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

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

ý        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:  June 30, 2005

 

OR

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                    to                   

 

Commission file number:  0-23804

 

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.)
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

 

The number of shares of the Registrant’s Common Stock outstanding as of June 30, 2005: 48,018,254

 

In November 2004, the Company completed a 2-for-1 stock split effected in the form of a stock dividend of its common stock. All of the share and per share numbers have been adjusted to reflect this stock split.

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

		June 30,						December 31,
		2005			2004			2004
ASSETS
Current assets
Cash and cash equivalents		$	53,137		$	34,438		$	30,917
Short-term investments		9,912			44,610			17,032
Trade accounts receivable, net		140,977			122,318			89,807
Inventories		179,568			130,853			192,879
Deferred income taxes		10,104			8,328			8,809
Other current assets		4,269			4,191			7,667
Total current assets		397,967			344,738			347,111
Property, plant and equipment, net		144,385			115,767			137,609
Goodwill		42,339			23,321			44,379
Equity method investment		168			—			—
Other noncurrent assets		16,596			7,369			16,038
Total assets		$	601,455		$	491,195		$	545,137
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current portion of long-term debt		$	1,212		$	813		$	579
Trade accounts payable		36,770			33,593			32,031
Accrued liabilities		26,456			21,986			27,780
Income taxes payable		7,845			1,184			—
Accrued profit sharing trust contributions		4,539			3,483			7,039
Accrued cash profit sharing and commissions		15,757			13,209			8,210
Accrued workers’ compensation		2,724			2,474			2,761
Total current liabilities		95,303			76,742			78,400
Long-term debt, net of current portion		1,932			2,483			2,397
Other long-term liabilities		1,413			1,165			1,415
Total liabilities		98,648			80,390			82,212
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, at par value		480			500			479
Additional paid-in capital		84,919			68,708			79,877
Retained earnings		409,576			392,852			369,154
Accumulated other comprehensive income		7,832			6,294			13,415
Treasury stock		—			(57,549		)	—
Total stockholders’ equity		502,807			410,805			462,925
Total liabilities and stockholders’ equity		$	601,455		$	491,195		$	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						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Net sales		$	224,334		$	181,835		$	408,550		$	341,751
Cost of sales		135,537			107,385			255,236			202,722
Gross profit		88,797			74,450			153,314			139,029
Operating expenses:
Selling		15,501			15,338			31,379			28,383
General and administrative		27,411			23,490			49,616			45,716
		42,912			38,828			80,995			74,099
Income from operations		45,885			35,622			72,319			64,930
Income in equity method investment, before tax		95			—			168			—
Interest income (expense), net		131			(164		)	223			108
Income before income taxes		46,111			35,458			72,710			65,038
Provision for income taxes		17,273			13,643			27,488			25,274
Net income		$	28,838		$	21,815		$	45,222		$	39,764
Net income per common share
Basic		$	0.60		$	0.45		$	0.94		$	0.82
Diluted		$	0.60		$	0.45		$	0.93		$	0.81
Cash dividends declared per common share		$	0.05		$	0.05		$	0.10		$	0.10
Number of shares outstanding
Basic		48,005			48,025			47,990			48,285
Diluted		48,447			48,870			48,476			49,106

 

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 six months ended June 30, 2004 and 2005 and 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		—		—			—			39,764			—			—			39,764
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			(71		)	—			(71		)
Translation adjustment		—		—			—			—			(1,618		)	—			(1,618		)
Comprehensive income																			38,075
Options exercised		157		2			1,513			—			—			—			1,515
Stock compensation expense		—		—			2,379			—			—			—			2,379
Tax benefit of options exercised		—		—			1,044			—			—			—			1,044
Repurchase of common stock		(1,037	)	—			—			—			—			(28,122		)	(28,122		)
Cash dividends declared on Common stock ($0.10 per share)		—		—			—			(4,828		)	—			—			(4,828		)
Common stock issued at $25.43 per share		17		—			437			—			—			—			437
Balance, June 30, 2004		47,648		500			68,708			392,852			6,294			(57,549		)	410,805
Comprehensive income:
Net income		—		—			—			41,744			—			—			41,744
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			9			—			9
Translation adjustment		—		—			—			—			7,112			—			7,112
Comprehensive income																			48,865
Options exercised		236		2			2,257			—			—			—			2,259
Stock compensation expense		—		—			2,071			—			—			—			2,071
Tax benefit of options exercised		—		—			1,842			—			—			—			1,842
Repurchase of common stock		(114	)	—			—			—			—			(3,152		)	(3,152		)
Retirement of treasury stock		—		(24		)	—			(60,677		)	—			60,701			—
Cash dividends declared on Common stock ($0.10 per share)		—		—			—			(4,765		)	—			—			(4,765		)
2-for-1 stock split effected in the form of a stock dividend
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		—		—			—			45,222			—			—			45,222
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			26			—			26
Translation adjustment		—		—			—			—			(5,609		)	—			(5,609		)
Comprehensive income																			39,639
Options exercised		69		1			877			—			—			—			878
Stock compensation expense		—		—			3,010			—			—			—			3,010
Tax benefit of options exercised		—		—			449			—			—			—			449
Cash dividends declared on Common stock ($0.10 per share)		—		—			—			(4,800		)	—			—			(4,800		)
Common stock issued at $34.30 per share		20		—			706			—			—			—			706
Balance, June 30, 2005		48,018		$	480		$	84,919		$	409,576		$	7,832		$	—		$	502,807

 

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)

 

		Six Months
		Ended June 30,
		2005			2004
Cash flows from operating activities
Net income		$	45,222		$	39,764
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of capital equipment		(98		)	(162		)
Depreciation and amortization		12,608			9,680
Deferred income taxes		(2,906		)	(1,396		)
Noncash compensation related to stock plans		3,210			2,795
Income in equity method investment		(168		)	—
Tax benefit of options exercised		449			1,044
Provision for obsolete inventory		874			1,080
Provision for doubtful accounts		(83		)	(92		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(52,666		)	(56,359		)
Inventories		10,331			(26,179		)
Trade accounts payable		3,740			9,449
Income taxes payable		12,998			2,777
Accrued profit sharing trust contributions		(2,443		)	(2,521		)
Accrued cash profit sharing and commissions		7,557			5,754
Other current assets		(1,759		)	(2,030		)
Accrued liabilities		(16		)	4,090
Other long-term liabilities		21			645
Accrued workers’ compensation		(36		)	50
Other noncurrent assets		12			251
Net cash provided by (used in) operating activities		36,847			(11,360		)
Cash flows from investing activities
Capital expenditures		(17,791		)	(17,022		)
Asset acquisitions, net of cash acquired		—			(575		)
Proceeds from sale of capital equipment		219			164
Purchases of available-for-sale investments		—			(40,238		)
Maturities of available-for-sale investments		3,400			4,500
Sales of available-for-sale investments		3,500			35,795
Net cash used in investing activities		(10,672		)	(17,376		)
Cash flows from financing activities
Line of credit borrowings		712			1,880
Repayment of debt and line of credit borrowings		(280		)	(4,736		)
Repurchase of common stock		—			(28,122		)
Issuance of Company’s common stock		878			1,515
Dividends paid		(4,797		)	(2,428		)
Net cash used by financing activities		(3,487		)	(31,891		)
Effect of exchange rate changes on cash		(468		)	(71		)
Net increase (decrease) in cash and cash equivalents		22,220			(60,698		)
Cash and cash equivalents at beginning of period		30,917			95,136
Cash and cash equivalents at end of period		$	53,137		$	34,438
Noncash capital expenditures		$	1,684		$	1,665
Dividends declared but not paid		$	2,402		$	2,400
Issuance of Company’s common stock for compensation		$	706		$	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

 

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								Three Months Ended
		June 30, 2005								June 30, 2004
(In thousands; per-							Per								Per
share amounts in dollars)		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	28,838		48,005		$	0.60		$	21,815		48,025		$	0.45
Effect of Dilutive Securities
Stock options		—			442		—			—			845		—
Diluted EPS
Income available to common stockholders		$	28,838		48,447		$	0.60		$	21,815		48,870		$	0.45

 

		Six Months Ended										Six Months Ended
		June 30, 2005										June 30, 2004
								Per									Per
		Income				Shares		Share				Income			Shares		Share
Basic EPS
Income available to common stockholders		$		45,222		47,990		$	0.94			$	39,764		48,285		$	0.82
Effect of Dilutive Securities
Stock options		—				486		(0.01			)	—			821		(0.01		)
Diluted EPS
Income available to common stockholders		$	45,222			48,476		$		0.93		$	39,764		49,106		$	0.81

 

For the three and six months ended June 30, 2005, 382 and 195 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 non-employee 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 that have been 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 June 30, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $0.9 million and $0.6 million, respectively. For the six months ended June 30, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $1.9 million and $1.5 million, respectively. These amounts are reflected 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						Six Months Ended
		June 30,						June 30,
(In thousands; per-share amounts in dollars)		2005			2004			2005			2004
Net income, as reported		$	28,838		$	21,815		$	45,222		$	39,764
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		894			639			1,872			1,454
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards granted prior to January 1, 2003, net of related tax effects		901			652			1,887			1,479
Net income, pro forma		$	28,831		$	21,802		$	45,207		$	39,739
Earnings per share
Basic, as reported		$	0.60		$	0.45		$	0.94		$	0.82
Basic, pro forma		0.60			0.45			0.94			0.82
Diluted, as reported		0.60			0.45			0.93			0.81
Diluted, pro forma		0.60			0.45			0.93			0.81

 

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 (in thousands):

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2005			2004			2005			2004
Stock-based compensation expense:
Nominal vesting period approach		$	894		$	639		$	1,872		$	1,454
Non-substantive vesting period approach		846			576			2,109			1,887
Effect on net income		$	48		$	63		$	(237	)	$	(433	)

 

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, 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 compensation in the statement of cash flows.

 

2.                                       Trade Accounts Receivable, net

 

Trade accounts receivable consist of the following (in thousands):

 

		At June 30,						At December 31,
		2005			2004			2004
Trade accounts receivable		$	145,749		$	125,921		$	93,515
Allowance for doubtful accounts		(2,268		)	(1,790		)	(2,397		)
Allowance for sales discounts and returns		(2,504		)	(1,813		)	(1,311		)
		$	140,977		$	122,318		$	89,807

 

3.                                       Inventories

 

The components of inventories consist of the following (in thousands):

 

		At June 30,						At December 31,
		2005			2004			2004
Raw materials		$	68,295		$	57,992		$	91,910
In-process products		22,870			16,037			22,235
Finished products		88,403			56,824			78,734
		$	179,568		$	130,853		$	192,879

 

9