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SSD > SEC Filings for SSD > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for SIMPSON MANUFACTURING CO INC /CA/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SIMPSON MANUFACTURING CO INC /CA/


6-Nov-2012

Quarterly Report


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 nine months ended September 30, 2012. 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, 2012, Compared with the Three Months Ended September 30, 2011

Income from operations decreased 11.6% from $24.9 million in the third quarter of 2011 to $22.0 million in the third quarter of 2012. The following table illustrates the differences in the Company's operating results in the three months ended September 30, 2012, from the three months ended September 30, 2011, and the increases or decreases for each category by segment.

                          Three                                                                 Three
                         Months                                                                Months
                          Ended            Increase (Decrease) in Operating Segment             Ended
                        Sep. 30,       North                          Asia/       Admin &     Sep. 30,
(in thousands)            2011        America          Europe        Pacific     All Other      2012

Net sales               $ 162,366   $      9,146    $        120    $     481   $         -   $ 172,113
Cost of sales              86,919          8,214           1,073           67           117      96,390
Gross profit               75,447            932            (953 )        414          (117 )    75,723
Research and
development and other
engineering expense         6,804          2,088             (65 )         89             -       8,916
Selling expense            18,633          1,830             277          196             5      20,941
General and
administrative
expense                    25,174         (1,506 )           397          756          (978 )    23,843
Loss (gain) on sale
of assets                     (46 )            7              66            6             -          33
Income from
operations                 24,882         (1,487 )        (1,628 )       (633 )         856      21,990
Income in equity
method investment,
before tax                  4,471         (4,471 )             -            -             -           -
Interest income, net           79            (35 )            46           19           (54 )        55
Income before income
taxes                      29,432         (5,993 )        (1,582 )       (614 )         802      22,045
Provision for income
taxes                      10,052         (1,905 )         1,350          114          (542 )     9,069
Net income              $  19,380   $     (4,088 )  $     (2,932 )  $    (728 ) $     1,344   $  12,976

The following table represents net sales by segment for the three months ended September 30, 2011 and 2012:

                        North                 Asia/      Admin &
(in thousands)         America     Europe    Pacific    All Other      Total
Three months ended:
September 30, 2011    $ 127,998   $ 31,761   $  2,370   $      237   $ 162,366
September 30, 2012      137,145     31,880      2,851          237     172,113
Increase                  9,147        119        481            -       9,747
Percentage increase         7.1 %      0.4 %     20.3 %        0.0 %       6.0 %


The Admin & All Other column primarily 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, as well as 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 10-year term expiring in August 2020.

For the third quarter of 2012, net sales increased 6.0% to $172.1 million compared to net sales of $162.4 million for the third quarter of 2011. The Company had net income of $13.0 million for the third quarter of 2012 compared to net income of $19.4 million for the third quarter of 2011, which included a $4.5 million gain on the sale of the Company's equity investment in Keymark. Diluted net income per common share was $0.27 for the third quarter of 2012 compared to diluted net income of $0.40 per common share for the third quarter of 2011.

The increase in the Company's third quarter 2012 net sales was due to sales of $8.8 million by businesses acquired since December 2011 and to increased volume. In the third quarter 2012, sales increased in North America, with an above-average increase in the United States, due in part to recent acquisitions. Sales in Europe were flat, due to sales from the European acquisition offset by decreases throughout the rest of the Company's European operations, particularly in France and the Nordic region, which were down 14% and 18%, respectively. The decrease in sales, apart from acquired businesses, was primarily due to economic uncertainty throughout most of Europe, which negatively affected sales volumes. Effects of foreign currency translation were not significant. Sales to contractor distributors and lumber dealers increased in the third quarter of 2012, compared to the third quarter of 2011, while sales to dealer distributors and to home centers decreased over the same period, although sales to the Company's largest customer increased 22.0% for the same periods. Wood construction product sales, including connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% of total Company sales in the third quarter of 2012, down from 89% in the third quarter of 2011. Concrete construction product sales, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, as a percentage of total sales increased to 15% in the third quarter of 2012, from 11% in the third quarter of 2011. The majority of sales from recent acquisitions were attributed to the European acquisition, and mostly in concrete construction products.

The following table represents gross profit by segment for the three months ended September 30, 2011 and 2012:

                                  North                  Asia/      Admin &
(in thousands)                   America     Europe     Pacific    All Other      Total
Three months ended:
September 30, 2011               $ 64,262   $ 10,928    $     81   $      176    $ 75,447
September 30, 2012                 65,194      9,975         495           59      75,723
Increase (decrease)                   932       (953 )       414         (117 )       276
Percentage increase (decrease)        1.5 %     (8.7 )%    511.1 %      (66.5 )%      0.4 %

Gross profit increased slightly to $75.7 million in the third quarter of 2012 from $75.4 million in the third quarter of 2011. As a percentage of net sales, gross profit decreased from 46.5% in the third quarter of 2011 to 44.0% in the third quarter of 2012. The North American gross profit margin decreased from 50.2% in the third quarter of 2011 to 47.5% in the third quarter of 2012, as a result of higher material and labor costs as a percentage of sales, increased concrete construction product sales, which have a lower gross margin than wood construction product sales, and competitive price pressure. These costs increases were partly offset by lower factory overhead costs as a percentage of sales, which resulted from higher sales volume. The European gross profit margin decreased from 34.4% in the third quarter of 2011 to 31.3% in the third quarter of 2012, primarily due to higher material, labor and warehouse costs. Steel prices decreased slightly in the third quarter. Due to a number of factors that could affect supply, the Company is uncertain of steel pricing through the last quarter of 2012, but steel prices are expected to increase in 2013.

Unless otherwise noted, changes in operating expenses were mostly attributable to the North American segment. Research and development and engineering expense increased 31.0% from $6.8 million in the third quarter of 2011 to $8.9 million in the third quarter of 2012, including increases in professional fees of $1.5 million primarily for truss software development costs and personnel costs of $0.9 million resulting from additional employees, partly due to the recent North American acquisitions, and an annual pay rate increase instituted in January 2012, which also applied to personnel in other departments. Selling expense increased 12.4% from $18.6 million in the third quarter of 2011 to $20.9 million in the third quarter of 2012, primarily due to increases in personnel costs of $1.1 million, mostly from the recent North American acquisitions, additional employees and increased pay rates, promotional costs of $0.9 million and professional and legal fees of $0.4 million. These increases were partly offset by a reduction in cash profit sharing of $0.8 million due to lower operating income. General and administrative expense


decreased 5.3% from $25.2 million in the third quarter of 2011 to $23.8 million in the third quarter of 2012. Professional and legal fees decreased $2.4 million, which was primarily due to a $1.1 million legal contingency recorded in 2011, and the balance due to acquisitions that were completed in 2011 and the first quarter of 2012, and cash profit sharing decreased $1.1 million due to lower operating income. These decreases were partly offset by increases in depreciation expense of $0.8 million and amortization expense of $0.7 million primarily due to recent acquisitions in both North America and Europe and to increased personnel costs of $0.5 million primarily due to the recent European acquisition, additional employees and increased pay rates.

The effective tax rate increased from 34.2% in the third quarter of 2011 to 41.1% in the third quarter of 2012, primarily due to $0.9 million in valuation allowances related to 2012 European operational losses, while in 2011 release of valuation allowances related to the disposal of the Keymark equity investment led to the lower effective tax rate.

Results of Operations for the Nine Months Ended September 30, 2012, Compared with the Nine Months Ended September 30, 2011

Income from operations decreased 8.4% from $68.4 million in the first nine months of 2011 to $62.6 million in the first nine months of 2012. The following table illustrates the differences in the Company's operating results in the nine months ended September 30, 2012, from the nine months ended September 30, 2011, and the increases or decreases for each category by segment.

                          Nine                                                                  Nine
                         Months                                                                Months
                          Ended            Increase (Decrease) in Operating Segment             Ended
                        Sep. 30,       North                          Asia/       Admin &     Sep. 30,
(in thousands)            2011        America          Europe        Pacific     All Other      2012

Net sales               $ 472,713   $     37,912    $      1,030    $     895   $         -   $ 512,550
Cost of sales             256,819         27,708            (204 )        371          (418 )   284,276
Gross profit              215,894         10,204           1,234          524           418     228,274
Research and
development and other
engineering expense        19,743          7,381             (79 )        111             -      27,156
Selling expense            55,527          4,749             304          641            34      61,255
General and
administrative
expense                    72,250          1,189           4,143          (46 )        (362 )    77,174
Loss on sale of
assets                          1             77             (27 )          4           (13 )        42
Income from
operations                 68,373         (3,192 )        (3,107 )       (186 )         759      62,647
Income in equity
method investment,
before tax                  4,389         (4,389 )             -            -             -           -
Interest income, net          258            (88 )            69           49          (111 )       177
Income before income
taxes                      73,020         (7,669 )        (3,038 )       (137 )         648      62,824
Provision for income
taxes                      27,069         (1,287 )         1,064          382          (440 )    26,788
Net income              $  45,951   $     (6,382 )  $     (4,102 )  $    (519 ) $     1,088   $  36,036

The following table represents net sales by segment for the nine months ended September 30, 2011 and 2012:

                        North                 Asia/      Admin &
(in thousands)         America     Europe    Pacific    All Other      Total
Nine months ended:
September 30, 2011    $ 371,732   $ 93,206   $  7,062   $      713   $ 472,713
September 30, 2012      409,644     94,236      7,958          712     512,550
Increase                 37,912      1,030        896           (1 )    39,837
Percentage increase        10.2 %      1.1 %     12.7 %        0.0 %       8.4 %

In the first nine months of 2012, net sales increased 8.4% to $512.6 million compared to net sales of $472.7 million for the first nine months of 2011 due in part to recent acquisitions. The Company had net income of $36.0 million for the first nine months of 2012 compared to net income of $46.0 million for the first nine months of 2011, which included a $4.5 million gain on the sale of the Company's equity investment in Keymark. Diluted net income per common share was $0.74 for the first nine months of 2012 compared to diluted net income of $0.93 per common share for the first nine months of 2011.


Sales in North America for the first nine months of 2012 increased, with an above-average increase in the United States, primarily due to increases in volume and recent acquisitions. Sales in the first nine months of 2012 in Europe increased slightly, due to the recent European acquisition, partly offset by decreases throughout the rest of the Company's European operations. Foreign currency translation effects were not significant. Sales to contractor distributors and lumber dealers had above-average increases in the first nine months of 2012 as compared to the same period in 2011, while sales to home centers decreased over the same period. Wood construction product sales represented 86% of total Company sales in the first nine months of 2012, down from 89% in the first nine months of 2011. Concrete product sales represented 14% of total sales in the first nine months of 2012, up from 11% in the first nine months of 2011, with increases in all geographic segments. Acquisitions since December 2011 contributed $23.5 million to sales in the first nine months of 2012, with the majority attributed to the European acquisition, and mostly in concrete construction products.

The following table represents gross profit by segment for the nine months ended September 30, 2011 and 2012:

                        North                  Asia/      Admin &
(in thousands)         America     Europe     Pacific    All Other      Total
Nine months ended:
September 30, 2011    $ 184,523   $ 30,595   $     719   $       57   $ 215,894
September 30, 2012      194,727     31,829       1,243          475     228,274
Increase                 10,204      1,234         524          418      12,380
Percentage increase         5.5 %      4.0 %      72.8 %      733.3 %       5.7 %

Gross profit increased to $228.3 million in the first nine months of 2012 from $215.9 million in the first nine months of 2011. As a percentage of net sales, gross profit decreased from 45.7% in the first nine months of 2011 to 44.5% in the first nine months of 2012. The North American segment gross profit margin decreased from 49.6% in the first nine months of 2011 to 47.5% in the first nine months of 2012, primarily due to higher material and labor costs as a percentage of sales, increased concrete construction product sales, which have a lower gross margin than wood construction product sales, and competitive price pressure. These cost increases were partly offset by lower factory overhead costs as a percentage of sales, which resulted from higher sales volume. The gross profit margin for the European segment increased to 33.8% in in the first nine months of 2012 from 32.8% in the first nine months of 2011, primarily due to lower material costs, partly offset by higher labor and factory overhead costs.

Unless otherwise noted, changes in operating expenses were mostly attributable to the North American segment. Research and development and engineering expense increased 37.5% from $19.7 million in the first nine months of 2011 to $27.2 million in the first nine months of 2012, including increases in professional fees of $5.2 million, primarily due to truss software development costs, and personnel costs of $1.8 million resulting from additional employees and a pay rate increase. These increases were partly offset by a reduction in cash profit sharing of $0.7 million due to lower operating income. Selling expense increased 10.3% from $55.5 million in the first nine months of 2011 to $61.3 million in the first nine months of 2012, primarily due to increases in personnel costs of $3.3 million, resulting from the recent North American acquisitions, additional employees and increased pay rates, increased equity-based compensation of $1.1 million and increased promotional costs of $1.0 million. General and administrative expense increased 6.8% from $72.3 million in the first nine months of 2011 to $77.2 million in the first nine months of 2012. Personnel costs increased $2.7 million primarily due to the recent European acquisition, additional employees and an increase in pay rates. Depreciation expense increased $2.2 million and amortization expense increased $2.2 million primarily due to recent acquisitions in both North America and Europe. The remaining increases in general and administrative expenses included $1.3 million in equity-based compensation, $0.5 million in computer hardware and license fees and $0.4 million reduction in foreign currency gains. These increases were partly offset by a reduction in cash profit sharing of $2.1 million due to lower operating income and a net decrease in professional and legal fees of $2.1 million although professional and legal fees increased by $0.7 million in Europe due to first quarter 2012 acquisition related activities.

The effective tax rate increased from 37.1% in the first nine months of 2011 to 42.6% in the first nine months of 2012, primarily due to 2012 non-deductible acquisition costs and valuation allowances taken on foreign losses, while in 2011 release of valuation allowances related to the disposal of the Keymark equity investment led to the lower effective tax rate.


Liquidity and Sources of Capital

As of September 30, 2012, working capital was $404.1 million as compared to $477.7 million at September 30, 2011, and $430.5 million at December 31, 2011. The decrease in working capital from December 31, 2011, was primarily due to decreases in cash and cash equivalents of $26.3 million, inventories of $8.1 million and assets held for sale of $6.8 million, and increases in accrued liabilities of $8.7 million, accrued cash profit sharing of $5.5 million, trade accounts payable of $2.2 million, and income taxes of $1.0 million. The decrease in cash and cash equivalents was primarily due to the recent European acquisition for $50.7 million, net of cash received of $6.8 million, and the recent North American acquisition for $5.3 million, net of contingent consideration of $0.2 million, partly offset by the sale of real estate in North America for $6.4 million, net of closing costs, which also accounted for the decrease in assets held for sale. Raw material inventories decreased 14.0% as compared to December 31, 2011, while in-process and finished goods inventories increased 2.7% over the same period. The increase in accrued liabilities was primarily due to the recent European acquisition, sales rebates, collected VAT/GST taxes exceeding taxes paid, a liability related to the acquisition of Canadian truss plate distribution rights, and other intangibles assets and termination expense related to the plant closing, while the increase to accrued cash profit sharing and accrued income taxes payable was due to higher operating profits in the third quarter of 2012, compared to the fourth quarter of 2011. The increase in trade accounts payable was primarily due to the recent European and North American acquisitions, employee compensation, and professional and consulting fees. The decrease in working capital from December 31, 2011, was partly offset by an increase in net trade accounts receivable of $32.0 million, which was primarily due to seasonal increases in net sales during the third quarter of 2012 compared to the fourth quarter of 2011. 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 $36.0 million and noncash expenses, primarily charges for depreciation, amortization, stock-based compensation and impairment of assets held for sale totaling $28.6 million, resulted in net cash provided by operating activities of $56.7 million. As of September 30, 2012, the Company had unused credit facilities available of $311.1 million, including a $300.0 million credit facility.

The Company's investing activities used cash of $63.5 million primarily due to the recent European acquisition for $50.7 million, net of contingent consideration of $0.6 million, and cash received of $6.8 million, the recent North American acquisition for $5.3 million, net of contingent consideration of $0.2 million, and capital expenditures of $16.1 million. The cash paid for these acquisitions and for capital assets was partly offset by the proceeds of the sale of North American real estate and other asset sales of $6.9 million. The Company's capital expenditures were primarily due to the continued construction of a manufacturing facility in Germany, improvement of various facilities in France and the United States and equipment purchases. The Company estimates that its full-year capital spending will be $22.0 to $24.0 million in 2012.

The Company's financing activities used net cash of $20.7 million. The primary uses of cash were payments of cash dividends in the amount of $18.1 million and repayment of $5.7 million of borrowings on credit facilities, including borrowings obtained through acquisition. Cash was provided from the issuance of the Company's common stock through the exercise of stock options totaling $2.2 million. In October 2012, 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 January 24, 2013, to stockholders of record on January 3, 2013. The Company borrowed $2.2 million from its lines of credit during the first nine months of 2012, primarily for raw material purchases attributable to the recent European acquisition. The Company has $50.0 million remaining of its common stock repurchase authorization for 2012.

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 $300.0 million unsecured credit agreement will expire in July 2017.

A significant portion of the cash held by the Company is in foreign currencies. Cash held in foreign countries could be subject to additional taxation if it were repatriated to the United States. The Company has no plans to repatriate cash and cash equivalents held outside the United States, as it is expected to be used to fund future international growth and acquisitions.

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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