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Simpson Manufacturing Co., Inc. - Quarter Report: 2012 September (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:  September 30, 2012

 

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 September 30, 2012:  48,326,901

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

187,471

 

$

265,162

 

$

213,817

 

Trade accounts receivable, net

 

108,425

 

98,032

 

76,420

 

Inventories

 

172,021

 

172,142

 

180,129

 

Deferred income taxes

 

12,302

 

12,117

 

11,774

 

Assets held for sale

 

 

6,792

 

6,793

 

Other current assets

 

11,890

 

9,598

 

13,131

 

Total current assets

 

492,109

 

563,843

 

502,064

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

211,132

 

191,016

 

195,716

 

Goodwill

 

128,812

 

69,688

 

99,849

 

Intangible assets, net

 

40,075

 

20,252

 

27,856

 

Other noncurrent assets

 

6,868

 

10,670

 

10,602

 

Total assets

 

$

878,996

 

$

855,469

 

$

836,087

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Line of credit and notes payable

 

$

193

 

$

 

$

 

Trade accounts payable

 

24,225

 

27,739

 

22,034

 

Accrued liabilities

 

44,807

 

36,314

 

36,156

 

Income taxes payable

 

1,007

 

1,251

 

 

Accrued profit sharing trust contributions

 

4,003

 

3,560

 

4,477

 

Accrued cash profit sharing and commissions

 

8,911

 

11,867

 

3,446

 

Accrued workers’ compensation

 

4,880

 

5,455

 

5,474

 

Total current liabilities

 

88,026

 

86,186

 

71,587

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

4,810

 

7,001

 

6,137

 

Total liabilities

 

92,836

 

93,187

 

77,724

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, at par value

 

482

 

481

 

481

 

Additional paid-in capital

 

178,962

 

169,117

 

170,483

 

Retained earnings

 

598,533

 

581,672

 

580,616

 

Accumulated other comprehensive income

 

8,183

 

11,012

 

6,783

 

Total stockholders’ equity

 

786,160

 

762,282

 

758,363

 

Total liabilities and stockholders’ equity

 

$

878,996

 

$

855,469

 

$

836,087

 

 

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

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

172,113

 

$

162,366

 

$

512,550

 

$

472,713

 

Cost of sales

 

96,390

 

86,919

 

284,276

 

256,819

 

Gross profit

 

75,723

 

75,447

 

228,274

 

215,894

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development and other engineering

 

8,916

 

6,804

 

27,156

 

19,743

 

Selling

 

20,941

 

18,633

 

61,255

 

55,527

 

General and administrative

 

23,843

 

25,174

 

77,174

 

72,250

 

Loss (gain) on sale of assets

 

33

 

(46

)

42

 

1

 

 

 

53,733

 

50,565

 

165,627

 

147,521

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

21,990

 

24,882

 

62,647

 

68,373

 

 

 

 

 

 

 

 

 

 

 

Gain in equity method investment, before tax

 

 

4,471

 

 

4,389

 

Interest income, net

 

55

 

79

 

177

 

258

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

22,045

 

29,432

 

62,824

 

73,020

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

9,069

 

10,052

 

26,788

 

27,069

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

12,976

 

$

19,380

 

$

36,036

 

$

45,951

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

$

0.40

 

$

0.75

 

$

0.93

 

Diluted

 

$

0.27

 

$

0.40

 

$

0.74

 

$

0.93

 

 

 

 

 

 

 

 

 

 

 

Number of shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

48,346

 

48,253

 

48,322

 

49,247

 

Diluted

 

48,390

 

48,288

 

48,385

 

49,296

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.125

 

$

0.125

 

$

0.375

 

$

0.375

 

 

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

 

3



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Statements of Comprehensive Income

(In thousands, unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

12,976

 

$

19,380

 

$

36,036

 

$

45,951

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

Translation adjustment, net of tax benefit of $28, $3, $31 and $4, respectively

 

4,125

 

(13,867

)

1,400

 

(3,615

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

17,101

 

$

5,513

 

$

37,436

 

$

42,336

 

 

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

 

4



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the nine months ended September 30, 2011 and 2012 and for the three months ended December 31, 2011

(In thousands except per-share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

 

Shares

 

Par Value

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Total

 

Balance, January 1, 2011

 

50,096

 

$

500

 

$

165,425

 

$

607,241

 

$

14,627

 

$

 

$

787,793

 

Net income

 

 

 

 

45,951

 

 

 

45,951

 

Translation adjustment

 

 

 

 

 

(3,615

)

 

(3,615

)

Stock options exercised

 

6

 

 

154

 

 

 

 

154

 

Stock compensation

 

 

 

3,405

 

 

 

 

3,405

 

Tax effect of options exercised

 

 

 

(71

)

 

 

 

(71

)

Repurchase of common stock

 

(1,948

)

 

 

 

 

(53,208

)

(53,208

)

Retirement of common stock

 

 

(19

)

 

(53,189

)

 

53,208

 

 

Cash dividends declared on common stock, $0.375 per share

 

 

 

 

(18,331

)

 

 

(18,331

)

Common stock issued at $30.91 per share for stock bonus

 

7

 

 

204

 

 

 

 

204

 

Balance, September 30, 2011

 

48,161

 

481

 

169,117

 

581,672

 

11,012

 

 

762,282

 

Net income

 

 

 

 

4,949

 

 

 

4,949

 

Translation adjustment

 

 

 

 

 

(4,229

)

 

(4,229

)

Stock options exercised

 

2

 

 

60

 

 

 

 

60

 

Stock compensation

 

 

 

2,789

 

 

 

 

2,789

 

Tax effect of options exercised

 

 

 

(1,483

)

 

 

 

(1,483

)

Cash dividends declared on common stock, $0.125 per share

 

 

 

 

(6,005

)

 

 

(6,005

)

Balance, December 31, 2011

 

48,163

 

481

 

170,483

 

580,616

 

6,783

 

 

758,363

 

Net income

 

 

 

 

36,036

 

 

 

36,036

 

Translation adjustment

 

 

 

 

 

1,400

 

 

1,400

 

Stock options exercised

 

90

 

1

 

2,183

 

 

 

 

2,184

 

Stock compensation

 

 

 

7,048

 

 

 

 

7,048

 

Tax effect of options exercised

 

 

 

(60

)

 

 

 

(60

)

Shares issued from release of Restricted Stock Units

 

62

 

 

(1,110

)

 

 

 

(1,110

)

Cash dividends declared on common stock, $0.375 per share

 

 

 

 

(18,119

)

 

 

(18,119

)

Common stock issued at $33.71 per share for stock bonus

 

12

 

 

418

 

 

 

 

418

 

Balance, September 30, 2012

 

48,327

 

$

482

 

$

178,962

 

$

598,533

 

$

8,183

 

$

 

$

786,160

 

 

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

 

5



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

 

 

Nine Months

 

 

 

Ended September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

36,036

 

$

45,951

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on sale of assets

 

42

 

1

 

Depreciation and amortization

 

20,744

 

14,988

 

Impairment loss on assets held for sale

 

461

 

1,094

 

Deferred income taxes

 

(500

)

(1,049

)

Noncash compensation related to stock plans

 

7,364

 

3,812

 

Income in equity method investment

 

 

(4,389

)

Excess tax benefit of options exercised

 

(99

)

4

 

Provision for doubtful accounts

 

470

 

249

 

Accrued interest earned from related party

 

 

(58

)

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Trade accounts receivable

 

(28,630

)

(30,174

)

Inventories

 

14,067

 

(19,778

)

Trade accounts payable

 

(381

)

(4,211

)

Income taxes payable

 

3,731

 

5,755

 

Accrued profit sharing trust contributions

 

(488

)

(2,017

)

Accrued cash profit sharing and commissions

 

5,458

 

9,068

 

Other current assets

 

3,686

 

(220

)

Accrued liabilities

 

(791

)

3,856

 

Long-term liabilities

 

(1,159

)

(302

)

Accrued workers’ compensation

 

(595

)

771

 

Other noncurrent assets

 

(2,723

)

729

 

Net cash provided by operating activities

 

56,693

 

24,080

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(16,128

)

(23,515

)

Asset acquisitions, net of cash acquired

 

(56,003

)

 

Proceeds from sale of property and equipment

 

6,937

 

3,205

 

Loans repaid by related parties

 

1,698

 

552

 

Net cash used in investing activities

 

(63,496

)

(19,758

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Repurchase of common stock

 

 

(53,208

)

Debt and line of credit borrowings

 

2,156

 

 

Repayment of debt and line of credit borrowings

 

(5,655

)

 

Debt issuance costs

 

(1,408

)

 

Issuance of common stock

 

2,184

 

154

 

Excess tax benefit of options exercised

 

99

 

(4

)

Dividends paid

 

(18,099

)

(17,309

)

Net cash used in financing activities

 

(20,723

)

(70,367

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

1,180

 

(3,842

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(26,346

)

(69,887

)

Cash and cash equivalents at beginning of period

 

213,817

 

335,049

 

Cash and cash equivalents at end of period

 

$

187,471

 

$

265,162

 

 

 

 

 

 

 

Noncash activity during the period

 

 

 

 

 

Noncash capital expenditures

 

$

520

 

$

3,251

 

Dividends declared but not paid

 

6,040

 

5,805

 

Issuance of Company’s common stock for compensation

 

418

 

204

 

Non-cash contingent consideration

 

786

 

 

 

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

 

6



 

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, 2011 (the “2011 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.

 

Net Earnings Per Common Share

 

Basic earnings 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.

 

7



 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands, except per share amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

12,976

 

$

19,380

 

$

36,036

 

$

45,951

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

48,346

 

48,253

 

48,322

 

49,247

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of potential common stock equivalents — stock options

 

44

 

35

 

63

 

49

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

48,390

 

48,288

 

48,385

 

49,296

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.27

 

$

0.40

 

$

0.75

 

$

0.93

 

Diluted

 

0.27

 

0.40

 

0.74

 

0.93

 

 

 

 

 

 

 

 

 

 

 

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

 

1,709

 

1,752

 

1,714

 

1,746

 

 

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. The Company has, however, granted only non-qualified stock options under both 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 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 the grant of the options. The exercise price per share under each option granted under the 1995 Plan was at the fair market value on the date specified in the 1995 Plan. Options vest and expire according to terms established at the grant date. Options granted under the 1994 Plan typically vest evenly over the requisite service period of four years and have a term of seven years. The vesting of options granted under the 1994 Plan will be accelerated if the grantee ceases to be employed by the Company after reaching age 60 or if there is a change in control of the Company. Options granted under the 1995 Plan were 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. Shares of common stock to be issued pursuant to the 2011 Plan are registered under the Securities Act of 1933.

 

8



 

The following table represents the Company’s stock option and restricted stock unit activity for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense recognized in operating expenses

 

$

1,966

 

$

1,230

 

$

7,086

 

$

3,524

 

 

 

 

 

 

 

 

 

 

 

Tax benefit of stock-based compensation expense in provision for income taxes

 

691

 

449

 

2,462

 

1,267

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense, net of tax

 

$

1,275

 

$

781

 

$

4,624

 

$

2,257

 

 

 

 

 

 

 

 

 

 

 

Fair value of shares vested

 

$

2,043

 

$

1,287

 

$

7,048

 

$

3,405

 

 

 

 

 

 

 

 

 

 

 

Proceeds to the Company from the exercise of stock-based compensation

 

$

201

 

$

 

$

2,184

 

$

154

 

 

 

 

 

 

 

 

 

 

 

Tax effect from exercise of stock-based compensation, including shortfall tax benefits

 

$

(4

)

$

 

$

(60

)

$

(71

)

 

 

 

At September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Stock-based compensation cost capitalized in inventory

 

$

354

 

$

166

 

 

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 and restricted stock units were awarded.

 

The assumptions used to calculate the fair value of options or restricted stock units 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.

 

As of September 30, 2012, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $85.2 million, which are the primary financial instruments, maintained in cash equivalents and carried at cost, approximating fair value, based on Level 1 inputs. The carrying amounts of trade receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s line of credit is classified as Level 2 within the fair value hierarchy and is calculated based on borrowings with similar maturities, current remaining average life to maturity and current market conditions.

 

9



 

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 effective tax rate increases from the third quarter of 2011 to the third quarter of 2012 and the first nine months of 2011 to the first nine months of 2012 were primarily due to 2012 valuation allowances taken on foreign losses, primarily in the European segment and non-deductible acquisition costs. In 2011 release of valuation allowances related to the disposal of the North America segment’s Keymark equity investment led to the lower effective tax rate.

 

The following table presents the Company’s effective tax rates and income tax expense for the three and nine months ended September 30, 2012 and 2011:

 

 

 

Three Months Ended

 

Nine Months Ended

 

(in thousands, except

 

September 30,

 

September 30,

 

percentage amounts)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

41.4

%

34.2

%

42.6

%

37.1

%

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

9,069

 

$

10,052

 

$

26,788

 

$

27,069

 

 

Acquisitions

 

In January 2012, the Company purchased all of the shares of S&P Clever Reinforcement Company AG and S&P Clever International AG, both companies incorporated under the laws of Switzerland (collectively, “S&P Clever”), for $58.1 million, subject to post-closing adjustments. S&P Clever manufactures and sells engineered materials to repair, strengthen and restore concrete and masonry construction and has operations in Switzerland, Germany, Portugal, Poland, The Netherlands and Austria. Payments under the purchase agreement included cash payments of $57.5 million and contingent consideration of $0.6 million payable over a three-year period if sales goals are met. As a result of the acquisition, the Company has increased its presence in the infrastructure, commercial and industrial construction market in Europe. The Company’s provisional measurement of assets acquired and liabilities assumed included cash and cash equivalents of $6.8 million, other current assets of $9.9 million, non-current assets of $54.2 million, current liabilities of $12.6 million and non-current liabilities of $0.2 million. Included in non-current assets is goodwill of $26.1 million, which was assigned to the European segment and is not deductible for tax purposes, and intangible assets of $15.0 million, the amortization of which is deductible for tax purposes.

 

In March 2012, the Company purchased substantially all of the assets of CarbonWrap Solutions, L.L.C. (“CarbonWrap”) for $5.5 million, subject to post-closing adjustments. CarbonWrap develops fiber-reinforced polymer products primarily for infrastructure and transportation projects. Payments under the purchase agreement totaled $5.3 million in cash and contingent consideration of $0.2 million to be paid on resolution of specified post-closing contingencies to the principal officer of CarbonWrap, who is now employed by the Company. Goodwill of $3.6 million was assigned to the North American segment and is deductible for tax purposes.  Intangible assets were valued at $1.6 million and are subject to tax-deductible amortization.  Net tangible assets consisting of accounts receivable, inventory, equipment and prepaid expenses accounted for the balance of the purchase price.

 

Under the business combinations topic of the FASB ASC, the Company accounted for these acquisitions as business combinations and ascribed acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements were made in the first quarter of 2012 for acquired assets and assumed liabilities. Adjustments to those measurements may be made in subsequent periods, up to one year from the acquisition date, as information necessary to complete the analysis is obtained. Fair value of intangible assets was based on Level 3 inputs. The Company expects the measurement process for each acquisition to be finalized within a year of its acquisition date.

 

Pro-forma financial information is not presented as it would not be materially different from the information presented in the Condensed Consolidated Statements of Operations.

 

Recently Adopted Accounting Standards

 

Effective January 1, 2012, the Company adopted the guidance codified in the “Comprehensive Income” topic of the FASB ASC, amending the comprehensive income guidance to eliminate the option to present components of other comprehensive income as part of the statement of stockholders’ equity. This amendment requires that all non-owner

 

10



 

changes in stockholders’ equity be presented in a single continuous statement or in two separate but consecutive statements. The Company has chosen to present comprehensive income in two separate consecutive statements. The implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

 

In July 2012, the FASB issued an amendment to the indefinite-lived intangible assets impairment guidance which provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendment is effective for annual and interim indefinite-lived intangible assets impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The early adoption and implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

 

Recently Issued Accounting Standards

 

Other 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 consisted of the following:

 

 

 

At September 30,

 

At December 31,

 

(in thousands)

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

$

111,726

 

$

100,877

 

$

78,642

 

Allowance for doubtful accounts

 

(1,514

)

(1,210

)

(991

)

Allowance for sales discounts and returns

 

(1,787

)

(1,635

)

(1,231

)

 

 

$

108,425

 

$

98,032

 

$

76,420

 

 

3.             Inventories

 

Inventories consisted of the following:

 

 

 

At September 30,

 

At December 31,

 

(in thousands)

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Raw materials

 

$

66,508

 

$

71,908

 

$

77,364

 

In-process products

 

19,225

 

21,454

 

21,357

 

Finished products

 

86,288

 

78,780

 

81,408

 

 

 

$

172,021

 

$

172,142

 

$

180,129

 

 

11



 

4.             Property, Plant and Equipment, Net

 

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

 

 

 

At September 30,

 

At December 31,

 

(in thousands)

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Land

 

$

32,282

 

$

28,889

 

$

28,996

 

Buildings and site improvements

 

170,761

 

152,167

 

153,597

 

Leasehold improvements

 

5,047

 

3,736

 

3,820

 

Machinery and equipment

 

212,918

 

203,687

 

208,292

 

 

 

421,008

 

388,479

 

394,705

 

Less accumulated depreciation and amortization

 

(215,562

)

(199,614

)

(201,540

)

 

 

205,446

 

188,865

 

193,165

 

Capital projects in progress

 

5,686

 

2,151

 

2,551

 

 

 

$

211,132

 

$

191,016

 

$

195,716

 

 

5.             Goodwill and Intangible Assets, Net

 

Goodwill was as follows:

 

 

 

At September 30,

 

At December 31,

 

(in thousands)

 

2012

 

2011

 

2011

 

North America

 

$

77,630

 

$

41,585

 

$

73,901

 

Europe

 

49,238

 

26,249

 

24,000

 

Asia/Pacific

 

1,944

 

1,854

 

1,948

 

Total

 

$

128,812

 

$

69,688

 

$

99,849

 

 

Intangible assets, net, were as follows:

 

 

 

At September 30, 2012

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

(in thousands)

 

Amount

 

Amortization

 

Amount

 

North America

 

$

35,620

 

$

(16,278

)

$

19,342

 

Europe

 

28,064

 

(7,331

)

20,733

 

Total

 

$

63,684

 

$

(23,609

)

$

40,075

 

 

 

 

At September 30, 2011

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

North America

 

$

24,022

 

$

(12,746

)

$

11,276

 

Europe

 

14,567

 

(5,591

)

8,976

 

Total

 

$

38,589

 

$

(18,337

)

$

20,252

 

 

 

 

At December 31, 2011

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

North America

 

$

32,912

 

$

(13,288

)

$

19,624

 

Europe

 

13,114

 

(4,882

)

8,232

 

Total

 

$

46,026

 

$

(18,170

)

$

27,856

 

 

12



 

Intangible assets consist primarily of customer relationships, patents, unpatented technology and non-compete agreements. Amortization expense for intangible assets during the three months ended September 30, 2012 and 2011, totaled $1.7 million and $1.0 million, respectively, and during the nine months ended September 30, 2012 and 2011, totaled $5.4 million and $3.2 million, respectively.

 

At September 30, 2012, estimated future amortization of intangible assets was as follows:

 

(in thousands)

 

 

 

Final three months of 2012

 

$

1,677

 

2013

 

6,707

 

2014

 

6,495

 

2015

 

5,732

 

2016

 

5,365

 

2017

 

3,822

 

Thereafter

 

10,277

 

 

 

$

40,075

 

 

The changes in the carrying amount of goodwill and intangible assets for the nine months ended September 30, 2012, were as follows:

 

 

 

 

 

Intangible

 

(in thousands)

 

Goodwill

 

Assets

 

 

 

 

 

 

 

Balance at December 31, 2011

 

$

99,849

 

$

27,856

 

Acquisitions

 

29,607

 

17,672

 

Amortization

 

 

(5,438

)

Foreign exchange

 

(644

)

(15

)

Balance at September 30, 2012

 

$

128,812

 

$

40,075

 

 

6.             Debt

 

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at September 30, 2012, was $311.1 million, including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.

 

The Company’s primary credit facility is a revolving line of credit with $300.0 million in available credit. This credit facility will expire in July 2017.  Amounts borrowed under this credit facility will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars appearing on Reuters LIBOR01screen page (the “LIBOR Rate”), adjusted for any reserve requirement in effect, plus a spread of 0.60% to 1.45%, determined quarterly based on the Company’s leverage ratio (at September 30, 2012, the LIBOR Rate was 0.21%), or (b) a base rate, plus a spread of 0.00% to 0.45%, determined quarterly based on the Company’s leverage ratio. The base rate is defined in a manner such that it will not be less than the LIBOR Rate. The Company will pay fees for standby letters of credit at an annual rate equal to the LIBOR Rate plus the applicable spread described above, and will pay market-based fees for commercial letters of credit. The Company is required to pay an annual facility fee of 0.15% to 0.30% of the available commitments under the credit agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The Company is also required to pay customary fees as specified in a separate fee agreement between the Company and Wells Fargo Bank, National Association, in its capacity as the Agent under the credit agreement.

 

The Company’s borrowing capacity under other revolving credit lines and a term note totaled $11.1 million at September 30, 2012. The other revolving credit lines and term note charge interest ranging from 0.81% to 7.25%, have maturity dates from December 2012 to September 2020, and had outstanding balances totaling $0.2 million at September 30, 2012. No balances were outstanding on September 30, 2011, or December 31, 2011. The Company was in compliance with its financial covenants at September 30, 2012.

 

13



 

7.             Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the 2011 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 embrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, environmental conditions or other factors can contribute to failure of fasteners, connectors, tools, anchors, adhesives 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 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 is a putative class action brought, like Case 1, 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.  Cases 1 and 4 have been consolidated.  On July 13, 2012, the Court denied, without prejudice, a motion by the homeowner plaintiffs in Case 4 to certify a Fourth Amended Class Action Complaint.  In addition, on July 13, 2012, the Court in Case 4 dismissed several claims that the homeowner plaintiffs had asserted against the Company.  On October 1, 2012, the Court granted summary judgment in favor of the Company and against the homeowner plaintiffs with respect to additional claims the homeowner plaintiffs had asserted against the Company.  The Company continues to investigate 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.  Management believes the Cases may not be resolved for an extended period.  The Company intends to defend itself vigorously in connection with the Cases.

 

14



 

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.  By Order dated November 7, 2011, all proceedings in the National Union action have been stayed.  If the stay is lifted and the National Union action is not dismissed, the Company intends vigorously to defend all claims advanced by National Union.

 

On April 12, 2011, Fireman’s Fund Insurance Company (“Fireman’s Fund”), another of the Company’s general liability insurers, sued Hartford Fire Insurance Company (“Hartford”), a third insurance company from whom the Company purchased general liability insurance, in the United States District Court for the Northern District of California, Fireman’s Fund Insurance Company v. Hartford Fire Insurance Company, Civil No. 11 1789 SBA (the “Fireman’s Fund action”).  The Company has intervened in the Fireman’s Fund action and has moved to stay all proceedings in that action as well, pending resolution of the underlying Ocean Pointe Cases.

 

On November 21, 2011, the Company commenced a lawsuit against National Union, Fireman’s Fund, Hartford and others in the Superior Court of the State of California in and for the City and County of San Francisco (the “San Francisco coverage action”).  In the San Francisco coverage action, the Company alleges generally that the separate pendency of the National Union action and the Fireman’s Fund action presents a risk of inconsistent adjudications; that the San Francisco Superior Court has jurisdiction over all of the parties and should exercise jurisdiction at the appropriate time to resolve any and all disputes that have arisen or may in the future arise among the Company and its liability insurers; and that the San Francisco coverage action should also be stayed pending resolution of the underlying Ocean Pointe Cases.  The Company intends to move for such a stay if necessary.

 

Nishimura v. Gentry Homes, Ltd; Simpson Manufacturing Co., Inc.; and Simpson Strong-Tie Company, Inc., Civil no. 11-1-1522-07, was filed in the Circuit Court of the First Circuit of Hawaii on July 20, 2011.  The case alleges premature corrosion of the Company’s strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii.  The case is a putative class action brought by owners of allegedly affected homes.  The Complaint alleges that the Company’s strap products and mudsill anchors are insufficiently corrosion resistant and/or fail to comply with Honolulu’s building code.  The Court has dismissed several of the claims the plaintiffs had asserted against the Company.  The Company is currently investigating the claims asserted in the complaint, including, among other things: the existence and extent of the alleged corrosion, if any; the building code provisions alleged to be applicable and, if applicable, whether the products complied; 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 any are needed.  At this time, the likelihood that the Company will be found liable for any damage allegedly suffered and the extent of such liability, if any, are unknown.  The Company denies any liability of any kind and intends to defend itself vigorously in this case.

 

8.             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. Certain participants may have additional goals based on strategic initiatives of the Company.

 

The fair value of each restricted stock unit award is estimated on the date of the award based on the closing market price of the underlying stock on the day preceding the date of the award. On January 30, 2012, 361,061 restricted stock units were awarded, including 8,550 awarded to the Company’s independent directors, at an estimated value of $33.23 per share, based on the closing price on January 27, 2012. The restrictions on these awards generally lapse one quarter on the date of the award and one quarter on each of the first, second and third anniversaries of the date of the award.

 

15



 

The following table summarizes the Company’s unvested restricted stock unit activity for the nine months ended September 30, 2012:

 

 

 

 

 

 

 

Aggregate

 

 

 

 

 

Weighted-

 

Intrinsic

 

 

 

Shares

 

Average

 

Value *

 

Unvested Restricted Stock Units (RSUs)

 

(in thousands)

 

Price

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2012

 

 

$

 

 

 

Awarded

 

361

 

33.23

 

 

 

Vested

 

(95

)

33.23

 

 

 

Forfeited

 

(1

)

33.23

 

 

 

Outstanding at September 30, 2012

 

265

 

$

33.23

 

$

7,593

 

Outstanding and expected to vest at September 30, 2012

 

257

 

$

33.23

 

$

7,367

 

 


*  The intrinsic value is calculated using the closing price per share of $28.62 as reported by the New York Stock Exchange on September 28, 2012.

 

The total intrinsic value of restricted stock units vested during the nine months ended September 30, 2012, was $3.1 million, based on the market value on the award date.

 

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 each award 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.

 

No stock options were granted in 2012.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1995 Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

02/15/11

 

2.92

%

1.76

%

6.6 years

 

38.0

%

$29.58

 

$

10.49

 

 

16



 

The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2012:

 

 

 

 

 

 

 

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, 2012

 

2,134

 

$

31.15

 

 

 

 

 

Exercised

 

(90

)

24.16

 

 

 

 

 

Forfeited

 

(24

)

35.97

 

 

 

 

 

Outstanding at September 30, 2012

 

2,020

 

$

31.41

 

 

 

$

846

 

Outstanding and expected to vest at September 30, 2012

 

1,977

 

$

31.45

 

4.0

 

$

832

 

Exercisable at September 30, 2012

 

1,100

 

$

33.15

 

3.1

 

$

590

 

 


*  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 stock option, using the closing price per share of $28.62 as reported by the New York Stock Exchange on September 28, 2012.

 

The total intrinsic value of stock options exercised during the nine months ended September 30, 2012 and 2011, was $0.8 million and $40 thousand, respectively.

 

A summary of the status of unvested stock options as of September 30, 2012, and changes during the nine months ended September 30, 2012, are presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Unvested Stock Options

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at January 1, 2012

 

1,242

 

$

10.11

 

Vested

 

(319

)

9.86

 

Forfeited

 

(3

)

10.33

 

Unvested at September 30, 2012

 

920

 

$

10.19

 

 

As of September 30, 2012, $19.8 million of total unrecognized compensation cost was related to unvested stock-based compensation arrangements under the 2011 Incentive Plan. The portions of this cost related to stock options, and restricted stock units awarded through January 2012, are expected to be recognized over a weighted-average period of 2.3 years.

 

9.             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.

 

17



 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(in thousands)

 

2012

 

2011

 

2012

 

2011

 

Net Sales

 

 

 

 

 

 

 

 

 

North America

 

$

137,145

 

$

127,998

 

$

409,644

 

$

371,732

 

Europe

 

31,880

 

31,761

 

94,236

 

93,206

 

Asia/Pacific

 

2,851

 

2,370

 

7,958

 

7,062

 

Administrative and all other

 

237

 

237

 

712

 

713

 

Total

 

$

172,113

 

$

162,366

 

$

512,550

 

$

472,713

 

 

 

 

 

 

 

 

 

 

 

Sales to Other Segments*

 

 

 

 

 

 

 

 

 

North America

 

$

969

 

$

1,093

 

$

3,783

 

$

3,905

 

Europe

 

105

 

 

258

 

250

 

Asia/Pacific

 

3,894

 

3,350

 

12,191

 

7,505

 

Total

 

$

4,968

 

$

4,443

 

$

16,232

 

$

11,660

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Operations

 

 

 

 

 

 

 

 

 

North America

 

$

22,102

 

$

23,594

 

$

66,558

 

$

69,463

 

Europe

 

1,172

 

2,801

 

889

 

3,997

 

Asia/Pacific

 

(1,043

)

(410

)

(1,860

)

(1,674

)

Administrative and all other

 

(241

)

(1,103

)

(2,940

)

(3,413

)

Total

 

$

21,990

 

$

24,882

 

$

62,647

 

$

68,373

 

 


* The sales to other segments are eliminated on consolidation.

 

 

 

 

 

 

 

At

 

 

 

At September 30,

 

December 31,

 

(in thousands)

 

2012

 

2011

 

2011

 

Total Assets

 

 

 

 

 

 

 

North America

 

$

568,878

 

$

608,350

 

$

540,082

 

Europe

 

196,883

 

131,138

 

180,016

 

Asia/Pacific

 

31,067

 

28,349

 

29,306

 

Administrative and all other

 

82,168

 

87,632

 

86,683

 

Total

 

$

878,996

 

$

855,469

 

$

836,087

 

 

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 $107.3 million, $177.5 million, and $68.5 million, as of September 30, 2012 and 2011, and December 31, 2011, respectively.

 

10.                                 Plant Closure

 

In September 2012, the Company committed to a plan to close its heavy-duty anchor production facility in Ireland and to exit the heavy-duty mechanical anchor business in the Company’s European segment. The Company expects that the closure to be completed as early as December 2012 or first quarter 2013. The facility produces heavy duty metric anchors used in commercial applications and sold mainly in Europe. After the facility is closed, the Company will continue to sell light and medium-duty anchor products in Europe and its other markets, including metric anchors for commercial use. As a result of this decision, the Company recorded an employee severance obligation of $1.0 million in September 2012, representing the estimated minimum statutory amount due to employees that will be involuntarily terminated. Severance expense was allocated in the statement of operations on the same basis as employee labor cost with 85% allocated to cost of sales. It is likely that additional severance expense will be accrued after negotiations with employees or trade unions have concluded, although amounts are unknown at this time.

 

18



 

Long-lived assets include land, building, equipment and product code approvals. At September 30, 2012, the net book value of this land, building and equipment was $2.9 million and of these product code approvals was $1.2 million. These assets will either be sold to outside parties or be transferred to other branches within the Company. Future depreciation for assets expected to be transferred will not be revised.  The Company has engaged an outside firm to assist in the sale and valuation of the assets for sale. While the facility is operating, gains or losses on the sale of long-lived assets will be recognized in the period sold.  Long-lived assets to be disposed of are considered to be held and in use. Future depreciation for these assets will be revised to reflect the use of the assets over a shortened period. When the assets cease being used, the carrying amount will equal their expected salvage or net realizable value. During the quarter-ended September 30, 2012, the Company had not committed to sell any of these long-lived assets. The Company has not sufficiently progressed in its sale or valuation efforts to have a reasonable estimate of the fair value of held and in-use long-lived assets.

 

The Company has not yet estimated other closing liabilities, such as professional and consulting fees, environmental clean-up costs, and on-going maintenance and utility costs. Closing liabilities are accrued when a transaction or event has occurred that leaves little or no discretion to avoid future settlement of the liability.  As of September 30, 2012, the Company had not accrued any closing liabilities because the conditions for accruing a liability were not met.

 

11.                                 Subsequent Events

 

In October 2012, the Company’s Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.0 million, to be paid on January 24, 2013, to stockholders of record on January 3, 2013. The Board of Directors also scheduled the Company’s 2013 annual meeting of stockholders for Tuesday, April 23, 2013.

 

19



 

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 operations for the Company for the three months and nine months ended September 30, 2012. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.

 

Results of Operations for the Three Months Ended September 30, 2012, Compared with the Three Months Ended September 30, 2011

 

Income from operations decreased 11.6% from $24.9 million in the third quarter of 2011 to $22.0 million in the third quarter of 2012. The following table illustrates the differences in the Company’s operating results in the three months ended September 30, 2012, from the three months ended September 30, 2011, and the increases or decreases for each category by segment.

 

 

 

Three

 

 

 

 

 

 

 

 

 

Three

 

 

 

Months

 

 

 

 

 

 

 

 

 

Months

 

 

 

Ended

 

Increase (Decrease) in Operating Segment

 

Ended

 

 

 

Sep. 30,

 

North

 

 

 

Asia/

 

Admin &

 

Sep. 30,

 

(in thousands)

 

2011

 

America

 

Europe

 

Pacific

 

All Other

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

162,366

 

$

9,146

 

$

120

 

$

481

 

$

 

$

172,113

 

Cost of sales

 

86,919

 

8,214

 

1,073

 

67

 

117

 

96,390

 

Gross profit

 

75,447

 

932

 

(953

)

414

 

(117

)

75,723

 

Research and development and other engineering expense

 

6,804

 

2,088

 

(65

)

89

 

 

8,916

 

Selling expense

 

18,633

 

1,830

 

277

 

196

 

5

 

20,941

 

General and administrative expense

 

25,174

 

(1,506

)

397

 

756

 

(978

)

23,843

 

Loss (gain) on sale of assets

 

(46

)

7

 

66

 

6

 

 

33

 

Income from operations

 

24,882

 

(1,487

)

(1,628

)

(633

)

856

 

21,990

 

Income in equity method investment, before tax

 

4,471

 

(4,471

)

 

 

 

 

Interest income, net

 

79

 

(35

)

46

 

19

 

(54

)

55

 

Income before income taxes

 

29,432

 

(5,993

)

(1,582

)

(614

)

802

 

22,045

 

Provision for income taxes

 

10,052

 

(1,905

)

1,350

 

114

 

(542

)

9,069

 

Net income

 

$

19,380

 

$

(4,088

)

$

(2,932

)

$

(728

)

$

1,344

 

$

12,976

 

 

The following table represents net sales by segment for the three months ended September 30, 2011 and 2012:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

$

127,998

 

$

31,761

 

$

2,370

 

$

237

 

$

162,366

 

September 30, 2012

 

137,145

 

31,880

 

2,851

 

237

 

172,113

 

Increase

 

9,147

 

119

 

481

 

 

9,747

 

Percentage increase

 

7.1

%

0.4

%

20.3

%

0.0

%

6.0

%

 

20



 

The Admin & All Other column primarily includes expenses such as self-insured workers compensation claims, if any, for certain members of management, stock compensation for certain members of management, interest expense, foreign exchange gains or losses and income tax expense, as well as revenues and expenses related to real estate activities, such as rental income and depreciation expense on the Company’s facility in Vacaville, California, which the Company has leased to a third party for a 10-year term expiring in August 2020.

 

For the third quarter of 2012, net sales increased 6.0% to $172.1 million compared to net sales of $162.4 million for the third quarter of 2011. The Company had net income of $13.0 million for the third quarter of 2012 compared to net income of $19.4 million for the third quarter of 2011, which included a $4.5 million gain on the sale of the Company’s equity investment in Keymark. Diluted net income per common share was $0.27 for the third quarter of 2012 compared to diluted net income of $0.40 per common share for the third quarter of 2011.

 

The increase in the Company’s third quarter 2012 net sales was due to sales of $8.8 million by businesses acquired since December 2011 and to increased volume. In the third quarter 2012, sales increased in North America, with an above-average increase in the United States, due in part to recent acquisitions. Sales in Europe were flat, due to sales from the European acquisition offset by decreases throughout the rest of the Company’s European operations, particularly in France and the Nordic region, which were down 14% and 18%, respectively. The decrease in sales, apart from acquired businesses, was primarily due to economic uncertainty throughout most of Europe, which negatively affected sales volumes. Effects of foreign currency translation were not significant. Sales to contractor distributors and lumber dealers increased in the third quarter of 2012, compared to the third quarter of 2011, while sales to dealer distributors and to home centers decreased over the same period, although sales to the Company’s largest customer increased 22.0% for the same periods. Wood construction product sales, including connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% of total Company sales in the third quarter of 2012, down from 89% in the third quarter of 2011. Concrete construction product sales, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, as a percentage of total sales increased to 15% in the third quarter of 2012, from 11% in the third quarter of 2011. The majority of sales from recent acquisitions were attributed to the European acquisition, and mostly in concrete construction products.

 

The following table represents gross profit by segment for the three months ended September 30, 2011 and 2012:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

$

64,262

 

$

10,928

 

$

81

 

$

176

 

$

75,447

 

September 30, 2012

 

65,194

 

9,975

 

495

 

59

 

75,723

 

Increase (decrease)

 

932

 

(953

)

414

 

(117

)

276

 

Percentage increase (decrease)

 

1.5

%

(8.7

)%

511.1

%

(66.5

)%

0.4

%

 

Gross profit increased slightly to $75.7 million in the third quarter of 2012 from $75.4 million in the third quarter of 2011. As a percentage of net sales, gross profit decreased from 46.5% in the third quarter of 2011 to 44.0% in the third quarter of 2012. The North American gross profit margin decreased from 50.2% in the third quarter of 2011 to 47.5% in the third quarter of 2012, as a result of higher material and labor costs as a percentage of sales, increased concrete construction product sales, which have a lower gross margin than wood construction product sales, and competitive price pressure.  These costs increases were partly offset by lower factory overhead costs as a percentage of sales, which resulted from higher sales volume. The European gross profit margin decreased from 34.4% in the third quarter of 2011 to 31.3% in the third quarter of 2012, primarily due to higher material, labor and warehouse costs. Steel prices decreased slightly in the third quarter. Due to a number of factors that could affect supply, the Company is uncertain of steel pricing through the last quarter of 2012, but steel prices are expected to increase in 2013.

 

Unless otherwise noted, changes in operating expenses were mostly attributable to the North American segment. Research and development and engineering expense increased 31.0% from $6.8 million in the third quarter of 2011 to $8.9 million in the third quarter of 2012, including increases in professional fees of $1.5 million primarily for truss software development costs and personnel costs of $0.9 million resulting from additional employees, partly due to the recent North American acquisitions, and an annual pay rate increase instituted in January 2012, which also applied to personnel in other departments. Selling expense increased 12.4% from $18.6 million in the third quarter of 2011 to $20.9 million in the third quarter of 2012, primarily due to increases in personnel costs of $1.1 million, mostly from the recent North American acquisitions, additional employees and increased pay rates, promotional costs of $0.9 million and professional and legal fees of $0.4 million. These increases were partly offset by a reduction in cash profit sharing of $0.8 million due to lower operating income. General and administrative expense

 

21



 

decreased 5.3% from $25.2 million in the third quarter of 2011 to $23.8 million in the third quarter of 2012. Professional and legal fees decreased $2.4 million, which was primarily due to a $1.1 million legal contingency recorded in 2011, and the balance due to acquisitions that were completed in 2011 and the first quarter of 2012, and cash profit sharing decreased $1.1 million due to lower operating income. These decreases were partly offset by increases in depreciation expense of $0.8 million and amortization expense of $0.7 million primarily due to recent acquisitions in both North America and Europe and to increased personnel costs of $0.5 million primarily due to the recent European acquisition, additional employees and increased pay rates.

 

The effective tax rate increased from 34.2% in the third quarter of 2011 to 41.1% in the third quarter of 2012, primarily due to $0.9 million in valuation allowances related to 2012 European operational losses, while in 2011 release of valuation allowances related to the disposal of the Keymark equity investment led to the lower effective tax rate.

 

Results of Operations for the Nine Months Ended September 30, 2012, Compared with the Nine Months Ended September 30, 2011

 

Income from operations decreased 8.4% from $68.4 million in the first nine months of 2011 to $62.6 million in the first nine months of 2012. The following table illustrates the differences in the Company’s operating results in the nine months ended September 30, 2012, from the nine months ended September 30, 2011, and the increases or decreases for each category by segment.

 

 

 

Nine

 

 

 

 

 

 

 

 

 

Nine

 

 

 

Months

 

 

 

 

 

 

 

 

 

Months

 

 

 

Ended

 

Increase (Decrease) in Operating Segment

 

Ended

 

 

 

Sep. 30,

 

North

 

 

 

Asia/

 

Admin &

 

Sep. 30,

 

(in thousands)

 

2011

 

America

 

Europe

 

Pacific

 

All Other

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

472,713

 

$

37,912

 

$

1,030

 

$

895

 

$

 

$

512,550

 

Cost of sales

 

256,819

 

27,708

 

(204

)

371

 

(418

)

284,276

 

Gross profit

 

215,894

 

10,204

 

1,234

 

524

 

418

 

228,274

 

Research and development and other engineering expense

 

19,743

 

7,381

 

(79

)

111

 

 

27,156

 

Selling expense

 

55,527

 

4,749

 

304

 

641

 

34

 

61,255

 

General and administrative expense

 

72,250

 

1,189

 

4,143

 

(46

)

(362

)

77,174

 

Loss on sale of assets

 

1

 

77

 

(27

)

4

 

(13

)

42

 

Income from operations

 

68,373

 

(3,192

)

(3,107

)

(186

)

759

 

62,647

 

Income in equity method investment, before tax

 

4,389

 

(4,389

)

 

 

 

 

Interest income, net

 

258

 

(88

)

69

 

49

 

(111

)

177

 

Income before income taxes

 

73,020

 

(7,669

)

(3,038

)

(137

)

648

 

62,824

 

Provision for income taxes

 

27,069

 

(1,287

)

1,064

 

382

 

(440

)

26,788

 

Net income

 

$

45,951

 

$

(6,382

)

$

(4,102

)

$

(519

)

$

1,088

 

$

36,036

 

 

The following table represents net sales by segment for the nine months ended September 30, 2011 and 2012:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Nine months ended:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

$

371,732

 

$

93,206

 

$

7,062

 

$

713

 

$

472,713

 

September 30, 2012

 

409,644

 

94,236

 

7,958

 

712

 

512,550

 

Increase

 

37,912

 

1,030

 

896

 

(1

)

39,837

 

Percentage increase

 

10.2

%

1.1

%

12.7

%

0.0

%

8.4

%

 

In the first nine months of 2012, net sales increased 8.4% to $512.6 million compared to net sales of $472.7 million for the first nine months of 2011 due in part to recent acquisitions. The Company had net income of $36.0 million for the first nine months of 2012 compared to net income of $46.0 million for the first nine months of 2011, which included a $4.5 million gain on the sale of the Company’s equity investment in Keymark. Diluted net income per common share was $0.74 for the first nine months of 2012 compared to diluted net income of $0.93 per common share for the first nine months of 2011.

 

22



 

Sales in North America for the first nine months of 2012 increased, with an above-average increase in the United States, primarily due to increases in volume and recent acquisitions. Sales in the first nine months of 2012 in Europe increased slightly, due to the recent European acquisition, partly offset by decreases throughout the rest of the Company’s European operations. Foreign currency translation effects were not significant. Sales to contractor distributors and lumber dealers had above-average increases in the first nine months of 2012 as compared to the same period in 2011, while sales to home centers decreased over the same period.  Wood construction product sales represented 86% of total Company sales in the first nine months of 2012, down from 89% in the first nine months of 2011. Concrete product sales represented 14% of total sales in the first nine months of 2012, up from 11% in the first nine months of 2011, with increases in all geographic segments. Acquisitions since December 2011 contributed $23.5 million to sales in the first nine months of 2012, with the majority attributed to the European acquisition, and mostly in concrete construction products.

 

The following table represents gross profit by segment for the nine months ended September 30, 2011 and 2012:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Nine months ended:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

$

184,523

 

$

30,595

 

$

719

 

$

57

 

$

215,894

 

September 30, 2012

 

194,727

 

31,829

 

1,243

 

475

 

228,274

 

Increase

 

10,204

 

1,234

 

524

 

418

 

12,380

 

Percentage increase

 

5.5

%

4.0

%

72.8

%

733.3

%

5.7

%

 

Gross profit increased to $228.3 million in the first nine months of 2012 from $215.9 million in the first nine months of 2011. As a percentage of net sales, gross profit decreased from 45.7% in the first nine months of 2011 to 44.5% in the first nine months of 2012.  The North American segment gross profit margin decreased from 49.6% in the first nine months of 2011 to 47.5% in the first nine months of 2012, primarily due to higher material and labor costs as a percentage of sales, increased concrete construction product sales, which have a lower gross margin than wood construction product sales, and competitive price pressure.  These cost increases were partly offset by lower factory overhead costs as a percentage of sales, which resulted from higher sales volume. The gross profit margin for the European segment increased to 33.8% in in the first nine months of 2012 from 32.8% in the first nine months of 2011, primarily due to lower material costs, partly offset by higher labor and factory overhead costs.

 

Unless otherwise noted, changes in operating expenses were mostly attributable to the North American segment. Research and development and engineering expense increased 37.5% from $19.7 million in the first nine months of 2011 to $27.2 million in the first nine months of 2012, including increases in professional fees of $5.2 million, primarily due to truss software development costs, and personnel costs of $1.8 million resulting from additional employees and a pay rate increase. These increases were partly offset by a reduction in cash profit sharing of $0.7 million due to lower operating income. Selling expense increased 10.3% from $55.5 million in the first nine months of 2011 to $61.3 million in the first nine months of 2012, primarily due to increases in personnel costs of $3.3 million, resulting from the recent North American acquisitions, additional employees and increased pay rates, increased equity-based compensation of $1.1 million and increased promotional costs of $1.0 million. General and administrative expense increased 6.8% from $72.3 million in the first nine months of 2011 to $77.2 million in the first nine months of 2012. Personnel costs increased $2.7 million primarily due to the recent European acquisition, additional employees and an increase in pay rates.  Depreciation expense increased $2.2 million and amortization expense increased $2.2 million primarily due to recent acquisitions in both North America and Europe. The remaining increases in general and administrative expenses included $1.3 million in equity-based compensation, $0.5 million in computer hardware and license fees and $0.4 million reduction in foreign currency gains. These increases were partly offset by a reduction in cash profit sharing of $2.1 million due to lower operating income and a net decrease in professional and legal fees of $2.1 million although professional and legal fees increased by $0.7 million in Europe due to first quarter 2012 acquisition related activities.

 

The effective tax rate increased from 37.1% in the first nine months of 2011 to 42.6% in the first nine months of 2012, primarily due to 2012 non-deductible acquisition costs and valuation allowances taken on foreign losses, while in 2011 release of valuation allowances related to the disposal of the Keymark equity investment led to the lower effective tax rate.

 

23



 

Liquidity and Sources of Capital

 

As of September 30, 2012, working capital was $404.1 million as compared to $477.7 million at September 30, 2011, and $430.5 million at December 31, 2011. The decrease in working capital from December 31, 2011, was primarily due to decreases in cash and cash equivalents of $26.3 million, inventories of $8.1 million and assets held for sale of $6.8 million, and increases in accrued liabilities of $8.7 million, accrued cash profit sharing of $5.5 million, trade accounts payable of $2.2 million, and income taxes of $1.0 million. The decrease in cash and cash equivalents was primarily due to the recent European acquisition for $50.7 million, net of cash received of $6.8 million, and the recent North American acquisition for $5.3 million, net of contingent consideration of $0.2 million, partly offset by the sale of real estate in North America for $6.4 million, net of closing costs, which also accounted for the decrease in assets held for sale. Raw material inventories decreased 14.0% as compared to December 31, 2011, while in-process and finished goods inventories increased 2.7% over the same period. The increase in accrued liabilities was primarily due to the recent European acquisition, sales rebates, collected VAT/GST taxes exceeding taxes paid, a liability related to the acquisition of Canadian truss plate distribution rights, and other intangibles assets and termination expense related to the plant closing, while the increase to accrued cash profit sharing and accrued income taxes payable was due to higher operating profits in the third quarter of 2012, compared to the fourth quarter of 2011. The increase in trade accounts payable was primarily due to the recent European and North American acquisitions, employee compensation, and professional and consulting fees. The decrease in working capital from December 31, 2011, was partly offset by an increase in net trade accounts receivable of $32.0 million, which was primarily due to seasonal increases in net sales during the third quarter of 2012 compared to the fourth quarter of 2011. 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 $36.0 million and noncash expenses, primarily charges for depreciation, amortization, stock-based compensation and impairment of assets held for sale totaling $28.6 million, resulted in net cash provided by operating activities of $56.7 million. As of September 30, 2012, the Company had unused credit facilities available of $311.1 million, including a $300.0 million credit facility.

 

The Company’s investing activities used cash of $63.5 million primarily due to the recent European acquisition for $50.7 million, net of contingent consideration of $0.6 million, and cash received of $6.8 million, the recent North American acquisition for $5.3 million, net of contingent consideration of $0.2 million, and capital expenditures of $16.1 million. The cash paid for these acquisitions and for capital assets was partly offset by the proceeds of the sale of North American real estate and other asset sales of $6.9 million. The Company’s capital expenditures were primarily due to the continued construction of a manufacturing facility in Germany, improvement of various facilities in France and the United States and equipment purchases. The Company estimates that its full-year capital spending will be $22.0 to $24.0 million in 2012.

 

The Company’s financing activities used net cash of $20.7 million. The primary uses of cash were payments of cash dividends in the amount of $18.1 million and repayment of $5.7 million of borrowings on credit facilities, including borrowings obtained through acquisition. Cash was provided from the issuance of the Company’s common stock through the exercise of stock options totaling $2.2 million. In October 2012, the Company’s Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.0 million, to be paid on January 24, 2013, to stockholders of record on January 3, 2013. The Company borrowed $2.2 million from its lines of credit during the first nine months of 2012, primarily for raw material purchases attributable to the recent European acquisition. The Company has $50.0 million remaining of its common stock repurchase authorization for 2012.

 

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 $300.0 million unsecured credit agreement will expire in July 2017.

 

A significant portion of the cash held by the Company is in foreign currencies. Cash held in foreign countries could be subject to additional taxation if it were repatriated to the United States. The Company has no plans to repatriate cash and cash equivalents held outside the United States, as it is expected to be used to fund future international growth and acquisitions.

 

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.

 

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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 increases in accumulated other comprehensive income of $4.1 million and $1.4 million for the three and nine months ended September 30, 2012. The translation adjustment in the third quarter of 2012 was primarily due to the effect of a weakening United States dollar in relation to all currencies. The translation adjustment in the first nine months of 2012 was primarily due to the effect of the weakening of the United States dollar in relation to most currencies, partly offset by the strengthening of the United States dollar in relation to a few European currencies.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures. As of September 30, 2012, 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 September 30, 2012, 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.

 

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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 is a putative class action brought, like Case 1, 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.  Cases 1 and 4 have been consolidated.  On July 13, 2012, the Court denied, without prejudice, a motion by the homeowner plaintiffs in Case 4 to certify a Fourth Amended Class Action Complaint.  In addition, on July 13, 2012, the Court in Case 4 dismissed several claims that the homeowner plaintiffs had asserted against the Company.  On October 1, 2012, the Court granted summary judgment in favor of the Company and against the homeowner plaintiffs with respect to additional claims the homeowner plaintiffs had asserted against the Company.  The Company continues to investigate 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.  Management believes the Cases may not be resolved for an extended period.  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.  By Order dated November 7, 2011, all proceedings in the National Union action have been stayed.  If the stay is lifted and the National Union action is not dismissed, the Company intends vigorously to defend all claims advanced by National Union.

 

On April 12, 2011, Fireman’s Fund Insurance Company (“Fireman’s Fund”), another of the Company’s general liability insurers, sued Hartford Fire Insurance Company (“Hartford”), a third insurance company from whom the Company purchased general liability insurance, in the United States District Court for the Northern District of California, Fireman’s Fund Insurance Company v. Hartford Fire Insurance Company, Civil No. 11 1789 SBA (the “Fireman’s Fund action”).  The Company has intervened in the Fireman’s Fund action and has moved to stay all proceedings in that action as well, pending resolution of the underlying Ocean Pointe Cases.

 

On November 21, 2011, the Company commenced a lawsuit against National Union, Fireman’s Fund, Hartford and others in the Superior Court of the State of California in and for the City and County of San Francisco (the “San Francisco coverage action”).  In the San Francisco coverage action, the Company alleges generally that the separate pendency of the National Union action and the Fireman’s Fund action presents a risk of inconsistent adjudications; that the San Francisco Superior Court has jurisdiction over all of the parties and should exercise jurisdiction at the appropriate time to resolve any and all disputes that have arisen or may in the future arise among the Company and its liability insurers; and that the San Francisco coverage action should also be stayed pending resolution of the underlying Ocean Pointe Cases.  The Company intends to move for such a stay if necessary.

 

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Nishimura v. Gentry Homes, Ltd; Simpson Manufacturing Co., Inc.; and Simpson Strong-Tie Company, Inc., Civil no. 11-1-1522-07, was filed in the Circuit Court of the First Circuit of Hawaii on July 20, 2011.  The case alleges premature corrosion of the Company’s strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii.  The case is a putative class action brought by owners of allegedly affected homes.  The Complaint alleges that the Company’s strap products and mudsill anchors are insufficiently corrosion resistant and/or fail to comply with Honolulu’s building code.  The Court has dismissed several of the claims the plaintiffs had asserted against the Company.  The Company is currently investigating the claims asserted in the complaint, including, among other things: the existence and extent of the alleged corrosion, if any; the building code provisions alleged to be applicable and, if applicable, whether the products complied; 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 any are needed.  At this time, the likelihood that the Company will be found liable for any damage allegedly suffered and the extent of such liability, if any, are unknown.  The Company denies any liability of any kind and intends to defend itself vigorously in this case.

 

Item 1A. Risk Factors

 

We are affected by risks specific to us, as well as risks that generally affect 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-2011.pdf or www.sec.gov).

 

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

 

In January 2012, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock. This replaced the $100.0 million repurchase authorization from February 2011. The authorization will remain in effect through the end of 2012. There were no purchases by the Company during the third quarter of 2012.

 

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.

 

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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 10.4 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

10.4             Credit Agreement, dated as of July 27, 2012, among Simpson Manufacturing Co., Inc. as Borrower, the Lenders party thereto, Wells Fargo Bank, National Association, in its separate capacities as Swing Line Lender and L/C issuer and as Administrative Agent, and Simpson Strong-Tie Company Inc., and Simpson Strong-Tie International, Inc. as Guarantors, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.’s Current Report on Form 8-K dated August 1, 2012.

 

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., 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 January 30, 2012.

 

10.7               Compensation of Named Executive Officers is incorporated by reference to Simpson Manufacturing Co., Inc.’s Schedule 14A Proxy Statement dated March 9, 2012.

 

10.8               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 9, 2012.

 

10.9               Share Purchase Agreement dated as of October 26, 2011, between Josef Scherer and Yvonne Scherer, owners of S&P Clever Reinforcement Company AG and S&P Reinforcement International AG, both companies incorporated under the laws of Switzerland, on the one hand, and Simpson Manufacturing Co., Inc., on the other hand, is incorporated by reference to Exhibit 10.9 of Simpson Manufacturing Co., Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011.

 

10.10         Asset Purchase Agreement dated as of December 16, 2011, by and between Automatic Stamping, LLC, a North Carolina limited liability company, Automatic Stamping Auxiliary Services, LLC, a North Carolina limited liability company, and William H. Black, Jr., on the one hand, and Simpson Strong-Tie Company Inc., a California corporation, on the other hand, is incorporated by reference to Exhibit 10.10 of Simpson Manufacturing Co., Inc.’s Annual Report on Form 10-K for the year ended December 31, 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 September 30, 2012, 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 Comprehensive Income, (iv) the Condensed Consolidated Statements of Stockholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

 

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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:

November 6, 2012

 

By

/s/Brian J. Magstadt

 

 

 

Brian J. Magstadt

 

 

 

Chief Financial Officer

 

 

 

(principal accounting and financial officer)

 

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