Simpson Manufacturing Co., Inc. - Quarter Report: 2009 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number:  1-13429

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o   No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x	Accelerated filer  o
Non-accelerated filer  o	Smaller reporting company  o
(Do not check if a smaller reporting company)

 

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, 2009:  48,989,123

 

 

 

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,
		2009			2008			2008
ASSETS
Current assets
Cash and cash equivalents		$	158,208		$	164,381		$	170,750
Trade accounts receivable, net		79,383			107,634			76,005
Inventories		225,568			227,855			251,878
Deferred income taxes		13,672			11,236			11,995
Assets held for sale		8,387			9,677			8,387
Other current assets		13,236			8,825			8,582
Total current assets		498,454			529,608			527,597
Property, plant and equipment, net		191,412			195,319			193,318
Goodwill		69,160			57,845			68,619
Equity method investment		21			—			214
Intangible assets, net		22,137			22,142			23,453
Other noncurrent assets		18,225			18,513			16,999
Total assets		$	799,409		$	823,427		$	830,200
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit		$	821		$	3,390		$	26
Trade accounts payable		22,232			34,745			21,675
Accrued liabilities		28,873			30,357			34,102
Income taxes payable		—			1,639			—
Accrued profit sharing trust contributions		1,973			2,411			9,541
Accrued cash profit sharing and commissions		1,353			4,665			2,264
Accrued workers’ compensation		4,299			4,116			4,286
Total current liabilities		59,551			81,323			71,894
Other long-term liabilities		9,289			12,144			9,280
Total liabilities		68,840			93,467			81,174
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, at par value		490			486			490
Additional paid-in capital		137,503			127,573			136,867
Retained earnings		592,644			574,988			605,950
Accumulated other comprehensive income (loss)		(68		)	26,913			5,719
Total stockholders’ equity		730,569			729,960			749,026
Total liabilities and stockholders’ equity		$	799,409		$	823,427		$	830,200

 

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,
		2009			2008
Net sales		$	119,323		$	167,656
Cost of sales		88,610			111,398
Gross profit		30,713			56,258
Operating expenses:
Research and development and other engineering		4,864			5,103
Selling		16,025			19,807
General and administrative		20,162			17,874
		41,051			42,784
Income (loss) from operations		(10,338		)	13,474
Loss on equity method investment, before tax		(193		)	—
Interest income, net		102			1,128
Income (loss) before income taxes		(10,429		)	14,602
Provision for (benefit from) income taxes		(2,020		)	6,250
Net income (loss)		$	(8,409	)	$	8,352
Net income (loss) per common share
Basic		$	(0.17	)	$	0.17
Diluted		$	(0.17	)	$	0.17
Cash dividends declared per common share		$	0.10		$	0.10
Number of shares outstanding
Basic		48,987			48,574
Diluted		48,987			48,931

 

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, 2008 and 2009 and the nine months ended December 31, 2008

(In thousands except per-share amounts, unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive
		Shares		Par Value			Capital			Earnings			Income (Loss)			Total
Balance, January 1, 2008		48,552		$	485		$	126,119		$	571,499		$	25,297		$	723,400
Comprehensive income:
Net income		—		—			—			8,352			—			8,352
Other comprehensive income:
Translation adjustment, net of tax of $17		—		—			—			—			1,616			1,616
Comprehensive income																9,968
Stock options exercised		26		1			507			—			—			508
Stock compensation		—		—			765			—			—			765
Tax benefit of options exercised		—		—			(65		)	—			—			(65		)
Cash dividends declared on common stock ($0.10 per share)		—		—			—			(4,863		)	—			(4,863		)
Common stock issued at $26.59 per share for stock bonus		9		—			247			—			—			247
Balance, March 31, 2008		48,587		486			127,573			574,988			26,913			729,960
Comprehensive income:
Net income		—		—			—			45,582			—			45,582
Other comprehensive income:
Translation adjustment, net of tax of ($695)		—		—			—			—			(21,194		)	(21,194		)
Comprehensive income																24,388
Stock options exercised		384		4			6,369			—			—			6,373
Stock compensation		—		—			2,484			—			—			2,484
Tax benefit of options exercised		—		—			441			—			—			441
Cash dividends declared on common stock ($0.30 per share)		—		—			—			(14,620		)	—			(14,620		)
Balance, December 31, 2008		48,971		490			136,867			605,950			5,719			749,026
Comprehensive loss:
Net loss		—		—			—			(8,409		)	—			(8,409		)
Other comprehensive income:
Translation adjustment, net of tax of ($9)		—		—			—			—			(5,787		)	(5,787		)
Comprehensive loss																(14,196		)
Stock options exercised		8		—			128			—			—			128
Stock compensation		—		—			393			—			—			393
Tax benefit of options exercised		—		—			(185		)	—			—			(185		)
Cash dividends declared on common stock ($0.10 per share)		—		—			—			(4,897		)	—			(4,897		)
Common stock issued at $27.76 per share for stock bonus		10		—			300			—			—			300
Balance, March 31, 2009		48,989		$	490		$	137,503		$	592,644		$	(68	)	$	730,569

 

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,
		2009			2008
Cash flows from operating activities
Net income (loss)		$	(8,409	)	$	8,352
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Gain) loss on sale of assets		(111		)	2
Depreciation and amortization		6,848			7,420
Deferred income taxes		(1,497		)	172
Noncash compensation related to stock plans		557			936
Loss in equity method investment		193			—
Excess tax benefit of options exercised		(8		)	(25		)
Provision for (recovery of) doubtful accounts		1,760			(727		)
Provision for obsolete inventory		1,018			—
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(5,946		)	(17,788		)
Inventories		23,381			(8,514		)
Trade accounts payable		835			2,069
Income taxes payable		(2,965		)	3,043
Accrued profit sharing trust contributions		(7,556		)	(6,228		)
Accrued cash profit sharing and commissions		(880		)	512
Other current assets		(2,374		)	(2,650		)
Accrued liabilities		(4,428		)	(4,196		)
Other long-term liabilities		1			1,474
Accrued workers’ compensation		13			—
Other noncurrent assets		99			(415		)
Net cash provided by (used in) operating activities		531			(16,563		)
Cash flows from investing activities
Capital expenditures		(5,895		)	(2,849		)
Proceeds from sale of capital assets		41			19
Asset acquisitions, net of cash acquired		(1,655		)	—
Net cash used in investing activities		(7,509		)	(2,830		)
Cash flows from financing activities
Line of credit borrowings		817			2,206
Issuance of common stock		128			508
Excess tax benefit of options exercised		8			25
Dividends paid		(4,898		)	(4,857		)
Net cash used in financing activities		(3,945		)	(2,118		)
Effect of exchange rate changes on cash		(1,619		)	(250		)
Net decrease in cash and cash equivalents		(12,542		)	(21,761		)
Cash and cash equivalents at beginning of period		170,750			186,142
Cash and cash equivalents at end of period		$	158,208		$	164,381
Noncash activity during the period
Noncash capital expenditures		$	180		$	161
Dividends declared but not paid		$	4,897		$	4,863
Issuance of Company’s common stock for compensation		$	300		$	247

 

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 (the “Company”). Investments in 50% or less owned affiliates are 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “2008 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, engineering activities, and software sales and service, though both significantly less than 1% of net sales and not material to the consolidated financial statements, are recognized as the services are completed or the software products and services are delivered. If 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 (Loss) Per Common Share

 

Basic net income (loss) 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.

 

6

 

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

 

		Three Months Ended,								Three Months Ended,
		March 31, 2009								March 31, 2008
(in thousands, except		Income					Per			Income					Per
per-share amounts)		(Loss)			Shares		Share			(Loss)			Shares		Share
Basic EPS
Income (loss) available to common stockholders		$	(8,409	)	48,987		$	(0.17	)	$	8,352		48,574		$	0.17
Effect of Dilutive Securities
Stock options		—			—		—			—			357		—
Diluted EPS
Income (loss) available to common stockholders		$	(8,409	)	48,987		$	(0.17	)	$	8,352		48,931		$	0.17

 

Anti-dilutive shares attributable to outstanding stock options were excluded from the calculation of diluted net income per share. All potentially dilutive securities were excluded from the diluted loss per share calculation for the three months ended March 31, 2009, because the effect of their inclusion would be antidilutive, or would decrease the reported loss per share. For both the three months ended March 31, 2009 and 2008, 1.1 million shares subject to stock options were 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, 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 of each option granted in February 2009 and February 2008 under the 1994 Plan equaled the closing market price per share of the Company’s common stock as reported by the New York Stock Exchange on the day preceding the day that the Compensation Committee of the Company’s Board of Directors met to approve the grant of the options. 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. There were no options granted under the 1995 Plan in 2009 or 2008.

 

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 by the Company 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.

 

7

 

The following table represents the Company’s stock option activity for the three months ended March 31, 2009 and 2008:

 

		Three Months Ended
		March 31,
(in thousands)		2009			2008
Stock option expense recognized in operating expenses		$	448		$	900
Tax benefit of stock option expense in provision for (benefit from) income taxes		148			355
Stock option expense, net of tax		$	300		$	545
Fair value of shares vested		$	393		$	765
Proceeds to the Company from the exercise of stock options		$	128		$	508
Tax benefit from exercise of stock options, including windfall (shortfall) tax benefits, net		$	(185	)	$	(65	)

 

		At March 31,
		2009			2008
Stock option cost capitalized in inventory		$	46		$	117

 

The amounts included in cost of sales, research and development and other engineering, selling, or general and administrative expense 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.

 

Fair Value of Financial Instruments

 

As of March 31, 2009, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $59.5 million, which are maintained in cash equivalents and are carried at cost, approximating fair value, based on Level 1 inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities, as defined in Statement of Financial Accounting Standards (“SFAS”) No. 157.

 

Income Taxes

 

In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in an interim period. The income tax benefit for the three months ended March 31, 2009, however, has been computed based on the first three months of 2009 as a discrete period due to the uncertainty regarding the Company’s ability to reliably estimate pre-tax income for the remainder of the year. The Company cannot reliably estimate pre-tax income for the remainder of 2009 or for the full year, primarily due to the continued uncertainty in the construction markets in which the Company operates. The income tax provision for the three months ended March 31, 2008, was calculated using estimated annual effective tax rates.

 

The effective tax rate was 19.4% in the first quarter of 2009, which resulted in income tax benefit of $2.0 million, versus an effective tax rate of 42.8% in the first quarter of 2008, which resulted in income tax expense of $6.3 million. The effective tax rate of 19.4% is lower than the statutory rate primarily due to the valuation allowances taken on foreign losses and a reduced benefit from the reduction or loss of enterprise zone tax credits at two of the Company’s facilities in California. As a result of the loss before taxes in the first quarter of 2009, the lower effective tax rate resulted in a smaller benefit than if the Company had a higher effective tax rate.

 

8

 

Acquisitions

 

Effective January 1, 2009, the Company adopted the provisions of SFAS No. 141(R), “Business Combinations.” SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies to all transactions or other events in which the Company obtains control of one or more businesses, including combinations achieved without the transfer of consideration, such as by contract alone or through the lapse of minority veto rights. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009, except that resolution of certain tax contingencies and adjustments to valuation allowances related to business combinations, which previously were adjusted to goodwill, will be adjusted to income tax expense for all such adjustments after January 1, 2009, regardless of the date of the original business combination. While this statement did not have a material effect on the company’s consolidated financial statements upon adoption, the effects on future periods will depend upon the nature and significance of future business combinations subject to this statement.

 

In January 2009, the Company acquired the business of RO Design Corp, a Florida corporation doing business as DeckTools, which licenses deck design and estimation software. The software provides professional deck builders, home centers and lumber yards a simple, graphics-driven solution for designing decks and estimating material and labor costs for the project. Payments under this agreement total $4.0 million in cash, including $2.5 million to be paid in the future, which will be treated as compensation expense to the principal officer of RO Design Corp, who is now employed by the Company. The Company recorded goodwill of $1.5 million in the connector products segment as a result of the acquisition. The Company has not finalized the purchase price allocation for the RO Design Corp acquisition, as the Company is still obtaining information and analyzing the fair value of certain acquired assets and liabilities. The results of operations of the business acquired in 2009 are included in the Company’s consolidated results of operations since the date of the acquisition and, for periods prior to 2009, were not material to the Company. Accordingly, pro forma results of operations have not been presented.

 

Recently Issued Accounting Standards

 

In April 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141(R)-1 applies to all assets and liabilities assumed in a business combination that would be within the scope of SFAS No. 5, Accounting for Contingencies,” if not acquired in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in SFAS No. 141(R). An acquirer shall recognize at fair value, at the acquisition date, an asset or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period.  If the acquisition-date fair value of an asset acquired or liability assumed in a business combination that arises from a contingency cannot be determined during the measurement period, an asset or liability shall be recognized at the acquisition date if both information is available before the end of the measurement period indicates that it is probable that an asset existed or that a liability had been incurred at the acquisition date and the amount of the assets or liability can be reasonably estimated. FSP FAS 141(R)-1 became effective for the Company for business combinations for which the acquisition date was on or after January 1, 2009, and is not expected to have a material effect on the Company’s consolidated financial statements.

 

9

 

2.             Trade Accounts Receivable, Net

 

Trade accounts receivable consist of the following:

 

		At March 31,						At December 31,
(in thousands)		2009			2008			2008
Trade accounts receivable		$	87,154		$	112,019		$	81,929
Allowance for doubtful accounts		(5,924		)	(1,968		)	(4,368		)
Allowance for sales discounts and returns		(1,847		)	(2,417		)	(1,556		)
		$	79,383		$	107,634		$	76,005

 

3.             Inventories

 

Inventories consist of the following:

 

		At March 31,						At December 31,
(in thousands)		2009			2008			2008
Raw materials		$	86,411		$	85,756		$	92,638
In-process products		24,890			25,592			26,371
Finished products		114,267			116,507			132,869
		$	225,568		$	227,855		$	251,878

 

4.             Property, Plant and Equipment, Net

 

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

 

		At March 31,						At December 31,
(in thousands)		2009			2008			2008
Land		$	22,654		$	19,783		$	23,989
Buildings and site improvements		137,589			131,907			135,992
Leasehold improvements		4,261			4,005			4,287
Machinery and equipment		219,372			214,232			219,641
		383,876			369,927			383,909
Less accumulated depreciation and amortization		(197,788		)	(182,262		)	(193,639		)
		186,088			187,665			190,270
Capital projects in progress		5,324			7,654			3,048
		$	191,412		$	195,319		$	193,318

 

The Company’s vacant facility in San Leandro, California, remained classified as an asset held for sale as of March 31, 2009, consistent with the classification at December 31, 2008. This facility is associated with the connector segment. In 2007 and 2008, environmental analyses of the San Leandro property indicated that it had contamination related to spilled fuel that would require an estimated $0.7 million to remediate. The clean-up is expected to be completed in 2009. The Company expects to sell the San Leandro property after the remediation is completed.

 

5.             Investments

 

Equity Method Investment

 

The Company has a 35% equity interest in Keymark Enterprises, LLC (“Keymark”), for which the Company accounts using the equity method. Keymark develops software that assists in designing and engineering 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 capital contributions to Keymark.

 

10

 

6.             Debt

 

Outstanding debt at March 31, 2009 and 2008, and December 31, 2008, and the available lines of credit at March 31, 2009, consisted of the following:

 

		Available			Debt Outstanding
		Credit at			at						at
		March 31,			March 31,						December 31,
(dollar amounts in thousands)		2009			2009			2008			2008
Revolving line of credit, interest at LIBOR plus 0.27% (at March 31, 2009, LIBOR plus 0.27% was 0.79%), expires October 2012, commitment fees payable at the annual rate of 0.08% on the unused portion of the facility		$	200,000		$	—		$	—		$	—
Revolving line of credit, interest at the bank’s base rate plus 3% (at March 31, 2009, the bank’s base rate plus 3% was 3.50%), expires October 2009		358			—			—			—
Revolving lines of credit, interest rates between 1.86% and 3.82%		4,331			821			3,390			26
Line of credit					$	821		$	3,390		$	26
Available credit		$	204,689

 

7.             Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the 2008 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. See Note 4 “Property, Plant and Equipment, Net.”

 

Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, environmental conditions or other factors can contribute to failure of fasteners, connectors, tools and venting products. 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. Based on test results to date, the Company believes that, generally, if its products are appropriately selected, installed and used in accordance with the Company’s guidance, they may be reliably used in appropriate applications.

 

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8.             Stock Option Plans

 

The Company currently has two stock option plans (see Note 1 “Basis of Presentation — 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 United States 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 yield on the grant date.

 

Black-Scholes option pricing model assumptions for options granted in 2009 and 2008 are as follows:

 

Number				Risk											Weighted
of Options				Free											Average
Granted		Grant		Interest		Dividend		Expected							Fair
(in thousands)		Date		Rate		Yield		Life		Volatility		Exercise Price			Value
1994 Plan
24		02/23/09		2.08	%	2.48	%	6.5 years		30.9	%	$	16.10		$	4.06
29		02/04/09		2.17	%	1.88	%	6.5 years		30.9	%	$	21.25		$	5.86
14		04/23/08		3.15	%	1.55	%	6.0 years		27.1	%	$	25.74		$	6.92
40		02/13/08		2.90	%	1.68	%	6.0 years		27.1	%	$	23.78		$	6.16

 

There were no options granted under the 1995 Plan in 2009 or 2008.

 

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2009:

 

							Weighted-
				Weighted-			Average		Aggregate
				Average			Remaining		Intrinsic
		Shares		Exercise			Contractual		Value *
Non-Qualified Stock Options		(in thousands)		Price			Life (in years)		(in thousands)
Outstanding at January 1, 2009		2,250		$	29.70
Granted		53		18.92
Exercised		(8	)	16.45
Forfeited		(38	)	38.84
Outstanding at March 31, 2009		2,257		$	29.34		2.6		$	467
Outstanding and expected to vest at March 31, 2009		2,245		$	29.34		2.6		$	463
Exercisable at March 31, 2009		2,006		$	29.03		2.3		$	422

 

*  The intrinsic value represents the amount, if any, 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 $18.02 on March 31, 2009.

 

The total intrinsic value of options exercised during the three months ended March 31, 2009 and 2008, was $60 thousand and $179 thousand, respectively.

 

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