose severe safety hazards, especially if not properly and carefully used. Some of our products also incorporate materials that are hazardous or toxic in some forms, such as:
•zinc and lead used in some steel galvanizing processes;
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chemicals used in our acrylic and epoxy anchoring products, and our concrete repair, strengthening and
protecting products; and
•gun powder used in our powder-actuated tools, which is explosive.
We have in the past, and may in the future, need to take steps to remedy our failure to properly label, store, transport, use and manufacture such toxic and hazardous materials.
If we do not obtain all material licenses and permits required by environmental, health and safety laws and regulations, we may be subject to regulatory action by governmental authorities. If our policies and procedures are flawed, or our employees fail or neglect to follow our policies and procedures in all respects, we might incur liability. Relevant laws and regulations could change or new ones could be adopted that require us to incur substantial expense to comply.
Complying or failing to comply with conflict minerals regulations could materially and adversely affect our supply chain, our relationships with customers and suppliers and our financial results.
We are currently subject to conflict mineral disclosure regulations in the U.S. and may be affected by new regulations concerning conflict and similar minerals adopted by other jurisdictions where we operate. While we have been successful to date in adapting to such regulations, we have and will continue to incur added costs to comply with the disclosure requirements, including costs related to determining the source of such minerals used in our products. We may not be able to ascertain the origins of such minerals that we use and may not be able to satisfy requests from customers to certify that our products are free of conflict minerals. These requirements also could constrain the pool of suppliers from which we source such minerals. We may be unable to obtain conflict-free minerals at competitive prices. Such consequences will increase costs and may materially and adversely affect our manufacturing operations and profitability.
When we provide engineering services we are subject to various local, state and federal rules and regulations which can increase our potential liability.
As part of our product offerings, we may provide engineering and design-related services to our clients. Some of these services require us to stamp drawings or otherwise be involved in the engineering process. While we generally attempt to limit our liability through our internal processes and through our legal agreements with third parties to which we provide such services, under various local, state and federal rules and regulations these limitations may not be effective and we may be held liable for engineering failures. Any such liability could materially and adversely affect our profitability.
Capital Expenditures, Expansions, Acquisitions and Divestitures Risks
Our acquisition activities, if any, present unique risks for our business, and any acquisition could materially and adversely affect our business and operating results.
Although it is not as important to our strategy as it has been in the past, we may consider and evaluate acquisitions and we compete for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than we do. As a result, we may not be able to identify suitable acquisition candidates or strategic opportunities. Any acquisitions we undertake involve numerous risks, including, for example:
•inadequate access to information and/or due diligence of acquired businesses;
•diversion of management’s attention from other business concerns;
•overvaluation of acquired businesses;
•difficulties integrating the operations and products of acquired businesses, including expensive and time
consuming integration costs such as employee redeployment, relocation or severance, combining teams and processes in various functional areas, reorganization or closures of facilities, and relocation or disposition of excess equipment;
•inaccurate accounting or public reporting arising from integration of the financial statements and disclosures of
acquired businesses;
•undisclosed existing or potential liabilities of acquired businesses;
•slow acceptance or rejection of acquired businesses’ products by our customers;
•risks of entering markets in which we have little or no prior experience;
•litigation involving activities, properties or products of acquired businesses;
•increased cost of regulatory compliance and enforcement;
•consumer and other claims related to products of acquired businesses; and
•the potential loss of key employees of acquired businesses.
In addition, future acquisitions may involve issuance of additional equity securities that dilute the value of our existing equity securities, increase our debt, cause impairment related to goodwill and cause impairment of, and amortization expenses related to, other intangible assets, which could materially and adversely affect our profitability. Any acquisition could materially and adversely affect our business and operating results, and as a result, our business and operating results may differ from any guidance that we may provide.
Our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner.
Our capital expenditures are limited by our liquidity and capital resources and the amount we have available for capital spending is limited by the need to pay our other expenses and to maintain adequate cash reserves and borrowing capacity to meet unexpected demands that may arise. Productivity improvements through process re-engineering, design efficiency and manufacturing cost improvements may be required to offset potential increases in labor and raw material costs and competitive price pressures. If we are unable to make sufficient capital expenditures, or to maximize the efficiency of the capital expenditures we do make, our competitive position may be harmed and we may be unable to manufacture the products necessary to compete successfully in our targeted market segments.
Additional financing, if needed, to fund our working capital, growth or other business requirements may not be available on reasonable terms, or at all.
If the cash needed for working capital or to fund our growth or other business requirements increases to a level that exceeds the amount of cash that we generate from operations and have available through our current credit arrangements, we will need to seek additional financing. Additional or new borrowings may not be available on reasonable terms, or at all. Our ability to raise money by issuing and selling shares of our common or preferred stock depends on general market conditions and the demand for our stock. If we sell stock, our existing stockholders could experience substantial dilution. Our inability to secure additional financing could prevent the expansion of our business, internally and through acquisitions.
International Operations Risks
International operations and our financial results in those markets may be affected by legal, regulatory, political, currency exchange and other economic risks.
During 2019, revenue from sales outside of the United States was $214.8 million, representing approximately 19% of consolidated sales. In addition, a significant amount of our manufacturing and production operations are located outside the United States. As a result, our business is subject to risks associated with international operations. These risks include the burdens of complying with foreign laws and regulations, unexpected changes in tariffs, taxes or regulatory requirements, political unrest and corruption, local acceptance of our products, fluctuations in foreign exchange rates, currency controls, and cash repatriation restrictions. Regulatory changes could occur in the countries in which we sell, produce or source our products or significantly increase the cost of operating in or obtaining materials originating from certain countries. Restrictions imposed by such changes can have a particular impact on our business when, after we have moved our operations to a particular location, new unfavorable regulations are enacted in that area or favorable regulations currently in effect are changed.
Countries in which our products are manufactured or sold may from time to time impose additional new regulations, or modify existing regulations, including:
changes in duties, taxes, tariffs and other charges on imports;
requirements as to where products and/or inputs are manufactured or sourced;
creation of export licensing requirements, imposition of restrictions on export quantities or specifications of minimum export pricing/and or export prices or duties;
limitations on foreign owned business; or
government actions to cancel contracts, re-denominate the official currency, renounce or default on obligations, renegotiate terms unilaterally or expropriate assets.
In addition, political and economic changes or volatility, geopolitical regional conflicts, terrorist activity, political unrest, civil strife, acts of war, public corruption and other economic or political uncertainties could interrupt and negatively affect our business operations. All of these factors could result in increased costs or decreased revenues and could materially and adversely affect our product sales, financial condition and results of operations. Additionally, international construction standards, techniques and methods differ from those in the United States and as a result, we may need to redesign our products, or invent or design new products, to compete effectively and profitably in international markets. Inflation in emerging markets may also make our products more expensive there and increases the market and credit risks that we are exposed to.
We are also subject to the U.S. Foreign Corrupt Practices Act, in addition to the anti-corruption laws of the foreign countries in which we operate. Although we implement policies and procedures designed to promote compliance with these laws, our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, may take actions in violation of our policies. Any such violation could result in sanctions or other penalties and have an adverse effect on our business, reputation and operating results.
Failure to comply with export, import, and sanctions laws and regulations could affect us materially and adversely.
We are subject to a number of export, import and economic sanction regulations, including the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and U.S. sanction regulations administered by the U.S. Department of Treasury, Office of Foreign Assets (“OFAC”). Foreign governments where we have operations also implement export, import and sanction laws and regulations, some of which may be inconsistent or conflict with ITAR and EAR. Where we face such inconsistencies, it may be impossible for us to comply with all applicable regulations.
If we do not obtain all necessary import and export licenses required by applicable export and import regulations, including ITAR and EAR, or do business with sanctioned countries or individuals, we may be subject to fines, penalties and other regulatory action by governmental authorities, including, among other things, having our export or import privileges suspended. Even if our policies and procedures for exports, imports and sanction regulations comply, but our employees fail or neglect to follow them in all respects, we might incur similar liability.
Any changes in applicable export, import or sanction laws or regulations or any legal or regulatory violations could materially and adversely affect our business and financial condition.
Our manufacturing facilities in China complicate our supply and inventory management.
We maintain manufacturing capability in various parts of the world, including Jiangsu, China, in part to allow us to serve our customers with prompt delivery of needed products. In recent years, we have significantly expanded our manufacturing capabilities in China. Substantially all of our manufacturing output in China was and is currently intended for export to other parts of the world. If a widespread outbreak of an illness or other health issues, such as the Wuhan Coronavirus outbreak occurred in the area where our
Jiangsu, China manufacturing facility is located, it could substantially interfere with our general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our financial condition, results of operations, business or prospects. If this outbreak causes us to curtail our operations, we may need to seek alternative sources of supply for products for our customers, which may increase the costs to manufacture and deliver our products.
Customer service is a significant component in our efforts to compete with larger companies that have greater resources than we have. Because of the great distances between our manufacturing facilities in China and the markets to which our products will be shipped, any factors that adversely impact our ability to timely deliver products to our customers, including but not limited to government-imposed work restrictions and restrictions on travel, may delay delivery to our customers, which will put us at a competitive disadvantage. Our attempts to provide prompt delivery may necessitate that in China, we produce and keep on hand substantially more inventory of finished products than would otherwise be needed. Inventory fluctuations can materially and adversely affect our margins, cash flow and profits. Any tariffs, duties, taxes, penalties imposed by the United States on imports from China would negatively affect our inventory management and profits.
If significant tariffs or other restrictions are placed on our imports or any related counter-measures are taken by other countries, our costs of doing business, revenue and results of operations may be negatively impacted.
If significant tariffs or other restrictions are placed on Chinese or other imports or any related counter-measures are taken by China or other countries, our costs of doing business, revenue and results of operations may be materially harmed. If duties are imposed on our imports, we may be required to raise our prices, which may result in the loss of customers and harm our operating performance. Alternatively, we may seek to shift production outside of China, resulting in significant costs and disruption to our operations as we would need to pursue the time-consuming processes of recreating a new supply chain, identifying substitute components and establishing new manufacturing locations. .
We are subject to U.S. and international tax laws that could affect our financial results.
We generally conduct international operations through our wholly-owned subsidiaries. Our income tax liabilities in the different countries where we operate depend in part on internal settlement prices and administrative charges among us and our subsidiaries. These arrangements require us to make judgments with which tax authorities may disagree. Tax authorities may impose additional tariffs, duties, taxes, penalties and interest on us. Transactions that we have arranged in light of current tax rules could have material and adverse consequences if tax rules change, and changes in tax rules or imposition of any new or increased tariffs, duties and taxes could materially and adversely affect our sales, profits and financial condition.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations are issued or applied. If the U.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
Capital Structure Risks
Any issuance of preferred stock may dilute your investment and reduce funds available for dividends.
Our Board of Directors is authorized by our Certificate of Incorporation to determine the terms of one or more series of preferred stock and to authorize the issuance of shares of any such series on such terms as our Board of Directors may approve. Any such issuance could be used to impede an acquisition of our business that our Board of Directors does not approve, further dilute the equity investments of holders of our common stock and reduce funds available for the payment of dividends to holders of our common stock.
Delaware law and our corporate governance documents could deter takeover attempts that might otherwise be beneficial to our stockholders.
Provisions of Delaware law could make it more difficult for a third party to acquire us. Section 203 of the Delaware General Corporation Law may make the acquisition of the Company more difficult for potential acquirers by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us without the consent of our Board of Directors for at least three years from the date they first hold 15% or more of the voting stock.
Pursuant to the Company’s current corporate governance documents, our stockholders cannot call special meetings and cannot take action by written consent. In addition, a change in the composition of our Board of Directors that is not approved by the existing Board of Directors could trigger a default under our existing credit facilities.
These provisions may discourage, delay or make difficult a merger or acquisition of the Company, including a transaction that may offer a premium price for our common stock.
Employee Risks
We depend on executives and other key employees, the loss of whom could harm our business.
We depend, in part, on the efforts and skills of our executives and other key employees, including members of our sales force. Our executives and key employees are experienced and highly qualified. The loss of any of our executive officers or other key employees could harm the business and the Company’s ability to timely achieve its strategic initiatives. Our success also depends on our ability to identify, attract, hire and retain our key personnel. We face strong competition for such personnel and may not be able to attract or retain such personnel. In addition, when we experience periods with little or no profits, a decrease in compensation based on our profits may make it difficult to attract and retain highly qualified personnel. We may not be able to attract and retained key personnel or may incur significant costs in order to do so.
Our work force could become increasingly unionized in the future and our unionized or union-free work force could strike, which could adversely affect the stability of our production and reduce our profitability.
A significant number of our employees are represented by labor unions and covered by collective bargaining agreements that will expire between 2021 and 2023. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike similar to the strike which was initiated at our Stockton, California facility in the third quarter of 2019. Although we believe that our relations with our employees are generally good, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if the workers covered by one or more of the collective bargaining agreements engage in a strike, lockout, or other work stoppage, we could have a material adverse effect on production at one or more of our facilities, incur higher labor costs, and, depending upon the length of such dispute or work stoppage, on our business, results of operations, financial position and liquidity.
Other Risks
Natural disasters could decrease our manufacturing capacity.
Some of our current manufacturing facilities are located in geographic regions that have experienced major natural disasters, such as earthquakes, floods and hurricanes. Our disaster recovery plan may not be adequate or effective. We do not carry earthquake insurance. Other insurance that we carry is limited in the risks covered and the amount of coverage. Our insurance would not be adequate to cover all of our resulting costs, business interruption and lost profits when a major natural disaster occurs. A natural disaster rendering one or more of our manufacturing facilities totally or partially inoperable, whether or not covered by insurance, would materially and adversely affect our business and financial condition.
Climate change could materially and adversely affect our business.
We cannot predict the effects that climate change may have on our business. They might, for example:
•depress or reverse economic development,
•reduce the demand for construction,
•increasing the cost and reducing the availability of wood products used in construction,
•increase the cost and reduce the availability of raw materials and energy,
•increase the cost and reduce the availability of insurance covering damage from natural disasters, and
•lead to new laws and regulations that increase our expenses and reduce our sales.
Any of these consequences, and other consequences of climate change that we do not foresee, could materially and adversely affect our sales, profits and financial condition.
Significant judgment and certain estimates are required in determining our worldwide provision for income taxes. Future tax law changes may materially increase the Company’s prospective income tax expense.
We are subject to income taxation in the U.S. as well as numerous foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and, there are many transactions and calculations where the ultimate tax determination is uncertain.
Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law. The impact of the Tax Reform Act and any future Treasury rules, regulations or guidance thereunder on our business and our stockholders is uncertain and could be adverse and cause our future results of operations and financial condition to differ materially from our expectations, estimates and assumptions disclosed in this Annual Report on Form 10-K.
Impairment charges on goodwill or other intangible assets adversely affect our financial position and results of operations.
We are required to perform impairment tests on our goodwill, indefinite-lived intangible assets and definite-lived intangible assets annually or at any time when events occur that could affect the value of such assets. To determine whether a goodwill impairment has occurred, we compare fair value of each of our reporting units with its carrying value. In the past, these tests have led us to incur significant impairment charges. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulatory authorities, unanticipated competition, loss of key customers or changes in technology or markets, can require a charge for impairment that can materially and adversely affect our reported net income and our stockholders’ equity.
We rely on complex software systems and hosted applications to operate our business, and our business may be disrupted if we are unable to successfully/successfully and efficiently update these systems or convert to new systems.
We are increasingly dependent on technology systems to operate our business, reduce costs, and enhance customer service. These systems include complex software systems and hosted applications that are provided by third parties such as financial management and human capital management platforms from SAP America, Inc. and Workday, Inc. Software systems need to be updated on a regular basis with patches, bug fixes and other modifications. Hosted applications are subject to service availability and reliability of hosting environments. We also migrate from legacy systems to new systems from time to time.
Maintaining existing software systems, implementing upgrades and converting to new systems are costly and require a significant allocation of personnel and other resources. The implementation of these systems upgrades and conversions is a complex and time-consuming project involving substantial expenditures for implementation activities, consultants, system hardware and software, often requires transforming our current business and financial processes to conform to new systems, and therefore, may take longer, be more disruptive, and cost more than forecast and may not be successful. If the implementation is delayed or otherwise is not successful, it may hinder our business operations and negatively affect our financial condition and results of operations. There are many factors that may materially and adversely affect the schedule, cost, and execution of the implementation process, including, without limitation, problems during the design and testing phases of new systems; system delays and malfunctions; the deviation by suppliers and contractors from the required performance under their contracts with us; the diversion of management attention from our daily operations to the implementation project; reworks due to unanticipated changes in business processes; difficulty in training employees in the operation of new systems and maintaining internal control while converting from legacy systems to new systems; and integration with our existing systems. Some of such factors may not be reasonably anticipated or may be beyond our control.
Failure of our internal control over financial reporting or our accounting systems could harm our business and financial results.
Because of the inherent limitations of internal control, our internal control over financial reporting might not detect or prevent misstatements of our consolidated financial statementson a timely basis. We have used accountingexperienced and other financial management softwaremay in the future experience delays, outages, cyber-based attacks or security breaches in relation to our information systems and computer networks, which have disrupted and may in connection withthe future disrupt our operations. Defects in such systems or their implementation couldoperations and may result in errors in our consolidated financial statements. Our growth and entry into globally dispersed markets as well as periodic conversions from legacy software systems to new software systems puts significant additional pressure on our internal control. Failure to maintain an effective internal control could limit our ability to report our financial results accurately or to detect and prevent deficiencies timely, cause investors to lose confidence in the accuracy and completeness of our financial reports, and subject us to regulatory investigations and litigation.data corruption. As a result, our profitability, financial condition and reputation could be negatively affected. In addition, data privacy statements and laws could subject us to liability.
We depend on information technology networks and systems, including the Internet, to process, transmit and store electronic information. We depend on our information technology infrastructure for electronic communications among our locations around the world and between our personnel and our subsidiaries, customers and suppliers. We collect and retain large volumes of internal and customer, vendor and supplier data, including some personally identifiable information, for business purposes. We also maintain personally identifiable information about our employees. The integrity and protection of our customer, vendor, supplier, employee and other Company data is critical to our business. The regulatory environment governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs or adversely affect our business operations.
Despite the security and maintenance measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third-parties with which we do business, we remain vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, malware, data corruption, delays, disruptions, programming and/or human errors or other similar events, such as those accomplished through fraud, trickery or other forms of deceiving our employees, contractors or other agents or representatives and those due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunications failures, acts of terrorism or war, computer viruses, physical or electronic break-ins or similar events. Such incidents have occurred, continue to occur, and may occur in the future.
Security breaches of our infrastructure could create system disruptions, shutdowns or unauthorized disclosures of confidential information. Despite the security measures we have in place, our facilities and systems, and those of the retailers, dealers, licensees and other third parties with which we do business, we may be vulnerable to security breaches, cyber-attacks, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. Such incidents may involve misappropriation, loss or other unauthorized disclosure of confidential data, materials or information, including those concerning our customers, employees or suppliers, whether by us or by the retailers, dealers, licensees and other third-party distributors with which we do business, disrupt our operations, result in losses, damage our reputation, and expose us to the risks of litigation and liability (including regulatory liability); and may have a material adverse effect on our business, results of operations and financial condition.
Some of our agreements for software and software-as-services products have limited terms, and we may be unable to renew such agreements and may lose access to such products.
We have various agreements with a number of third parties that provide software and software-as-a-service products to us. These agreements often require reoccurring payments for online access to the products and have limited terms. In the future, we will be required to renegotiate the terms of these agreements, and may be unable to renew such agreements on favorable terms. If any such agreement cannot be renewed or can only be renewed on terms that are materially worse for us, we may be unable to access the applicable software, and our business and operating results may be adversely affected.
Regulatory Risks
Failure to comply with industry regulations could result in reduced sales and increased costs.
We are subject to environmental laws and regulations governing emissions into the market priceair, discharges into water, and generation, handling, storage, transportation, treatment and disposal of waste materials. We are also subject to other federal and state laws and regulations regarding health and safety matters.
Our manufacturing operations involve the use of solvents, chemicals, oils and other materials that are regarded as hazardous or toxic. We also use complex and heavy machinery and equipment that can pose severe safety hazards, especially if not properly and carefully used. Some of our common stockproducts also incorporate materials that are hazardous or toxic in some forms, such as:
•zinc and lead used in some steel galvanizing processes;
•chemicals used in our acrylic and epoxy anchoring products, our concrete repair, strengthening and protecting products; and
•gun powder used in our powder-actuated tools, which is explosive.
We have in the past, and may in the future, need to take steps to remedy our failure to properly label, store, transport, use and manufacture such toxic and hazardous materials.
If we do not obtain all material licenses and permits required by environmental, health and safety laws and regulations, or otherwise fail to comply with applicable laws and regulations, we may be subject to regulatory action by governmental authorities. If our policies and procedures are flawed, or our employees fail or neglect to follow our policies and procedures in all respects, we might incur liability. Relevant laws and regulations could change or new ones could be materially and adversely affected.adopted that require us to incur substantial expense to comply.
Changes in accounting standardsComplying or failing to comply with conflict minerals regulations could materially and adversely affect our supply chain, our relationships with customers and suppliers and our financial results.
The accounting rules applicableWe are currently subject to public companiesconflict mineral disclosure regulations in the U.S. and may be affected by new regulations concerning conflict and similar minerals adopted by other jurisdictions where we operate. While we have been successful to date in adapting to such regulations, we have and will continue to incur added costs to comply with the disclosure requirements, including costs related to determining the source of such minerals used in our products. We may not be able to ascertain the origins of such minerals that we use and may not be able to satisfy requests from customers to certify that our products are free of conflict minerals. These requirements also could constrain the pool of suppliers from which we source such minerals. We may be unable to obtain conflict-free minerals at competitive prices. Such consequences will increase costs and may materially and adversely affect our manufacturing operations and profitability.
When we provide engineering services we are subject to frequent revision. Future various local, state and federal rules and regulations which can increase our potential liability.
As part of our product offerings, we may provide engineering and design-related services to our clients. Some of these services require us to stamp drawings or otherwise be involved in the engineering process. While we generally attempt to limit our liability through our internal processes and through our legal agreements with third parties to which we provide such services, under various local, state and federal rules and regulations these limitations may not be effective and we may be held liable for engineering failures. Any such liability could materially and adversely affect our profitability.
Capital Expenditures, Expansions, Acquisitions and Divestitures Risks
The integration of ETANCO may not result in anticipated improvements in market position or the realization of anticipated operating synergies or may take longer to realize than expected.
Although we believe that our acquisition of ETANCO will improve our market position and realize positive operating results, including operating synergies, we cannot be assured that these improvements will be obtained or the timing of such improvements. The management and acquisition of businesses involves substantial risks, any of which may result in a material adverse effect on our business and results of operations, including:
•the uncertainty that an acquired business will achieve anticipated operating results;
•significant expenses to integrate;
•diversion of management’s attention from business operations to integration matters;
•departure of key personnel from the acquired business;
•effectively managing entrepreneurial spirit and decision-making;
•integration of different information systems;
•unanticipated costs and exposure to unforeseen liabilities; and
•impairment of assets.
Our acquisition activities from time to time present unique risks for our business, and any acquisition could materially and adversely affect our business and operating results.
We may consider and evaluate acquisitions and compete for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than we do. Any acquisitions we undertake involve numerous risks, including:
•unforeseen difficulties in integrating operations, products, technologies, services, accounting and employees;
•diversion of financial and management resources attention from existing operations;
•unforeseen difficulties integrating geographic regions where we do not have prior experience;
•the potential loss of key employees of acquired businesses;
•unforeseen liabilities associated with businesses acquired; and
•inability to generate sufficient revenue or realize sufficient cost savings to offset acquisition or investment costs.
As a result, if we fail to evaluate and execute acquisitions properly, we might not achieve the anticipated benefits of such acquisitions and we may incur costs in excess of what we anticipate. These risks would likely be greater in the case of larger acquisitions.
In addition, future acquisitions may involve issuance of additional equity securities that dilute the value of our existing equity securities, increase our debt, cause impairment related to goodwill and cause impairment of, and amortization expenses related to, other intangible assets, which could materially and adversely affect our profitability.
Our capital expenditures may not be adequate to maintain our competitive position and may not be implemented in a timely or cost-effective manner.
Our capital expenditures are limited by our liquidity and capital resources and the amount we have available for capital spending is limited by the need to pay our other expenses and to maintain adequate cash reserves and borrowing capacity to meet unexpected demands that may arise. Productivity improvements through process re-engineering, design efficiency and manufacturing cost improvements may be required to offset potential increases in labor and raw material costs and competitive price pressures. If we are unable to make sufficient capital expenditures, or to maximize the efficiency of the capital expenditures we do make, our competitive position may be harmed and we may be unable to manufacture the products necessary to compete successfully in our targeted market segments.
Additional financing, if needed, to fund our working capital, growth or other business requirements may not be available on reasonable terms, or at all.
If the cash needed for working capital or to fund our growth or other business requirements increases to a level that exceeds the amount of cash that we generate from operations and have available through our current credit arrangements, we will need to seek additional financing. Additional or new borrowings may not be available on reasonable terms, or at all. Our ability to raise money by issuing and selling shares of our common or preferred stock depends on general market conditions and the demand for our stock. If we sell stock, our existing stockholders could experience substantial dilution. Our inability to secure additional financing could prevent the expansion of our business, internally and through acquisitions.
Risks Related to Human Capital
We depend on executives and other key employees, the loss of whom could harm our business.
We depend, in part, on the efforts and skills of our executives and other key employees, including members of our sales force. Our executives and key employees are experienced and highly qualified. The loss of any of our executive officers or other key employees could harm the business and the Company’s ability to timely achieve its strategic initiatives. Our success also depends on our ability to identify, attract, hire and retain our key personnel. We face strong competition for such personnel and may not be able to attract or retain such personnel. In addition, when we experience periods with little or no profits, a decrease in compensation based on our profits may make it difficult to attract and retain highly qualified personnel. We may not be able to attract and retain key personnel or may incur significant costs to do so.
Our work force could become increasingly unionized in the future and our unionized or union-free work force could strike, which could adversely affect the stability of our production and reduce our profitability.
A significant number of our employees are represented by labor unions and covered by collective bargaining agreements that will expire between 2023 and 2026. Generally, collective bargaining agreements that expire may be terminated after notice by the union. After termination, the union may authorize a strike similar to the strike which was initiated at our Stockton facility in the third quarter of 2019. Although we believe that our relations with our employees are generally good, no assurance can be given that we will be able to successfully extend or renegotiate our collective bargaining agreements as they expire. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise, or if the workers covered by one or more of the collective bargaining agreements engage in a strike, lockout, or other work stoppage, we could have a material adverse effect on production at one or more of our facilities, incur higher labor costs, and, depending upon the length of such dispute or work stoppage, on our business, results of operations, financial position and liquidity.
Risks Related to Our International Operations
International operations and our financial results in those markets may be affected by legal, regulatory, political, currency exchange and other economic risks.
During 2022, revenue from sales outside of the U.S. was $500.4 million, representing approximately 23.6% of consolidated sales. In addition, a significant amount of our manufacturing and production operations are located outside the U.S. As a result, our business is subject to risks and uncertainties associated with international operations, including:
•difficulties and costs associated with complying with a wide variety of complex and changing laws, including securities laws, tax laws, employment and pension-related laws, competition laws, U.S. and foreign export and trading laws, and laws governing improper business practices, treaties and regulations;
•limitations on our ability to enforce legal rights and remedies;
•adverse domestic or international economic and political conditions, business interruption, war and civil disturbance;
•changes to tax, currency, or other laws or policies that may adversely impact our ability to repatriate cash from non-U.S. subsidiaries, make cross-border investments, or engage in accounting standards,other intercompany transactions;
•future regulatory guidance and interpretations of the tax legislation commonly known as the U.S. Tax Cuts and Jobs Act of 2017 (the "Tax Act"), as well as assumptions that the Company makes related to the Tax Act;
•changes to tariffs or other import or export restrictions, penalties or sanctions, including modification or elimination of international agreements covering trade or investment;
•costs and availability of shipping and transportation;
•nationalization or forced relocation of properties by foreign governments;
•currency exchange rate fluctuations between the U.S. dollar and foreign currencies; and
•uncertainty with respect to any potential changes to laws, regulations and policies that could exacerbate the risks described above.
All of these factors could result in increased costs or decreased revenues and could materially and adversely affect our sales, financial condition and results of operations. Additionally, international construction standards, techniques and methods differ from those in the U.S. and as a result, we may need to redesign our products, or design new products, to compete effectively and profitably in international markets.
In addition, we operate in many parts of the world that have experienced governmental corruption and we could be adversely affected by violations of the Foreign Corrupt Practices Act ("FCPA") and similar worldwide anti-corruption laws. The FCPA and similar anti-corruption laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. Although we mandate compliance with these anti-corruption laws, we cannot provide assurance that these measures will necessarily prevent violations of these laws by our employees or agents. If we were found to be liable for violations of anti-corruption laws, we could be liable for criminal or civil penalties or other sanctions, which could have a material adverse impact on our business, financial condition and results of operations.
Failure to comply with export, import, and sanctions laws and regulations could materially and adversely affect us.
We are subject to a number of export, import and economic sanction regulations, including the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and U.S. sanction regulations administered by the U.S. Department of Treasury, Office of Foreign Assets (“OFAC”). Foreign governments where we have operations also implement export, import and sanction laws and regulations, some of which may be inconsistent or conflict with ITAR and EAR. Where we face such inconsistencies, it may be impossible for us to comply with all applicable regulations.
If we do not obtain all necessary import and export licenses required by applicable export and import regulations, including ITAR and EAR, or do business with sanctioned countries or individuals, we may be subject to fines, penalties and other regulatory action by governmental authorities, including, among other things, having our export or import privileges suspended. Even if our policies and procedures for exports, imports and sanction regulations comply, but our employees fail or neglect to follow them in all respects, we might incur similar liability.
Any changes in applicable export, import or sanction laws or regulations or any legal or regulatory violations could materially and adversely affect our business and financial condition.
Our manufacturing facilities in China complicate our supply and inventory management.
We maintain manufacturing capability in various parts of the world, including Jiangsu, China, in part to allow us to serve our customers with prompt delivery of needed products. In recent years, we have significantly expanded our manufacturing capabilities in China. Substantially all of our manufacturing output in China was and is currently intended for export to other parts of the world. Any halting or disruption to our operations at or near our Jiangsu, China manufacturing facility could substantially interfere with our general commercial activity related to our supply chain and customer base, which could have a material adverse effect on our financial condition, results of operations, business or prospects. In such event, we may need to seek alternative sources of supply for products for our customers, which may increase the costs to manufacture and deliver our products.
If significant tariffs or other restrictions are placed on our imports or any related counter-measures are taken by other countries, our costs of doing business, revenue and results of operations may be negatively impacted.
If significant tariffs or other restrictions are placed on Chinese or other imports or any related countermeasures are taken by China or other countries, our costs of doing business, revenue and results of operations may be materially harmed. If duties are imposed on our imports, we may be required to raise our prices, which may result in the loss of customers and harm our operating performance. Alternatively, we may seek to shift production outside of China, resulting in diversion of management's attention, significant costs and disruption to our operations as we would need to pursue the time-consuming processes of establishing a new supply chain, identifying substitute components and establishing new manufacturing locations.
We are subject to U.S. and international tax laws that could affect our financial results.
We generally conduct international operations through our wholly-owned subsidiaries. Our income tax liabilities in the different countries where we operate depend in part on internal settlement prices and administrative charges among us and our subsidiaries. These arrangements require us to make judgments with which tax authorities may disagree. Tax authorities may impose additional tariffs, duties, taxes, penalties and interest on us. Transactions that we have arranged in light of current tax rules could have material and adverse consequences if tax rules change, and changes in tax rules or imposition of any new or increased tariffs, duties and taxes could materially and adversely affect our sales, profits and financial condition.
Tax laws are dynamic and subject to change as new laws are passed and new interpretations are issued or applied. If the wayU.S. or other foreign tax authorities change applicable tax laws, our overall taxes could increase, and our business, financial condition or results of operations may be adversely impacted.
Significant judgment and certain estimates are required in determining our worldwide provision for income taxes. Future tax law changes may materially increase the Company’s prospective income tax expense.
We are subject to income taxation in the U.S. as well as numerous foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and, there are many transactions and calculations where the ultimate tax determination is uncertain. Although we measure revenue, expensebelieve our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or balance sheet amounts,periods for which such determination is made.
We are a global company with significant revenues and earnings generated internationally, which exposes us to the impact of foreign currency fluctuations, as well as political and economic risks.
A significant portion of our net sales and earnings are generated internationally. Sales outside of the U.S. accounted for 23.6% of our consolidated net sales in 2022 and we anticipate that sales from international operations will continue to represent a significant portion of our net sales in the future. In addition, many of our manufacturing facilities and suppliers are located outside of the U.S. Our foreign operations subject us to certain commercial, political and financial risks. Our business in these
foreign markets is subject to general political conditions, including any political instability (such as those resulting from war, terrorism and insurrections) and general economic conditions in these markets, such as inflation, deflation, interest rate volatility and credit availability. Additionally, a number of factors, including U.S. relations with the governments of the foreign countries in which we operate, changes to international trade agreements and treaties, increases in trade protectionism, or the weakening or loss of certain intellectual property protection rights in some countries, may affect our business, financial condition and results of operations. Foreign regulatory requirements, including those related to the testing, authorization, and labeling of products and import or export licensing requirements, could affect the availability of our products in these markets.
In addition to risks associated with general political conditions, our international operations are subject to fluctuations in foreign currency exchange rates The functional currency for most of our foreign operations is the applicable local currency. As a result, fluctuations in foreign currency exchange rates affect the results of our operations and the value of our foreign assets and liabilities, which in turn may adversely affect results of operations and cash flows and the comparability of period-to-period results of operations. Foreign governmental policies and actions regarding currency valuation could result in materialactions by the United States and adverseother countries to offset the effects of such fluctuations. Given the unpredictability and volatility of foreign currency exchange rates, ongoing or unusual volatility may adversely impact our business and financial conditions.
General Risk Factors
Any issuance of preferred stock may dilute your investment and reduce funds available for dividends.
Our Board of Directors is authorized by our certificate of incorporation to determine the terms of one or more series of preferred stock and to authorize the issuance of shares of any such series on such terms as our Board of Directors may approve. Any such issuance could be used to impede an acquisition of our business that our Board of Directors does not approve, further dilute the equity investments of holders of our common stock and reduce funds available for the payment of dividends to holders of our common stock.
Provisions in our amended and restated certificate of incorporation and bylaws or Delaware law might discourage, delay or prevent a change in control of our company or changes in our management.
Our amended and restated certificate of incorporation and bylaws contain provisions that may discourage, delay or prevent a change in control of our Company or changes in our management that our stockholders may deem advantageous. For example, under our charter documents, our stockholders cannot call special meetings and cannot take action by written consent.
Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay or prevent a change in control of our company. Delaware law and our corporate governance documents could deter takeover attempts that might otherwise be beneficial to our reportedstockholders.
If we were required to write down all or part of our goodwill or other indefinite-lived intangible assets, our results of operations or financial condition.condition could be materially adversely affected in a particular period.
Declines in the Company’s business may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge. At least annually, or at other times when events occur that could affect the value of such assets, we perform impairment tests on our goodwill, indefinite-lived intangible assets and definite-lived intangible assets. To determine whether an impairment has occurred, we compare fair value of each of our reporting units with its carrying value. In the past, these tests have led us to incur significant impairment charges. Significant and unanticipated changes in circumstances, such as significant adverse changes in business climate, adverse actions by regulatory authorities, unanticipated competition, loss of key customers or changes in technology or markets, can require a charge for impairment that can negatively impact our results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters and principal executive offices in Pleasanton, California, and our principal United StatesU.S. manufacturing facilities in Stockton and San Bernardino County, California, McKinney, Texas, West Chicago, Illinois, Columbus, Ohio, and Gallatin,
Tennessee are located in owned premises. The principal manufacturing facilities located outside the United States,U.S., the majority of which we own, are in France, Italy, Romania, Denmark, Germany, Poland, Switzerland, Sweden, Portugal and China. We also own and lease smaller manufacturing facilities, warehouses, research and development facilities and sales offices in the United States,U.S., Canada, the United Kingdom, Europe, Asia, Australia, New Zealand, and Chile. As of February 25, 2020,28, 2023, the Company’s owned and leased facilities were as follows:
| | | | Number | | | | | | | | | Number | | | | | | |
| | Of | | Approximate Square Footage | | | Of | | Approximate Square Footage |
| | Properties | | Owned | | Leased | | Total | | | Properties | | Owned | | Leased | | Total |
| | | | (in thousands of square feet) | | | | | (in thousands of square feet) |
North America | | 28 |
| | 2,287 |
| | 683 |
| | 2,970 |
| North America | | 28 | | | 2,235 | | | 1,031 | | | 3,266 | |
Europe | | 18 |
| | 533 |
| | 342 |
| | 875 |
| Europe | | 36 | | | 1,749 | | | 725 | | | 2,474 | |
Asia/Pacific | | 10 |
| | 175 |
| | 41 |
| | 216 |
| Asia/Pacific | | 9 | | | 175 | | | 40 | | | 215 | |
Administrative and all other | | 1 |
| | 89 |
| | — |
| | 89 |
| Administrative and all other | | 1 | | | 89 | | | — | | | 89 | |
Total | | 57 |
| | 3,084 |
| | 1,066 |
| | 4,150 |
| Total | | 74 | | | 4,248 | | | 1,796 | | | 6,044 | |
We believe that our properties are maintained in good operating condition. Our manufacturing facilities are equipped with specialized equipment and use extensive automation. Our leased facilities typically have renewal options and have expiration dates through 2028.2032. We believe we will be able to extend leases on our various facilities as necessary, or as they expire. Currently, our manufacturing facilities are being operated with at least one full-time shift. Based on current information and subject to future events and circumstances, we anticipate that we may require additional facilities to accommodate possible future growth.
Item 3. Legal Proceedings.
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.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company’s common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “SSD.”
The following graph compares the cumulative total stockholder return on the Company’s common stock from December 31, 2014,2017, through December 31, 2019,2022, with the cumulative total return on the S&P 500 Index (a broad equity market index), the Dow Jones U.S. Building Materials & Fixtures Index (a published industry or line-of-business index) and a Peer Group Index over the same period (assuming the investment of $100 in the Company’s common stock and in each of the indices on December 31, 2014,2017, and reinvestment of all dividends into additional shares of the same class of equity securities at the frequency with which dividends are paid on such securities during the applicable fiscal year). To provide an additional comparison to our performance, we included an index consisting of companies in the building products or construction materials industries that are most comparable to us in terms of size and nature of operations, which group has also been referenced by us in connection with setting our executive compensation. The Peer Group Index below consisted of AAON, Inc., PGT Innovations,Advance Drainage Systems, Inc., Continental Building Products,Allegion Plc, American Woodmark Corp, Apogee Enterprises, Inc., TrexArmstrong World Industries, Inc., Atkore Inc., Axek Company Inc., InsteelEagle Materials, Inc., Gibraltar Industries, Inc., Masonite International Corp., Patrick Industries, Inc., PGT Innovations, Inc., Quanex Building Products Corp., American Woodmark Corp, Patrick Industries,Summit Materials, Inc., Apogee Enterprises,and Trex Company, Inc., U.S. Concrete, Inc., Gibraltar Industries, Inc., Eagle Materials Corp., Summit Material, LLC., Advanced Drainage System, Armstrong World Industries, Inc., Masonite International Corp., Advanced Drainage System, and Armstrong World Industries, Inc. We added a Peer Group Index to the stock performance graph below to ensure that it continues to reflect an appropriate comparison to our business operations.
Item 6. Selected Financial Data.[Reserved]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Historically our North America segment has generated more revenues from wood construction products compared to concrete construction products. During 2019, economic conditions and wet weather resulted in lower than projected single-family housing starts in the first half of the year, which decreased wood construction product sales volumes over the same time period. Wood construction product sales volume increased slightly compared to the year ended December 31, 2018, partly due to increased housing starts in the second half of 2019. Concrete construction product sales volume increased compared to 2018, which was primarily due to increased sales volumes. Our wood construction product netNorth America sales increased 5%24.8% for the year ended December 31, 20192022 compared to the year ended December 31, 2018, primarily due to both increased sales volumes and higher average sales prices.2021. Our concretewood construction product net sales increased 18%34.6% for the year ended December 31, 20192022 compared to the year ended December 31, 2018 also mostly2021 and our concrete construction product sales increased 33.9% over the same periods, for both, primarily due to product price increases throughout 2021 in an effort to offset rising raw material costs and partly due to increased volumes. These product price increases were also the primary contributor to gross profits and operating profits increasing over the same comparable periods. Recently announced decreases for pricing on certain of our wood products for 2023 will likely negatively affect 2023 net sales volumes andcompared to 2022. We currently anticipate compression of our operating margin for fiscal 2023 compared to 2022 due to the effects of these price decreases, higher average prices.
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.