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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  September 30, 2019
 
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                           to                           
 
Commission file number:  1-13429
 
Simpson Manufacturing Co., Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
94-3196943
(State or other jurisdiction of incorporation
 
(I.R.S. Employer
or organization)
 
Identification No.)
 
5956 W. Las Positas Blvd., Pleasanton, CA 94588
(Address of principal executive offices, including zip code) 
(925) 560-9000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
SSD
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No ý
Securities registered pursuant to Section 12(b) of the Act:
 
The number of shares of the registrant’s common stock outstanding as of October 31, 2019: 44,327,218.




Simpson Manufacturing Co., Inc. and Subsidiaries

TABLE OF CONTENTS

Part I - Financial Information

Item 1 - Financial Statements
 
 
 
Page No.
 
 
 
 
 
Part II - Other Information





PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
 
 
September 30,
 
December 31,
 
2019
 
2018
 
2018
ASSETS
 

 
 

 
 

Current assets
 

 
 

 
 

Cash and cash equivalents
$
194,061

 
$
166,961

 
$
160,180

Trade accounts receivable, net
180,898

 
192,981

 
146,052

Inventories
242,730

 
279,503

 
276,088

Assets held-for-sale

 
9,251

 

Other current assets
17,565

 
12,220

 
17,209

Total current assets
635,254

 
660,916

 
599,529

 
 
 
 
 
 
Property, plant and equipment, net
250,950

 
257,679

 
254,597

Operating lease right-of-use assets
34,463

 

 

Goodwill
131,191

 
136,459

 
130,250

Equity investment
2,485

 
2,498

 
2,487

Intangible assets, net
21,816

 
25,457

 
24,402

Other noncurrent assets
10,149

 
11,604

 
10,398

Total assets
$
1,086,308

 
$
1,094,613

 
$
1,021,663

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current liabilities
 

 
 

 
 

Trade accounts payable
$
40,861

 
$
42,734

 
$
34,361

Accrued liabilities and other current liabilities
125,006

 
124,717

 
117,219

      Total current liabilities
165,867

 
167,451

 
151,580

   Operating lease liabilities
27,256

 

 

  Deferred income tax and other long-term liabilities
16,238

 
13,743

 
14,569

Total liabilities
209,361

 
181,194

 
166,149

Commitments and contingencies (see Note 12)


 


 


Stockholders’ equity
 

 
 

 
 

Common stock, at par value
446

 
462

 
453

Additional paid-in capital
278,898

 
274,126

 
276,504

Retained Earnings
649,053

 
686,351

 
628,207

Treasury stock
(21,437
)
 
(24,491
)
 
(25,000
)
Accumulated other comprehensive loss
(30,013
)
 
(23,029
)
 
(24,650
)
Total stockholders’ equity
876,947

 
913,419

 
855,514

Total liabilities and stockholders’ equity
$
1,086,308

 
$
1,094,613

 
$
1,021,663



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


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings and Comprehensive Income
(In thousands except per-share amounts, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net sales
$
309,932

 
$
284,178

 
$
874,029

 
$
836,964

Cost of sales
172,288

 
150,282

 
491,952

 
454,881

Gross profit
137,644

 
133,896

 
382,077

 
382,083

Operating expenses:
 
 
 
 
 
 
 
Research and development and other engineering
11,972

 
10,441

 
35,287

 
32,840

Selling
27,672

 
26,879

 
84,471

 
83,653

General and administrative
37,047

 
37,358

 
117,941

 
113,565

Total operating expenses
76,691

 
74,678

 
237,699

 
230,058

Net gain on disposal of assets
(14
)
 
(460
)
 
(265
)
 
(1,769
)
Income from operations
60,967

 
59,678

 
144,643

 
153,794

Interest income (expense), net and other
(1,778
)
 
1,156

 
(2,394
)
 
284

Income before taxes
59,189

 
60,834

 
142,249

 
154,078

Provision for income taxes
15,503

 
16,473

 
36,324

 
40,202

Net income
$
43,686

 
$
44,361

 
$
105,925

 
$
113,876

Other comprehensive income
 
 
 
 
 
 
 
Translation adjustment
5,797

 
(2,950
)
 
5,825

 
(10,533
)
   Unamortized pension adjustments
(362
)
 

 
(462
)
 

        Comprehensive net income
$
49,121

 
$
41,411

 
$
111,288

 
$
103,343

 
 
 
 
 
 
 
 
Net income per common share:
 

 
 

 
 
 
 
Basic
$
0.98

 
$
0.96

 
$
2.37

 
$
2.46

Diluted
$
0.97

 
$
0.95

 
$
2.35

 
$
2.43

 
 
 
 
 
 
 
 
Number of shares outstanding
 

 
 

 
 
 
 
Basic
44,477

 
46,192

 
44,673

 
46,375

Diluted
44,814

 
46,622

 
44,995

 
46,770

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.23

 
$
0.22

 
$
0.68

 
$
0.65

 

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


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
At September 30, 2018 and 2019, and December 31, 2018
(In thousands except per-share amounts, unaudited)
 
 
 
Additional
 
Accumulated
Other
 
 
 
Common Stock
Paid-in
Retained
Comprehensive
Treasury
 
 
Shares
Par Value
Capital
Earnings
Income (Loss)
Stock
Total
Balance at January 1, 2018
46,745

$
473

$
260,157

$
676,644

$
(12,496
)
$
(40,000
)
$
884,778

Net income



113,876



113,876

Translation adjustment, net of tax




(10,533
)

(10,533
)
Options exercised
23


695




695

Stock-based compensation


7,939




7,939

Adoption of ASC 606, net of tax




791



791

Shares issued from release of Restricted Stock Units
177

2

(5,130
)



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

10,000



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

(13
)


(74,986
)

74,999


Cash dividends declared on common stock, $0.65 per share




(29,974
)


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


465




465

Balance, at September 30, 2018
45,968

462

274,126

686,351

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

Net income



12,757


 

12,757

Translation adjustment, net of tax




(2,378
)

(2,378
)
Pension adjustment, net of tax




376


376

Stock-based compensation


2,395




2,395

Adoption of new accounting standards



(381
)
381



Shares issued from release of Restricted Stock Units


(17
)



(17
)
Repurchase of common stock
(970
)




(61,050
)
(61,050
)
Retirement of common stock

(9
)

(60,532
)

60,541


Cash dividends declared on common stock, $0.22 per share



(9,988
)


(9,988
)
Balance, at December 31, 2018
44,998

453

276,504

628,207

(24,650
)
(25,000
)
855,514

Net income



105,925



105,925

Translation adjustment, net of tax




(5,825
)

(5,825
)
Pension adjustment, net of tax




462


462

Stock-based compensation


8,007




8,007

Shares issued from release of Restricted Stock Units
178

2

(5,905
)



(5,903
)
Repurchase of common stock
(854
)




(51,437
)
(51,437
)
Retirement of treasury stock

(9
)

(54,991
)

55,000


Cash dividends declared on common stock, $0.68 per share



(30,088
)


(30,088
)
Common stock issued at $54.31 per share for stock bonus
5


292




292

Balance at September 30, 2019
44,327

$
446

$
278,898

$
649,053

$
(30,013
)
$
(21,437
)
$
876,947



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


Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
 
Nine Months Ended
 
September 30,
 
2019
 
2018
Cash flows from operating activities
 

 
 

Net income
$
105,925

 
$
113,876

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

 
 

Gain on sale of assets and other
(263
)
 
(1,716
)
Depreciation and amortization
29,044

 
29,049

Noncash lease expense
5,278

 

Deferred income taxes and other long-term liabilities
2,262

 
2,061

Noncash compensation related to stock plans
8,699

 
8,773

Provision of doubtful accounts
435

 
361

Foreign exchange gain on capital repatriation

 
(1,604
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Trade accounts receivable
(36,385
)
 
(58,678
)
Inventories
31,163

 
(29,233
)
Trade accounts payable
8,130

 
14,254

Other current assets
(3,197
)
 
5,099

Accrued liabilities and other current liabilities
3,452

 
26,356

Other noncurrent assets and liabilities
(5,308
)
 
(629
)
Net cash provided by operating activities
149,235

 
107,969

Cash flows from investing activities
 

 
 

Capital expenditures
(24,495
)
 
(24,714
)
Asset acquisitions, net of cash acquired
(3,529
)
 

Proceeds from sale of property and equipment
2,498

 
3,539

Net cash used in investing activities
(25,526
)

(21,175
)
Cash flows from financing activities
 

 
 

Repurchase of common stock
(51,437
)
 
(49,490
)
Proceeds from line of credit
13,308

 

Repayments of line of credit and capital leases
(14,335
)
 
(702
)
Issuance of common stock for exercise of options

 
695

Dividends paid
(30,002
)
 
(29,738
)
Cash paid on behalf of employees for shares withheld
(5,905
)
 
(5,128
)
Net cash used in financing activities
(88,371
)
 
(84,363
)
Effect of exchange rate changes on cash and cash equivalents
(1,457
)
 
(3,984
)
Net increase (decrease) in cash and cash equivalents
33,881

 
(1,553
)
Cash and cash equivalents at beginning of period
160,180

 
168,514

Cash and cash equivalents at end of period
$
194,061

 
$
166,961

Noncash activity during the period
 

 
 

Noncash capital expenditures
$
194

 
$
212

Dividends declared but not paid
10,162

 
10,134

Issuance of Company’s common stock for compensation
292

 
465

 
 
 
 

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


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



1.    Basis of Presentation
 
 Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (collectively, the “Company”). Investments in 50% or less owned entities are accounted for using either cost or the equity method. All significant intercompany transactions have been eliminated.

Interim Reporting Period
 
The accompanying unaudited quarterly condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These interim statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “2018 Form 10-K”).
 
The unaudited quarterly condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial information set forth therein in accordance with GAAP. Certain prior period amounts in the condensed consolidated financial statements and the accompanying notes have been reclassified to conform to the current period’s presentation. The year-end condensed consolidated balance sheet data provided herein were derived from audited financial statements included in the 2018 Form 10-K, but do not include all disclosures required by GAAP. The Company’s quarterly results fluctuate. As a result, the Company believes the results of operations for this interim period presented are not indicative of the results to be expected for any future periods.

The Company changed its presentation of its Consolidated Statement of Earnings and Comprehensive Income to display non-operating activities, including foreign exchange gain (loss), and certain other income or expenses as a separate line item below income from operations. Foreign exchange gain (loss), and other was previously included in general and administrative expenses and in income from operations. The change did not affect income before taxes and net income as previously presented for the three months and nine months ended September 30, 2018.

Revenue Recognition
 
Generally, the Company's revenue contract with a customer exists when the goods are shipped, services are rendered; and its related invoice is generated. The duration of the contract does not extend beyond the promised goods or services already transferred. The transaction price of each distinct promised product or service specified in the invoice is based on its relative stated standalone selling price. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer at a point in time. The Company’s shipping terms provide the primary indicator of the transfer of control. The Company's general shipping terms are F.O.B. shipping point, where title and risk and rewards of ownership transfer at the point when the products leave the Company's warehouse. The Company recognizes revenue based on the consideration specified in the invoice with a customer, excluding any sales incentives, discounts, and amounts collected on behalf of third parties (i.e., governmental tax authorities). Based on historical experience with the customer, the customer's purchasing pattern and its significant experience selling products, the Company concluded that a significant reversal in the cumulative amount of revenue recognized will not occur when the uncertainty (if any) is resolved (that is, when the total amount of purchases is known). Refer to Note 2 for additional information.

Net Income Per Common Share
 
The Company calculates net income per common share based on the weighted-average number of the Company's common stock outstanding during the period. Potentially dilutive securities are included in the diluted per-share calculations using the treasury stock method for all periods when the effect is dilutive.
 

8


Accounting for Leases

The Company has operating and finance leases for certain facilities, equipment, autos and data centers. As an accounting policy for short-term leases, the Company elected to not recognize the right-of-use asset and liability, if, at the commencement date, the lease (1) has a term of 12 months or less and (2) does not include renewal and purchase options that the Company is reasonably certain to exercise. Monthly payments on short-term leases are recognized on the straight-line basis over the full lease term.

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

Fair Value of Financial Instruments
 
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. Assets and liabilities recorded at fair value are measured and classified under a three-tier fair valuation hierarchy based on the observability of the inputs available in the market: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
As of September 30, 2019 and 2018, the Company’s investments included in cash equivalents consisted of only money market funds, which are the Company’s primary financial instruments and carried at cost, approximating fair value, based on Level 1 inputs. The balance of the Company’s primary financial instruments as of September 30, 2019 and 2018 was $0.1 million and $7.6 million, respectively. The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s contingent consideration related to acquisitions is classified as Level 3 within the fair value hierarchy as it is based on unobserved inputs such as management estimates and entity-specific assumptions and is evaluated on an ongoing basis.

Income Taxes

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

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

Accounting Standards - To Be Adopted

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 amendments provide guidance on accounting for current expected credit losses on financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other commitments to extend credit held by a reporting entity at each reporting date. The required measurement methodology is based on expected loss model that includes historical experience, current conditions, and reasonable and supportable forecasts. ASU 2016-13 eliminates the probable incurred loss recognition in current GAAP. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is evaluating the impact of the adoption of this new accounting guidance on its consolidated financial statements.

9



Accounting Standards - Recently Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). The core requirement of ASU 2016-02 is to recognize assets and liabilities that arise from leases, including those leases classified as operating leases. The amendments require a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset ("ROU") representing its right to use the underlying asset for the lease term in the statement of financial position. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. On January 1, 2019, the Company adopted ASU 2016-02 using the optional transition method. The Company elected and applied a few practical transition expedients including, not reassessing whether any expired or existing contracts are or contain leases; not reassessing the lease classification for any expired or existing leases and not reassessing initial direct costs for any existing leases. The Company has operating and finance leases for certain facilities, equipment, autos and data centers. The adoption of ASU 2016-02 resulted in the recognition of ROU assets and lease liabilities of approximately $34.3 million and $35.1 million, respectively on January 1, 2019. The adoption had no material impact on the condensed consolidated statement of operations or cash flows. See Note 10.

All other issued and effective accounting standards during the third quarter of 2019 were determined to be not relevant or material to the Company.

2. Revenue from Contracts with Customers

Disaggregated revenue

The Company disaggregates net sales into the following major product groups as described in the footnote for segment information included in these interim financial statements under Note 13.

Wood Construction Products Revenue. Wood construction products represented 84% and 85% of total net sales in the nine months ended September 30, 2019 and 2018, respectively.

Concrete Construction Products Revenue. Concrete construction products represented 16% and 15% of total net sales in the nine months ended September 30, 2019 and 2018, respectively.

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

Other revenue. Service sales, representing after-market repair and maintenance, engineering activities and software license sales and services were less than 1.0% of net sales and recognized as the services are completed or the software products and services are delivered. Services may be sold separately or in bundled packages. The typical contract length for a service is generally less than one year. For bundled packages, the Company accounts for individual services separately when they are distinct. A distinct service is separately identifiable from other items in the bundled package if a customer can benefit from the service on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the services.

Reconciliation of contract balances

Contract assets are the rights to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional on something other than the passage of time. Contract liabilities are recorded for any services billed to customers and not yet recognizable if the contract period has commenced or for the amount collected from customers in advance of the contract period commencing. As of September 30, 2019, the Company had no contract assets or contract liabilities from contracts with customers.

3.    Net Income Per Share


10


The following table reconciles basic net income per share of the Company's common stock to diluted net income per share for the three and nine months ended September 30, 2019 and 2018, respectively:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
2019
 
2018
 
2019
 
2018
Net income available to common stockholders
$
43,686

 
$
44,361

 
$
105,925

 
$
113,876

Basic weighted-average shares outstanding
44,477

 
46,192

 
44,673

 
46,375

Dilutive effect of potential common stock equivalents — restricted stock units
337

 
430

 
322

 
395

Diluted weighted-average shares outstanding
44,814

 
46,622

 
44,995

 
46,770

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.98

 
$
0.96

 
$
2.37

 
$
2.46

Diluted
$
0.97

 
$
0.95

 
$
2.35

 
$
2.43



4.    Stockholders' Equity

Share Repurchases

During the third quarter of 2019, the Company repurchased 348,901 shares of the Company's common stock in the open market at an average price of $61.44 per share, for a total of $21.4 million. For the nine months ended September 30, 2019, the Company repurchased 854,349 shares of the Company's common stock in the open market at an average price of $60.21 per share, for a total of $51.4 million. As of September 30, 2019, approximately $48.6 million remains available for repurchase under the previously announced $100.0 million share repurchase authorization (which expires at the end of 2019).

5.    Stock-Based Compensation
 
The Company allocates stock-based compensation expense related to equity plans for employees and non-employee directors among the cost of sales, research and development and other engineering expense, selling expense, or general and administrative expense based on the job functions performed by the employees to whom the stock-based compensation is awarded. The Company recognized stock-based compensation expense related to its equity plans for employees of $2.1 million and $2.8 million for the three months ended September 30, 2019 and 2018, respectively, and $8.7 million and $8.8 million for the nine months ended September 30, 2019 and 2018, respectively. Stock-based compensation cost capitalized in inventory was not material for all periods presented.

During the nine months ended September 30, 2019, the Company granted 208,321 restricted stock units ("RSUs") to the Company's employees, including officers, and seven non-employee directors at an estimated weighted average fair value of $57.73 per share based on the closing price (adjusted for the present value of dividends) of the Company's common stock on the grant date. The RSUs granted to the Company's employees may be time-based, performance-based or time- and performance-based. Certain of the performance-based RSUs are granted to officers and key employees, where the number of performance-based awards to be issued is based on the achievement of certain Company performance criteria established in the RSU agreement over a cumulative three year period. These awards cliff vest after three years. In addition, these same officers and key employees also receive time-based RSUs, which vest pursuant to a three-year graded vesting schedule. Time- and performance based RSUs that are granted to the Company's employees excluding officers and certain key employees, vest ratably over the four year life of the award, and require the underlying shares of the Company's common stock to be subject to a performance-based adjustment during the first year of the award.

As of September 30, 2019, the Company's aggregate unamortized stock compensation expense was approximately $13.2 million, which is entirely attributable to unvested RSUs and is expected to be recognized in expense over a weighted-average period of 2.4 years.

6.    Trade Accounts Receivable, Net
 
Trade accounts receivable at the dates indicated consisted of the following: 

11


 
At September 30,
 
At December 31,
(in thousands)
2019
 
2018
 
2018
Trade accounts receivable
$
186,219

 
$
197,378

 
$
149,886

Allowance for doubtful accounts
(1,434
)
 
(1,312
)
 
(1,364
)
Allowance for sales discounts and returns
(3,887
)
 
(3,085
)
 
(2,470
)
 
$
180,898

 
$
192,981

 
$
146,052


 
7.    Inventories
 
Inventories at the dates indicated consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2019
 
2018
 
2018
Raw materials
$
91,088

 
$
114,075

 
$
98,058

In-process products
24,554

 
28,251

 
24,645

Finished products
127,088

 
137,177

 
153,385

 
$
242,730

 
$
279,503

 
$
276,088



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

 
At September 30,
 
At December 31,
(in thousands)
2019
 
2018
 
2018
Land
$
29,132

 
$
30,173

 
$
30,034

Buildings and site improvements
197,075

 
203,323

 
198,809

Leasehold improvements
4,909

 
4,694

 
4,826

Machinery, equipment, and software
345,861

 
323,091

 
330,076

 
576,977

 
561,281

 
563,745

Less accumulated depreciation and amortization
(339,920
)
 
(316,768
)
 
(318,388
)
 
237,057

 
244,513

 
245,357

Capital projects in progress
13,893

 
13,166

 
9,240

 
$
250,950

 
$
257,679

 
$
254,597



9.    Goodwill and Intangible Assets, Net
 
Goodwill at the dates indicated was as follows: 
 
At September 30,
 
At December 31,
(in thousands)
2019
 
2018
 
2018
North America
$
96,192

 
$
95,677

 
$
96,435

Europe
33,710

 
39,404

 
32,471

Asia/Pacific
1,289

 
1,378

 
1,344

Total
$
131,191

 
$
136,459

 
$
130,250


 

12


Intangible assets, net, at the dates indicated were as follows: 
 
At September 30, 2019
 
Gross
 
 
 
Net
 
Carrying
 
Accumulated
 
Carrying
(in thousands)
Amount
 
Amortization
 
Amount
North America
$
31,305

 
$
(18,461
)
 
$
12,844

Europe
23,351

 
(14,379
)
 
8,972

Total
$
54,656

 
$
(32,840
)
 
$
21,816

 
 
At September 30, 2018
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
30,715

 
$
(15,993
)
 
$
14,722

Europe
23,935

 
(13,200
)
 
10,735

Total
$
54,650

 
$
(29,193
)
 
$
25,457

 
 
At December 31, 2018
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
30,825

 
$
(16,002
)
 
$
14,823

Europe
22,353

 
(12,774
)
 
9,579

Total
$
53,178

 
$
(28,776
)
 
$
24,402


 
Intangible assets consist of definite-lived and indefinite-lived assets. Definite-lived intangible assets include customer relationships, patents, unpatented technology, and non-compete agreements. Amortization expense of definite-lived intangible assets was $1.4 million for each of the three-month periods ended September 30, 2019 and 2018, respectively, and was $4.1 million and $4.0 million for the nine months ended September 30, 2019 and 2018, respectively. The weighted-average amortization period for all amortizable intangibles on a combined basis is 5.2 years.

The only indefinite-lived intangible asset, consisting of a trade name, totaled $0.6 million at September 30, 2019.

At September 30, 2019, the estimated future amortization of definite-lived intangible assets was as follows: 
(in thousands)
 
 
 
Remaining three months of 2019
$
1,371

2020
5,460

2021
4,981

2022
3,118

2023
2,314

2024
1,349

Thereafter
2,607

 
$
21,200


 

13


The changes in the carrying amount of goodwill and intangible assets for the nine months ended September 30, 2019, were as follows: 
 
 
 
Intangible
(in thousands)
Goodwill
 
Assets
Balance at December 31, 2018
$
130,250

 
$
24,402

Acquisitions
1,815

 
1,213

Reclassifications
(370
)
 
481

Amortization

 
(4,065
)
Foreign exchange
(504
)
 
(215
)
Balance at September 30, 2019
$
131,191

 
$
21,816



10.     Leases

On January 1, 2019, the Company adopted ASU 2016-02 using the optional transition method. The Company has operating leases for certain facilities, equipment and autos. The existing operating leases expire at various dates through 2023, some of which include options to extend the leases for up to 5 years. The Company measured the lease liability at the present value of the lease payments to be made over the lease term. The lease payments are discounted using the Company's incremental borrowing rate. The Company measured the ROU assets at the amount at which the lease liability is recognized plus initial direct costs incurred or prepayment amounts. The ROU assets are amortized on a straight-line basis over the lease term.

The following table provides a summary of leases included on the condensed consolidated balance sheets, condensed consolidated statements of earnings, and condensed consolidated statements of cash flows as of September 30, 2019:
 
Condensed Consolidated Balance Sheets Line Item
At September 30, 2019
(in thousands)
 
 
Operating leases
 
 
Assets
 
 
Operating leases
Operating lease right-of-use assets
$
34,463

Liabilities
 
 
Operating - current
Accrued expenses and other current liabilities
$
7,037

Operating - noncurrent
Operating lease liabilities
27,256

Total operating lease liabilities
 
$
34,293

 
 
 
Finance leases
 
 
Assets
 
 
Property and equipment, gross
Property, plant and equipment, net
$
3,569

Accumulated amortization
Property, plant and equipment, net
(2,578
)
Property and equipment, net
Property, plant and equipment, net
$
991

Liabilities
 
 
Other current liabilities
Accrued expenses and other current liabilities
$
1,116

Other long-term liabilities
Deferred income tax and other long-term liabilities
764

   Total finance lease liabilities
 
$
1,880



The components of lease expense were as follows:

14


 
Condensed Consolidated Statements of Operations Line Item
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
 
2019
2019
Operating lease cost
General administrative expenses and
cost of sales
$
2,379

$
6,784

 
 
 
 
Finance lease cost:
 
 
 
   Amortization of right-of-use assets
General administrative expenses
$
218

$
654

   Interest on lease liabilities
Interest expense, net
16

54

Total finance lease
 
$
234

$
708



Other information

Supplemental cash flow information related to leases as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
   Operating cash flows for operating leases
$
2,324

 
$
6,604

   Finance cash flows for finance leases
290

 
870

 
 
 
 
Operating right-of-use assets obtained in exchange for lease obligations during the current period
1,616

 
3,704



The following is a schedule, by years, of maturities of lease liabilities as of September 30, 2019:
(in thousands)
Operating Leases
 
Finance Leases
Remaining three months of 2019
$
2,355

 
$
290

2020
8,928

 
1,160

2021
7,441

 
484

2022
5,307

 

2023
3,590

 

Thereafter
13,551

 

Total lease payments
41,172

 
1,934

Less: Present value discount
(6,879
)
 
(54
)
     Total lease liabilities
$
34,293

 
$
1,880



The following table summarizes the Company's lease terms and discount rates as of September 30, 2019:

15


Weighted-average remaining lease terms (in years):
 
Operating leases
6.72

Finance leases
1.68

Weighted-average discount rate:
 
Operating leases
5.37
%
Finance leases
3.23
%


11.    Debt
 
Credit Facilities

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at September 30, 2019, was $303.2 million including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles. As of September 30, 2019, the Company had an outstanding balance of $0.5 million under these credit lines, and no amounts outstanding as of September 30, 2018, and December 31, 2018, respectively. The Company was in compliance with its financial covenants at September 30, 2019.

12.    Commitments and Contingencies

Litigation

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business, including those arising from or related to contractual matters, commercial disputes, intellectual property, personal injury, environmental matters, product performance or warranties, product liability, insurance coverage and personnel, labor and employment disputes.

Litigation can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are often uncertain and difficult to predict, and the Company's view of these matters may change in the future as the litigation and events related thereto unfold. The Company expenses legal fees as incurred. The Company records a provision for contingent losses when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. An unfavorable outcome to any legal matter, if material, could have an adverse effect on the Company's operations or its financial position, liquidity or results of operations. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits, including costs to settle claims and lawsuits, based on experience involving similar matters and specific facts known. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s consolidated financial position. However, substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, the Company could from time to time incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.

The Company previously recorded a charge to administrative expense of approximately $2.9 million, net of tax for a certain pending legal proceeding during the period ended December 31, 2018. The Company has recorded an additional charge of approximately $100,000 in the period ended September 30, 2019, resulting in the total charge recorded for such matter being approximately $3.0 million, net of tax.

Gentry Homes, Ltd. v. Simpson Strong-Tie Company, Inc., et al., Case No. 17-cv-00566, was filed in federal district court in Hawaii against Simpson Strong-Tie Company, Inc. and Simpson Manufacturing, Inc. on November 20, 2017.  The Gentry case is a product of a previous state court class action, Nishimura v. Gentry Homes, Ltd., et al. which is now closed.  The Nishimura case concerned alleged corrosion of the Company’s galvanized strap-tie holdowns and mudsill anchor products used in a residential project in Honolulu, Hawaii, Ewa by Gentry.  In the Nishimura case, the plaintiff homeowners and the developer, Gentry, arbitrated their dispute and agreed on a settlement in the amount of $90 million, with $54 million going to repair costs and $36 million going to attorney's fees.  In the Gentry case, Gentry alleges breach of warranty and negligent misrepresentation related to the Company’s strap-tie holdowns and mudsill anchor products. Gentry is demanding general, special, and consequential damages from the Company in an amount to be proven at trial.  Gentry also seeks pre-judgment and post-judgment interest, attorneys’ fees and costs, and other relief. 


16


Stephen Kaneshiro, et al. v. Stanford Carr Development, LLC et al./Stanford Carr Development, LLC, et al. v. Simpson Strong-Tie Company, Inc., Civil No. 18-1-1472-09 VLC, is a putative class action lawsuit filed in the Hawaii First Circuit.  The Company was added as a third-party defendant on December 28, 2018.  The homeowner plaintiffs allege that all homes built by Stanford Carr Development and its subsidiaries (collectively "Stanford Carr") in the State of Hawaii have strap-tie holdowns and mudsill anchors that are suffering premature corrosion. Stanford Carr has asserted indemnity and contribution claims against the Company. 

Potential Third-Party Claims

Charles Vitale, et al. v. D.R. Horton, Inc. and D.R. Horton-Schuler Homes, LLC, Civil No. 15-1-1347-07, a putative class action lawsuit, was filed in the Hawaii First Circuit on July 13, 2015, in which homeowner plaintiffs allege that all homes built by D.R Horton/D.R. Horton-Schuler Homes (collectively "Horton Homes") in the State of Hawaii have strap-tie holdowns that are suffering premature corrosion. The court has denied a motion for statewide class certification.  The Company is not currently a party to the Vitale lawsuit. If claims are asserted against the Company in the Vitale case, it will vigorously defend any such claims, whether brought by the plaintiff homeowners, or third party claims by Horton Homes. Based on facts currently known to the Company and subject to future events and circumstances, the Company believes that all or part of any claims that any party might seek to allege against it related to the Vitale case may be covered by its insurance policies.

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

The following tables illustrate certain measurements used by management to assess the performance of its reportable segments as of or for the following periods: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Net Sales
 

 
 

 
 

 
 

North America
$
265,505

 
$
239,898

 
$
746,009

 
$
705,932

Europe
42,219

 
42,020

 
121,647

 
124,096

Asia/Pacific
2,208

 
2,260

 
6,373

 
6,936

Total
$
309,932

 
$
284,178

 
$
874,029

 
$
836,964

Sales to Other Segments*
 

 
 

 
 

 
 

North America
$
520

 
$
683

 
$
1,327

 
$
1,889

Europe
479

 
140

 
1,568

 
740

Asia/Pacific
7,600

 
7,586

 
21,272

 
20,907

Total
$
8,599

 
$
8,409

 
$
24,167

 
$
23,536

Income (Loss) from Operations**
 

 
 

 
 

 
 

North America
$
56,844

 
$
56,280

 
$
139,489

 
$
152,724

Europe
5,386

 
3,953

 
9,645

 
6,053

Asia/Pacific
(481
)
 
(86
)
 
(837
)
 
(1,749
)
Administrative and all other
(782
)
 
(469
)
 
(3,654
)
 
(3,234
)
Total
$
60,967

 
$
59,678

 
$
144,643

 
$
153,794

            
*    Sales to other segments are eliminated in consolidation.
**     Beginning in the first quarter of 2019, income from inter-segment sales, previously included in income from operations for segment reporting, is now presented below income from operations. Income from inter-segment sales is eliminated in consolidation but was an expense in the North America and Europe segment and income in the Asia/Pacific segment.

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At
 
At September 30,
 
December 31,
(in thousands)
2019
 
2018
 
2018
Total Assets
 

 
 

 
 

North America
$
1,246,617

 
$
1,080,910

 
$
1,119,012

Europe
169,183

 
208,888

 
157,437

Asia/Pacific
28,009

 
28,448

 
25,644

Administrative and all other
(357,501
)
 
(223,633
)
 
(280,430
)
Total
$
1,086,308

 
$
1,094,613

 
$
1,021,663


 
Cash collected by the Company’s United States subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of “Administrative and all other.” Cash and cash equivalent balances in the “Administrative and all other” segment were $135.9 million, $87.5 million, and $113.6 million, as of September 30, 2019 and 2018, and December 31, 2018, respectively. Total "Administrative and all other" assets are net of inter-segment due to and from accounts eliminated in consolidation.

While the Company manages its business by geographic segment, the following table illustrates the distribution of the Company’s net sales by product group as additional information for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Wood construction products
$
255,869

 
$
238,230

 
$
731,898

 
$
710,880

Concrete construction products
53,947

 
45,832

 
141,883

 
125,847

Other
116

 
116

 
248

 
237

Total
$
309,932

 
$
284,178

 
$
874,029

 
$
836,964



Wood construction products include connectors, truss plates, fastening systems, fasteners and pre-fabricated shearwalls, and are used for connecting and strengthening wood-based construction primarily in the residential construction market. Concrete construction products include adhesives, chemicals, mechanical anchors, carbide drill bits, powder actuated tools and fiber reinforcing materials, and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction.

The Company’s largest customer, attributable mostly to the North America segment, accounted for 11.0% and 11.3% of net sales for three months and nine months ended September 30, 2019, respectively, and 10.5% of net sales, accounted for the nine months ended September 30, 2018.


14.    Subsequent Events

On October 24, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.23 per share, estimated to be $10.2 million in total. The dividend will be payable on January 23, 2020, to the Company's stockholders of record on January 2, 2020.

In November 2019, the Company sold its selling and distribution facility in British Columbia, Canada for approximately $9.5 million in net proceeds after closing costs and sale price adjustments, which resulted in an estimated gain on disposal of fixed assets of $5.6 million. To provide a temporary transition until the Company relocates to the new leased facility, the Company is leasing back the sold facility from the buyer for approximately five months. The Company treated the leaseback transaction as a short-term lease and will recognize the rent expense on the straight-line basis over the lease term.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


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Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation and its wholly-owned subsidiaries, including Simpson Strong-Tie Company Inc., unless otherwise stated. The Company regularly uses its website to post information regarding its business and governance. The Company encourages investors to use http://www.simpsonmfg.com as a source of information about the Company.

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

CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 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 growth, comparable sales, earnings and performance, stockholder value, capital expenditures, cash flows, the housing market, the home improvement industry, demand for services, share repurchases, 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 are reasonable, such statements involve risks and uncertainties and we can give no assurance that such statements will prove to be correct. Actual results may differ materially from those expressed or implied in such statements.

Forward-looking statements are subject to inherent uncertainties, risk and other factors that are difficult to predict and could cause our actual results to vary in material respects from what we have expressed or implied by these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those expressed in our forward looking statements include, among others, those discussed under the Item 1A. Risk Factors and Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2018 Form 10-K.

We caution that you should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.

Overview
 
We design, manufacture and sell building construction products that are of high quality and performance, easy to use and cost-effective for customers. We operate in three business segments determined by geographic region: North America, Europe and Asia/Pacific.

Our strategic plan for growth includes increasing our market share and profitability in Europe; growing our market share in the concrete space; and continuing to develop our software to support our core wood products offering while leveraging our strengths in engineering, sales and distribution, and our strong brand name. We believe these initiatives and objectives are crucial to not only offer a more complete solution to our customers and bolster our sales of core wood connector products, but also to mitigate the effect of the cyclicality of the U.S. housing market.

On October 30, 2017, we announced the 2020 Plan to provide additional transparency into the execution of our strategic plan and financial objectives. Under the 2020 Plan, we initially assumed (i) housing starts growing as a percentage in the mid-single digit, (ii) increasing our market share and profitability in Europe, and (iii) gaining market share in both our truss and concrete product offerings. At the time of the announcement, our 2020 Plan was centered on the following three key operational objectives.

First, a continued focus on organic growth with a goal to achieve a net sales compounded annual growth rate of approximately 8% (from $860.7 million reported in fiscal 2016) through fiscal 2020.
Second, rationalizing our cost structure to improve company-wide profitability by reducing total operating expenses as a percentage of net sales from 31.8% in fiscal 2016 to a range of 26.0% to 27.0% by fiscal 2020. We expect to achieve this initiative, aside from top-line growth, through cost reduction measures in Europe and our concrete product line, zero-based budgeting for certain expense categories, a SKU reduction program to right-size our product offering and a

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commitment to remaining headcount neutral (except in the production and sales departments to meet demands from sales growth). Offsetting these reductions will be the Company’s ongoing investment in its software initiatives as well as the expenses associated with our ongoing SAP implementation, which includes increasing headcount when necessary.
Third, improving our working capital management and overall balance sheet discipline primarily through the reduction of inventory levels in connection with the implementation of Lean principles in many of our factories. This included improving our inventory turn rate from two-times a year for fiscal 2016 to four-times by the end of 2020. With these efforts, we believed we could achieve an additional 25% to 30% reduction of our raw materials and finished goods inventory through 2020 without impacting day-to-day production and shipping procedures.

Since 2016, organic net sales has grown at a compound annual growth rate of 10%. Based on current trends and conditions, we expect to achieve our 8% net sales goal.

We are continuing to work towards reducing our operating expenses to a range of 26% to 27% of net sales by the end of 2020. Operating expenses as a percentage of net sales were 24.7% and 26.3% for the quarters ended September 30, 2019 and September 30, 2018, respectively, and 27.2% and 27.5% for the nine months ended September 30, 2019 and September 30, 2018, respectively. In dollars, operating expenses increased $2.0 million from the quarter ended September 30, 2018 to the quarter ended September 30, 2019 (mostly due to increased personnel costs) and increased $7.6 million from the nine months ended September 30, 2018 to the nine months ended September 30, 2019 (mostly due to increased consulting fees and personnel costs). In late 2017 and throughout 2018, we engaged a leading management consultant to perform an independent in-depth analysis of our operations, which contributed towards a reduction of expenses in 2018 and could potentially result in initiatives that reduce expenses beyond the 2020 Plan as well as improvements to net working capital. We incurred additional success-based consulting expenses in 2018 and 2019 due to these initiatives. These fees concluded as of the end of September 30, 2019. We expect these related consulting fees incurred in 2018 and 2019 will have a one-year or less pay back.

When we initiated our 2020 Plan in October 2017, it did not factor in macro events out of our control such as a volatile steel market as well as steel tariffs and other trade events. Given increases in raw material cost and resulting degradation on our gross profit margins from 48% in 2016, we recasted our 2020 target for improving our operating income margin to a range of 16% to 17% by the end of 2020. This is revised down from our prior 2020 target range of 21% to 22%, and in-line to slightly up compared to our operating margin of 16.4% in 2016. While the gross margin pressures have caused us to revise this goal, it’s important to note that rationalizing our cost structure has helped mitigate further downward pressure on our operating profit margins. We also recasted operating margins for Europe from a target of 10% by the end of 2020, which includes approximately 2% of net sales in costs associated with the SAP implementation, to a range of 6% to 7%, including the same 2% of SAP implementation costs. Higher material costs have also contributed to this revision yet it still reflects a 700-800 basis point improvement from 2016 and substantial progress in the segment.

Since 2016, we have reduced our inventory in North America, which is the bulk of our total inventory, by over 18% in pounds on hand, including an approximate 22% reduction in finished goods, while total dollars on hand increased marginally by a little over 1%.

We accomplished this reduction in inventory in pounds on hand even as three particular factors have transpired since October of 2017 when we released the 2020 Plan that have required us to build more inventory than expected:
 
we pro-actively increased our anchor inventory in anticipation of potential tariffs on our mechanical anchor finished goods from China, as well as in anticipation of additional demand related to The Home Depot, Inc. ("Home Depot") rollout;
we bought an additional allotment of steel in order to mitigate the potential impact of availability; and
we have inventory levels to ensure we can meet our customer needs as we continue our SAP roll-out.

Since 2016, our weighted average cost per pound of total inventory on hand and raw materials on hand in North America, which we cannot control, increased. As a result, there has not been a marked improvement in our inventory turns based on dollars and we no longer believe we can achieve an inventory turn rate of four-times per year by the end of 2020. We continue to strive to effectively manage our inventory by what we can control as a way of improving our use of working capital.

Through execution on the 2020 Plan, we expected by the end of fiscal 2020 to achieve a return on invested capital (1) target within the range of 17% to 18% from 10.5% in 2016. Given the pressure on gross margins, we updated our expectation for return on invested capital to be in a range of 15% to 16% by 2020. The Company's return on invested capital was 13.0% for the last four quarters ended September 30, 2019. Meeting the return on invested capital target is dependent on the Company's ability to return capital to our shareholders, usually in the form of cash dividends or share repurchases of the Company's common stock, which

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may or may not occur at the same levels as prior years. Nonetheless, we remain committed to returning 50% of our cash flows from operations through fiscal 2020.

We believe our ability to achieve industry-leading gross profit margins and operating income margins is due to the high level of value-added services that we provide to our customers. Aside from our strong brand recognition and trusted reputation, the Company is unique due to our extensive product testing capabilities and our state-of-the-art test lab; strong customer support and education for engineers, builders and contractors; a deep 40-plus year relationships with engineers that get our products specified on the blueprint and pulled through to the job site; product availability with delivery, typically, in 24 hours to 48 hours; and an active involvement with code officials to improve building codes and construction practices. Based on current information, we expect the competitive environment to be relatively stable with U.S. single-family housing starts to be flat or growing in the low single digits for the remainder of 2019 compared to 2018. For the purposes of re-defining our 2020 Plan objectives, during years 2017 to 2020 we assume U.S. single-family housing starts growing, as a percentage, in the low-single digits on average.

Prior to the 2020 Plan, acquisitions were part of a dual-fold approach to growth. Our strategy since has primarily focused on organic growth, supported by strategic capital investments in the business. As such, we have and will continue to focus less on acquisitions activities, especially in the concrete repair space. However, we will from time to time evaluate acquisition opportunities and if the right opportunity arises we are open to acquisitions in other areas of our business, such as in our core fastener space, which is an area where we believe it would be beneficial to gain additional production capacity to support our wood business or to enhance our wood and concrete product portfolio with additional value–added products, we may pursue the opportunities.

Factors Affecting Our Results of Operations

Unlike lumber or other products that have a more direct correlation to housing starts, our products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. Our products are generally used in a sequential process that follows the construction process. Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and then the installation of our products, which flow into a project or a house according to these schedules.

Our sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, our sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of a fiscal year, as our customers