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| SSD > SEC Filings for SSD > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
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 ended March 31, 2009 and 2008. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.
Results of Operations for the Three Months Ended March 31, 2009, Compared with the Three Months Ended March 31, 2008
Net sales decreased 28.8% from $167.7 for the first quarter of 2008 to $119.3 million in the first quarter of 2009. The Company had a net loss of $8.4 million for the first quarter of 2009 compared to net income of $8.4 million for the first quarter of 2008. Diluted net loss per common share was $0.17 for the first quarter of 2009 compared to diluted net income per common share of $0.17 for the first quarter of 2008.
In the first quarter of 2009, sales declined throughout the United States. California, the western states and the south/southeastern states had the largest decrease in sales. Sales during the quarter also decreased throughout Europe, the United Kingdom and Canada. Sales in Asia, although relatively small, have increased as Simpson Strong-Tie has recently expanded its presence in the region. Simpson Strong-Tie's first quarter sales decreased 29.2% from the same quarter last year, while Simpson Dura-Vent's sales decreased 24.5%. Simpson Strong-Tie's sales to dealer distributors and contractor distributors decreased significantly as homebuilding continued to decline and general economic conditions continued to worsen. In response to changing conditions, the Company recomposed the group of customers that it classifies as home centers by removing those customers that serve professional users rather than retail customers and classifying them as dealer distributors. Under the new classification, sales to home centers decreased slightly whereas under the old composition, the decrease would have been larger. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of most of Simpson Dura-Vent's product lines also decreased, with the exception of special gas vent and relining products, which increased as a result of the acquisition of ProTech Systems, Inc. in June 2008.
Income from operations decreased 176.7% from $13.5 million in income in the first quarter of 2008 to a loss of $10.3 million in the first quarter of 2009. Gross margins decreased from 33.6% in the first quarter of 2008 to 25.7% in the first quarter of 2009. The decrease in gross margins was primarily due to reduced absorption of fixed overhead, as a result of lower production volumes, as well as higher manufacturing costs, including higher cost of material, labor and distribution. Steel prices continued to decline from their peak in July 2008, as a result of weak demand. The Company has focused on reducing its inventories, which have come down by 10.4% since December 31, 2008, but, with lower sales volumes, it may take several quarters to sell excess inventory.
Research and development expenses decreased 4.7% from $5.1 million in the first quarter of 2008 to $4.9 million in the first quarter of 2009. This decrease was primarily due to a $0.4 million decrease in professional service fees, partly offset by $0.2 million increase in expenses related to additional personnel, including those at businesses acquired in 2008. Selling expenses decreased 19.1% from $19.8 million in the first quarter of 2008 to $16.0 million in the first quarter of 2009. The decrease resulted from a $2.0 million decrease in expenses associated with sales and marketing personnel, most of which was related to cost-cutting measures, and a $1.1 million decrease in promotional expenditures. General and administrative expenses increased 12.8% to $20.2 million in the first quarter of 2009 from $17.9 million in the first quarter of 2008. The increase was the result of several factors, including higher bad debt expense of $2.5 million, primarily related to one customer, increased legal and professional service expenses of $0.8 million and higher administrative personnel expenses of $0.7 million, including those at businesses acquired in 2008. This increase was partly offset by a decrease in cash profit sharing of $1.5 million, primarily due to the operating loss. Interest income decreased 91.0% from $1.1 million in the first quarter of 2008 to $0.1 million in the first quarter of 2009, primarily as a result of lower interest rates. The effective tax rate was 19.4% in the first quarter of 2009, which resulted in income tax benefit of $2.0 million, versus an effective tax rate of 42.8% in the first quarter of 2008, which resulted in income tax expense of $6.3 million. The effective tax rate of 19.4% is lower than the
statutory rate primarily due to the valuation allowances taken on foreign losses and a reduced benefit from the reduction or loss of enterprise zone tax credits at two of the Company's facilities in California. As a result of the loss before taxes in the first quarter of 2009, the lower effective tax rate resulted in a smaller benefit than if the Company had a higher effective tax rate. In general, the Company is required to use an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in an interim period. The income tax benefit for the three months ended March 31, 2009, however, has been computed based on the first three months of 2009 as a discrete period due to the uncertainty regarding the Company's ability to reliably estimate pre-tax income for the remainder of the year. The Company cannot reliably estimate pre-tax income for the remainder of 2009 or for the full year, primarily due to the continued uncertainty in the construction markets in which the Company operates. The income tax provision for the three months ended March 31, 2008, was calculated using estimated annual effective tax rates.
Connector Products - Simpson Strong-Tie
In the first quarter of 2009, Simpson Strong-Tie's net sales decreased 29.2% to $109.1 million from $154.2 million in the first quarter of 2008. Simpson Strong-Tie accounted for 91.5% of the Company's total net sales in the first quarter of 2009, a decrease from 92.0% in the first quarter of 2008. The decrease in net sales at Simpson Strong-Tie resulted primarily from a decrease in sales volume, although average prices increased 22.1% as compared to the first quarter of 2008. In the first quarter of 2009, Simpson Strong-Tie's sales declined throughout the United States. California, the western states and the south/southeastern states had the largest decrease in sales. Simpson Strong-Tie's sales during the quarter also decreased throughout Europe, the United Kingdom and Canada. Sales in Asia, although relatively small, have increased as Simpson Strong-Tie has recently expanded its presence in the region. Simpson Strong-Tie's sales to dealer distributors and contractor distributors decreased significantly as homebuilding continued to decline and general economic conditions continued to worsen. In response to changing conditions, the Company recomposed the group of customers which it classifies as home centers by removing those customers that serve professional users rather than retail customers and classifying them as dealer distributors. Under the new classification, sales to home centers decreased slightly whereas under the old composition, the decrease would have been larger. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction.
Simpson Strong-Tie's gross profit decreased 45.2% from $56.0 million in the first quarter of 2008 to $30.7 million in the first quarter of 2009. As a percentage of net sales, gross profit decreased from 36.3% in the first quarter of 2008 to 28.1% in the first quarter of 2009. This decrease was primarily due to reduced absorption of fixed overhead, as a result of lower production volumes, as well as higher manufacturing costs, including higher costs of material, labor and distribution.
Simpson Strong-Tie's research and development expenses decreased 6.7% from $4.8 million in the first quarter of 2008 to $4.5 million in the first quarter of 2009. This decrease was primarily due to a $0.5 million decrease in professional services partly offset by increases in expenses related to additional personnel, including those associated with the acquisitions made during 2008. Simpson Strong-Tie's selling expenses decreased 18.9% from $18.1 million in the first quarter of 2008 to $14.7 million in the first quarter of 2009. The decrease resulted primarily from a $1.9 million decrease in expenses associated with sales and marketing personnel, most of which was related to cost cutting measures, a decrease of $1.0 million in promotional expenditures, and a $0.5 million decrease in professional services. Simpson Strong-Tie's general and administrative expenses increased 12.2% to $18.5 million in the first quarter of 2009 from $16.5 million in the first quarter of 2008. The increase was primarily due to an increase in the provision for bad debt of $2.5 million, primarily related to one customer, higher administrative personnel expenses of $0.3 million, including those at businesses acquired in 2008, and increased home office administrative allocations of $1.3 million. The increase was partly offset by decreases in cash profit sharing of $1.5 million, as a result of the operating loss, and in information technology expenditures of $0.2 million.
Simpson Strong-Tie recorded a loss from operations of $7.1 million in the first quarter of 2009 as compared to income from operations of $16.5 million in the first quarter of 2008.
For its European operations, Simpson Strong-Tie recorded losses from operations of $4.2 million in the first quarter of 2009 compared to losses from operations of $1.0 million in the first quarter of 2008.
Simpson Strong-Tie has continued to adjust production levels downward at various facilities in the United States, and as a result, has reduced its labor force at these facilities.
Venting Products - Simpson Dura-Vent
In the first quarter of 2009, Simpson Dura-Vent's net sales decreased 24.5% to $10.2 million from $13.5 million in the first quarter of 2008. Simpson Dura-Vent accounted for 8.5% of the Company's total net sales in the first quarter of 2009, an increase from 8.0% in the first quarter of 2008. The decrease in net sales at Simpson Dura-Vent resulted primarily from a decrease in sales volume, although average prices increased 10.0% as compared to the first quarter of 2008. In the first quarter of 2009, Simpson Dura-Vent's sales decreased throughout the United States, with significant decreases in the western region resulting from the weakness in new home construction. Sales of most of Simpson Dura-Vent's product lines also decreased, with the exception of special gas vent and relining products, which increased as a result of the acquisition of ProTech Systems, Inc. in June 2008.
Simpson Dura-Vent's gross profit decreased slightly from $115 thousand in the first quarter of 2008 to $92 thousand in the first quarter of 2009. This decrease was primarily due to higher manufacturing costs, including higher cost of material and distribution costs, partly offset by lower fixed overhead costs.
Simpson Dura-Vent's selling expenses decreased 21.5% from $1.7 million in the first quarter of 2008 to $1.3 million in the first quarter of 2009. The decrease resulted primarily from decreases of $0.2 million in promotional activities, $0.2 million in agent commissions and $0.1 million in expenses associated with sales and marketing personnel. Simpson Dura-Vent's general and administrative expenses increased 65.7% to $1.7 million in the first quarter of 2009 from $1.0 million in the first quarter of 2008. This increase was primarily due to increased expenses associated with administrative personnel of $0.1 million, including those at businesses acquired in 2008, and higher intangible asset amortization expense of $0.2 million.
Simpson Dura-Vent's loss from operations increased to $3.3 million in the first quarter of 2009 from $2.9 million in the first quarter of 2008.
Administrative and All Other (Company)
Interest income is generated on the Company's cash and cash equivalents balances. Interest income decreased primarily as a result of lower interest rates. Interest expense includes interest, account maintenance fees and bank charges.
Critical Accounting Policies and Estimates
The Company did not make any significant changes to its critical accounting policies and estimates during the three months ended March 31, 2009, from those disclosed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Recently Issued Accounting Standards
See Note 1, "Basis of Presentation - Recently Issued Accounting Standards," to the Company's Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.
Liquidity and Sources of Capital
As of March 31, 2009, working capital was $438.9 million as compared to $448.3 million at March 31, 2008, and $455.7 million at December 31, 2008. The decrease in working capital from December 31, 2008, was primarily due to decreases in inventories and cash and cash equivalents of $26.3 million and $12.5 million, respectively. Raw material inventories decreased 6.7% from December 31, 2008, while in-progress and finished goods inventories decreased 12.6% over the same period. The decrease in raw material inventories resulted from lower purchasing activity during the quarter, and the decreases in in-progress and finished goods inventories resulted from lower production volumes at the Company's manufacturing facilities. Partly offsetting the decreases in working capital were decreases in accrued profit sharing contributions and accrued liabilities of $7.6 million and $5.2 million, respectively, and increases in net trade accounts receivable and other current assets of $3.4 million and $4.7 million, respectively. The balance of the change in working capital was due to the fluctuation of various other asset and liability accounts, none of which was individually material. The working capital change and changes in noncurrent
assets and liabilities, combined with a net loss of $8.4 million and noncash expenses, primarily depreciation, amortization and stock-based compensation charges totaling $7.4 million, resulted in net cash provided by operating activities of $0.5 million. As of March 31, 2009, the Company had unused credit facilities available of $204.7 million.
The Company used $7.5 million in its investing activities, primarily for the acquisition of the DeckTools business and capital expenditures mainly at its facilities in Europe and Asia. The Company estimates that its full-year capital spending will total $15.0 million for 2009.
In January 2009, the Company acquired the business of RO Design Corp, a Florida corporation doing business as DeckTools, which licenses deck design and estimation software. The software provides professional deck builders, home centers and lumber yards a simple, graphics-driven solution for designing decks and estimating material and labor costs for the project. Payments under this agreement total $4.0 million in cash, including $2.5 million to be paid in the future, which will be treated as compensation expense to the principal officer of RO Design Corp, who is now employed by the Company. The Company recorded goodwill of $1.5 million as a result of the acquisition, but the purchase price allocation has not been finalized.
In April 2009, the Company's subsidiary, Simpson Strong-Tie Europe EURL, purchased the equity of Agence Internationale Commerciale et Industrielle, S.A.S. ("Aginco"). Aginco manufactures a line of high quality builder products and distributes them in France. The purchase price (subject to post-closing adjustments) was $21.9 million in cash.
The Company has classified its vacant facility in San Leandro, California, as an asset held for sale. In 2007 and 2008, environmental analyses of the San Leandro property indicated that it had contamination related to spilled fuel that would require an estimated $0.7 million to remediate. The clean-up is expected to be completed in 2009. The Company expects to sell the San Leandro property after the remediation is completed.
The Company's financing activities used net cash of $3.9 million. The payment of cash dividends in the amount of $4.9 million was the primary financing activity use of cash. Cash provided by financing activities was primarily from borrowings of $0.8 million on credit lines of the Company's European subsidiaries. In April 2009, the Company's Board of Directors declared a cash dividend of $0.10 per share, a total currently estimated at $4.9 million, to be paid on July 23, 2009, to stockholders of record on July 2, 2009.
The Company believes that cash generated by operations and borrowings available under its credit facility will be sufficient for the Company's working capital needs and planned capital expenditures for the next 12 months. Depending, however, on the Company's future growth and possible acquisitions, it may become necessary to secure additional sources of financing, which may not be available on reasonable terms, or at all.
The Company believes that the effect of inflation on the Company has not been material in recent years, as general inflation rates have remained relatively low. Because, however, the Company's main raw material is steel, increases in steel prices may adversely affect the Company's gross margins if it cannot recover the higher costs through price increases.
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