Simpson Manufacturing Co., Inc. - Quarter Report: 2006 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number: 0-23804

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

ý

Accelerated filer

o

Non-accelerated filer

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 March 31, 2006:            48,444,456

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

		March 31,						December 31,
		2006			2005			2005
ASSETS
Current assets
Cash and cash equivalents		$	129,575		$	33,910		$	131,203
Short-term investments		—			13,839			—
Trade accounts receivable, net		125,041			110,608			101,621
Inventories		192,741			190,049			181,492
Deferred income taxes		10,439			9,641			10,088
Other current assets		7,336			4,816			10,051
Total current assets		465,132			362,863			434,455
Property, plant and equipment, net		174,039			137,949			166,480
Goodwill		42,919			43,242			42,681
Equity method investment		100			73			244
Other noncurrent assets		15,842			16,611			15,855
Total assets		$	698,032		$	560,738		$	659,715
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current portion of long-term debt		$	2,966		$	1,715		$	2,186
Trade accounts payable		40,167			35,139			29,485
Accrued liabilities		28,979			23,190			39,076
Income taxes payable		11,195			5,649			—
Accrued profit sharing trust contributions		9,236			2,705			7,721
Accrued cash profit sharing and commissions		12,944			8,580			10,229
Accrued workers’ compensation		3,312			2,594			3,262
Total current liabilities		108,799			79,572			91,959
Long-term debt, net of current portion		643			2,245			2,928
Other long-term liabilities		1,422			1,417			1,362
Total liabilities		110,864			83,234			96,249
Commitments and contingencies (Note 7)
Minority interest in consolidated variable interest entities		2,128			—			5,337
Stockholders’ equity
Common stock, at par value		484			480			483
Additional paid-in capital		99,342			83,038			94,398
Retained earnings		477,757			383,140			456,474
Accumulated other comprehensive income		7,457			10,846			6,774
Total stockholders’ equity		585,040			477,504			558,129
Total liabilities and stockholders’ equity		$	698,032		$	560,738		$	659,715

 

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 March 31,
		2006			2005
Net sales		$	215,658		$	184,216
Cost of sales		129,740			115,720
Gross profit		85,918			68,496
Operating expenses (income):
Research and development and other engineering		5,058			3,980
Selling		17,458			15,878
General and administrative		23,116			22,278
Loss (gain) on sale of assets		(2		)	(74		)
		45,630			42,062
Income from operations		40,288			26,434
Income (loss) in equity method investment, before tax		(143		)	73
Interest income, net		887			91
Income before income taxes		41,032			26,598
Provision for income taxes		15,788			10,214
Minority interest		91			—
Net income		$	25,153		$	16,384
Net income per common share
Basic		$	0.52		$	0.34
Diluted		$	0.51		$	0.33
Cash dividends declared per common share		$	0.08		$	0.05
Number of shares outstanding
Basic		48,378			47,974
Diluted		49,134			48,934

 

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 three months ended March 31, 2005 and 2006 and the nine months ended December 31, 2005

(In thousands except per share amounts, unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Par Value			Capital			Earnings			Income			Total
Balance, January 1, 2005		47,929		$	479		$	79,877		$	369,154		$	13,415		$	462,925
Comprehensive income:
Net income		—		—			—			16,384			—			16,384
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			—			—
Translation adjustment		—		—			—			—			(2,569		)	(2,569		)
Comprehensive income																13,815
Options exercised		46		1			601			—			—			602
Stock compensation		—		—			1,580			—			—			1,580
Tax benefit of options exercised		—		—			317			—			—			317
Cash dividends declared on Common stock ($0.05 per share)		—		—			—			(2,398		)	—			(2,398		)
Common stock issued at $34.91 per share		19		—			663			—			—			663
Balance, March 31, 2005		47,994		480			83,038			383,140			10,846			477,504
Comprehensive income:
Net income		—		—			—			82,010			—			82,010
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—		—			—			—			58			58
Translation adjustment		—		—			—			—			(4,130		)	(4,130		)
Comprehensive income																77,938
Options exercised		326		3			3,490			—			—			3,493
Stock compensation		—		—			4,293			—			—			4,293
Tax benefit of options exercised		—		—			3,526			—			—			3,526
Cash dividends declared on Common stock ($0.18 per share)		—		—			—			(8,676		)	—			(8,676		)
Common stock issued at $28.28 per share		2		—			51			—			—			51
Balance, December 31, 2005		48,322		483			94,398			456,474			6,774			558,129
Comprehensive income:
Net income		—		—			—			25,153			—			25,153
Other comprehensive income:
Translation adjustment, net of tax of $16		—		—			—			—			683			683
Comprehensive income																25,836
Options exercised		116		1			1,751			—			—			1,752
Stock compensation		—		—			2,018			—			—			2,018
Tax benefit of options exercised		—		—			946			—			—			946
Cash dividends declared on Common stock ($0.08 per share)		—		—			—			(3,870		)	—			(3,870		)
Common stock issued at $36.35 per share		6		—			229			—			—			229
Balance, March 31, 2006		48,444		$	484		$	99,342		$	477,757		$	7,457		$	585,040

 

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)

 

		Three Months Ended March 31,
		2006			2005
Cash flows from operating activities
Net income		$	25,153		$	16,384
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gain on sale of assets		(2		)	(74		)
Depreciation and amortization		6,495			6,489
Deferred income taxes		(961		)	(1,693		)
Noncash compensation related to stock plans		1,840			1,680
Loss (income) in equity method investment		143			(73		)
Tax benefit of options exercised		—			317
Excess tax benefit of options exercised		(894		)	—
Provision for obsolete inventory		—			522
Provision for (recovery of) doubtful accounts		(80		)	19
Minority interest		91			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(23,090		)	(21,435		)
Inventories		(10,745		)	1,307
Trade accounts payable		6,739			2,926
Income taxes payable		14,816			10,765
Accrued profit sharing trust contributions		1,513			(4,312		)
Accrued cash profit sharing and commissions		2,714			374
Other current assets		(3,527		)	(1,910		)
Accrued liabilities		(6,427		)	(3,838		)
Other long-term liabilities		(1,213		)	(5		)
Accrued workers’ compensation		50			(166		)
Other noncurrent assets		27			(95		)
Net cash provided by operating activities		12,642			7,182
Cash flows from investing activities
Capital expenditures		(9,502		)	(6,410		)
Acquisition of minority interest		(4,990		)	—
Proceeds from sale of capital assets		27			94
Sales of available-for-sale investments		—			3,000
Net cash used in investing activities		(14,465		)	(3,316		)
Cash flows from financing activities
Line of credit borrowings		696			1,140
Repayment of debt and line of credit borrowings		(530		)	(20		)
Issuance of Company’s common stock		1,752			602
Excess tax benefit of options exercised		894			—
Dividends paid		(3,867		)	(2,398		)
Net cash used in financing activities		(1,055		)	(676		)
Effect of exchange rate changes on cash		1,250			(197		)
Net increase (decrease) in cash and cash equivalents		(1,628		)	2,993
Cash and cash equivalents at beginning of period		131,203			30,917
Cash and cash equivalents at end of period		$	129,575		$	33,910
Noncash capital expenditures		$	3,749		$	449
Dividends declared but not paid		$	3,870		$	2,398
Issuance of Company’s common stock for compensation		$	229		$	663

 

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. The Company consolidates all variable interest entities where it is the primary beneficiary. 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”) 2005 Annual Report on Form 10-K (the “2005 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 incentives, 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 or 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 or customer acceptance, depending on terms of the sales agreement. Service sales, representing aftermarket repair and maintenance and engineering activities, though significantly less than 1% of net sales and not material to the consolidated financial statements, are recognized as the services are completed. If the actual costs of sales returns, incentives, and discounts were to significantly exceed the recorded estimated allowance, the Company’s sales would be adversely affected.

 

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 net income (earnings) per share (“EPS”), to diluted EPS:

 

		Three Months Ended, March 31, 2006								Three Months Ended, March 31, 2005
							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	25,153		48,378		$	0.52		$	16,384		47,974		$	0.34
Effect of Dilutive Securities
Stock options		—			756		(0.01		)	—			960		(0.01		)
Diluted EPS
Income available to common stockholders		$	25,153		49,134		$	0.51		$	16,384		48,934		$	0.33

 

For the three months ended March 31, 2006 and 2005, 60 thousand and 95 thousand shares attributable to outstanding stock options, respectively, were excluded from the calculation of diluted net income per share because their inclusion would have been anti-dilutive.

 

Accounting for Stock-Based Compensation

 

The Company maintains two stock option plans under which it may grant incentive stock options and non-qualified stock options, though the Company has granted only non-qualified stock options under these plans. The Simpson Manufacturing Co. Inc., 1994 Stock Option Plan (the “1994 Plan”) is principally for the Company’s employees and the Simpson Manufacturing Co., Inc., 1995 Independent Director Stock Option Plan (the “1995 Plan”) is for its independent 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.

 

Under the 1994 Plan, no more than 16 million shares of common stock may be sold (including shares already sold) pursuant to all options granted under the 1994 Plan. Under the 1995 Plan, no more than 320 thousand shares of common stock may be sold (including shares already sold) pursuant to all options granted under the 1995 Plan. Options granted under the 1994 Plan typically vest evenly over the requisite service period of four years and have a term of seven years. The 1994 Plan provides for accelerated vesting if there is a change in control. Options granted under the 1995 Plan are fully vested on the date of grant.

 

As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment (Revised 2004),” using the modified prospective application approach as the transition method. Prior periods are not restated under this method. The cash flow presentation changed whereby cash inflow from excess tax benefits from the exercise of stock options are presented in the consolidated statements of cash flows as a financing activity, where applicable, rather than as an operating activity, as previously presented. Prior to the adoption of SFAS 123R, since January 1, 2003, when the Company adopted SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and SFAS No. 123, “Accounting for Stock Based Compensation,” the Company accounted for stock options on a fair value basis and used the prospective method of applying SFAS No. 123 for the transition. As of January 1, 2006, the Company had no unvested options which were accounted for using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. For the three months ended March 31, 2006 and 2005, the Company has recognized after-tax stock option expense of $1.1 million and $1.0 million, respectively. These amounts are included in cost of goods sold, selling, or general and administrative expenses, depending on the job function performed by the employee to whom the stock options were granted. At March 31, 2006, $0.2 million was included in finished goods inventory. The fair value of shares vested during the three months ended March 31, 2006 and 2005, was $2.0 million and $1.6 million, respectively. The Company received $1.8 million and $0.6 million in proceeds from the exercise of stock options in the three-month periods ended March 31, 2006 and 2005, respectively. The tax benefit to the Company from the exercise of stock options, a reduction of its

 

7

 

income tax payable, was $0.9 million and $0.3 million for the three months ended March 31, 2006 and 2005, respectively. Shares of common stock issued on exercise of stock options under the plans are registered under the Securities Act of 1933.

 

The adoption of SFAS No. 123R had no material effect on the Company’s income from continuing operations, income before tax, net income, or net income per share. The adoption of SFAS No. 123R resulted in $0.9 million in additional cash flows from financing activities for the three months ended March 31, 2006, which were previously reported as cash flows from operating activities.

 

Had compensation cost for the Company’s stock options for all grants prior to January 1, 2003, 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, its net income and net income per share would have been as follows:

 

		Three
		Months Ended
		March 31,
		2005
Net income, as reported		$	16,384
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		973
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		980
Net income, pro forma		$	16,377
Net income per share
Basic, as reported		$	0.34
Basic, pro forma		0.34
Diluted, as reported		0.33
Diluted, pro forma		0.33

 

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.

 

Under the 1994 Stock Option plan, the Company allows for full vesting upon retirement if the employee becomes “retirement eligible” by reaching age sixty. Prior to the adoption of SFAS 123R, stock-based employee compensation expense was recorded over the nominal vesting period and if a retirement eligible employee retired before the end of the vesting period, the Company recorded 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. With the adoption of SFAS No. 123R on January 1, 2006, the Company adopted the non-substantive vesting period approach for new grants that have retirement eligibility provisions. The accounting treatment of options granted to retirement-eligible employees prior to the Company’s adoption of SFAS 123R has not changed and financial statements for periods prior to adoption have not been restated for the effects of adopting SFAS 123R. Therefore, the expense recorded in 2006 comprises stock options that vest under both the non-substantive period and the nominal vesting period approaches. In contrast, the 2005 expense was calculated using the nominal vesting period approach. The effect on net income of applying the nominal vesting period approach versus the non-substantive vesting period approach was not material to the Company’s results of operations for the three months ended March 31, 2006 and 2005.

 

8

 

Revision in Classification

 

Historically, the Company has reported research and development and other engineering expenses as a component of cost of sales because of the integration of these departments within the manufacturing environment. Upon analysis of the current production environment, the Company has determined that it is more appropriate to report these amounts as operating expenses. The Company has elected to conform the prior quarter’s condensed consolidated statement of operations with the current quarter’s presentation. Management has concluded that the effect of this revision in classification on the quarter ended March 31, 2005, which was an increase to gross margin by $4.0 million, was immaterial. The revision in classification had no effect on the Company’s consolidated income from operations, net income, net income per share, cash flows, or any balance sheet caption for any previous period. The Company believes this change enhances the transparency of its financial statements and is appropriate given the organizational changes that have occurred as the Company has grown.

 

2.                                       Trade Accounts Receivable, net

 

Trade accounts receivable consist of the following:

 

		At March 31,						At December 31,
		2006			2005			2005
Trade accounts receivable		$	129,610		$	114,835		$	105,940
Allowance for doubtful accounts		(1,982		)	(2,400		)	(2,131		)
Allowance for sales discounts and returns		(2,587		)	(1,827		)	(2,188		)
		$	125,041		$	110,608		$	101,621

 

3.                                       Inventories

 

The components of inventories consist of the following:

 

		At March 31,						At December 31,
		2006			2005			2005
Raw materials		$	65,131		$	77,753		$	65,163
In-process products		26,778			23,212			30,207
Finished products		100,832			89,084			86,122
		$	192,741		$	190,049		$	181,492

 

4.                                       Property, Plant and Equipment, net

 

Property, plant and equipment, net, consists of the following:

 

		At March 31,						At December 31,
		2006			2005			2005
Land		$	21,589		$	13,864		$	21,720
Buildings and site improvements		101,030			66,627			93,751
Leasehold improvements		5,977			6,816			5,945
Machinery and equipment		163,030			148,265			161,357
		291,626			235,572			282,773
Less accumulated depreciation and amortization		(141,252		)	(126,289		)	(135,570		)
		150,374			109,283			147,203
Capital projects in progress		23,665			28,666			19,277
		$	174,039		$	137,949		$	166,480

 

9

 

Included in property, plant and equipment at March 31, 2006, and December 31, 2005, are land, buildings and building improvements of consolidated variable interest entities.

 

5.                                       Investments

 

Equity Method Investment

 

The Company has a 35% equity interest in Keymark Enterprises, LLC (“Keymark”), for which it accounts using the equity method. Keymark develops software that assists in the design and engineering of residential structures. The Company’s relationship with Keymark includes the specification of its products in the Keymark software. The Company has no obligation to make any additional future capital contributions, nor does it intend to provide additional funding, to Keymark. In 2001, after several quarters of losses, the Company concluded that the carrying value of its investment in Keymark exceeded its fair value and therefore wrote down the value of its investment to zero. After three consecutive quarters of profitability in 2004, however, the Company began recording its share of Keymark’s profits. During the quarter ended March 31, 2006, the Company recorded an equity loss of $0.2 million. As of March 31, 2006, the carrying value of this investment was $0.1 million.

 

Available-for-Sale Investments

 

There were no new investments made in the quarter-ended March 31, 2006. As of December 31, 2005, the Company’s available-for-sale investments had either matured or were redeemed. Prior to that, the Company’s investments in all debt securities were classified as available-for-sale investments. As of March 31, 2005, the Company’s investments, classified as short-term investments, were as follows:

 

Gross

Gross

Estimated

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

At March 31, 2005

Debt investments Municipal bonds

$

13,896

$

—

$

57

$

13,839

 

10

 

6.                                       Debt

 

Outstanding debt at March 31, 2006 and 2005, and December 31, 2005, and the available credit at March 31, 2006, consisted of the following:

 

		Available			Debt Outstanding
		Credit at			at						at
		March 31,			March 31,						December 31,
		2006			2006			2005			2005
Revolving line of credit, interest at bank’s reference rate less 0.50% (at March 31, 2006, the bank’s reference rate less 0.50% was 7.25%), expires November 2006		$	13,800		$	—		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.50% (at March 31, 2006, the bank’s prime rate less 0.50% was 7.25%), expires October 2007		9,200			—			—			—
Revolving line of credit, interest at the bank’s base rate plus 2% (at March 31, 2006, the bank’s base rate plus 2% was 6.50%), expires September 2006		1,203			—			—			—
Revolving lines of credit, interest rates between 3.3206% and 4.50%, expirations through August 2006		4,409			705			1,150			—
Term loan, interest at 7.70%, collateralized by real estate, matures November 2007		—			1,932			—			1,941
Term loan, interest at bank’s base rate plus 1.65% (March 31, 2006, the bank’s base rate plus 1.65% was 6.177%), collateralized by real estate, matured March 2006		—			—			—			1,691
Term loan, interest at LIBOR plus 1.375% (at March 31, 2006, LIBOR plus 1.375% was 6.035%), matures May 2008		—			750			1,050			750
Term loans, interest rates between 4.00% and 5.50%, expirations between 2006 and 2018		—			222			1,760			732
		28,612			3,609			3,960			5,114
Less line of credit and current portion of long-term debt					(2,966		)	(1,715		)	(2,186		)
Long-term debt, net of current portion					$	643		$	2,245		$	2,928
Available credit		$	28,612

 

The Company’s outstanding debt at March 31, 2006, includes $1.9 million for a non-recourse loan that was payable by its consolidated variable interest entity.

 

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7.                                       Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the Company’s 2005 Annual Report provides information concerning commitments and contingencies. From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. The resolution of claims and litigation, however, is subject to inherent uncertainty and it is possible that such resolution could have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

The Company’s policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs when information becomes available that indicates that it is probable that the Company is liable for any related claims and assessments and the amount of the liability is reasonably estimable. The Company does not believe that these matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, environmental conditions or other factors can contribute to failure of fasteners, connectors and tools. On occasion, some of the fasteners that the Company sells have failed, although the Company has not incurred any material liability resulting from those failures. The Company attempts to avoid such failures by establishing and monitoring appropriate product specifications, manufacturing quality control procedures, inspection procedures and information on appropriate installation methods and conditions. The Company subjects its products to extensive testing, with results and conclusions published in Company catalogues and on its website (see www.strongtie.com/info). Based on test results to date, the Company believes that, generally, if its products are appropriately selected and installed in accordance with the Company’s guidance, they may be reliably used in appropriate applications.

 

In July 2005, the Company entered into an agreement to purchase a building in Vacaville, California, from a related party, which it consolidates as a variable interest entity (see Note 10 — “Consolidation of Variable Interest Entities”), for $5.7 million. The building is 125 thousand square feet and is currently used by the Company’s subsidiary, Simpson Dura-Vent. The Company has completed its due diligence and with the satisfaction of other customary conditions, the transaction was expected to close in January 2008. The transaction was unanimously approved by the independent members of the Company’s Board of Directors. In April 2006, the Company’s independent members of the Board of Directors authorized the Company to negotiate an accelerated closing date on the purchase of the facility. The Company has agreed to pay the remainder of the rent under the current lease associated with this building, estimated at the time of an anticipated June 2006 closing, to be $0.7 million.

 

8.                                       Stock Option Plans

 

The Company currently has two stock option plans (see Note 1 — “Accounting for Stock-Based Compensation”). The 1994 Plan is principally for its employees and the 1995 Plan is for its independent directors. Participants are granted stock options only if the company-wide and/or profit center operating goals, established by the Compensation Committee of the Board of Directors at the beginning of the year, are met.

 

The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based on historical volatilities of the Company’s Common Stock measured monthly over the expected life of the option. The expected term of options granted is estimated based on the Company’s prior exercise experience and future expectations of the exercise and termination behavior of the grantees. The risk-free rate is based on the yield of U.S. Treasury zero-coupon bonds with maturities comparable to the expected life in effect at the time of grant. The dividend yield is based on the expected dividend rate on the grant date. Black-Scholes option pricing model assumptions for options granted in 2006 and 2005 are as follows:

 

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Number					Risk															Weighted
of options					free															average
granted			Grant		interest		Dividend		Expected				Exercise							fair
(in thousands)			Date		rate		yield		life		Volatility		Price Range							value
1994 Plan
489			01/26/06		4.46	%	0.79	%	6.3 years		27.2	%	$	40.72	to	$	44.79			$	13.68
515			01/01/05		3.87	%	0.57	%	6.4 years		28.0	%	$	34.90	to	$	38.39			$	11.91
1995 Plan
5			02/15/06		4.46	%	0.81	%	6.3 years		27.2	%				$		39.27		$	13.14
14			02/14/05		3.87	%	0.57	%	6.3 years		28.0	%				$		36.00		$	12.18

 

The following table summarizes the Company’s stock option activity for the quarter ended March 31, 2006:

 

							Weighted-
				Weighted-			Average
				Average			Remaining		Aggregate
				Exercise			Contractual		Intrinsic
Non-Qualified Stock Options		Shares		Price			Life		Value
Outstanding at January 1, 2006		2,950		$	22.46
Granted		494		40.71
Exercised		(116	)	15.08
Forfeited		(8	)	22.62
Outstanding at March 31, 2006		3,320		$	25.41		4.6		$	59,370
Exercisable at March 31, 2006		1,763		$	20.46		3.8		$	40,281

 

The intrinsic value represents the amount by which the fair market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005, was $2.9 million and $1.0 million, respectively.

 

A summary of the status of unvested options as of March 31, 2006, and changes during the three months ended March 31, 2006, are presented below:

 

				Weighted-
				Average
				Grant-Date
Unvested Options		Shares		Fair Value
Unvested at January 1, 2006		1,291		$	9.52
Granted		494		13.67
Vested		(220	)	9.23
Forfeited		(8	)	10.83
Unvested at March 31, 2006		1,557		$	10.87

 

As of March 31, 2006, there was $15.3 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 1994 Plan. This cost is expected to be recognized over a weighted-average period of 2.7 years. Options granted under the 1995 Plan are fully vested and expensed to income on the date of grant.

 

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