7.
Commitments and Contingencies
Note 9 to the consolidated financial statements in the 2012 Annual Report provides information concerning commitments and contingencies. From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business. The resolution of claims and litigation is subject to inherent uncertainty and could have a material adverse effect on the Companys financial condition, cash flows and results of operations.
Pending Claims
Four lawsuits (the Cases) have been filed against the Company in the Hawaii First Circuit Court:
Alvarez v. Haseko Homes, Inc. and Simpson Manufacturing, Inc.
, Civil No. 09-1-2697-11 (Case 1);
Ke Noho Kai Development, LLC v. Simpson Strong-Tie Company, Inc.
,
and Honolulu Wood Treating Co., LTD.
, Case No. 09-1-1491-06 SSM (Case 2);
North American Specialty Ins. Co. v. Simpson Strong-Tie Company, Inc. and K.C. Metal Products, Inc.
, Case No. 09-1-1490-06 VSM (Case 3); and
Charles et al. v. Haseko Homes, Inc. et al. and Third Party Plaintiffs Haseko Homes, Inc. et al. v. Simpson Strong-Tie Company, Inc., et al.
, Civil No. 09-1-1932-08 (Case 4). Case 1 was filed on November 18, 2009. Cases 2 and 3 were originally filed on June 30, 2009. Case 4 was filed on August 19, 2009. The Cases all relate to alleged premature corrosion of the Companys strap tie holdown products installed in buildings in a housing development known as Ocean Pointe in Honolulu, Hawaii, allegedly causing property damage. Case 1 is a putative class action brought by the owners of allegedly affected Ocean Pointe houses. Case 1 was originally filed as
Kai et al. v. Haseko Homes, Inc., Haseko Construction, Inc. and Simpson Manufacturing, Inc.
, Case No. 09-1-1476, but was voluntarily dismissed and then re-filed with a new representative plaintiff. Case 2 is an action by the builders and developers of Ocean Pointe against the Company, claiming that either the Companys strap tie holdowns are defective in design or manufacture or the Company failed to provide adequate warnings regarding the products susceptibility to corrosion in certain environments. Case 3 is a subrogation action brought by the insurance company for the builders and developers against the Company claiming the insurance company expended funds to correct problems allegedly caused by the Companys products. Case 4 is a putative class action brought, like Case 1, by owners of allegedly affected Ocean Pointe homes. In Case 4, Haseko Homes, Inc. (Haseko), the developer of the Ocean Pointe development, brought a third party complaint against the Company alleging that any damages for which Haseko may be liable are actually the fault of the Company. Similarly, Hasekos sub-contractors on the Ocean Pointe development brought cross-claims against the Company seeking indemnity and contribution for any amounts for which they may ultimately be found liable. None of the Cases alleges a specific amount of damages sought, although each of the Cases seeks compensatory damages, and Case 1 seeks punitive damages. Cases 1 and 4 have been consolidated. In December 2012, the Court granted the Company summary judgment on the claims asserted by the plaintiff homeowners in Cases 1 and 4, and on the third party complaint and cross-claims asserted by Haseko and the sub-contractors, respectively, in Case 4. In April 2013, the Court granted Haseko and the sub-contractors motion for leave to amend their cross-claims to allege a claim for negligent misrepresentation. The Company continues to investigate the facts underlying the claims asserted in the Cases, including, among other things, the cause of the alleged corrosion; the severity of any problems shown to exist; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if needed. At this time, the likelihood that the Company will be found liable under any legal theory and the extent of such liability, if any, are unknown. Management believes the Cases may not be resolved for an extended period. The Company intends to defend itself vigorously in connection with the Cases.
Based on facts currently known to the Company, the Company believes that all or part of the claims alleged in the Cases may be covered by its insurance policies. On April 19, 2011, an action was filed in the United States District Court for the District of Hawaii,
National Union Fire Insurance Company of Pittsburgh, PA v. Simpson Manufacturing Company, Inc., et al.,
Civil No. 11-00254 ACK. In this action, Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union), which issued certain Commercial General Liability insurance policies to the Company, seeks declaratory relief in the Cases with respect to its obligations to defend or indemnify the Company, Simpson Strong-Tie Company Inc., and a vendor of the Companys strap tie holdown products. By Order dated November 7, 2011, all proceedings in the
National Union
action have been stayed. If the stay is lifted and the National Union action is not dismissed, the Company intends vigorously to defend all claims advanced by National Union.
15
On April 12, 2011, Firemans Fund Insurance Company (Firemans Fund), another of the Companys general liability insurers, sued Hartford Fire Insurance Company (Hartford), a third insurance company from whom the Company purchased general liability insurance, in the United States District Court for the Northern District of California,
Firemans Fund Insurance Company v. Hartford Fire Insurance Company
, Civil No. 11 1789 SBA (the
Firemans Fund
action). The Company has intervened in the
Firemans Fund
action and seeks a formal stay of proceedings in that action as well, pending resolution of the underlying Ocean Pointe cases.
On November 21, 2011, the Company commenced a lawsuit against National Union, Firemans Fund, Hartford and others in the Superior Court of the State of California in and for the City and County of San Francisco (the
San Francisco
coverage action). In the
San Francisco
coverage action, the Company alleges generally that the separate pendency of the
National Union
action and the
Firemans Fund
action presents a risk of inconsistent adjudications; that the San Francisco Superior Court has jurisdiction over all of the parties and should exercise jurisdiction at the appropriate time to resolve any and all disputes that have arisen or may in the future arise among the Company and its liability insurers; and that the
San Francisco
coverage action should also be stayed pending resolution of the underlying Ocean Pointe Cases. The
San Francisco
coverage action has been ordered stayed pending resolution of the Cases.
Nishimura v. Gentry Homes, Ltd; Simpson Manufacturing Co., Inc.; and Simpson Strong-Tie Company, Inc.
, Civil no. 11-1-1522-07, was filed in the Circuit Court of the First Circuit of Hawaii on July 20, 2011. The Nishimura case alleges premature corrosion of the Companys strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii. The case is a putative class action brought by owners of allegedly affected homes. The Complaint alleges that the Companys strap products and mudsill anchors are insufficiently corrosion resistant and/or fail to comply with Honolulus building code. In February 2012, the Court dismissed three of the five claims the plaintiffs had asserted against the Company. The Company is currently investigating the allegations of the complaint, including, among other things: the existence and extent of the alleged corrosion, if any; the building code provisions alleged to be applicable and, if applicable, whether the products complied; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if any are needed. At this time, the likelihood that the Company will be found liable for any damage allegedly suffered and the extent of such liability, if any, are unknown. The Company denies any liability of any kind and intends to defend itself vigorously in this case.
With respect to these legal proceedings, individually and in the aggregate, the Company has not yet been able to determine whether an unfavorable outcome is probable or reasonably possible and has not been able to reasonably estimate the amount or range of any possible loss. As a result, no amounts have been accrued or disclosed in the accompanying consolidated financial statements with respect to these legal proceedings.
The Company is not engaged in any other legal proceedings as of the date hereof, which the Company expects individually or in the aggregate to have a material adverse effect on the Companys financial condition, cash flows or results of operations. The resolution of claims and litigation is subject to inherent uncertainty and could have a material adverse effect on the Companys financial condition, cash flows or results of operations.
Other
The Companys policy with regard to environmental liabilities is to accrue for future environmental assessments and remediation costs when information becomes available that indicates that it is probable that the Company is liable for any related claims and assessments and the amount of the liability is reasonably estimable. The Company does not believe that these environmental matters will have a material adverse effect on the Companys financial condition, cash flows or results of operations.
Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, environmental conditions or other factors can contribute to failure of fasteners, connectors, tools, anchors, adhesives and tool products. On occasion, some of the products that the Company sells have failed, although the Company has not incurred any material liability resulting from those failures. The Company attempts to avoid such failures by establishing and monitoring appropriate product specifications, manufacturing quality control procedures, inspection procedures and information on appropriate installation methods and conditions. The Company subjects its products to extensive testing, with results and conclusions published in Company catalogues and on its websites. Based on test results to date, the Company believes that, generally, if its products are appropriately selected, installed and used in accordance with the Companys guidance, they may be reliably used in appropriate applications.
16
Item 2. Managements 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 Companys operations and cause the Companys actual results to be substantially different from the Companys 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, 2013. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.
Overview
The Company designs, manufactures and sells building construction products that are of high quality and performance, easy to use and cost-effective for customers. It operates in three business segments determined by geographic region: North America, Europe and Asia/Pacific. The Companys stated goals are to strengthen its core wood construction products, expand its global footprint to be less dependent on housing starts in the United States and continue to invest in its strategic initiatives, such as an expanded offering of concrete construction products, particularly specialty chemicals, and wood construction products, particularly truss plate and software offerings.
The North America segment sells both wood and concrete construction products. With the Companys ongoing investment in its integrated component systems offering and the acquisition of Keymarks software development team and Weyerhaeusers line of shearwalls, the Company continues to expand product lines that complement its core wood construction product group.
The Europe segment also sells both wood and concrete construction products and until recently sold primarily wood construction products. In September 2012, the Company decided to discontinue manufacturing and selling heavy-duty mechanical anchors in Europe to focus on other concrete construction products, such as its light-duty and medium-duty anchors, chemical-based products and carbon-fiber-based products. Excluding costs associated with closing the heavy-duty mechanical anchor business, closing the business has saved the segment an estimated $0.7 million in operating losses for the third quarter of 2013 and $2.5 million for the nine months ended September 30, 2013, compared to the respective periods of 2012. Based on current conditions, the Company estimates the Europe segment may report a small operating profit for the year 2013.
The Asia/Pacific segment sells both concrete construction and wood construction products. With the expansion of product lines that repair, protect and strengthen concrete, brick, masonry or asphalt construction, concrete construction product sales have increased in the Asia/Pacific segment. Based on current conditions, the Company expects the Asia/Pacific segment to report an operating loss for the current year.
The Admin & All Other column includes expenses such as self-insured workers compensation claims, if any, for certain members of management, stock compensation for certain members of management, interest expense, foreign exchange gains or losses and income tax expense. It also includes revenues and expenses related to real estate activities, such as rental income and associated expenses on the Companys facility in Vacaville, California, which the Company has leased to a third party for a term expiring in August 2020.
Estimated annual housing starts have increased recently, and the Company has begun to benefit from that increase with increased sales volumes in the third quarter of 2013, particularly in the North America segment, which had volume increases of nearly 20%. Unlike lumber or other products that have a more direct correlation to starts, however, the Companys products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. The Companys products are used in a sequential process that follows the construction process. Residential and commercial construction begins with the foundation, followed by the wall and the roof systems, and the installation of the Companys products flow into a project or a house according to those schedules. Foundation product sales could be considered a leading indicator. Year-to-date sales through September 2013 of these products increased compared to the same period in 2012, although due to seasonality, this comparative may be not as relevant at the end of the calendar year.
21
The Companys sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, the Companys sales and income have historically been lower in the first and fourth quarters than in the second and third quarters of the year, as customers purchase construction materials in the late spring and summer months for the construction season. In addition, weather conditions, such as extended cold or wet weather, which affect and sometimes delay installation of some of the Companys products, could negatively affect the Companys results of operations. Political and economic events can also affect the Companys sales and profitability.
Results of Operations for the Three Months Ended September 30, 2013, Compared
with the Three Months Ended September 30, 2012
Net sales increased 13.8% to $195.9 million in the third quarter of 2013 from $172.1 million in the third quarter of 2012. The Company had net income of $20.0 million for the third quarter of 2013 compared to net income of $13.0 million for the third quarter of 2012. Diluted net income per common share was $0.41 for the third quarter of 2013 compared to $0.27 per common share for the third quarter of 2012. Income from operations increased 40.4% to $30.9 million in the third quarter of 2013 from $22.0 million in the third quarter of 2012. The following table illustrates the differences in the Companys operating results in the three months ended September 30, 2013, from the three months ended September 30, 2012, 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)
|
|
2012
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
172,113
|
|
$
|
20,134
|
|
$
|
2,007
|
|
$
|
1,623
|
|
$
|
|
|
$
|
195,877
|
|
Cost of sales
|
|
96,390
|
|
9,959
|
|
(1,772
|
)
|
1,255
|
|
(108
|
)
|
105,724
|
|
Gross profit
|
|
75,723
|
|
10,175
|
|
3,779
|
|
368
|
|
108
|
|
90,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development and other engineering expense
|
|
8,916
|
|
335
|
|
(116
|
)
|
91
|
|
|
|
9,226
|
|
Selling expense
|
|
20,941
|
|
(367
|
)
|
(189
|
)
|
250
|
|
(5
|
)
|
20,630
|
|
General and administrative expense
|
|
23,843
|
|
3,670
|
|
951
|
|
(362
|
)
|
679
|
|
28,781
|
|
Loss on sale of assets
|
|
33
|
|
(19
|
)
|
623
|
|
(6
|
)
|
|
|
631
|
|
Income from operations
|
|
21,990
|
|
6,556
|
|
2,510
|
|
395
|
|
(566
|
)
|
30,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
55
|
|
27
|
|
(42
|
)
|
(20
|
)
|
(29
|
)
|
(9
|
)
|
Income before income taxes
|
|
22,045
|
|
6,583
|
|
2,468
|
|
375
|
|
(595
|
)
|
30,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
9,069
|
|
3,400
|
|
(1,645
|
)
|
(87
|
)
|
133
|
|
10,870
|
|
Net income
|
|
$
|
12,976
|
|
$
|
3,183
|
|
$
|
4,113
|
|
$
|
462
|
|
$
|
(728
|
)
|
$
|
20,006
|
|
Net sales
The following table represents net sales by segment for the three-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
(in thousands)
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
137,145
|
|
31,880
|
|
2,851
|
|
237
|
|
172,113
|
|
September 30, 2013
|
|
157,279
|
|
33,887
|
|
4,474
|
|
237
|
|
195,877
|
|
Increase
|
|
20,134
|
|
2,007
|
|
1,623
|
|
|
|
23,764
|
|
Percentage increase
|
|
14.7
|
%
|
6.3
|
%
|
56.9
|
%
|
0.0
|
%
|
13.8
|
%
|
22
The following table represents segment net sales as percentages of total net sales for three-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total 2012 net sales
|
|
79.7
|
%
|
18.5
|
%
|
1.7
|
%
|
0.1
|
%
|
100.0
|
%
|
Percentage of total 2013 net sales
|
|
80.3
|
%
|
17.3
|
%
|
2.3
|
%
|
0.1
|
%
|
100.0
|
%
|
The increase in the Companys third quarter 2013 net sales was due to increased sales in all segments, with North America reporting the largest increase in dollars. North America sales were affected positively by improved economic conditions, including an increase in estimated annualized housing starts compared to the third quarter of 2012. Net sales were negatively affected by reduced home center sales and lower selling prices in the United States, Canada and Europe.
·
Segment net sales:
·
North America net sales increased 14.7% in the third quarter of 2013, compared to the third quarter of 2012. Net sales in the United States increased over the same period in 2012, despite the reductions in home center business and prices. Canada net sales decreased over the same period in 2012 due to lower sales volumes and selling prices.
·
Europe net sales increased 6.3% in the third quarter of 2013 compared to the third quarter of 2012, due to slightly improved economic conditions and the effects of currency translations, partly offset by price reductions.
·
Consolidated net sales channels and product groups:
·
Net sales to contractor distributors, dealer distributors and lumber dealers increased in the third quarter of 2013, compared to the third quarter of 2012, while net sales to home centers decreased.
·
Net sales to the Companys largest customer decreased 5.1% in the third quarter of 2013, compared to the third quarter of 2012.
·
Wood construction product sales, including connectors, truss plates, fastening systems, fasteners and shearwalls, represented 84% of total Company sales in the third quarter of 2013, down from 85% in the third quarter of 2012.
·
Concrete construction product sales, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 16% of total Company sales in the third quarter of 2013, up from 15% in the third quarter of 2012.
Gross profit
The following table represents gross profit by segment for the three-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
(in thousands)
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
Three months ended:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
65,194
|
|
9,975
|
|
495
|
|
59
|
|
75,723
|
|
September 30, 2013
|
|
75,369
|
|
13,754
|
|
863
|
|
167
|
|
90,153
|
|
Increase
|
|
10,175
|
|
3,779
|
|
368
|
|
108
|
|
14,430
|
|
Percentage increase
|
|
15.6
|
%
|
37.9
|
%
|
74.4
|
%
|
*
|
|
19.1
|
%
|
The following table represents gross profit as a percentage of sales by segment for the three-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 gross profit percentage
|
|
47.5
|
%
|
31.3
|
%
|
17.4
|
%
|
*
|
|
44.0
|
%
|
2013 gross profit percentage
|
|
47.9
|
%
|
40.6
|
%
|
19.3
|
%
|
*
|
|
46.0
|
%
|
* The statistic is not material.
23
Gross profit
Gross profit increased to $90.2 million in the third quarter of 2013 from $75.7 million in the third quarter of 2012. Gross profit as a percentage of net sales increased to 46.0% in the third quarter of 2013 from 44.0% in the third quarter of 2012.
·
North America Gross profit margin increased slightly to 47.9% in the third quarter of 2013 from 47.5% in the third quarter of 2012,
as a result of slightly lower material costs and labor costs as a percentage of sales, partly offset by slightly higher factory overhead costs as a percentage of sales. Concrete construction product sales, which have a lower gross profit margin than wood construction product sales, were 13% of North America sales in the third quarter of each of 2013 and 2012.
·
Europe Gross profit margin increased to 40.6% in the third quarter of 2013 from 31.3% in the third quarter of 2012, as a result of decreases in all elements of costs as a percentage of sales, mostly
due to exiting the heavy-duty mechanical anchor business in 2012, which included $0.9 million in severance expense in the third quarter of 2012. Exiting the heavy-duty anchor business also resulted in the Europe segments gross profit margin on concrete construction product sales increasing to 49% in the third quarter of 2013 from 27% in the third quarter of 2012.
·
Product mix The gross profit margin differential between wood construction products and concrete construction products decreased from 14% in the third quarter of 2012 to 13% in the third quarter of 2013, primarily due to reduced concrete construction product costs, including labor, factory overhead and distribution costs, partly offset by higher material costs.
·
Steel prices
Steel prices increased slightly during the third quarter in the United States. The Company expects steel prices to continue to increase moderately during the fourth quarter of 2013 if industry inventories remain low.
Research and development and engineering expenses
Research and development and engineering expenses increased 3.5% to $9.2 million in the third quarter of 2013 from $8.9 million in the third quarter of 2012, primarily due to increases of $0.4 million in cash profit sharing, $0.3 million in amortization expense of capitalized software development costs, $0.2 million in personnel costs and $0.1 million in stock-based compensation expense, partly offset by a decrease of $0.8 million in professional fees primarily due to hiring the software development team at the end of 2012, whereas the Company contracted a third party development company in 2012.
·
North America
·
Research and development and engineering expenses increased $0.3 million, primarily due to increases of $0.4 million in cash profit sharing expense, $0.3 million in amortization expense of capitalized software development costs and $0.1 million in stock-based compensation, partly offset by a decrease of $0.7 million in professional fees, including third party software development fees.
·
In the third quarter of 2013, the Company capitalized $1.6 million in software development costs, which reduced research and development and engineering personnel expenses for the quarter as compared to no costs being capitalized in the third quarter of 2012.
Selling expenses
Selling expenses decreased 1.5% from $20.9 million in the third quarter of 2012 to $20.6 million in the third quarter of 2013, primarily due to decreases of $0.4 million in personnel costs and $0.4 million in promotional costs, partly offset by increases in cash profit sharing of $0.4 million.
·
North America Selling expenses decreased $0.4 million, primarily due to a decrease of $0.5 million in promotional expense.
General and administrative expenses
General and administrative expenses increased 20.7% to $28.8 million in the third quarter of 2013 from $23.8 million in the third quarter of 2012, primarily due to increases of $2.5 million in cash profit sharing, $1.5 million in personnel costs, $0.5 million in stock-based compensation and $0.5 million in communication and computer expense, partly offset by a decrease of $0.5 million in amortization expense, which was due to a change in the provisional measurement of Keymark assets that resulted in a reduced amount of amortizable intangible assets and an increase in goodwill.
24
·
North America General and administrative expenses increased $3.7 million, primarily due to increases of $1.6 million in cash profit sharing, $0.9 million in personnel costs due to the addition of administrative and information technology staff and pay rate increases instituted in January 2013, $0.5 million in communication and computer expense and $0.2 million in stock-based compensation, partly offset by a decrease of $0.4 million in amortization expense due to a reduction in the provisional measurement of Keymark intangible assets.
·
Europe General and administrative expenses increased by $1.0 million, primarily due to increases of $0.6 million in personnel costs and $0.3 million in cash profit sharing, partly offset by an increase of $0.3 million in losses from foreign currency translations.
·
Admin & All Other General and administrative expenses increased $0.7 million, primarily due to increases of $0.6 million in cash profit sharing, $0.3 million in stock-based compensation and $0.2 million in professional fees.
Sales of assets
In September 2013, the Company sold its Ireland facility for $1.0 million, which resulted in a loss on disposal of $0.7 million.
Income taxes
The effective income tax rate decreased from 41.1% in the third quarter of 2012 to 35.2% in the third quarter of 2013, due to reduced operating losses in the Europe and Asia/Pacific segments in the third quarter 2013, for which a valuation allowance had been recorded.
25
Results of Operations for the Nine Months Ended September 30, 2013, Compared
with the Nine Months Ended September 30, 2012
Net sales increased 6.5% to $546.0 million in the first nine months of 2013 from $512.6 million in the first nine months of 2012. The Company had net income of $43.3 million in the first nine months of 2013 compared to net income of $36.0 million in the first nine months of 2012. Diluted net income per common share was $0.89 in the first nine months of 2013 compared to $0.74 in the first nine months of 2012. Income from operations increased 11.1% to $69.6 million in the first nine months of 2013 from $62.6 million in the first nine months of 2012. The following table illustrates the differences in the Companys operating results in the nine months ended September 30, 2013, from the nine months ended September 30, 2012, 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)
|
|
2012
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
512,550
|
|
$
|
35,128
|
|
$
|
(4,333
|
)
|
$
|
2,663
|
|
$
|
|
|
$
|
546,008
|
|
Cost of sales
|
|
284,276
|
|
21,358
|
|
(6,144
|
)
|
1,717
|
|
254
|
|
301,461
|
|
Gross profit
|
|
228,274
|
|
13,770
|
|
1,811
|
|
946
|
|
(254
|
)
|
244,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development and other engineering expense
|
|
27,156
|
|
149
|
|
(601
|
)
|
314
|
|
|
|
27,018
|
|
Selling expense
|
|
61,255
|
|
2,455
|
|
(704
|
)
|
683
|
|
(35
|
)
|
63,654
|
|
General and administrative expense
|
|
77,174
|
|
4,141
|
|
1,661
|
|
(22
|
)
|
712
|
|
83,666
|
|
Loss on sale of assets
|
|
42
|
|
2
|
|
601
|
|
(11
|
)
|
|
|
634
|
|
Income from operations
|
|
62,647
|
|
7,023
|
|
854
|
|
(18
|
)
|
(931
|
)
|
69,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income, net
|
|
177
|
|
50
|
|
50
|
|
(20
|
)
|
(225
|
)
|
32
|
|
Income before income taxes
|
|
62,824
|
|
7,073
|
|
904
|
|
(38
|
)
|
(1,156
|
)
|
69,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
26,788
|
|
1,963
|
|
(1,717
|
)
|
(170
|
)
|
(560
|
)
|
26,304
|
|
Net income
|
|
$
|
36,036
|
|
$
|
5,110
|
|
$
|
2,621
|
|
$
|
132
|
|
$
|
(596
|
)
|
$
|
43,303
|
|
Net sales
The following table represents net sales by segment for the nine-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
(in thousands)
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
Nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
$
|
409,644
|
|
$
|
94,236
|
|
$
|
7,958
|
|
$
|
712
|
|
$
|
512,550
|
|
September 30, 2013
|
|
444,772
|
|
89,903
|
|
10,621
|
|
712
|
|
546,008
|
|
Increase (decrease)
|
|
35,128
|
|
(4,333
|
)
|
2,663
|
|
|
|
33,458
|
|
Percentage increase (decrease)
|
|
8.6
|
%
|
(4.6
|
)%
|
33.5
|
%
|
0.0
|
%
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents segment net sales as percentages of total net sales for the nine-month periods ended September 30, 2012 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total 2012 net sales
|
|
79.9
|
%
|
18.4
|
%
|
1.6
|
%
|
0.1
|
%
|
100.0
|
%
|
Percentage of total 2013 net sales
|
|
81.5
|
%
|
16.5
|
%
|
1.9
|
%
|
0.1
|
%
|
100.0
|
%
|
The increase in net sales was primarily due to increased sales in North America, which were positively affected by improved economic conditions, including an increase in estimated annualized housing starts compared to the first nine months of 2012, partly offset by reduced home center sales and lower selling prices.
26
·
Segment net sales:
·
North America net sales were up 8.6% in the first nine months of 2013, compared to the first nine months of 2012. Sales in the United States increased over the same period in 2012, despite reduced home center business and lower selling prices. Canada net sales decreased slightly over the same period in 2012 due to lower sales volumes and selling prices.
·
Europe net sales decreased 4.6% in the first nine months of 2013, compared to the first nine months of 2012, primarily due to exiting the heavy-duty mechanical anchor business, the regions economic conditions, lower sales volumes and lower selling prices. Based on current information, the Company expects that the regions current economic conditions will not change significantly during the fourth quarter of 2013 and could continue to negatively affect net sales. Effects of foreign currency translation were not significant.
·
Consolidated net sales channels and product groups:
·
Net sales to contractor distributors, dealer distributors and lumber dealers increased in the first nine months of 2013, compared to the first nine months of 2012, while net sales to home centers decreased, partly as a result of the loss of Lowes as a customer in the second quarter of 2012. Lowes accounted for $11.7 million in net sales in the first nine months of 2012.
·
Excluding Lowes, net sales to home centers decreased 4% in the first nine months of 2013, compared to the same period in 2012, while net sales to the Companys largest customer decreased slightly in the first nine months of 2013, compared to the same period in 2012.
·
Wood construction product sales represented 85% of total Company sales in the first nine months of 2013, down from 86% in the first nine months of 2012.
·
Concrete construction product sales increased as a percentage of total sales to 15% in the first nine months of 2013, from 14% in the first nine months of 2012.
Gross profit
The following table represents gross profit by segment for the nine-month periods ended September 30, 2012 and 2013:
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
(in thousands)
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
Nine months ended:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
$
|
194,727
|
|
$
|
31,829
|
|
$
|
1,243
|
|
$
|
475
|
|
$
|
228,274
|
|
September 30, 2013
|
|
208,497
|
|
33,640
|
|
2,189
|
|
221
|
|
244,547
|
|
Increase (decrease)
|
|
13,770
|
|
1,811
|
|
946
|
|
(254
|
)
|
16,273
|
|
Percentage increase (decrease)
|
|
7.1
|
%
|
5.7
|
%
|
76.1
|
%
|
*
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents gross profit as a percentage of sales by segment for the nine-month periods ended September 30, 2012 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
Asia/
|
|
Admin &
|
|
|
|
|
|
America
|
|
Europe
|
|
Pacific
|
|
All Other
|
|
Total
|
|
2012 gross profit percentage
|
|
47.5
|
%
|
33.8
|
%
|
15.6
|
%
|
*
|
|
44.5
|
%
|
2013 gross profit percentage
|
|
46.9
|
%
|
37.4
|
%
|
20.6
|
%
|
*
|
|
44.8
|
%
|
* The statistic is not material.
Gross profit increased to $244.6 million in the first nine months of 2013 from $228.3 million in the first nine months of 2012. Gross profit as a percentage of net sales increased slightly to 44.8% in the first nine months of 2013 from 44.5% in the first nine months of 2012. Based on current information, the Company estimates that its 2013 full-year gross profit margin will be 43% to 44%.
·
North America Gross profit margin decreased from 47.5% in the first nine months of 2012 to 46.9% in the first nine months of 2013,
as a result of competitive price pressure, higher factory overhead and higher distribution costs, as a percentage of sales, partly offset by lower material and labor costs as a percentage of sales. Concrete construction product sales, which have a lower gross profit margin than wood construction product sales, were 13% of North America sales in the first nine months of each of 2013 and 2012.
·
Europe Gross profit margin increased to 37.4% in the first nine months of 2013 from 33.8% in the first nine months of 2012, as a result of decreases in all elements of costs of sales as a percentage of sales, mostly
due to exiting the heavy-duty mechanical anchor business in 2012, which included $0.9 million in severance expense in the third quarter of 2012.
27
·
Product mix The gross profit margin differential between wood construction products and concrete construction products decreased from 15% in the first nine months of 2012 to 12% in the first nine months of 2013, primarily due to reduced concrete construction product costs, including material and labor costs and savings from exiting the heavy-duty mechanical anchor business, slightly offset by higher distribution costs.
Research and development and engineering expenses
Research and development and engineering expenses decreased 0.5% from $27.2 million in the first nine months of 2012 to $27.0 million in the first nine months of 2013, primarily due to the Company capitalizing $1.3 million of software development costs net of amortization expense, which reduced year-to-date software development expense, mostly offset by increases of $0.5 million in cash profit sharing, $0.2 million in stock-based compensation and $0.2 million in communication and computer expense.
·
North America
·
Research and development and engineering expenses increased slightly, primarily due to increases of $0.5 million in cash profit sharing, $0.2 million in stock-based compensation and $0.2 million in communication and computer expense, mostly offset by capitalization of $1.3 million of software development costs net of amortization expense.
·
The Company expects that its spending on software development will continue in the fourth quarter of 2013 at a similar rate as in the third quarter of 2013. Based on current information, the Company expects that the portion of software development spending that it will capitalize in the fourth quarter of 2013 will continue at a similar rate as in the first nine months of 2013 with remaining costs expensed as incurred.
·
Europe Research and development and engineering expenses decreased $0.6 million, primarily due to exiting the heavy-duty anchor business in 2012, which had research and development and engineering expenses of $0.5 million in the first nine months of 2012.
Selling expenses
Selling expenses increased 3.9% to $63.7 million in the first nine months of 2013 from $61.3 million in the first nine months of 2012, primarily due to increases of $0.8 million in personnel costs, $0.7 million in stock-based compensation, $0.6 million in cash profit sharing and commissions and $0.2 million in promotional costs.
·
North America Selling expenses increased $2.5 million, primarily due to increases of $1.0 million in personnel costs (mostly from additional sales representatives in support of new businesses acquired in 2011 and 2012 and increased annual pay rates), $0.6 million in stock-based compensation, $0.3 million in cash profit sharing and commissions, $0.2 million in promotional costs and $0.2 million in professional fees.
·
Europe Selling expenses decreased $0.7 million, primarily due to exiting the heavy-duty anchor business in 2012, which had selling expenses of $0.8 million in the first nine months of 2012.
General and administrative expenses
General and administrative expenses increased 8.4% to $83.7 million in the first nine months of 2013 from $77.2 million in the first nine months of 2012, primarily due to increases of $2.3 million in personnel costs, $2.2 million in cash profit sharing, $0.7 million in stock-based compensation, $0.6 million in impairment expenses, $0.5 million in communication and computer expense, $0.5 million in net losses on foreign currency translations, and $0.4 million in facility expenses. These changes were partly offset by a $0.9 million decrease in legal and professional fees.
·
North America General and administrative expenses increased $4.1 million, primarily due to increases of $2.2 million in personnel costs due to the addition of administrative and information technology staff and pay rate increases instituted in January 2013, $1.8 million in cash profit sharing, $0.5 million in communication and computer expense and $0.3 million in stock-based compensation, partly offset by decreases of $0.5 million in impairment costs and $0.5 million in legal and professional fees.
·
Europe General and administrative expenses increased $1.7 million, primarily due to a $1.0 million impairment in the first quarter of 2013 associated with the Companys real estate in Ireland and increases of $0.3 million in stock-based compensation, $0.2 million in cash profit sharing and $0.2 million in foreign currency translation losses.
28
·
Admin & All Other General and administrative expenses increased $0.7 million, primarily due to an increase of $0.2 million in each of cash profit sharing, personnel costs, due to the addition of administrative staff and pay rate increases instituted in January 2013, and stock-based compensation.
Income taxes
The effective income tax rate decreased from 42.6% in the first nine months of 2012 to 37.8% in the first nine months of 2013, primarily due to reduced operating losses in the Europe and Asia/Pacific segments and $2.3 million in non-deductible acquisition costs recorded in 2012. Based on current information and subject to future events and circumstances, the Company estimates that its 2013 effective tax rate will be 38% to 40%.
Liquidity and Sources of Capital
As of September 30, 2013, working capital was $442.9 million as compared to $404.1 million at September 30, 2012, and $402.5 million at December 31, 2012. The increase in working capital from December 31, 2012, was primarily due to increases of $40.2 million in cash and cash equivalents, $36.1 million in net trade accounts receivable and $0.9 million in deferred income taxes, and decreases of $3.7 million in trade accounts payable and $0.6 million in accrued profit sharing trust contributions. The increase in cash and cash equivalents was primarily due to increased profit from operations, issuance of the Companys stock and proceeds from sales of facilities in Ireland and Germany. The increase in net trade accounts receivable was primarily due to seasonal increases in net sales during the third quarter of 2013 compared to the fourth quarter of 2012. The decrease in trade accounts payable was primarily due to decreased material purchases in the third quarter of 2013 compared to the fourth quarter of 2012. The decrease in accrued profit sharing trust was due to the 2012 contribution paid in the first quarter of 2013. The increases in working capital from December 31, 2012, were partly offset by decreases of $16.9 million in inventories and $11.0 million in other current assets and increases of $9.1 million in accrued cash profit sharing, $2.3 million in accrued expenses and $ 0.8 million in line of credit and notes payable. Raw material inventories decreased 21.8% as compared to December 31, 2012, while in-process and finished goods inventories increased 3.8% over the same period. The decrease in other current assets was primarily due to the decrease in income tax refunds receivable. The increase in accrued cash profit sharing was due to higher operating profits in the third quarter of 2013, compared to the fourth quarter of 2012, while the increase in accrued liabilities was primarily due to increased purchases and to value-added taxes that resulted from increased sales in the third quarter of 2013 compared to the fourth quarter of 2012. The increase in line of credit and notes payable was primarily from borrowing for working capital in Europe. The working capital change and changes in noncurrent assets and liabilities, combined with net income of $43.3 million and noncash expenses, primarily charges for depreciation, amortization, stock-based compensation and impairment of assets totaling $31.8 million, resulted in net cash provided by operating activities of $71.9 million. As of September 30, 2013, the Company had unused credit available of $305.3 million, including a $300.0 million credit facility.
The Companys investing activities used cash of $15.8 million, including $12.9 million in capital expenditures and $5.3 million for the recent North America acquisition of the ShearBrace product line from Weyerhaeuser, partly offset by a Keymark-related entitys repayment of loan of $0.6 million and proceeds from the sale of property and equipment of $1.8 million. The Companys 2012 investing activities included the acquisitions of S&P Clever and CarbonWrap, which used cash of $56.0 million. The Companys capital expenditures were primarily to increase manufacturing capacity in North America and to improve information technology support systems. The Company estimates that its full-year capital spending will be $22.0 million to $24.0 million in 2013.
The Companys financing activities used net cash of $15.8 million, including $12.1 million in dividend payments, $9.8 million for the repurchase of common stock and repayment of $0.6 million of borrowings on credit facilities, partly offset by $1.4 million cash provided by borrowings on credit facilities, primarily for working capital in Europe, and $5.3 million from the issuance of common stock on the exercise of stock options. In October 2013, the Companys Board of Directors declared a cash dividend of $0.125 per share, estimated to total $6.0 million, to be paid on January 23, 2014, to stockholders of record on January 2, 2014. The Companys Board of Directors has authorized up to $50.0 million, of which $40.2 million remained at September 30, 2013, for the repurchase of common stock in 2013.
29
The Company believes that cash generated by operations and borrowings available under its credit facility will be sufficient for the Companys working capital needs and planned capital expenditures for the next 12 months. Depending, however, on the Companys 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 and cash equivalents held by the Company is in foreign currencies. Cash and cash equivalents of $95.7 million 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 Companys main raw material is steel, increases in steel prices may adversely affect the Companys gross profit margin if it cannot recover the higher costs through price increases.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has foreign exchange rate risk in its international operations, primarily Europe and Canada, and through purchases from foreign vendors. The Company does not currently hedge this risk. If the exchange rate were to change by 10% in any one country or currency where the Company has operations, the change in net income would not be material to the Companys operations as a whole. The translation adjustment resulted in increases in accumulated other comprehensive income of $8.3 million and $1.4 million for the three and nine months ended September 30, 2013, respectively. The translation adjustment in the third quarter of 2013 was primarily due to the effect of a weakening United States dollar in relation to other relevant currencies. The translation adjustment in the first nine months of 2013 was due to the effect of a strengthening United States dollar in relation to the British pound, the Polish Zloty, Czech Koruna, and Canadian and Australian dollars, partly offset by a weakening of the United States dollar in relation to the Euro, the Chinese Yuan, the New Zealand dollar, and other European currencies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures.
As of September 30, 2013, an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures was performed under the supervision and with the participation of the Companys management, including the chief executive officer (CEO) and the chief financial officer (CFO). Based on that evaluation, the CEO and the CFO concluded that the Companys disclosure controls and procedures were effective at the reasonable assurance level as of that date and that the Companys disclosure controls and procedures at that date were designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms, including ensuring that information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including the CEO and the CFO, as appropriate to allow timely decisions regarding required disclosures.
The Companys management, including the CEO and the CFO, does not, however, expect that the Companys disclosure controls and procedures or the Companys internal control over financial reporting will necessarily prevent all fraud and material errors. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the facts that there are resource constraints and that the benefits of controls must be considered relative to their costs. The inherent limitations in an internal control system include the realities that judgments can be faulty and that breakdowns can occur because of simple error or mistake. Controls also can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of controls. The design of any system of internal control is also based in part on assumptions about the likelihood of future events, and there can be only reasonable, not absolute, assurance that any design will succeed in achieving its stated goals under all potential events and conditions. Over time, controls may become inadequate because of changes in circumstances, or the degree of compliance with the policies and procedures may deteriorate.
30
Changes in Internal Control over Financial Reporting.
During the three months ended September 30, 2013, the Company made no changes to its internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, the Company is involved in various legal proceedings and other matters arising in the normal course of business.
Four lawsuits (the Cases) have been filed against the Company in the Hawaii First Circuit Court:
Alvarez v. Haseko Homes, Inc. and Simpson Manufacturing, Inc.
, Civil No. 09-1-2697-11 (Case 1);
Ke Noho Kai Development, LLC v. Simpson Strong-Tie Company, Inc.
,
and Honolulu Wood Treating Co., LTD.
, Case No. 09-1-1491-06 SSM (Case 2);
North American Specialty Ins. Co. v. Simpson Strong-Tie Company, Inc. and K.C. Metal Products, Inc.
, Case No. 09-1-1490-06 VSM (Case 3); and
Charles et al. v. Haseko Homes, Inc. et al. and Third Party Plaintiffs Haseko Homes, Inc. et al. v. Simpson Strong-Tie Company, Inc., et al.
, Civil No. 09-1-1932-08 (Case 4). Case 1 was filed on November 18, 2009. Cases 2 and 3 were originally filed on June 30, 2009. Case 4 was filed on August 19, 2009. The Cases all relate to alleged premature corrosion of the Companys strap tie holdown products installed in buildings in a housing development known as Ocean Pointe in Honolulu, Hawaii, allegedly causing property damage. Case 1 is a putative class action brought by the owners of allegedly affected Ocean Pointe houses. Case 1 was originally filed as
Kai et al. v. Haseko Homes, Inc., Haseko Construction, Inc. and Simpson Manufacturing, Inc.
, Case No. 09-1-1476, but was voluntarily dismissed and then re-filed with a new representative plaintiff. Case 2 is an action by the builders and developers of Ocean Pointe against the Company, claiming that either the Companys strap tie holdowns are defective in design or manufacture or the Company failed to provide adequate warnings regarding the products susceptibility to corrosion in certain environments. Case 3 is a subrogation action brought by the insurance company for the builders and developers against the Company claiming the insurance company expended funds to correct problems allegedly caused by the Companys products. Case 4 is a putative class action brought, like Case 1, by owners of allegedly affected Ocean Pointe homes. In Case 4, Haseko Homes, Inc. (Haseko), the developer of the Ocean Pointe development, brought a third party complaint against the Company alleging that any damages for which Haseko may be liable are actually the fault of the Company. Similarly, Hasekos sub-contractors on the Ocean Pointe development brought cross-claims against the Company seeking indemnity and contribution for any amounts for which they may ultimately be found liable. None of the Cases alleges a specific amount of damages sought, although each of the Cases seeks compensatory damages, and Case 1 seeks punitive damages. Cases 1 and 4 have been consolidated. In December 2012, the Court granted the Company summary judgment on the claims asserted by the plaintiff homeowners in Cases 1 and 4, and on the third party complaint and cross-claims asserted by Haseko and the sub-contractors, respectively, in Case 4. In April 2013, the Court granted Haseko and the sub-contractors motion for leave to amend their cross-claims to allege a claim for negligent misrepresentation. The Company continues to investigate the facts underlying the claims asserted in the Cases, including, among other things, the cause of the alleged corrosion; the severity of any problems shown to exist; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if needed. At this time, the likelihood that the Company will be found liable under any legal theory, and the extent of such liability, if any, are unknown. Management believes the Cases may not be resolved for an extended period. The Company intends to defend itself vigorously in connection with the Cases.
Based on facts currently known to the Company, the Company believes that all or part of the claims alleged in the Cases may be covered by its insurance policies. On April 19, 2011, an action was filed in the United States District Court for the District of Hawaii,
National Union Fire Insurance Company of Pittsburgh, PA v. Simpson Manufacturing Company, Inc., et al.,
Civil No. 11-00254 ACK. In this action, Plaintiff National Union Fire Insurance Company of Pittsburgh, Pennsylvania (National Union), which issued certain Commercial General Liability insurance policies to the Company, seeks declaratory relief in the Cases with respect to its obligations to defend or indemnify the Company, Simpson Strong-Tie Company Inc., and a vendor of the Companys strap tie holdown products. By Order dated November 7, 2011, all proceedings in the
National Union
action have been stayed. If the stay is lifted and the National Union action is not dismissed, the Company intends vigorously to defend all claims advanced by National Union.
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On April 12, 2011, Firemans Fund Insurance Company (Firemans Fund), another of the Companys general liability insurers, sued Hartford Fire Insurance Company (Hartford), a third insurance company from whom the Company purchased general liability insurance, in the United States District Court for the Northern District of California,
Firemans Fund Insurance Company v. Hartford Fire Insurance Company
, Civil No. 11 1789 SBA (the
Firemans Fund
action). The Company has intervened in the
Firemans Fund
action and seeks a formal stay of proceedings in that action as well, pending resolution of the underlying Ocean Pointe cases.
On November 21, 2011, the Company commenced a lawsuit against National Union, Firemans Fund, Hartford and others in the Superior Court of the State of California in and for the City and County of San Francisco (the
San Francisco
coverage action). In the
San Francisco
coverage action, the Company alleges generally that the separate pendency of the
National Union
action and the
Firemans Fund
action presents a risk of inconsistent adjudications; that the San Francisco Superior Court has jurisdiction over all of the parties and should exercise jurisdiction at the appropriate time to resolve any and all disputes that have arisen or may in the future arise among the Company and its liability insurers; and that the
San Francisco
coverage action should also be stayed pending resolution of the underlying Ocean Pointe Cases. The
San Francisco
coverage action has been ordered stayed pending resolution of the Cases.
Nishimura v. Gentry Homes, Ltd; Simpson Manufacturing Co., Inc.; and Simpson Strong-Tie Company, Inc.
, Civil no. 11-1-1522-07, was filed in the Circuit Court of the First Circuit of Hawaii on July 20, 2011. The
Nishimura
case alleges premature corrosion of the Companys strap tie holdown products in a housing development at Ewa Beach in Honolulu, Hawaii. The case is a putative class action brought by owners of allegedly affected homes. The Complaint alleges that the Companys strap products and mudsill anchors are insufficiently corrosion resistant and/or fail to comply with Honolulus building code. In February 2012, the Court dismissed three of the five claims the plaintiffs had asserted against the Company. The Company is currently investigating the allegations of the complaint, including, among other things: the existence and extent of the alleged corrosion, if any; the building code provisions alleged to be applicable and, if applicable, whether the products complied; the buildings affected; the responsibility of the general contractor, various subcontractors and other construction professionals for the alleged damages; the amount, if any, of damages suffered; and the costs of repair, if any are needed. At this time, the likelihood that the Company will be found liable for any damage allegedly suffered and the extent of such liability, if any, are unknown. The Company denies any liability of any kind and intends to defend itself vigorously in this case.
Item 1A. Risk Factors
We are affected by risks specific to us, as well as risks that generally affect businesses operating in global markets. Some of the significant factors that could materially adversely affect our business, financial condition and operating results appear in Item 1A. Risk Factors of our most recent Annual Report on Form 10-K (available at www.simpsonmfg.com/docs/10K-2012.pdf or www.sec.gov).
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In February 2013, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Companys common stock. This replaced the $50.0 million repurchase authorization from January 2012. The authorization will remain in effect through the end of 2013. Approximately $40.2 million may be used during the remainder of 2013 to repurchase additional shares under this authorization. There were no purchases by the Company during the third quarter of 2013.
Item 6. Exhibits.
The following exhibits are either incorporated by reference into this report or filed with this report, as indicated below.
3.1
Certificate of Incorporation of Simpson Manufacturing Co., Inc., as amended, is incorporated by reference to Exhibit 3.1 of its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007.
3.2
Bylaws of Simpson Manufacturing Co., Inc., as amended through October 16, 2013, are incorporated by reference to Exhibit 3.2 of its Current Report on Form 8-K dated October 17, 2013.
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4.1
Amended Rights Agreement dated as of June 15, 2009, between Simpson Manufacturing Co., Inc. and Computershare Trust Company, N.A., which includes as Exhibit B the form of Rights Certificate, is incorporated by reference to Exhibit 4.1 of Simpson Manufacturing Co., Inc.s Registration Statement on Form 8-A/A dated June 15, 2009.
4.2
Certificate of Designation, Preferences and Rights of Series A Participating Preferred Stock of Simpson Manufacturing Co., Inc., dated July 30, 1999, is incorporated by reference to Exhibit 4.2 of its Registration Statement on Form 8-A dated August 4, 1999.
4.3
Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan for Salaried Employees is incorporated by reference to Exhibit 4.3 of Simpson Manufacturing Co., Inc.s Registration Statement on Form S-8, File Number 333-173811, dated April 29, 2011.
4.4
Simpson Manufacturing Co., Inc. 401(k) Profit Sharing Plan for Hourly Employees is incorporated by reference to Exhibit 4.4 of Simpson Manufacturing Co., Inc.s Registration Statement on Form S-8, File Number 333-173811, dated April 29, 2011.
10.1
Simpson Manufacturing Co., Inc. 1994 Stock Option Plan, as amended through February 13, 2008, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
10.2
Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan, as amended through November 18, 2004, is incorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
10.3
Simpson Manufacturing Co., Inc. Executive Officer Cash Profit Sharing Plan, as amended through February 25, 2008, is incorporated by reference to Exhibit 10.3 of Simpson Manufacturing Co., Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
10.4
Credit Agreement, dated as of July 27, 2012, among Simpson Manufacturing Co., Inc. as Borrower, the Lenders party thereto, Wells Fargo Bank, National Association, in its separate capacities as Swing Line Lender and L/C issuer and as Administrative Agent, and Simpson Strong-Tie Company Inc., and Simpson Strong-Tie International, Inc. as Guarantors, is incorporated by reference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.s Current Report on Form 8-K dated August 1, 2012.
10.5
Form of Indemnification Agreement between Simpson Manufacturing Co., Inc. and its directors and executive officers, as well as the officers of Simpson Strong-Tie Company Inc., is incorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.s Annual Report on Form 10-K for the year ended December 31, 2004.
10.6
Compensation of Named Executive Officers is
incorporated by reference to Exhibit 10 of Simpson Manufacturing Co., Inc.s Current Report on Form 8-K dated December 10, 2012, as amended on Form 8-K/A dated January 31, 2013.
10.7
Compensation of Named Executive Officers is
incorporated by reference to Simpson Manufacturing Co., Inc.s Schedule 14A Proxy Statement dated March 8, 2013.
10.8
Simpson Manufacturing Co., Inc. 2011 Incentive Plan is incorporated by reference to Exhibit A of Simpson Manufacturing Co., Inc.s Schedule 14A Proxy Statement dated March 9, 2012.
10.9
Asset Purchase Agreement dated as of December 16, 2011, by and between Automatic Stamping, LLC, a North Carolina limited liability company, Automatic Stamping Auxiliary Services, LLC, a North Carolina limited liability company, and William H. Black, Jr., on the one hand, and Simpson Strong-Tie Company Inc., a California corporation, on the other hand, is incorporated by reference to Exhibit 10.10 of Simpson Manufacturing Co., Inc.s Annual Report on Form 10-K for the year ended December 31, 2011.
33
10.10
Separation agreement dated as of July 3, 2013, between Michael J. Herbert, Vice President of Simpson Manufacturing Co., Inc., on the one hand, and Simpson Manufacturing Co., Inc., on the other hand, is incorporated by reference to Exhibit 10.11 of Simpson Manufacturing Co., Inc.s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013.
31.
Rule 13a-14(a)/15d-14(a) Certifications are filed herewith.
32.
Section 1350 Certifications are filed herewith.
99.1
Simpson Manufacturing Co., Inc. 1994 Employee Stock Bonus Plan, as amended through November 18, 2004, is incorporated by reference to Exhibit 99.1 of Simpson Manufacturing Co., Inc.s Annual Report on Form 10-K for the year ended December 31, 2007.
101
Financial statements from the quarterly report on Form 10-Q of Simpson Manufacturing Co., Inc. for the quarter ended September 30, 2013, formatted in XBRL, are filed herewith and include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Stockholders Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Simpson Manufacturing Co., Inc.
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(Registrant)
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DATE:
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November 8, 2013
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By
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/s/Brian J. Magstadt
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Brian J. Magstadt
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Chief Financial Officer
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(principal accounting and financial officer)
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