Simpson Manufacturing Co., Inc. - Quarter Report: 2007 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:   March 31, 2007
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)

 

 

(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  x    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   x

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  x

The number of shares of the Registrant’s common stock outstanding as of March 31, 2007:   48,409,475

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,
		2007			2006			2006
ASSETS
Current assets
Cash and cash equivalents		$	149,310		$	129,575		$	148,299
Trade accounts receivable, net		126,577			125,041			95,991
Inventories		208,797			192,741			217,608
Deferred income taxes		11,042			10,439			11,216
Other current assets		8,003			7,336			6,224
Total current assets		503,729			465,132			479,338
Property, plant and equipment, net		206,442			174,039			197,180
Goodwill		44,617			42,919			44,337
Equity method investment		—			100			33
Other noncurrent assets		21,568			15,842			14,446
Total assets		$	776,356		$	698,032		$	735,334
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current portion of long-term debt		$	2,691		$	2,966		$	327
Trade accounts payable		35,863			40,167			22,909
Accrued liabilities		34,239			28,979			36,874
Income taxes payable		5,994			11,195			—
Accrued profit sharing trust contributions		10,309			9,236			8,616
Accrued cash profit sharing and commissions		8,345			12,944			7,817
Accrued workers’ compensation		3,712			3,312			3,712
Total current liabilities		101,153			108,799			80,255
Long-term debt, net of current portion		337			643			338
Other long-term liabilities		8,775			1,422			1,866
Total liabilities		110,265			110,864			82,459
Commitments and contingencies (Note 7)
Minority interest in consolidated variable interest entities		—			2,128			—
Stockholders’ equity
Common stock, at par value		484			484			484
Additional paid-in capital		118,590			99,342			114,535
Retained earnings		534,597			477,757			526,362
Accumulated other comprehensive income		12,420			7,457			11,494
Total stockholders’ equity		666,091			585,040			652,875
Total liabilities and stockholders’ equity		$	776,356		$	698,032		$	735,334

 

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

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Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands except per-share amounts, unaudited)

		Three Months Ended
		March 31,
		2007			2006
Net sales		$	193,155		$	215,658
Cost of sales		121,533			129,740
Gross profit		71,622			85,918
Operating expenses:
Research and development and other engineering		5,260			5,058
Selling		18,154			17,458
General and administrative		21,638			23,114
		45,052			45,630
Income from operations		26,570			40,288
Loss on equity method investment, before tax		(33		)	(143		)
Interest income, net		1,374			887
Income before income taxes		27,911			41,032
Provision for income taxes		10,621			15,788
Minority interest		—			91
Net income		$	17,290		$	25,153
Net income per common share
Basic		$	0.36		$	0.52
Diluted		$	0.35		$	0.51
Cash dividends declared per common share		$	0.10		$	0.08
Number of shares outstanding
Basic		48,414			48,378
Diluted		48,886			49,134

 

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

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Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the three months ended March 31, 2006 and 2007 and the nine months ended December 31, 2006

(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, 2006		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
Comprehensive income:
Net income		—		—			—			77,343			—			—			77,343
Other comprehensive income:
Translation adjustment, net of tax of $248		—		—			—			—			4,037			—			4,037
Comprehensive income																			81,380
Options exercised		468		5			7,190			—			—			—			7,195
Stock compensation		—		—			5,600			—			—			—			5,600
Tax benefit of options exercised		—		—			2,403			—			—			—			2,403
Cash dividends declared on common stock ($0.24 per share)		—		—			—			(11,577		)	—			—			(11,577		)
Repurchase of common stock		(500	)	—			—			—			—			(17,166		)	(17,166		)
Retirement of common stock		—		(5		)	—			(17,161		)	—			17,166			—
Balance, December 31, 2006		48,412		484			114,535			526,362			11,494			—			652,875
Cumulative effect due to adoption of FIN 48		—		—			—			(16		)	—			—			(16		)
Balance, January 1, 2007		48,412		484			114,535			526,346			11,494			—			652,859
Comprehensive income:
Net income		—		—			—			17,290			—			—			17,290
Other comprehensive income:
Translation adjustment, net of tax of $17		—		—			—			—			926			—			926
Comprehensive income																			18,216
Options exercised		110		1			1,917			—			—			—			1,918
Stock compensation		—		—			1,468			—			—			—			1,468
Tax benefit of options exercised		—		—			363			—			—			—			363
Repurchase of common stock		(123	)	—			—			—			—			(4,191		)	(4,191		)
Retirement of common stock		—		(1		)	—			(4,190		)	—			4,191			—
Cash dividends declared on Common stock ($0.10 per share)		—		—			—			(4,849		)	—			—			(4,849		)
Common stock issued at $31.65 per share		10		—			307			—			—			—			307
Balance, March 31, 2007		48,409		$	484		$	118,590		$	534,597		$	12,420		$	—		$	666,091

 

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

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Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)

		Three Months
		Ended March 31,
		2007			2006
Cash flows from operating activities
Net income		$	17,290		$	25,153
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of assets		(6		)	(2		)
Depreciation and amortization		7,078			6,495
Deferred income taxes		(507		)	(961		)
Noncash compensation related to stock plans		1,677			1,840
Loss in equity method investment		33			143
Excess tax benefit of options exercised		(431		)	(894		)
Provision for (recovery of) doubtful accounts		271			(80		)
Minority interest		—			91
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(30,629		)	(23,090		)
Inventories		9,069			(10,745		)
Trade accounts payable		11,396			6,739
Income taxes payable		8,504			14,816
Accrued profit sharing trust contributions		1,687			1,513
Accrued cash profit sharing and commissions		528			2,714
Other current assets		(3,471		)	(3,527		)
Accrued liabilities		(3,735		)	(6,427		)
Other long-term liabilities		(1,714		)	(1,213		)
Accrued workers’ compensation		—			50
Other noncurrent assets		1,737			27
Net cash provided by operating activities		18,777			12,642
Cash flows from investing activities
Capital expenditures		(14,164		)	(9,502		)
Acquisition of minority interest		—			(4,990		)
Proceeds from sale of capital assets		20			27
Asset acquisitions		(327		)	—
Net cash used in investing activities		(14,471		)	(14,465		)
Cash flows from financing activities
Line of credit borrowings		2,347			696
Repayment of debt and line of credit borrowings		(2		)	(530		)
Repurchase of common stock		(4,191		)	—
Issuance of common stock		1,918			1,752
Excess tax benefit of options exercised		431			894
Dividends paid		(3,875		)	(3,867		)
Net cash used in financing activities		(3,372		)	(1,055		)
Effect of exchange rate changes on cash		77			1,250
Net increase (decrease) in cash and cash equivalents		1,011			(1,628		)
Cash and cash equivalents at beginning of period		148,299			131,203
Cash and cash equivalents at end of period		$	149,310		$	129,575
Noncash activity during the period
Noncash capital expenditures		$	1,438		$	3,749
Dividends declared but not paid		$	4,849		$	3,870
Issuance of Company’s common stock for compensation		$	307		$	229
Noncash asset acquisition		$	608		$	—

 

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

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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 (the “Company”). Investments in 50% or less owned affiliates are generally accounted for using either cost or the equity method. The Company consolidates all variable interest entities (VIEs) where it is the primary beneficiary. There were no VIEs as of December 31, 2006, or March 31, 2007. 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 the Company’s 2006 Annual Report on Form 10-K (the “2006 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 fluctuate. 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 on 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.

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

		Three Months Ended,								Three Months Ended,
(in thousands, except		March 31, 2007								March 31, 2006
per-share amounts)							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	17,290		48,414		$	0.36		$	25,153		48,378		$	0.52
Effect of Dilutive Securities
Stock options		—			472		(0.01		)	—			756		(0.01		)
Diluted EPS
Income available to common stockholders		$	17,290		48,886		$	0.35		$	25,153		49,134		$	0.51

 

Anti-dilutive shares attributable to outstanding stock options were excluded from the calculation of diluted net income per share. For the three months ended March 31, 2007 and 2006, 1.1 million and 1.0 million shares subject to stock options were anti-dilutive, respectively.

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, although 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. The Company generally grants options under each of the 1994 Plan and the 1995 Plan once each year. The exercise price per share under each option granted in February 2007 and January 2006 under the 1994 Plan equaled or exceeded the closing market price per share of the Company’s Common Stock as reported by the New York Stock Exchange for the date when the Company first publicly announced its financial results for 2006 and 2005, respectively. The exercise price per share under each option granted under the 1995 Plan is at the fair market value on the date specified in the 1995 Plan. Options vest and expire according to terms established at the grant date.

Under the 1994 Plan, no more than 16 million shares of the Company’s 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 vesting of options granted under the 1994 Plan will be accelerated if the grantee ceases to be employed after reaching age 60 or if there is a change in control of the Company. Options granted under the 1995 Plan are fully vested on the date of grant.

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The following table represents the Company’s stock option activity for the three months ended March 31, 2007 and 2006:

		Three Months Ended
		March 31,
(in thousands)		2007			2006
Stock option expense recognized in operating expenses		$	1,545		$	1,776
Tax benefit of stock option expense in provision for income taxes		589			684
Stock option expense, net of tax		$	956		$	1,092
Fair value of shares vested		$	1,468		$	2,018
Proceeds to the Company from the exercise of stock options		$	1,918		$	1,752
Tax benefit from exercise of stock options		$	363		$	946

 

		At March 31,
		2007			2006
Stock option cost capitalized in inventory		$	188		$	242

 

The amounts included in cost of sales, selling, or general and administrative expenses depend on the job functions performed by the employees to whom the stock options were granted. Shares of common stock issued on exercise of stock options under the plans are registered under the Securities Act of 1933.

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.

Income Taxes

On January 1,  2007,  the Company adopted Financial Accounting Standards Board (“FASB”)  Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”  (“FIN 48”).  FIN 48  prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

As a result of the adoption of FIN 48, the Company recognized an adjustment to its January 1, 2007, opening retained earnings balance in the amount of $16 thousand.

At January 1, 2007, the Company had $7.5 million in unrecognized tax benefits, of which $1.8 million, if recognized, would favorably affect the effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense, which is a continuation of the Company’s historical accounting policy. At January 1, 2007, the Company had accrued $1.0 million for the potential payment of interest, before income tax benefits.

There were no material changes to any of these amounts during the first quarter of 2007.

At January 1, 2007, the Company is subject to U.S. federal income tax examinations for the tax years 2003 through 2006. In addition, the Company is subject to state, local and foreign income tax examinations primarily for the tax years 2002 through 2006.

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Presentation of Taxes Collected and Remitted to Governmental Authorities

During 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The Company presents taxes collected and remitted to governmental authorities on a net basis in the accompanying condensed consolidated statements of operations.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has not yet determined the effect, if any, on the Company’s financial statements for its fiscal year ending December 31, 2008, or its fiscal quarters within that year. SFAS No. 157 will be applied prospectively as of the beginning of the fiscal year in which it is initially applied.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities to choose to elect, at specified dates, to measure eligible financial instruments at fair value. Entities must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date, and recognize up-front costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for companies that have also elected to apply the provisions of SFAS No. 157, “Fair Value Measurements.” Companies are prohibited from retrospectively applying SFAS No. 159 unless they choose to early adopt both SFAS No. 157 and SFAS No. 159.  SFAS No. 159 also applies to eligible items existing at November 15, 2007 (or early adoption date). The Company has not elected to early adopt SFAS 157 and SFAS 159. Management has not yet determined the effect, if any, on the Company’s financial statements for its fiscal year ending December 31, 2008.

2.             Trade Accounts Receivable, net

Trade accounts receivable consist of the following:

		At March 31,						At December 31,
(in thousands)		2007			2006			2006
Trade accounts receivable		$	131,380		$	129,610		$	100,197
Allowance for doubtful accounts		(2,502		)	(1,982		)	(2,286		)
Allowance for sales discounts and returns		(2,301		)	(2,587		)	(1,920		)
		$	126,577		$	125,041		$	95,991

 

3.             Inventories

Inventories consist of the following:

		At March 31,						At December 31,
(in thousands)		2007			2006			2006
Raw materials		$	81,753		$	65,131		$	86,927
In-process products		20,778			26,778			24,209
Finished products		106,266			100,832			106,472
		$	208,797		$	192,741		$	217,608

 

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4.             Property, Plant and Equipment, net

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

		At March 31,						At December 31,
(in thousands)		2007			2006			2006
Land		$	23,838		$	21,589		$	22,797
Buildings and site improvements		121,006			101,030			117,815
Leasehold improvements		2,832			5,977			2,805
Machinery and equipment		190,308			163,030			188,901
		337,984			291,626			332,318
Less accumulated depreciation and amortization		(161,607		)	(141,252		)	(155,167		)
		176,377			150,374			177,151
Capital projects in progress		30,065			23,665			20,029
		$	206,442		$	174,039		$	197,180

 

Included in property, plant and equipment at March 31, 2006, are land, buildings, building improvements and construction-in-progress of consolidated variable interest entities with a net book value of $4.0 million.

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 the Company’s 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. Due to equity losses through March 31, 2007, the carrying amount of the Company’s investment in Keymark has been written down to zero.

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6.             Debt

Outstanding debt at March 31, 2007 and 2006, and December 31, 2006, and the available lines of credit at March 31, 2007, consisted of the following:

		Available			Debt Outstanding
		Credit at			at						at
		March 31,			March 31,						December 31,
(dollar amounts in thousands)		2007			2007			2006			2006
Revolving line of credit, interest at bank’s reference rate less 0.50% (at March 31, 2007, the bank’s reference rate less 0.50% was 7.75%), expires November 2008		$	13,800		$	—		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.50% (at March 31, 2007, the bank’s prime rate less 0.50% was 7.75%), expires October 2007		9,200			—			—			—
Revolving line of credit, interest at the bank’s base rate plus 2% (at March 31, 2007, the bank’s base rate plus 2% was 7.25%), expires October 2007		492			—			—			—
Revolving lines of credit, interest rates between 4.4948% and 5.60%		1,886			2,363			705			—
Term loan, interest at 7.70%, collateralized by real estate, repaid June 2006		—			—			1,932			—
Term loan, interest at LIBOR plus 1.375% (at March 31, 2007, LIBOR plus 1.375% was 6.735%), matures May 2008		—			450			750			450
Term loans, interest rates between 4.00% and 5.00%, expirations between 2011 and 2018		—			215			222			215
		25,378			3,028			3,609			665
Less line of credit and current portion of long-term debt					(2,691		)	(2,966		)	(327		)
Long-term debt, net of current portion					$	337		$	643		$	338
Available credit		$	25,378

 

7.             Commitments and Contingencies

Note 9 to the consolidated financial statements in the 2006 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 is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows and 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.

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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 and connectors 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 websites (see www.strongtie.com/info and www.duravent.com). 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.

8.             Stock Option Plans

The Company currently has two stock option plans (see Note 1 — Accounting for Stock-Based Compensation). Participants are granted stock options only if the applicable company-wide or profit-center operating goals, or both, 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 a term that is equivalent to 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 2007 and 2006 are as follows:

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
123		02/02/07		4.84	%	1.19	%	5.9 years		29.0	%				$	33.62		$	11.11
1		05/30/06		4.97	%	0.90	%	6.3 years		27.2	%				$	35.75		$	12.25
489		01/26/06		4.46	%	0.79	%	6.3 years		27.2	%	$	40.72	to	$	44.79		$	13.68
1995 Plan
5		02/15/06		4.46	%	0.81	%	6.3 years		27.2	%				$	39.27		$	13.14

 

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The following table summarizes the Company’s stock option activity for the three months ended March 31, 2007:

							Weighted-
				Weighted-			Average		Aggregate
				Average			Remaining		Intrinsic
		Shares		Exercise			Contractual		Value *
Non-Qualified Stock Options		(in thousands)		Price			Life		(in thousands)
Outstanding at January 1, 2007		2,837		$	27.03
Granted		123		33.62
Exercised		(110	)	17.40
Forfeited		(20	)	34.64
Outstanding at March 31, 2007		2,830		$	27.64		4.1		$	16,158
Exercisable at March 31, 2007		1,927		$	24.36		3.6		$	14,967

 

*                 The intrinsic value represents the amount by which the fair market value of the underlying common stock exceeds the exercise price of the option, using the closing price per share of $30.84 on March 31, 2007.

The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006, was $1.7 million and $2.9 million, respectively.

A summary of the status of unvested options as of March 31, 2007, and changes during the three months ended March 31, 2007, are presented below:

				Weighted-
				Average
		Shares		Grant-Date
Unvested Options		(in thousands)		Fair Value
Unvested at January 1, 2007		1,029		$	11.51
Granted		123		11.11
Vested		(229	)	9.78
Forfeited		(20	)	11.74
Unvested at March 31, 2007		903		$	11.89

 

As of March 31, 2007, $9.7 million of total unrecognized compensation cost was 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 2.3 years. Options granted under the 1995 Plan are fully vested and are expensed on the date of grant.

9.             Segment Information

The Company is organized into two primary operating segments. The segments are defined by types of products manufactured, marketed and distributed to the Company’s customers. The two product segments are connector products and venting products. These segments are differentiated in several ways, including the types of materials, the production processes, the distribution channels and the product applications. Transactions between the two segments were immaterial for each of the periods presented.

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The following table illustrates certain measurements used by management to assess the performance of the segments described above as of or for the following periods:

		Three Months Ended
		March 31,
(in thousands)		2007			2006
Net Sales
Connector products		$	179,470		$	195,766
Venting products		13,685			19,892
Total		$	193,155		$	215,658
Income from Operations
Connector products		$	29,013		$	40,596
Venting products		(1,943		)	74
Administrative and all other		(500		)	(382		)
Total		$	26,570		$	40,288

 

								At
		At March 31,						December 31,
		2007			2006			2006
Total Assets
Connector products		$	538,432		$	493,173		$	509,705
Venting products		75,195			67,063			80,143
Administrative and all other		162,729			137,796			145,486
Total		$	776,356		$	698,032		$	735,334

 

Cash collected by the Company’s 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 and short-term investment balances in the “Administrative and all other” segment were $140.2 million, $121.9 million, and $130.7 million, as of March 31, 2007 and 2006, and December 31, 2006, respectively.

10.           Consolidation of Variable Interest Entities

The Company previously leased two facilities from related-party partnerships whose primary purpose was to own and lease these two properties to the Company. The partnerships did not have any other significant assets. These partnerships were considered variable interest entities under FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities (revised December 2003)—an Interpretation of ARB No. 51” (“FIN 46(R)”). Although the Company did not have direct ownership interests in the partnerships, it was required to consolidate the partnerships, as it was considered the primary beneficiary as interpreted by FIN 46(R). The Company became the primary beneficiary when it agreed to a fixed price purchase option for the properties owned by the related-party partnerships. The Company purchased the two facilities in 2006.

The real estate owned by the partnerships consisted of land, buildings and building improvements, which were pledged as collateral for mortgages under which the lender had no recourse to the Company. The Company had no off-balance sheet arrangements at March 31, 2007.

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Noncash consolidation of the assets and liabilities of the variable interest entities at March 31, 2006, consisted of the following:

		At March 31,
(in thousands)		2006
Assets
Cash		$	80
Land		1,162
Buildings and site improvements, net of depreciation		2,965
Capital projects in progress		(100		)
Other noncurrent assets		(47		)
Liabilities
Current portion of long term debt		$	1,932
Minority interest		$	2,128

 

The amount of rent expense for the properties owned by the variable interest entities during the quarter ended March 31, 2006, was $0.2 million. In March 2006, the Company completed the purchase, for $5.0 million, of the facility that it previously leased from a related party and consolidated variable interest entity in San Leandro, California. The transaction was unanimously approved by the independent members of the Company’s Board of Directors.

11.           Lease Termination

In May 2006, the Company relocated its home office from a leased facility in Dublin, California, to the facility in Pleasanton, California, which it purchased in August 2005. In June 2006, the Company ceased using the leased facility in Dublin, California. As a result of this move, the Company recorded a lease termination expense of $1.2 million, in June 2006, representing the fair value of the remaining rent obligation, reduced by the estimated sublease rentals that the Company believed could reasonably be obtained for the facility. These estimates and assumptions are monitored on at least a quarterly basis for changes in circumstances. Estimates for the liability balance are based on the status of the Company’s efforts to lease vacant office space, including a review of real estate market conditions, projections for sublease income and sublease commencement assumptions. Lease termination charges are reflected in general and administrative expenses in the Company’s condensed consolidated statements of operations.

The following table provides the liability balances and activities of the Company’s lease termination reserve for the three months ended March 31, 2007:

(in thousands)
Balance at December 31, 2006		$	777
Additional provision		85
Cash payments		(282		)
Balance at March 31, 2007		$	580

 

Remaining cash expenditures associated with the lease termination are expected to be paid over the remaining lease term, which concludes in October 2007. Based on the Company’s assumptions as of March 31, 2007, the Company expected its lease payments, net of expected sublease income, to result in a total cash outlay of $0.6 million. Substantially all of the lease termination charge is associated with the connector products segment.

During the quarter-ended March 31, 2007, the Company was not successful in subleasing the facility and has reversed the expected sublease income for the quarter, resulting in an additional expense of $74 thousand.

12.           Subsequent Events

In April 2007, the Company’s Board of Directors declared a dividend of $0.10 per share, estimated to total $4.8 million, to be paid on July 26, 2007, to stockholders of record on July 6, 2007.

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