UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number:  0-23804

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

As of June 30, 2003, there were outstanding 24,638,087 shares of the registrant’s common stock, par value $0.01, which is the only outstanding class of common or voting stock of the registrant. The aggregate market value of the shares of common stock held by nonaffiliates of the registrant (based on the closing price for the common stock on the New York Stock Exchange on June 30, 2003) was approximately $666,763,062. As of February 9, 2004, 24,269,290 shares of the registrant’s common stock were outstanding.

 

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

       Yes    ý    No    o

 

Documents Incorporated by Reference

 

The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 7, 2004, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2003.

 

 

This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company’s operations and cause the Company’s actual results to be substantially different from the Company’s expectations. Those factors include, but are not limited to: (i) general economic and construction business conditions; (ii) customer acceptance of the Company’s products; (iii) materials and manufacturing costs; (iv) the financial condition of customers, competitors and suppliers; (v) technological developments; (vi) increased competition; (vii) changes in capital market conditions; (viii) governmental and business conditions in countries where the Company’s products are manufactured and sold; (ix) changes in trade regulations; (x) the effect of acquisition activity; (xi) changes in the Company’s plans, strategies, objectives, expectations or intentions; and (xii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report. The Company does not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

 

PART I

 

Item 1. Business.

 

Background

 

Simpson Manufacturing Co., Inc. (the “Company”), through its subsidiary, Simpson Strong-Tie Company Inc. (“Simpson Strong-Tie” or “SST”), designs, engineers and is a leading manufacturer of wood-to-wood, wood-to-concrete and wood-to-masonry connectors and pre-fabricated shearwalls. SST also offers a full line of adhesives, mechanical anchors and powder actuated tools for concrete, masonry and steel. The Company’s subsidiary, Simpson Dura-Vent Company, Inc. (“Simpson Dura-Vent” or “SDV”), designs, engineers and manufactures venting systems for gas, wood, oil and pellet burning appliances. The Company markets its products to the residential construction, light industrial and commercial construction, remodeling and do-it-yourself (“DIY”) markets. The Company believes that SST benefits from strong brand name recognition among architects and engineers who frequently specify in building plans the use of SST products, and that SDV benefits from strong brand name recognition among contractors, dealers, distributors and SDV’s relationships with original equipment manufacturers (“OEMs”) to which SDV markets its products. The Company has continuously manufactured structural connectors since 1956. See Note 14 to the Company’s Consolidated Financial Statements for information regarding the net sales, income from operations, depreciation and amortization, capital expenditures and acquisitions and total assets for the Company’s two primary segments.

 

Connectors produced by Simpson Strong-Tie typically are steel devices that are used to strengthen, support and connect joints in residential and commercial construction and DIY projects. SST’s Anchor Systems product line is included in the connector product segment. SST’s connector products enhance the safety and durability of the structures in which they are installed and can save time and labor costs for the contractor. SST’s connector products contribute to structural integrity and resistance to seismic, wind and other forces. Applications range from commercial and residential building, to deck construction, to DIY projects. SST produces and markets over 5,000 standard and custom products.

 

Simpson Dura-Vent’s venting systems are used to vent gas furnaces and water heaters, gas fireplaces and stoves, wood and oil burning appliances and pellet stoves. SDV’s metal vents, chimneys and chimney liner systems exhaust the products of combustion to the exterior of the building, and some products also introduce outside air into the appliance for more efficient combustion. SDV designs its products for ease of assembly and safe operation and to achieve a high level of performance. SDV produces and markets approximately 2,400 different venting products.

 

The Company emphasizes continuous new product development and often obtains patent protection for its new products. The Company’s products are marketed in all 50 states of the United States and in Europe, Canada, Japan, Australia, New Zealand and several countries in Central and South America. Both Simpson Strong-Tie and Simpson Dura-Vent products are distributed through a contractor and dealer distributor network, home centers and OEMs.

 

The Company has developed and uses automated manufacturing processes. Its innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company’s development of specialized manufacturing processes has also permitted increased operating flexibility and enhanced product design innovation. The Company

 

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has developed a quality management system that employs numerous quality-control procedures. Since 1996, SST’s quality management system has been registered under ISO 9001. SST achieved registration under the new ISO 9001-2000 standard for its operations in North America and England in the first quarter of 2003 and is working towards registration for its operations in Denmark and France. The Company has 15 manufacturing locations in the United States, Canada, France, Denmark and England.

 

The Company is a Delaware corporation organized and merged with its predecessor company in 1999. The Company serves as a holding company for Simpson Strong-Tie and its subsidiaries, and for Simpson Dura-Vent.

 

Industry and Market Trends

 

Based on trade periodicals, participation in trade and professional associations and communications with governmental and quasi-governmental organizations and with customers and suppliers, the Company believes that a variety of events and trends have resulted in significant developments in the markets that the Company serves. The Company’s products are designed to respond to increasing demand resulting from these trends. Some of these events and trends are discussed below.

 

Natural disasters throughout the world have focused attention on safety concerns relating to the structural integrity of homes and other buildings. The 1995 earthquake in Kobe, Japan, the 1994 earthquake in Northridge, California, the 1989 Loma Prieta earthquake in Northern California, Hurricanes Hugo in 1989 and Andrew in 1992 in the Southeastern United States, and other less cataclysmic natural disasters damaged and destroyed innumerable homes and other buildings, resulting in heightened consciousness of the fragility of some of those structures.

 

In recent years, architects, engineers, model code agencies, contractors, building inspectors and legislators have continued efforts to improve structural integrity and safety of homes and other buildings in the face of disasters of various types, including seismic events, storms and fires. Based on ongoing participation in trade and professional associations and communications with governmental and quasi-governmental regulatory agencies, the Company believes that building codes, such as the International Building Code 2000, are being more uniformly applied around the country and their enforcement is becoming more rigorous.

 

Recently, there has been consolidation among several of the Company’s customer groups. The industry has experienced increased complexity in home design and builders are more aggressively trying to reduce their costs. The Company has responded to these trends by marketing its products as systems solutions in addition to individual parts. In some cases, systems marketing is facilitated by the use of sophisticated design and specification software.

 

The requirements of the Endangered Species Act, the Federal Lands Policy Management Act and the National Forest Management Act have reduced the amount of timber available for harvest from public lands. Over the past several years, this and other factors have led to the increased use of engineered wood products. Engineered wood products, which substitute for strong, clear-grained lumber historically obtained from logging older, large-diameter trees, have been developed to conserve lumber. Engineered wood products frequently require specialized connectors. Sales of Simpson Strong-Tie’s engineered wood connector products have increased significantly over the past several years.

 

Concerns about energy conservation and air quality have led to increasing recognition of the advantages of natural gas as a heating fuel, including its clean burning characteristics. Use of natural gas for home heating has been increasing in the United States over a number of years.

 

The Company continues to develop its distribution through home centers throughout the United States. The Company’s sales to home centers increased significantly in 2002 and 2003. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Business Strategy

 

The Company designs, manufactures and sells products that are of high quality and performance, easy to use and cost-effective for customers. The Company provides rapid delivery of its products and prompt engineering and sales support. Based on its communications with customers, engineers, architects, contractors and other industry participants, the Company believes that its products have strong brand name recognition, and the Company seeks to continue to develop the value of its brand names through a variety of customer-driven strategies. Information provided by customers has led to the development of many of the Company’s products, and the Company expects that customer needs will continue to shape the Company’s product development, marketing and services.

 

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Specification in architects’ and engineers’ plans and drawings influences which products will be used for particular purposes and therefore is key to the use of the Company’s products in construction projects. The Company encourages architects and engineers to specify the installation of the Company’s products in projects they design and supervise, and encourages acceptance of the Company’s products by construction contractors. The Company maintains frequent contacts with architects, engineers and contractors, as well as private organizations that provide information to building code officials, both to inform them regarding the quality, proper installation, capabilities and value of the Company’s products and to update them about product modifications and new products that may be useful or necessary. The Company sponsors seminars to inform architects, engineers, contractors and building officials on appropriate use and proper installation of the Company’s products. Additionally, the Company maintains relationships with home builders throughout the country to promote the use of its products.

 

The Company seeks to expand its product and distribution coverage through several channels:

 

Distributors. The Company regularly evaluates its distribution coverage and service levels provided by its distributors and from time to time modifies its distribution strategy and implements changes to address weaknesses and opportunities. The Company has various programs to evaluate distributor product mix and conducts promotions to encourage distributors to add Company products that complement the mix of product offerings in their markets.

 

Through its efforts to increase specifications by architects and engineers, and through increasing the number of products sold to particular contractors, the Company seeks to increase sales to channels that serve building contractors. The Company continuously seeks to expand the number of contractors served by each distributor through such sales efforts as demonstrations of product cost-effectiveness and information programs.

 

Home Centers. The Company intends to continue to increase penetration of the DIY markets by solicitation of home centers. The Company’s Sales Representatives and Retail Specialists maintain on-going contact with home centers to provide timely product availability and product knowledge training. To satisfy specialized requirements of the home center market, the Company has developed extensive bar coding and merchandising aids and has devoted a portion of its research efforts to the development of DIY products.

 

Dealers. In some markets, the Company sells its products directly to lumber dealers.

 

OEM Relationships. The Company works closely with manufacturers of engineered wood products and OEMs in developing and expanding the application and sales of Simpson Strong-Tie’s engineered wood connector products and Simpson Dura-Vent’s gas, wood and pellet stove venting products. SST has relationships with several of the largest manufacturers of engineered wood products, and SDV has OEM relationships with several major gas fireplace and gas stove manufacturers. In 2002, SDV was informed by a significant gas appliance manufacturer that the customer planned to supply certain venting products from internal sources beginning in mid 2003. Sales of the affected products to this customer were approximately $3.8 million in 2003, down from $6.6 million in 2002. SDV expects minimal sales to this customer in 2004.

 

The Company is expanding its established facilities outside California to increase its presence and sales in markets east of the Rocky Mountains, although over the last three years, sales in the 37 states east of the Rocky Mountains have increased only with the market generally. Since 1993, the Company has established operations in the United Kingdom, opened warehouse and distribution facilities in Western Canada and the Northeastern United States, purchased anchor products manufacturers in Illinois and Eastern Canada and connector product manufacturers in France, Denmark and western Canada, and acquired the shares of the German company that it did not already own. The European investments are intended to establish a presence in the European Community through companies with existing customer bases and through servicing U.S.-based customers operating there. The Company is also developing its distribution in Chile, Japan, Australia and New Zealand. The Company intends to continue to pursue and expand operations both inside and outside of the United States (see Note 14 to the Company’s Consolidated Financial Statements).

 

A Company goal is to manufacture and warehouse its products in geographic proximity to its markets to provide availability and rapid delivery of products to customers and prompt response to customer requests for specially designed products and services. With respect to the DIY and dealer markets, the Company’s strategy is to keep the customer’s retail stores continuously stocked with adequate supplies of the full line of the Company’s products that those stores carry. The Company manages its inventory to help assure continuous product availability. Most

 

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customer orders are filled within a few days. High levels of manufacturing automation and flexibility allow the Company to maintain its quality standards while continuing to provide prompt delivery.

 

The Company’s product research and development is based largely on needs that customers communicate to the Company. The Company typically has developed 10 to 20 new products annually (some of which may be produced in a range of sizes). The Company’s strategy is to develop new products on a proprietary basis, to patent them where possible, and to seek trade secret protection for others.

 

The Company’s long-term strategy is to develop, acquire or invest in product lines or businesses that (a) complement the Company’s existing product lines, (b) can be marketed through its existing distribution channels, (c) might benefit from use of the Simpson Strong-Tie and Simpson Dura-Vent brand names, (d) are responsive to needs of the Company’s customers and (e) expand its markets geographically.

 

Simpson Strong-Tie

 

Overview

 

Connectors produced by Simpson Strong-Tie typically are steel devices that are used to strengthen, support and connect joints in residential and commercial construction and DIY projects. These products enhance the safety and durability of the structures in which they are installed and can save time and labor costs for the contractor. SST’s connector products increase structural integrity and improve structural resistance to seismic, wind and other forces. Applications range from building framing to deck construction to DIY projects. SST produces and markets over 5,000 standard and custom products.

 

In the United States, connector usage developed faster in the West than elsewhere due to the low cost and abundance of timber and to local construction practices. Increasingly, the market has been influenced both by a growing awareness that the devastation caused by seismic, wind and other disasters can be reduced through improved building codes and construction practices and by environmental concerns that contribute to the increasing cost and reduced availability of wood. Most Simpson Strong-Tie products are listed by recognized building standards agencies as complying with model building codes and are specified by architects and engineers for use in projects they are designing or supervising. The engineered wood products industry continues to develop in response to concerns about the availability of wood, and the Company believes that SST is the leading supplier of connectors for use with engineered wood products.

 

Metal connectors, anchors and fasteners will corrode and lose load carrying capacity when installed in corrosive environments or exposed to corrosive materials. There are many environments and materials which may cause corrosion, including ocean salt air, fire retardants, preservative-treated wood, dissimilar metals, fumes and fertilizers. The variables present in a single building environment make it impossible to accurately predict if, or when, significant corrosion will begin or reach a critical level. This relative uncertainty makes it crucial that the specifiers be knowledgeable of the potential risks and select a product coating or metal that is suitable for the intended use. Changes in the preservative-treated wood industry have created additional concerns. Effective December 31, 2003, the preservative-treated wood industry voluntarily transitioned from Chromated Copper Arsenate (“CCA-C”) used in residential applications to alternative treatments. Testing has shown that certain alternative replacement treatments are generally more corrosive that CCA-C. SST publishes technical bulletins on subjects such as this and others that affect the installation and use of its products and makes them available on its website at www.strongtie.com.

 

Products

 

Simpson Strong-Tie is a recognized brand name in the markets it serves. SST manufactures and markets products that strengthen the three types of connections typically found in residential and commercial construction:  wood-to-wood, wood-to-concrete and wood-to-masonry. The Company’s connector products, including its pre-fabricated shearwalls, are installed on the continuous load path from the foundation to the roof system. SST also markets specialty screws and nails for proper installation of certain of its connector products. These products have seismic, retrofit and remodeling applications for both new construction and DIY markets. Through its Anchor Systems product line, SST also offers a full line of adhesives, mechanical anchors and powder actuated tools for numerous anchoring applications in concrete, masonry and steel.

 

Most of Simpson Strong-Tie’s products are listed by recognized model building code agencies. To achieve such listings, SST conducts extensive product testing, which is witnessed and certified by independent testing engineers.

 

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The tests also provide the basis for publication of load ratings for SST structural connectors, and this information is used by architects, engineers, contractors and homeowners. The information is useful across the range of applications of SST’s products, from the deck constructed by a homeowner to a multi-story structure designed by an architect or engineer in an earthquake zone.

 

Simpson Strong-Tie also manufactures connector products specifically designed for use with engineered wood products, such as wood I-joists. With increased timber costs and reduced availability of trees suitable for making traditional solid sawn lumber, construction with engineered wood products has increased substantially in the last several years. Over the same period, SST’s net sales of engineered wood connectors through dealer and contractor distributors and engineered wood product manufacturers have also increased significantly.

 

New Product Development

 

Simpson Strong-Tie commits substantial resources to engineering and new product development and the majority of its products have been developed through SST’s internal research and development program. SST typically has developed 10 to 20 new products each year. SST’s research and development expense for the three years ended December 31, 2003, 2002 and 2001, was $3,599,000, $3,199,000 and $2,309,000, respectively. In late 2002, SST completed construction of its advanced testing facility in Stockton, California, and testing there of multi-story wall systems began in 2003. As part of the new product development process, SST engineers, in cooperation with sales and marketing staff, meet regularly with architects, engineers, building inspectors, code officials and customers. Several new products derived from existing product lines are developed annually. SST developed and introduced a line of pre-fabricated shearwall products primarily for the new construction market and has expanded its line of chemical and mechanical anchor products and powder actuated tools. The Company believes that existing distribution channels are receptive to product line extensions, thereby enhancing SST’s ability to enter new markets.

 

Sales and Marketing

 

Simpson Strong-Tie’s sales and marketing programs are implemented through SST’s branch system. SST currently maintains branches in Northern and Southern California, Texas, Ohio, Canada, England, France and Denmark. Each branch is served by its own sales force, as well as manufacturing, warehouse and office facilities. Each branch is responsible for a broad geographic area. Branch managers have significant autonomy in managing their operations. Each is responsible for setting and executing sales and marketing strategies that are consistent with the markets that the branch serves and the goals of the Company. Each domestic branch is an independent profit center with cash profit sharing bonus and stock option programs based on its own performance. At the same time, the domestic branches closely integrate their manufacturing activities to enhance product availability. Branch sales forces in the U.S. are supported by marketing managers in the home office in Dublin, California. The sales force maintains close working relationships with customers, develops new business, calls on architects, engineers and building officials and participates in a range of educational seminars.

 

Simpson Strong-Tie sells its products through an extensive distribution system comprising dealer distributors supplying thousands of retail locations nationwide, contractor distributors, home centers, lumber dealers, manufacturers of engineered wood products, and specialized contractors such as roof framers. In recent years, sales to home centers have been one of the Company’s fastest growing distribution channels. A large part of that growth was sales to The Home Depot which exceeded 10% of the Company’s consolidated net sales in each of the last three years (see Note 14 to the Company’s Consolidated Financial Statements and “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations”). SST’s DIY and dealer products are used to build projects such as decks, patio covers and shelf and bench systems. The Company believes that SST’s increasing diversification into new and growing markets has reduced its vulnerability to construction industry cycles.

 

Simpson Strong-Tie dedicates substantial resources to customer service. SST produces numerous publications and point-of-sale marketing aids to serve specifiers, distributors, retailers and users for the various markets that it serves. These publications include general catalogs, as well as various specific catalogs, such as those for its Anchor System products and the engineered wood and plated truss industries. The catalogs and publications describe the products and provide load and installation information. SST also maintains several linked websites centered on www.strongtie.com, which include catalogs, product and technical information, code reports and other general information related to SST’s product lines and promotional programs.

 

Simpson Strong-Tie’s engineers not only design and test products, but also provide engineering support for customers. This support might range from the discussion of a load value in a catalog to testing a unique application

 

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for an existing product. SST’s sales force communicates with customers in each of its marketing channels, through its publications, seminars and frequent calls.

 

Based on its communications with customers, Simpson Strong-Tie believes that its products are essential to its customers’ businesses, and it is SST’s policy to ship products within a few days of receiving the order. Many of SST’s customers serve contractors that require rapid delivery of needed products. Home centers and dealers also require superior service, because of fluctuating demand and to serve the needs of a broad base of customers. To satisfy these requirements, SST maintains high inventory levels, has redundant manufacturing capability and some multiple dies to produce the same parts. SST also maintains information systems that provide sales and inventory control and forecasting capabilities throughout its network of factories and warehouses. SST also has special programs for contractors intended to ensure the prompt manufacture and delivery of custom products.

 

Simpson Strong-Tie believes that dealer and home center sales of SST products are significantly greater when the bins and racks at large dealer and home center locations are adequately stocked with appropriate products. Various retailers carry varying numbers of SST products, and SST’s Retail Specialists are engaged in ongoing efforts to inform retailers about other SST products that can be used in their specific markets and to encourage them to add these products to better meet their customers’ needs. Achieving these objectives requires teamwork and significant inventory commitments between SST and the distributors and retailers. Retail Specialists play a significant role in keeping the racks full and extending the product lines at the large dealer and home center level. They help retailers order product, set up merchandising systems, stock shelves, hold product seminars and provide SST with information that is used to improve service and product mix.

 

Simpson Dura-Vent

 

Overview

 

Simpson Dura-Vent’s venting systems are used to vent gas furnaces and water heaters, gas fireplaces and stoves, wood and oil burning appliances and pellet stoves. SDV’s metal vents, chimneys and chimney liner systems exhaust the products of combustion to the exterior of the building and have been designed for ease of assembly and safe operation and to achieve a high level of performance. SDV produces and markets nearly 2,400 different venting products.

 

The clean burning characteristics of natural gas have gained public recognition, resulting in increased market share for gas appliances in the new construction and the appliance replacement markets. As a result, Simpson Dura-Vent has developed venting systems, such as Direct-Vent, to address changes in appliance technology. Fluctuations in natural gas prices, however, affect demand for gas appliances. Historically, sales of wood and pellet burning stoves, considered alternative energy sources, have increased during periods of high oil and natural gas prices and energy shortages while sales of gas burning appliances have tended to decline.

 

Simpson Dura-Vent’s objective is to expand market share in all of its distribution channels, by entering expanding markets that address energy and environmental concerns. SDV’s strategy is to capitalize on its strengths in new product development and its established distribution network and to continue its commitment to high quality and service. SDV operates manufacturing and warehouse facilities in California and Mississippi.

 

Products

 

Simpson Dura-Vent is a leading supplier of double-wall Type B Gas Vent systems, used for venting gas furnaces, water heaters, boilers and decorative gas fireplaces. SDV’s Type B Gas Vent product line features heavy-duty quality construction and a twist-lock design that provides for fast and easy job-site assembly compared to conventional snap together designs. The twist-lock design has broader applications and has been incorporated into SDV’s gas, pellet and direct vent product lines. SDV also markets a patented flexible vent connector, Dura/Connect, for use between the gas appliance flue outlet and the connection to the Type B Gas Vent installed in the ceiling. Dura/Connect offers a simple twist, bend and connect installation for water heaters and gas furnaces.

 

Consumer concerns over the rising costs of natural gas and home heating oil in 2003 increased demand for alternative fuel appliances. This has resulted in increased demand for SDV’s all-fuel chimney and pellet vent products. The gas fireplace market has evolved into two basic types of fireplace: top-vent fireplaces that are vented with the standard Type B Gas Vent and direct-vent fireplaces that use a special double-wall venting system. SDV’s direct-vent system is designed not only to exhaust the flue products, but also to draw in outside air for combustion,

 

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an important feature in modern energy-efficient home construction. The direct-vent gas fireplace systems provide ease of installation, permitting horizontal through-the-wall venting or standard vertical through-the-roof venting. SDV has established relationships with several large manufacturers of gas stoves and gas fireplaces to supply direct-vent venting products. In 1996, SDV expanded its direct-vent product line to include both co-axial and co-linear direct vent systems for venting gas stoves and gas inserts into existing masonry chimneys or existing factory-built metal chimneys.

 

New Product Development

 

Simpson Dura-Vent has gained industry recognition by offering innovative new products that meet changing needs of customers. SDV representatives serve on industry committees concerned with issues such as new appliance standards and government regulations. SDV’s research and development expense for the three years ended December 31, 2003, 2002 and 2001, was $464,000, $460,000 and $438,000, respectively. SDV also maintains working relationships with research and development departments of major appliance manufacturers, providing prototypes for field testing and conducting tests in SDV’s testing laboratory. SDV believes that such relationships provide competitive advantages. For example, SDV introduced the first direct vent system for direct vent gas appliances. In 2003, SDV developed stainless steel flexible relining systems for masonry chimneys. These systems are used to resize and retrofit masonry chimneys to accommodate wood burning and pellet burning fireplace inserts. In 1999, SDV introduced DuraTech, a twin-walled insulated chimney system for use on wood burning stoves, fireplaces and oil fired appliances. This product line has been designed and manufactured to a new standard of excellence. It is constructed from stainless steel and incorporates blanket insulation for enhanced safety and efficiency.

 

Sales and Marketing

 

Simpson Dura-Vent’s sales organization consists of a director of sales and marketing, a marketing communications manager, regional sales managers, and independent representative agencies. SDV markets venting systems for both gas and wood burning appliances through wholesale distributors in the United States, Canada and Australia to the HVAC (heating, ventilating and air conditioning) and PHC (plumbing, heating and cooling) contractor markets, and to fireplace specialty shop distributors. These customers sell to contractor and DIY markets. SDV also markets venting products to home center and hardware store chains. SDV has established OEM relationships with several major gas fireplace and gas stove manufacturers, which SDV believes are leaders in the direct-vent gas appliance market (see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

 

Simpson Dura-Vent responds to technological changes occurring in the industry through new product development and has developed a reputation for quality and service to its customers. To reinforce its reputation for quality, SDV produces extensive sales support literature and advertising materials. Recognizing the difficulty that customers and users may have in understanding new, complex venting requirements, SDV publishes a venting handbook to assist contractors, building officials and retail outlets with the science of proper venting. Advertising and promotional materials have been designed to be used by distributors and their customers, as well as home centers and hardware chains.

 

To enhance its marketing effort, SDV has developed a website, www.duravent.com, that includes product descriptions, catalogs and installation instructions, as well as a direct link to SDV’s customer service and engineering departments.

 

Manufacturing Process

 

The Company has concentrated on making its manufacturing processes as efficient as possible without compromising quality or flexibility necessary to serve the needs of its customers. The Company has developed and uses automated manufacturing processes. The Company’s innovative manufacturing systems and techniques have allowed it to control manufacturing costs, even while developing both new products and products that meet customized requirements and specifications. The Company’s development of specialized manufacturing processes also has permitted increased operating flexibility and enhanced product design innovation. The Company sources some products from third party vendors, both domestically and internationally.

 

The Company is committed to helping people build safer structures economically through the design, engineering and manufacturing of structural connectors, pre-fabricated shearwalls, anchors and related products. To this end, the Company has developed a quality management system that employs numerous quality-control procedures, such as

 

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computer-generated work orders, constant review of parts as they are produced and frequent quality testing (see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations”). Since 1996, Simpson Strong-Tie’s quality management system has been registered under ISO 9001, an internationally recognized set of quality-assurance standards. SST achieved registration under the new ISO 9001-2000 standard for its operations in North America and England in the first quarter of 2003 and is working towards registration for its operations in Denmark and France. The Company believes that ISO registration is becoming increasingly important to U.S. companies.

 

Simpson Strong-Tie operates manufacturing and warehouse facilities in California, Texas, Ohio, Florida, Connecticut, Illinois, Washington, British Columbia, Ontario, England, France, Denmark, Germany and Poland. SST also stocks its products in Scotland, Austria and Chile. Most of SST’s products are produced with a high level of automation, using progressive dies run in automatic presses making parts from coiled sheet steel at rates that often exceed 100 strokes per minute. SST produces over 500 million product pieces per year. Most of SST’s products (SKUs) are bar coded with UPC numbers for easy identification, and nearly all of the products sold to home centers are labeled with bar codes. SST has significant press capacity and has multiple dies for some of its high volume products because of the need to produce these products close to the customer and to provide backup capacity. The balance of production is accomplished through a combination of manual, blanking and numerically controlled (NC) processes which include robotic welders, lasers and turret punches. This capability allows SST to produce products with little redesign or set-up time, facilitating rapid turnaround for customers. New tooling is also highly automated. Dies are designed and produced using computer aided design (CAD) and computer aided machining (CAM) systems. CAD/CAM capability enables SST to create multiple dies rapidly and design them to high standards. The Company is constantly reviewing its product line to reduce manufacturing costs, increase automation, and take advantage of new types of materials. For example, in recent years SST has introduced multiple products made from an engineered composite plastic, the AnchorMate, the StrapMate and the Anchor Bolt Stabilizer.

 

Simpson Dura-Vent operates manufacturing and warehouse facilities in California and Mississippi. SDV produces component parts for venting systems using NC-controlled punch presses equipped with high-speed progressive and compound tooling. SDV’s vent pipe and elbow assembly lines are automated, to produce finished products efficiently from large coils of steel and aluminum. UPC bar coding and computer tracking systems provide SDV’s industrial engineers and production supervisors with real-time productivity tools to measure and evaluate current production rates, methods and equipment.

 

Most of the Company’s current and planned manufacturing facilities are located in geographic regions that have experienced major natural disasters, such as earthquakes, floods and hurricanes. For example, the 1989 Loma Prieta earthquake in Northern California destroyed a freeway and caused other major damage within a few miles of the Company’s facilities in San Leandro, California, and the earthquake in Northridge, California, in January 1994, destroyed several freeways and numerous buildings in the region in which the Company’s facilities in Brea are located. The Company has developed a disaster recovery plan, but it does not carry earthquake insurance on its buildings or its equipment. Other insurance that it carries is limited and not likely to be adequate to cover all of the Company’s resulting costs, business interruption and lost profits in the event of a major natural disaster in the future. If a natural disaster were to render one or more of the Company’s manufacturing facilities totally or partially unusable, whether or not covered by insurance, the Company’s business and financial condition could be materially and adversely affected.

 

Regulation

 

The design, capacity and quality of most of the Company’s products and manufacturing processes are subject to numerous and extensive regulations and standards promulgated by governmental, quasi-governmental and industry organizations. Such regulations and standards are highly technical and complex and are subject to frequent revision. The failure of the Company’s products or manufacturing processes to comply with any of such regulations and standards could impair the Company’s ability to manufacture and market its products profitably and could materially and adversely affect the Company’s business and financial condition.

 

Simpson Strong-Tie’s product lines are subject to Federal, state, county, municipal and other governmental and quasi-governmental regulations that affect product design, development, testing, applications, marketing, sales, installation and use. Most SST products are recognized by building code and standards agencies. Agencies that recognize Company products include the International Conference of the Building Officials (“ICBO”), the Building Officials and Code Administrators (“BOCA”), the Southern Building Code Congress International (“SBCCI”), the International Code Council, the City of Los Angeles, the State of Florida, and the California Division of State

 

9

 

Architecture. These and other code agencies adopt various testing and design standards and incorporate them into their related building codes. With the adoption of the International Residential Code 2000 and the International Building Code 2000, these standards have become more uniformly applied and are recognized throughout the country, rather than by only the jurisdictions covered by the respective agencies. SST considers code recognition to be a significant marketing tool and devotes considerable effort to obtaining and maintaining appropriate approvals for its products. SST believes that architects, engineers, contractors and other customers are less likely to purchase structural products that lack the appropriate code acceptance if code-accepted competitive products are available. SST’s management actively participates in industry related professional associations to keep abreast of regulatory changes and to provide information to regulatory agencies.

 

Simpson Dura-Vent operates under a complex regulatory environment that includes appliance and venting performance standards related to safety, energy efficiency and air quality. Gas venting regulations are contained in the National Fuel Gas Code (“NFGC”), while safety and performance regulations for wood burning appliances and chimney systems are contained in a National Fire Protection Association standard (“NFPA 211”). Standards for testing gas vents and chimneys are developed by testing laboratories such as Underwriter’s Laboratories (“UL”) in compliance with the American National Standards Institute. Clean air standards for both gas and wood burning appliances are regulated by the Environmental Protection Agency (“EPA”). Energy efficiency standards are regulated by the Department of Energy (“DOE”) under the authority of the National Appliance Energy Conservation Act. Under this act, the DOE periodically reviews the necessity for increased efficiency standards with respect to gas furnaces and gas water heaters. A substantial percentage of SDV’s Type B Gas Vent sales are for gas furnaces and gas water heaters. Minimum appliance efficiency standards are being considered that could negatively affect sales of Type B Gas Vents, which could materially and adversely affect the Company’s operating results and financial condition if the standards and regulations contained in the NFGC and NFPA 211 are ultimately adopted by national building code organizations such as ICBO, BOCA and SBCCI. In turn, the various building codes could be adopted by local municipalities, resulting in enforcement through the building permit process. Safety, air quality and energy efficiency requirements are enforced by local air quality districts and municipalities by requiring proper UL, EPA and DOE labels on appliances and venting systems.

 

Competition

 

The Company faces a variety of competition in all of the markets in which it participates. This competition ranges from subsidiaries of large national or international corporations to small regional manufacturers. While price is an important factor, the Company competes on the basis of quality, breadth of product line, technical support, service, field support and product innovation. As a result of differences in structural design and building practices and codes, Simpson Strong-Tie’s markets tend to differ by region. Within these regions, SST competes with companies of varying size, several of which also distribute their products nationally.

 

The venting industry is highly competitive. SDV’s principal competitors include the Selkirk division of Tinicum Capital Partners LP, Hart & Cooley, Inc. and American Metal Products, Inc. (both now owned by Tomkins PLC), Metal-Fab, Inc. and the Air Jet Division of General Products Co., now owned by ThermaTrue. The Company believes that Metal-Fab, Inc. and Air Jet tend to be more regional than SDV, and that they have smaller shares of the national market than SDV.

 

Raw Materials

 

The principal raw material used by the Company is steel, including stainless steel, and is generally ordered to specific American Society of Testing and Materials (“ASTM”) standards. Other raw materials include aluminum, aluminum alloys and ceramic and other insulation materials, which are used by Simpson Dura-Vent, and cartons, which are used by both SST and SDV. The Company purchases raw materials from a variety of commercial sources. The Company’s practice is to seek cost savings and enhanced quality by purchasing from a limited number of suppliers.

 

The steel industry is highly cyclical and prices for the Company’s raw materials are influenced by numerous factors beyond the Company’s control, including general economic conditions, competition, labor costs, import duties and other trade restrictions. Steel prices rose in the latter half of 2003 and are expected to continue to increase. Several factors have contributed to these price increases. Demand, particularly from China, is very high and this has constrained supplies available to buyers in the United States. In addition, weakness in the U.S. dollar has discouraged foreign steel mills from supplying the U.S. market despite the lifting of tariffs on certain types of imported steel. Finally, major domestic integrated steel producers have consolidated over the last several years. All

 

10

 

of these factors could have an adverse effect on the Company’s cost and availability of steel in 2004. The Company might not be able to increase its product prices to correspond to increases in raw materials prices without materially and adversely affecting its sales and profits. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The Company historically has not attempted to hedge against changes in prices of steel or other raw materials.

 

Patents and Proprietary Rights

 

The Company’s subsidiaries have U.S. and foreign patents, the majority of which cover products that they currently manufacture and market. These patents, and applications for new patents, cover various design aspects of the subsidiaries’ products, as well as processes used in their manufacture. The Company’s subsidiaries are continuing to develop new potentially patentable products, product enhancements and product designs. Although the Company’s subsidiaries do not intend to apply for additional foreign patents covering existing products, the Company has developed an international patent program to protect new products that its subsidiaries may develop.

 

The Company’s ability to compete effectively with other companies depends in part on its ability to maintain the proprietary nature of its technology. There can be no assurance, however, as to the degree of protection afforded by these patents or the likelihood that patents will be issued pursuant to pending patent applications. Furthermore, there can be no assurance that others will not independently develop the same or similar technology, develop around the patented aspects of any of the Company’s products or proposed products, or otherwise obtain access to the Company’s proprietary technology.

 

In addition to seeking patent protection, the Company also relies on unpatented proprietary technology to maintain its competitive position. Nevertheless, there can be no assurance that the Company will be able to protect its know-how or other proprietary information.

 

In attempting to protect its proprietary information, the Company expects that it may sometimes be necessary to initiate lawsuits against competitors and others that the Company believes have infringed or are infringing on the Company’s rights. In such an event, the defendant may assert counterclaims to complicate or delay the litigation or for other reasons. If the Company were to be unable to maintain the proprietary nature of its significant products, the Company’s business and financial condition could be materially and adversely affected.

 

Acquisitions and Expansion into New Markets

 

The Company’s future growth, if any, may depend to some extent on its ability to penetrate new markets, both domestically and internationally. See “Industry and Market Trends” and “Business Strategy.” Therefore, the Company may in the future pursue acquisitions of product lines or businesses. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the diversion of management’s attention from other business concerns, risks of entering markets in which the Company has little or no direct prior experience, and the potential loss of key employees of the acquired company. In addition, future acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurring of additional debt, and impairment and amortization expenses related to goodwill and other intangible assets, all of which could adversely affect the Company’s profitability. If an acquisition occurs, no assurance can be given as to its effect on the Company’s business or operating results. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Construction customs, standards, techniques and methods in international markets differ from those in the United States. Laws and regulations applicable in new markets for the Company may be unfamiliar to the Company and compliance may be substantially more costly than the Company anticipates. As a result, it may become necessary for the Company to redesign products or to invent or design new products in order to compete effectively and profitably outside the United States or in markets that are new to the Company in the United States. The Company expects that significant time will be required for it to generate substantial sales or profits in new markets.

 

Other significant challenges to conducting business in foreign countries include, among other factors, local acceptance of the Company’s products, political instability, currency controls, changes in import and export regulations, changes in tariff and freight rates, and fluctuations in foreign exchange rates. There can be no assurance that the Company will be able to penetrate these markets or that any such market penetration can be achieved on a timely basis or profitably. If the Company is not successful in penetrating these markets within a reasonable time, it

 

11

 

will be unable to recoup part or all of the significant investments it will have made in attempting to do so. See “Business Strategy” and “Industry and Market Trends.”

 

In May 2003, Simpson Strong-Tie Canada Limited, a subsidiary of the Company, purchased MGA Construction Hardware & Steel Fabricating Limited and MGA Connectors Limited (collectively, “MGA”), for approximately $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. In January 2001, Simpson Strong-Tie International, Inc. (“SSTI”), a subsidiary of the Company, acquired 100% of the shares of BMF Bygningsbeslag A/S (“BMF”) of Denmark for $13.6 million in cash. BMF manufactures and distributes connector products in northern and central Europe. In August 2001, the German subsidiary of BMF purchased the remaining 51% stake in Bulldog-Simpson GmbH for approximately $0.6 million in cash.

 

Seasonality and Cyclicality

 

The Company’s sales are seasonal, with operating results varying from quarter to quarter. With some exceptions, the Company’s sales and income have historically been lower in the first and fourth quarters and higher in the second and third quarters of the year, as retailers and contractors purchase construction materials in the late spring and summer months for the construction season. In addition, demand for the Company’s products and the Company’s results of operations are significantly affected by weather conditions, such as unseasonably warm, cold or wet weather, which affect, and sometimes delay or accelerate, installation of certain of the Company’s products. Political and economic events can also affect the Company’s revenues. The Company has little control over the timing of customer purchases, and sales anticipated in one quarter may occur in another quarter, thereby affecting both quarters’ results. In addition, the Company incurs significant expenses as it develops, produces and markets its products in anticipation of future orders. Products typically are shipped as orders are received, and accordingly the Company operates with little backlog. As a result, net sales in any quarter generally depend on orders booked and shipped in that quarter. A significant portion of the Company’s operating expenses are fixed, and planned expenditures are based primarily on sales forecasts. If sales fall below the Company’s expectations, operating results would be adversely affected for the relevant quarters, as expenses based on those expectations will already have been incurred. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The Company’s principal markets are in the building construction industry. That industry is subject to significant volatility as a result of fluctuations in interest rates, the availability of credit to builders and developers, inflation rates, weather and other factors and trends, none of which is within the Company’s control. Declines in commercial and residential construction may be expected to reduce the demand for the Company’s products. The Company cannot provide any assurance that its business will not be adversely affected by future negative economic or construction industry performance or that future declines in construction activity or the demand for the Company’s products will not have material adverse effects on the Company and its business and financial condition. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Product Liability

 

The Company designs and manufactures most of its standard products and expects that it will continue to do so. The Company employs engineers and designers to design and test its products under development. In addition, the Company maintains a quality control system. The Company has on occasion found manufacturing flaws in its products. In addition, the Company purchases from third party suppliers raw materials, principally steel, and finished goods that are produced and processed by other manufacturers. The Company also has on occasion found flaws in raw materials and finished goods produced by others. Some flaws have not become apparent until after the products were installed by customers. Many of the Company’s products are integral to the structural soundness or fire safety of the structures in which they are used. As a result, if any flaws exist in the Company’s products (as a result of design, raw material or manufacturing flaws or lapses in product quality control) and such flaws are not discovered and corrected before the Company’s products are incorporated into structures, the structures could suffer severe damage (such as collapse or fire) and personal injury could result. To the extent that such damage or injury is not covered by the Company’s product liability insurance, and if the Company were to be found to have been negligent or otherwise culpable, the Company and its business and financial condition could be materially and adversely affected by the necessity to correct such damage and to compensate persons who might have suffered injury. Furthermore, in the event that a flaw is discovered after installation but before any damage or injury occurs, it may be necessary for the Company to recall products, and the Company may be liable for any costs necessary to retrofit the affected structures. Any such recall or retrofit could entail substantial costs and adversely affect the Company’s

 

12

 

reputation, sales and financial condition. The Company does not carry insurance against recall costs, and its product liability insurance may not cover retrofit costs.

 

No assurance can be given that claims will not be made against the Company with regard to damage or destruction of structures incorporating Company products resulting from a natural disaster. Any such claims, if asserted, could materially and adversely affect the Company.

 

Environmental, Health and Safety Matters

 

The Company is subject to environmental laws and regulations governing emissions into the air, discharges into water, and generation, handling, storage, transportation, treatment and disposal of waste materials. The Company is also subject to other Federal and state laws and regulations regarding health and safety matters. The Company’s manufacturing operations involve the use of solvents, chemicals, oils and other materials that are regarded as hazardous or toxic and the use of complex and heavy machinery and equipment that can pose severe safety hazards (especially if not properly and carefully used). Some of the Company’s products also incorporate materials that are hazardous or toxic in some forms (such as zinc and lead, which are used in some steel galvanizing processes) or explosive (such as the gun powder used in its powder actuated tools). The Company believes that it has obtained all material licenses and permits required by environmental, health and safety laws and regulations in connection with the Company’s operations and that its policies and procedures comply in all material respects with existing environmental, health and safety laws and regulations. It is possible that additional licenses or permits may be required, that the Company’s policies and procedures might not comply in all respects with all such laws and regulations or, even if they do, that employees might fail or neglect to follow them in all respects, and that the Company’s generation, handling, use, storage, transportation, treatment or disposal of hazardous or toxic materials, machinery and equipment might cause injury to persons or to the environment. In addition, properties occupied by the Company may be contaminated by hazardous or toxic substances and remedial action may be required at some time in the future. It is also possible that materials in certain of the Company’s products could cause injury or sickness. Relevant laws and regulations could also be changed or new ones could be adopted that require the Company to obtain additional licenses and permits and cause the Company to incur substantial expense. Any such event or contamination could have a material adverse effect on the Company and its liquidity, results of operations and financial condition. See “Regulation.”

 

Employees and Labor Relations

 

As of January 1, 2004, the Company had 2,244 full-time employees, of whom 1,496 were hourly employees and 748 were salaried employees. The Company believes that its overall compensation and benefits for the most part exceed industry averages and that its relations with its employees are good.

 

The Company is dependent on certain key management and technical personnel, including Thomas J Fitzmyers, Michael J. Herbert, Stephen B. Lamson, Barclay Simpson and Stephen P. Eberhard. The loss of one or more key employees could have a material adverse effect on the Company. The Company’s success will also depend on its ability to attract and retain additional highly qualified technical, marketing and management personnel necessary for the maintenance and expansion of the Company’s activities. The Company faces strong competition for such personnel and there can be no assurance that the Company will be able to attract or retain such personnel.

 

A significant number of the employees at four of the Company’s manufacturing facilities are represented by labor unions and are covered by collective bargaining agreements. Two of the Company’s collective bargaining agreements cover the Company’s sheetmetal and maintenance workers and its tool and die craftsmen in Brea. These two contracts expire in June 2004 and February 2005, respectively. Two other contracts, covering tool and die personnel and sheetmetal workers in San Leandro, expire in June 2007. Simpson Strong-Tie’s Stockton, California, facility is also a union facility. The collective bargaining agreements at this facility expire in September 2007. A work stoppage or interruption by a significant number of the Company’s employees could have a material and adverse effect on the Company and its business and financial condition.

 

13

 

Available Information

 

The Company makes available, free of charge, copies of its recent annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, corporate governance guidelines and code of ethics and the charters of the Audit, Compensation, and Governance and Nominating Committees of its Board of Directors on its website at www.simpsonmfg.com. Printed copies of any of these materials will be provided to stockholders on request.

 

14

 

Item 2. Properties.

 

The Company maintains its home office in Dublin, California, and other offices, manufacturing and warehouse facilities elsewhere in California and in Texas, Ohio, Florida, Mississippi, Illinois, Connecticut, Washington, British Columbia, Ontario, England, Scotland, France, Denmark, Germany, Austria and Poland. As of February 1, 2004, the Company’s facilities were as follows:

 

Location		Approximate Square Footage		Owned or Leased		Lessee		Lease Expires		Function
Dublin, California		35,400		Leased		Company		2007		Office
Stockton, California		436,000		Owned						Office, Manufacturing and Warehouse
Stockton, California		25,000		Owned						Research and Development
San Leandro, California		47,100		Owned	(1)					Office, Manufacturing and Warehouse
San Leandro, California		71,000		Owned						Office, Manufacturing and Warehouse
San Leandro, California		57,000		Leased	(2)	SST		2009		Manufacturing and Warehouse
San Leandro, California		48,000		Owned						Office and Warehouse
San Leandro, California		27,000		Owned						Manufacturing and Warehouse
Brea, California		50,700		Owned						Office, Manufacturing and Warehouse
Brea, California		78,000		Owned						Office and Warehouse
Brea, California		30,500		Owned						Office, Manufacturing and Warehouse
Brea, California		42,900		Owned						Warehouse
Brea, California		19,200		Owned						Warehouse
McKinney, Texas		84,300		Owned						Office, Manufacturing and Warehouse
McKinney, Texas		117,100		Owned						Office and Warehouse
Columbus, Ohio		153,500		Leased	(3)	SST		2005		Office, Manufacturing and Warehouse
Jacksonville, Florida		74,600		Leased	(4)	SST		2006		Office and Warehouse
Addison, Illinois		52,400		Leased		SST		2008		Office, Manufacturing and Warehouse
Enfield, Connecticut		55,100		Leased		SST		2008		Office and Warehouse
Kent, Washington		24,000		Leased		SST		2009		Office, Manufacturing and Warehouse
Visalia, California		92,000		Owned						Office, Manufacturing and Warehouse
Tamworth, England		78,100		Leased		SST	(5)	2012		Office, Manufacturing and Warehouse
Glasgow, Scotland		5,000		Leased		SST	(5)	2004		Warehouse
Vacaville, California		125,000		Leased	(6)	SDV		2007		Office, Manufacturing and Warehouse
Vacaville, California		120,300		Owned						Office, Manufacturing and Warehouse
Vicksburg, Mississippi		302,000		Owned						Office, Manufacturing and Warehouse
Fontana, California		17,900		Leased		SDV		2004		Warehouse

 

15

 

Location		Approximate Square Footage		Owned or Leased		Lessee		Lease Expires		Function
Maple Ridge, British Columbia		36,400		Leased		SST	(7)	2007		Office, Manufacturing and Warehouse
Maple Ridge, British Columbia		2,300		Leased		SST	(7)	2005		Warehouse
Maple Ridge, British Columbia		2,400		Leased		SST	(7)	2004		Warehouse
Langley, British Columbia		19,700		Leased		SST	(7)	2010		Warehouse
Brampton, Ontario (8)		104,000		Leased		SST	(7)	2009		Office, Manufacturing and Warehouse
Odder, Denmark		162,500		Owned						Office, Manufacturing and Warehouse
Syke, Germany		10,300		Owned						Office and Warehouse
Warsaw, Poland		8,300		Leased		SST	(9)	2004		Office and Warehouse
Grossebersdorf, Austria		5,100		Leased		SST	(9)	2006		Office and Warehouse
St. Gemme La Plaine, France		99,000		Owned				2010		Office, Manufacturing and Warehouse

 

(1)                      The Company purchased this property from Simpson Investment Company, a related party, in 2001 for approximately $1.7 million. See Note 9 and Note 12 to the Consolidated Financial Statements contained elsewhere herein.

 

(2)                      Lessor is Doolittle Investors, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein.

 

(3)                      Lessor is Columbus Westbelt Investment Company, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein.

 

(4)                      SST has signed a lease for a nearby building with the same lessor with approximately 112,000 square feet of office and warehouse space. The new lease expires 2011 and SST plans to occupy the building upon completion of construction, which is expected in the first quarter of 2004.

 

(5)                      Lessee is Simpson Strong-Tie International, Inc., a wholly-owned subsidiary of SST.

 

(6)                      Lessor is Vacaville Investors, a related party. See Note 9 to the Consolidated Financial Statements contained elsewhere herein.

 

(7)                      Lessee is Simpson Strong-Tie Canada, Ltd., a wholly-owned subsidiary of SST.

 

(8)                      An expansion of approximately 57,000 square feet has commenced on this property and the Company expects to occupy it at the end of the second quarter of 2004.

 

(9)                      Lessee is BMF Bygningsbeslag A/S, a wholly-owned subsidiary of SST.

 

The Company is purchasing an additional building in Brea, California, for approximately $1.8 million. The building is approximately 20,000 square feet. The Company expects the purchase to be completed during the first quarter of 2004. The Company is planning to build a 300,000 square foot building on its property in McKinney, Texas, to replace its existing facility there.

 

The Company’s manufacturing facilities are equipped with specialized equipment and use extensive automation. The Company considers its existing and planned facilities to be suitable and adequate for its operations as currently conducted and as planned through 2004. The manufacturing facilities currently are being operated with one full shift and at most plants with at least a partial second or third shift. The Company anticipates that it may require additional facilities to accommodate possible future growth.

 

16

 

Item 3. Legal Proceedings.

 

From time to time, the Company is involved in litigation that it considers to be in the normal course of its business. No such litigation within the last five years resulted in any material loss. The Company is not engaged in any 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.

 

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

 

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

 

PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

 

The Company’s Common Stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “SSD.” 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. The following table shows the range of high and low closing sale prices per share of the Common Stock as reported by the NYSE for the calendar quarters indicated:

 

		Market Price
Quarter		High			Low
2003
Fourth		$	52.550		$	42.500
Third		48.880			36.720
Second		38.150			33.070
First		34.950			30.850
2002
Fourth		$	36.300		$	29.600
Third		33.550			25.325
Second		34.050			27.550
First		30.950			25.995

 

The Company estimates that as of February 9, 2004, approximately 7,182 persons owned shares of the Company’s Common Stock either directly or through nominees.

 

In January 2004, the Company’s Board of Directors declared a dividend of $0.10 per share to be paid on April 20, 2004, to stockholders of record on April 5, 2004. The Company currently intends to pay dividends quarterly. Future dividends, if any, will be determined by the Company’s Board of Directors, based on the Company’s earnings, cash flow, financial condition and other factors deemed relevant by the Board of Directors. In addition, existing loan agreements require the Company to maintain tangible net worth of $250.0 million plus 50% of net profit after taxes for each fiscal year ending after December 31, 2002. This requirement may limit the amount that the Company may pay out as dividends on the common stock. As of December 31, 2003, the Company had approximately $97.4 million available for the payment of dividends under these loan agreements.

 

In December 2003, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock. The authorization will remain in effect through the end of 2004. This replaces the $50.0 million repurchase authorization from December 2002. In November 2003, the Company repurchased 500,000 shares of its Common Stock for $47.05 per share from the Simpson PSB Fund for approximately $23.5 million under the 2002 authorization.

 

17

 

Item 6. Selected Financial Data.

 

The following table sets forth selected consolidated financial information with respect to the Company for each of the five years ended December 31, 2003, 2002, 2001, 2000 and 1999, derived from the audited Consolidated Financial Statements of the Company (for the years ended December 31, 2000 and 1999, amounts have been restated for the effect of the accounting change for inventory valuation from the last-in, first-out method to the first-in, first-out method), the most recent three years of which appear elsewhere herein. The data presented below should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

 

(Dollars in thousands, except per share data)		Year Ended December 31,
		2003			2002			2001			2000			1999
Statement of Operations Data:
Net sales		$	548,182		$	465,474		$	415,863		$	369,087		$	328,440
Cost of sales		329,902			276,557			257,785			225,628			197,701
Gross profit		218,280			188,917			158,078			143,459			130,739
Selling expense		49,669			44,581			42,230			37,410			32,204
General and administrative expense		70,538			58,253			50,032			44,634			37,846
Income from operations		98,073			86,083			65,816			61,415			60,689
Interest income, net		999			985			1,587			3,010			1,669
Income before income taxes		99,072			87,068			67,403			64,425			62,358
Provision for income taxes		38,510			35,134			27,619			26,296			25,021
Minority interest		—			—			(734		)	(1,246		)	—
Net income		$	60,562		$	51,934		$	40,518		$	39,375		$	37,337
Basic net income per share of common stock		$	2.46		$	2.12		$	1.67		$	1.64		$	1.58
Diluted net income per share of common stock		$	2.42		$	2.09		$	1.64		$	1.60		$	1.53

 

 

		As of December 31,
(Dollars in thousands)		2003			2002			2001			2000			1999
Balance Sheet Data:
Working capital		$	268,583		$	238,277		$	194,261		$	168,008		$	141,143
Property, plant and equipment, net		107,226			97,397			81,410			63,823			61,144
Total assets		460,249			396,401			329,612			279,570			246,341
Total debt		6,292			6,738			6,673			2,405			2,764
Total liabilities		59,945			47,217			41,495			35,134			36,665
Total stockholders’ equity		400,304			349,184			288,117			243,681			209,676

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company’s operations and cause the Company’s actual results to be substantially different from the Company’s expectations. Those factors include, but are not limited to: (i) general economic and construction business conditions; (ii) customer acceptance of the Company’s products; (iii) materials and manufacturing costs; (iv) the financial condition of customers, competitors and suppliers; (v) technological developments; (vi) increased competition; (vii) changes in capital market conditions; (viii) governmental and business conditions in countries where the Company’s products are manufactured and sold; (ix) changes in trade regulations; (x) the effect of acquisition activity; (xi) changes in the Company’s plans, strategies, objectives, expectations or intentions; and (xii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report. The Company does not have an obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

 

The following is a discussion and analysis of the consolidated financial condition and results of operations for the Company for the years ended December 31, 2003, 2002 and 2001, and of certain factors that may affect the Company’s prospective financial condition and results of operations. The following should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere herein.

 

Overview

 

Annual net sales of the Company increased 31.8% to $548.2 million in 2003 from $415.9 million in 2001. The increase in net sales resulted primarily from increased geographic distribution and a broadening of the Company’s customer base and product lines, both internally and through acquisitions. Net sales increased in 2003 from 2001 in all regions of the United States, with above average rates of growth in the Southeastern portion of the country. In recent years, home centers have been one of the Company’s fastest growing distribution channels. In this channel, the company’s largest customer, The Home Depot, exceeded 10% of the Company’s consolidated net sales in each of the last three years (see Note 14 to the Company’s Consolidated Financial Statements and “Item 1. Business. Simpson Strong-tie, Sales and Marketing”). Expansion into overseas markets also contributed to the net sales growth over the last three years. Sales outside of the U.S. have increased significantly, due in large part to the acquisition of BMF in January 2001 and to the acquisition of MGA in May 2003. Gross profit margin, which increased to 40.6% in 2002 from 38.0% in 2001, decreased in 2003 to 39.8% primarily due to material costs, mainly steel, prices of which have continued to increase (see “Item 1. Business. Raw Materials”). Income from operations, as a percentage of net sales, which increased to 18.5% in 2002 from 15.8% in 2001, decreased in 2003 to 17.8%.

 

Results of Operations

 

The following table sets forth, for the years indicated, the percentage of net sales of certain items in the Company’s Consolidated Statements of Operations.

 

		Years Ended December 31,
		2003		2002		2001
Net sales		100.0	%	100.0	%	100.0	%
Cost of sales		60.2	%	59.4	%	62.0	%
Gross profit		39.8	%	40.6	%	38.0	%
Selling expense		9.1	%	9.6	%	10.2	%
General and administrative expense		12.9	%	12.5	%	12.0	%
Income from operations		17.8	%	18.5	%	15.8	%
Interest income, net		0.2	%	0.2	%	0.4	%
Income before income taxes		18.0	%	18.7	%	16.2	%
Provision for income taxes		7.0	%	7.5	%	6.6	%
Minority interest		0.0	%	0.0	%	(0.2	)%
Net income		11.0	%	11.2	%	9.7	%

 

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

 

19

 

Comparison of the Years Ended December 31, 2003 and 2002

 

Net Sales

 

Net sales increased 17.8% to $548.2 million in 2003 from $465.5 million in 2002. Net sales of Simpson Strong-Tie’s products increased 19.9% to $473.6 million in 2003 from $394.9 million in 2002, while net sales of Simpson Dura-Vent’s products increased by 5.7% to $74.6 million in 2003 from $70.6 million in 2002. SDV accounted for approximately 13.6% of the Company’s total net sales in 2003, a decrease from 15.2% in 2002. The increase in net sales at SST resulted primarily from an increase in sales volume with approximately 3% of the increase resulting from an increase in average prices. The increase in net sales at SDV resulted from increases in volume and average prices in similar amounts. The majority of the Company’s sales growth occurred domestically, although sales in Europe and Canada, including sales resulting from the acquisition of MGA in May 2003, grew at a faster rate. Lumber dealers, contractor distributors and home centers were the fastest growing 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 pellet vent, gas vent and chimney products increased compared to 2002, while sales of its Direct-Vent product line decreased primarily due to a significant gas appliance manufacturer that decided to supply certain venting products from internal sources in 2003. Sales of the affected products to this customer were approximately $3.8 million in 2003, down from approximately $6.6 million in 2002. SDV expects minimal sales to this customer in 2004.

 

Gross Profit

 

Gross profit increased 15.5% to $218.3 million in 2003 from $188.9 million in 2002. As a percentage of net sales, gross profit decreased to 39.8% in 2003 from 40.6% in 2002, primarily due to materials costs, mainly steel, prices of which have continued to increase, partially offset by improved absorption of overhead costs.

 

The Company faces uncertainty in the cost and availability of steel. Several factors are contributing to this uncertainty. Demand, particularly from China, is very high and this has constrained supplies available to buyers in the United States. Weakness in the U.S. dollar has discouraged foreign steel mills from supplying the U.S. market despite the lifting of tariffs on certain types of imported steel. In addition, major domestic integrated steel producers have consolidated over the last several years. All of these factors could have an adverse effect on the Company. The Company might not be able to increase its product prices to correspond to increases in raw materials prices without materially and adversely affecting its sales and profits.

 

Selling Expense

 

Selling expense increased 11.4% to $49.7 million in 2003 from $44.6 million in 2002. The increase was primarily due to increased costs associated with the addition of sales personnel, including those related to the acquisition of MGA, and promotional activities.

 

General and Administrative Expense

 

General and administrative expenses increased 21.1% to $70.5 million in 2003 from $58.3 million in 2002, but increased only slightly as a percentage of net sales to 12.9% in 2003 from 12.5% in 2002. 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 the recently adopted accounting standard, Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” higher bad debt expense after consideration of the reversal of the allowance for doubtful accounts in 2002 related to a significant customer, the addition of administrative employees, including those related to the acquisition of MGA, and increases in professional services and insurance expenses. The Company believes that the after-tax effect of stock option expenses in 2004 will be approximately $2.5 million related to stock options granted during 2003 and 2004.

 

20

 

Interest Income, Net

 

Interest income, net of interest expense, is generated on the Company’s cash and short term investment balances.

 

Provision for Income Taxes

 

The Company’s effective tax rate was 38.9% in 2003, down from 40.4% in 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. The effective tax rates exceeded the federal statutory rate of 35.0% primarily due to the effect of state income taxes, net of the federal benefit.

 

European Operations

 

For its combined European operations, the Company recorded an after-tax net loss of $0.5 million in 2003 compared to after-tax net loss of $0.2 million in 2002. This loss is related to the Company’s UK operations. The goodwill associated with operations there, carried on the balance sheet at approximately $4.7 million, could be partially or fully impaired if the losses continue. The Company’s operations elsewhere in Europe were marginally profitable for the year.

 

Other Information

 

In November 2003, the Company discovered a product quality issue with certain welded products produced in its Columbus, Ohio, facility. The Company is in the process of inspecting installations of this product. The Company reserved approximately $0.4 million in the fourth quarter of 2003 to pay for the expected costs of finding and retrofitting defective parts.

 

Comparison of the Years Ended December 31, 2002 and 2001

 

Net Sales

 

Net sales increased 11.9% to $465.5 million in 2002 from $415.9 million in 2001. Net sales of Simpson Strong-Tie’s products increased 14.2% to $394.9 million in 2002 from $345.8 million in 2001, while net sales of Simpson Dura-Vent’s products increased by 0.7% to $70.6 million in 2002 from $70.1 million in 2001. SDV accounted for approximately 15.2% of the Company’s total net sales in 2002, a decrease from 16.9% in 2001. The increase in net sales at SST resulted primarily from an increase in sales volume with a modest increase in average prices. The increase in net sales at SDV resulted primarily from an increase in average prices. The majority of the Company’s sales growth occurred domestically, although sales in Europe and Canada grew at a slightly faster rate. Lumber dealers and contractor and dealer distributors were the fastest growing connector sales channels. The sales increase was broad based across most of Simpson Strong-Tie’s major product lines. Simpson Strong-Tie’s Strong-Wall and seismic and high wind related products had the highest percentage growth rates in sales. Sales of Simpson Dura-Vent’s Direct-Vent products increased compared to the prior year, while sales of its pellet vent and chimney product lines decreased.

 

Gross Profit

 

Gross profit increased 19.5% to $188.9 million in 2002 from $158.1 million in 2001. As a percentage of net sales, gross profit increased to 40.6% in 2002 from 38.0% in 2001, primarily due to lower manufacturing costs.

 

Selling Expense

 

Selling expense increased 5.6% to $44.6 million in 2002 from $42.2 million in 2001. The increase was primarily due to increased sales commissions as a result of sales in excess of goals and to higher personnel costs related to additional merchandising personnel. This increase was partially offset by decreased spending on advertising and promotion.

 

21

 

General and Administrative Expense

 

General and administrative expenses increased 16.4% to $58.3 million in 2002 from $50.0 million in 2001, but increased only slightly as a percentage of net sales to 12.5% in 2002 from 12.0% in 2001. The increase was primarily due to higher cash profit sharing, as a result of higher operating income, partially offset by a reduction in the allowance for doubtful accounts as compared to 2001 and by a reduction in goodwill amortization charges. The reduced amortization charge was affected by both the write-off of the Keybuilder.com software license in the second quarter of 2001 and the change in accounting related to the adoption of SFAS statement No. 142, “Goodwill and Other Intangible Assets,” at the start of 2002.

 

Interest Income, Net

 

Interest income, net of interest expense, is generated on the Company’s cash and short term investment balances.

 

Provision for Income Taxes

 

The Company’s effective tax rate was 40.4% in 2002, a decrease from 40.5% in 2001.

 

European Operations

 

For its combined European operations, the Company recorded an after-tax net loss of $0.2 million in 2002 compared to after-tax net loss of $2.1 million in 2001. This loss is primarily associated with the Company’s UK operations. The consolidated European operations reached profitability during the building season of the second and third quarters of 2002.

 

Critical Accounting Policies and Estimates

 

The Company’s critical accounting policies are listed below. These critical policies affect the Company’s more significant judgments and estimates used in the preparation of the Consolidated Financial Statements. If the Company’s business conditions change or if it uses different assumptions or estimates in the application of these and other accounting policies, the Company’s future results of operations could be adversely affected.

 

Inventory Valuation

 

Inventories are valued at the lower of cost or market using the first-in, first-out (“FIFO”) method. An allowance for obsolete inventory is recorded when the Company’s on-hand supply of a product exceeds two years’ sales of that product or when the Company believes a product is no longer marketable.

 

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 whether actual or estimated based on the Company’s experience.

 

Allowances for Doubtful Accounts

 

The Company reserves significant accounts receivable balances that are over 90 days outstanding. In addition, the Company reserves 100% of the amount that it deems potentially uncollectible due to a customer’s bankruptcy or deteriorating financial condition.

 

Liquidity and Sources of Capital

 

The Company’s liquidity needs arise principally from working capital requirements, capital expenditures and asset acquisitions. During the three years ended December 31, 2003, the Company has relied primarily on internally generated funds to finance these needs. The Company’s working capital requirements are seasonal with the highest need typically occurring in the second and third quarters of the year. Cash and cash equivalents were $95.1 million and $103.3 million at December 31, 2003 and 2002, respectively. The Company also had short term investments of $44.7 million and $17.7 million at December 31, 2003 and 2002, respectively. Working capital was $268.6 million and $238.3 million at December 31, 2003 and 2002, respectively. As of December 31, 2003, the Company had

 

22

 

approximately $6.3 million in debt outstanding and had available to it unused credit facilities of approximately $27.3 million.

 

The Company had cash flows from operating activities of $71.4 million, $50.4 million and $73.2 million for 2003, 2002 and 2001, respectively. In 2003, cash was provided by net income and noncash expenses, such as depreciation and amortization and noncash compensation related to stock plans, totaling $78.5 million, and increases in accounts payable and accrued cash profit sharing of $7.7 million. In addition, the tax benefit to the Company related to the exercise of stock options also provided cash of approximately $1.8 million. These increases were partially offset by increases in trade accounts receivable and inventories aggregating approximately $18.3 million. The balance of the cash provided in 2003 resulted from changes in other asset and liability accounts, none of which was material.

 

Cash used in investing activities was $58.1 million, $45.5 million and $38.7 million for 2003, 2002 and 2001, respectively. Capital expenditures and assets acquisitions were approximately $31.2 million in 2003, up from $28.0 million in 2002, primarily due to the acquisition of MGA. Approximately $9.4 million of the capital expenditures was used to purchase or improve the Company’s real estate, primarily for the Company’s manufacturing and distribution facilities in Stockton, California. In 2004, the Company plans to break ground on a 300,000 square foot facility in McKinney, Texas, that will replace its existing facilities there. In addition, the Company invested $27.1 million in short term investments.

 

Financing activities used $21.9 million in net cash in 2003 and provided $2.1 million and $2.5 million in 2002 and 2001, respectively. In November 2003, the Company used approximately $23.5 million in cash to repurchase 500,000 shares of its Common Stock for $47.05 per share from the Simpson PSB Fund (a charitable organization) to offset the dilution of stock options granted in 2003. The Chairman and the President and Chief Executive Officer of the Company, who are directors and significant stockholders of the Company, serve as directors and officers of the Simpson PSB Fund. This use of cash was offset by approximately $3.1 million provided by the issuance of Common Stock through the exercise of stock options by employees and directors of the Company. In January 2004, the Company’s Board of Directors declared a dividend of $0.10 per share, a total of approximately $2.5 million, to be paid on April 20, 2004, to stockholders of record on April 5, 2004.

 

The Company’s contractual obligations for future payments are as follows:

 

		Payments due by period (in 000s)
Contractual Obligation		Total		Less Than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Long-term debt obligations		6,270		827		1,695		1,490		2,258
Operating lease obligations		24,719		5,175		9,261		6,374		3,909
Purchase obligations		5,943		4,839		552		552		—
Total		36,932		10,841		11,508		8,416		6,167

 

In December 2003, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock. This replaces the $50.0 million repurchase authorization from December 2002. The authorization will remain in effect through the end of 2004.

 

The Company believes that cash generated by operations, borrowings available under its existing credit agreements and other available financing will be sufficient for the Company’s working capital needs and planned capital expenditures through at least 2004.

 

Inflation

 

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

 

23

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s short term investments consisted of debt securities of approximately $44.7 million as of December 31, 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 December 31, 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, primarily Europe and Canada, and through purchases from foreign vendors. The Company does not currently hedge this risk. If the exchange rate changed by 10% in any one country where the Company has operations, the change in net income would not be material to its operations taken as a whole. The translation adjustment resulted in a gain of approximately $7.7 million in 2003 primarily due to the effect of the devaluation of the U.S. dollar in relation to European and Canadian currencies.

 

24

 

Item 8. Financial Statements and Supplementary Data.

 

SIMPSON MANUFACTURING CO., INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Financial Statements
		Report of Independent Auditors
		Consolidated Balance Sheets at December 31, 2003 and 2002
		Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001
		Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2001, 2002 and 2003
		Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
		Notes to the Consolidated Financial Statements
Financial Statement Schedule
	Schedule II – Valuation and Qualifying Accounts

 

25

 

Report of Independent Auditors

 

 

To the Board of Directors and Stockholders of Simpson Manufacturing Co., Inc.:

 

In our opinion, the accompanying consolidated financial statements listed in the index on page ­­­25 of this Form 10-K present fairly, in all material respects, the financial position of Simpson Manufacturing Co., Inc. (the “Company”) and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/PricewaterhouseCoopers LLP

 

San Francisco, California

February 6, 2004

 

26

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Consolidated Balance Sheets

 

		December 31,
		2003			2002
ASSETS
Current assets
Cash and cash equivalents		$	95,135,885		$	103,318,056
Short term investments		44,737,867			17,683,611
Trade accounts receivable, net		66,073,296			55,313,885
Inventories		106,202,713			93,079,620
Deferred income taxes		7,821,198			7,276,642
Other current assets		3,378,608			3,342,423
Total current assets		323,349,567			280,014,237
Property, plant and equipment, net		107,226,319			97,396,608
Goodwill		23,655,860			14,534,187
Other noncurrent assets		6,017,204			4,456,033
Total assets		$	460,248,950		$	396,401,065
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Notes payable and current portion of long-term debt		$	1,113,657		$	1,257,782
Trade accounts payable		22,567,291			14,217,487
Accrued liabilities		15,181,487			13,267,373
Accrued profit sharing trust contributions		6,021,136			5,138,579
Accrued cash profit sharing and commissions		7,459,428			6,170,500
Accrued workers’ compensation		2,423,764			1,685,764
Total current liabilities		54,766,763			41,737,485
Long-term debt, net of current portion		5,177,936			5,479,834
Total liabilities		59,944,699			47,217,319
Commitments and contingencies (Note 9)
Stockholders’ equity
Preferred Stock, par value $0.01; authorized shares, 5,000,000; issued and outstanding shares, none		—			—
Common Stock, par value $0.01; authorized shares, 40,000,000; issued and outstanding shares, 24,255,294 and 24,565,254 at December 31, 2003 and 2002, respectively		38,862,292			51,521,634
Deferred compensation related to stock plans		(4,456,740		)	—
Retained earnings		357,916,036			297,353,812
Accumulated other comprehensive income		7,982,663			308,300
Total stockholders’ equity		400,304,251			349,183,746
Total liabilities and stockholders’ equity		$	460,248,950		$	396,401,065

 

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

 

27

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Consolidated Statements of Operations

 

		Years Ended December 31,
		2003			2002			2001
Net sales		$	548,181,933		$	465,473,959		$	415,862,601
Cost of sales		329,902,422			276,556,932			257,784,583
Gross profit		218,279,511			188,917,027			158,078,018
Operating expenses
Selling		49,668,567			44,581,335			42,230,211
General and administrative		70,538,012			58,253,069			50,031,666
		120,206,579			102,834,404			92,261,877
Income from operations		98,072,932			86,082,623			65,816,141
Interest income, net		999,486			985,107			1,587,234
Income before income taxes		99,072,418			87,067,730			67,403,375
Provision for income taxes		38,510,194			35,133,583			27,619,575
Minority interest		—			—			(734,326		)
Net income		$	60,562,224		$	51,934,147		$	40,518,126
Net income per common share
Basic		$	2.46		$	2.12		$	1.67
Diluted		$	2.42		$	2.09		$	1.64
Weighted average number of shares outstanding
Basic		24,571,758			24,470,067			24,216,494
Diluted		24,995,493			24,807,549			24,631,700

 

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

 

28

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

for the years ended December 31, 2001, 2002 and 2003

 

		Common Stock					Deferred Compensation Related to Stock Plans			Retained Earnings			Accumulated Other Comprehensive Income			Total
		Shares		Amount
Balance, January 1, 2001		23,933,464		$	40,968,501		$	—		$	204,901,539		$	(2,188,963	)	$	243,681,077
Comprehensive income:
Net income		—		—			—			40,518,126			—			40,518,126
Other comprehensive income:
Translation adjustment		—		—			—			—			(1,982,506		)	(1,982,506		)
Comprehensive income																38,535,620
Options exercised		396,528		2,750,049			—			—			—			2,750,049
Tax benefit of options exercised		—		3,012,659			—			—			—			3,012,659
Common stock issued at $25.50 per share		5,400		137,700			—			—			—			137,700
Balance, December 31, 2001		24,335,392		46,868,909			—			245,419,665			(4,171,469		)	288,117,105
Comprehensive income:
Net income		—		—			—			51,934,147			—			51,934,147
Other comprehensive income:
Change in net unrealized gains on available-for- sale investments		—		—			—			—			34,111			34,111
Translation adjustment		—		—			—			—			4,445,658			4,445,658
Comprehensive income																56,413,916
Options exercised		224,862		2,708,690			—			—			—			2,708,690
Tax benefit of options exercised		—		1,800,785			—			—			—			1,800,785
Common stock issued at $28.65 per share		5,000		143,250			—			—			—			143,250
Balance, December 31, 2002		24,565,254		51,521,634			—			297,353,812			308,300			349,183,746
Comprehensive income:
Net income		—		—			—			60,562,224			—			60,562,224
Other comprehensive income:
Change in net unrealized gains on available-for- sale investments		—		—			—			—			(30,132		)	(30,132		)
Translation adjustment		—		—			—			—			7,704,495			7,704,495
Comprehensive income																68,236,587
Options exercised		181,240		2,763,841			—			—			—			2,763,841
Deferred compensation related to stock options		—		5,993,554			(5,993,554		)	—			—			—
Stock compensation expense		—		—			1,536,814			—			—			1,536,814
Tax benefit of options exercised		—		1,818,743			—			—			—			1,818,743
Repurchase of common stock		(500,000	)	(23,525,000		)	—			—			—			(23,525,000		)
Common stock issued at $32.90 per share		8,800		289,520			—			—			—			289,520
Balance, December 31, 2003		24,255,294		$	38,862,292		$	(4,456,740	)	$	357,916,036		$	7,982,663		$	400,304,251

 

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

 

29

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

		Years Ended December 31,
		2003			2002			2001
Cash flows from operating activities
Net income		$	60,562,224		$	51,934,147		$	40,518,126
Adjustments to reconcile net income to net cash provided by operating activities:
Loss (gain) on sale of capital equipment		104,095			176,565			(83,677		)
Depreciation and amortization		15,648,390			14,023,152			15,649,657
Gain on sale of available-for-sale investments		(2,129		)	—			—
Minority interest		—			—			(734,326		)
Deferred income taxes		(790,963		)	(697,654		)	(879,603		)
Equity in income of affiliates		—			—			(256,412		)
Noncash compensation related to stock plans		2,293,261			505,187			254,611
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable, net		(8,535,369		)	(11,845,701		)	4,025,941
Inventories		(9,791,598		)	(9,118,571		)	8,043,158
Other current assets		537,810			368,247			1,170,040
Other noncurrent assets		(463,122		)	107,110			953,128
Trade accounts payable		6,458,326			(2,501,005		)	(1,594,126		)
Accrued liabilities		961,985			2,709,504			222,705
Accrued profit sharing trust contributions		795,255			403,632			788,154
Accrued cash profit sharing and commissions		1,279,881			4,180,405			(990,738		)
Accrued workers’ compensation		738,000			440,000			(230,000		)
Income taxes payable		1,556,164			(313,796		)	6,306,507
Total adjustments		10,789,986			(1,562,925		)	32,645,019
Net cash provided by operating activities		71,352,210			50,371,222			73,163,145
Cash flows from investing activities
Capital expenditures		(21,592,265		)	(27,953,218		)	(25,571,460		)
Proceeds from sale of capital equipment		142,278			137,533			919,715
Asset acquisitions, net of cash acquired and equity
interest already owned		(9,610,669		)	(1,527		)	(14,083,805		)
Purchases of available-for-sale investments		(78,890,059		)	(39,049,500		)	—
Sales of available-for-sale investments		51,807,800			21,400,000			—
Net cash used in investing activities		(58,142,915		)	(45,466,712		)	(38,735,550		)
Cash flows from financing activities
Issuance of debt		1,468,903			121,881			1,276,625
Repayment of debt		(2,849,545		)	(897,770		)	(1,690,568		)
Buyback of common stock		(23,525,000		)	—			—
Issuance of Company’s common stock		3,053,361			2,851,940			2,887,749
Net cash provided by (used in) financing activities		(21,852,281		)	2,076,051			2,473,806
Effect of exchange rate changes on cash		460,815			465,545			(447,109		)
Net increase (decrease) in cash and cash equivalents		(8,182,171		)	7,446,106			36,454,292
Cash and cash equivalents at beginning of period		103,318,056			95,871,950			59,417,658
Cash and cash equivalents at end of period		$	95,135,885		$	103,318,056		$	95,871,950
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for
Interest		$	426,276		$	410,070		$	441,278
Income taxes		$	37,885,039		$	36,068,543		$	23,820,694

 

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

 

30

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Notes to Consolidated Financial Statements

 

1.                                       Operations and Summary of Significant Accounting Policies

 

Nature of Operations

 

Simpson Manufacturing Co., Inc., through its subsidiaries Simpson Strong-Tie Company Inc. (“Simpson Strong-Tie”) and Simpson Dura-Vent Company, Inc. and its other subsidiaries (collectively, the “Company”), designs, engineers and manufactures wood-to-wood, wood-to-concrete and wood-to-masonry connectors, pre-fabricated shearwalls and venting systems for gas and wood burning appliances. The Company markets its products to the residential construction, light industrial and commercial construction, remodeling and do-it-yourself markets. Simpson Strong-Tie also offers a line of adhesives, mechanical anchors and powder actuated tools for concrete, masonry and steel.

 

The Company operates exclusively in the building products industry. The Company’s products are sold primarily throughout North America and Europe. Revenues have some geographic market concentration on the West Coast. A portion of the Company’s business is therefore dependent upon economic activity within this region and market.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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 whether actual or estimated based on the Company’s experience.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50% owned affiliates are accounted for using the equity method. All significant intercompany transactions have been eliminated.

 

Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

Investments

 

The Company’s investments in debt securities are classified as available-for-sale investments and are recorded at fair value. The cost of securities sold is based on the specific identification method. Unrealized gains and losses are reported as a separate component of stockholders’ equity. The Company also has a minority investment in a privately held company. These kinds of investments are carried at cost, unless the Company has the ability to exert significant influence, and are classified as long-term investments.

 

The Company periodically reviews its investments for impairment. If the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other-than-temporary, the Company writes down the value of the investment to its fair value. The Company generally believes an other-than-temporary decline occurs when the fair value of an investment is below the carrying value for two full consecutive quarters.

 

Inventory Valuation

 

Inventories are valued at the lower of cost or market using the first-in, first-out (“FIFO”) method.

 

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Property, Plant and Equipment

 

Property, plant and equipment is carried at cost. Major renewals and betterments are capitalized; maintenance and repairs are expensed on a current basis. When assets are sold or retired, their costs and accumulated depreciation are removed from the accounts; the resulting gains or losses are reflected in the consolidated statements of operations.

 

Depreciation and Amortization

 

Depreciation of property, plant and equipment is provided for using accelerated methods over the following estimated useful lives:

 

Factory machinery and equipment		5 to 10 years
Automobiles, trucks and other equipment		3 to 10 years
Office equipment		3 to 8 years
Buildings and site improvements		20 to 45 years

 

Leasehold improvements are amortized using the straight-line method over the shorter of the expected life or the remaining term of the lease. Amortization of intangible assets is computed using the straight-line method over the estimated useful lives of the assets.

 

Product Research and Development Costs

 

Product research and development costs, which are included in cost of sales, were charged against income as incurred and approximated $4,063,000, $3,659,000 and $2,747,000 in 2003, 2002 and 2001, respectively.

 

Tooling Costs

 

Tool and die costs are included in product costs in the year incurred.

 

Income Taxes

 

Income taxes are calculated using an asset and liability approach. The provision for income taxes includes federal and state taxes currently payable and deferred taxes, due to temporary differences between the financial statement and tax bases of assets and liabilities. In addition, future tax benefits are recognized to the extent that realization of such benefits is more likely than not.

 

Foreign Currency Translation

 

The local currency is the functional currency of the Company’s operations in Europe and Canada. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. The translation adjustment resulting from this process is shown separately as a component of stockholders’ equity. Foreign currency transaction gains or losses are included in general and administrative expenses and have not been significant in any of the years presented.

 

Common Stock

 

Subject to the rights of holders of any Preferred Stock that may be issued in the future, holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors (the “Board”) out of legally available funds and in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets available for distribution. The holders of Common Stock have no preemptive or conversion rights. Subject to the rights of any Preferred Stock that may be issued in the future, the holders of Common Stock are entitled to one vote per share on any matter submitted to a vote of the stockholders, except that, subject to compliance with pre-meeting notice and other conditions pursuant to the Company’s Bylaws, stockholders may cumulate their votes in an election of directors, and each stockholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such stockholder or may distribute such stockholder’s votes on the same principle among as many candidates as such stockholder thinks fit. There are no redemption or sinking fund provisions applicable to the Common Stock.

 

In 1999, the Company declared a dividend distribution of one Right to purchase Series A Participating Preferred Stock per share of Common Stock. The Rights will be exercisable, unless redeemed earlier by the Company, if a person or group acquires, or obtains the right to acquire, 15% or more of the outstanding shares of Common Stock or commences a tender or exchange offer that would result in it acquiring 15% or more of the outstanding shares of

 

32

 

Common Stock, either event occurring without the prior consent of the Company. The amount of Series A Participating Preferred Stock that the holder of a Right is entitled to receive and the purchase price payable on exercise of a Right are both subject to adjustment. Any person or group that acquires 15% or more of the outstanding shares of Common Stock without the prior consent of the Company would not be entitled to this purchase. Any stockholder who holds 25% or more of the Company’s Common Stock on the date of the Rights distribution would not be treated as having acquired 15% or more of the outstanding shares unless such stockholder’s ownership is increased to more than 40% of the outstanding shares.

 

The Rights will expire on July 29, 2009, or they may be redeemed by the Company at one cent per Right prior to that date. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the Company. One million shares of the Company’s Preferred Stock have been designated Series A Participating Preferred Stock and reserved for issuance on exercise of the Rights. No event during 2003 made the Rights exercisable.

 

Preferred Stock

 

The Board has the authority to issue the authorized and unissued Preferred Stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board. Accordingly, the Board is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company’s Common Stock.

 

Stock Split

 

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.

 

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 shares, 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 share (“EPS”) to diluted EPS:

 

		2003								2002								2001
		Net Income			Weighted Average Shares		Per Share			Net Income			Weighted Average Shares		Per Share			Net Income			Weighted Average Shares		Per Share
Basic EPS
Income available to common stockholders		$	60,562,224		24,571,758		$	2.46		$	51,934,147		24,470,067		$	2.12		$	40,518,126		24,216,494		$	1.67
Effect of Dilutive Securities
Stock options		—			423,735		(0.04		)	—			337,482		(0.03		)	—			415,206		(0.03		)
Diluted EPS
Income available to common stockholders		$	60,562,224		24,995,493		$	2.42		$	51,934,147		24,807,549		$	2.09		$	40,518,126		24,631,700		$	1.64

 

Comprehensive Income

 

Comprehensive income, which is included in the consolidated statement of stockholders’ equity, is defined as net income plus other comprehensive income. Other comprehensive income includes changes in foreign currency translation adjustments recorded directly into stockholders’ equity and changes in net unrealized gains on available-for-sale investments.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash in banks, short-term investments in U.S. Treasury and other fixed income instruments and trade accounts receivable. The Company maintains its cash in demand deposit and money market accounts held primarily by four banks.

 

33

 

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.

 

The Company has adopted SFAS No. 123 and SFAS No. 148 and has used the prospective method of applying SFAS No. 123 for the transition. For stock options 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 year ended December 31, 2003, the Company has recognized an after-tax expense of approximately $940,000 related to stock options granted during the year.

 

Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123 (see Note 13), as amended by SFAS No. 148, the Company’s net income and earnings per share would have been as follows:

 

		Years Ended December 31,
		2002			2001
Net income, as reported		$	51,934,147		$	40,518,126
Less compensation cost calculated under SFAS No. 123		1,283,573			627,482
Pro forma		50,650,574			39,890,644
Earnings per share
Basic, as reported		2.12			1.67
Basic, pro forma		2.07			1.65
Diluted, as reported		2.09			1.64
Diluted, pro forma		2.04			1.62

 

The fair value of each option granted was estimated on the date of grant using the Black-Sholes option-pricing model with the following assumptions: risk-free interest rate of 4.01% and 4.46% for 2002 and 2001, respectively; no dividend yield for both years; expected lives of 6.2 years for options granted for 2002 and 2001; and volatility of 29.2% and 29.8% for 2002 and 2001, respectively. The weighted average fair value per share of options granted for 2002 and 2001 was $12.34 and $11.18, respectively. 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. The Company believes that the effect on its net income in 2004 will be a charge of approximately $2,500,000 related to stock options granted during 2003 and 2004.

 

With the adoption of SFAS Statement No. 123 and SFAS Statement No. 148, the expense for the estimated fair value of the stock options awarded is recorded over the vesting period of each option commencing in the year in which the option is granted rather than during the year in which the option is earned as in the pro forma computation. Accordingly, the amount expensed differs from the pro forma expense disclosure under SFAS Statement No. 123.

 

34

 

Adoption of Statements of Financial Accounting Standards

 

In July 2001, the FASB issued SFAS Statement No. 142, “Goodwill and Other Intangible Assets” which requires that goodwill and certain other intangible assets having indefinite lives no longer be amortized to earnings, but instead be subject to periodic testing for impairment. Intangible assets determined to have definitive lives will continue to be amortized over their useful lives. SFAS Statement No. 142 is effective for the Company’s fiscal year beginning January 1, 2002. Goodwill and intangible assets acquired after June 30, 2001, however, are subject immediately to the non-amortization and amortization provisions of this Statement. The following table presents the effect of SFAS Statement No. 142 on net income and earnings per share had the accounting standard been in effect for the year ended December 31, 2001:

 

		Year Ended December 31, 2001
Net income, as reported		$	40,518,126
Amortization of goodwill		1,672,215
Pro forma		$	42,190,341
Earnings per share
Basic, as reported		1.67
Basic, pro forma		1.74
Diluted, as reported		1.64
Diluted, pro forma		1.71

 

The Company reviews its indefinite lived intangible assets annually, in the fourth quarter of each year, for impairment. Should losses in the Company’s UK operations continue, the value of the goodwill there, carried on the balance sheet at approximately $4.7 million, may not be supported and the goodwill may be partially or fully impaired. This would result in a noncash charge to income.

 

The changes in the carrying amount of goodwill not subject to amortization as of December 31, 2002 and 2003 is as follows:

 

		Goodwill			Accumulated Amortization			Net Goodwill
Balance at January 1, 2002		$	16,082,319		$	(3,184,963	)	$	12,897,356
Impairment of goodwill		(189,067		)	—			(189,067		)
Foreign exchange		1,825,898			—			1,825,898
Balance at December 31, 2002		17,719,150			(3,184,963		)	14,534,187
Goodwill related to the acquisition of MGA		6,709,088			—			6,709,088
Foreign exchange		2,412,585			—			2,412,585
Balance at December 31, 2003		26,840,823			(3,184,963		)	23,655,860

 

The changes in the carrying amount of intangible assets subject to amortization as of December 31, 2002 and 2003 is as follows:

 

		Intangible Assets			Accumulated Amortization			Net Intangible Assets
Balance at January 1, 2002		$	3,039,159		$	(580,834	)	$	2,458,325
Amortization		—			(348,648		)	(348,648		)
Foreign exchange		18,198			—			18,198
Balance at December 31, 2002		3,057,357			(929,482		)	2,127,875
Acquisitions		1,637,615			—			1,637,615
Amortization		—			(573,748		)	(573,748		)
Foreign exchange		178,102			—			178,102
Balance at December 31, 2003		4,873,074			(1,503,230		)	3,369,844

 

35

 

At December 31, 2003, estimated future amortization of intangible assets is as follows:

 

2004		$	728,092
2005		728,092
2006		670,554
2007		413,380
2008		220,610
Thereafter		609,116
		$	3,369,844

 

Reclassifications

 

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

 

 

2.                                       Acquisitions

 

In May 2003, Simpson Strong-Tie Canada Limited, the Company’s wholly-owned Canadian subsidiary, completed the purchase of 100% of the equity of MGA Construction Hardware & Steel Fabricating Limited and MGA Connectors Limited, both Canadian federal corporations (collectively, “MGA”), for approximately $9.8 million in cash. MGA manufactures and distributes connector products throughout Canada and portions of the United States. The amount of goodwill that resulted from this purchase is approximately $6.7 million.

 

In January 2001, Simpson Strong-Tie International, Inc. (“SSTI”), a subsidiary of the Company, acquired 100% of the shares of BMF Bygningsbeslag A/S (“BMF”) of Denmark for approximately $13.6 million in cash. BMF manufactures and distributes connector products in northern and central Europe. The amount of goodwill that resulted from this purchase is approximately $8.4 million. In August 2001, the German subsidiary of BMF purchased the remaining 51% stake in Bulldog-Simpson GmbH (“Bulldog”) for approximately $0.6 million in cash.

 

Results of operations for the entities acquired in 2003 and 2001, accounted for under the purchase method of accounting, for periods prior to the acquisition were not material to the Company on either an individual or aggregate basis, and accordingly, pro forma results of operations have not been presented.

 

 

3.                                       Trade Accounts Receivable

 

Trade accounts receivable consist of the following:

 

		December 31,
		2003			2002
Trade accounts receivable		$	68,717,357		$	57,441,613
Allowance for doubtful accounts		(1,889,210		)	(1,741,321		)
Allowance for sales discounts		(754,851		)	(386,407		)
		$	66,073,296		$	55,313,885

 

The Company sells products on credit and generally does not require collateral. One customer accounted for approximately 16% and another for approximately 10% of trade accounts receivable as of December 31, 2003.

 

36

 

4.                                       Inventories

 

The components of inventories consist of the following:

 

		December 31,
		2003			2002
Raw materials		$	38,822,274		$	30,684,411
In-process products		15,132,723			13,169,570
Finished products		52,247,716			49,225,639
		$	106,202,713		$	93,079,620

 

5.                                       Property, Plant and Equipment, net

 

Property, plant and equipment consists of the following:

 

		December 31,
		2003			2002
Land		$	13,133,848		$	12,366,824
Buildings and site improvements		64,054,606			54,108,232
Leasehold improvements		5,833,533			5,833,165
Machinery and equipment		125,987,726			112,767,419
		209,009,713			185,075,640
Less accumulated depreciation and amortization		(105,397,774		)	(92,943,166		)
		103,611,939			92,132,474
Capital projects in progress		3,614,380			5,264,134
		$	107,226,319		$	97,396,608

 

Included in property, plant and equipment at December 31, 2003 and 2002, are fully depreciated assets with an original cost of approximately $42,188,000 and $38,638,000, respectively. These fully depreciated assets are still in use in the Company’s operations.

 

6.                                       Investments

 

The Company has a 35% investment in Keymark Enterprises, LLC (“Keymark”) (see Note 12), 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. The Company’s equity in the earnings or losses of this investment or its initial 49% investment in Bulldog (see Note 2) were not material in any of the three years ended December 31, 2003.

 

37

 

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 December 31, 2003 and 2002, the Company’s investments were as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
At December 31, 2003
Debt investments
Municipal bonds		$	44,733,887		$	27,380		$	23,400		$	44,737,867
Commercial paper		5,705,141			—			—			5,705,141
Total debt investments		50,439,028			27,380			23,400			50,443,008
Money market instruments and funds		10,615			—			—			10,615
		$	50,449,643		$	27,380		$	23,400		$	50,453,623
At December 31, 2002
Debt investments
Municipal bonds		$	16,642,819		$	34,111		$	—		$	16,676,930
Commercial paper		8,413,846			—			—			8,413,846
Total debt investments		25,056,665			34,111			—			25,090,776
Money market instruments and funds		44,219			—			—			44,219
		$	25,100,884		$	34,111		$	—		$	25,134,995

 

Of the total estimated fair value of debt securities, $5,715,756 and $7,451,384 was classified as cash equivalents as of December 31, 2003 and 2002, respectively, and $44,737,867 and $17,683,611 was classified as short-term investments as of December 31, 2003 and 2002, respectively.

 

As of December 31, 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		$	9,789,209		$	9,778,976
Amounts maturing in 1 to 5 years		4,748,399			4,760,712
Amounts maturing in 5 to 10 years		3,121,109			3,128,007
Amounts maturing after 10 years		27,075,170			27,070,172
		$	44,733,887		$	44,737,867

 

During the year ended December 31, 2003, the Company realized gains of $2,129 on the sale of available-for-sale investments.

 

7.                                       Accrued Liabilities

 

Accrued liabilities consist of the following:

 

		December 31,
		2003			2002
Sales incentive and advertising allowances		$	9,600,613		$	7,083,275
Vacation liability		3,132,463			2,746,831
Other		2,448,411			3,437,267
		$	15,181,487		$	13,267,373

 

38

 

8.                                       Debt

 

The outstanding debt at December 31, 2003 and 2002, and the available credit at December 31, 2003, consisted of the following:

 

		Available on Credit Facility at December 31, 2003			Debt Outstanding at December 31,
					2003			2002
Revolving line of credit, interest at bank’s base rate less 0.5% (at December 31, 2003 the bank’s reference rate less 0.5% was 3.50%), matures November 2004, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility		$	12,964,385		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.5% (at December 31, 2003, the bank’s prime rate less 0.5% was 3.50%), matures June 2005, commitment fees are paid at the annual rate of 0.125% on the unused portion of the facility		9,200,000			—			—
Revolving line of credit, interest rate at 4.50%, matures June 2004		4,686,527			—			530,515
Revolving line of credit, interest rate at the bank’s base rate of interest plus 2% (at December 31, 2003, this rate was 5.75%), matures September 2004, has an annual commission charge of 0.45%		444,476			—			—
Term loan, interest at LIBOR plus 1.375% (at December 31, 2003, LIBOR plus 1.375% was 2.535%), matures May 2008		—			1,350,000			1,650,000
Term loans, interest rates from 2.94% to 6.00%, maturities between 2006 and 2018		—			4,941,593			4,557,101
Standby letter of credit facilities		835,615			—			—
		28,131,003			6,291,593			6,737,616
Less current portion					(1,113,657		)	(1,257,782		)
					$	5,177,936		$	5,479,834
Less standby letters of credit issued and outstanding		(835,615		)
		$	27,295,388

 

The revolving lines of credit are guaranteed by the Company and its subsidiaries. At December 31, 2003, the Company had one outstanding standby letter of credit in the amount of $835,615 to guarantee performance on the Company’s leased facility in the United Kingdom. This letter of credit matures in January 2005.

 

39

 

9.                                       Commitments and Contingencies

 

Leases

 

Certain properties occupied by the Company are leased. The leases expire at various dates through 2012 and generally require the Company to assume the obligations for insurance, property taxes and maintenance of the facilities.

 

Some of the properties were leased from partnerships formed by certain current and former Company stockholders, directors, officers and employees. Rental expenses under these related party leases were as follows:

 

		Years Ended December 31,
		2003			2002			2001
Simpson Investment Company		$	—		$	—		$	82,331
Doolittle Investors		367,992			367,992			253,080
Vacaville Investors		454,874			452,736			438,898
Vicksburg Investors		64,226			385,356			368,543
Columbus Westbelt Investment Co.		626,328			626,328			626,328
		$	1,513,420		$	1,832,412		$	1,769,180

 

In June 2001, the Company purchased the property that was subject to the lease with Simpson Investment Company for approximately $1.7 million (See Note 12). Rental expense for 2003, 2002 and 2001 with respect to all other leased property was approximately $4,510,000, $4,091,000 and $3,790,000, respectively.

 

At December 31, 2003, minimum rental commitments under all noncancelable leases are as follows:

 

2004		$	5,175,141
2005		4,827,259
2006		4,434,167
2007		4,091,136
2008		2,283,458
Thereafter		3,908,732
		$	24,719,893

 

Some of these minimum rental commitments that involve the related parties described above and in Note 12 contain renewal options and provide for periodic rental adjustments based on changes in the consumer price index or current market rental rates.

 

The nominal term of SSTI’s lease in the United Kingdom is 25 years but includes an option to terminate without penalty in either the fifteenth or twentieth year upon one year written notice by SSTI. Future minimum rental payments associated with the first 15 years of this lease are included in minimum rental commitments in the table above.

 

40

 

Environmental

 

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.

 

At one of the Company’s operating facilities, evidence of contamination resulting from activities of prior occupants was discovered. The Company took certain remedial actions at the facility in 1990 and continues to monitor the condition of this property. The Company does not believe that any further action will be required. The Company does not believe that this matter will have a material adverse effect on its financial condition, cash flows or results of operations.

 

Litigation

 

From time to time, the Company is involved in litigation that it considers to be in the normal course of its business. No such litigation within the last five years resulted in any material loss. The Company is not engaged in any 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.

 

10.                                 Income Taxes

 

The provision for income taxes consists of the following:

 

		Years Ended December 31,
		2003			2002			2001
Current
Federal		$	32,352,000		$	29,918,000		$	24,700,000
State		5,939,000			5,809,000			4,196,000
Foreign		665,000			142,000			234,000
Deferred		(445,806		)	(735,417		)	(1,510,425		)
		$	38,510,194		$	35,133,583		$	27,619,575

 

Reconciliations between the statutory federal income tax rates and the Company’s effective income tax rates as a percentage of income before income taxes are as follows:

 

		Years Ended December 31,
		2003		2002		2001
Federal tax rate		35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit		3.6	%	4.1	%	4.3	%
Other		0.3	%	1.3	%	1.2	%
Effective income tax rate		38.9	%	40.4	%	40.5	%

 

41

 

The tax effects of the significant temporary differences that constitute the deferred tax assets and liabilities at December 31, 2003, 2002 and 2001, were as follows:

 

		Years Ended December 31,
		2003			2002			2001
Current deferred tax assets
State tax		$	1,895,792		$	1,942,732		$	1,451,474
Compensation related to stock plans		—			82,732			82,732
Workers’ compensation		953,242			662,994			489,947
Health claims		933,800			680,385			325,957
Vacation accrual		874,188			793,313			556,617
Accounts receivable allowance		557,924			610,238			1,451,457
Inventories		2,175,981			2,095,916			1,312,195
Sales incentive and advertising allowances		328,914			189,104			176,708
Rental reserve		—			140,452			293,538
Other		101,357			78,776			335,878
		$	7,821,198		$	7,276,642		$	6,476,503
Long-term deferred tax assets (liabilities)
Depreciation		$	1,153,749		$	1,679,032		$	1,681,767
Goodwill amortization		265,278			566,471			870,283
Deferred compensation related to stock options		554,746			—			—
State tax credit carryforward		81,981			—			—
Other		(447,204		)	(725,037		)	(758,448		)
		$	1,608,550		$	1,520,466		$	1,793,602

 

No valuation allowance has been recorded for deferred tax assets for the years ended December 31, 2003, 2002 and 2001, due to the Company’s taxable income in 2003 and prior years.

 

11.                                 Retirement Plans

 

The Company has six defined contribution retirement plans covering substantially all salaried employees and nonunion hourly employees. Two of the plans, covering U.S. employees, provide for annual contributions in amounts that the Board of Directors may authorize, subject to certain limitations, but in no event more than the amounts permitted under the Internal Revenue Code as deductible expense. The other four plans, covering the Company’s European and Canadian employees, require the Company to make contributions ranging from 3% to 15% of the employees’ compensation. The total cost for these retirement plans for the years ended December 31, 2003, 2002 and 2001, was approximately $6,325,000, $5,197,000 and $4,769,000, respectively.

 

The Company also contributes to various industry-wide, union-sponsored pension funds for union, hourly employees. Payments to these funds aggregated approximately $2,002,000, $1,524,000 and $1,077,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

 

12.                                 Related Party Transactions

 

In 2003, the Company purchased 500,000 shares of its Common Stock for approximately $23,525,000 from the Simpson PSB Fund to offset the dilution of stock options granted in 2003. The Chairman and the President and Chief Executive Officer of the Company, who are directors and significant stockholders of the Company, serve as directors and officers of the Simpson PSB Fund (a charitable organization). The price per share was $47.05 which was the closing price on the day before the transaction less $0.50. The independent members of the Board of Directors unanimously approved this transaction.

 

In 2003, the Company paid $500,000 for an additional 5% ownership interest in Keymark. The Company now owns 35% of Keymark (see Note 6). The Company paid $550,472 and $800,000 in 2002 and 2001, respectively, to Keymark. The payments were related to the development of specified features in the Keymark software as well as for expenses related to marketing the software.

 

42

 

In 2003, the Company’s Chief Executive Officer leased an airplane that is managed by a charter company unrelated to the Company. The Company pays the charter company standard hourly rates when this airplane is hired for use by its Chief Executive Officer in travel between his home and Company offices or by him and other Company employees in travel on Company business. As lessee of the airplane, the Company’s Chief Executive Officer is also responsible for its maintenance and receives a portion of each payment to the charter company for its use, whether by the Company or others. The total cost to the Company for this and other airplanes that are used, including $34,717 paid to the Company’s Chief Executive Officer for compensation, was approximately $352,000 in 2003. The independent members of the Board of Directors unanimously approved this arrangement.

 

In 2003, the Company paid approximately $90,000 to Barclay Simpson Fine Arts, an art gallery owned by the Company’s Chairman, for artwork to decorate the Company’s offices. In January 2004, the Company made an additional purchase of approximately $4,000. The independent members of the Board of Directors unanimously approved these purchases after a review of an independent appraisal and a review of the cost of comparable artwork.

 

In 2001, the Company purchased for approximately $1.7 million the property that had been subject to the lease with Simpson Investment Company. The independent members of the Board of Directors unanimously approved this transaction.

 

See Note 9 regarding related party transactions involving Company leases.

 

13.                                 Stock Option and Stock Bonus Plans

 

The Company currently has two stock option plans. One is principally for the Company’s employees and the other is for the Company’s independent directors. Participants are granted options only if the company-wide and/or profit center operating goals, established by the Compensation Committee of the Board of Directors at the beginning of the year, are met. In 2003, the Company met most of the operating goals established for both of its stock option plans and committed to grant options to purchase 579,500 shares in 2004. During 2002, the Company met most of the operating goals established for its stock option plans, and accordingly, granted options to purchase 505,500 shares in 2003. The Company has recognized an after-tax expense of approximately $940,000 for these options. During 2001, the Company met some of the operating goals established for one of its stock option plans, and accordingly, granted options to purchase 19,000 shares. These options have exercise prices ranging from $46.07 to $55.95 per share for 2003, exercise prices ranging from $32.90 to $36.19 per share for 2002 and an exercise price of $28.65 for 2001.

The following table summarizes the Company’s stock option activity for the years ended December 31, 2003, 2002 and 2001:

 

		2003					2002					2001
Non-Qualified Stock Options		Shares		Weighted- Average Exercise Price			Shares		Weighted- Average Exercise Price			Shares		Weighted- Average Exercise Price
Outstanding at beginning of year		1,220,708		$	24.62		947,160		$	16.97		1,325,294		$	13.97
Granted		579,500		50.84			503,500		32.91			19,000		28.65
Additional shares granted		—		—			2,000		32.90			—		—
Exercised		(181,240	)	15.25			(224,862	)	12.05			(396,528	)	6.94
Forfeited		(4,584	)	29.47			(7,090	)	19.55			(606	)	21.88
Outstanding at end of year		1,614,384		35.08			1,220,708		24.62			947,160		16.97

 

The numbers of shares for which stock options were exercisable at the end of 2003, 2002 and 2001 were 611,506, 608,523 and 699,720, respectively.

 

43

 

The following table summarizes information about the Company’s stock options outstanding at December 31, 2003, including those committed to be granted in 2004:

 

				Options Outstanding							Options Exercisable
Range of Exercise Prices				Number Outstanding at December 31, 2003		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price			Number Outstanding at December 31, 2003		Weighted- Average Exercise Price
$	16.66 to $18.66			122,014		1.0 years		$	16.67		122,014		$	16.67
$	18.31 to $20.59			158,177		2.0 years		18.72			158,177		18.72
$	19.47 to $24.06			223,369		3.0 years		21.82			214,042		21.82
$	25.50			14,000		4.0 years		25.50			10,208		25.50
$	28.65			18,000		5.0 years		28.65			8,625		28.65
$	32.90 to $36.19			499,324		6.0 years		32.91			98,440		32.93
$	46.07 to $55.95			579,500		7.0 years		50.84			—		—
$	16.66 to $55.95			1,614,384		5.1 years		35.08			611,506		21.93

 

The fair value of the 501,500 stock options granted on January 1, 2003, under the employee plan was estimated using the Black-Sholes option pricing model with the following assumptions: risk-free interest rate of 4.01%; no dividend yield; expected life of 6.2 years; and volatility of 29.2%. The weighted average fair value per share of these options is $12.34, the exercise price is $32.90 for 500,500 shares and $36.19 for 1,000 shares. The assumption are the same for the 4,000 stock options granted on February 14, 2003, under the independent director plan except that the expected life used was 6.3 years. The weighted average fair value per share of these options is $12.81 and the exercise price is $33.95.

 

The tax benefit to the Company from the exercise of stock options, a reduction of the Company’s income tax payable, was $1,818,743, $1,800,785 and $3,012,659 for 2003, 2002 and 2001, respectively.

 

The Company also maintains a Stock Bonus Plan whereby, for each ten years of continuous employment with the Company, each employee who does not participate in one of the Company’s stock option plans receives up to 200 shares of common stock. In 2003, 2002 and 2001, the Company committed to issue 9,000, 8,800 and 5,000 shares, respectively, which resulted in compensation charges of $756,447, $505,187 and $254,611, respectively. These employees are also compensated for the income taxes payable as a result of the stock bonuses. The shares are issued in the year following the year in which they are earned.

 

44

 

14.                                 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 construction connector products and venting products. These segments are differentiated in several ways, including the types of materials, the production processes, the distribution channels and the product applications. Transactions between the two segments were immaterial for each of the years presented.

 

The following table illustrates certain measurements used by management to assess the performance of the segments described above as of December 31, 2003, 2002 and 2001, or for the years then ended:

 

2003		Connector Products			Venting Products			All Other			Total
Net sales		$	473,608,000		$	74,574,000		$	—		$	548,182,000
Income from operations		87,255,000			11,058,000			(240,000		)	98,073,000
Depreciation and amortization		13,734,000			1,897,000			17,000			15,648,000
Capital expenditures and acquisitions		29,486,000			1,717,000			—			31,203,000
Total assets		272,917,000			38,628,000			148,704,000			460,249,000

 

2002		Connector Products			Venting Products			All Other			Total
Net sales		$	394,922,000		$	70,552,000		$	—		$	465,474,000
Income from operations		76,613,000			9,569,000			(99,000		)	86,083,000
Depreciation and amortization		12,093,000			1,903,000			27,000			14,023,000
Capital expenditures and acquisitions		26,360,000			1,595,000			—			27,955,000
Total assets		228,601,000			39,723,000			128,077,000			396,401,000

 

2001		Connector Products			Venting Products			All Other			Total
Net sales		$	345,785,000		$	70,078,000		$	—		$	415,863,000
Income from operations		57,082,000			8,734,000			—			65,816,000
Depreciation and amortization		13,518,000			2,043,000			89,000			15,650,000
Capital expenditures and acquisitions		38,569,000			1,086,000			—			39,655,000
Total assets		189,756,000			39,675,000			100,181,000			329,612,000

 

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 short term investment balances in the All Other segment were approximately $139,021,000, $118,948,000 and $91,647,000 as of December 31, 2003, 2002 and 2001, respectively.

 

45

The following table illustrates how the Company’s net sales and long-lived assets are distributed geographically as of December 31, 2003, 2002 and 2001, or for the years then ended.

 

		2003						2002						2001
		Net Sales			Long-Lived Assets			Net Sales			Long-Lived Assets			Net Sales			Long-Lived Assets
United States		$	467,148,000		$	98,042,000		$	413,205,000		$	88,442,000		$	371,068,000		$	73,971,000
Denmark		37,630,000			14,869,000			22,183,000			13,178,000			19,107,000			11,217,000
Other countries		43,404,000			24,018,000			30,086,000			13,246,000			25,688,000			12,662,000
		$	548,182,000		$	136,929,000		$	465,474,000		$	114,866,000		$	415,863,000		$	97,850,000

 

Net sales and long-lived assets are attributable to the country where the operations are located.

 

Net sales of approximately 11% for the year ended December 31, 2003, and 12% in each of the years ended December 31, 2002 and 2001, were to one customer and were attributable mostly to the Connector segment.

 

15.               Selected Quarterly Financial Data (Unaudited)

 

The following table sets forth selected quarterly financial data for each of the quarters in 2003 and 2002:

 

Selected Quarterly Financial Data (Unaudited)

 

		2003												2002
(Dollars in thousands, except per share data)		Fourth Quarter			Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter			First Quarter
Net sales		$	133,373		$	151,892		$	146,461		$	116,456		$	108,660		$	130,293		$	124,150		$	102,371
Cost of sales		81,918			91,569			85,570			70,845			66,273			74,597			72,510			63,178
Gross profit		51,455			60,323			60,891			45,611			42,387			55,696			51,640			39,193
Selling expense		13,382			12,376			12,384			11,527			12,408			10,510			11,134			10,529
General and administrative expense		16,619			18,719			19,601			15,599			12,329			17,718			15,711			12,494
Income from operations		21,454			29,228			28,906			18,485			17,650			27,468			24,795			16,170
Interest income, net		321			441			107			130			292			218			216			258
Income before income taxes		21,775			29,669			29,013			18,615			17,942			27,686			25,011			16,428
Provision for income taxes		8,477			11,111			11,331			7,590			7,344			10,971			10,119			6,698
Net income		$	13,298		$	18,558		$	17,682		$	11,025		$	10,598		$	16,715		$	14,892		$	9,730
Basic net income per share of common stock		$	0.54		$	0.75		$	0.72		$	0.45		$	0.43		$	0.68		$	0.61		$	0.40
Diluted net income per share of common stock		$	0.53		$	0.74		$	0.71		$	0.44		$	0.43		$	0.67		$	0.60		$	0.39

 

The Company’s results of operations fluctuate from quarter to quarter. The fluctuations are caused by various factors, primarily the increase in construction activity during warmer months of the year.

 

16.               Subsequent Events

 

In January 2004, the Company’s Board of Directors declared a dividend of $0.10 per share, a total of approximately $2,500,000 to be paid on April 20, 2004, to stockholders of record on April 5, 2004.

 

46

 

SCHEDULE II

 

Simpson Manufacturing Co., Inc. and Subsidiaries

 

VALUATION AND QUALIFYING ACCOUNTS

for the years ended December 31, 2003, 2002 and 2001

 

Column A		Column B			Column C Additions						Column D			Column E
Classification		Balance at Beginning of Year			Charged to Costs and Expenses			Charged to Other Accounts – Write-offs			Deductions			Balance at End of Year
Year Ended December 31, 2003
Allowance for doubtful accounts		$	1,741,321		$	1,428,732		$	—		$	1,280,843		$	1,889,210
Allowance for obsolete inventory		6,097,377			669,927			—			1,581,119			5,186,185
Year Ended December 31, 2002
Allowance for doubtful accounts		3,736,098			1,380,955			—			3,375,732			1,741,321
Allowance for obsolete inventory		3,547,330			3,526,201			—			976,154			6,097,377
Year Ended December 31, 2001
Allowance for doubtful accounts		1,201,289			3,181,123			—			646,314			3,736,098
Allowance for obsolete inventory		3,000,792			1,763,481			—			1,216,943			3,547,330

 

47

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.

 

None.

 

Item 9A. Controls and Procedures.

 

As of December 31, 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 internal controls subsequent to that date.

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant.

 

Information required by this Item will be contained in the Registrant’s proxy statement for the annual meeting of stockholders to be held on April 7, 2004, to be filed not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2003, which will set forth certain information with respect to the directors and executive officers of the Registrant and is incorporated herein by reference.

 

Item 11. Executive Compensation.

 

Information required by this Item will be contained in the Registrant’s proxy statement for the annual meeting of stockholders to be held on April 7, 2004, to be filed not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2003, which will set forth certain information with respect to executive compensation of the Registrant and is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management.

 

Information required by this Item will be contained in the Registrant’s proxy statement for the annual meeting of stockholders to be held on April 7, 2004, to be filed not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2003, which will set forth certain information with respect to security ownership of certain beneficial owners and management of the Registrant and is incorporated herein by reference.

 

Item 13. Certain Relationships and Related Transactions.

 

Information required by this Item will be contained in the Registrant’s proxy statement for the annual meeting of stockholders to be held on April 7, 2004, to be filed not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2003, which will set forth certain information with respect to certain relationships and related transactions of the Registrant and is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services.

 

Information required by this Item will be contained in the Registrant’s proxy statement for the annual meeting of stockholders to be held on April 7, 2004, to be filed not later than 120 days following the end of the Registrant’s fiscal year ended December 31, 2003, which will set forth certain information with respect to principal accountant fees and services and is incorporated herein by reference.

 

48

 

PART IV

 

Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

 

a.                                       Exhibits

 

11.                                 Statement re computation of earnings per share.

21.                                 List of Subsidiaries of the Registrant.

23.                                 Consent of Independent Accountants.

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 October 21, 2003, reporting under item 9 the Company’s announcement of its third quarter 2003 earnings.

 

Report on Form 8-K, dated November 7, 2003, reporting under item 5 the repurchase of 500,000 shares of the Company’s Common Stock.

 

Report on Form 8-K, dated November 17, 2003, reporting under Item 5 the resignation of Sunne Wright McPeak from the Company’s Board of Directors.

 

49

 

SIGNATURES

 

Pursuant to the requirements Section 13 or 15(d) 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.

 

 

Dated:  February 26, 2004		Simpson Manufacturing Co., Inc.
		(Registrant)
	By	/s/ Michael J. Herbert
		Michael J. Herbert
		Chief Financial Officer and Duly Authorized Officer of the Registrant
		(principal accounting and financial officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below.

 

 

Signature		Title		Date
Chief Executive Officer:
/s/       Thomas J Fitzmyers		President, Chief Executive		February 26, 2004
(Thomas J Fitzmyers)		Officer and Director
Chief Financial Officer:
/s/       Michael J. Herbert		Chief Financial Officer,		February 26, 2004
(Michael J. Herbert)		Treasurer and Secretary
		(principal accounting and financial officer)
Directors:
/s/       Barclay Simpson		Chairman of the Board		February 26, 2004
(Barclay Simpson)
		Director
(Jennifer A. Chatman)
/s/       Earl F. Cheit		Director		February 26, 2004
(Earl F. Cheit)
/s/       Stephen B. Lamson		President and Chief Operating		February 26, 2004
(Stephen B. Lamson)		Officer, Simpson Strong-Tie
		Company Inc., and Director
/s/       Peter N. Louras		Director		February 26, 2004
(Peter N. Louras)
		Director
(Robin G. MacGillivray)
/s/       Barry Lawson Williams		Director		February 26, 2004
(Barry Lawson Williams)

 

50