UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended: March 31, 2005

 

OR

 

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

 

For the transition period from                      to

 

Commission file number: 0-23804

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

 

4120 Dublin Boulevard, Suite 400, Dublin, CA 94568

(Address of principal executive offices)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý  No o

 

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

 

Yes ý  No o

 

The number of shares of the Registrant’s Common Stock outstanding as of March 31, 2005: 47,994,172

 

In November 2004, the Company completed a 2-for-1 stock split effected in the form of a stock dividend of its common stock. All of the share and per share numbers have been adjusted to reflect this stock split.

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

		March 31,						December 31,
		2005			2004			2004
ASSETS
Current assets
Cash and cash equivalents		$	33,909,839		$	70,446,242		$	30,916,357
Short-term investments		13,838,703			45,456,581			17,032,159
Trade accounts receivable		110,607,502			106,004,468			89,806,749
Inventories		190,048,738			115,290,897			192,879,318
Deferred income taxes		9,641,296			7,624,878			8,809,071
Other current assets		4,816,388			4,248,835			7,667,288
Total current assets		362,862,466			349,071,901			347,110,942
Property, plant and equipment, net		137,949,180			108,477,981			137,608,800
Goodwill		43,241,861			23,444,265			44,378,861
Equity method investment		73,123			—			—
Other noncurrent assets		16,611,381			7,030,061			16,038,357
Total assets		$	560,738,011		$	488,024,208		$	545,136,960
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current
portion of long-term debt		$	1,715,170		$	2,666,161		$	579,198
Trade accounts payable		35,138,620			20,392,693			32,030,936
Accrued liabilities		23,190,304			17,902,826			27,780,583
Income taxes payable		5,648,676			8,412,050			—
Accrued profit sharing trust contributions		2,705,024			2,082,057			7,038,952
Accrued cash profit sharing and commissions		8,580,031			10,583,238			8,209,753
Accrued workers’ compensation		2,594,350			2,473,764			2,760,613
Total current liabilities		79,572,175			64,512,789			78,400,035
Long-term debt, net of current portion		2,245,353			5,199,434			2,396,886
Other long-term liabilities		1,416,347			1,112,856			1,414,831
Total liabilities		83,233,875			70,825,079			82,211,752
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity
Common stock, at par value		479,942			498,214			479,290
Additional paid-in capital		83,037,685			65,502,295			79,876,789
Retained earnings		383,140,301			373,437,866			369,154,260
Accumulated other comprehensive income		10,846,208			7,187,752			13,414,869
Treasury stock		—			(29,426,998		)	—
Total stockholders’ equity		477,504,136			417,199,129			462,925,208
Total liabilities and stockholders’ equity		$	560,738,011		$	488,024,208		$	545,136,960

 

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

 

2

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

 

		Three Months Ended March 31,
		2005			2004
Net sales		$	184,215,855		$	159,915,734
Cost of sales		119,699,504			95,337,098
Gross profit		64,516,351			64,578,636
Operating expenses:
Selling		15,877,818			13,045,528
General and administrative		22,204,680			22,225,820
		38,082,498			35,271,348
Income from operations		26,433,853			29,307,288
Income in equity method investment		73,123			—
Interest income, net		91,416			272,847
Income before income taxes		26,598,392			29,580,135
Provision for income taxes		10,214,351			11,630,665
Net income		$	16,384,041		$	17,949,470
Net income per common share
Basic		$	0.34		$	0.37
Diluted		$	0.33		$	0.36
Cash dividends declared per common share		$	0.05		$	0.05
Number of shares outstanding
Basic		47,974,289			48,544,544
Diluted		48,934,352			49,328,540

 

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

 

3

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the three months ended March 31, 2005 and 2004 and the nine months ended December 31, 2004

(Unaudited)

 

																			Accumulated
											Additional								Other
		Common Stock								Paid-in					Retained				Comprehensive			Treasury
		Shares				Par Value				Capital					Earnings				Income			Stock			Total
Balance, January 1, 2004		48,510,588				$	497,792			$		63,334,758			$		357,916,036		$	7,982,663		$	(29,426,998	)	$	400,304,251
Comprehensive income:
Net income		—				—				—					17,949,470				—			—			17,949,470
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—				—				—					—				1,367			—			1,367
Translation adjustment		—				—				—					—				(796,278		)	—			(796,278		)
Comprehensive income																									17,154,559
Options exercised		25,000				250				246,809					—				—			—			247,059
Stock compensation expense		—				—				1,339,246					—				—			—			1,339,246
Tax benefit of options exercised		—				—				144,258					—				—			—			144,258
Cash dividends declared on Common stock ($0.05 per share)		—				—				—					(2,427,640			)	—			—			(2,427,640		)
Common stock issued at $25.43 per share		17,200				172				437,224					—				—			—			437,396
Balance, March 31, 2004		48,552,788				498,214				65,502,295					373,437,866				7,187,752			(29,426,998		)	417,199,129
Comprehensive income:
Net income		—				—				—					63,558,873				—			—			63,558,873
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—				—				—					—				(63,260		)	—			(63,260		)
Translation adjustment		—				—				—					—				6,290,377			—			6,290,377
Comprehensive income																									69,785,990
Options exercised		367,834				3,678				3,523,809					—				—			—			3,527,487
Stock compensation expense		—				—				3,110,173					—				—			—			3,110,173
Tax benefit of options exercised		—				—				2,742,104					—				—						2,742,104
Repurchase of common stock		(1,150,854			)	—				—					—				—			(31,273,933		)	(31,273,933		)
Retirement of treasury stock		—				(24,194		)		—					(60,676,737			)	—			60,700,931			—
Cash dividends declared on Common stock ($0.15 per share)		—				—				—					(7,165,742			)	—			—			(7,165,742		)
2-for-1 stock split effected in the form of a stock dividend
Common stock issued $31.40 per share for acquisition		159,234				1,592				4,998,408					—				—			—			5,000,000
Balance, December 31, 2004		47,929,002				479,290				79,876,789					369,154,260				13,414,869			—			462,925,208
Comprehensive income:
Net income		—				—				—					16,384,041				—			—			16,384,041
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments		—				—				—					—				659			—			659
Translation adjustment		—				—				—					—				(2,569,320		)	—			(2,569,320		)
Comprehensive income																									13,815,380
Options exercised		46,170				462				601,766					—				—			—			602,228
Stock compensation expense		—				—				1,579,625					—				—			—			1,579,625
Tax benefit of options exercised		—				—				316,395					—				—			—			316,395
Cash dividends declared on Common stock ($0.05 per share)		—				—				—					(2,398,000			)	—			—			(2,398,000		)
Common stock issued at $34.91 per share		19,000				190				663,110					—				—			—			663,300
Balance, March 31, 2005		47,994,172				$	479,942			$		83,037,685			$		383,140,301		$	10,846,208		$	—		$	477,504,136

 

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

 

4

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2005			2004
Cash flows from operating activities
Net income		$	16,384,041		$	17,949,470
Adjustments to reconcile net income to net cash used in operating activities:
Gain on sale of capital equipment		(73,695		)	(40,997		)
Depreciation and amortization		6,488,890			4,717,031
Deferred income taxes		(1,693,248		)	(528,818		)
Noncash compensation related to stock plans		1,679,625			1,506,133
Income in equity method investment		(73,123		)	—
Tax benefit of options exercised		316,395			144,258
Provision for obsolete inventory		521,533			682,801
Provision for doubtful accounts		19,300			(276,528		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Trade accounts receivable		(21,435,007		)	(39,731,096		)
Inventories		1,307,566			(10,008,066		)
Trade accounts payable		2,925,952			(2,305,357		)
Income taxes payable		10,765,516			10,001,229
Accrued profit sharing trust contributions		(4,311,450		)	(3,931,734		)
Accrued cash profit sharing and commissions		374,003			3,125,651
Other current assets		(1,910,056		)	(2,457,741		)
Accrued liabilities		(3,837,533		)	753,470
Other long-term liabilities		(5,191		)	587,916
Accrued workers’ compensation		(166,263		)	50,000
Other noncurrent assets		(95,195		)	26,543
Net cash provided by (used in) operating activities		7,182,060			(19,735,835		)
Cash flows from investing activities
Capital expenditures		(6,409,825		)	(6,113,235		)
Proceeds from sale of capital equipment		94,211			40,541
Purchases of available-for-sale investments		—			(26,217,348		)
Sales of available-for-sale investments		3,000,000			25,500,000
Net cash used in investing activities		(3,315,614		)	(6,790,042		)
Cash flows from financing activities
Line of credit borrowings		1,140,245			1,874,190
Repayment of debt and line of credit borrowings		(20,110		)	(125,498		)
Issuance of Company’s common stock		602,228			247,059
Dividends paid		(2,397,409		)	—
Net cash (used in) provided by financing activities		(675,046		)	1,995,751
Effect of exchange rate changes on cash		(197,918		)	(159,517		)
Net increase (decrease) in cash and cash equivalents		2,993,482			(24,689,643		)
Cash and cash equivalents at beginning of period		30,916,357			95,135,885
Cash and cash equivalents at end of period		$	33,909,839		$	70,446,242
Noncash capital expenditures		$	448,910		$	38,076
Dividends declared but not paid		$	2,398,000		$	2,427,640
Issuance of Company’s common stock for compensation		$	663,300		$	437,396

 

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

 

5

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.             Basis of Presentation

 

Principles of Consolidation

 

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

 

Interim Period Reporting

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America have been condensed or omitted. These interim statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Simpson Manufacturing Co., Inc.’s (the “Company’s”) 2004 Annual Report on Form 10-K (the “2004 Annual Report”).

 

The unaudited quarterly condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States of America. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The Company’s quarterly results may be subject to fluctuations. As a result, the Company believes the results of operations for the interim periods are not necessarily indicative of the results to be expected for any future period.

 

Revenue Recognition

 

The Company recognizes revenue when the earnings process is complete, net of applicable provision for discounts, returns and allowances, whether actual or estimated based on the Company’s experience. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectibility is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery. If the actual costs of sales returns, allowances, and discounts were to exceed the recorded estimated allowance, the Company’s sales would be adversely affected. Accrued sales returns have not been material and have been within management’s expectations. Service sales, representing aftermarket repair and maintenance and engineering activities, though significantly less than 1% of net sales and not material to the financial statements, are recognized as the services are completed.

 

Treasury Stock

 

The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Upon retirement, the resulting gains or losses are credited or charged to retained earnings.

 

Net Income Per Common Share

 

Basic net income per common share is computed based upon the weighted average number of common shares outstanding. Potentially dilutive securities, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive.

 

6

 

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

 

		Three Months Ended March 31, 2005								Three Months Ended March 31, 2004
		Income			Shares		Per Share			Income			Shares		Per Share
Basic EPS
Income available to common stockholders		$	16,384,041		47,974,289		$	0.34		$	17,949,470		48,544,544		$	0.37
Effect of Dilutive Securities
Stock options		—			960,063		(0.01		)	—			783,996		(0.01		)
Diluted EPS
Income available to common stockholders		$	16,384,041		48,934,352		$	0.33		$	17,949,470		49,328,540		$	0.36

 

For the quarter ended March 31, 2005, 94,677 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

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.

 

As of January 1, 2003, the Company adopted Statement of Financial Accounting Standards (‘SFAS”) No. 148 and SFAS No. 123 and used the prospective method of applying SFAS No. 123 for the transition. For stock options that have been granted prior to January 1, 2003, the Company will continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equaled or exceeded the market price on the date of grant for options issued by the Company, no compensation expense has been recognized for stock options granted prior to January 1, 2003. For the three months ended March 31, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $973,049 and $812,922, respectively.

 

7

 

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

 

		Three Months Ended March 31,
		2005			2004
Net income, as reported		$	16,384,041		$	17,949,470
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		973,049			812,922
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards granted prior to January 1, 2003, net of related tax effects		980,275			825,374
Net income, pro forma		$	16,376,815		$	17,937,018
Earnings per share
Basic, as reported		$	0.34		$	0.37
Basic, pro forma		0.34			0.37
Diluted, as reported		0.33			0.36
Diluted, pro forma		0.33			0.36

 

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.

 

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Accounting for Stock-Based Compensation,” which revised SFAS No. 123 to require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. While the Company currently accounts for stock options on a fair value basis, additional changes will be required such as those affecting cash flow presentation. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005, and management has not determined all of the effects on the Company’s financial statements once effective.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the 2005 presentation with no effect on net income or retained earnings as previously reported. These reclassifications were primarily in relation to stockholders’ equity and between deferred tax assets and liabilities.

 

2.             Trade Accounts Receivable

 

Trade accounts receivable consist of the following:

 

		At March 31,						At December 31,
		2005			2004			2004
Trade accounts receivable		$	114,835,195		$	108,936,659		$	93,515,436
Allowance for doubtful accounts		(2,399,876		)	(1,573,209		)	(2,397,302		)
Allowance for sales discounts and returns		(1,827,817		)	(1,358,982		)	(1,311,385		)
		$	110,607,502		$	106,004,468		$	89,806,749

 

8

 

3.             Inventories

 

The components of inventories consist of the following:

 

		At March 31,						At December 31,
		2005			2004			2004
Raw materials		$	77,752,620		$	47,085,114		$	91,910,430
In-process products		23,212,185			15,109,278			22,234,940
Finished products		89,083,933			53,096,505			78,733,948
		$	190,048,738		$	115,290,897		$	192,879,318

 

4.             Property, Plant and Equipment, net

 

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

 

		At March 31,						At December 31,
		2005			2004			2004
Land		$	13,863,789		$	13,130,093		$	13,870,992
Buildings and site improvements		66,626,613			63,761,809			67,215,428
Leasehold improvements		6,816,523			5,861,256			6,837,774
Machinery and equipment		148,264,612			128,187,553			147,442,008
		235,571,537			210,940,711			235,366,202
Less accumulated depreciation and amortization		(126,289,028		)	(109,787,233		)	(121,610,695		)
		109,282,509			101,153,478			113,755,507
Capital projects in progress		28,666,671			7,324,503			23,853,293
		$	137,949,180		$	108,477,981		$	137,608,800

 

Gains or losses on disposal of capital equipment are reported in the general and administrative expenses in the consolidated statements of operations.

 

5.             Investments

 

Equity Method Investment

 

The Company has a 35% investment in Keymark Enterprises, LLC (“Keymark”), for which it accounts using the equity method. Keymark develops software that assists in the design and engineering of residential structures. The Company’s relationship with Keymark includes the specification of its products in the Keymark software. The Company has no obligation to make any additional future capital contributions, nor does it intend to provide additional funding to Keymark. In 2001, after several quarters of losses, the Company concluded that the carrying value of its investment in Keymark exceeded its fair value and therefore wrote down the value of its investment to zero. However, after three consecutive quarters of profitability in 2004, the Company began recording its share of Keymark’s 2005 profits and as of March 31, 2005, the carrying value of this investment was $73,123.

 

9

 

Available-for-Sale Investments

 

The Company’s investments in debt securities are classified as either cash and cash equivalents or available-for-sale investments. As of March 31, 2005 and 2004, and December 31, 2004, the Company’s investments were as follows:

 

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
At March 31, 2005
Debt investments
Municipal bonds		$	13,895,960		$	—		$	57,257		$	13,838,703
At March 31, 2004
Debt investments
Municipal bonds		$	45,451,236		$	34,630		$	29,285		$	45,456,581
Commercial paper		5,106,910			—			—			5,106,910
Total debt investments		50,558,146			34,630			29,285			50,563,491
Money market instruments and funds		19,997			—			—			19,997
		$	50,578,143		$	34,630		$	29,285		$	50,583,488
At December 31, 2004
Debt investments
Municipal bonds		$	17,090,075		$	—		$	57,916		$	17,032,159
Total debt investments		17,090,075			—			57,916			17,032,159
Money market instruments and funds		85,514			—			—			85,514
		$	17,175,589		$	—		$	57,916		$	17,117,673

 

Of the total estimated fair value of debt securities, $5,126,907 and $85,514 were classified as cash and cash equivalents as of March 31, 2004 and December 31, 2004, respectively, and $13,838,703, $45,456,581, and $17,032,159 were classified as short-term investments as of March 31, 2005 and 2004, and December 31, 2004, respectively.

 

As of March 31, 2005, 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		$	13,395,960		$	13,338,703
Amounts maturing in 1 - 5 years		—			—
Amounts maturing in 5 - 10 years		—			—
Amounts maturing after 10 years		500,000			500,000
		$	13,895,960		$	13,838,703

 

10

 

6.             Debt

 

Outstanding debt at March 31, 2005 and 2004, and December 31, 2004, and the available credit at March 31, 2005, consisted of the following:

 

		Available			Debt Outstanding
		Credit at			at						at
		March 31,			March 31,						December 31,
		2005			2005			2004			2004
Revolving line of credit, interest at bank’s reference rate less 0.50% (at March 31, 2005, the bank’s reference rate less 0.50% was 5.25%), expires November 2006		$	13,800,000		$	—		$	—		$	—
Revolving term commitment, interest at bank’s prime rate less 0.50% (at March 31, 2005, the bank’s prime rate less 0.50% was 5.25%), expires June 2006		9,200,000			—			—			—
Revolving line of credit, interest at the bank’s base rate plus 2% (at March 31, 2005, the bank’s base rate plus 2% was 6.75%), expires September 2005		1,300,068			—			—			—
Revolving line of credit, interest at 4.50%, expires August 2005		3,669,288			1,149,314			1,846,227			—
Term loan, interest at LIBOR plus 1.375% (at March 31, 2005, LIBOR plus 1.375% was 4.065%), matures June 2008		—			1,050,000			1,350,000			1,050,000
Term loans, interest rates between 2.94% and 5.60%, expirations between 2005 and 2018		—			1,761,209			4,669,368			1,926,084
		27,969,356			3,960,523			7,865,595			2,976,084
Less line of credit and current portion of long-term debt					(1,715,170		)	(2,666,161		)	(579,198		)
Long-term debt, net of current portion					$	2,245,353		$	5,199,434		$	2,396,886
Available credit		$	27,969,356

 

7.             Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the Company’s 2004 Annual Report provides information concerning commitments and contingencies. From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. However the resolution of outstanding claims and litigation is subject to inherent uncertainty and it is at least reasonably possible that such resolution could have an adverse effect on the Company.

 

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

 

Corrosion, hydrogen enbrittlement, stress corrosion cracking, hardness, wood pressure-treating chemicals (such as copper), misinstallations, environmental conditions or other factors can contribute to failure of fasteners and connectors. On occasion, some of the fasteners that the Company sells have failed, although the Company has not incurred any material liability resulting from those failures. The Company attempts to avoid such failures by establishing and monitoring appropriate product specifications, manufacturing quality control procedures, inspection procedures and information on appropriate installation methods and conditions.

 

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