Simpson Manufacturing Co., Inc. - Quarter Report: 2014 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended:  March 31, 2014

 

OR

 

o           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

 

Commission file number:  1-13429

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

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

(Address of principal executive offices)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares of the registrant’s common stock outstanding as of March 31, 2014:  48,938,691

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

		March 31,						December 31,
		2014			2013			2013
ASSETS
Current assets
Cash and cash equivalents		$	211,988		$	141,965		$	251,208
Trade accounts receivable, net		114,159			102,813			90,017
Inventories		216,529			202,341			197,728
Deferred income taxes		12,998			12,419			12,699
Assets held for sale		—			577			—
Other current assets		16,073			20,377			16,454
Total current assets		571,747			480,492			568,106
Property, plant and equipment, net		207,457			211,010			209,533
Goodwill		129,433			122,582			129,218
Intangible assets, net		39,728			50,636			41,773
Other noncurrent assets		4,804			6,827			4,983
Total assets		$	953,169		$	871,547		$	953,613
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and notes payable		$	83		$	1,214		$	103
Trade accounts payable		31,291			30,958			34,933
Accrued liabilities		48,946			31,290			51,745
Accrued profit sharing trust contributions		2,005			1,849			5,784
Accrued cash profit sharing and commissions		8,105			4,707			6,049
Accrued workers’ compensation		5,119			4,673			4,591
Total current liabilities		95,549			74,691			103,205
Deferred income tax and other long-term liabilities		10,111			8,435			9,129
Total liabilities		105,660			83,126			112,334
Commitments and contingencies (Note 7)
Stockholders’ equity
Common stock, at par value		489			485			486
Additional paid-in capital		208,870			184,550			207,418
Retained earnings		621,260			597,104			615,289
Accumulated other comprehensive income		16,890			6,282			18,086
Total stockholders’ equity		847,509			788,421			841,279
Total liabilities and stockholders’ equity		$	953,169		$	871,547		$	953,613

 

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

 

2

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands except per-share amounts, unaudited)

 

		Three Months Ended
		March 31,
		2014			2013
Net sales		$	168,288		$	154,281
Cost of sales		90,526			89,561
Gross profit		77,762			64,720
Operating expenses:
Research and development and other engineering		9,700			8,308
Selling		21,819			21,371
General and administrative		26,922			26,036
Gain on sale of assets		(285		)	(8		)
		58,156			55,707
Income from operations		19,606			9,013
Interest income, net		85			38
Income before taxes		19,691			9,051
Provision for income taxes		7,604			4,256
Net income		$	12,087		$	4,795
Earnings per common share:
Basic		$	0.25		$	0.10
Diluted		$	0.25		$	0.10
Number of shares outstanding
Basic		48,899			48,536
Diluted		49,065			48,626
Cash dividends declared per common share		$	0.125		$	—

 

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

 

3

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

 

		Three Months Ended
		March 31,
		2014			2013
Net income		$	12,087		$	4,795
Other comprehensive loss
Translation adjustment, net of tax of $11 and ($84), respectively		(1,196		)	(5,817		)
Comprehensive income (loss)		$	10,891		$	(1,022	)

 

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 three months ended March 31, 2013 and 2014, and for the nine months ended December 31, 2013

(In thousands except per-share amounts, unaudited)

 

							Additional						Accumulated Other
		Common Stock					Paid-in			Retained			Comprehensive			Treasury
		Shares		Par Value			Capital			Earnings			Income (Loss)			Stock			Total
Balance, January 1, 2013		48,422		$	483		$	184,677		$	592,309		$	12,099		$	—		$	789,568
Net income		—		—			—			4,795			—			—			4,795
Translation adjustment, net of tax		—		—			—			—			(5,817		)	—			(5,817		)
Stock options exercised		18		1			495			—			—			—			496
Stock-based compensation		—		—			2,813			—			—			—			2,813
Tax effect of options exercised		—		—			(1,843		)	—			—			—			(1,843		)
Shares issued from release of Restricted Stock Units		108		1			(1,907		)	—			—			—			(1,906		)
Common stock issued at $33.83 per share for stock bonus		9		—			315			—			—			—			315
Balance, March 31, 2013		48,557		485			184,550			597,104			6,282			—			788,421
Net income		—		—			—			46,176			—						46,176
Translation adjustment, net of tax		—		—			—			—			11,758			—			11,758
Pension adjustment, net of tax		—		—			—			—			46			—			46
Stock options exercised		494		4			14,557			—			—			—			14,561
Stock-based compensation		—		—			9,277			—			—			—			9,277
Tax effect of options exercised		—		—			(802		)	—			—			—			(802		)
Shares issued from release of Restricted Stock Units		3		1			(167		)	—			—			—			(166		)
Repurchase of common stock		(342	)	—			—			—			—			(9,825		)	(9,825		)
Retirement of treasury stock		—		(4		)	—			(9,821		)	—			9,825			—
Cash dividends declared on common stock, $0.375 per share		—		—			—			(18,170		)	—			—			(18,170		)
Common stock issued at $31.58 per share for stock bonus		—		—			3			—			—			—			3
Balance, December 31, 2013		48,712		486			207,418			615,289			18,086			—			841,279
Net income		—		—			—			12,087			—			—			12,087
Translation adjustment, net of tax		—		—			—			—			(1,196		)	—			(1,196		)
Stock options exercised		62		1			1,768			—			—			—			1,769
Stock-based compensation		—		—			2,379			—			—			—			2,379
Tax effect of options exercised		—		—			(135		)	—			—			—			(135		)
Shares issued from release of Restricted Stock Units		153		2			(2,962		)	—			—			—			(2,960		)
Cash dividends declared on common stock, $0.125 per share		—		—			—			(6,116		)	—			—			(6,116		)
Common stock issued at $35.87 per share for stock bonus		11		—			402			—			—			—			402
Balance, March 31, 2014		48,938		$	489		$	208,870		$	621,260		$	16,890		$	—		$	847,509

 

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)

 

		Three Months Ended
		March 31,
		2014			2013
Cash flows from operating activities
Net income		$	12,087		$	4,795
Adjustments to reconcile net income to net cash used in operating activities:
Gain on sale of assets		(285		)	(8		)
Depreciation and amortization		7,684			7,487
Impairment loss on assets		—			1,024
Deferred income taxes		1,651			2,093
Noncash compensation related to stock plans		2,657			2,977
Excess tax benefit of options exercised		(8		)	—
Provision for doubtful accounts		(53		)	(39		)
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable		(24,220		)	(21,006		)
Inventories		(19,128		)	823
Trade accounts payable		(3,403		)	(5,578		)
Income taxes payable		4,140			927
Accrued profit sharing trust contributions		(3,770		)	(3,335		)
Accrued cash profit sharing and commissions		2,057			1,318
Other current assets		(2,977		)	16
Accrued liabilities		(5,022		)	(9,179		)
Long-term liabilities		(950		)	(612		)
Accrued workers’ compensation		528			(18		)
Other noncurrent assets		54			(417		)
Net cash used in operating activities		(28,958		)	(18,732		)
Cash flows from investing activities
Capital expenditures		(4,193		)	(4,632		)
Asset acquisitions, net of cash acquired		—			(5,300		)
Proceeds from sale of property and equipment		451			17
Loan repayment by related parties		—			605
Net cash used in investing activities		(3,742		)	(9,310		)
Cash flows from financing activities
Deferred and contingent consideration paid for asset acquisition		(1,294		)	—
Debt and line of credit borrowings		—			1,080
Repayment of debt and line of credit borrowings		(20		)	(20		)
Issuance of common stock		1,769			496
Excess tax benefit of options exercised		8			—
Dividends paid		(6,089		)	(6,053		)
Net cash used in financing activities		(5,626		)	(4,497		)
Effect of exchange rate changes on cash and cash equivalents		(894		)	(1,049		)
Net decrease in cash and cash equivalents		(39,220		)	(33,588		)
Cash and cash equivalents at beginning of period		251,208			175,553
Cash and cash equivalents at end of period		$	211,988		$	141,965
Noncash activity during the period
Noncash capital expenditures		$	406		$	140
Dividends declared but not paid		6,116			—
Issuance of Company’s common stock for compensation		402			315

 

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 condensed 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 audited 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, 2013 (the “2013 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 presented are not necessarily indicative of the results to be expected for any future period.

 

Revisions

 

The Company revised its March 31, 2013, Condensed Consolidated Balance Sheet to classify $5.4 million of indefinite-lived assets as intangible assets, net, that had erroneously been classified as other noncurrent assets. The Condensed Consolidated Statement of Operations for the three months ended March 31, 2013, was revised to reflect $0.3 million of rent income from properties rented to third-parties as an offset to general and administrative expense rather than as net sales as originally reported in error. With this revision, rental incomes are reported, net of related expenses, in general and administrative expense. These revisions were not considered material to the affected periods.

 

Out-of-Period Adjustment

 

In the first quarter of 2014, the Company recorded an out-of-period adjustment, which had the effect of increasing gross profit, income from operations and net income by $2.3 million, $2.0 million and $1.3 million, respectively. The adjustment resulted from an over-statement of prior periods’ workers compensation expense, net of cash profit sharing expense, and was not material to the current period or any prior 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, collectability 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 condensed 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.

 

7

 

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.

 

The following is a reconciliation of basic earnings per common share to diluted earnings per share:

 

		Three Months Ended March 31,
(in thousands, except per share amounts)		2014			2013
Net income available to common stockholders		$	12,087		$	4,795
Basic weighted-average shares outstanding		48,899			48,536
Dilutive effect of potential common stock equivalents — stock options		166			90
Diluted weighted-average shares outstanding		49,065			48,626
Earnings per common share:
Basic		$	0.25		$	0.10
Diluted		0.25			0.10
Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive		—			—

 

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 directors who are not employees. Options previously granted under the 1994 Plan or the 1995 Plan were not affected by the adoption of the 2011 Plan and 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, 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 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 has not awarded, and 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 issued) 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 months ended March 31, 2014 and 2013:

 

		Three Months Ended March 31,
(in thousands)		2014			2013
Stock-based compensation expense recognized in operating expenses		$	2,476		$	2,879
Tax benefit of stock-based compensation expense in provision for income taxes		910			1,048
Stock-based compensation expense, net of tax		$	1,566		$	1,831
Fair value of shares vested		$	2,379		$	2,813
Proceeds to the Company from the exercise of stock-based compensation		$	1,769		$	496
Tax effect from exercise of stock-based compensation, including shortfall tax benefits		$	(135	)	$	(1,843	)

 

		At March 31,
(in thousands)		2014			2013
Stock-based compensation cost capitalized in inventory		$	459		$	361

 

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 restricted stock units awarded 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 Codification™ (“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.

 

The Company’s investments consisted of only United States Treasury securities and money market funds, which are the Company’s primary financial instruments, maintained in cash equivalents and carried at cost, approximating fair value, based on Level 1 inputs. The balance of the Company’s primary financial instruments was as follows:

 

		At March 31,						At December 31
(in thousands)		2014			2013			2013
Financial instruments		$	99,235		$	59,074		$	117,571

 

The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s contingent consideration related to acquisitions is classified as Level 3 within the fair value hierarchy and is based on the Company’s unobserved inputs and assumptions, which are used to measure the liabilities at fair value.

 

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 was lower in the first quarter of 2014 than in the first quarter of 2013, primarily due to reduced first quarter 2014 operating losses in the Europe and Asia/Pacific segments, for which no tax benefit was recorded.

 

The following table presents the Company’s effective tax rates and income tax expense for the three months ended March 31, 2014 and 2013:

 

		Three Months Ended March 31,
(in thousands, except percentages)		2014			2013
Effective tax rate		38.6		%	47.0		%
Provision for income taxes		$	7,604		$	4,256

 

Acquisitions

 

In February 2013, the Company purchased certain assets relating to the TJ® ShearBrace (“ShearBrace”) product line of Weyerhaeuser NR Company (“Weyerhaeuser”) for $5.3 million in cash. The ShearBrace is a line of pre-fabricated shearwalls that complements the Company’s Strong-Wall shearwall, and is sold throughout North America. The Company’s measurement of assets acquired included goodwill of $0.9 million that has been assigned to the North America segment, and intangible assets of $3.6 million, both of which are subject to tax-deductible amortization. Net tangible assets consisting of inventory and equipment accounted for the balance of the purchase price. The weighted-average amortization period for the intangible assets is 11.3 years.

 

In November 2013, the Company purchased certain assets related to a connector product line from Bierbach GmbH & Co. KG (“Bierbach”), a Germany corporation, for $1.2 million in cash and a contingent liability of $0.8 million. Bierbach manufactured and sold a line of connectors, primarily in Germany. The Company’s provisional measurement of assets acquired included goodwill of $0.7 million, which was assigned to the Europe segment, and intangible assets of $0.6 million, both of which are subject to tax-deductible amortization. Net tangible assets consisting of inventory and tooling accounted for the balance of the purchase price.

 

In the first quarter of 2014, the Company paid $1.1 million in deferred consideration and $0.2 million in contingent consideration related to the acquisition of S&P Clever Reinforcement Company AG and S&P Clever International AG (collectively, “S&P Clever”). The remaining deferred and contingent consideration of $1.5 million is payable in the first quarter of 2015.

 

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. Provisional fair value measurements were made in the first and fourth quarters of 2013 for the acquired assets of ShearBrace and Bierbach, respectively. 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 has completed the measurement process for ShearBrace assets and expects the measurement process for the Bierbach 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 Issued Accounting Standards

 

In April 2014, the FASB issued ASC Update No. 2014-08 (Topic 205 and Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASC update modifies the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. This update also requires additional financial statement disclosures about discontinued operations, as well as disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The updated guidance is effective prospectively for years beginning on or after December 15, 2014.  The Company expects that the adoption of ASC Update 2014-08 will not materially affect its financial position or results of operations.

 

10

 

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 March 31,						At December 31,
(in thousands)		2014			2013			2013
Trade accounts receivable		$	117,728		$	105,880		$	92,413
Allowance for doubtful accounts		(870		)	(1,134		)	(945		)
Allowance for sales discounts and returns		(2,699		)	(1,933		)	(1,451		)
		$	114,159		$	102,813		$	90,017

 

3.             Inventories

 

Inventories consisted of the following:

 

		At March 31,						At December 31,
(in thousands)		2014			2013			2013
Raw materials		$	92,671		$	90,697		$	81,338
In-process products		19,822			18,118			18,475
Finished products		104,036			93,526			97,915
		$	216,529		$	202,341		$	197,728

 

4.             Property, Plant and Equipment, Net

 

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

 

		At March 31,						At December 31,
(in thousands)		2014			2013			2013
Land		$	29,960		$	30,364		$	29,347
Buildings and site improvements		178,135			173,923			178,391
Leasehold improvements		5,492			4,708			5,213
Machinery, equipment, and software		229,112			213,865			225,831
		442,699			422,860			438,782
Less accumulated depreciation and amortization		(240,289		)	(221,468		)	(235,535		)
		202,410			201,392			203,247
Capital projects in progress		5,047			9,618			6,286
		$	207,457		$	211,010		$	209,533

 

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5.             Goodwill and Intangible Assets, Net

 

Goodwill was as follows:

 

		At March 31,						At December 31,
(in thousands)		2014			2013			2013
North America		$	84,690		$	81,205		$	84,822
Europe		42,982			39,390			42,690
Asia/Pacific		1,761			1,987			1,706
Total		$	129,433		$	122,582		$	129,218

 

Amortizable and indefinite-lived intangible assets, net, were as follows:

 

		At March 31, 2014
		Gross						Net
		Carrying			Accumulated			Carrying
(in thousands)		Amount			Amortization			Amount
North America		$	34,495		$	(17,278	)	$	17,217
Europe		33,367			(10,856		)	22,511
Total		$	67,862		$	(28,134	)	$	39,728

 

		At March 31, 2013
		Gross						Net
(in thousands)		Carrying Amount			Accumulated Amortization			Carrying Amount
North America		$	40,551		$	(13,313	)	$	27,238
Europe		31,171			(7,773		)	23,398
Total		$	71,722		$	(21,086	)	$	50,636

 

		At December 31, 2013
		Gross						Net
(in thousands)		Carrying Amount			Accumulated Amortization			Carrying Amount
North America		$	34,520		$	(15,909	)	$	18,611
Europe		33,217			(10,055		)	23,162
Total		$	67,737		$	(25,964	)	$	41,773

 

Intangible assets consist primarily of definite-lived intangible assets such as customer relationships, patents, unpatented technology and non-compete agreements and indefinite-lived intangible assets consist of in-process research and development assets. Amortization expense for definite-lived intangible assets during the three months ended March 31, 2014 and 2013, totaled $2.2 million and $2.0 million, respectively.

 

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At March 31, 2014, estimated future amortization of definite-lived intangible assets was as follows:

 

(in thousands)
Remaining nine months of 2014		$	4,866
2015		6,068
2016		5,877
2017		4,066
2018		3,042
2019		3,014
Thereafter		7,089
		$	34,022

 

The changes in the carrying amount of goodwill and intangible assets for the three months ended March 31, 2014, were as follows:

 

					Intangible
(in thousands)		Goodwill			Assets
Balance at December 31, 2013		$	129,218		$	41,773
Amortization		—			(2,170		)
Foreign exchange		215			125
Balance at March 31, 2014		$	129,433		$	39,728

 

6.             Debt

 

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at March 31, 2014, was $304.7 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 LIBOR1screen 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 March 31, 2014, the LIBOR Rate was 0.24%), 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 also paid customary closing 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 $4.7 million at March 31, 2014. The other revolving credit lines and term note charge interest ranging from 1.110% to 7.25%, have maturity dates from December 2014 to July 2017, and had outstanding balances totaling $0.1 million, $1.2 million and $0.1 million at March 31, 2014, March 31, 2013, and December 31, 2013, respectively. The Company was in compliance with its financial covenants at March 31, 2014.

 

7.             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.

 

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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, 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. Similarly, Haseko’s sub-contractors on the Ocean Pointe development brought cross-claims against the Company seeking indemnity and contribution for any amounts for which they may ultimately be found liable. 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.  In December 2012, the Court granted the Company summary judgment on the claims asserted by the plaintiff homeowners in Cases 1 and 4, and on the third party complaint and cross-claims asserted by Haseko and the sub-contractors, respectively, in Case 4. In April 2013, the Court granted Haseko and the sub-contractors’ motion for leave to amend their cross-claims to allege a claim for negligent misrepresentation. 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 under any legal theory and the extent of such liability, if any, are unknown.  Management believes the Cases may not be resolved for an extended period in the absence of agreement to settle the Cases and other related legal proceedings (discussed below). The Company is defending 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 seeks a stay of 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 San Francisco coverage action has been ordered stayed pending resolution of the Cases.

 

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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 Nishimura case alleges premature corrosion of the Company’s strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii.  In February 2012, the Court dismissed three of the five claims the plaintiffs had asserted against the Company. In December 2013, the Court granted the Company’s motion for summary judgment on the remaining claims. Currently, the case is closed, though it remains subject to appeal.

 

Based on recent mediation, a tentative settlement in principle has been reached to resolve all of these legal proceedings, including Cases 1, 2, 3 and 4; the National Union action; the Fireman’s Fund action; and the San Francisco coverage action.  No settlement agreement has been documented or is currently enforceable.  If the tentative settlement in principle is documented in a final, enforceable agreement and its conditions are satisfied, the Company will incur no uninsured liability in any of these legal proceedings. The Company cannot predict when, if ever, any settlement will be finalized, and an unfavorable outcome could result in uninsured liability that substantially exceeds the amount of such tentative settlement in principle. It is not possible to reasonably estimate the amount or range of any such possible excess.

 

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

 

Other

 

The Company’s policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs when information becomes available that indicates that it is probable that the Company is liable for any related claims and assessments and the amount of the liability is reasonably estimable.  The Company does not believe that these environmental matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, environmental conditions or other factors can contribute to failure of fasteners, connectors, tools, anchors, adhesives and tool products.  On occasion, some of the products 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. Based on test results to date, the Company believes that, generally, if its products are appropriately selected, installed and used in accordance with the Company’s guidance, they may be reliably used in appropriate applications.

 

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 February 3, 2014, 342,950 restricted stock units were awarded, including 9,975 awarded to the Company’s directors who are not employees, at an estimated value of $30.98 per share, based on the closing price on January 31, 2014. 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.

 

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The following table summarizes the Company’s unvested restricted stock unit activity for the three months ended March 31, 2014:

 

		Shares		Weighted-			Aggregate Intrinsic Value *
Unvested Restricted Stock Units (RSUs)		(in thousands)		Average Price			(in thousands)
Outstanding at January 1, 2014		448		$	32.45
Awarded		343
Vested		(245	)
Outstanding at March 31, 2014		546		$	31.68		$	19,294
Outstanding and expected to vest at March 31, 2014		533		$	31.69		$	16,904

 

*  The intrinsic value is calculated using the closing price per share of $35.33 as reported by the New York Stock Exchange on March 31, 2014.

 

Based on the market value on the award date, the total intrinsic value of vested restricted stock units during the three-month periods ended March 31, 2014 and 2013, was $7.9 million and $5.5 million, respectively.

 

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility was based on historical volatilities of the Company’s common stock measured monthly over a term that is equivalent to the expected life of the stock option. The expected term of each stock option was 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 was 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 was based on the expected dividend yield on the grant date.

 

No stock options were granted in 2013 or the first three months of 2014. The following table summarizes the Company’s stock option activity for the three months ended March 31, 2014:

 

		Shares		Weighted- Average			Weighted- Average Remaining Contractual Life		Aggregate Intrinsic Value *
Non-Qualified Stock Options		(in thousands)		Exercise Price			(in years)		(in thousands)
Outstanding at January 1, 2014		1,021		$	29.35
Exercised		(61	)
Forfeited		(3	)
Outstanding at March 31, 2014		957		$	29.38				$	5,696
Outstanding and expected to vest at March 31, 2014		939		$	29.37		3.7		$	5,593
Exercisable at March 31, 2014		637		$	29.24		3.7		$	3,883

 

*  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 $35.33 as reported by the New York Stock Exchange on March 31, 2014.

 

The total intrinsic value of stock options exercised during the three-month periods ended March 31, 2014 and 2013, was $0.3 million and $0.1 million, respectively.

 

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