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Basis of Presentation | 9 Months Ended
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Sep. 30, 2012
Basis of Presentation |
Basis of Presentation |
1. Basis of Presentation Principles of Consolidation The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (the “Company”). Investments in 50% or less owned affiliates are accounted for using either cost or the equity method. 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 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, 2011 (the “2011 Annual Report”). 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 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 the interim periods are not necessarily indicative of the results to be expected for any future period. 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, collectibility is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, where 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, software license sales and services and lease income, though significantly less than 1% of net sales and not material to the 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 is 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 share (“EPS”) to diluted EPS:
|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
(in thousands, except per share amounts) |  | 2012 |  | 2011 |  | 2012 |  | 2011 |
Net income available to common stockholders |  | $ | 12,976 |  | $ | 19,380 |  | $ | 36,036 |  | $ | 45,951 |
Basic weighted average shares outstanding |  | 48,346 |  | 48,253 |  | 48,322 |  | 49,247 |
Dilutive effect of potential common stock equivalents — stock options |  | 44 |  | 35 |  | 63 |  | 49 |
Diluted weighted average shares outstanding |  | 48,390 |  | 48,288 |  | 48,385 |  | 49,296 |
Earnings per common share: |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.27 |  | $ | 0.40 |  | $ | 0.75 |  | $ | 0.93 |
Diluted |  | 0.27 |  | 0.40 |  | 0.74 |  | 0.93 |
Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive |  | 1,709 |  | 1,752 |  | 1,714 |  | 1,746 |
Accounting for Stock-Based Compensation With the approval of the Company’s stockholders on April 26, 2011, the Company adopted the Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the “2011 Plan”). The 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. Options previously granted under the 1994 Plan or the 1995 Plan will not be affected by the adoption of the 2011 Plan and will continue to be governed by the 1994 Plan or the 1995 Plan, respectively. Under the 1994 Plan, the Company could grant incentive stock options and non-qualified stock options. The Company has, however, granted only non-qualified stock options under both the 1994 Plan and the 1995 Plan. The Company generally granted options under each of the 1994 Plan and the 1995 Plan once each year. The exercise price per share of each option granted in February 2011 under the 1994 Plan equaled the closing market price per share of the Company’s common stock as reported by the New York Stock Exchange on the day preceding the day that the Compensation and Leadership Development Committee of the Company’s Board of Directors met to approve the grant of the options. The exercise price per share under each option granted under the 1995 Plan was at the fair market value on the date specified in the 1995 Plan. Options vest and expire according to terms established at the grant date. Options granted under the 1994 Plan typically vest evenly over the requisite service period of four years and have a term of seven years. The vesting of options granted under the 1994 Plan will be accelerated if the grantee ceases to be employed by the Company after reaching age 60 or if there is a change in control of the Company. Options granted under the 1995 Plan were 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 are registered under the Securities Act of 1933. Under the 2011 Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although the Company currently intends to award primarily restricted stock units and to a lesser extent, if at all, non-qualified stock options. 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 may be issued (including shares already sold) pursuant to all awards under the 2011 Plan, including on exercise of options previously granted under the 1994 Plan and the 1995 Plan. Shares of common stock to be issued pursuant to the 2011 Plan are registered under the Securities Act of 1933. The following table represents the Company’s stock option and restricted stock unit activity for the three and nine months ended September 30, 2012 and 2011:
|  | Three Months Ended |  | Nine Months Ended |
|  | September 30, |  | September 30, |
(in thousands) |  | 2012 |  | 2011 |  | 2012 |  | 2011 |
Stock-based compensation expense recognized in operating expenses |  | $ | 1,966 |  | $ | 1,230 |  | $ | 7,086 |  | $ | 3,524 |
Tax benefit of stock-based compensation expense in provision for income taxes |  | 691 |  | 449 |  | 2,462 |  | 1,267 |
Stock-based compensation expense, net of tax |  | $ | 1,275 |  | $ | 781 |  | $ | 4,624 |  | $ | 2,257 |
Fair value of shares vested |  | $ | 2,043 |  | $ | 1,287 |  | $ | 7,048 |  | $ | 3,405 |
Proceeds to the Company from the exercise of stock-based compensation |  | $ | 201 |  | $ | — |  | $ | 2,184 |  | $ | 154 |
Tax effect from exercise of stock-based compensation, including shortfall tax benefits |  | $ | (4 | ) | $ | — |  | $ | (60 | ) | $ | (71 | )
|  | At September 30, |
|  | 2012 |  | 2011 |
Stock-based compensation cost capitalized in inventory |  | $ | 354 |  | $ | 166 |
The amounts included in cost of sales, research and development and other engineering, selling, or general and administrative expense depend on the job functions performed by the employees to whom the stock options and restricted stock units were awarded. The assumptions used to calculate the fair value of options or restricted stock units granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience. Fair Value of Financial Instruments The “Fair Value Measurements and Disclosures” topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification TM (“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; 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. As of September 30, 2012, the Company’s investments consisted of only United States Treasury securities and money market funds aggregating $85.2 million, which are the primary financial instruments, maintained in cash equivalents and carried at cost, approximating fair value, based on Level 1 inputs. The carrying amounts of trade receivables, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s line of credit is classified as Level 2 within the fair value hierarchy and is calculated based on borrowings with similar maturities, current remaining average life to maturity and current market conditions. Income Taxes The Company uses an estimated annual effective tax rate to measure the tax benefit or tax expense recognized in each interim period. The effective tax rate increases from the third quarter of 2011 to the third quarter of 2012 and the first nine months of 2011 to the first nine months of 2012 were primarily due to 2012 valuation allowances taken on foreign losses, primarily in the European segment and non-deductible acquisition costs. In 2011 release of valuation allowances related to the disposal of the North America segment’s Keymark equity investment led to the lower effective tax rate. The following table presents the Company’s effective tax rates and income tax expense for the three and nine months ended September 30, 2012 and 2011:
|  | Three Months Ended |  | Nine Months Ended |
(in thousands, except |  | September 30, |  | September 30, |
percentage amounts) |  | 2012 |  | 2011 |  | 2012 |  | 2011 |
Effective tax rate |  | 41.4 | % | 34.2 | % | 42.6 | % | 37.1 | %
Provision for income taxes |  | $ | 9,069 |  | $ | 10,052 |  | $ | 26,788 |  | $ | 27,069 |
Acquisitions In January 2012, the Company purchased all of the shares of S&P Clever Reinforcement Company AG and S&P Clever International AG, both companies incorporated under the laws of Switzerland (collectively, “S&P Clever”), for $58.1 million, subject to post-closing adjustments. S&P Clever manufactures and sells engineered materials to repair, strengthen and restore concrete and masonry construction and has operations in Switzerland, Germany, Portugal, Poland, The Netherlands and Austria. Payments under the purchase agreement included cash payments of $57.5 million and contingent consideration of $0.6 million payable over a three-year period if sales goals are met. As a result of the acquisition, the Company has increased its presence in the infrastructure, commercial and industrial construction market in Europe. The Company’s provisional measurement of assets acquired and liabilities assumed included cash and cash equivalents of $6.8 million, other current assets of $9.9 million, non-current assets of $54.2 million, current liabilities of $12.6 million and non-current liabilities of $0.2 million. Included in non-current assets is goodwill of $26.1 million, which was assigned to the European segment and is not deductible for tax purposes, and intangible assets of $15.0 million, the amortization of which is deductible for tax purposes. In March 2012, the Company purchased substantially all of the assets of CarbonWrap Solutions, L.L.C. (“CarbonWrap”) for $5.5 million, subject to post-closing adjustments. CarbonWrap develops fiber-reinforced polymer products primarily for infrastructure and transportation projects. Payments under the purchase agreement totaled $5.3 million in cash and contingent consideration of $0.2 million to be paid on resolution of specified post-closing contingencies to the principal officer of CarbonWrap, who is now employed by the Company. Goodwill of $3.6 million was assigned to the North American segment and is deductible for tax purposes. Intangible assets were valued at $1.6 million and are subject to tax-deductible amortization. Net tangible assets consisting of accounts receivable, inventory, equipment and prepaid expenses accounted for the balance of the purchase price. Under the business combinations topic of the FASB ASC, the Company accounted for these acquisitions as business combinations and ascribed acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements were made in the first quarter of 2012 for acquired assets and assumed liabilities. 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 was based on Level 3 inputs. The Company expects the measurement process for each acquisition to be finalized within a year of its acquisition date. Pro-forma financial information is not presented as it would not be materially different from the information presented in the Condensed Consolidated Statements of Operations. Recently Adopted Accounting Standards Effective January 1, 2012, the Company adopted the guidance codified in the “Comprehensive Income” topic of the FASB ASC, amending the comprehensive income guidance to eliminate the option to present components of other comprehensive income as part of the statement of stockholders’ equity. This amendment requires that all non-owner changes in stockholders’ equity be presented in a single continuous statement or in two separate but consecutive statements. The Company has chosen to present comprehensive income in two separate consecutive statements. The implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations. In July 2012, the FASB issued an amendment to the indefinite-lived intangible assets impairment guidance which provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendment is effective for annual and interim indefinite-lived intangible assets impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The early adoption and implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations. Recently Issued Accounting Standards Other recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants and the Securities and Exchange Commission did not or is not expected to have a material effect on the Company’s consolidated financial statements.

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