Simpson Manufacturing Co., Inc. - Quarter Report: 2005 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

For the quarterly period ended:  September 30, 2005

 

OR

 

 

For the transition period from                      to                     

 

Commission file number:  0-23804

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

4120 Dublin Boulevard, Suite 400, Dublin, CA 94568

(Address of principal executive offices)

 

(Registrant’s telephone number, including area code): (925) 560-9000

 

 

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý   No  o

 

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o   No  ý

 

        The number of shares of the Registrant’s Common Stock outstanding as of September 30, 2005:  48,164,119

 

 

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,
		2005			2004			2004
ASSETS
Current assets
Cash and cash equivalents		$	104,360		$	62,093		$	30,917
Short-term investments		6,303			21,395			17,032
Trade accounts receivable, net		129,590			113,723			89,807
Inventories		174,783			163,860			192,879
Deferred income taxes		10,160			8,325			8,809
Other current assets		3,598			5,400			7,667
Total current assets		428,794			374,796			347,111
Property, plant and equipment, net		151,724			125,881			137,609
Goodwill		42,901			24,451			44,379
Equity method investment		222			—			—
Other noncurrent assets		16,952			7,105			16,038
Total assets		$	640,593		$	532,233		$	545,137
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current portion of long-term debt		$	545		$	551		$	579
Trade accounts payable		41,290			44,592			32,031
Accrued liabilities		30,471			28,692			27,780
Income taxes payable		3,313			—			—
Accrued profit sharing trust contributions		6,013			5,193			7,039
Accrued cash profit sharing and commissions		15,449			14,427			8,210
Accrued workers’ compensation		2,724			2,324			2,761
Total current liabilities		99,805			95,779			78,400
Long-term debt, net of current portion		1,874			2,455			2,397
Other long-term liabilities		1,352			1,716			1,415
Total liabilities		103,031			99,950			82,212
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, at par value		482			501			479
Additional paid-in capital		89,383			72,192			79,877
Retained earnings		438,773			412,271			369,154
Accumulated other comprehensive income		8,924			8,020			13,415
Treasury stock		—			(60,701		)	—
Total stockholders’ equity		537,562			432,283			462,925
Total liabilities and stockholders’ equity		$	640,593		$	532,233		$	545,137

 

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

 

2

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands except per share amounts, unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
Net sales		$	233,809			$	188,560			$		642,359		$	530,311
Cost of sales		144,126				110,959				399,362				313,681
Gross profit		89,683				77,601				242,997				216,630
Operating expenses (income):
Selling		15,679				14,223				47,057				42,607
General and administrative		27,282				24,723				76,995				70,600
Loss (gain) on sale of assets		(2,027			)	59				(2,124			)	(103			)
		40,934				39,005				121,928				113,104
Income from operations		48,749				38,596				121,069				103,526
Income in equity method investment, before tax		54				—				222				—
Interest income, net		373				150				595				258
Income before income taxes		49,176				38,746				121,886				103,784
Provision for income taxes		17,569				14,562				45,057				39,836
Net income		$	31,607			$	24,184			$	76,829			$		63,948
Net income per common share
Basic		$		0.66		$		0.51		$	1.60			$		1.33
Diluted		$		0.65		$		0.50		$	1.58			$		1.31
Cash dividends declared per common share		$		0.05		$		0.10		$	0.15			$		0.20
Number of shares outstanding
Basic		48,091				47,644				48,024				48,116
Diluted		48,658				48,505				48,532				48,954

 

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

 

3

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the nine months ended September 30, 2004 and 2005 and three months ended December 31, 2004

(In thousands except per share amounts, unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive			Treasury
		Shares		Par Value			Capital			Earnings			Income			Stock			Total
Balance, January 1, 2004		48,511		$	498		$	63,335		$	357,916		$	7,983		$	(29,427	)	$	400,305
Comprehensive income:
Net income		—		—			—			63,948			—			—			63,948
Other comprehensive income:
Change in net unrealized gains or losses on available- for-sale investments		—		—			—			—			(45		)	—			(45		)
Translation adjustment		—		—			—			—			82			—			82
Comprehensive income																			63,985
Options exercised		303		3			2,952			—			—			—			2,955
Stock compensation expense		—		—			3,423			—			—			—			3,423
Tax benefit of options exercised		—		—			2,045			—			—			—			2,045
Repurchase of common stock		(1,151	)	—			—			—			—			(31,274		)	(31,274		)
Cash dividends declared on Common stock ($0.20 per share)		—		—			—			(9,593		)	—			—			(9,593		)
Common stock issued at $25.43 per share		17		—			437			—			—			—			437
Balance, September 30, 2004		47,680		501			72,192			412,271			8,020			(60,701		)	432,283
Comprehensive income:
Net income		—		—			—			17,560			—			—			17,560
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			(17		)	—			(17		)
Translation adjustment		—		—			—			—			5,412			—			5,412
Comprehensive income																			22,955
Options exercised		90		1			819			—			—			—			820
Stock compensation expense		—		—			1,026			—			—			—			1,026
Tax benefit of options exercised		—		—			841			—			—			—			841
Repurchase of common stock		—		—			—			—			—			—
Retirement of treasury stock		—		(24		)	—			(60,677		)	—			60,701			—
Common stock issued $31.40 per share for acquisition		159		1			4,999			—			—			—			5,000
Balance, December 31, 2004		47,929		479			79,877			369,154			13,415			—			462,925
Comprehensive income:
Net income		—		—			—			76,829			—			—			76,829
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			46			—			46
Translation adjustment		—		—			—			—			(4,537		)	—			(4,537		)
Comprehensive income																			72,338
Options exercised		214		3			2,409			—			—			—			2,412
Stock compensation expense		—		—			4,414			—			—			—			4,414
Tax benefit of options exercised		—		—			1,976			—			—			—			1,976
Cash dividends declared on Common stock ($0.15 per share)		—		—			—			(7,210		)	—			—			(7,210		)
Common stock issued at $34.30 per share		21		—			707			—			—			—			707
Balance, September 30, 2005		48,164		$	482		$	89,383		$	438,773		$	8,924		$	—		$	537,562

 

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

 

4

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

		Nine Months Ended September 30,
		2005			2004
Cash flows from operating activities
Net income		$	76,829		$	63,948
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of assets		(2,124		)	(103		)
Depreciation and amortization		17,850			14,693
Deferred income taxes		(3,794		)	(1,278		)
Noncash compensation related to stock plans		4,798			4,139
Income in equity method investment		(222		)	—
Tax benefit of options exercised		1,976			2,045
Provision for obsolete inventory		808			(321		)
Provision for doubtful accounts		(143		)	(3		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(41,221		)	(47,602		)
Inventories		15,697			(57,273		)
Trade accounts payable		7,340			19,191
Income taxes payable		8,493			(377		)
Accrued profit sharing trust contributions		(1,006		)	(829		)
Accrued cash profit sharing and commissions		7,250			6,970
Other current assets		(667		)	(1,432		)
Accrued liabilities		4,015			8,584
Other long-term liabilities		(97		)	1,214
Accrued workers’ compensation		(36		)	(100		)
Other noncurrent assets		(245		)	(323		)
Net cash provided by operating activities		95,501			11,143
Cash flows from investing activities
Capital expenditures		(31,074		)	(30,946		)
Asset acquisitions, net of cash acquired		—			(582		)
Proceeds from sale of capital assets		4,025			188
Purchases of available-for-sale investments		—			(41,397		)
Maturities of available-for-sale investments		7,000			5,700
Sales of available-for-sale investments		3,500			58,995
Net cash used in investing activities		(16,549		)	(8,042		)
Cash flows from financing activities
Line of credit borrowings		724			1,913
Repayment of debt and line of credit borrowings		(1,047		)	(5,112		)
Repurchase of common stock		—			(31,274		)
Issuance of Company’s common stock		2,412			2,955
Dividends paid		(7,198		)	(4,810		)
Net cash used in financing activities		(5,109		)	(36,328		)
Effect of exchange rate changes on cash		(400		)	184
Net increase (decrease) in cash and cash equivalents		73,443			(33,043		)
Cash and cash equivalents at beginning of period		30,917			95,136
Cash and cash equivalents at end of period		$	104,360		$	62,093
Noncash capital expenditures		$	2,376		$	2,463
Dividends declared but not paid		$	2,410		$	4,783
Issuance of Company’s common stock for compensation		$	707		$	437

 

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

 

5

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

1.             Basis of Presentation

 

Except where otherwise indicated, dollar amounts and balances in the consolidated financial statements and the notes thereto are in thousands, except per share amounts.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50% owned affiliates are generally accounted for using either cost or the equity method. All significant intercompany transactions have been eliminated.

 

Interim Period Reporting

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America have been condensed or omitted. These interim statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Simpson Manufacturing Co., Inc.’s (the “Company’s”) 2004 Annual Report on Form 10-K (the “2004 Annual Report”).

 

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 accounting principles generally accepted in the United States of America. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The Company’s quarterly results may be subject to fluctuations. As a result, the Company believes the results of operations for the interim periods are not necessarily indicative of the results to be expected for any future period.

 

Revenue Recognition

 

The Company recognizes revenue when the earnings process is complete, net of applicable provision for discounts, returns and allowances, whether actual or estimated based on the Company’s experience. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectibility is reasonably assured and pricing is fixed and determinable. The Company’s general shipping terms are F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery. If the actual costs of sales returns, allowances, and discounts were to exceed the recorded estimated allowance, the Company’s sales would be adversely affected. Accrued sales returns have not been material and have been within management’s expectations. Service sales, representing aftermarket repair and maintenance and engineering activities, though significantly less than 1% of net sales and not material to the financial statements, are recognized as the services are completed.

 

Treasury Stock

 

The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Upon retirement, the resulting gains or losses are credited or charged to retained earnings.

 

Net Income Per Common Share

 

Basic net income per common share is computed based upon the weighted average number of common shares outstanding. Potentially dilutive securities, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive.

 

6

 

The following is a reconciliation of basic earnings per share (“EPS”) to diluted EPS:

 

		Three Months Ended September 30, 2005								Three Months Ended September 30, 2004
							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	31,607		48,091		$	0.66		$	24,184		47,644		$		0.51
Effect of Dilutive Securities
Stock options		—			567		(0.01		)	—			861		(0.01			)
Diluted EPS
Income available to common stockholders		$	31,607		48,658		$	0.65		$	24,184		48,505		$	0.50
		Nine Months Ended September 30, 2005								Nine Months Ended September 30, 2004
							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	76,829		48,024		$	1.60		$	63,948		48,116		$	1.33
Effect of Dilutive Securities
Stock options		—			508		(0.02		)	—			838		(0.02			)
Diluted EPS
Income available to common stockholders		$	76,829		48,532		$	1.58		$	63,948		48,954		$	1.31

 

For the three and nine months ended September 30, 2005, 125 thousand and 111 thousand shares attributable to outstanding stock options, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

Accounting for Stock-Based Compensation

 

The Company maintains two stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees, consultants and directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date.

 

As of January 1, 2003, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and SFAS No. 123, “Accounting for Stock Based Compensation,” and used the prospective method of applying SFAS No. 123 for the transition. For stock options granted prior to January 1, 2003, the Company will continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equaled or exceeded the market price on the date of grant for options issued by the Company, no compensation expense has been recognized for stock options granted prior to January 1, 2003. For the three months ended September 30, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $0.9 million and $0.7 million, respectively. For the nine months ended September 30, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $2.8 million and $2.1 million, respectively. These amounts are included in general and administrative expenses.

 

7

 

Had compensation cost for the Company’s stock options for all grants been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share would have been as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
Net income, as reported		$	31,607			$	24,184			$		76,829		$	63,948
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		903				652				2,781				2,109
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, including those granted prior to January 1, 2003, net of related tax effects		910				664				2,803				2,146
Net income, pro forma		$	31,600			$	24,172			$	76,807			$		63,911
Earnings per share
Basic, as reported		$		0.66		$		0.51		$	1.60			$		1.33
Basic, pro forma		0.66				0.51				1.60				1.33
Diluted, as reported		0.65				0.50				1.58				1.31
Diluted, pro forma		0.65				0.50				1.58				1.31

 

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share Based Payment (Revised 2004),” which revised SFAS No. 123 to require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. While the Company currently accounts for stock options on a fair value basis, additional changes will be required such as those affecting cash flow presentation. SFAS No. 123R will be adopted in the first quarter of 2006 and management has not determined all of the effects on the Company’s financial statements or the transition method that will be used.

 

Under the 1994 Stock Option plan, the Company allows for full vesting upon retirement if the employee becomes “retirement eligible” by reaching age sixty. Currently, stock-based employee compensation expense is recorded over the nominal vesting period and if a retirement eligible employee retires before the end of the vesting period, the Company records any unrecognized compensation cost at the date of retirement (the “nominal vesting period approach”). The nominal vesting period is four years of service subsequent to the grant date. The “non-substantive vesting period approach” specifies that awards, in substance, become vested when the employee’s retention of the award is no longer contingent on providing service. Under this approach, the unrecorded compensation cost is expensed when that condition is met even if the employee continues providing service to the Company. This would be the case for existing grants when an employee becomes retirement eligible as well as when a retirement eligible employee is granted an award. Upon adoption of SFAS No. 123R in the first quarter of 2006, the Company will adopt the non-substantive vesting period approach for new grants that have retirement eligibility provisions. The after-tax effect on net income of applying the nominal vesting period approach versus the non-substantive vesting period approach is as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Stock-based compensation expense:
Nominal vesting period approach		$	903		$	652		$	2,781		$	2,109
Non-substantive vesting period approach		815			644			2,935			2,538
Effect on net income		$	88		$	8		$	(154	)	$	(429	)

 

8

 

Recently Issued Accounting Standards

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion 20 and FASB Statement No. 3.” This Statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In the absence of explicit transition requirements specific to the newly adopted accounting principle, it establishes, unless not practicable, retrospective application as the required method for reporting a change in accounting principle. Management has not determined the effect, if any, of SFAS No. 154 on the Company’s financial statements for its fiscal year ending December 31, 2006.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the 2005 presentation with no effect on net income or retained earnings as previously reported. These reclassifications were primarily in relation to the presentation of deferred taxes and non-cash adjustments to reconcile net income to net cash in the statement of cash flows.

 

2.             Trade Accounts Receivable, net

 

Trade accounts receivable consist of the following:

 

		At September 30,						At December 31,
		2005			2004			2004
Trade accounts receivable		$	133,799		$	116,834		$		93,515
Allowance for doubtful accounts		(2,196		)	(1,853		)	(2,397			)
Allowance for sales discounts and returns		(2,013		)	(1,258		)	(1,311			)
		$	129,590		$	113,723		$	89,807

 

3.             Inventories

 

The components of inventories consist of the following:

 

		At September 30,						At December 31,
		2005			2004			2004
Raw materials		$	63,740		$	76,002		$	91,910
In-process products		25,221			18,882			22,235
Finished products		85,822			68,976			78,734
		$	174,783		$	163,860		$	192,879

 

9