UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

 

 

OR 

 

For the transition period from                           to                           

 

 

Simpson Manufacturing Co., Inc.

(Exact name of registrant as specified in its charter) 

(Address of principal executive offices) 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, based on numerous assumptions and subject1995. All statements relating to risks and uncertainties (some of whichevents or results that may occur in the future are beyondforward-looking statements, including but not limited to, statements regarding our control), such as statements below regarding future plans, sales, sales trends, product price changes, revenues, profits, costs, inventories, expenses, unrecognized costs (including those with respect to unvested stock-based compensation), cost savings, repatriation of funds, factory utilization rates, results of operations, tax liabilities, losses, capital spending, price changes (including product prices or inflation (includingand raw material (such as steel) prices), profit margins, effective tax rates, depreciation or amortization expenses, amortization periods, stock repurchases, dividends, compensation arrangements, plans or awards ofamendments (including those related to profit sharing and stock-based compensation,compensation), record dates, valuescompany policies, corporate governance practices, documents or amendments (including charter or bylaw amendments, stockholder rights plans or similar arrangements), capital and corporate structure (including major stockholders, board structure and board composition), prospective adoption of stock repurchases, dividends or stock-based compensation, unrecognized costs with respect to unvested stock-based compensation, repatriation of funds,new accounting standards, effects of changes in accounting standards, effects and expenses of (including eventual gains or losses related to) mergers and acquisitions and related integrations, effects and expenses of equity investments, effects and expenses of relocating manufacturing facilities, effects of changes in foreign exchange rates or interest rates.rates, effects and costs of facility consolidations and expansions (including related savings), effects and costs of software program implementations (including related capital expenditures and savings), relationships with distributors, labor relations, needs for additional facilities, materials and personnel, effects and costs of credit facilities and capital lease obligations, and the projected impact of any of the foregoing on our business, financial condition and results of operations. Forward-looking statements generally can be identified by words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “target,” “continue,” “predict,” “project,” “will be,“change,” “result,” “future,” “will, continue,” “will likely result,“could,” "could potentially," and“may,” “likely,” “potentially,” or similar expressions. Forward-looking statements are necessarily speculative in nature, are based on numerous assumptions, and it can be expectedinvolve known and unknown risks, uncertainties and other factors (some of which are beyond our control) that some or all of the assumptions of the forward-looking statements we furnish will not materialize or will vary significantly from actual results. Although we believe that the forward-looking statements are reasonable, we do not and cannot give any assurance that our beliefs and expectations will prove to be correct, and our actual results might differ materially from results suggested by any forward-looking statement in this document. Many factors could significantly affect our operations and may cause our actual actions, results, financial condition, performance or achievements to differbe substantially different from those reflected in theany future actions, results, financial condition, performance or achievements expressed or implied by any such forward-looking statements. Those factors include, but are not limited to: (i) general businesseconomic cycles and construction business conditions; (ii) customer acceptance of the Company'sour products; (iii) product liability claims, contractual liability, engineering and design liability and similar liabilities or claims, (iv) relationships with key customers; (v) materials and manufacturing costs; (vi) the financial conditionconditions of customers, competitors and suppliers; (vii) technological developments, including software development; (viii) increased competition; (ix) changes in regulations (including changes in trade regulations) or industry practices or regulations;practices; (x) litigation risks, (xi) changes in capital and credit market conditions; (xii) governmental and business conditions in countries where the Company'sour products are manufactured and sold; (xiii) changes in trade regulations;effects of merger or acquisition activities; (xiv) the effect of acquisition activity;actual or potential takeover or other change-of-control threats; (xv) changes in the Company'sour plans, strategies, objectives, expectations or intentions; and (xvi) other risks and uncertainties indicated from time to time in the Company'sour filings with the U.S. Securities and Exchange Commission, including the Company's most recent Annual Report on Form 10-K under the heading "Item“Item 1A - Risk Factors."” See below “Part II,I, Item 1A - Risk Factors.” Each forward-looking statement contained in this Quarterly Report on Form 10-Q is specifically qualified in its entirety by the aforementioned factors. In light of the foregoing, investors are advised to carefully read this Quarterly Report on Form 10-Q in connection with the important disclaimers set forth above and are urged not to rely on any forward-looking statements in reaching any conclusions or making any investment decisions about us or our securities. All forward-looking statements hereunder are made as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not intend and undertake no obligation to update, revise or publicly release the results of any revisionupdates or revisions to theseany forward-looking statements hereunder, whether as a result of the receipt of new information, the occurrence of future events, the change of circumstances or otherwise. In light of the foregoing, investors are urged not to rely on our forward-looking statements in making an investment decision about our securities. We further do not accept any responsibility for any projections or reports published by analysts, investors or other third parties.

Each of the terms the “Company,” “we,” “our,” "us"“us” and similar terms used herein refer collectively to Simpson Manufacturing Co., Inc., a Delaware corporation and its wholly-owned subsidiaries, including Simpson Strong-Tie Company Inc., unless otherwise stated.

“Strong-Tie” and our other trademarks appearing in this report are our property. This report contains additional trade names and trademarks of other companies. We do not intend our use or display of other companies’ trade names or trademarks to imply an endorsement or sponsorship of us by such companies, or any relationship with any of these companiescompanies.

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, unaudited)

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(In thousands except per-share amounts, unaudited)

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2015At March 31, 2016 and 2016,2017, and December 31, 20152016

(In thousands except per-share amounts, unaudited)

Simpson Manufacturing Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(In thousands, unaudited)

1.    Basis of Presentation

 

 Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (collectively, the “Company”). There were no investments in affiliates that would render such affiliates to be considered variable interest entities. 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 audited 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, 2015.2016.

 

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 provided herein 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 this interim period presented are not indicative of the results to be expected for any future periods.

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, and 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 and software license sales and services, though significantly less than 0.1%1.0% net sales and not material to the condensed 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 are 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.

 

The following is a reconciliation of basic earnings per common share to diluted earnings per share for the three months ended March 31, 2017 and nine months ended September 30, 2016, and 2015, respectively:

 

Accounting for Stock-Based Compensation

 

With the approval of the Company’s stockholders on April 26, 2011, theThe Company adoptedcurrently maintains an equity incentive plan, the Simpson Manufacturing Co., Inc. Amended and Restated 2011 Incentive Plan (the “Original“2011 Plan”), which was originally adopted on April 26, 2011 Plan”). With the approval of the Company's stockholdersand was subsequently amended and restated on April 21, 2015, the Company adopted the amended and restated Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the "2011 Plan"), which amended and restated in its entirety, and incorporated and superseded, the Original 2011 Plan.2015. The Original 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. Awards previously granted under the 1994 Plan or the 1995 Plan were not affected by the adoption of the Original 2011 Plan or the 2011 Plan and will continuecontinued to be governed by the 1994 Plan or the 1995 Plan, respectively.

Under the 1994 Plan and the 1995 Plan, the Company could grant incentive stock options and non-qualified stock options, although the Company granted only granted non-qualified stock options under both plans. As of September 30, 2016, there were no unvestedthereunder. The Company generally granted stock options outstandingunder each of the 1994 Plan and the 1995 Plan once every year. Stock options vest and expire according to terms established at the grant date. Stock options granted under the 1994 Plan typically vested evenly over the requisite service period of four years and have a term of seven years. Stock options granted under the 1995 Plan typically 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.Plan are registered under the Securities Act of 1933, as amended (the "Securities Act").

Under the 2011 Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock and restricted stock units ("RSUs"), although the Company currently intends to award primarily restricted stock unitsperformance-based and/or time-based RSUs and to a lesser extent, if at all, non-qualified stock options.options (see "Note 9 Stock-Based Incentive Plans"). 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 in aggregate may be issued (including shares already issued) pursuant to all awards under the 2011 Plan, including shares already issued pursuant to prior awards and shares reserved for issuance on exercise of options previously granted under the 1994 Plan and the 1995 Plan.

Subject to certain adjustments, the following limits shall apply with respect to any awards under the 2011 Plan that are intended to qualify for the performance-based exception from the tax deductibility limitations of section 162(m) of the U.S. Internal Revenue Code of 1986, as amended (the "Securities Act").

The following table represents the Company’s stock option and restricted stock unitstock-based compensation activity for the three months ended March 31, 2017 and nine months ended September 30, 2016, and 2015, respectively:

 

The Company allocates stock-based compensation expenses among cost of sales, research and development and other engineering expense, selling expense, or general and administrative expense based on the job functions performed by the employees to whom the stock-based compensation is awarded.

Fair Value of Financial Instruments

 

The “Fair Value Measurements and Disclosures” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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; and 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.

TheAs of December 31, 2016 and March 31, 2017, the Company’s investments consisted of only money market funds, and as of March 31, 2016, its 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 balances of the Company’sCompany's primary financial instruments at the dates indicated were as follows:

The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s contingent consideration related to acquisitions is classified

 

Income Taxes

 

 

 

Acquisitions

 

Under the business combinations topic of the FASB ASC 805, the Company accounts for acquisitions as business combinations and ascribes acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements are made at the time of the acquisitions. 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 are generally based on Level 3 inputs.

 

In December 2015, the Company purchased all of the business assets, including intellectual property rights, from Blue Heron Enterprises, LLC, and Fox Chase Enterprises, LLC, both New Jersey limited liability companies (collectively, "EBTY"), for $3.4 million in cash. EBTY manufactured and sold hidden deck clips and products and systems using a patented design. The Company believes that EBTY's patented design for hidden deck clips and products and systems complements the Company's hidden clips and fastener systems. The Company's provisional measurement of assets acquired included goodwill of $2.0 million which was assigned to the Company's North American segment, and intangible assets of $1.1 million, both of which are subject to tax-deductible amortization. Net assets consisting of inventory and equipment accounted for the balance of the purchase price. The estimated weighted-average amortization period for the intangible assets is 7 years.

The results of operations of the businesses acquired in 20152016 through 2016 are2017 were included in the Company’s condensed consolidated results of operations since the date of the applicable acquisition. They wereSuch businesses are not material to the Company on an individual or aggregate basis, and accordingly, pro forma results of operations haveare not been presented.

The Company substantially completedrecorded a preliminary nontaxable bargain purchase gain of $8.4 million, which was included in the liquidationcondensed consolidated statements of its Asia sales officesoperations. This nonrecurring bargain purchase gain represents an estimate of the excess fair value of the net assets acquired over the consideration exchanged as of December 31, 2015,the acquisition date. The fair value measurement and does not expect to recognize significant additional costs inrecognition of the assets acquired and liabilities assumed were based on preliminary purchase price allocation and pro forma data for future periods, relatedwithout speculating as to this event.the seller's motivation. The Company concluded that the valuation procedures and resulting measures, including when repeated, appropriately reflect consideration of all available information as of the acquisition date.

Additional compensation expensesThe following table represents the preliminary allocation of $0.2 million were incurredthe purchase price to the estimated fair value of the assets acquired and paidliabilities assumed at the acquisition date of the Gbo Fastening Systems acquisition:

The Company believes it is possible that during the third quarterpreliminary measurement period or after the final purchase price allocation is determined, the fair value measurement of 2016. Estimated accrued closing costs, including additional compensation expense, retention bonuses and professional fees, were reduced by $0.2acquired assets or liabilities could change, which could affect the estimated $8.4 million during the third quarter of 2016. Estimated closing costs of $0.1 million were accrued and not paid as of September 30, 2016.provisional gain.

Recently Adopted Accounting Standards

2.    Trade Accounts Receivable, Net

 

Trade accounts receivable at the dates indicated consisted of the following: 

 

3.    Inventories

 

Inventories at the dates indicated consisted of the following: 

 

4.    Property, Plant and Equipment, Net

 

Property, plant and equipment, net, at the dates indicated consisted of the following: 

 

 

Amortizable and indefinite-lived intangibleIntangible assets, net, at the dates indicated were as follows: 

 

 

 

At September 30, 2016,March 31, 2017, estimated future amortization of definite-lived intangible assets was as follows: 

 

The changes in the carrying amount of goodwill and intangible assets for the ninethree months ended September 30, 2016,March 31, 2017, were as follows: 

6.    Investments

7.    Debt

 

The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at September 30, 2016,March 31, 2017, was $303.9$303.8 million including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.

 

The Company’s primary credit facility is a revolving line of credit with $300 million in available credit. On July 25, 2016, the Company entered into a second amendment (the "Amendment") to the credit facility. For additional information about the Amendment, see the Company's Current Report on Form 8-K dated July 28, 2016. As amended, this credit facility expireswill expire on July 23, 2021. 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 LIBOR1screen 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 September 30, 2016,March 31, 2017, the LIBOR Rate was 0.53%0.93%), 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 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 facility, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio. Theratio.The Company was also required to pay customary fees as specified in a separate fee agreement to the agent under the credit facility.

             

BasedThe total intrinsic value of RSUs vested during the three-month periods ended March 31, 2017 and 2016, was $10.8 million and $10.3 million, respectively, based on the market value on the award date, the total intrinsic value of restricted stock units vested during the nine-month periods ended September 30, 2016 and 2015, was $10.8 million and $10.1 million, respectively.date.

 

No stock options were granted in 20152016 or in the first ninethree months of 2016. As of September 30, 2016, there were no unvested options outstanding. 2017.

The following table summarizes the changes to the Company’s outstanding non-qualified stock option activityoptions for the ninethree months ended September 30, 2016:March 31, 2017: 

The total intrinsic value of stock options exercised was $0.2 million during the nine-monthboth three-month periods ended September 30, 2016March 31, 2017 and 2015, was $2.4 million and $1.6 million, respectively.2016.

As of September 30, 2016, $25.4March 31, 2017, there was $20.0 million of unrecognized cost was related to unvested stock-based compensation arrangements under the 2011 Plan for awards made through February 2016 and those expected to be made through January 2017. The portion of this cost related to restricted stock units awarded through February 20162017 (as discussed above) is expected to be recognized over a weighted-average period of 1.92.5 years.

9.10.    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,Canada; the Europe segment, comprising continental Europe and the United Kingdom,Kingdom; and the Asia/Pacific segment, which the Company believes is not significant to its overall performance, comprising the Company’s operations in China, Hong Kong, the South Pacific and the Middle East. China and Hong Kong operations are

manufacturing and administrative support locations, respectively. These three reportable 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 amount between consolidated income before tax and consolidated income from operations is interest expense, which is primarily attributed to Administrativethe "Administrative and All Other.

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