UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended:  June 30, 2003
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:     0-23804

 

 

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  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ý   No  o

 

The number of shares of the Registrant’s Common Stock outstanding as of June 30, 2003:     24,638,087

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

		June 30,						December 31, 2002
		(Unaudited)
		2003			2002
ASSETS
Current assets
Cash and cash equivalents		$	89,942,479		$	85,599,578		$	103,318,056
Short-term investments		19,965,820			—			17,683,611
Trade accounts receivable, net		94,699,861			79,749,530			55,313,885
Inventories		97,004,974			92,922,483			93,079,620
Deferred income taxes		7,762,013			5,980,120			7,276,642
Other current assets		3,594,511			3,469,294			3,342,423
Total current assets		312,969,658			267,721,005			280,014,237
Property, plant and equipment, net		104,461,724			87,155,900			97,396,608
Other noncurrent assets		28,497,266			19,285,433			18,990,220
Total assets		$	445,928,648		$	374,162,338		$	396,401,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable and current portion of long-term debt		$	1,977,686		$	2,955,105		$	1,257,782
Trade accounts payable		19,325,007			19,832,660			14,217,487
Accrued liabilities		14,994,313			10,865,245			13,267,373
Income taxes payable		4,707,679			3,250,426			—
Accrued profit sharing trust contributions		3,006,125			2,726,797			5,138,579
Accrued cash profit sharing and commissions		10,782,301			8,592,862			6,170,500
Accrued workers’ compensation		1,990,764			1,685,764			1,685,764
Total current liabilities		56,783,875			49,908,859			41,737,485
Long-term debt, net of current portion		5,313,247			5,442,806			5,479,834
Total liabilities		62,097,122			55,351,665			47,217,319
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity
Common stock		54,015,499			50,093,680			51,521,634
Retained earnings		326,060,321			270,041,206			297,353,812
Accumulated other comprehensive income		3,755,706			(1,324,213		)	308,300
Total stockholders’ equity		383,831,526			318,810,673			349,183,746
Total liabilities and stockholders’ equity		$	445,928,648		$	374,162,338		$	396,401,065

 

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

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Net sales		$	146,460,792		$	124,150,330		$	262,916,972		$	226,521,565
Cost of sales		85,569,521			72,509,812			156,415,122			135,687,491
Gross profit		60,891,271			51,640,518			106,501,850			90,834,074
Operating expenses:
Selling		12,383,934			11,133,905			23,910,643			21,663,264
General and administrative		19,601,051			15,711,585			35,199,776			28,205,969
		31,984,985			26,845,490			59,110,419			49,869,233
Income from operations		28,906,286			24,795,028			47,391,431			40,964,841
Interest income, net		106,808			216,405			236,757			474,731
Income before income taxes		29,013,094			25,011,433			47,628,188			41,439,572
Provision for income taxes		11,331,486			10,119,832			18,921,679			16,818,031
Net income		$	17,681,608		$	14,891,601		$	28,706,509		$	24,621,541
Net income per common share
Basic		$	0.72		$	0.61		$	1.17		$	1.01
Diluted		$	0.71		$	0.60		$	1.15		$	0.99
Number of shares outstanding
Basic		24,604,164			24,465,340			24,592,820			24,417,648
Diluted		24,957,412			24,809,380			24,936,338			24,763,682

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003				2002
Net income		$	17,681,608		$	14,891,601		$	28,706,509			$	24,621,541
Other comprehensive income, net of tax:
Foreign currency translation adjustments		2,413,617			3,663,857			3,452,899				2,847,256
Change in net unrealized gains on available-for-sale investments		7,182			—			(5,494			)	—
Comprehensive income		$	20,102,407		$	18,555,458		$		32,153,914		$		27,468,797

 

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

 

3

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Six Months Ended June 30,
		2003			2002
Cash flows from operating activities
Net income		$	28,706,509		$	24,621,541
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on sale of capital equipment		(46,043		)	148,643
Depreciation and amortization		8,103,361			7,354,196
Deferred income taxes and long-term liabilities		(1,253,864		)	356,375
Noncash compensation related to stock plans		1,092,023			215,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(37,814,247		)	(36,424,335		)
Inventories		(1,922,429		)	(9,356,644		)
Trade accounts payable		4,121,488			3,482,810
Income taxes payable		6,435,623			3,528,063
Accrued profit sharing trust contributions		(2,167,787		)	(1,995,496		)
Accrued cash profit sharing and commissions		4,604,020			6,604,869
Other current assets		(1,222,222		)	(1,247,505		)
Accrued liabilities		1,100,611			434,584
Accrued workers’ compensation		305,000			440,000
Other noncurrent assets		(558,763		)	(388,619		)
Total adjustments		(19,223,229		)	(26,848,059		)
Net cash provided by (used in) operating activities		9,483,280			(2,226,518		)
Cash flows from investing activities
Capital expenditures		(12,757,030		)	(11,552,746		)
Asset acquisitions, net of cash acquired		(8,863,170		)	(1,492		)
Proceeds from sale of equipment		65,027			63,688
Purchases of available-for-sale investments		(12,237,702		)	—
Sales of available-for-sale investments		9,950,000			—
Net cash used in investing activities		(23,842,875		)	(11,490,550		)
Cash flows from financing activities
Issuance of debt		1,363,129			1,841,207
Repayment of debt		(1,325,650		)	(712,002		)
Issuance of common stock		1,266,769			2,091,871
Net cash provided by financing activities		1,304,248			3,221,076
Effect of exchange rate changes on cash		(320,230		)	223,620
Net decrease in cash and cash equivalents		(13,375,577		)	(10,272,372		)
Cash and cash equivalents at beginning of period		103,318,056			95,871,950
Cash and cash equivalents at end of period		$	89,942,479		$	85,599,578

 

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

 

4

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

 

1.             Basis of Presentation

 

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 have been condensed or omitted. These interim statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Simpson Manufacturing Co., Inc.’s (the “Company’s”) 2002 Annual Report on Form 10-K (the “2002 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 present fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States of America. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The Company’s quarterly results may be subject to fluctuations. 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 as title to products is transferred to customers or services are rendered, net of applicable provision for discounts, returns and allowances.

 

Net Income Per Common Share

 

Basic net income per common share is computed based upon 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.

 

5

 

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

 

		Three Months Ended June 30, 2003								Three Months Ended June 30, 2002
							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	17,681,608		24,604,164		$	0.72		$	14,891,601		24,465,340		0.61
Effect of Dilutive Securities
Stock options		—			353,248		(0.01		)	—			344,040		(0.01		)
Diluted EPS
Income available to common stockholders		$	17,681,608		24,957,412		$	0.71		$	14,891,601		24,809,380		$	0.60

 

		Six Months Ended June 30, 2003								Six Months Ended June 30, 2002
							Per								Per
		Income			Shares		Share			Income			Shares		Share
Basic EPS
Income available to common stockholders		$	28,706,509		24,592,820		$	1.17		$	24,621,541		24,417,648		1.01
Effect of Dilutive Securities
Stock options		—			343,518		(0.02		)	—			346,034		(0.02		)
Diluted EPS
Income available to common stockholders		$	28,706,509		24,936,338		$	1.15		$	24,621,541		24,763,682		$	0.99

 

There were no stock options included in the dilutive securities in the tables above whose effect would be anti-dilutive in nature.

 

Accounting for Stock-Based Compensation

 

The Company maintains two stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees, consultants and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date.

 

Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123. SFAS No. 148 requires more prominent and frequent disclosures about the effects of stock-based compensation.

 

6

 

The Company has adopted SFAS No. 148 and SFAS No. 123 and has used the prospective method of applying SFAS No. 123 for the transition. For stock options that have been granted prior to January 1, 2003, the Company will continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equaled or exceeded the market price on the date of grant for options issued by the Company, no compensation expense has been recognized for stock options granted prior to January 1, 2003. For the three and six months ended June 30, 2003, the Company has recognized an after-tax expense of approximately $227,000 and $479,000, respectively.

 

Had compensation cost for the Company’s stock options for all grants been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share would have been as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Net income, as reported		$	17,681,608		$	14,891,601		$	28,706,509		$	24,621,541
Deduct total stock-based employee compensation expense determined under the fair value method for all awards granted prior to January 1, 2003, net of related tax effects		93,274			151,482			186,549			302,965
Pro forma		$	17,588,334		$	14,740,119		$	28,519,960		$	24,318,576
Earnings per share
Basic, as reported		0.72			0.61			1.17			1.01
Basic, pro forma		0.71			0.60			1.16			1.00
Diluted, as reported		0.71			0.60			1.15			0.99
Diluted, pro forma		0.70			0.59			1.14			0.98

 

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the 2003 presentation with no effect on net income or retained earnings as previously reported.

 

In August 2002, the Company completed a 2-for-1 split of its common stock. All of the share and per share numbers have been adjusted to reflect the stock split.

 

2.             Trade Accounts Receivable, net

 

Trade accounts receivable consist of the following:

 

		At June 30,						At December 31,
		2003			2002			2002
Trade accounts receivable		$	97,961,040		$	82,180,688		$	57,441,613
Allowance for doubtful accounts		(2,270,983		)	(1,602,359		)	(1,741,321		)
Allowance for sales discounts		(990,196		)	(828,799		)	(386,407		)
		$	94,699,861		$	79,749,530		$	55,313,885

 

7

 

3.             Inventories

 

The components of inventories consist of the following:

 

		At June 30,						At December 31,
		2003			2002			2002
Raw materials		$	31,870,625		$	32,972,814		$	30,684,411
In-process products		14,461,112			13,770,946			13,169,570
Finished products		50,673,237			46,178,723			49,225,639
		$	97,004,974		$	92,922,483		$	93,079,620

 

4.             Property, Plant and Equipment, Net

 

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

 

		At June 30,						At December 31,
		2003			2002			2002
Land		$	13,122,771		$	10,568,675		$	12,366,824
Buildings and site improvements		55,153,402			38,328,658			54,108,232
Leasehold improvements		5,885,042			5,823,592			5,833,165
Machinery and equipment		122,101,089			103,242,362			112,767,419
		196,262,304			157,963,287			185,075,640
Less accumulated depreciation and amortization		(101,569,556		)	(87,166,121		)	(92,943,166		)
		94,692,748			70,797,166			92,132,474
Capital projects in progress		9,768,976			16,358,734			5,264,134
		$	104,461,724		$	87,155,900		$	97,396,608

 

8

 

5.             Investments

 

As of June 30, 2003, the Company held a 35.0% investment in Keymark Enterprises, LLC (“Keymark”), for which it accounts using the equity method. The Company believes that the carrying value of its investment in Keymark exceeds its fair value and therefore has written down the value of its investment to zero.

 

Available-for-Sale Investments

 

The Company’s investments in all debt securities are classified as either cash and cash equivalents or available-for-sale investments. As of June 30, 2003, the Company’s investments were as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Debt investments
Municipal bonds		$	17,441,312		$	41,251		$	12,633		$	17,469,930
Commercial paper		6,622,816			—			—			6,622,816
Total debt investments		24,064,128			41,251			12,633			24,092,746
Money market instruments and funds		1,182,578			—			—			1,182,578
		$	25,246,706		$	41,251		$	12,633		$	25,275,324

 

Of the total estimated fair value, $5,309,504 was classified as cash equivalents and $19,965,820 was classified as short-term investments.

 

As of June 30, 2003, contractual maturities of the Company’s available-for-sale investments were as follows:

 

		Amortized Cost			Estimated Fair Value
Amounts maturing in less than 1 year		$	7,473,112		$	7,468,996
Amounts maturing in 1 – 5 years		5,035,690			5,056,546
Amounts maturing in 5 – 10 years		1,427,873			1,440,278
Amounts maturing after 10 years		6,000,000			6,000,000
		$	19,936,675		$	19,965,820

 

During the three and six months ended June 30, 2003, there were realized gains of $3,497 and $2,129, respectively, related to the sale of available-for-sale investments.

 

9

 

6.             Debt

 

Outstanding debt at June 30, 2003 and 2002, and December 31, 2002, and the available credit at June 30, 2003, consisted of the following:

 

		Available			Debt Outstanding
		Credit at			at						at
		June 30,			June 30,						December 31,
		2003			2003			2002			2002
Revolving line of credit, interest at bank’s reference rate less 0.50% (at June 30, 2003, the bank’s reference rate less 0.50% was 3.50%), expires November 2004		$	11,879,402		$	—		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.50% (at June 30, 2003, the bank’s prime rate less 0.50% was 3.50%), expires June 2005		8,213,673			—			—			—
Revolving line of credit, interest at the bank’s base rate plus 2% (at June 30, 2003, the bank’s base rate plus 2% was 5.50%), expires September 2003		412,174			—			—			—
Revolving line of credit, interest at 5.75%, expires June 2004		3,275,265			1,004,684			2,075,000			530,515
Term loan, interest at LIBOR plus 1.375% (at June 30, 2003, LIBOR plus 1.375% was 2.685%), expires May 2008		—			1,500,000			1,800,000			1,650,000
Term loans, interest rates between 4.00% and 6.23%, expirations between 2006 and 2018		—			4,786,249			4,522,911			4,557,101
Standby letter of credit facilities		2,906,925			—			—			—
		26,687,439			7,290,933			8,397,911			6,737,616
Less current portion		—			(1,977,686		)	(2,955,105		)	(1,257,782		)
					$	5,313,247		$	5,442,806		$	5,479,834
Standby letters of credit issued and outstanding		(2,906,925		)
		$	23,780,514

 

As of June 30, 2003, the Company had three outstanding standby letters of credit. Two of these letters of credit, in the aggregate amount of $2,132,038, are used to support the Company’s self-insured workers’ compensation insurance requirements. The other one, in the amount of $774,887 is used to guarantee performance on the Company’s leased facility in the United Kingdom. The Company has qualified for full participation in the Self-insurers’ Security Fund Alternative Deposit program, and as of July 2003, will no longer be required to maintain letters of credit for its self-insured workers’ compensation plans.

 

7.             Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the Company’s 2002 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 Company does not believe that the outcomes of currently pending matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

10

 

The Company’s policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs as they are discovered and become estimable. The Company does not believe that these matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

Corrosion, hydrogen enbrittlement, stress corrosion cracking, hardness, wood pressure-treating chemicals, misinstallations, environmental conditions or other factors can contribute to failure of fasteners and connectors. On occasion, some of the fasteners 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.

 

8.             Segment Information

 

The Company is organized into two primary segments. The segments are defined by types of products manufactured, marketed and distributed to the Company’s customers. The two product segments are connector products and venting products. These segments are differentiated in several ways, including the types of materials used, the production process, the distribution channels used and the applications in which the products are used. Transactions between the two segments were immaterial for each of the periods presented.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Net Sales
Connector products		$	129,435,000		$	108,609,000		$	229,823,000		$	195,234,000
Venting products		17,026,000			15,541,000			33,094,000			31,288,000
Total		$	146,461,000		$	124,150,000		$	262,917,000		$	226,522,000
Income from Operations
Connector products		$	26,855,000		$	23,232,000		$	43,587,000		$	37,955,000
Venting products		1,998,000			1,829,000			4,196,000			3,481,000
All other		53,000			(266,000		)	(392,000		)	(471,000		)
Total		$	28,906,000		$	24,795,000		$	47,391,000		$	40,965,000

 

								At
		At June 30,						December 31,
		2003			2002			2002
Total Assets
Connector products		$	278,295,000		$	224,996,000		$	228,601,000
Venting products		48,515,000			47,064,000			39,723,000
All other		119,119,000			102,102,000			128,077,000
Total		$	445,929,000		$	374,162,000		$	396,401,000

 

Cash collected by the Company’s subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of the segment entitled “All other.” Cash and cash equivalent and short-term investment balances in the “All other” segment were approximately $108,217,000, $83,767,000 and $118,948,000 as of June 30, 2003 and 2002, and December 31, 2002, respectively.

 

11

 

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

 

Certain matters discussed below are forward-looking statements that involve risks and uncertainties, certain of which are discussed in this report and in other reports filed by the Company with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report.

 

The following is a discussion and analysis of the consolidated financial condition and results of operations for the Company for the three and six months ended June 30, 2003 and 2002. 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 June 30, 2003, Compared

with the Three Months Ended June 30, 2002

 

In the second quarter of 2003, sales growth occurred throughout North America and Europe. The growth in the United States was strongest in the southern and northeastern regions. Simpson Strong-Tie’s second quarter sales increased 19.2% over the same quarter last year, while Simpson Dura-Vent’s sales increased 9.6%. Lumber dealers, homecenters and contractor distributors were the fastest growing Simpson Strong-Tie connector sales channels. The sales increase was broad based across most of Simpson Strong-Tie’s major product lines. Simpson Strong-Tie’s engineered wood products and seismic and high wind related products had the highest percentage growth rates in sales. Sales of Simpson Dura-Vent’s Direct-Vent and gas vent products increased compared to the second quarter of 2002 while sales of its pellet vent and chimney product lines were flat. The customer that had informed Simpson Dura-Vent last year that it planned to supply certain venting products from internal sources is expected to continue buying these products from Simpson Dura-Vent through the third quarter of 2003. Sales of the affected products to this customer decreased slightly in the first half of 2003 as compared to the first half of 2002.

 

Income from operations increased 16.6% from $24,795,028 in the second quarter of 2002 to $28,906,286 in the second quarter of 2003 and gross margins were unchanged at 41.6%. Selling expenses increased 11.2% from $11,133,905 in the second quarter of 2002 to $12,383,934 in the second quarter of 2003, primarily due to increased costs associated with the addition of sales personnel and advertising and promotional activities. General and administrative expenses increased 24.8% from $15,711,585 in the second quarter of 2002 to $19,601,051 in the second quarter of 2003. This increase was primarily due to increased cash profit sharing, as a result of higher operating income, and higher bad debt expense including the reversal of the allowance for doubtful accounts in 2002 related to a significant customer. The increase was also partially due to the recognition of stock option expenses in accordance with recently adopted accounting standards. The tax rate was 39.1% in the second quarter of 2003, down from 40.5% in the second quarter of 2002. The decrease was primarily due to tax credits for research and development and manufacturing investment related to the expansion of the Company’s facilities in Stockton, California.

 

Results of Operations for the Six Months Ended June 30, 2003, Compared

with the Six Months Ended June 30, 2002

 

In the first half of 2003, sales growth occurred throughout North America and Europe. The growth in the United States was strongest in the southern and western regions. Simpson Strong-Tie’s first half sales increased 17.7% over the same period last year, while Simpson Dura-Vent’s sales increased 5.8%. Lumber dealers, homecenters and contractor distributors were the fastest growing Simpson Strong-Tie connector sales channels. The sales increase was broad based across most of Simpson Strong-Tie’s major product lines. Simpson Strong-Tie’s engineered wood products and seismic and high wind related products had the highest percentage growth rates in sales. Sales of Simpson Dura-Vent’s Direct-Vent and gas vent products increased compared to the first half of 2002 while sales of its pellet vent and chimney product lines decreased.

 

Income from operations increased 15.7% from $40,964,841 in the first half of 2002 to $47,391,431 in the first half of 2003 and gross margins increased from 40.1% in the first half of 2002 to 40.5% in the first half of 2003. The increase in gross margins was primarily due to improved absorption of fixed overhead costs offset somewhat by increased material costs. Selling expenses increased 10.4% from $21,663,264 in the first half of 2002 to $23,910,643 in the first half of 2003, primarily due to increased costs associated with the addition of sales personnel and advertising and promotional activities. General and administrative expenses increased 24.8% from $28,205,969 in the first half of 2002 to $35,199,776 in the first half of 2003. This increase was primarily due to increased cash profit sharing, as a result of higher operating income, and higher bad debt expense including the reversal of the allowance

 

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for doubtful accounts in 2002 related to a significant customer. The increase was also partially due to the recognition of stock option expenses in accordance with recently adopted accounting standards and increased professional fees.  The tax rate was 39.7% in the first half of 2003, down from 40.6% in the first half of 2002. The decrease was primarily due to tax credits for research and development and manufacturing investment related to the expansion of the Company’s facilities in Stockton, California.

 

In May 2003, the Company’s subsidiary, Simpson Strong-Tie Canada, Limited, completed the purchase of 100% of the equity of MGA Construction Hardware & Steel Fabricating Limited and MGA Connectors Limited (collectively “MGA”), both Canadian federal corporations, for approximately USD $9.8 million in cash. MGA manufactures and distributes throughout Canada and portions of the United States a quality line of connectors used in construction. This purchase did not have a material effect on the Company’s results of operations for the three and six months ended June 30, 2003.

 

The Company continues to face uncertain market conditions, tariffs and other factors that may influence the cost of steel and other raw materials. The Company might not be able to increase its product prices in amounts that correspond to increases in raw material prices without materially and adversely affecting its sales and profits.

 

 

Liquidity and Sources of Capital

 

As of June 30, 2003, working capital was $256.2 million as compared to $217.8 million at June 30, 2002, and $238.3 million at December 31, 2002. The increase in working capital from December 31, 2002, was primarily due to the increase in the Company’s trade accounts receivable of approximately $39.4 million, resulting from higher sales levels and the effect of seasonal buying programs, increases in inventories and short-term investments of approximately $3.9 million and $2.3 million, respectively, and a decrease in accrued profit sharing trust contributions of approximately $2.1 million. Offsetting these factors was a decrease in cash and cash equivalents of approximately $13.4 million and increases in accounts payable, income taxes payable and accrued cash profit sharing and commissions totaling approximately $14.4 million. The balance of the change in working capital was due to the fluctuation of various other asset and liability accounts. The working capital change and changes in noncurrent assets and liabilities, combined with net income and noncash expenses, including depreciation, amortization and stock compensation charges, totaling approximately $37.9 million, resulted in net cash provided by operating activities of approximately $9.5 million. As of June 30, 2003, the Company had unused credit facilities available of approximately $23.8 million.

 

The Company used approximately $23.8 million in its investing activities of which approximately $12.8 million was used for capital expenditures. Approximately $5.1 million of the capital expenditures comprised real estate and related purchases, primarily for the expansion of its manufacturing facilities in Stockton, California, and for additional land in McKinney, Texas. Approximately $8.9 million in cash, net of cash acquired, was used to purchase the equity of MGA. In addition, a net amount of approximately $2.3 million was invested in short-term securities.

 

The Company’s financing activities provided net cash of approximately $1.3 million, primarily from the issuance of the Company’s stock through its stock option and bonus plans.

 

The Company believes that cash generated by operations and borrowings available under its existing credit agreements will be sufficient for the Company’s working capital needs and planned capital expenditures through the remainder of 2003. Depending on the Company’s future growth and possible acquisitions, it may become necessary to secure additional sources of financing.

 

The Company believes that the effect of inflation on the Company has not been material in recent years, as inflation rates have remained relatively low.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s short-term investments consisted of debt securities of approximately $20.0 million as of June 30, 2003. These securities, like all fixed income instruments, are subject to interest rate risk and will vary in value as market interest rates fluctuate. If market interest rates were to increase immediately and uniformly by 10% from levels as of June 30, 2003, the decline in the fair value of the investments would not be material.

 

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The Company has foreign exchange rate risk in its international operations and through purchases from foreign vendors. The Company does not currently hedge this risk. If the exchange rates were to change by 10% in a substantial part of the Company’s non-U.S. operations, the change in the value of the assets and liabilities could be materially adverse to its operations taken as a whole.

 

Item 4. Controls and Procedures.

 

As of June 30, 2003, an evaluation 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”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and the CFO concluded that the Company’s disclosure controls and procedures were effective as of that date. No significant changes in the Company’s internal controls or other factors have occurred that could significantly affect controls subsequent to that date.

 

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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. The Company does not believe that the outcomes of these matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

Item 2. Changes in Securities.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits and Reports on Form 8-K.

 

a.                                       Exhibits.

 

10.         MGA Group Share Purchase Agreement, dated May 9, 2003, between Michael Petrovic, MPCO Holdings Inc., George Shahnazarian, GSHAH Inc., Armen Jeknavorian, JOREK Holdings Inc., and Marvin Wight and Simpson Strong-Tie Canada, Limited.

11.         Statements re computation of earnings per share.

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

32.         Section 1350 Certifications.

 

b.                                      Reports on Form 8-K

 

Report on Form 8-K, dated April 17, 2003, reporting under item 9 the Company’s announcement of its first quarter 2003 earnings.

 

Report on Form 8-K, dated May 20, 2003, reporting under item 5 that the Company purchased a Canadian connector company.

 

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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:	August 8, 2003		By	/s/ Michael J. Herbert
				Michael J. Herbert
				Chief Financial Officer
				(principal accounting and financial officer)

 

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