UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended:  June 30, 2013

 

OR

 

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

 

For the transition period from                to

 

Commission file number:  1-13429

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

94-3196943

(State or other jurisdiction of incorporation

 

(I.R.S. Employer

or organization)

 

Identification No.)

 

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

(Address of principal executive offices)

 

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

 

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

Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x  No o

 

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

 

Large accelerated filer x

Accelerated filer o

 

 

Non-accelerated filer o(Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o  No x

 

The number of shares of the registrant’s common stock outstanding as of June 30, 2013:  48,569,132

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

2012

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

165,275

 

$

162,719

 

$

175,553

 

Trade accounts receivable, net

 

126,888

 

120,119

 

82,812

 

Inventories

 

196,247

 

185,217

 

204,124

 

Deferred income taxes

 

12,874

 

12,124

 

11,473

 

Assets held for sale

 

586

 

 

593

 

Other current assets

 

8,465

 

14,516

 

23,499

 

Total current assets

 

510,335

 

494,695

 

498,054

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

209,544

 

208,685

 

213,452

 

Goodwill

 

122,678

 

127,983

 

121,981

 

Intangible assets, net

 

43,346

 

41,529

 

50,598

 

Other noncurrent assets

 

11,082

 

6,013

 

6,237

 

Total assets

 

$

896,985

 

$

878,905

 

$

890,322

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Line of credit and notes payable

 

$

1,201

 

$

4,837

 

$

178

 

Trade accounts payable

 

29,579

 

34,740

 

37,117

 

Accrued liabilities

 

44,619

 

41,491

 

44,923

 

Income taxes payable

 

 

1,396

 

 

Accrued profit sharing trust contributions

 

3,229

 

2,393

 

5,191

 

Accrued cash profit sharing and commissions

 

12,010

 

10,307

 

3,414

 

Accrued workers’ compensation

 

5,095

 

4,861

 

4,692

 

Total current liabilities

 

95,733

 

100,025

 

95,515

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

8,221

 

5,936

 

5,239

 

Total liabilities

 

103,954

 

105,961

 

100,754

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, at par value

 

485

 

482

 

483

 

Additional paid-in capital

 

187,549

 

176,809

 

184,677

 

Retained earnings

 

609,538

 

591,595

 

592,309

 

Treasury stock

 

(9,825

)

 

 

Accumulated other comprehensive income

 

5,284

 

4,058

 

12,099

 

Total stockholders’ equity

 

793,031

 

772,944

 

789,568

 

Total liabilities and stockholders’ equity

 

$

896,985

 

$

878,905

 

$

890,322

 

 

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

 

2



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands except per-share amounts, unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net sales

 

$

195,596

 

$

181,703

 

$

350,130

 

$

340,437

 

Cost of sales

 

106,176

 

98,557

 

195,736

 

187,886

 

Gross profit

 

89,420

 

83,146

 

154,394

 

152,551

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development and other engineering

 

9,484

 

9,043

 

17,792

 

18,240

 

Selling

 

21,652

 

19,881

 

43,024

 

40,314

 

General and administrative

 

28,595

 

27,087

 

54,884

 

53,331

 

Loss (gain) on sale of assets

 

11

 

(13

)

3

 

10

 

 

 

59,742

 

55,998

 

115,703

 

111,895

 

Income from operations

 

29,678

 

27,148

 

38,691

 

40,656

 

Interest income, net

 

1

 

58

 

40

 

123

 

Income before taxes

 

29,679

 

27,206

 

38,731

 

40,779

 

Provision for income taxes

 

11,177

 

11,347

 

15,434

 

17,719

 

Net income

 

$

18,502

 

$

15,859

 

$

23,297

 

$

23,060

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.33

 

$

0.48

 

$

0.48

 

Diluted

 

$

0.38

 

$

0.33

 

$

0.48

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

Number of shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

48,529

 

48,340

 

48,532

 

48,307

 

Diluted

 

48,628

 

48,419

 

48,627

 

48,378

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.125

 

$

0.125

 

$

0.125

 

$

0.25

 

 

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

 

3



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(In thousands, unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18,502

 

$

15,859

 

$

23,297

 

$

23,060

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

Translation adjustment, net of tax benefit (expense) of $0, ($20), ($84) and $3, respectively

 

(999

)

(9,951

)

(6,815

)

(2,725

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

17,503

 

$

5,908

 

$

16,482

 

$

20,335

 

 

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

 

4



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the six-month periods ended June 30, 2012 and 2013 and for the six months ended December 31, 2012

(In thousands except per-share amounts, unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

 

 

 

 

Shares

 

Par Value

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Total

 

Balance, January 1, 2012

 

48,163

 

$

481

 

$

170,483

 

$

580,616

 

$

6,783

 

$

 

$

758,363

 

Net income

 

 

 

 

23,060

 

 

 

23,060

 

Translation adjustment, net of tax

 

 

 

 

 

(2,725

)

 

(2,725

)

Stock options exercised

 

82

 

1

 

1,982

 

 

 

 

1,983

 

Stock-based compensation

 

 

 

5,005

 

 

 

 

5,005

 

Tax effect of options exercised

 

 

 

(56

)

 

 

 

(56

)

Shares issued from release of Restricted Stock Units

 

61

 

 

(1,023

)

 

 

 

(1,023

)

Cash dividends declared on common stock, $0.25 per share

 

 

 

 

(12,081

)

 

 

(12,081

)

Common stock issued at $33.71 per share for stock bonus

 

12

 

 

418

 

 

 

 

418

 

Balance, June 30, 2012

 

48,318

 

482

 

176,809

 

591,595

 

4,058

 

 

772,944

 

Net income

 

 

 

 

18,858

 

 

 

 

18,858

 

Translation adjustment, net of tax

 

 

 

 

 

8,284

 

 

8,284

 

Pension adjustment, net of tax

 

 

 

 

 

(243

)

 

(243

)

Stock options exercised

 

103

 

1

 

2,941

 

 

 

 

2,942

 

Stock-based compensation

 

 

 

5,190

 

 

 

 

5,190

 

Tax effect of options exercised

 

 

 

(177

)

 

 

 

(177

)

Shares issued from release of Restricted Stock Units

 

1

 

 

(86

)

 

 

 

(86

)

Cash dividends declared on common stock, $0.375 per share

 

 

 

 

(18,144

)

 

 

(18,144

)

Balance, December 31, 2012

 

48,422

 

483

 

184,677

 

592,309

 

12,099

 

 

789,568

 

Net income

 

 

 

 

23,297

 

 

 

23,297

 

Translation adjustment, net of tax

 

 

 

 

 

(6,815

)

 

(6,815

)

Stock options exercised

 

31

 

1

 

775

 

 

 

 

776

 

Stock-based compensation

 

 

 

5,649

 

 

 

 

5,649

 

Tax effect of options exercised

 

 

 

(1,850

)

 

 

 

(1,850

)

Shares issued from release of Restricted Stock Units

 

107

 

1

 

(2,020

)

 

 

 

(2,019

)

Repurchase of common stock

 

(342

)

 

 

 

 

(9,825

)

(9,825

)

Cash dividends declared on common stock, $0.125 per share

 

 

 

 

(6,068

)

 

 

(6,068

)

Common stock issued at $33.81 per share for stock bonus

 

9

 

 

318

 

 

 

 

318

 

Balance, June 30, 2013

 

48,227

 

$

485

 

$

187,549

 

$

609,538

 

$

5,284

 

$

(9,825

)

$

793,031

 

 

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

 

5



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

 

 

 

Six Months

 

 

 

Ended June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

23,297

 

$

23,060

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Loss on sale of assets

 

3

 

10

 

Depreciation and amortization

 

14,777

 

13,813

 

Impairment loss on assets

 

1,025

 

461

 

Deferred income taxes

 

1,281

 

(681

)

Noncash compensation related to stock plans

 

6,001

 

5,300

 

Excess tax benefit of options exercised

 

(11

)

(99

)

Provision for doubtful accounts

 

9

 

225

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Trade accounts receivable

 

(45,345

)

(40,837

)

Inventories

 

7,168

 

(47

)

Trade accounts payable

 

(7,021

)

10,694

 

Income taxes payable

 

11,859

 

4,462

 

Accrued profit sharing trust contributions

 

(1,944

)

(2,085

)

Accrued cash profit sharing and commissions

 

8,624

 

6,873

 

Other current assets

 

185

 

3,537

 

Accrued liabilities

 

(1,502

)

(4,775

)

Long-term liabilities

 

(477

)

(250

)

Accrued workers’ compensation

 

403

 

(613

)

Other noncurrent assets

 

578

 

(2,168

)

Net cash provided by operating activities

 

18,910

 

16,880

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Capital expenditures

 

(8,095

)

(9,629

)

Asset acquisitions, net of cash acquired

 

(5,300

)

(56,044

)

Proceeds from sale of property and equipment

 

110

 

6,958

 

Loan repayment by related parties

 

625

 

 

Net cash used in investing activities

 

(12,660

)

(58,715

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Repurchase of common stock

 

(9,825

)

 

Debt and line of credit borrowings

 

1,129

 

2,146

 

Repayment of debt and line of credit borrowings

 

(86

)

(954

)

Debt issuance costs

 

 

(25

)

Issuance of common stock

 

776

 

1,983

 

Excess tax benefit of options exercised

 

11

 

99

 

Dividends paid

 

(6,053

)

(12,059

)

Net cash used in financing activities

 

(14,048

)

(8,810

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(2,480

)

(453

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(10,278

)

(51,098

)

Cash and cash equivalents at beginning of period

 

175,553

 

213,817

 

Cash and cash equivalents at end of period

 

$

165,275

 

$

162,719

 

 

 

 

 

 

 

Noncash activity during the period

 

 

 

 

 

Noncash capital expenditures

 

$

63

 

$

258

 

Dividends declared but not paid

 

6,068

 

6,044

 

Issuance of Company’s common stock for compensation

 

318

 

418

 

Non-cash contingent consideration

 

 

786

 

 

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

 

6



 

Simpson Manufacturing Co., Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

1.                                      Basis of Presentation

 

Principles of Consolidation

 

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

 

Interim Period Reporting

 

The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These interim statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 (the “2012 Annual Report”).

 

The unaudited quarterly condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, contain all adjustments (consisting of only normal recurring adjustments) necessary to state fairly the financial information set forth therein, in accordance with GAAP. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by GAAP. The Company’s quarterly results fluctuate. As a result, the Company believes the results of operations for the interim periods 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 incentives, whether actual or estimated, based on the Company’s experience. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectability is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement. Service sales, representing after-market repair and maintenance, engineering activities, software license sales and services and lease income, though significantly less than 1% of net sales and not material to the consolidated financial statements, are recognized as the services are completed or the software products and services are delivered. If actual costs of sales returns, incentives and discounts were to significantly exceed the recorded estimated allowance, the Company’s sales would be adversely affected.

 

Net Earnings Per Common Share

 

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

 

7



 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except per share amounts)

 

2013

 

2012

 

2013

 

2012

 

Net income available to common stockholders

 

$

18,502

 

$

15,859

 

$

23,297

 

$

23,060

 

Basic weighted average shares outstanding

 

48,529

 

48,340

 

48,532

 

48,307

 

Dilutive effect of potential common stock equivalents — stock options

 

99

 

79

 

95

 

71

 

Diluted weighted average shares outstanding

 

48,628

 

48,419

 

48,627

 

48,378

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.33

 

$

0.48

 

$

0.48

 

Diluted

 

0.38

 

0.33

 

0.48

 

0.48

 

Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive

 

 

1,711

 

 

1,711

 

 

Accounting for Stock-Based Compensation

 

With the approval of the Company’s stockholders on April 26, 2011, the Company adopted the Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the “2011 Plan”). The 2011 Plan amended and restated in their entirety, and incorporated and superseded, both the Simpson Manufacturing Co., Inc. 1994 Stock Option Plan (the “1994 Plan”), which was principally for the Company’s employees, and the Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan (the “1995 Plan”), which was for its independent directors. Options previously granted under the 1994 Plan or the 1995 Plan will not be affected by the adoption of the 2011 Plan and will continue to be governed by the 1994 Plan or the 1995 Plan, respectively.

 

Under the 1994 Plan, the Company could grant incentive stock options and non-qualified stock options. The Company, however, granted only non-qualified stock options under both the 1994 Plan and the 1995 Plan. The Company generally granted options under each of the 1994 Plan and the 1995 Plan once each year. The exercise price per share of each option granted under the 1994 Plan equaled the closing market price per share of the Company’s common stock as reported by the New York Stock Exchange on the day preceding the day that the Compensation and Leadership Development Committee of the Company’s Board of Directors met to approve the grant of the options. The exercise price per share under each option granted under the 1995 Plan was at the fair market value on the date specified in the 1995 Plan. Options vest and expire according to terms established at the grant date. Options granted under the 1994 Plan typically vest evenly over the requisite service period of four years and have a term of seven years. The vesting of options granted under the 1994 Plan will be accelerated if the grantee ceases to be employed by the Company after reaching age 60 or if there is a change in control of the Company. Options granted under the 1995 Plan were fully vested on the date of grant. Shares of common stock issued on exercise of stock options under the 1994 Plan and the 1995 Plan are registered under the Securities Act of 1933.

 

Under the 2011 Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although the Company currently intends to award primarily restricted stock units and to a lesser extent, if at all, non-qualified stock options. The Company does not currently intend to award incentive stock options or restricted stock. Under the 2011 Plan, no more than 16.3 million shares of the Company’s common stock may be issued (including shares already sold) pursuant to all awards under the 2011 Plan, including on exercise of options previously granted under the 1994 Plan and the 1995 Plan. Shares of common stock to be issued pursuant to the 2011 Plan are registered under the Securities Act of 1933.

 

8



 

The following table represents the Company’s stock option and restricted stock unit activity for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Stock-based compensation expense recognized in operating expenses

 

$

2,807

 

$

2,052

 

$

5,686

 

$

5,120

 

Tax benefit of stock-based compensation expense in provision for income taxes

 

896

 

705

 

1,944

 

1,771

 

Stock-based compensation expense, net of tax

 

$

1,911

 

$

1,347

 

$

3,742

 

$

3,349

 

Fair value of shares vested

 

$

2,836

 

$

1,895

 

$

5,649

 

$

5,005

 

Proceeds to the Company from the exercise of stock-based compensation

 

$

280

 

$

225

 

$

776

 

$

1,983

 

Tax effect from exercise of stock-based compensation, including shortfall tax benefits

 

$

(7

)

$

(54

)

$

(1,850

)

$

(56

)

 

 

 

At June 30,

 

 

 

2013

 

2012

 

Stock-based compensation cost capitalized in inventory

 

$

384

 

$

229

 

 

The amounts included in cost of sales, research and development and other engineering, selling, or general and administrative expense depend on the job functions performed by the employees to whom the stock options and restricted stock units were awarded.

 

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

 

Fair Value of Financial Instruments

 

The “Fair Value Measurements and Disclosures” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards CodificationTM (“ASC”) establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

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

 

 

 

At June 30,

 

At December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

Financial instruments

 

$

60,725

 

$

51,283

 

$

76,130

 

 

9



 

The carrying amounts of trade receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s line of credit is classified as Level 2 within the fair value hierarchy and is calculated based on borrowings with similar maturities, current remaining average life to maturity and current market conditions.

 

Income Taxes

 

The Company uses an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in each interim period. The effective tax rate decrease from the second quarter of 2012 to the second quarter of 2013 was primarily due to reduced valuation allowances taken on lower second quarter 2013 operating losses in the Europe and Asia/Pacific segments. The effective tax rate decrease from the first half of 2012 to the first half of 2013 was primarily due to $2.3 million in non-deductible acquisition costs recorded in 2012.

 

The following table presents the Company’s effective tax rates and income tax expense for the three and six months ended June 30, 2013 and 2012:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands, except percentage amounts)

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

37.7

%

41.7

%

39.8

%

43.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

$

11,177

 

$

11,347

 

$

15,434

 

$

17,719

 

 

Acquisitions

 

In January 2012, the Company purchased all of the shares of S&P Clever, for $58.1 million, subject to post-closing adjustments. S&P Clever manufactures and sells engineered materials to repair, strengthen and restore concrete, masonry and asphalt and has operations in Switzerland, Germany, Portugal, Poland, The Netherlands and Austria. Payments under the purchase agreement included cash payments of $57.5 million and contingent consideration of $0.6 million payable over a three-year period if sales goals are met. As a result of the acquisition, the Company has increased its presence in the infrastructure, commercial and industrial construction markets in Europe. The Company’s measurement of assets acquired and liabilities assumed included cash and cash equivalents of $6.8 million, other current assets of $10.8 million, non-current assets of $53.4 million, current liabilities of $12.6 million and non-current liabilities of $0.2 million. Included in non-current assets is goodwill of $19.3 million, which was assigned to the Europe segment and is not deductible for tax purposes, intangible assets of $15.7 million, the amortization of which is not deductible for tax purposes and long-lived intangibles of $4.8 million related to in-progress product development, which will be amortized when the Company markets the product for sale. The weighted-average amortization period for the intangible assets is 9.8 years.

 

In March 2012, the Company purchased substantially all of the assets of CarbonWrap Solutions, L.L.C. (“CarbonWrap”) for $5.5 million, subject to post-closing adjustments. CarbonWrap develops fiber-reinforced polymer products primarily for infrastructure and transportation projects. Payments under the purchase agreement totaled $5.3 million in cash and contingent consideration of $0.2 million paid on resolution of specified post-closing contingencies to the principal officer of CarbonWrap, who is now employed by the Company. The Company’s measurement of assets acquired included goodwill of $3.5 million, which was assigned to the North America segment and is deductible for tax purposes, and intangible assets of $1.7 million, which is subject to tax-deductible amortization. Net tangible assets consisting of accounts receivable, inventory, equipment and prepaid expenses accounted for the balance of the purchase price. The weighted-average amortization period for the intangible assets is 15.6 years.

 

In February 2013, the Company purchased certain assets relating to the TJ® ShearBrace (“ShearBrace”) product line of Weyerhaeuser NR Company (“Weyerhaeuser”) for $5.3 million in cash, subject to post-closing adjustments. The ShearBrace is a line of pre-fabricated shearwalls that will complement the Company’s Strong-Wall shearwall, and is sold throughout North America. The Company’s provisional measurement of assets acquired included goodwill of $2.6 million that has been assigned to the North America segment, and intangible assets of $1.9 million, both of which are subject to tax-deductible amortization. Net tangible assets consisting of inventory and equipment accounted for the balance of the purchase price.

 

10



 

Under the business combinations topic of the FASB ASC, the Company accounted for these acquisitions as business combinations and ascribed acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements were made in the first quarter of 2013 for acquired assets and assumed liabilities. Adjustments to those measurements may be made in subsequent periods, up to one year from the acquisition date, as information necessary to complete the analysis is obtained. Fair value of intangible assets was based on Level 3 inputs. The Company expects the measurement process for each acquisition to be finalized within a year of its acquisition date.

 

Pro-forma financial information is not presented as it would not be materially different from the information presented in the Condensed Consolidated Statements of Operations.

 

Recently Adopted Accounting Standards

 

In February 2013, the FASB issued an amendment to the comprehensive income guidance requiring reporting of the effect of significant reclassifications out of other comprehensive income on the respective lines in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional information about these amounts. This amendment is effective for fiscal years beginning after December 15, 2012, and interim periods within those years. The implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

 

Recently Issued Accounting Standards

 

Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants and the Securities and Exchange Commission did not or is not expected to have a material effect on the Company’s consolidated financial statements.

 

2.                                      Trade Accounts Receivable, Net

 

Trade accounts receivable consisted of the following:

 

 

 

At June 30,

 

At December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

Trade accounts receivable

 

$

130,612

 

$

123,531

 

$

85,732

 

Allowance for doubtful accounts

 

(1,141

)

(1,343

)

(1,288

)

Allowance for sales discounts and returns

 

(2,583

)

(2,069

)

(1,632

)

 

 

$

126,888

 

$

120,119

 

$

82,812

 

 

3.                                      Inventories

 

Inventories consisted of the following:

 

 

 

At June 30,

 

At December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

Raw materials

 

$

85,490

 

$

75,580

 

$

95,959

 

In-process products

 

18,759

 

21,594

 

16,878

 

Finished products

 

91,998

 

88,043

 

91,287

 

 

 

$

196,247

 

$

185,217

 

$

204,124

 

 

11



 

4.                                      Property, Plant and Equipment, Net

 

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

 

 

 

At June 30,

 

At December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

Land

 

$

30,390

 

$

32,100

 

$

32,068

 

Buildings and site improvements

 

174,771

 

166,767

 

174,187

 

Leasehold improvements

 

4,996

 

4,852

 

4,747

 

Machinery and equipment

 

216,154

 

210,560

 

214,222

 

 

 

426,311

 

414,279

 

425,224

 

Less accumulated depreciation and amortization

 

(226,202

)

(210,431

)

(217,868

)

 

 

200,109

 

203,848

 

207,356

 

Capital projects in progress

 

9,435

 

4,837

 

6,096

 

 

 

$

209,544

 

$

208,685

 

$

213,452

 

 

The Company’s vacant facility in Hungen, Germany, remained classified as an asset held for sale as of June 30, 2013, consistent with the classification at December 31, 2012. In the first quarter of 2013, the Company concluded that the carrying value of its Ireland facility, associated with the Europe segment, exceeded its net estimated realizable value, and therefore recorded an impairment charge, within general and administrative expenses, of $1.0 million, equal to the amount by which carrying value exceeds net estimated realizable value. See note 10.

 

Determining the fair value of the Ireland facility is a judgment involving estimates and assumptions. These estimates and assumptions include lease rates, operating costs and inflation factors used to calculate projected future cash flows and future economic and market conditions (Level 3 fair value inputs). The Company bases its fair value estimates on assumptions that it believes to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

 

5.                                      Goodwill and Intangible Assets, Net

 

Goodwill was as follows:

 

 

 

At June 30,

 

At December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

North America

 

$

81,080

 

$

77,501

 

$

78,739

 

Europe

 

39,853

 

48,529

 

41,263

 

Asia/Pacific

 

1,745

 

1,953

 

1,979

 

Total

 

$

122,678

 

$

127,983

 

$

121,981

 

 

Intangible assets, net, were as follows:

 

 

 

At June 30, 2013

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

(in thousands)

 

Amount

 

Amortization

 

Amount

 

North America

 

$

39,908

 

$

(14,591

)

$

25,317

 

Europe

 

26,546

 

(8,517

)

18,029

 

Total

 

$

66,454

 

$

(23,108

)

$

43,346

 

 

12



 

 

 

At June 30, 2012

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

North America

 

$

35,581

 

$

(15,350

)

$

20,231

 

Europe

 

27,832

 

(6,534

)

21,298

 

Total

 

$

63,413

 

$

(21,884

)

$

41,529

 

 

 

 

At December 31, 2012

 

 

 

Gross

 

 

 

Net

 

 

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Amount

 

Amortization

 

Amount

 

North America

 

$

37,992

 

$

(12,012

)

$

25,980

 

Europe

 

31,701

 

(7,083

)

24,618

 

Total

 

$

69,693

 

$

(19,095

)

$

50,598

 

 

Intangible assets consist primarily of customer relationships, patents, unpatented technology and non-compete agreements. Amortization expense for intangible assets during the three-month periods ended June 30, 2013 and 2012, totaled $2.0 million and $1.9 million, respectively, and during the six months ended June 30, 2013 and 2012, totaled $4.0 million and $3.7 million, respectively.

 

At June 30, 2013, estimated future amortization of intangible assets was as follows:

 

(in thousands)

 

 

 

Remaining six months of 2013

 

$

4,120

 

2014

 

8,064

 

2015

 

7,158

 

2016

 

6,881

 

2017

 

4,965

 

2018

 

2,886

 

Thereafter

 

9,272

 

 

 

$

43,346

 

 

The changes in the carrying amount of goodwill and intangible assets for the six months ended June 30, 2013, were as follows:

 

 

 

 

 

Intangible

 

(in thousands)

 

Goodwill

 

Assets

 

Balance at December 31, 2012

 

$

121,981

 

$

50,598

 

Acquisitions

 

2,606

 

1,869

 

Reclassifications*

 

(696

)

(4,369

)

Amortization

 

 

(4,013

)

Foreign exchange

 

(1,213

)

(739

)

Balance at June 30, 2013

 

$

122,678

 

$

43,346

 

 


* Measurement period adjustments related to finalizing accounting for acquisitions, primarily due to $4.8 million in long-lived intangible assets related to S&P Clever in-progress development projects reclassified from intangible assets to other non-current assets.

 

6.                                      Debt

 

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at June 30, 2013, was $307.5 million, including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.

 

13



 

The Company’s primary credit facility is a revolving line of credit with $300.0 million in available credit. This credit facility will expire in July 2017. Amounts borrowed under this credit facility will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars appearing on Reuters LIBOR01screen page (the “LIBOR Rate”), adjusted for any reserve requirement in effect, plus a spread of 0.60% to 1.45%, determined quarterly based on the Company’s leverage ratio (at June 30, 2013, the LIBOR Rate was 0.19%), or (b) a base rate, plus a spread of 0.00% to 0.45%, determined quarterly based on the Company’s leverage ratio. The base rate is defined in a manner such that it will not be less than the LIBOR Rate. The Company will pay fees for standby letters of credit at an annual rate equal to the LIBOR Rate plus the applicable spread described above, and will pay market-based fees for commercial letters of credit. The Company is required to pay an annual facility fee of 0.15% to 0.30% of the available commitments under the credit agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. The Company was also required to pay customary fees as specified in a separate fee agreement between the Company and Wells Fargo Bank, National Association, in its capacity as the Agent under the credit agreement.

 

The Company’s borrowing capacity under other revolving credit lines and a term note totaled $8.7 million at June 30, 2013. The other revolving credit lines and term note charge interest ranging from 1.018% to 11.515%, have maturity dates from August 2013 to September 2020, and had outstanding balances totaling $1.2 million at June 30, 2013. The Company had outstanding balances of $4.8 million and $0.2 million on June 30, 2012 and December 31, 2012, respectively. The Company was in compliance with its financial covenants at June 30, 2013.

 

7.                                      Commitments and Contingencies

 

Note 9 to the consolidated financial statements in the 2012 Annual Report provides information concerning commitments and contingencies. From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business.  The resolution of claims and litigation is subject to inherent uncertainty and could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

 

Pending Claims

 

Four lawsuits (the “Cases”) have been filed against the Company in the Hawaii First Circuit Court: Alvarez v. Haseko Homes, Inc. and Simpson Manufacturing, Inc., Civil No. 09-1-2697-11 (“Case 1”); Ke Noho Kai Development, LLC v. Simpson Strong-Tie Company, Inc., and Honolulu Wood Treating Co., LTD., Case No. 09-1-1491-06 SSM (“Case 2”); North American Specialty Ins. Co. v. Simpson Strong-Tie Company, Inc. and K.C. Metal Products, Inc., Case No. 09-1-1490-06 VSM (“Case 3”); and Charles et al. v. Haseko Homes, Inc. et al. and Third Party Plaintiffs Haseko Homes, Inc. et al. v. Simpson Strong-Tie Company, Inc., et al., Civil No. 09-1-1932-08 (“Case 4”).  Case 1 was filed on November 18, 2009.  Cases 2 and 3 were originally filed on June 30, 2009.  Case 4 was filed on August 19, 2009.  The Cases all relate to alleged premature corrosion of the Company’s strap tie holdown products installed in buildings in a housing development known as Ocean Pointe in Honolulu, Hawaii, allegedly causing property damage.  Case 1 is a putative class action brought by the owners of allegedly affected Ocean Pointe houses.  Case 1 was originally filed as Kai et al. v. Haseko Homes, Inc., Haseko Construction, Inc. and Simpson Manufacturing, Inc., Case No. 09-1-1476, but was voluntarily dismissed and then re-filed with a new representative plaintiff.  Case 2 is an action by the builders and developers of Ocean Pointe against the Company, claiming that either the Company’s strap tie holdowns are defective in design or manufacture or the Company failed to provide adequate warnings regarding the products’ susceptibility to corrosion in certain environments.  Case 3 is a subrogation action brought by the insurance company for the builders and developers against the Company claiming the insurance company expended funds to correct problems allegedly caused by the Company’s products.  Case 4 is a putative class action brought, like Case 1, by owners of allegedly affected Ocean Pointe homes.  In Case 4, Haseko Homes, Inc. (“Haseko”), the developer of the Ocean Pointe development, brought a third party complaint against the Company alleging that any damages for which Haseko may be liable are actually the fault of the Company. Similarly, Haseko’s sub-contractors on the Ocean Pointe development brought cross-claims against the Company seeking indemnity and contribution for any amounts for which they may ultimately be found liable. None of the Cases alleges a specific amount of damages sought, although each of the Cases seeks compensatory damages, and Case 1 seeks punitive damages.  Cases 1 and 4 have been consolidated.  In December 2012, the Court granted the Company summary judgment on the claims asserted by the plaintiff homeowners in Cases 1 and 4, and on the third party complaint and cross-claims asserted by Haseko and the sub-contractors, respectively, in Case 4. In April 2013, the Court granted Haseko and the sub-contractors’ motion for leave to amend their cross-claims to allege a claim for

 

14



 

negligent misrepresentation. The Company continues to investigate the facts underlying the claims asserted in the Cases, including, among other things, the cause of the alleged corrosion; the severity of any problems shown to exist; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if needed.  At this time, the likelihood that the Company will be found liable under any legal theory and the extent of such liability, if any, are unknown.  Management believes the Cases may not be resolved for an extended period.  The Company intends to defend itself vigorously in connection with the Cases.

 

Based on facts currently known to the Company, the Company believes that all or part of the claims alleged in the Cases may be covered by its insurance policies.  On April 19, 2011, an action was filed in the United States District Court for the District of Hawaii, National Union Fire Insurance Company of Pittsburgh, PA v. Simpson Manufacturing Company, Inc., et al., Civil No. 11-00254 ACK.  In this action, Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania (“National Union”), which issued certain Commercial General Liability insurance policies to the Company, seeks declaratory relief in the Cases with respect to its obligations to defend or indemnify the Company, Simpson Strong-Tie Company Inc., and a vendor of the Company’s strap tie holdown products.  By Order dated November 7, 2011, all proceedings in the National Union action have been stayed.  If the stay is lifted and the National Union action is not dismissed, the Company intends vigorously to defend all claims advanced by National Union.

 

On April 12, 2011, Fireman’s Fund Insurance Company (“Fireman’s Fund”), another of the Company’s general liability insurers, sued Hartford Fire Insurance Company (“Hartford”), a third insurance company from whom the Company purchased general liability insurance, in the United States District Court for the Northern District of California, Fireman’s Fund Insurance Company v. Hartford Fire Insurance Company, Civil No. 11 1789 SBA (the “Fireman’s Fund action”).  The Company has intervened in the Fireman’s Fund action and has moved to stay all proceedings in that action as well, pending resolution of the underlying Ocean Pointe Cases.

 

On November 21, 2011, the Company commenced a lawsuit against National Union, Fireman’s Fund, Hartford and others in the Superior Court of the State of California in and for the City and County of San Francisco (the “San Francisco coverage action”).  In the San Francisco coverage action, the Company alleges generally that the separate pendency of the National Union action and the Fireman’s Fund action presents a risk of inconsistent adjudications; that the San Francisco Superior Court has jurisdiction over all of the parties and should exercise jurisdiction at the appropriate time to resolve any and all disputes that have arisen or may in the future arise among the Company and its liability insurers; and that the San Francisco coverage action should also be stayed pending resolution of the underlying Ocean Pointe Cases.  The San Francisco coverage action has been ordered stayed pending resolution of the Cases.

 

Nishimura v. Gentry Homes, Ltd; Simpson Manufacturing Co., Inc.; and Simpson Strong-Tie Company, Inc., Civil no. 11-1-1522-07, was filed in the Circuit Court of the First Circuit of Hawaii on July 20, 2011.  The Nishimura case alleges premature corrosion of the Company’s strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii.  The case is a putative class action brought by owners of allegedly affected homes.  The Complaint alleges that the Company’s strap products and mudsill anchors are insufficiently corrosion resistant and/or fail to comply with Honolulu’s building code.  In February 2012, the Court dismissed three of the five claims the plaintiffs had asserted against the Company.  The Company is currently investigating the allegations of the complaint, including, among other things: the existence and extent of the alleged corrosion, if any; the building code provisions alleged to be applicable and, if applicable, whether the products complied; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if any are needed.  At this time, the likelihood that the Company will be found liable for any damage allegedly suffered and the extent of such liability, if any, are unknown.  The Company denies any liability of any kind and intends to defend itself vigorously in this case.

 

With respect to these legal proceedings, individually and in the aggregate, the Company has not yet been able to determine whether an unfavorable outcome is probable or reasonably possible and has not been able to reasonably estimate the amount or range of any possible loss. As a result, no amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to these legal proceedings.

 

15



 

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

 

Other

 

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

 

Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, environmental conditions or other factors can contribute to failure of fasteners, connectors, tools, anchors, adhesives and tool products.  On occasion, some of the products that the Company sells have failed, although the Company has not incurred any material liability resulting from those failures.  The Company attempts to avoid such failures by establishing and monitoring appropriate product specifications, manufacturing quality control procedures, inspection procedures and information on appropriate installation methods and conditions.  The Company subjects its products to extensive testing, with results and conclusions published in Company catalogues and on its websites. Based on test results to date, the Company believes that, generally, if its products are appropriately selected, installed and used in accordance with the Company’s guidance, they may be reliably used in appropriate applications.

 

8.                                      Stock-Based Incentive Plans

 

The Company currently has one stock-based incentive plan, which incorporates and supersedes its two previous plans (see Note 1 “Basis of Presentation — Accounting for Stock-Based Compensation”). Participants are granted stock-based awards only if the applicable Company-wide or profit-center operating goals, or both, established by the Compensation and Leadership Development Committee of the Board of Directors at the beginning of the year, are met. Certain participants may have additional goals based on strategic initiatives of the Company.

 

The fair value of each restricted stock unit award is estimated on the date of the award based on the closing market price of the underlying stock on the day preceding the date of the award. On February 6, 2013, 359,371 restricted stock units were awarded, including 9,975 awarded to the Company’s directors who are not employees, at an estimated value of $31.96 per share, based on the closing price on February 5, 2013. The restrictions on these awards generally lapse one quarter on the date of the award and one quarter on each of the first, second and third anniversaries of the date of the award.

 

The following table summarizes the Company’s unvested restricted stock unit activity for the six months ended June 30, 2013:

 

 

 

 

 

 

 

Aggregate

 

 

 

 

 

Weighted-

 

Intrinsic

 

 

 

Shares

 

Average

 

Value *

 

Unvested Restricted Stock Units (RSUs)

 

(in thousands)

 

Price

 

(in thousands)

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2013

 

264

 

$

33.23

 

 

 

Awarded

 

359

 

 

 

 

 

Vested

 

(169

)

 

 

 

 

Forfeited

 

(1

)

 

 

 

 

Outstanding at June 30, 2013

 

453

 

$

32.45

 

$

13,339

 

Outstanding and expected to vest at June 30, 2013

 

442

 

$

32.45

 

$

12,993

 

 


*  The intrinsic value is calculated using the closing price per share of $29.42 as reported by the New York Stock Exchange on June 28, 2013.

 

16



 

Based on the market value on the award date, the total intrinsic value of vested restricted stock units during the six-month periods ended June 30, 2013 and 2012, was $5.5 million and $3.1 million, respectively.

 

The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility was based on historical volatilities of the Company’s common stock measured monthly over a term that is equivalent to the expected life of the stock option. The expected term of each stock option was estimated based on the Company’s prior exercise experience and future expectations of the exercise and termination behavior of the grantees. The risk-free rate was based on the yield of United States Treasury zero-coupon bonds with maturities comparable to the expected life in effect at the time of grant. The dividend yield was based on the expected dividend yield on the grant date.

 

No stock options were granted in 2012 or the first half of 2013. The following table summarizes the Company’s stock option activity for the six months ended June 30, 2013:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

Weighted-

 

Average

 

Aggregate

 

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Contractual

 

Value *

 

Non-Qualified Stock Options

 

(in thousands)

 

Price

 

Life (in years)

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at January 1, 2013

 

1,907

 

$

31.58

 

 

 

 

 

Exercised

 

(30

)

25.34

 

 

 

 

 

Forfeited

 

(374

)

40.65

 

 

 

 

 

Outstanding at June 30, 2013

 

1,503

 

$

29.45

 

 

 

$

717

 

Outstanding and expected to vest at June 30, 2013

 

1,478

 

$

29.44

 

4.2

 

$

713

 

Exercisable at June 30, 2013

 

890

 

$

29.40

 

3.9

 

$

631

 

 


*  The intrinsic value represents the amount, if any, by which the fair market value of the underlying common stock exceeds the exercise price of the stock option, using the closing price per share of $29.42 as reported by the New York Stock Exchange on June 28, 2013.

 

The total intrinsic value of stock options exercised during the six-month periods ended June 30, 2013 and 2012, was $0.2 million and $0.7 million, respectively.

 

A summary of the status of unvested stock options as of June 30, 2013, and changes during the six months ended June 30, 2013, are presented below:

 

 

 

 

 

Weighted-

 

 

 

 

 

Average

 

 

 

Shares

 

Grant-Date

 

Unvested Stock Options

 

(in thousands)

 

Fair Value

 

 

 

 

 

 

 

Unvested at January 1, 2013

 

826

 

$

10.25

 

Vested

 

(212

)

10.17

 

Forfeited

 

(1

)

10.33

 

Unvested at June 30, 2013

 

613

 

$

10.27

 

 

As of June 30, 2013, $12.8 million of total unrecognized compensation cost was related to unvested stock-based compensation arrangements under the 2011 Incentive Plan. The portions of this cost related to stock options, and restricted stock units awarded through January 2013, are expected to be recognized over a weighted-average period of 2.0 years.

 

17



 

9.                                      Segment Information

 

The Company is organized into three reportable segments. The segments are defined by the regions where the Company’s products are manufactured, marketed and distributed to the Company’s customers. The three regional segments are the North America segment, comprising primarily the United States and Canada, the Europe segment, and the Asia/Pacific segment, comprising the Company’s operations in China, Hong Kong, the South Pacific and the Middle East. These segments are similar in several ways, including the types of materials, the production processes, the distribution channels and the product applications.

 

The Company’s measure of profit or loss for its reportable segments is income (loss) from operations. The reconciling amounts between consolidated income before tax and consolidated income from operations are net interest income, which is primarily attributed to Administrative and All Other.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Net Sales

 

 

 

 

 

 

 

 

 

North America

 

$

159,757

 

$

144,532

 

$

287,493

 

$

272,500

 

Europe

 

32,099

 

34,120

 

56,016

 

62,356

 

Asia/Pacific

 

3,502

 

2,735

 

6,147

 

5,107

 

Administrative and all other

 

238

 

316

 

474

 

474

 

Total

 

$

195,596

 

$

181,703

 

$

350,130

 

$

340,437

 

 

 

 

 

 

 

 

 

 

 

Sales to Other Segments*

 

 

 

 

 

 

 

 

 

North America

 

$

1,170

 

$

1,442

 

$

1,931

 

$

2,814

 

Europe

 

394

 

19

 

674

 

153

 

Asia/Pacific

 

4,875

 

4,573

 

9,011

 

8,297

 

Total

 

$

6,439

 

$

6,034

 

$

11,616

 

$

11,264

 

 

 

 

 

 

 

 

 

 

 

Income (Loss) from Operations

 

 

 

 

 

 

 

 

 

North America

 

$

29,665

 

$

26,583

 

$

44,924

 

$

44,456

 

Europe

 

2,241

 

2,088

 

(1,939

)

(284

)

Asia/Pacific

 

(46

)

(163

)

(1,229

)

(817

)

Administrative and all other

 

(2,182

)

(1,360

)

(3,065

)

(2,699

)

Total

 

$

29,678

 

$

27,148

 

$

38,691

 

$

40,656

 

 


* The sales to other segments are eliminated in consolidation.

                   

 

 

 

 

 

 

At

 

 

 

At June 30,

 

December 31,

 

(in thousands)

 

2013

 

2012

 

2012

 

Total Assets

 

 

 

 

 

 

 

North America

 

$

603,981

 

$

557,502

 

$

583,501

 

Europe

 

188,563

 

204,864

 

194,000

 

Asia/Pacific

 

32,408

 

31,734

 

30,455

 

Administrative and all other

 

72,033

 

84,805

 

82,366

 

Total

 

$

896,985

 

$

878,905

 

$

890,322

 

 

Cash collected by the Company’s United States subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of “Administrative and all other.” Cash and cash equivalent balances in the “Administrative and all other” segment were $86.8 million, $82.6 million, and $91.9 million, as of June 30, 2013 and 2012, and December 31, 2012, respectively.

 

18



 

The following table illustrates how the Company’s net sales are distributed by product group for the following periods:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

(in thousands)

 

2013

 

2012

 

2013

 

2012

 

Wood Construction

 

$

165,869

 

$

154,810

 

$

298,666

 

$

292,589

 

Concrete Construction

 

29,421

 

26,488

 

50,856

 

47,230

 

Other

 

306

 

405

 

608

 

618

 

Total

 

$

195,596

 

$

181,703

 

$

350,130

 

$

340,437

 

 

Wood construction products include connectors, truss plates, fastening systems, fasteners and pre-fabricated shearwalls and are used for connecting and strengthening wood-based construction primarily in the residential construction market. Concrete construction products include adhesives, chemicals, mechanical anchors, carbide drill bits, powder actuated tools and fiber reinforcing materials and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction.

 

10.                               Plant Closure

 

In September 2012, the Company decided to discontinue manufacturing heavy-duty mechanical anchors made in its facility in Ireland, which were sold mainly in Europe, to focus on selling light-duty and medium-duty anchors and fastener products in conjunction with its connector products. In December 2012, the Company ceased producing and selling heavy-duty mechanical anchors and terminated employees in Europe, primarily in Ireland and Germany, who were manufacturing, selling or supporting the product line. In July 2013, the Company concluded all remaining closing activities associated with the terminated product line, including transferring remaining inventories and certain fixed assets to its other operating locations, and began preparing the site for lease or sale. All costs associated with the closure are reported in the Europe segment.

 

At December 31, 2012, the long-lived assets of the Ireland facility had a net book value of $2.8 million, including land and building with a net book value of $2.7 million. Due to an adverse real estate market, the Company has decided to pursue leasing the facility until the market value of the facility recovers sufficiently. In the first quarter of 2013, the Company concluded that the carrying value of its Ireland facility, associated with the Europe segment, exceeded its net estimated realizable value, and therefore recorded an impairment charge, within general and administrative expenses, of $1.0 million, equal to the amount by which carrying value exceeds net estimated realizable value. Remaining equipment with a net book value of $0.1 million was sold to outside parties, transferred to other branches within the Company or scrapped. See note 4.

 

In 2012, the Company recorded employee severance obligations of $3.0 million, of which $2.4 million was paid in 2012, and $0.6 million was accrued at December 31, 2012. In the first half of 2013, severance payments of $77 thousand were made and severance charges of $36 thousand were reversed due to the decision to retain an employee. No additional severance obligations were recorded in 2013. The remaining balance of $0.4 million to be paid in 2013 represents the statutory and discretionary amounts due to employees that were or will be involuntarily terminated. The Company does not expect to record additional severance expense in 2013.

 

Closure liabilities are recognized when a transaction or event has occurred that leaves little or no discretion to avoid future settlement of the liability. The Company estimates that closure costs will total $0.7 million, all of which will be allocated to operating expenses. As of December 31, 2012, the Company had recorded $0.3 million in plant closure expenses, of which $0.2 million was paid in 2012 and $0.1 million is to be paid in 2013. In the first half of 2013, the Company had recorded $35 thousand in plant closure costs and paid $125 thousand in accrued plant closure costs, with $18 thousand to be paid during the remainder of 2013. The Company estimates additional closure costs of $0.4 million will be incurred and paid in 2013.

 

11.                               Subsequent Events

 

In July 2013, the Company’s Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.0 million, to be paid on October 24, 2013, to stockholders of record on October 3, 2013.

 

19



 

Item 2. 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. See “Part II, Item 1A - Risk Factors.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 three months and six months ended June 30, 2013. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.

 

Overview

 

The Company designs, manufactures and sells building construction products that are of high quality and performance, easy to use and cost-effective for customers. It operates in three business segments determined by geographic region: North America, Europe and Asia/Pacific. The Company’s stated goals are to strengthen its core wood construction products, expand its global footprint to be less dependent on housing starts in the United States and continue to invest in its strategic initiatives, such as an expanded offering of concrete construction products, particularly specialty chemicals, and wood construction products, particularly truss plate and software offerings.

 

The North America segment sells both wood and concrete construction products. With the Company’s ongoing investment in its integrated component systems offering and the acquisition of Keymark’s software development team and Weyerhaeuser’s line of shearwalls, the Company continues to expand product lines that complement its core wood construction product group.

 

The Europe segment also sells both wood and concrete construction products and until recently sold primarily wood construction products. In September 2012, the Company decided to discontinue manufacturing and selling heavy-duty mechanical anchors in Europe to focus on other concrete construction products, such as its light-duty and medium-duty anchors, chemical-based products and carbon-fiber-based products. Closing the heavy-duty mechanical anchor business will save the segment an estimated $0.9 million in operating losses per quarter, excluding closing costs. Based on current conditions, the Company estimates the Europe segment will either break-even or report a small operating profit for the year 2013.

 

The Asia/Pacific segment sells both wood and concrete construction products in nearly equal amounts. With the expansion of product lines that repair, protect and strengthen concrete, brick, mortar or asphalt construction, the Company hopes to increase concrete construction product sales in the Asia/Pacific segment. Based on current conditions, the Company estimates the Asia/Pacific segment will report an operating loss for the year 2013.

 

The Admin & All Other column includes expenses such as self-insured workers compensation claims, if any, for certain members of management, stock compensation for certain members of management, interest expense, foreign exchange gains or losses and income tax expense. It also includes revenues and expenses related to real estate activities, such as rental income and depreciation expense on the Company’s facility in Vacaville, California, which the Company has leased to a third party for a term expiring in August 2020.

 

Housing starts have increased recently, and the Company has begun to benefit from that increase. Unlike lumber or other products that have a more direct correlation to starts, however, the Company’s products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. The Company’s products are used in a sequential process that follows the construction process. Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and the installation of the Company’s products flow into a project or a house according to those schedules. Foundation product sales could be considered a leading indicator for the Company. Year-to-date sales through June 2013 of these products increased in the low double digits compared to the same period in 2012.

 

20



 

The Company’s sales also tend to be 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 than in the second and third quarters of the year, as customers purchase construction materials in the late spring and summer months for the construction season. In addition, weather conditions, such as extended cold or wet weather, which affect and sometimes delay installation of some of the Company’s products, could negatively affect the Company’s results of operations. Political and economic events can also affect the Company’s sales and profitability.

 

Results of Operations for the Three Months Ended June 30, 2013, Compared with the Three Months Ended June 30, 2012

 

Net sales increased 7.6% to $195.6 million in the second quarter of 2013 from $181.7 million in the second quarter of 2012. The Company had net income of $18.5 million for the second quarter of 2013 compared to net income of $15.9 million for the second quarter of 2012. Diluted net income per common share was $0.38 for the second quarter of 2013 compared to diluted net income of $0.33 per common share for the second quarter of 2012. Income from operations increased 9.3% to $29.7 million in the second quarter of 2013 from $27.1 million in the second quarter of 2012. The following table illustrates the differences in the Company’s operating results in the three months ended June 30, 2013, from the three months ended June 30, 2012, and the increases or decreases for each category by segment.

 

 

 

Three

 

 

 

 

 

 

 

 

 

Three

 

 

 

Months

 

 

 

 

 

 

 

 

 

Months

 

 

 

Ended

 

Increase (Decrease) in Operating Segment

 

Ended

 

 

 

June 30,

 

North

 

 

 

Asia/

 

Admin &

 

June 30,

 

(in thousands)

 

2012

 

America

 

Europe

 

Pacific

 

All Other

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

181,703

 

$

15,225

 

$

(2,021

)

$

768

 

$

(79

)

$

195,596

 

Cost of sales

 

98,557

 

8,896

 

(1,876

)

226

 

373

 

106,176

 

Gross profit

 

83,146

 

6,329

 

(145

)

542

 

(452

)

89,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development and other engineering expense

 

9,043

 

280

 

(96

)

257

 

 

9,484

 

Selling expense

 

19,881

 

1,658

 

(85

)

194

 

4

 

21,652

 

General and administrative expense

 

27,087

 

1,300

 

(127

)

(30

)

365

 

28,595

 

Loss (gain) on sale of assets

 

(13

)

10

 

11

 

3

 

 

11

 

Income from operations

 

27,148

 

3,081

 

152

 

118

 

(821

)

29,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

58

 

36

 

27

 

(13

)

(107

)

1

 

Income before income taxes

 

27,206

 

3,117

 

179

 

105

 

(928

)

29,679

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

11,347

 

1,151

 

(17

)

(91

)

(1,213

)

11,177

 

Net income

 

$

15,859

 

$

1,966

 

$

196

 

$

196

 

$

285

 

$

18,502

 

 

Net sales

 

The following table represents net sales by segment for the three-month periods ended June 30, 2012 and 2013:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

$

144,532

 

$

34,120

 

$

2,735

 

$

316

 

$

181,703

 

June 30, 2013

 

159,757

 

32,099

 

3,503

 

237

 

195,596

 

Increase (decrease)

 

15,225

 

(2,021

)

768

 

(79

)

13,893

 

Percentage increase (decrease)

 

10.5

%

(5.9

)%

28.1

%

(25.0

)%

7.6

%

 

21



 

The following table represents segment net sales as percentages of total net sales for three-month periods ended June 30, 2012 and 2013:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

 

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of total 2012 net sales

 

79.5

%

18.8

%

1.5

%

0.2

%

100.0

%

Percentage of total 2013 net sales

 

81.7

%

16.4

%

1.8

%

0.1

%

100.0

%

 

The increase in the Company’s second quarter 2013 net sales was primarily due to increased sales in North America, which were affected by improved economic conditions, including a greater number of housing starts compared to the second quarter of 2012. Net sales were affected negatively by economic conditions in Europe, reduced home center sales and lower selling prices in regions of the United States, Canada and Europe.

 

·                Segment net sales:

 

·                  North America net sales increased 10.5% in the second quarter of 2013, compared to the second quarter of 2012. Net sales in the United States increased in all regions over the same period in 2012, despite the loss of some home center business and price reductions of 3% on average. Canada net sales decreased slightly over the same period in 2012 due to lower sales volumes and lower selling prices.

·                  Europe net sales decreased 5.9% in the second quarter of 2013, compared to the second quarter of 2012, with approximately half of the decrease due to exiting the heavy-duty mechanical anchor business. The region’s economic conditions, extended winter conditions and price decreases also contributed to the lower net sales. Effects due to foreign currency translation were not significant.

 

·                Consolidated net sales channels and product groups:

 

·                  Net sales to contractor distributors, dealer distributers and lumber dealers increased in the second quarter of 2013, compared to the second quarter of 2012, while net sales to home centers decreased, partly as a result of the loss of Lowe’s Companies, Inc. (“Lowe’s”) as a customer in the second quarter of 2012. Lowe’s accounted for $5.3 million in net sales in the second quarter of 2012.

·                  Excluding Lowe’s, net sales to home centers increased 6% in the second quarter of 2013 compared to the second quarter of 2012, while net sales to the Company’s largest customer increased 10% over the same period.

·                  Wood construction product sales, including connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% of total Company sales in the second quarter of each of 2013 and 2012.

·                  Concrete construction product sales, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 15% of total Company sales in the second quarter of each of 2013 and 2012.

 

Gross profit

 

The following table represents gross profit by segment for the three-month periods ended June 30, 2012 and 2013:

 

 

 

North

 

 

 

Asia/

 

Admin &

 

 

 

(in thousands)

 

America

 

Europe

 

Pacific

 

All Other

 

Total

 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

June 30, 2012

 

$

69,707

 

$

12,729

 

$

339

 

$

371

 

$

83,146

 

June 30, 2013

 

76,036

 

12,584

 

881

 

(81

)

89,420

 

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