UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

 

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 September 30, 2003:  24,702,587

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets

 

		September 30,						December 31, 2002
		(Unaudited)
		2003			2002
ASSETS
Current assets
Cash and cash equivalents		$	116,665,851		$	115,069,989		$	103,318,056
Short-term investments		24,449,420			—			17,683,611
Trade accounts receivable, net		87,150,342			71,797,232			55,313,885
Inventories		95,059,967			88,959,586			93,079,620
Deferred income taxes		8,061,609			6,625,743			7,276,642
Other current assets		3,355,797			2,616,335			3,342,423
Total current assets		334,742,986			285,068,885			280,014,237
Property, plant and equipment, net		104,808,790			89,914,143			97,396,608
Other noncurrent assets		28,583,484			19,342,440			18,990,220
Total assets		$	468,135,260		$	394,325,468		$	396,401,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable and current portion of long-term debt		$	1,922,860		$	1,469,176		$	1,257,782
Trade accounts payable		20,974,311			19,973,306			14,217,487
Accrued liabilities		15,928,743			12,767,352			13,267,373
Income taxes payable		1,098,324			3,191,231			—
Accrued profit sharing trust contributions		4,406,011			4,033,943			5,138,579
Accrued cash profit sharing and commissions		11,205,893			10,156,014			6,170,500
Accrued workers’ compensation		2,123,764			1,685,764			1,685,764
Total current liabilities		57,659,906			53,276,786			41,737,485
Long-term debt, net of current portion		5,320,972			5,360,514			5,479,834
Total liabilities		62,980,878			58,637,300			47,217,319
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity
Common stock		56,069,754			50,543,672			51,521,634
Retained earnings		344,617,811			286,756,348			297,353,812
Accumulated other comprehensive income		4,466,817			(1,611,852		)	308,300
Total stockholders’ equity		405,154,382			335,688,168			349,183,746
Total liabilities and stockholders’ equity		$	468,135,260		$	394,325,468		$	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 September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net sales		$	151,892,152		$	130,292,752		$	414,809,124		$	356,814,317
Cost of sales		91,569,063			74,596,873			247,984,184			210,284,364
Gross profit		60,323,089			55,695,879			166,824,940			146,529,953
Operating expenses:
Selling		12,375,801			10,510,011			36,286,443			32,173,275
General and administrative		18,719,477			17,718,054			53,919,254			45,924,023
		31,095,278			28,228,065			90,205,697			78,097,298
Income from operations		29,227,811			27,467,814			76,619,243			68,432,655
Interest income, net		440,887			218,579			677,644			693,310
Income before income taxes		29,668,698			27,686,393			77,296,887			69,125,965
Provision for income taxes		11,111,208			10,971,251			30,032,888			27,789,282
Net income		$	18,557,490		$	16,715,142		$	47,263,999		$	41,336,683
Net income per common share
Basic		$	0.75		$	0.68		$	1.92		$	1.69
Diluted		$	0.74		$	0.67		$	1.89		$	1.67
Number of shares outstanding
Basic		24,677,648			24,500,445			24,621,404			24,445,550
Diluted		25,123,587			24,811,435			25,013,987			24,782,141

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net income		$	18,557,490		$	16,715,142		$	47,263,999		$	41,336,683
Other comprehensive income, net of tax:
Foreign currency translation adjustments		719,293			(287,639		)	4,172,192			2,559,617
Change in net unrealized gains on available-for-sale investments		(8,182		)	—			(13,676		)	—
Comprehensive income		$	19,268,601		$	16,427,503		$	51,422,515		$	43,896,300

 

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)

 

		Nine Months Ended September 30,
		2003			2002
Cash flows from operating activities
Net income		$	47,263,999		$	41,336,683
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on sale of capital equipment		(59,504		)	127,073
Depreciation and amortization		12,495,918			11,232,051
Deferred income taxes and long-term liabilities		(1,348,017		)	(230,060		)
Noncash compensation related to stock plans		1,634,418			347,000
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(30,117,555		)	(28,500,946		)
Inventories		210,049			(5,587,617		)
Trade accounts payable		5,455,724			3,849,286
Income taxes payable		3,482,299			3,668,693
Accrued profit sharing trust contributions		(778,960		)	(682,892		)
Accrued cash profit sharing and commissions		5,028,940			8,168,021
Other current assets		(1,086,685		)	(290,115		)
Accrued liabilities		1,973,905			2,327,134
Accrued workers’ compensation		438,000			440,000
Other noncurrent assets		(210,585		)	(1,003,502		)
Total adjustments		(2,882,053		)	(6,135,874		)
Net cash provided by operating activities		44,381,946			35,200,809
Cash flows from investing activities
Capital expenditures		(16,946,210		)	(18,328,034		)
Asset acquisitions, net of cash acquired		(9,521,685		)	(1,506		)
Proceeds from sale of equipment		78,865			84,048
Purchases of available-for-sale investments		(23,529,485		)	—
Sales of available-for-sale investments		16,750,000			—
Net cash used in investing activities		(33,168,515		)	(18,245,492		)
Cash flows from financing activities
Issuance of debt		1,415,659			2,013,899
Repayment of debt		(1,482,468		)	(2,313,052		)
Issuance of common stock		2,286,150			2,345,042
Net cash provided by financing activities		2,219,341			2,045,889
Effect of exchange rate changes on cash		(84,977		)	196,833
Net increase in cash and cash equivalents		13,347,795			19,198,039
Cash and cash equivalents at beginning of period		103,318,056			95,871,950
Cash and cash equivalents at end of period		$	116,665,851		$	115,069,989

 

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 September 30, 2003								Three Months Ended September 30, 2002
		Income			Shares		Per Share			Income			Shares		Per Share
Basic EPS
Income available to common stockholders		$	18,557,490		24,677,648		$	0.75		$	16,715,142		24,500,445		0.68
Effect of Dilutive Securities
Stock options		—			445,939		(0.01		)	—			310,990		(0.01		)
Diluted EPS
Income available to common stockholders		$	18,557,490		25,123,587		$	0.74		$	16,715,142		24,811,435		$	0.67

 

		Nine Months Ended September 30, 2003								Nine Months Ended September 30, 2002
		Income			Shares		Per Share			Income			Shares		Per Share
Basic EPS
Income available to common stockholders		$	47,263,999		24,621,404		$	1.92		$	41,336,683		24,445,550		1.69
Effect of Dilutive Securities
Stock options		—			392,583		(0.03		)	—			336,591		(0.02		)
Diluted EPS
Income available to common stockholders		$	47,263,999		25,013,987		$	1.89		$	41,336,683		24,782,141		$	1.67

 

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 nine months ended September 30, 2003, the Company has recognized an after-tax expense of approximately $232,000 and $712,000, 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 September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net income, as reported		$	18,557,490		$	16,715,142		$	47,263,999		$	41,336,683
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			279,823			454,447
Pro forma		$	18,464,216		$	16,563,660		$	46,984,176		$	40,882,236
Earnings per share
Basic, as reported		$	0.75		$	0.68		$	1.92		$	1.69
Basic, pro forma		0.75			0.68			1.91			1.67
Diluted, as reported		0.74			0.67			1.89			1.67
Diluted, pro forma		0.73			0.67			1.88			1.65

 

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.

 

2.                                       Trade Accounts Receivable, net

 

Trade accounts receivable consist of the following:

 

		At September 30,						At December 31, 2002
		2003			2002
Trade accounts receivable		$	89,583,137		$	74,299,392		$	57,441,613
Allowance for doubtful accounts		(1,790,363		)	(1,959,930		)	(1,741,321		)
Allowance for sales discounts		(642,432		)	(542,230		)	(386,407		)
		$	87,150,342		$	71,797,232		$	55,313,885

 

7

 

3.                                       Inventories

 

The components of inventories consist of the following:

 

		At September 30,						At December 31, 2002
		2003			2002
Raw materials		$	32,056,747		$	29,765,418		$	30,684,411
In-process products		14,849,626			13,405,892			13,169,570
Finished products		48,153,594			45,788,276			49,225,639
		$	95,059,967		$	88,959,586		$	93,079,620

 

4.                                       Property, Plant and Equipment, Net

 

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

 

		At September 30,						At December 31, 2002
		2003			2002
Land		$	13,124,355		$	10,557,676		$	12,366,824
Buildings and site improvements		55,296,943			38,243,246			54,108,232
Leasehold improvements		5,891,470			5,822,946			5,833,165
Machinery and equipment		124,726,769			103,216,776			112,767,419
		199,039,537			157,840,644			185,075,640
Less accumulated depreciation and amortization		(105,961,155		)	(90,405,546		)	(92,943,166		)
		93,078,382			67,435,098			92,132,474
Capital projects in progress		11,730,408			22,479,045			5,264,134
		$	104,808,790		$	89,914,143		$	97,396,608

 

8

 

5.                                       Investments

 

As of September 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 September 30, 2003, the Company’s investments were as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Debt investments
Municipal bonds		$	22,206,727		$	37,753		$	17,317		$	22,227,163
Commercial paper		3,122,257			—			—			3,122,257
Total debt investments		25,328,984			37,753			17,317			25,349,420
Money market instruments and funds		(4,406		)	—			—			(4,406		)
		$	25,324,578		$	37,753		$	17,317		$	25,345,014

 

Of the total estimated fair value, $900,000 was classified as cash equivalents and $24,449,420 was classified as short-term investments.

 

As of September 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		$	8,975,975		$	9,053,160
Amounts maturing in 1 – 5 years		4,527,352			4,626,587
Amounts maturing in 5 – 10 years		2,114,529			2,165,069
Amounts maturing after 10 years		8,600,000			8,604,604
		$	24,217,856		$	24,449,420

 

During the nine months ended September 30, 2003, there were realized gains of $2,129 related to the sale of available-for-sale investments.

 

9

 

6.                                       Debt

 

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

 

		Available Credit at September 30, 2003			Debt Outstanding
					at September 30,						at December 31, 2002
					2003			2002
Revolving line of credit, interest at bank’s reference rate less 0.50% (at September 30, 2003, the bank’s reference rate less 0.50% was 3.50%), expires November 2004		$	13,016,836		$	—		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.50% (at September 30, 2003, the bank’s prime rate less 0.50% was 3.50%), expires June 2005		9,200,000			—			—			—
Revolving line of credit, interest at the bank’s base rate plus 2% (at September 30, 2003, the bank’s base rate plus 2% was 5.50%), expires September 2004		416,577			—			—			—
Revolving line of credit, interest at 5.75%, expires June 2004		3,288,910			1,050,604			500,000			530,515
Term loan, interest at LIBOR plus 1.375% (at September 30, 2003, LIBOR plus 1.375% was 2.485%), 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		—			4,693,228			4,529,690			4,557,101
Standby letter of credit facilities		783,164			—			—			—
		26,705,487			7,243,832			6,829,690			6,737,616
Less current portion					(1,922,860		)	(1,469,176		)	(1,257,782		)
					$	5,320,972		$	5,360,514		$	5,479,834
Standby letters of credit issued and outstanding		(783,164		)
		$	25,922,323

 

As of September 30, 2003, the Company had one outstanding standby letter of credit in the amount of $783,164 to guarantee performance on the Company’s leased facility in the United Kingdom.

 

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.

 

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

 

10

 

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 September 30,						Nine Months Ended September 30,
		2003			2002			2003			2002
Net Sales
Connector products		$	133,563,000		$	112,636,000		$	363,386,000		$	307,869,000
Venting products		18,329,000			17,657,000			51,423,000			48,945,000
Total		$	151,892,000		$	130,293,000		$	414,809,000		$	356,814,000
Income from Operations
Connector products		$	26,277,000		$	24,961,000		$	69,864,000		$	62,824,000
Venting products		2,723,000			2,786,000			6,918,000			6,280,000
All other		228,000			(279,000		)	(163,000		)	(671,000		)
Total		$	29,228,000		$	27,468,000		$	76,619,000		$	68,433,000

 

								At December 31, 2002
		At September 30,
		2003			2002
Total Assets
Connector products		$	278,862,000		$	230,783,000		$	228,601,000
Venting products		41,728,000			44,164,000			39,723,000
All other		147,545,000			119,378,000			128,077,000
Total		$	468,135,000		$	394,325,000		$	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 $137,218,000, $110,361,000 and $118,948,000 as of September 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 nine months ended September 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 September 30, 2003, Compared
with the Three Months Ended September 30, 2002

 

In the third 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 third quarter sales increased 18.6% over the same quarter last year, while Simpson Dura-Vent’s sales increased 3.8%. Lumber dealers 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 Anchor Systems, engineered wood products and seismic and high wind related products had the highest percentage growth rates in sales. Sales of Simpson Dura-Vent’s gas vent, chimney and pellet vent products increased compared to the third quarter of 2002, while sales of its Direct-Vent product line decreased primarily as a result of the loss of the customer who began to supply these products from internal sources. The timing of the loss of this customer was expected and previously disclosed.

 

Income from operations increased 6.4% from $27,467,814 in the third quarter of 2002 to $29,227,811 in the third quarter of 2003 and gross margins decreased from 42.7% in the third quarter of 2002 to 39.7% in the third quarter of 2003. This decrease was primarily due to an increase in material costs as well as increased overhead. Selling expenses increased 17.8% from $10,510,011 in the third quarter of 2002 to $12,375,801 in the third quarter of 2003, primarily due to increased costs associated with the addition of sales personnel, including those related to the acquisition of MGA Construction Hardware & Steel Fabricating Limited and MGA Connectors Limited (collectively, “MGA”) in May 2003, and increased promotional activities. General and administrative expenses increased 5.7% from $17,718,054 in the third quarter of 2002 to $18,719,477 in the third quarter of 2003. This increase was primarily due to increased cash profit sharing, as a result of higher operating income, the recognition of stock option expenses in accordance with recently adopted accounting standards and increased cost associated with the addition of administrative employees, including those related to the acquisition of MGA. Partially offsetting the increase was a decrease in the bad debt expense related to the collection of previously reserved trade accounts receivable. The tax rate was 37.5% in the third quarter of 2003, down from 39.6% in the third quarter of 2002. The decrease was primarily due to tax credits for research and development and manufacturing investment in an enterprise zone related to the expansion of the Company’s facilities in Stockton, California.

 

Results of Operations for the Nine Months Ended September 30, 2003, Compared

with the Nine Months Ended September 30, 2002

 

In the first nine months 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 nine months sales increased 18.0% over the same period last year, while Simpson Dura-Vent’s sales increased 5.1%. Lumber dealers, contractor distributors and homecenters 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, Anchor Systems and seismic and high wind related products had the highest percentage growth rates in sales. Sales of Simpson Dura-Vent’s gas vent and chimney products increased compared to the first nine months of 2002, while sales of its pellet vent products decreased.

 

Income from operations increased 12.0% from $68,432,655 in the first nine months of 2002 to $76,619,243 in the first nine months of 2003 and gross margins decreased from 41.1% in the first nine months of 2002 to 40.2% in the first nine months of 2003. The decrease in gross margins was primarily due to increased material costs. Selling expenses increased 12.8% from $32,173,275 in the first nine months of 2002 to $36,286,443 in the first nine months of 2003, primarily due to increased costs associated with the addition of sales personnel, including those related to

 

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the acquisition of MGA, and promotional activities. General and administrative expenses increased 17.4% from $45,924,023 in the first nine months of 2002 to $53,919,254 in the first nine months of 2003. This increase was primarily due to increased cash profit sharing, as a result of higher operating income, higher bad debt expense after consideration of 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, increased professional fees and increased cost associated with the addition of administrative employees, including those related to the acquisition of MGA. The tax rate was 38.9% in the first nine months of 2003, down from 40.2% in the first nine months of 2002. The decrease was primarily due to tax credits for research and development and manufacturing investment in an enterprise zone related to the expansion of the Company’s facilities in Stockton, California.

 

In August 2003, the Company reported that Donald M. Townsend, President and Chief Executive Officer of its subsidiary, Simpson Dura-Vent Company, Inc., had announced his intention to retire. Mr. Townsend will remain in his position into January 2004. The Company has named Stephen P. Eberhard as Mr. Townsend’s successor. Mr. Eberhard has been employed by the Company since 1983, most recently as its Vice President of Information Technology.

 

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. The Company is also facing significant competition in some of its markets which may lead to a reduction in market share and its ability to maintain its pricing levels.

 

Liquidity and Sources of Capital

 

As of September 30, 2003, working capital was $277.1 million as compared to $231.8 million at September 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 $31.8 million, resulting from higher sales levels, and increases in cash and cash equivalents and short-term investments, totaling $20.1 million, and an increase in inventories of approximately $2.0 million. Offsetting these factors were increases in trade accounts payable, accrued cash profit sharing and commissions, accrued liabilities and income taxes payable totaling approximately $15.6 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 $61.4 million, resulted in net cash provided by operating activities of approximately $44.4 million. As of September 30, 2003, the Company had unused credit facilities available of approximately $25.9 million.

 

The Company used approximately $33.2 million in its investing activities of which approximately $16.9 million was used for capital expenditures. Approximately $7.7 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 $9.5 million in cash, net of cash acquired, was used to purchase the equity of MGA. In addition, a net amount of approximately $6.8 million was invested in short-term securities.

 

The Company’s financing activities provided net cash of approximately $2.2 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 and into 2004. 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s short-term investments consisted of debt securities of approximately $24.4 million as of September 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% or less from levels as of September 30, 2003, the decline in the fair value of the investments would not be material.

 

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% or more 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 September 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.

 

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 July 17, 2003, reporting under item 9 the Company’s announcement of its second quarter 2003 earnings.

 

Report on Form 8-K, dated August 5, 2003, reporting under item 5 the retirement of the Company’s subsidiary, Simpson Dura-Vent Company, Inc., Chief Executive Officer.

 

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

 

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