Simpson Manufacturing Co., Inc. - Quarter Report: 2011 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, 2011

 

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, 2011: 48,281,053

 

 

 

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,
		2011			2010			2010
ASSETS
Current assets
Cash and cash equivalents		$	262,013		$	219,763		$	335,049
Trade accounts receivable, net		117,975			104,284			68,256
Inventories		166,934			150,786			152,297
Deferred income taxes		10,884			19,257			10,189
Assets held for sale		6,792			40,457			10,787
Other current assets		8,813			10,224			14,678
Total current assets		573,411			544,771			591,256
Property, plant and equipment, net		183,698			184,949			177,072
Goodwill		72,111			72,163			70,069
Intangible assets, net		22,051			23,156			23,466
Equity method investment		839			473			213
Other noncurrent assets		12,465			17,005			12,633
Total assets		$	864,575		$	842,517		$	874,709
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Trade accounts payable		$	32,060		$	27,906		$	35,164
Accrued liabilities		36,067			31,192			31,372
Liabilities held for sale		—			2,739			—
Income taxes payable		3,054			760			—
Accrued profit sharing trust contributions		2,997			3,540			5,591
Accrued cash profit sharing and commissions		13,036			9,264			2,805
Accrued workers’ compensation		5,663			4,386			4,684
Total current liabilities		92,877			79,787			79,616
Long-term liabilities		7,246			9,263			7,300
Total liabilities		100,123			89,050			86,916
Commitments and contingencies (Note 8)
Stockholders’ equity
Common stock, at par value		482			494			500
Additional paid-in capital		167,862			147,745			165,425
Retained earnings		571,229			604,479			607,241
Accumulated other comprehensive income		24,879			749			14,627
Total stockholders’ equity		764,452			753,467			787,793
Total liabilities and stockholders’ equity		$	864,575		$	842,517		$	874,709

 

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,
		2011			2010			2011			2010
Net sales		$	177,812		$	165,614		$	310,348		$	289,434
Cost of sales		94,313			88,828			169,900			158,620
Gross profit		83,499			76,786			140,448			130,814
Operating expenses:
Research and development and other engineering		6,945			5,700			12,939			10,441
Selling		19,819			16,610			36,895			31,483
General and administrative		25,454			20,524			47,076			37,456
Loss on sale of assets		73			15			48			404
		52,291			42,849			96,958			79,784
Income from operations		31,208			33,937			43,490			51,030
Loss in equity method investment, before tax		(69		)	(131		)	(82		)	(275		)
Interest income, net		108			26			179			37
Income from continuing operations before taxes		31,247			33,832			43,587			50,792
Provision for income taxes from continuing operations		11,754			12,773			17,016			19,903
Income from continuing operations, net of tax		19,493			21,059			26,571			30,889
Loss from discontinued operations, net of tax		—			(14,356		)	—			(14,986		)
Net income		$	19,493		$	6,703		$	26,571		$	15,903
Earnings (loss) per common share:
Basic
Continuing operations		$	0.39		$	0.43		$	0.53		$	0.63
Discontinued operations		—			(0.29		)	—			(0.30		)
Net income		0.39			0.14			0.53			0.32
Diluted
Continuing operations		$	0.39		$	0.42		$	0.53		$	0.62
Discontinued operations		—			(0.29		)	—			(0.30		)
Net income		0.39			0.14			0.53			0.32
Number of shares outstanding
Basic		49,404			49,417			49,753			49,403
Diluted		49,456			49,598			49,809			49,559
Cash dividends declared per common share		$	0.125		$	0.10		$	0.25		$	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, 2010 and 2011 and December 31, 2010

(In thousands except per-share amounts, unaudited)

 

													Accumulated
							Additional						Other
		Common Stock					Paid-in			Retained			Comprehensive			Treasury
		Shares		Par Value			Capital			Earnings			Income (Loss)			Stock			Total
Balance, January 1, 2010		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 effect 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
Comprehensive income:
Net income		—		—			—			12,683			—			—			12,683
Other comprehensive income:
Translation adjustment, net of tax of $9		—		—			—			—			13,878			—			13,878
Comprehensive income																			26,561
Stock options exercised		668		6			16,987			—			—			—			16,993
Stock compensation		—		—			3,016			—			—			—			3,016
Tax effect of options exercised		—		—			(2,347		)	—			—			—			(2,347		)
Cash dividends declared on common stock, $0.20 per share		—		—			—			(9,921		)	—			—			(9,921		)
Common stock issued at $22.04 per share for stock bonus		2		—			24			—			—			—			24
Balance, December 31, 2010		50,096		500			165,425			607,241			14,627			—			787,793
Comprehensive income:
Net income		—		—			—			26,571			—			—			26,571
Other comprehensive income:
Translation adjustment, net of tax of $1		—		—			—			—			10,252			—			10,252
Comprehensive income																—			36,823
Stock options exercised		6		—			154			—			—			—			154
Stock compensation		—		—			2,118			—			—			—			2,118
Tax effect of options exercised		—		—			(39		)	—			—			—			(39		)
Repurchase of common stock		(1,828	)	—			—			—			—			(50,075		)	(50,075		)
Retirement of common stock		—		(18		)	—			(50,057		)	—			50,075			—
Cash dividends declared on common stock, $0.25 per share		—		—			—			(12,526		)	—			—			(12,526		)
Common stock issued at $30.91 per share for stock bonus		7		—			204			—			—			—			204
Balance, June 30, 2011		48,281		$	482		$	167,862		$	571,229		$	24,879		$	—		$	764,452

 

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,
		2011			2010
Cash flows from operating activities
Net income		$	26,571		$	15,903
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss on sale of assets		48			404
Depreciation and amortization		10,055			12,501
Impairment loss on assets held for sale		1,094			17,566
Deferred income taxes		(1,026		)	(5,396		)
Noncash compensation related to stock plans		2,377			768
Loss in equity method investment		82			275
Excess tax benefit of options exercised		4			(10		)
Provision for (recovery of) doubtful accounts		179			(189		)
Provision for excess and obsolete inventory		—			4,932
Accrued interest earned from related party		(58		)	—
Changes in operating assets and liabilities:
Trade accounts receivable		(48,234		)	(41,951		)
Inventories		(12,404		)	(15,703		)
Trade accounts payable		(2,386		)	1,854
Income taxes payable		7,890			6,883
Accrued profit sharing trust contributions		(2,611		)	(3,459		)
Accrued cash profit sharing and commissions		10,160			6,966
Other current assets		410			(540		)
Accrued liabilities		3,215			4,373
Long-term liabilities		(42		)	190
Accrued workers’ compensation		979			34
Other noncurrent assets		352			158
Net cash provided by (used in) operating activities		(3,345		)	5,559
Cash flows from investing activities
Capital expenditures		(14,095		)	(21,628		)
Proceeds from sale of capital assets		3,156			60
Loans made to related parties		—			(1,798		)
Loans repaid by related parties		26			50
Net cash used in investing activities		(10,913		)	(23,316		)
Cash flows from financing activities
Repurchase of common stock		(50,075		)	—
Issuance of common stock		154			955
Excess tax benefit of options exercised		(4		)	10
Dividends paid		(11,274		)	(9,879		)
Net cash used in financing activities		(61,199		)	(8,914		)
Effect of exchange rate changes on cash and cash equivalents		2,421			(3,947		)
Net decrease in cash and cash equivalents		(73,036		)	(30,618		)
Cash and cash equivalents at beginning of period		335,049			250,381
Cash and cash equivalents at end of period		$	262,013		$	219,763
Noncash activity during the period
Noncash capital expenditures		$	1,587		$	226
Dividends declared but not paid		$	6,263		$	4,978
Issuance of Company’s common stock for compensation		$	204		$	277

 

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, 2010 (the “2010 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, software license sales and services and lease income, 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.

 

Segment and Discontinued Operations Information

 

The Company had operated under two reportable segments, the connector products segment and the venting products segment. As set forth in Note 11 “Discontinued Operations,” on August 31, 2010, the Company sold substantially all of the assets and liabilities of its venting segment. 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 Condensed Consolidated Statements of Operations for all periods presented. Except as otherwise stated below, discussion in these notes pertains to the Company’s continuing operations.

 

As a result of the sale of the assets of Simpson Dura-Vent Company, Inc (“Simpson Dura-Vent”), the Company has reorganized its operating segments into three reportable operating segments consisting of North America, Europe and Asia/Pacific.

 

6

 

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 (loss) per share (“EPS”) to diluted EPS:

 

		Three Months Ended						Six Months Ended
(in thousands, except)		June 30,						June 30,
per-share amounts)		2011			2010			2011			2010
Earnings from continuing operations, net of tax		$	19,493		$	21,059		$	26,571		$	30,889
Loss from discontinued operations, net of tax		—			(14,356		)	—			(14,986		)
Net income available to common stockholders		$	19,493		$	6,703		$	26,571		$	15,903
Basic weighted average shares outstanding		49,404			49,417			49,753			49,403
Dilutive effect of potential common stock equivalents — stock options		52			181			56			156
Diluted weighted average shares outstanding		49,456			49,598			49,809			49,559
Net earnings (loss) per share — basic:
Continuing operations		$	0.39		$	0.43		$	0.53		$	0.63
Discontinued operations		—			(0.29		)	—			(0.30		)
Net income		0.39			0.14			0.53			0.32
Net earnings (loss) per share — diluted:
Continuing operations		$	0.39		$	0.42		$	0.53		$	0.62
Discontinued operations		—			(0.29		)	—			(0.30		)
Net income		0.39			0.14			0.53			0.32
Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive		1,743			646			1,743			856

 

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

 

Accounting for Stock-Based Compensation

 

With the approval of the Company’s stockholders on April 26, 2011, the Company adopted the Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the “2011 Plan”). The 2011 Plan amended and restated in their entirety, and incorporated and superseded, both the Simpson Manufacturing Co., Inc. 1994 Stock Option Plan (the “1994 Plan”), which was principally for the Company’s employees, and the Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan (the “1995 Plan”), which was for its independent directors. Options previously granted under the 1994 Plan or the 1995 Plan will not be affected by the adoption of the 2011 Plan and will continue to be governed by the 1994 Plan or the 1995 Plan, respectively.

 

Under the 1994 Plan, the Company could grant incentive stock options and non-qualified stock options, although the Company granted only non-qualified stock options under the 1994 Plan and the 1995 Plan. The Company generally granted 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 2011 and February 2010 under the 1994 Plan equaled the closing market price per share

 

7

 

of the Company’s common stock as reported by the New York Stock Exchange on the day preceding the day that the Compensation and Leadership Development 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 was 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. 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. Shares of common stock issued on exercise of stock options under the 1994 Plan and the 1995 Plan are registered under the Securities Act of 1933.

 

Under the 2011 Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although the Company currently intends to award primarily restricted stock units and to a lesser extent, if at all, non-qualified stock options. The Company does not currently intend to award incentive stock options or restricted stock. Under the 2011 Plan, no more than 16.3 million shares of the Company’s common stock may be issued (including shares already sold) pursuant to all awards under the 2011 Plan, including on exercise of options previously granted under the 1994 Plan and the 1995 Plan. The Company currently intends that shares of common stock to be issued pursuant to the 2011 Plan will be registered under the Securities Act of 1933.

 

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, 2011 and 2010:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
(in thousands)		2011			2010			2011			2010
Stock option expense recognized in operating expenses		$	845		$	218		$	2,293		$	585
Tax benefit of stock option expense in provision for income taxes		297			56			818			173
Stock option expense, net of tax		$	548		$	162		$	1,475		$	412
Fair value of shares vested		$	837		$	179		$	2,118		$	561
Proceeds to the Company from the exercise of stock options		$	—		$	863		$	154		$	955
Tax effect from exercise of stock options, including shortfall tax benefits		$	—		$	(9	)	$	(39	)	$	(83	)

 

						At June 30,
						2011			2010
Stock option cost capitalized in inventory						$	108		$	44

 

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

 

The “Fair Value Measurements and Disclosures” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar

 

8

 

assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

As of June 30, 2011, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $171.6 million, which are maintained in cash equivalents and are carried at cost, approximating fair value, based on Level 1 inputs. There are no other recurring or non-recurring fair value measurements.

 

Income Taxes

 

The Company uses an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in each interim period. The provision for income taxes for the first two quarters of 2010, however, have been computed based on those quarters as discrete periods due to the uncertainty regarding the Company’s ability to reliably estimate income before taxes during 2010, primarily as a result of uncertainty in the construction markets in which the Company operates.

 

The following table presents the Company’s effective tax rates and income tax expense for the three and six months ended June 30, 2011 and 2010:

 

		Three Months Ended						Six Months Ended
(in thousands, except)		June 30,						June 30,
percentage amounts)		2011			2010			2011			2010
Effective tax rate		37.6		%	37.8		%	39.0		%	39.2		%
Provision for income taxes		$	11,754		$	12,773		$	17,016		$	19,903

 

Recently Issued Accounting Standards

 

Recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or is not expected to have a material effect on the Company’s consolidated financial statements.

 

2.             Trade Accounts Receivable, Net

 

Trade accounts receivable consist of the following:

 

		At June 30,						At December 31,
(in thousands)		2011			2010			2010
Trade accounts receivable		$	121,414		$	107,910		$	70,781
Allowance for doubtful accounts		(1,500		)	(1,506		)	(1,344		)
Allowance for sales discounts and returns		(1,939		)	(2,120		)	(1,181		)
		$	117,975		$	104,284		$	68,256

 

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3.             Inventories

 

Inventories consist of the following:

 

		At June 30,							At December 31,
(in thousands)		2011				2010			2010
Raw materials		$	66,016			$	61,238		$	61,996
In-process products		19,885				18,729			18,364
Finished products		81,033				70,819			71,937
		$		166,934		$	150,786		$	152,297

 

4.             Property, Plant and Equipment, Net

 

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

 

		At June 30,						At December 31,
(in thousands)		2011			2010			2010
Land		$	29,459		$	23,182		$	26,384
Buildings and site improvements		155,251			139,304			141,834
Leasehold improvements		3,737			3,543			3,693
Machinery and equipment		190,202			182,317			186,021
		378,649			348,346			357,932
Less accumulated depreciation and amortization		(198,461		)	(184,638		)	(189,751		)
		180,188			163,708			168,181
Capital projects in progress		3,510			21,241			8,891
		$	183,698		$	184,949		$	177,072

 

The Company’s vacant facility in San Leandro, California, remained classified as an asset held for sale as of June 30, 2011, consistent with the classification at December 31, 2010. The Company concluded, in the quarter ended June 30, 2011, that the San Leandro facility, associated with the North American segment, is expected to be sold below carrying value, and therefore recorded an impairment charge, within general and administrative expense, of $1.1 million, equal to the amount by which carrying value exceeds net estimated realizable value. In April 2011, the facility in France, which was acquired in the Aginco purchase, was sold for an amount approximately equal to its carrying cost.

 

5.             Investments

 

Equity Method Investment

 

At December 31, 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. In March 2011, Keymark’s other owner defaulted on its loan and pledge agreement, entered into with the Company in October 2008, for the payment of the remaining balance of $0.7 million that was due in March 2011. As a result, the Company was assigned an additional 5.5% equity interest pursuant to the pledge agreement, which discharged the remaining debt. At June 30, 2011, the Company’s equity interest in Keymark was 46.1%.

 

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