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

 

Delaware

 

94-3196943

(State or other jurisdiction of incorporation

 

(I.R.S. Employer

or organization)

 

Identification No.)

 

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.

 

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, 2011: 50,108,673

 

 

 



 

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,

 

 

 

2011

 

2010

 

2010

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

301,231

 

$

202,843

 

$

335,049

 

Trade accounts receivable, net

 

91,076

 

93,030

 

68,256

 

Inventories

 

166,966

 

180,684

 

152,297

 

Deferred income taxes

 

10,360

 

13,657

 

10,189

 

Assets held for sale

 

9,148

 

7,887

 

10,787

 

Other current assets

 

11,927

 

13,054

 

14,678

 

Total current assets

 

590,708

 

511,155

 

591,256

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

184,606

 

200,975

 

177,072

 

Goodwill

 

71,338

 

79,608

 

70,069

 

Intangible assets, net

 

22,896

 

26,889

 

23,466

 

Equity method investment

 

200

 

604

 

213

 

Other noncurrent assets

 

13,422

 

16,722

 

12,633

 

Total assets

 

$

883,170

 

$

835,953

 

$

874,709

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Trade accounts payable

 

$

29,822

 

$

25,606

 

$

35,164

 

Accrued liabilities

 

31,831

 

29,548

 

31,372

 

Accrued profit sharing trust contributions

 

6,508

 

1,858

 

5,591

 

Accrued cash profit sharing and commissions

 

5,396

 

3,508

 

2,805

 

Accrued workers’ compensation

 

4,715

 

4,374

 

4,684

 

Total current liabilities

 

78,272

 

64,894

 

79,616

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

7,833

 

8,924

 

7,300

 

Total liabilities

 

86,105

 

73,818

 

86,916

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, at par value

 

500

 

493

 

500

 

Additional paid-in capital

 

167,025

 

146,711

 

165,425

 

Retained earnings

 

608,056

 

602,754

 

607,241

 

Accumulated other comprehensive income

 

21,484

 

12,177

 

14,627

 

Total stockholders’ equity

 

797,065

 

762,135

 

787,793

 

Total liabilities and stockholders’ equity

 

$

883,170

 

$

835,953

 

$

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

 

 

 

March 31,

 

 

 

2011

 

2010

 

Net sales

 

$

132,536

 

$

123,820

 

Cost of sales

 

75,588

 

69,793

 

Gross profit

 

56,948

 

54,027

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Research and development and other engineering

 

5,994

 

4,742

 

Selling

 

17,075

 

14,872

 

General and administrative

 

21,621

 

16,932

 

Loss (gain) on sale of assets

 

(25

)

389

 

 

 

44,665

 

36,935

 

 

 

 

 

 

 

Income from operations

 

12,283

 

17,092

 

 

 

 

 

 

 

Loss in equity method investment, before tax

 

(14

)

(144

)

Interest income, net

 

72

 

12

 

Income from continuing operations before taxes

 

12,341

 

16,960

 

Provision for income taxes from continuing operations

 

5,263

 

7,130

 

Income from continuing operations, net of tax

 

7,078

 

9,830

 

Loss from discontinued operations, net of tax

 

 

(631

)

Net income

 

$

7,078

 

$

9,199

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.20

 

Discontinued operations

 

 

(0.01

)

Net income

 

0.14

 

0.19

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.20

 

Discontinued operations

 

 

(0.01

)

Net income

 

0.14

 

0.19

 

 

 

 

 

 

 

Number of shares outstanding

 

 

 

 

 

Basic

 

50,107

 

49,388

 

Diluted

 

50,165

 

49,520

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.125

 

$

0.10

 

 

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, 2010 and 2011 and nine months ended December 31, 2010

(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, 2010

 

49,377

 

$

493

 

$

146,036

 

$

598,493

 

$

18,762

 

$

763,784

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

9,199

 

 

9,199

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment, net of tax of $3

 

 

 

 

 

(6,585

)

(6,585

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

2,614

 

Stock options exercised

 

4

 

 

92

 

 

 

92

 

Stock compensation

 

 

 

382

 

 

 

382

 

Tax effect of options exercised

 

 

 

(76

)

 

 

(76

)

Cash dividends declared on common stock, $0.10 per share

 

 

 

 

(4,938

)

 

(4,938

)

Common stock issued at $26.89 per share for stock bonus

 

10

 

 

277

 

 

 

277

 

Balance, March 31, 2010

 

49,391

 

493

 

146,711

 

602,754

 

12,177

 

762,135

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

19,387

 

 

19,387

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment, net of tax of $9

 

 

 

 

 

2,450

 

2,450

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

21,837

 

Stock options exercised

 

703

 

7

 

17,849

 

 

 

17,856

 

Stock compensation

 

 

 

3,195

 

 

 

3,195

 

Tax effect of options exercised

 

 

 

(2,354

)

 

 

(2,354

)

Cash dividends declared on common stock, $0.30 per share

 

 

 

 

(14,900

)

 

(14,900

)

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

 

 

 

 

7,078

 

 

7,078

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Translation adjustment, net of tax of $(1)

 

 

 

 

 

6,857

 

6,857

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

13,935

 

Stock options exercised

 

6

 

 

154

 

 

 

154

 

Stock compensation

 

 

 

1,281

 

 

 

1,281

 

Tax effect of options exercised

 

 

 

(39

)

 

 

(39

)

Cash dividends declared on common stock, $0.125 per share

 

 

 

 

(6,263

)

 

(6,263

)

Common stock issued at $30.91 per share for stock bonus

 

7

 

 

204

 

 

 

204

 

Balance, March 31, 2011

 

50,109

 

$

500

 

$

167,025

 

$

608,056

 

$

21,484

 

$

797,065

 

 

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,

 

 

 

2011

 

2010

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

7,078

 

$

9,199

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Loss (gain) on sale of assets

 

(25

)

389

 

Depreciation and amortization

 

4,972

 

6,276

 

Deferred income taxes

 

(740

)

225

 

Noncash compensation related to stock plans

 

1,521

 

469

 

Loss in equity method investment

 

14

 

144

 

Excess tax benefit of options exercised

 

4

 

 

Provision for (recovery of) doubtful accounts

 

126

 

(406

)

Provision for excess and obsolete inventory

 

 

477

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Trade accounts receivable

 

(21,896

)

(16,286

)

Inventories

 

(13,103

)

(18,922

)

Trade accounts payable

 

(6,250

)

(2,194

)

Income taxes payable

 

2,943

 

5,341

 

Accrued profit sharing trust contributions

 

905

 

(5,165

)

Accrued cash profit sharing and commissions

 

2,534

 

1,126

 

Other current assets

 

(692

)

(1,339

)

Accrued liabilities

 

(647

)

936

 

Long-term liabilities

 

627

 

108

 

Accrued workers’ compensation

 

31

 

21

 

Other noncurrent assets

 

190

 

95

 

Net cash used in operating activities

 

(22,408

)

(19,506

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(10,095

)

(20,293

)

Proceeds from sale of capital assets

 

1,786

 

46

 

Loans made to related parties

 

 

(1,798

)

Loans repaid by related parties

 

 

50

 

Net cash used in investing activities

 

(8,309

)

(21,995

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Issuance of common stock

 

154

 

92

 

Excess tax benefit of options exercised

 

(4

)

 

Dividends paid

 

(5,010

)

(4,939

)

Net cash used in financing activities

 

(4,860

)

(4,847

)

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

1,759

 

(1,190

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(33,818

)

(47,538

)

Cash and cash equivalents at beginning of period

 

335,049

 

250,381

 

Cash and cash equivalents at end of period

 

$

301,231

 

$

202,843

 

 

 

 

 

 

 

Noncash activity during the period

 

 

 

 

 

Noncash capital expenditures

 

$

66

 

$

 

Dividends declared but not paid

 

$

6,263

 

$

4,938

 

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 and except with respect to items reflected on the Company’s Condensed Consolidated Balance Sheets, discussion in these notes pertains to the Company’s continuing operations.

 

6



 

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.

 

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

 

(in thousands, except)

 

March 31,

 

per-share amounts)

 

2011

 

2010

 

 

 

 

 

 

 

Earnings from continuing operations, net of tax

 

$

7,078

 

$

9,830

 

 

 

 

 

 

 

 

 

Loss from discontinued operations, net of tax

 

 

(631

)

 

 

 

 

 

 

Net income available to common stockholders

 

$

7,078

 

$

9,199

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

50,107

 

49,388

 

 

 

 

 

 

 

Dilutive effect of potential common stock equivalents — stock options

 

58

 

132

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

50,165

 

49,520

 

 

 

 

 

 

 

Net earnings (loss) per share — basic:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.20

 

Discontinued operations

 

 

(0.01

)

Net income

 

0.14

 

0.19

 

 

 

 

 

 

 

Net earnings (loss) per share — diluted:

 

 

 

 

 

Continuing operations

 

$

0.14

 

$

0.20

 

Discontinued operations

 

 

(0.01

)

Net income

 

0.14

 

0.19

 

 

 

 

 

 

 

Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive

 

1,743

 

1,066

 

 

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 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

 

7



 

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. 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 months ended March 31, 2011 and 2010:

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

 

2011

 

2010

 

 

 

 

 

 

 

Stock option expense recognized in operating expenses

 

$

1,449

 

$

366

 

 

 

 

 

 

 

Tax benefit of stock option expense in provision for income taxes

 

522

 

110

 

 

 

 

 

 

 

Stock option expense, net of tax

 

$

927

 

$

256

 

 

 

 

 

 

 

Fair value of shares vested

 

$

1,281

 

$

382

 

 

 

 

 

 

 

Proceeds to the Company from the exercise of stock options

 

$

154

 

$

92

 

 

 

 

 

 

 

Tax effect from exercise of stock options, including shortfall tax benefits

 

$

(39

)

$

(76

)

 

 

 

At March 31,

 

 

 

2011

 

2010

 

Stock option cost capitalized in inventory

 

$

115

 

$

61

 

 

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 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.

 

8



 

As of March 31, 2011, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $215.4 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 quarter of 2010, however, has been computed based on that quarter as a discrete period 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 months ended March 31, 2011 and 2010:

 

 

 

Three Months Ended

 

(in thousands, except)

 

March 31,

 

percentage amounts)

 

2011

 

2010

 

 

 

 

 

 

 

Effective tax rate

 

42.6

%

42.0

%

 

 

 

 

 

 

Provision for income taxes

 

$

5,263

 

$

7,130

 

 

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 March 31,

 

At December 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

$

94,641

 

$

100,051

 

$

70,781

 

Allowance for doubtful accounts

 

(1,457

)

(4,198

)

(1,344

)

Allowance for sales discounts and returns

 

(2,108

)

(2,823

)

(1,181

)

 

 

$

91,076

 

$

93,030

 

$

68,256

 

 

3.             Inventories

 

Inventories consist of the following:

 

 

 

At March 31,

 

At December 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Raw materials

 

$

70,780

 

$

75,953

 

$

61,996

 

In-process products

 

19,218

 

20,267

 

18,364

 

Finished products

 

76,968

 

84,464

 

71,937

 

 

 

$

166,966

 

$

180,684

 

$

152,297

 

 

9



 

4.             Property, Plant and Equipment, Net

 

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

 

 

 

At March 31,

 

At December 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Land

 

$

29,287

 

$

23,543

 

$

26,384

 

Buildings and site improvements

 

143,227

 

147,446

 

141,834

 

Leasehold improvements

 

3,794

 

3,819

 

3,693

 

Machinery and equipment

 

187,819

 

225,594

 

186,021

 

 

 

364,127

 

400,402

 

357,932

 

Less accumulated depreciation and amortization

 

(194,869

)

(220,303

)

(189,751

)

 

 

169,258

 

180,099

 

168,181

 

Capital projects in progress

 

15,348

 

20,876

 

8,891

 

 

 

$

184,606

 

$

200,975

 

$

177,072

 

 

The Company’s vacant facilities in San Leandro, California, and in France, remained classified as assets held for sale at March 31, 2011, consistent with the classification at December 31, 2010. In April 2011, the facility in France was sold for its approximate carrying cost. If the Company concludes that the San Leandro facility is expected to be sold below carrying value, the Company will record an impairment charge equal to the amount by which carrying value exceeds net estimated realizable value.  An impairment charge, if any, is not expected to be material to the Company’s results of operations.

 

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. The Company's equity interest in Keymark is now 46.1%.

 

6.             Goodwill and Intangible Assets, Net

 

Goodwill was as follows:

 

 

 

At March 31,

 

At December 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

North America

 

$

41,871

 

$

41,697

 

$

41,761

 

Europe

 

27,500

 

31,730

 

26,367

 

Asia/Pacific

 

1,967

 

1,746

 

1,941

 

Venting products (discontinued operations)

 

 

4,435

 

 

Total

 

$

71,338

 

$

79,608

 

$

70,069

 

 

10



 

Intangible assets, net, were as follows:

 

 

 

At March 31, 2011

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

(in thousands)

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

North America

 

$

24,022

 

$

(11,443

)

$

12,579

 

Europe

 

15,078

 

(4,761

)

10,317

 

Total

 

$

39,100

 

$

(16,204

)

$

22,896

 

 

 

 

At March 31, 2010

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

North America

 

$

24,022

 

$

(8,838

)

$

15,184

 

Europe

 

12,388

 

(2,528

)

9,860

 

Venting products (discontinued operations)

 

3,291

 

(1,446

)

1,845

 

Total

 

$

39,701

 

$

(12,812

)

$

26,889

 

 

 

 

At December 31, 2010

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

North America

 

$

24,022

 

$

(10,792

)

$

13,230

 

Europe

 

14,632

 

(4,396

)

10,236

 

Total

 

$

38,654

 

$

(15,188

)

$

23,466

 

 

Intangible assets consist primarily of customer relationships, patents, unpatented technology and non-compete agreements. Amortization expense, for continuing and discontinued operations, for intangible assets during the three months ended March 31, 2011 and 2010, totaled $1.1 million and $1.3 million.

 

At March 31, 2011, estimated future amortization of intangible assets was as follows:

 

(in thousands)

 

 

 

 

 

 

 

Final nine months of 2011

 

$

3,301

 

2012

 

3,937

 

2013

 

3,370

 

2014

 

3,151

 

2015

 

2,410

 

2016

 

2,269

 

Thereafter

 

4,458

 

 

 

$

22,896

 

 

11



 

The changes in the carrying amount of goodwill and intangible assets from December 31, 2010, to March 31, 2011, were as follows:

 

 

 

 

 

Intangible

 

(in thousands)

 

Goodwill

 

Assets

 

Balance at December 31, 2010

 

$

70,069

 

$

23,466

 

Amortization

 

 

(1,098

)

Reclassification

 

(227

)

 

Foreign exchange

 

1,496

 

528

 

Balance at March 31, 2011

 

$

71,338

 

$

22,896

 

 

7.             Debt

 

The Company has revolving lines of credit with different banks in the United States and Europe. The Company’s primary credit facility, a revolving line of credit with $200.0 million in available credit, charges interest at LIBOR plus 0.27% (at March 31, 2011, LIBOR plus 0.27% was 0.51%), expires in October 2012, and has commitment fees payable at the annual rate of 0.08% on the unused portion of the facility. Other revolving credit lines, with combined available credit of $4.7 million at March 31, 2011, charge interest ranging from 2.0% to 3.5% and have various maturity dates. There were no outstanding balances at March 31, 2011 and 2010, or December 31, 2010.

 

8.             Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the 2010 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 environmental matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, 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.

 

Pending Claims

 

Four lawsuits (the “Cases”) have been filed against the Company in the Hawaii First Circuit Court: Alvarez v. Haseko Homes, Inc. and Simpson Manufacturing, Inc., Civil No. 09-1-2697-11 (“Case 1”); Ke Noho Kai Development, LLC v. Simpson Strong-Tie Company, Inc., and Honolulu Wood Treating Co., LTD., Case No. 09-1-1491-06 SSM (“Case 2”); North American Specialty Ins. Co. v. Simpson Strong-Tie Company, Inc. and K.C. Metal Products, Inc., Case No. 09-1-1490-06 VSM (“Case 3”); and Charles et al. v. Haseko Homes, Inc. et al. and Third Party Plaintiffs Haseko Homes, Inc. et al. v. Simpson Strong-Tie Company, Inc., et al., Civil No. 09-1-1932-08 (“Case 4”). Case 1 was filed on November 18, 2009. Cases 2 and 3 were originally filed on June 30, 2009. Case 4 was filed on August 19, 2009. The Cases all relate to alleged premature corrosion of the Company’s strap tie holdown products installed in buildings in a housing development known as Ocean Pointe in Honolulu, Hawaii, allegedly causing property damage. Case 1 is a putative class action brought by the owners of allegedly affected Ocean Pointe houses. Case 1 was originally filed as Kai et al. v. Haseko Homes, Inc., Haseko Construction, Inc. and

 

12



 

Simpson Manufacturing, Inc., Case No. 09-1-1476, but was voluntarily dismissed and then re-filed with a new representative plaintiff. Case 2 is an action by the builders and developers of Ocean Pointe against the Company, claiming that either the Company’s strap tie holdowns are defective in design or manufacture or the Company failed to provide adequate warnings regarding the products’ susceptibility to corrosion in certain environments. Case 3 is a subrogation action brought by the insurance company for the builders and developers against the Company claiming the insurance company expended funds to correct problems allegedly caused by the Company’s products. Case 4, like Case 1, is a putative class action brought by owners of allegedly affected Ocean Pointe homes. In Case 4, Haseko Homes, Inc. (“Haseko”), the developer of the Ocean Pointe development, has brought a third party complaint against the Company alleging that any damages for which Haseko may be liable are actually the fault of the Company. None of the Cases alleges a specific amount of damages sought, although each of the Cases seeks compensatory damages, and Case 1 seeks punitive damages. The Company is currently investigating the facts underlying the claims asserted in the Cases, including, among other things, the cause of the alleged corrosion; the severity of any problems shown to exist; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if needed. At this time, the likelihood that the Company will be found liable for any property damage allegedly suffered and the extent of such liability, if any, are unknown. The Company intends to defend itself vigorously in connection with the Cases.

 

Based on facts currently known to the Company, the Company believes that all or part of the claims alleged in the Cases may be covered by its insurance policies. On April 19, 2011, an action was filed in the United States District Court for the District of Hawaii, National Union Fire Insurance Company of Pittsburgh, PA v. Simpson Manufacturing Company, Inc., et al., Civil No. 11-00254 ACK. In this action, Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), which issued certain Commercial General Liability insurance policies to the Company, seeks declaratory relief in the Cases with respect to its obligations to defend or indemnify the Company, Simpson Strong-Tie Company Inc., and a vendor of the Company’s strap tie holdown products. The Company has not yet appeared in this action, but anticipates that it will vigorously defend the allegations and file counterclaims against National Union.

 

On October 28, 2009, a patent infringement lawsuit, entitled Ei-Land Corporation v. Simpson Strong-Tie Company Inc., Simpson Manufacturing Co., Inc., et at., was filed against the Company in the United States District Court, for the Eastern District of Texas, Marshall Division, 2:09-cv-00337-TJW. In this action, Plaintiff alleges that the Company’s Steel Strong Wall® product infringes several claims of a patent owned by Plaintiff. Plaintiff seeks monetary damages in the form of a reasonable royalty based on the Company’s manufacture and sale of the allegedly infringing product. Plaintiff does not manufacture the invention disclosed by the patent-in-suit. The Company denies the allegations of the Plaintiff’s complaint and has counterclaimed on the ground that the patent-in-suit is invalid. Trial is set to begin on April 2, 2012. At this time, liability, if any, is unknown.

 

9.             Stock-Based Incentive Plans

 

The Company currently has one stock-based incentive plan, which incorporates and supersedes its two previous plans (see Note 1 “Basis of Presentation — Accounting for Stock-Based Compensation”). Participants are granted stock-based awards only if the applicable Company-wide or profit-center operating goals, or both, established by the Compensation and Leadership Development Committee of the Board of Directors at the beginning of the year, are met.

 

The fair value of each stock 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 award. The expected term of awards 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.

 

13



 

Black-Scholes option pricing model assumptions for options granted in 2011 and 2010 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,362

 

 

02/03/11

 

2.62

%

1.75

%

6.2 years

 

39.0

%

$29.66 to $32.63

 

$

10.33

 

148

 

 

02/02/10

 

2.93

%

1.62

%

6.5 years

 

36.0

%

$24.75

 

$

8.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1995 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

02/15/11

 

2.92

%

1.76

%

6.6 years

 

38.0

%

$29.58

 

$

10.49

 

 

No options were granted under the 1995 Plan in 2010.

 

The following table summarizes the Company’s stock option activity for the three months ended March 31, 2011:

 

 

 

 

 

 

 

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, 2011

 

1,124

 

$

34.19

 

 

 

 

 

Granted

 

1,392

 

29.66

 

 

 

 

 

Exercised

 

(7

)

23.74

 

 

 

 

 

Forfeited

 

(8

)

36.31

 

 

 

 

 

Outstanding at March 31, 2011

 

2,501

 

$

31.69

 

4.8

 

$

1,478

 

Outstanding and expected to vest at March 31, 2011

 

2,440

 

$

31.76

 

4.8

 

$

1,431

 

Exercisable at March 31, 2011

 

1,010

 

$

35.56

 

2.1

 

$

613

 

 


*  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 $29.46 as reported by the New York Stock Exchange on March 31, 2011.

 

The total intrinsic value of options exercised during the three months ended March 31, 2011 and 2010, was $40 thousand and $11 thousand, respectively.

 

14



 

A summary of the status of unvested options as of March 31, 2011, and changes during the three months ended March 31, 2011, are presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Unvested Options

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at January 1, 2011

 

180

 

$

7.85

 

Granted

 

1,392

 

10.33

 

Vested

 

(80

)

9.97

 

Forfeited

 

(1

)

6.55

 

Unvested at March 31, 2011

 

1,491

 

$

10.06

 

 

As of March 31, 2011, $10.7 million of total unrecognized compensation cost was related to unvested share-based compensation arrangements under the 1994 Plan. This cost is expected to be recognized over a weighted-average period of 3.8 years. Options granted under the 1995 Plan are fully vested and are expensed on the date of grant.

 

10.          Segment Information

 

The Company is organized into three reportable segments. The segments are defined by the regions where the Company’s products are manufactured, marketed and distributed to the Company’s customers. The three regional segments are the North American segment, comprising primarily the United States and Canada, the European segment and the Asia/Pacific segment, comprising the Company’s operations in China, Hong Kong, the south Pacific and the Middle East. These segments are similar in several ways, including the types of materials, the production processes, the distribution channels and the product applications.

 

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

 

 

 

Three Months Ended

 

 

 

March 31,

 

(in thousands)

 

2011

 

2010

 

Net Sales

 

 

 

 

 

North America

 

$

104,622

 

$

100,531

 

Europe

 

25,798

 

21,111

 

Asia/Pacific

 

1,877

 

2,178

 

Administrative and all other

 

239

 

 

Total

 

$

132,536

 

$

123,820

 

Sales to Other Segments*

 

 

 

 

 

North America

 

$

1,322

 

$

642

 

Europe

 

81

 

52

 

Asia/Pacific

 

2,111

 

1,653

 

Total

 

$

3,514

 

$

2,347

 

Income (Loss) from Operations

 

 

 

 

 

North America

 

$

15,091

 

$

20,223

 

Europe

 

(1,454

)

(1,837

)

Asia/Pacific

 

(712

)

(192

)

Administrative and all other

 

(642

)

(1,102

)

Total

 

$

12,283

 

$

17,092

 

 


* The sales to other segments are eliminated on consolidation.

 

15



 

 

 

 

 

 

 

At

 

 

 

At March 31,

 

December 31,

 

(in thousands)

 

2011

 

2010

 

2010

 

Total Assets

 

 

 

 

 

 

 

North America

 

$

566,939

 

$

523,069

 

$

557,762

 

Europe

 

135,146

 

124,084

 

123,669

 

Asia/Pacific

 

24,856

 

21,274

 

25,576

 

Administrative and all other

 

156,229

 

167,526

 

167,702

 

Total

 

$

883,170

 

$

835,953

 

$

874,709

 

 

Total assets from discontinued operations of $69.5 million at March 31, 2010, are included in “Administrative and all other.” Cash collected by the Company’s United States 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 balances in the “Administrative and all other” segment were $237.9 million, $160.6 million, and $274.6 million, as of March 31, 2011 and 2010, and December 31, 2010, respectively. Real estate assets previously allocated to the venting products segment have been allocated to the “Administrative and all other” as of August 31, 2010. See Note 11.

 

11.          Discontinued Operations

 

On August 31, 2010, the Company sold substantially all of the assets and liabilities of Simpson Dura-Vent pursuant to an agreement dated June 30, 2010, with M&G Holding B.V. (“M&G”) and M&G Dura-Vent, Inc. The Company decided to sell the assets of Simpson Dura-Vent in order to focus exclusively on the development of its profitable connector products business. Simpson Dura-Vent represented the Company’s entire venting operating segment.

 

The results from discontinued operations for the three months ended March 31, 2010, was as follows:

 

(in thousands)

 

 

 

 

 

 

 

Revenues

 

$

10,080

 

Cost of sales

 

8,673

 

Gross profit

 

1,407

 

Operating and other expenses

 

2,455

 

Loss from discontinued operations

 

(1,048

)

Benefit from income taxes from discontinued operations

 

(417

)

Loss from discontinued operations, net of tax

 

$

(631

)

 

12.          Subsequent Events

 

In April 2011, the Company’s Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.3 million, to be paid on July 28, 2011, to stockholders of record on July 7, 2011.

 

In April 2011, the Company’s stockholders approved and the Company adopted the Simpson Manufacturing Co., Inc. 2011 Incentive Plan (see Note 1 “Basis of Presentation — Accounting for Stock-Based Compensation”).

 

16



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company’s operations and cause the Company’s actual results to be substantially different from the Company’s expectations. See “Part II, Item 1A - Risk Factors.Actual results might differ materially from results suggested by any forward-looking statements in this report. The Company does not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

 

The following is a discussion and analysis of the consolidated financial condition and results of continuing operations for the Company for the three months ended March 31, 2011 and 2010. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.

 

Results of Continuing Operations for the Three Months Ended March 31, 2011, Compared with the Three Months Ended March 31, 2010

 

Income from operations decreased 28.1% from $17.1 million in the first quarter of 2010 to $12.3 million in the first quarter of 2011. The following table illustrates the change in the Company’s continuing operations from the three months ended March 31, 2010, to March 31, 2011, and the increases or decreases for each category by segment.

 

 

 

Three Months Ended March 31,

 

 

 

Continuing

 

Increase (Decrease) in Operating Segment

 

Continuing

 

 

 

Operations

 

North

 

 

 

Asia/

 

Admin &

 

Operations

 

(in thousands)

 

2010

 

America

 

Europe

 

Pacific

 

All Other

 

2011

 

Net sales

 

$

123,820

 

$

4,091

 

$

4,687

 

$

(301

)

$

239

 

$

132,536

 

Cost of sales

 

69,793

 

2,440

 

2,978

 

147

 

230

 

75,588

 

Gross profit

 

54,027

 

1,651

 

1,709

 

(448

)

9

 

56,948

 

Research and development and other engineering expense

 

4,742

 

1,134

 

145

 

(23

)

(4

)

5,994

 

Selling expense

 

14,872

 

1,664

 

421

 

133

 

(15

)

17,075

 

General and administrative expense

 

16,933

 

4,118

 

1,102

 

(44

)

(488

)

21,621

 

Loss (gain) on sale of assets

 

388

 

(78

)

(343

)

8

 

 

(25

)

Income from operations

 

17,092

 

(5,187

)

384

 

(522

)

516

 

12,283

 

Loss in equity method investment, before tax

 

(144

)

130

 

 

 

 

(14

)

Interest income, net

 

12

 

29

 

2

 

9

 

20

 

72

 

Income from continuing operations before income taxes

 

16,960

 

(5,028

)

386

 

(513

)

536

 

12,341

 

Provision for income taxes from continuing operations

 

7,130

 

(1,693

)

309

 

(83

)

(400

)

5,263

 

Income from continuing operations, net of tax

 

$

9,830

 

$

(3,335

)

$

77

 

$

(430

)

$

936

 

$

7,078

 

 

17



 

The following table represents net sales by segment for the three months ended March 31, 2010 and 2011:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010

 

$

100,531

 

$

21,111

 

$

2,178

 

$

 

$

123,820

 

March 31, 2011

 

104,622

 

25,798

 

1,877

 

239

 

132,536

 

Increase (decrease)

 

4,091

 

4,687

 

(301

)

239

 

8,716

 

Percentage increase (decrease)

 

4.1

%

22.2

%

(13.8

)%

 

7.0

%

 

Net sales increased 7.0% from $123.8 million in the first quarter of 2010 to $132.5 million in the first quarter of 2011. The increase in net sales resulted from increases in both sales volume and average prices, as average prices increased 4.0% as compared to the first quarter of 2010. The Company had income, net of tax, of $7.1 million for the first quarter of 2011 compared to income, net of tax, of $9.8 million for the first quarter of 2010. Diluted income, net of tax, was $0.14 per common share for the first quarter of 2011 compared to diluted income, net of tax, of $0.20 per common share for the first quarter of 2010.

 

In the first quarter of 2011, sales increased throughout most of North America and increased significantly in Europe. Sales increased in the United States with increases in California, the midwestern, southeastern and northeastern regions as compared to the first quarter of 2010, partly offset by decreases in the western region excluding California. Sales in Canada decreased compared to the first quarter of 2010. Sales in Asia and Australia, although relatively small, decreased as compared to the first quarter of 2010. Sales to contractor distributors, dealer distributors, lumber dealers and home centers increased, although economic conditions remain challenging. The sales increase was broad-based across most of the Company’s major product lines as compared to the first quarter of 2010. Sales of anchor products and shearwalls also increased over the same period.

 

The following table represents gross profit by segment for the three months ended March 31, 2010 and 2011:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010

 

$

46,828

 

$

6,381

 

$

671

 

$

147

 

$

54,027

 

March 31, 2011

 

48,479

 

8,090

 

223

 

156

 

56,948

 

Increase (decrease)

 

1,651

 

1,709

 

(448

)

9

 

2,921

 

Percentage increase (decrease)

 

3.5

%

26.8

%

(66.7

)%

6.1

%

5.4

%

 

Gross margins decreased slightly from 43.6% in the first quarter of 2010 to 43.0% in the first quarter of 2011, primarily due to higher factory overhead costs. Steel prices increased from their levels in mid-2010, as steel mills have been raising prices as demand returns to global steel markets. The Company expects steel prices to remain at current levels or to increase throughout 2011. The Company’s inventories increased 9.6% from $152.3 million at December 31, 2010, to $167.0 million at March 31, 2011, primarily due to purchases of raw materials.

 

Research and development and engineering expense increased 26.4% from $4.7 million in the first quarter of 2010 to $6.0 million in the first quarter of 2011, including increases in personnel costs of $0.8 million, professional services of $0.3 million and cash profit sharing of $0.2 million.  Selling expense increased 14.8% from $14.9 million in the first quarter of 2010 to $17.1 million in the first quarter of 2011, including increases in personnel costs of $1.3 million, cash profit sharing and commissions of $0.5 million, and promotional costs of $0.2 million. General and administrative expense increased 27.7% from $16.9 million in the first quarter of 2010 to $21.6 million in the first quarter of 2011, including increases in cash profit sharing of $1.1 million, stock option expense of $0.8 million, personnel costs of $0.8 million, professional fees of $0.7 million, provision for bad debt of $0.5 million and various other items. The changes in operating costs were mostly attributable to the North American segment. The effective tax rate was 42.6% in the first quarter of 2011, as compared to 42.0% in the first quarter of 2010.

 

Critical Accounting Policies and Estimates

 

The Company did not make any significant changes to its critical accounting policies and estimates during the three months ended March 31, 2011, from those disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010. 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.

 

18



 

Liquidity and Sources of Capital

 

As of March 31, 2011, working capital was $512.4 million as compared to $446.3 million at March 31, 2010, and $511.6 million at December 31, 2010. The increase in working capital from December 31, 2010, was primarily due to increases in net trade accounts receivable of $22.8 million and inventories of $14.7 million, and a decrease in trade accounts payable of $5.3 million. Net trade accounts receivable increased 33.4% from December 31, 2010, as a result of increased sales in the latter part of the first quarter of 2011 compared to the latter part of the fourth quarter of 2010. Raw material inventories increased 14.2% as compared to December 31, 2010, and in-progress and finished goods inventories increased 6.5% over the same period. These increases in working capital were partly offset by decreases in cash and cash equivalents of $33.8 million, other current assets of $2.8 million and available for sale assets of $1.6 million, and an increase in accrued cash profit sharing and commissions of $2.6 million. The balance of the change in working capital was due to the fluctuation of various other asset and liability accounts, none of which was individually material. The working capital change and changes in noncurrent assets and liabilities, combined with net income of $7.1 million and noncash expenses, primarily depreciation, amortization and stock-based compensation charges totaling $6.5 million, resulted in net cash used by operating activities of $22.4 million. As of March 31, 2011, the Company had unused credit facilities available of $204.7 million.

 

The Company’s investing activities used cash of $8.3 million. The Company’s capital expenditures were primarily to improve its facility in San Bernardino, California, and to acquire real estate in Germany, and the cash received was primarily from the sale of a facility in Visalia, California. The Company estimates that its full-year capital spending will total between $33 million and $35 million in 2011.

 

The Company’s vacant facility in San Leandro, California, remained classified as an asset held for sale as of March 31, 2011, consistent with the classification at December 31, 2010. If the Company concludes that the San Leandro facility is expected to be sold below carrying value, the Company will record an impairment charge equal to the amount by which carrying value exceeds net estimated realizable value. An impairment charge, if any, is not expected to be material to the Company’s results of operations.

 

The Company’s financing activities used net cash of $4.9 million. The payments of cash dividends in the amount of $5.0 million were the primary use of cash. Cash was provided from the issuance of the Company’s common stock through the exercise of stock options totaling $0.2 million. In April 2011, the Company’s Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.3 million, to be paid on July 28, 2011, to stockholders of record on July 7, 2011.

 

The Company believes that cash generated by operations and borrowings available under its credit facility will be sufficient for the Company’s working capital needs and planned capital expenditures for the next 12 months. Depending, however, on the Company’s future growth and possible acquisitions, it may become necessary to secure additional sources of financing, which may not be available on reasonable terms, or at all.

 

The Company believes that the effect of inflation on the Company has not been material in recent years, as general inflation rates have remained relatively low. Because, however, the Company’s main raw material is steel, increases in steel prices may adversely affect the Company’s gross margins if it cannot recover the higher costs through price increases.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

The Company has foreign exchange rate risk in its international operations, primarily Europe and Canada, and through purchases from foreign vendors. The Company does not currently hedge this risk. If the exchange rate were to change by 10% in any one country or currency where the Company has operations, the change in net income would not be material to the Company’s operations as a whole. The translation adjustment resulted in an increase in accumulated other comprehensive income of $6.9 million for the three months ended March 31, 2011, primarily due to the effect of the weakening of the United States dollar in relation to the Canadian and European currencies.

 

19



 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures. As of March 31, 2011, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was performed under the supervision and with the participation of the Company’s management, including the chief executive officer (“CEO”) and the chief financial officer (“CFO”). Based on that evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of that date and that the Company’s disclosure controls and procedures at that date were designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosures.

 

The Company’s management, including the CEO and the CFO, does not, however, expect that the Company’s disclosure controls and procedures or the Company’s internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the facts that there are resource constraints and that the benefits of controls must be considered relative to their costs. The inherent limitations in an internal control system include the realities that judgments can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of internal control is also based in part on assumptions about the likelihood of future events, and there can be only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential events and conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.

 

Changes in Internal Control over Financial Reporting. During the three months ended March 31, 2011, the Company made no changes to its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

20



 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business.

 

Four lawsuits (the “Cases”) have been filed against the Company in the Hawaii First Circuit Court: Alvarez v. Haseko Homes, Inc. and Simpson Manufacturing, Inc., Civil No. 09-1-2697-11 (“Case 1”); Ke Noho Kai Development, LLC v. Simpson Strong-Tie Company, Inc., and Honolulu Wood Treating Co., LTD., Case No. 09-1-1491-06 SSM (“Case 2”); North American Specialty Ins. Co. v. Simpson Strong-Tie Company, Inc. and K.C. Metal Products, Inc., Case No. 09-1-1490-06 VSM (“Case 3”); and Charles et al. v. Haseko Homes, Inc. et al. and Third Party Plaintiffs Haseko Homes, Inc. et al. v. Simpson Strong-Tie Company, Inc., et al., Civil No. 09-1-1932-08 (“Case 4”). Case 1 was filed on November 18, 2009. Cases 2 and 3 were originally filed on June 30, 2009. Case 4 was filed on August 19, 2009. The Cases all relate to alleged premature corrosion of the Company’s strap tie holdown products installed in buildings in a housing development known as Ocean Pointe in Honolulu, Hawaii, allegedly causing property damage. Case 1 is a putative class action brought by the owners of allegedly affected Ocean Pointe houses. Case 1 was originally filed as Kai et al. v. Haseko Homes, Inc., Haseko Construction, Inc. and Simpson Manufacturing, Inc., Case No. 09-1-1476, but was voluntarily dismissed and then re-filed with a new representative plaintiff. Case 2 is an action by the builders and developers of Ocean Pointe against the Company, claiming that either the Company’s strap tie holdowns are defective in design or manufacture or the Company failed to provide adequate warnings regarding the products’ susceptibility to corrosion in certain environments. Case 3 is a subrogation action brought by the insurance company for the builders and developers against the Company claiming the insurance company expended funds to correct problems allegedly caused by the Company’s products. Case 4, like Case 1, is a putative class action brought by owners of allegedly affected Ocean Pointe homes. In Case 4, Haseko Homes, Inc. (“Haseko”), the developer of the Ocean Pointe development, has brought a third party complaint against the Company alleging that any damages for which Haseko may be liable are actually the fault of the Company. None of the Cases alleges a specific amount of damages sought, although each of the Cases seeks compensatory damages, and Case 1 seeks punitive damages. The Company is currently investigating the facts underlying the claims asserted in the Cases, including, among other things, the cause of the alleged corrosion; the severity of any problems shown to exist; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if needed. At this time, the likelihood that the Company will be found liable for any property damage allegedly suffered and the extent of such liability, if any, are unknown. The Company intends to defend itself vigorously in connection with the Cases.

 

Based on facts currently known to the Company, the Company believes that all or part of the claims alleged in the Cases may be covered by its insurance policies. On April 19, 2011, an action was filed in the United States District Court for the District of Hawaii, National Union Fire Insurance Company of Pittsburgh, PA v. Simpson Manufacturing Company, Inc., et al., Civil No. 11-00254 ACK. In this action, Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), which issued certain Commercial General Liability insurance policies to the Company, seeks declaratory relief in the Cases with respect to its obligations to defend or indemnify the Company, Simpson Strong-Tie Company Inc., and a vendor of the Company’s strap tie holdown products. The Company has not yet appeared in this action, but anticipates that it will vigorously defend the allegations and file counterclaims against National Union.

 

On October 28, 2009, a patent infringement lawsuit, entitled Ei-Land Corporation v. Simpson Strong-Tie Company Inc., Simpson Manufacturing Co., Inc., et at., was filed against the Company in the United States District Court, for the Eastern District of Texas, Marshall Division, 2:09-cv-00337-TJW. In this action, Plaintiff alleges that the Company’s Steel Strong Wall® product infringes several claims of a patent owned by Plaintiff. Plaintiff seeks monetary damages in the form of a reasonable royalty based on the Company’s manufacture and sale of the allegedly infringing product. Plaintiff does not manufacture the invention disclosed by the patent-in-suit. The Company denies the allegations of the Plaintiff’s complaint and has counterclaimed on the ground that the patent-in-suit is invalid. Trial is set to begin on April 2, 2012.

 

The Company is not engaged in any other legal proceedings as of the date hereof, which the Company expects individually or in the aggregate to have a material adverse effect on the Company’s financial condition, cash flows or results of operations. 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 or results of operations.

 

21



 

Item 1A. Risk Factors

 

We are affected by risks specific to us, as well as risks that affect all businesses operating in global markets. Some of the significant factors that could materially adversely affect our business, financial condition and operating results appear in “Item 1A. Risk Factors” of our most recent Annual Report on Form 10-K (available at www.simpsonmfg.com/docs/10K-2010.pdf or www.sec.gov).

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In February 2011, the Board of Directors authorized the Company to repurchase up to $100.0 million of the Company’s common stock. This replaced the $50.0 million repurchase authorization from December 2009. The authorization will remain in effect through the end of 2011. The Company did not repurchase any of its common stock in the first three months of 2011.

 

Item 6. Exhibits.

 

The following exhibits are either incorporated by reference into this report or filed with this report, as indicated below.

 

3.1                     Certificate of Incorporation of Simpson Manufacturing Co., Inc., as amended, is incorporated by reference to Exhibit 3.1 of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.

 

3.2                     Bylaws of Simpson Manufacturing Co., Inc., as amended through December 13, 2010, are incorporated by reference to Exhibit 3.2 of its Current Report on Form 8-K dated December 16, 2010.

 

4.1                   Amended Rights Agreement dated as of June 15, 2009, between Simpson Manufacturing Co., Inc. and Computershare Trust Company, N.A., which includes as Exhibit B the form of Rights Certificate, is incorporated by reference to Exhibit 4.1 of Simpson Manufacturing Co., Inc.’s Registration Statement on Form 8-A/A dated June 15, 2009.

 

4.2                   Certificate of Designation, Preferences and Rights of Series A Participating Preferred Stock of Simpson Manufacturing Co., Inc., dated July 30, 1999, is incorporated by reference to Exhibit 4.2 of its Registration Statement on Form 8-A dated August 4, 1999.

 

4.3                   Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan for Salaried Employees is incorporated by reference to Exhibit 4.3 of Simpson Manufacturing Co., Inc.’s Registration Statement on Form S-8, File Number 333-173811, dated April 29, 2011.

 

4.4                   Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan for Hourly Employees is incorporated by reference to Exhibit 4.4 of Simpson Manufacturing Co., Inc.’s Registration Statement on Form S-8, File Number 333-173811, dated April 29, 2011.

 

10.1             Simpson Manufacturing Co., Inc. 1994 Stock Option Plan, as amended through February 13, 2008, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

10.2             Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan, as amended through November 18, 2004, is incorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

10.3             Simpson Manufacturing Co., Inc. Executive Officer Cash Profit Sharing Plan, as amended through February 25, 2008, is incorporated by reference to Exhibit 10.3 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

22



 

10.4             Credit Agreement dated as of October 10, 2007, among Simpson Manufacturing Co., Inc. as Borrower, the Lenders party thereto, Wells Fargo Bank as Agent, and Simpson Strong Tie Company Inc., and Simpson Strong-Tie International, Inc. as Guarantors, is incorporated by reference to Exhibit 10.4 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

 

10.5             Form of Indemnification Agreement between Simpson Manufacturing Co., Inc. and its directors and executive officers, as well as the officers of Simpson Strong-Tie Company Inc. and Simpson Dura-Vent Company, Inc., is incorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

10.6               Compensation of Named Executive Officers is incorporated by reference to Exhibit 10 of Simpson Manufacturing Co., Inc.’s Current Report on Form 8-K dated February 8, 2011.

 

10.7               Simpson Manufacturing Co., Inc. 2011 Incentive Plan is incorporated by reference to Exhibit A of Simpson Manufacturing Co., Inc.’s Schedule 14A Proxy Statement dated March 10, 2011.

 

31.                     Rule 13a-14(a)/15d-14(a) Certifications are filed herewith.

 

32.                     Section 1350 Certifications are filed herewith.

 

99.1               Simpson Manufacturing Co., Inc. 1994 Employee Stock Bonus Plan, as amended through November 18, 2004, is incorporated by reference to Exhibit 99.1 of Simpson Manufacturing Co., Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

101                  Financial statements from the quarterly report on Form 10-Q of Simpson Manufacturing Co., Inc. for the quarter ended March 31, 2011, formatted in XBRL, are filed herewith and include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text.

 

23



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Simpson Manufacturing Co., Inc.

 

(Registrant)

 

 

 

 

 

DATE:

May 6, 2011

 

By

/s/Karen Colonias

 

 

Karen Colonias

 

 

Chief Financial Officer

 

 

(principal accounting and financial officer)

 

24