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)

 

 

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 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

 

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4.             Property, Plant and Equipment, Net

 

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

 

		At March 31,						At December 31,
(in thousands)		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

 

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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

 

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