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| SSD > SEC Filings for SSD > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-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 and nine months ended September 30, 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 September 30, 2009, Compared with the Three Months Ended September 30, 2008
Net sales decreased 23.9% from $219.8 million in the third quarter of 2008 to $167.2 million in the third quarter of 2009. Net income decreased 45.4% from $23.4 million in the third quarter of 2008 to $12.8 million in the third quarter of 2009. Diluted net income per common share was $0.26 in the third quarter of 2009 compared to diluted net income per common share of $0.48 in the third quarter of 2008.
In the third quarter of 2009, sales declined throughout the United States. Sales during the quarter also decreased throughout Europe, with the exception of France, and decreased in the United Kingdom and Canada. Sales in France were up primarily due to the acquisition of Agence Internationale Commerciale et Industrielle, S.A.S. ("Aginco") in April 2009. Simpson Strong-Tie's third quarter sales decreased 22.0% from the same quarter last year, while Simpson Dura-Vent's sales decreased 37.5%. Simpson Strong-Tie's sales to contractor distributors and dealer distributors decreased significantly as home-building activity, and general economic conditions, remained weak. Sales to home centers also decreased. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Simpson Dura-Vent's sales decreased across most of its product lines, with the exception of special gas vent products, which were up slightly.
Income from operations decreased 43.5% from $37.2 million in the third quarter of 2008 to $21.0 million in the third quarter of 2009. Gross margins decreased from 40.8% in the third quarter of 2008 to 36.4% in the third 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 costs of material and labor. The decline in steel prices slowed in the second quarter of 2009 and prices again started to rise in the third quarter of 2009. The Company expects steel prices to continue to increase as demand returns to the market. Through the first nine months of 2009, inventories decreased 29.2% from $251.9 million at December 31, 2008, to $178.2 million at September 30, 2009.
Research and development expense decreased 12.2% from $5.7 million in the third quarter of 2008 to $5.0 million in the third quarter of 2009, primarily due to a $0.4 million decrease in personnel expenses. Selling expense decreased 27.0% from $21.3 million in the third quarter of 2008 to $15.6 million in the third quarter of 2009, which resulted primarily from a $3.6 million decrease in expenses associated with sales and marketing personnel, most of which was related to cost-cutting measures, a $1.1 million decrease in promotional expenditures and a $0.6 million decrease in commissions paid to selling agents. General and administrative expense decreased 24.2% from $25.5 million in the third quarter of 2008 to $19.4 million in the third quarter of 2009. This decrease resulted from several factors, including a $1.8 million decrease in administrative personnel expenses, related in part to cost-cutting measures, a $1.7 million decrease in cash profit sharing, a $1.6 million decrease in legal and professional service expenses and a $0.9 million decrease in the provision for bad debt, partly offset by a $0.5 million increase in amortization of intangible assets, primarily related to the acquisition of Aginco. Interest income decreased primarily due to lower interest rates. The effective tax rate was 39.3% in the third quarter of 2009, up from 38.1% in the third quarter of 2008. The effective tax rate is higher 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. 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 expense for the three months ended September 30, 2009, however, has been computed based on the three months ended September 30,
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 September 30, 2008, was calculated using estimated annual effective tax rates.
Connector Products - Simpson Strong-Tie
Simpson Strong-Tie's net sales decreased 22.0% from $192.4 million in the third quarter of 2008 to $150.1 million in the third quarter of 2009. Simpson Strong-Tie accounted for 89.8% of the Company's total net sales in the third quarter of 2009, up from 87.5% in the third quarter of 2008. The decrease in net sales at Simpson Strong-Tie resulted primarily from a decrease in sales volume, some of which was offset by increases from newly acquired businesses, although average prices increased 3.0% as compared to the third quarter of 2008. In the third quarter of 2009, Simpson Strong-Tie's sales declined throughout the United States. California and the western and the southeastern regions had the largest decrease in sales. Simpson Strong-Tie's sales during the quarter also decreased throughout Europe, with the exception of France, and decreased in the United Kingdom and Canada. Sales in France increased, primarily due to the acquisition of Aginco in April 2009. Simpson Strong-Tie's sales to contractor distributors and dealer distributors decreased significantly as home-building activity, and general economic conditions, remained weak. Sales to home centers also decreased. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction.
Simpson Strong-Tie's income from operations decreased 41.1% from $35.3 million in the third quarter of 2008 to $20.8 million in the third quarter of 2009. Gross margin decreased from 43.7% in the third quarter of 2008 to 38.1% in the third 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 and labor.
Simpson Strong-Tie's research and development expense decreased 13.1% from $5.3 million in the third quarter of 2008 to $4.6 million in the third quarter of 2009. This decrease was primarily due to a $0.4 million decrease in personnel expenses and a $0.2 million decrease in professional service fees. Simpson Strong-Tie's selling expense decreased 26.1% from $19.2 million in the third quarter of 2008 to $14.2 million in the third quarter of 2009, which resulted primarily from a $3.5 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. Simpson Strong-Tie's general and administrative expense decreased 27.3% from $24.2 million in the third quarter of 2008 to $17.6 million in the third quarter of 2009, which was primarily due to a $2.4 million decrease in cash profit sharing, a $1.7 million decrease in administrative personnel expenses, a $1.3 million decrease in professional service fees and a $1.0 million decrease in bad debt expense, partly offset by an increase of $0.3 million in amortization of intangible assets, primarily related to the businesses acquired since June 2008.
For its European and United Kingdom operations, Simpson Strong-Tie recorded income from operations of $0.5 million in the third quarter of 2009 compared to income from operations of $1.4 million in the third 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
Simpson Dura-Vent's net sales decreased 37.5% from $27.4 million in the third quarter of 2008 to $17.1 million in the third quarter of 2009. Simpson Dura-Vent accounted for 10.2% of the Company's total net sales in the third quarter of 2009, a decrease from 12.5% in the third quarter of 2008. The decrease in net sales at Simpson Dura-Vent resulted primarily from a decrease in sales volume, although average prices increased 2.5% as compared to the third quarter of 2008. In the third quarter of 2009, Simpson Dura-Vent's sales decreased throughout the United States, resulting from the weakness in new home construction, with the exception of the southeast where sales were flat. Simpson Dura-Vent's sales decreased across most of its product lines, with the exception of special gas vent products, which were up slightly.
Simpson Dura-Vent's income from operations decreased 66.4% from $1.8 million in the third quarter of 2008 to $0.6 million in the third quarter of 2009. Gross margin increased to 21.7% in the third quarter of 2009 from 20.6% in the third quarter of 2008, primarily due to lower fixed overhead costs, partly offset by higher costs of material and labor.
Simpson Dura-Vent's selling expense decreased 35.5% from $2.1 million in the third quarter of 2008 to $1.4 million in the third quarter of 2009, which was primarily due to a $0.6 million decrease in expenses associated with agent commissions due to lower sales.
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 and was more than offset by interest expense, which includes interest, account maintenance fees and bank charges.
Results of Operations for the Nine Months Ended September 30, 2009, Compared with the Nine Months Ended September 30, 2008
Net sales decreased 25.4% from $606.7 million in the first nine months of 2008 to $452.4 million in the first nine months of 2009. Net income decreased 71.1% from $52.1 million in the first nine months of 2008 to $15.0 million in the first nine months of 2009. Diluted net income per common share was $0.31 in the first nine months of 2009 compared to diluted net income per common share of $1.06 in the first nine months of 2008.
In the first nine months of 2009, sales declined throughout the United States. California and the western and southeastern regions had the largest decreases in sales. Sales during the period also decreased in Europe, the United Kingdom and Canada. Simpson Strong-Tie's sales for the first nine months of the year decreased 25.5% from the same period last year, while Simpson Dura-Vent's sales decreased 24.6%. Simpson Strong-Tie's sales to contractor distributors and dealer distributors decreased as a result of the weakness in the U.S. housing market. Sales to home centers also decreased. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction. Sales of Simpson Dura-Vent's Direct-Vent and gas vent, hearth and pellet vent product lines decreased, while sales of special gas vent and relining products increased, primarily as a result of the acquisition of ProTech in June 2008.
Income from operations decreased 64.4% from $83.0 million in the first nine months of 2008 to $29.6 million in the first nine months of 2009. Gross margins decreased from 37.9% in the first nine months of 2008 to 33.8% in the first nine months 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 costs of material and labor.
Research and development expense decreased 8.4% from $16.4 million in the first nine months of 2008 to $15.0 million in the first nine months of 2009, primarily due to a $0.7 million decrease in professional service fees and a $0.6 million decrease in personnel expenses. Selling expense decreased 23.4% from $63.3 million in the first nine months of 2008 to $48.4 million in the first nine months of 2009, which resulted primarily from an $8.6 million decrease in expenses associated with sales and marketing personnel, most of which was related to cost-cutting measures, a $4.0 million decrease in promotional expenditures and a $1.0 million decrease in commissions paid to selling agents. General and administrative expense decreased 10.9% from $67.2 million in the first nine months of 2008 to $59.8 million in the first nine months of 2009, which resulted primarily from a $6.1 million decrease in cash profit sharing, a $1.7 million decrease in administrative personnel expenses, related in part to cost-cutting measures, and a $1.5 million decrease in legal and professional service expenses, partly offset by a $1.3 million increase in bad debt charges, most of which was recorded in the first quarter of 2009, and a $1.5 million increase in amortization of intangible assets, primarily related to the businesses acquired since June 2008. Interest income decreased from $2.2 million in the first nine months of 2008 to $64 thousand in the first nine months of 2009, primarily due to lower interest rates. The effective tax rate was 48.9% in the first nine months of 2009, up from 38.9% in the first nine months of 2008. The effective tax rate is higher 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. The income tax expense for the first nine months of 2009, however, has been computed based on the first three quarters of 2009 as discrete periods due to the uncertainty regarding the Company's ability to reliably estimate pre-tax income for the remainder of the year. The effective tax rate was 19.4% in the first quarter of 2009, which, as a result of the loss before taxes in the first quarter of 2009, resulted in income tax benefit of $2.0 million. The effective tax rate was 43.3% in the second quarter of 2009, which resulted in income tax expense of $8.2 million. The effective tax rate was 39.3% in the third quarter of 2009, which resulted in income tax expense of $8.3 million. 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 nine months ended September 30, 2008, was calculated using estimated annual effective tax rates.
Connector Products - Simpson Strong-Tie
Simpson Strong-Tie's net sales decreased 25.5% from $552.3 million in the first nine months of 2008 to $411.4 million in the first nine months of 2009. Simpson Strong-Tie accounted for 90.9% of the Company's total net sales in the first nine months of 2009, a slight decrease from 91.0% in the first nine months of 2008. The decrease in net sales at Simpson Strong-Tie resulted primarily from a decrease in sales volume, partly offset by increases from newly acquired businesses and increases in prices averaging 13.7% from the first nine months of 2008. In the first nine months of 2009, Simpson Strong-Tie's sales declined throughout the United States. California, the western states and the southeastern states had the largest decrease in sales. Simpson Strong-Tie's sales to contractor distributors and dealer distributors decreased as a result of the weakness in the U.S. housing market. Sales to home centers also decreased. Sales decreased across all of Simpson Strong-Tie's major product lines, particularly those used in new home construction.
Simpson Strong-Tie's income from operations decreased 61.1% from $88.2 million in the first nine months of 2008 to $34.4 million in the first nine months of 2009. Gross margin decreased from 40.6% in the first nine months of 2008 to 35.7% in the first nine months 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 expense decreased 9.9% from $15.5 million in the first nine months of 2008 to $14.0 million in the first nine months of 2009, primarily due to a $0.7 million decrease in professional services and a $0.7 million decrease in personnel expenses. Simpson Strong-Tie's selling expense decreased 23.6% from $58.0 million in the first nine months of 2008 to $44.3 million in the first nine months of 2009, which resulted primarily from a $8.4 million decrease in expenses associated with sales and marketing personnel, most of which was related to cost-cutting measures, a $3.9 million decrease in promotional expenditures and a $0.6 million decrease in professional services. Simpson Strong-Tie's general and administrative expense decreased 13.3% from $62.6 million in the first nine months of 2008 to $54.3 million in the first nine months of 2009, primarily due to a $6.1 million decrease in cash profit sharing that resulted from lower operating income, a $2.6 million decrease in administrative personnel expenses, a $1.3 million decrease in legal and professional fees and a $0.8 million decrease in information technology expenditures, partly offset by a $1.2 million increase in the provision for bad debt, a $1.1 million increase in home office administrative allocations, and a $0.9 million increase in intangible asset amortization expense, primarily related to the acquisition of Aginco.
For its European and United Kingdom operations, Simpson Strong-Tie recorded losses from operations of $5.1 million in the first nine months of 2009 compared to income from operations of $3.0 million in the first nine months 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
Simpson Dura-Vent's net sales decreased 24.6% from $54.4 million in the first nine months of 2008 to $41.0 million in the first nine months of 2009. Simpson Dura-Vent accounted for 9.1% of the Company's total net sales in the first nine months of 2009, a slight increase from 9.0% in the first nine months of 2008. The decrease in net sales at Simpson Dura-Vent resulted primarily from a decrease in sales volume, partly offset by the addition of ProTech sales and an increase in average prices of 5.3% from the first nine months of 2008. In the first nine months of 2009, Simpson Dura-Vent's sales decreased throughout the United States, with the largest decreases in California and the western and northeastern regions, resulting from the weakness in new home construction. These decreases were offset slightly by increases in the southeastern region. Sales of Simpson Dura-Vent's Direct-Vent and gas vent, hearth and pellet vent product lines decreased, while sales of special gas vent and relining products increased, primarily as a result of the acquisition of ProTech in June 2008.
Simpson Dura-Vent's loss from operations decreased slightly from $3.9 million in the first nine months of 2008 to $3.7 million in the first nine months of 2009. Gross margin increased to 14.6% in the first nine months of 2009 from 10.3% in the first nine months of 2008, primarily due to lower fixed overhead and labor costs, offset slightly by higher material costs.
Simpson Dura-Vent's research and development expense increased 20.7% to $1.0 million in the first nine months of 2009 from $0.8 million in the first nine months of 2008, which resulted primarily from an increase of $0.1 million in professional service expenses and a $0.1 million increase in personnel costs. Simpson Dura-Vent's selling expense decreased 20.9% from $5.2 million in the first nine months of 2008 to $4.1 million in the first nine months of 2009. This decrease resulted primarily from a $0.8 million decrease in agent commissions, a $0.2 million decrease in expenses associated with sales and marketing personnel and a $0.1 million decrease in promotional expenditures. Simpson Dura-Vent's general and administrative expense increased 33.5% to $4.5 million in the first nine months of 2009 from $3.4 million in the first nine months of 2008, primarily due to a $0.2 million increase in expenses associated with administrative personnel, including those at businesses acquired in 2008, and a $0.6 million increase in intangible asset amortization expense.
Administrative and All Other (Company)
Interest income is generated on the Company's cash and cash equivalents balances. In the first nine months of 2009, interest income decreased primarily as a result of lower interest rates and was nearly offset by interest expense, which 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 or nine months ended September 30, 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. See Note 1, "Basis of Presentation - Recently Issued Accounting Standards," to the Company's Condensed Consolidated Financial Statements appearing elsewhere in this report regarding recently issued accounting standards.
Liquidity and Sources of Capital
As of September 30, 2009, working capital was $461.2 million as compared to $456.5 million at September 30, 2008, and $455.7 million at December 31, 2008. The increase in working capital from December 31, 2008, was primarily due to a $49.4 million increase in cash and cash equivalents, a $32.0 million increase in net trade accounts receivable, a $4.1 million decrease in accrued profit sharing trust contributions and a $2.4 million decrease in other accrued liabilities. Net trade accounts receivable increased 42.1% from December 31, 2008, as a result of increased sales in the latter part of the third quarter of 2009 compared to the latter part of the fourth quarter of 2008. Partly offsetting the increases in working capital were a $73.6 million decrease in inventories, an $8.0 million increase in trade accounts payable, a $3.4 million increase in accrued cash profit sharing and commissions and a $1.2 million increase in income taxes payable. Raw material inventories decreased 33.7% from December 31, 2008, and in-progress and finished goods inventories decreased 26.6% over the same period. The decrease in inventories resulted primarily from decreased raw material purchases. 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 net income of $15.0 million and noncash expenses, primarily depreciation, amortization and stock-based compensation charges totaling $23.6 million, resulted in net cash provided by operating activities of $88.7 million. As of September 30, 2009, the Company had unused credit facilities available of $205.1 million.
In January 2009, the Company's subsidiary, Simpson Strong-Tie Company Inc., 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 $0.4 million and intangible assets subject to amortization of $1.1 million in the connector products segment 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 Aginco, which 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 recorded goodwill of $12.1 million and intangible assets subject to amortization of $7.4 million in the connector products segment as a result of the acquisition. Net tangible assets, including machinery and equipment, inventory and trade accounts receivable, accounted for the balance of the purchase price, but the purchase price allocation has not been finalized.
The Company used $35.2 million in its investing activities, primarily for the acquisitions of the RO Design Corp and Aginco businesses and capital expenditures mainly at its facilities in Europe and Asia. The Company estimates that its full-year capital spending will total $14.5 million in 2009.
The Company has classified its vacant facility in San Leandro, California, as an asset held for sale. The Company has completed its environmental remediation at this facility.
The Company's financing activities used net cash of $8.1 million. The payment of cash dividends in the amount of $14.7 million was the primary financing activity use of cash. Cash provided by financing activities was primarily from the issuance of the Company's common stock through the exercise of stock options totaling $6.4 million. In October 2009, the Company's Board of Directors declared a cash dividend of $0.10 per share, estimated at $4.9 million, to be paid on January 28, 2010, to stockholders of record on January 7, 2010.
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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