Simpson Manufacturing Co., Inc. - Quarter Report: 2010 June (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: June 30, 2010

 

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: 1-13429

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

5956 W. Las Positas Blvd., Pleasanton, CA 94588

(Address of principal executive offices)

 

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

 

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

 

 

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 June 30, 2010:  49,426,053

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

		June 30,						December 31,
		2010			2009			2009
ASSETS
Current assets
Cash and cash equivalents		$	219,763		$	169,132		$	250,381
Trade accounts receivable, net		104,284			118,646			77,317
Inventories		150,786			190,153			163,754
Deferred income taxes		19,257			12,153			13,970
Assets held for sale		40,457			7,887			7,887
Other current assets		10,224			10,686			16,766
Total current assets		544,771			508,657			530,075
Property, plant and equipment, net		184,949			193,958			187,814
Goodwill		72,163			79,858			81,626
Intangible assets, net		23,156			33,050			28,852
Equity method investment		473			—			748
Other noncurrent assets		17,005			14,374			14,690
Total assets		$	842,517		$	829,897		$	843,805
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit		$	—		$	27		$	—
Trade accounts payable		27,906			22,574			28,462
Accrued liabilities		31,192			33,855			29,209
Liabilities held for sale		2,739			—			—
Income taxes payable		760			1,370			—
Accrued profit sharing trust contributions		3,540			3,718			7,018
Accrued cash profit sharing and commissions		9,264			4,436			2,427
Accrued workers’ compensation		4,386			4,279			4,352
Total current liabilities		79,787			70,259			71,468
Long-term liabilities		9,263			9,659			8,553
Total liabilities		89,050			79,918			80,021
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, at par value		494			491			493
Additional paid-in capital		147,745			138,839			146,036
Retained earnings		604,479			598,412			598,493
Accumulated other comprehensive income		749			12,237			18,762
Total stockholders’ equity		753,467			749,979			763,784
Total liabilities and stockholders’ equity		$	842,517		$	829,897		$	843,805

 

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

 

2

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands except per-share amounts, unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2010			2009			2010			2009
Net sales		$	165,614		$	152,198		$	289,434		$	261,341
Cost of sales		88,828			92,987			158,620			171,335
Gross profit		76,786			59,211			130,814			90,006
Operating expenses:
Research and development and other engineering		5,700			4,860			10,441			9,372
Selling		16,610			15,409			31,483			30,103
General and administrative		20,524			19,033			37,456			38,127
Loss on sale of assets		15			180			404			68
		42,849			39,482			79,784			77,670
Income from operations		33,937			19,729			51,030			12,336
Loss in equity method investment, before tax		(131		)	(21		)	(275		)	(214		)
Interest income (expense), net		26			(34		)	37			69
Income from continuing operations before taxes		33,832			19,674			50,792			12,191
Provision for income taxes from continuing operations		12,773			8,442			19,903			7,500
Income from continuing operations, net of tax		21,059			11,232			30,889			4,691
Discontinued operations:
Loss from discontinued operations		(21,176		)	(824		)	(22,223		)	(3,770		)
Benefit from income taxes from discontinued operations		6,820			275			7,237			1,353
Loss from discontinued operations, net of tax		(14,356		)	(549		)	(14,986		)	(2,417		)
Net income		$	6,703		$	10,683		$	15,903		$	2,274
Earnings (loss) per common share:
Basic
Continuing operations		$	0.43		$	0.23		$	0.63		$	0.10
Discontinued operations		(0.29		)	(0.01		)	(0.30		)	(0.05		)
Net income		0.14			0.22			0.32			0.05
Diluted
Continuing operations		$	0.42		$	0.23		$	0.62		$	0.10
Discontinued operations		(0.29		)	(0.01		)	(0.30		)	(0.05		)
Net income		0.14			0.22			0.32			0.05
Number of shares outstanding
Basic		49,417			49,016			49,403			49,001
Diluted		49,598			49,114			49,559			49,099
Cash dividends declared per common share		$	0.10		$	0.10		$	0.20		$	0.20

 

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

 

3

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the six months ended June 30, 2009 and 2010 and December 31, 2009

(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, 2009		48,971		$	490		$	136,867		$	605,950		$	5,719		$	749,026
Comprehensive income:
Net income		—		—			—			2,274			—			2,274
Other comprehensive income:
Translation adjustment, net of tax of ($38)		—		—			—			—			6,518			6,518
Comprehensive income																8,792
Stock options exercised		69		1			1,125			—			—			1,126
Stock compensation		—		—			791			—			—			791
Tax benefit of options exercised		—		—			(244		)	—			—			(244		)
Cash dividends declared on common stock, $0.20 per share		—		—			—			(9,812		)	—			(9,812		)
Common stock issued at $27.76 per share for stock bonus		10		—			300			—			—			300
Balance, June 30, 2009		49,050		491			138,839			598,412			12,237			749,979
Comprehensive income:
Net income		—		—			—			9,943			—			9,943
Other comprehensive income:
Translation adjustment, net of tax of ($1)		—		—			—			—			6,525			6,525
Comprehensive income																16,468
Stock options exercised		327		2			6,499			—			—			6,501
Stock compensation		—		—			899			—			—			899
Tax benefit of options exercised		—		—			(201		)	—			—			(201		)
Cash dividends declared on common stock, $0.20 per share		—		—			—			(9,862		)	—			(9,862		)
Balance, December 31, 2009		49,377		493			146,036			598,493			18,762			763,784
Comprehensive income:
Net income		—		—			—			15,903			—			15,903
Other comprehensive income:
Translation adjustment, net of tax of $3		—		—			—			—			(18,013		)	(18,013		)
Comprehensive income																(2,110		)
Stock options exercised		39		1			954			—			—			955
Stock compensation		—		—			561			—			—			561
Tax benefit of options exercised		—		—			(83		)	—			—			(83		)
Cash dividends declared on common stock, $0.20 per share		—		—			—			(9,917		)	—			(9,917		)
Common stock issued at $26.89 per share for stock bonus		10		—			277			—			—			277
Balance, June 30, 2010		49,426		$	494		$	147,745		$	604,479		$	749		$	753,467

 

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

 

4

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

		Six Months
		Ended June 30,
		2010			2009
Cash flows from operating activities
Net income		$	15,903		$	2,274
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of assets		404			71
Depreciation and amortization		12,501			14,599
Impairment loss on assets held for sale		17,566			—
Deferred income taxes		(5,396		)	(448		)
Noncash compensation related to stock plans		768			1,043
Loss in equity method investment		275			214
Excess tax benefit of options exercised		(10		)	(19		)
Provision for (recovery of) doubtful accounts		(189		)	1,594
Provision for excess and obsolete inventory		4,932			570
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(41,951		)	(39,970		)
Inventories		(15,703		)	64,612
Trade accounts payable		1,854			(818		)
Income taxes payable		6,883			3,061
Accrued profit sharing trust contributions		(3,459		)	(5,853		)
Accrued cash profit sharing and commissions		6,966			2,142
Other current assets		(540		)	(4,444		)
Accrued liabilities		4,373			(1,789		)
Long-term liabilities		190			3,254
Accrued workers’ compensation		34			(8		)
Other noncurrent assets		158			(1,903		)
Net cash provided by operating activities		5,559			38,182
Cash flows from investing activities
Capital expenditures		(21,628		)	(9,509		)
Proceeds from sale of capital assets		60			612
Asset acquisitions, net of cash acquired		—			(23,670		)
Loans made to related parties		(1,798		)	—
Loans repaid by related parties		50			—
Net cash used in investing activities		(23,316		)	(32,567		)
Cash flows from financing activities
Line of credit borrowings		—			842
Repayment of line of credit borrowings		—			(842		)
Issuance of common stock		955			1,126
Excess tax benefit of options exercised		10			19
Dividends paid		(9,879		)	(9,798		)
Net cash used in financing activities		(8,914		)	(8,653		)
Effect of exchange rate changes on cash		(3,947		)	1,420
Net decrease in cash and cash equivalents		(30,618		)	(1,618		)
Cash and cash equivalents at beginning of period		250,381			170,750
Cash and cash equivalents at end of period		$	219,763		$	169,132
Noncash activity during the period
Noncash capital expenditures		$	226		$	194
Dividends declared but not paid		$	4,978		$	4,915
Issuance of Company’s common stock for compensation		$	277		$	300

 

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 (“GAAP”) 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, 2009 (the “2009 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 GAAP. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP. 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 after-market repair and maintenance, engineering activities and software license sales and service, though 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.

 

Reclassifications

 

Certain financial statement reclassifications, all related to discontinued operations, have been made to previously reported amounts to conform to the current year’s presentation.

 

Segment and Discontinued Operations Information

 

The Company operates under two reportable segments, the connector products segment and the venting products segment. As set forth in Note 11 “Discontinued Operations,” on June 30, 2010, the Company entered into an agreement to sell substantially all of the assets and liabilities of its venting segment and therefore, they are no longer included in continuing operations. Accordingly, the Company has classified the results of the venting products segment, including impairments and losses of goodwill and other assets, as discontinued operations in the

 

6

 

Condensed Consolidated Statements of Operations for all periods presented. The Company’s financial position, as of June 30, 2010, reflects the assets and liabilities of the venting products segment to be sold as assets or liabilities held for sale at their estimated net realizable value. Except as otherwise stated, discussion in these notes pertains to the Company’s continuing operations. The Company is currently evaluating its organizational structure and the future presentation of segment information.

 

Net Earnings(Loss) Per Common Share

 

Basic earnings (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.

 

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

 

		Three Months Ended						Six Months Ended
(in thousands, except)		June 30,						June 30,
per-share amounts)		2010			2009			2010			2009
Earnings from continuing operations, net of tax		$	21,059		$	11,232		$	30,889		$	4,691
Loss from discontinued operations, net of tax		(14,356		)	(549		)	(14,986		)	(2,417		)
Net income available to common stockholders		$	6,703		$	10,683		$	15,903		$	2,274
Basic weighted average shares outstanding		49,417			49,016			49,403			49,001
Dilutive effect of potential common stock equivalents — stock options		181			98			156			98
Diluted weighted average shares outstanding		49,598			49,114			49,559			49,099
Net earnings (loss) per share — basic:
Continuing operations		$	0.43		$	0.23		$	0.63		$	0.10
Discontinued operations		(0.29		)	(0.01		)	(0.30		)	(0.05		)
Net income		0.14			0.22			0.32			0.05
Net earnings (loss) per share — diluted:
Continuing operations		$	0.42		$	0.23		$	0.62		$	0.10
Discontinued operations		(0.29		)	(0.01		)	(.030		)	(0.05		)
Net income		0.14			0.22			0.32			0.05
Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive		646			1,061			856			1,078

 

Anti-dilutive shares attributable to outstanding stock options were excluded from the calculation of diluted net income per share.

 

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 2010 and February 2009 under the 1994 Plan equaled the closing market price per share of the Company’s common stock as reported by the New York Stock

 

7

 

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 2010 or 2009.

 

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. Shares of common stock issued on exercise of stock options under both of the plans are registered under the Securities Act of 1933. 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.

 

The following table represents the Company’s stock option activity, including both continuing and discontinued operations, for the three and six months ended June 30, 2010 and 2009:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(in thousands)		2010			2009			2010			2009
Stock option expense recognized in operating expenses		$	218		$	397		$	585		$	845
Tax benefit of stock option expense in provision for income taxes		56			135			173			283
Stock option expense, net of tax		$	162		$	262		$	412		$	562
Fair value of shares vested		$	179		$	398		$	561		$	791
Proceeds to the Company from the exercise of stock options		$	863		$	998		$	955		$	1,126
Tax benefit from exercise of stock options, including shortfall tax benefits		$	(9	)	$	(59	)	$	(83	)	$	(244	)

 

		At June 30,
		2010			2009
Stock option cost capitalized in inventory		$	44		$	47

 

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. The amounts attributed to discontinued operations were not significant for any of the periods presented.

 

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 June 30, 2010, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $127.2 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 the “Fair Value Measurements and Disclosures” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”).

 

8

 

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 expense for the first and second quarters of both 2010 and 2009, however, has been computed based on those quarters as discrete periods due to the uncertainty regarding the Company’s ability to reliably estimate pre-tax income for the remainder of those years, primarily as a result of the continued uncertainty in the construction markets in which the Company operates. The effective tax rate was 37.8% in the second quarter of 2010, which resulted in income tax expense of $12.8 million. The effective tax rate was 42.9% in the second quarter of 2009, which resulted in income tax expense of $8.4 million. The effective tax rate was 39.2% in the first half of 2010, which resulted in income tax expense of $19.9 million. The effective tax rate was 61.5% in the first half of 2009, which resulted in income tax expense of $7.5 million.

 

Recently Issued Accounting Standards

 

In May 2009, the FASB issued guidance codified in the “Subsequent Events” topic of the FASB ASC, which establishes general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. In February 2010, the FASB amended this guidance to remove the requirement for companies that file or furnish financial statements with the Securities and Exchange Commission to disclose the date through which subsequent events have been evaluated.

 

2.             Trade Accounts Receivable, Net

 

Trade accounts receivable consist of the following:

 

		At June 30,						At December 31,
(in thousands)		2010			2009			2009
Trade accounts receivable		$	107,910		$	126,686		$	83,892
Allowance for doubtful accounts		(1,506		)	(5,469		)	(4,667		)
Allowance for sales discounts and returns		(2,120		)	(2,571		)	(1,908		)
		$	104,284		$	118,646		$	77,317

 

3.             Inventories

 

Inventories consist of the following:

 

		At June 30,						At December 31,
(in thousands)		2010			2009			2009
Raw materials		$	61,238		$	62,041		$	61,408
In-process products		18,729			23,670			21,113
Finished products		70,819			104,442			81,233
		$	150,786		$	190,153		$	163,754

 

9

 

4.             Property, Plant and Equipment, Net

 

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

 

		At June 30,						At December 31,
(in thousands)		2010			2009			2009
Land		$	23,182		$	23,489		$	23,729
Buildings and site improvements		139,304			140,431			148,381
Leasehold improvements		3,543			4,395			3,893
Machinery and equipment		182,317			224,752			226,436
		348,346			393,067			402,439
Less accumulated depreciation and amortization		(184,638		)	(205,833		)	(216,157		)
		163,708			187,234			186,282
Capital projects in progress		21,241			6,724			1,532
		$	184,949		$	193,958		$	187,814

 

The Company’s vacant facility in San Leandro, California, remained classified as an asset held for sale as of June 30, 2010, consistent with the classification at December 31, 2009, and is being actively marketed. In March 2010, the Company acquired a facility in San Bernadino, California, for $19.2 million in cash. The Company plans to consolidate its operations from Brea, California, and its former leased warehouse in Ontario, California, into this facility in early 2011. The Company sold all of the real estate associated with its Brea properties in July 2010 for $14.7 million in cash and will record a gain on the sale of $5.2 million.

 

5.             Investments

 

Equity Method Investment

 

At June 30, 2010, the Company had a 40.6% 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.

 

6.             Goodwill and Intangible Assets, Net

 

Goodwill was as follows:

 

		At June 30,						At December 31,
(in thousands)		2010			2009			2009
Connector products		$	72,163		$	75,423		$	77,191
Venting products (discontinued operations)		—			4,435			4,435
Total		$	72,163		$	79,858		$	81,626

 

Intangible assets, net, were as follows:

 

		At June 30, 2010
		Gross						Net
		Carrying			Accumulated			Carrying
(in thousands)		Amount			Amortization			Amount
Connector products		$	35,420		$	(12,264	)	$	23,156

 

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