UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-23804
Simpson Manufacturing Co., Inc.
(Exact name of registrant as specified in its charter)
Delaware
94-3196943
(State or other jurisdiction of incorporationor organization)
(I.R.S. EmployerIdentification No.)
4120 Dublin Boulevard, Suite 400, Dublin, CA 94568
(Address of principal executive offices)
(Registrant’s telephone number, including area code): (925) 560-9000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of shares of the Registrant’s Common Stock outstanding as of March 31, 2005: 47,994,172
In November 2004, the Company completed a 2-for-1 stock split effected in the form of a stock dividend of its common stock. All of the share and per share numbers have been adjusted to reflect this stock split.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
March 31,
December 31,
2005
2004
ASSETS
Current assets
Cash and cash equivalents
$
33,909,839
70,446,242
30,916,357
Short-term investments
13,838,703
45,456,581
17,032,159
Trade accounts receivable
110,607,502
106,004,468
89,806,749
Inventories
190,048,738
115,290,897
192,879,318
Deferred income taxes
9,641,296
7,624,878
8,809,071
Other current assets
4,816,388
4,248,835
7,667,288
Total current assets
362,862,466
349,071,901
347,110,942
Property, plant and equipment, net
137,949,180
108,477,981
137,608,800
Goodwill
43,241,861
23,444,265
44,378,861
Equity method investment
73,123
—
Other noncurrent assets
16,611,381
7,030,061
16,038,357
Total assets
560,738,011
488,024,208
545,136,960
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Line of credit and current
portion of long-term debt
1,715,170
2,666,161
579,198
Trade accounts payable
35,138,620
20,392,693
32,030,936
Accrued liabilities
23,190,304
17,902,826
27,780,583
Income taxes payable
5,648,676
8,412,050
Accrued profit sharing trust contributions
2,705,024
2,082,057
7,038,952
Accrued cash profit sharing and commissions
8,580,031
10,583,238
8,209,753
Accrued workers’ compensation
2,594,350
2,473,764
2,760,613
Total current liabilities
79,572,175
64,512,789
78,400,035
Long-term debt, net of current portion
2,245,353
5,199,434
2,396,886
Other long-term liabilities
1,416,347
1,112,856
1,414,831
Total liabilities
83,233,875
70,825,079
82,211,752
Commitments and contingencies (Notes 6 and 7)
Stockholders’ equity
Common stock, at par value
479,942
498,214
479,290
Additional paid-in capital
83,037,685
65,502,295
79,876,789
Retained earnings
383,140,301
373,437,866
369,154,260
Accumulated other comprehensive income
10,846,208
7,187,752
13,414,869
Treasury stock
(29,426,998
)
Total stockholders’ equity
477,504,136
417,199,129
462,925,208
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Condensed Consolidated Statements of Operations
Three Months EndedMarch 31,
Net sales
184,215,855
159,915,734
Cost of sales
119,699,504
95,337,098
Gross profit
64,516,351
64,578,636
Operating expenses:
Selling
15,877,818
13,045,528
General and administrative
22,204,680
22,225,820
38,082,498
35,271,348
Income from operations
26,433,853
29,307,288
Income in equity method investment
Interest income, net
91,416
272,847
Income before income taxes
26,598,392
29,580,135
Provision for income taxes
10,214,351
11,630,665
Net income
16,384,041
17,949,470
Net income per common share
Basic
0.34
0.37
Diluted
0.33
0.36
Cash dividends declared per common share
0.05
Number of shares outstanding
47,974,289
48,544,544
48,934,352
49,328,540
3
Condensed Consolidated Statements of Stockholders’ Equity
for the three months ended March 31, 2005 and 2004 and the nine months ended December 31, 2004
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Treasury
Shares
Par Value
Capital
Earnings
Income
Stock
Total
Balance, January 1, 2004
48,510,588
497,792
63,334,758
357,916,036
7,982,663
400,304,251
Comprehensive income:
Other comprehensive income:
Change in net unrealized gains or losses on available-for-sale investments
1,367
Translation adjustment
(796,278
Comprehensive income
17,154,559
Options exercised
25,000
250
246,809
247,059
Stock compensation expense
1,339,246
Tax benefit of options exercised
144,258
Cash dividends declared on Common stock ($0.05 per share)
(2,427,640
Common stock issued at $25.43 per share
17,200
172
437,224
437,396
Balance, March 31, 2004
48,552,788
63,558,873
(63,260
6,290,377
69,785,990
367,834
3,678
3,523,809
3,527,487
3,110,173
2,742,104
Repurchase of common stock
(1,150,854
(31,273,933
Retirement of treasury stock
(24,194
(60,676,737
60,700,931
Cash dividends declared on Common stock ($0.15 per share)
(7,165,742
2-for-1 stock split effected in the form of a stock dividend
Common stock issued $31.40 per share for acquisition
159,234
1,592
4,998,408
5,000,000
Balance, December 31, 2004
47,929,002
659
(2,569,320
13,815,380
46,170
462
601,766
602,228
1,579,625
316,395
(2,398,000
Common stock issued at $34.91 per share
19,000
190
663,110
663,300
Balance, March 31, 2005
47,994,172
4
Condensed Consolidated Statements of Cash Flows
Three MonthsEnded March 31,
Cash flows from operating activities
Adjustments to reconcile net income to net cash used in operating activities:
Gain on sale of capital equipment
(73,695
(40,997
Depreciation and amortization
6,488,890
4,717,031
(1,693,248
(528,818
Noncash compensation related to stock plans
1,679,625
1,506,133
(73,123
Provision for obsolete inventory
521,533
682,801
Provision for doubtful accounts
19,300
(276,528
Changes in operating assets and liabilities, net of effects of acquisitions:
(21,435,007
(39,731,096
1,307,566
(10,008,066
2,925,952
(2,305,357
10,765,516
10,001,229
(4,311,450
(3,931,734
374,003
3,125,651
(1,910,056
(2,457,741
(3,837,533
753,470
(5,191
587,916
(166,263
50,000
(95,195
26,543
Net cash provided by (used in) operating activities
7,182,060
(19,735,835
Cash flows from investing activities
Capital expenditures
(6,409,825
(6,113,235
Proceeds from sale of capital equipment
94,211
40,541
Purchases of available-for-sale investments
(26,217,348
Sales of available-for-sale investments
3,000,000
25,500,000
Net cash used in investing activities
(3,315,614
(6,790,042
Cash flows from financing activities
Line of credit borrowings
1,140,245
1,874,190
Repayment of debt and line of credit borrowings
(20,110
(125,498
Issuance of Company’s common stock
Dividends paid
(2,397,409
Net cash (used in) provided by financing activities
(675,046
1,995,751
Effect of exchange rate changes on cash
(197,918
(159,517
Net increase (decrease) in cash and cash equivalents
2,993,482
(24,689,643
Cash and cash equivalents at beginning of period
95,135,885
Cash and cash equivalents at end of period
Noncash capital expenditures
448,910
38,076
Dividends declared but not paid
2,398,000
2,427,640
Issuance of Company’s common stock for compensation
5
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
Principles of Consolidation
The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in less than 50% owned affiliates are generally 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 have been condensed or omitted. These interim statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Simpson Manufacturing Co., Inc.’s (the “Company’s”) 2004 Annual Report on Form 10-K (the “2004 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 accounting principles generally accepted in the United States of America. The year-end condensed consolidated balance sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. The Company’s quarterly results may be subject to fluctuations. 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 allowances, 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. If the actual costs of sales returns, allowances, and discounts were to exceed the recorded estimated allowance, the Company’s sales would be adversely affected. Accrued sales returns have not been material and have been within management’s expectations. Service sales, representing aftermarket repair and maintenance and engineering activities, though significantly less than 1% of net sales and not material to the financial statements, are recognized as the services are completed.
Treasury Stock
The Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Upon retirement, the resulting gains or losses are credited or charged to retained earnings.
Net Income Per Common Share
Basic net income per common share is computed based upon 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.
6
The following is a reconciliation of basic earnings per share (“EPS”) to diluted EPS:
Three Months EndedMarch 31, 2005
Three Months EndedMarch 31, 2004
PerShare
Basic EPS
Income available to common stockholders
Effect of Dilutive Securities
Stock options
960,063
(0.01
783,996
Diluted EPS
For the quarter ended March 31, 2005, 94,677 shares attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
Accounting for Stock-Based Compensation
The Company maintains two stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees, consultants and non-employee directors. Stock options have been granted with exercise prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date.
As of January 1, 2003, the Company adopted Statement of Financial Accounting Standards (‘SFAS”) No. 148 and SFAS No. 123 and used the prospective method of applying SFAS No. 123 for the transition. For stock options that have been granted prior to January 1, 2003, the Company will continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equaled or exceeded the market price on the date of grant for options issued by the Company, no compensation expense has been recognized for stock options granted prior to January 1, 2003. For the three months ended March 31, 2005 and 2004, the Company has recognized after-tax stock option expense of approximately $973,049 and $812,922, respectively.
7
Had compensation cost for the Company’s stock options for all grants been recognized based upon the estimated fair value on the grant date under the fair value methodology prescribed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net income and earnings per share would have been as follows:
Net income, as reported
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects
973,049
812,922
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards granted prior to January 1, 2003, net of related tax effects
980,275
825,374
Net income, pro forma
16,376,815
17,937,018
Earnings per share
Basic, as reported
Basic, pro forma
Diluted, as reported
Diluted, pro forma
The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, “Accounting for Stock-Based Compensation,” which revised SFAS No. 123 to require companies to record compensation cost for stock-based employee compensation plans based on the fair value of options granted. While the Company currently accounts for stock options on a fair value basis, additional changes will be required such as those affecting cash flow presentation. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005, and management has not determined all of the effects on the Company’s financial statements once effective.
Reclassifications
Certain prior period amounts have been reclassified to conform to the 2005 presentation with no effect on net income or retained earnings as previously reported. These reclassifications were primarily in relation to stockholders’ equity and between deferred tax assets and liabilities.
2. Trade Accounts Receivable
Trade accounts receivable consist of the following:
At March 31,
At December 31,
114,835,195
108,936,659
93,515,436
Allowance for doubtful accounts
(2,399,876
(1,573,209
(2,397,302
Allowance for sales discounts and returns
(1,827,817
(1,358,982
(1,311,385
8
3. Inventories
The components of inventories consist of the following:
Raw materials
77,752,620
47,085,114
91,910,430
In-process products
23,212,185
15,109,278
22,234,940
Finished products
89,083,933
53,096,505
78,733,948
4. Property, Plant and Equipment, net
Property, plant and equipment, net consists of the following:
Land
13,863,789
13,130,093
13,870,992
Buildings and site improvements
66,626,613
63,761,809
67,215,428
Leasehold improvements
6,816,523
5,861,256
6,837,774
Machinery and equipment
148,264,612
128,187,553
147,442,008
235,571,537
210,940,711
235,366,202
Less accumulated depreciation and amortization
(126,289,028
(109,787,233
(121,610,695
109,282,509
101,153,478
113,755,507
Capital projects in progress
28,666,671
7,324,503
23,853,293
Gains or losses on disposal of capital equipment are reported in the general and administrative expenses in the consolidated statements of operations.
5. Investments
Equity Method Investment
The Company has a 35% investment in Keymark Enterprises, LLC (“Keymark”), for which it accounts using the equity method. Keymark develops software that assists in the design and engineering of residential structures. The Company’s relationship with Keymark includes the specification of its products in the Keymark software. The Company has no obligation to make any additional future capital contributions, nor does it intend to provide additional funding to Keymark. In 2001, after several quarters of losses, the Company concluded that the carrying value of its investment in Keymark exceeded its fair value and therefore wrote down the value of its investment to zero. However, after three consecutive quarters of profitability in 2004, the Company began recording its share of Keymark’s 2005 profits and as of March 31, 2005, the carrying value of this investment was $73,123.
9
Available-for-Sale Investments
The Company’s investments in debt securities are classified as either cash and cash equivalents or available-for-sale investments. As of March 31, 2005 and 2004, and December 31, 2004, the Company’s investments were as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
EstimatedFairValue
At March 31, 2005
Debt investments
Municipal bonds
13,895,960
57,257
At March 31, 2004
45,451,236
34,630
29,285
Commercial paper
5,106,910
Total debt investments
50,558,146
50,563,491
Money market instruments and funds
19,997
50,578,143
50,583,488
At December 31, 2004
17,090,075
57,916
85,514
17,175,589
17,117,673
Of the total estimated fair value of debt securities, $5,126,907 and $85,514 were classified as cash and cash equivalents as of March 31, 2004 and December 31, 2004, respectively, and $13,838,703, $45,456,581, and $17,032,159 were classified as short-term investments as of March 31, 2005 and 2004, and December 31, 2004, respectively.
As of March 31, 2005, contractual maturities of the Company’s available-for-sale investments were as follows:
Amounts maturing in less than 1 year
13,395,960
13,338,703
Amounts maturing in 1 - 5 years
Amounts maturing in 5 - 10 years
Amounts maturing after 10 years
500,000
10
6. Debt
Outstanding debt at March 31, 2005 and 2004, and December 31, 2004, and the available credit at March 31, 2005, consisted of the following:
Available
Debt Outstanding
Credit at
at
Revolving line of credit, interest at bank’s reference rate less 0.50% (at March 31, 2005, the bank’s reference rate less 0.50% was 5.25%), expires November 2006
13,800,000
Revolving term commitment, interest at bank’s prime rate less 0.50% (at March 31, 2005, the bank’s prime rate less 0.50% was 5.25%), expires June 2006
9,200,000
Revolving line of credit, interest at the bank’s base rate plus 2% (at March 31, 2005, the bank’s base rate plus 2% was 6.75%), expires September 2005
1,300,068
Revolving line of credit, interest at 4.50%, expires August 2005
3,669,288
1,149,314
1,846,227
Term loan, interest at LIBOR plus 1.375% (at March 31, 2005, LIBOR plus 1.375% was 4.065%), matures June 2008
1,050,000
1,350,000
Term loans, interest rates between 2.94% and 5.60%, expirations between 2005 and 2018
1,761,209
4,669,368
1,926,084
27,969,356
3,960,523
7,865,595
2,976,084
Less line of credit and current portion of long-term debt
(1,715,170
(2,666,161
(579,198
Available credit
7. Commitments and Contingencies
Note 9 to the consolidated financial statements in the Company’s 2004 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. However the resolution of outstanding claims and litigation is subject to inherent uncertainty and it is at least reasonably possible that such resolution could have an adverse effect on the Company.
The Company’s 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 matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Corrosion, hydrogen enbrittlement, stress corrosion cracking, hardness, wood pressure-treating chemicals (such as copper), misinstallations, environmental conditions or other factors can contribute to failure of fasteners and connectors. On occasion, some of the fasteners 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.
11
The Company subjects its products to extensive testing, with results and conclusions published in Company catalogues and on its website (see www.strongtie.com/info). Based on test results to date, the Company believes that if its products are appropriately selected and installed in accordance with the Company’s guidance, they may be reliably used in appropriate applications.
8. Segment Information
The Company is organized into two primary segments. The segments are defined by types of products manufactured, marketed and distributed to the Company’s customers. The two product segments are connector products and venting products. These segments are differentiated in several ways, including the types of materials used, the production process, the distribution channels used and the applications in which the products are used. Transactions between the two segments were immaterial for each of the periods presented.
The following table illustrates certain measurements used by management to assess the performance of the segments described above as of or for the following periods:
Net Sales
Connector products
166,993,000
142,510,000
Venting products
17,223,000
17,406,000
184,216,000
159,916,000
Income from Operations
26,782,000
28,537,000
65,000
1,639,000
Administrative and all other
(413,000
(869,000
26,434,000
29,307,000
At
Total Assets
442,471,000
317,907,000
427,418,000
59,225,000
42,671,000
56,188,000
59,042,000
127,446,000
61,531,000
560,738,000
488,024,000
545,137,000
Cash collected by the Company’s subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of the segment entitled “Administrative and all other.” Cash and cash equivalent and short-term investment balances in the “Administrative and all other” segment were approximately $47,019,000, $115,685,000 and $47,023,000 as of March 31, 2005 and 2004, and December 31, 2004, respectively.
9. Subsequent Events
In May 2005, the Company’s Board of Directors declared a cash dividend of $0.05 per share, totaling approximately $2.4 million. The record date for the cash dividend is July 7, 2005, and it will be paid on July 27, 2005.
In May 2005, the Company completed the purchase, for approximately $4.1 million, of the facility that it previously rented from a related party in Columbus, Ohio.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Certain matters discussed below are forward-looking statements that involve risks and uncertainties, certain of which are discussed in this report and in other reports filed by the Company with the Securities and Exchange Commission. Actual results might differ materially from results suggested by any forward-looking statements in this report.
The following is a discussion and analysis of the consolidated financial condition and results of operations for the Company for the three months ended March 31, 2005 and 2004. The following should be read in conjunction with the interim Condensed Consolidated Financial Statements and related Notes appearing elsewhere herein.
Results of Operations for the Three Months Ended March 31, 2005, Compared
with the Three Months Ended March 31, 2004
Net sales increased 15.2% to $184,215,855 as compared to net sales of $159,915,734 for the first quarter of 2004. Net income decreased 8.7% to $16,384,041 for the first quarter of 2005 as compared to net income of $17,949,470 for the first quarter of 2004. Diluted net income per common share was $0.33 for the first quarter of 2005 as compared to $0.36 for the first quarter of 2004.
In the first quarter of 2005, sales growth occurred throughout Europe and North America, with the exception of California. The growth in the United States was strongest in the western region, excluding California, and the southern region. While sales increased overall, the increase was primarily due to higher sales prices and to the sales related to the acquisition of the Quik Drive product line in the fourth quarter of 2004. Simpson Strong-Tie’s first quarter sales increased 17.2% over the same quarter last year, while Simpson Dura-Vent’s sales decreased 1.1%. Lumber dealers were the fastest growing Simpson Strong-Tie sales channel. The sales increase was broad based across most of Simpson Strong-Tie’s major product lines. Anchor systems, engineered wood products and seismic and high wind products had the highest percentage growth rates in sales, while sales of core products, which include joist hangers and column bases, were flat. Sales of Simpson Strong-Tie’s Strong-Wall product line, with a substantial share of its sales in California, were down significantly from the first quarter of 2004. Sales of Simpson Dura-Vent’s Direct-Vent product line was up somewhat while sales of its chimney and pellet vent products decreased compared to the first quarter of 2004.
Income from operations decreased 9.8% from $29,307,288 in the first quarter of 2004 to $26,433,853 in the first quarter of 2005 and gross margins decreased from 40.4% in the first quarter of 2004 to 35.0% in the first quarter of 2005. This decrease was primarily due to increased material costs, mainly steel, which increased at a faster rate than the sales price increases that the Company put in place during 2004 and early 2005. The Company’s raw material inventory as of March 31, 2005, decreased 15.4% from December 31, 2004, while its in-process and finished goods inventory increased by 11.2% over the same period.
Selling expenses increased 21.7% from $13,045,528 in the first quarter of 2004 to $15,877,818 in the first quarter of 2005, primarily due to increased costs associated with the addition of sales and marketing personnel, including those associated with the acquisition of the assets of Quik Drive, U.S.A., Inc. and Quik Drive Canada, Inc. and 100% of the equity of Quik Drive Australia Pty. Limited (collectively “Quik Drive”), of approximately $1,500,000. In addition, advertising and promotional expenses increased by approximately $650,000 as a result of increased consumer advertising efforts. General and administrative expenses decreased 0.1% from $22,225,820 in the first quarter of 2004 to $22,204,680 in the first quarter of 2005. The decrease was primarily due to a decrease in cash profit sharing of approximately $2,200,000, as a result of decreased operating profit, and a decrease in donations relative to the first quarter of 2004 when the Company donated $500,000 to a university in central California to help fund the research and development of innovative construction practices. Offsetting these decreases in general and administrative expenses were several factors including increased amortization of intangible assets, primarily those associated with the Quik Drive acquisition, of approximately $500,000, increased costs associated with the addition of administrative personnel, including those associated with the Quik Drive acquisition, of approximately $500,000, higher fees associated with compliance with the Sarbanes-Oxley Act of 2002 of approximately $400,000, higher bad debt expense of approximately $300,000 relative to the same quarter last year, primarily due to favorable collections experience in the first quarter of 2004, and higher stock compensation costs of approximately $200,000. The tax rate was 38.4% in the first quarter of 2005, down from 39.3% in the first quarter of 2004. The decrease was primarily due
13
to lower taxable income as a result of the new manufacturing deduction for qualified production activity income under the American Jobs Creation Act of 2004.
Liquidity and Sources of Capital
As of March 31, 2005, working capital was $283.3 million as compared to $284.6 million at March 31, 2004, and $268.7 million at December 31, 2004. The increase in working capital from December 31, 2004, was primarily due to an increase in the Company’s trade accounts receivable of approximately $20.8 million. Net accounts receivable increased 23.2% from December 31, 2004, primarily due to the increase in sales. In addition, accrued liabilities decreased by approximately $4.6 million, primarily as a result of lower accrued sales incentives and allowances. Offsetting this increase in working capital was a shift from prepaid income taxes to income taxes payable totaling approximately $10.8 million, a decrease in total inventories of approximately $2.8 million, and an increase in net trade accounts payable of approximately $3.1 million. The balance of the change in working capital was due to the fluctuation of various other asset and liability accounts. The working capital change and changes in noncurrent assets and liabilities, combined with net income and noncash expenses, including depreciation, amortization, stock-based compensation charges and provisions for obsolete inventory and doubtful accounts, totaling approximately $25.1 million, resulted in net cash provided by operating activities of approximately $7.2 million. As of March 31, 2005, the Company had unused credit facilities available of approximately $28.0 million.
The Company used approximately $3.3 million in its investing activities. Approximately $6.4 million was used for capital expenditures, primarily for machinery and equipment for its facilities in McKinney, Texas, San Leandro and Vacaville, California, and Vicksburg, Mississippi. This was offset by the redemptions of available-for-sale securities of approximately $3.0 million. The Company expects its total capital spending to be approximately $60.0 million to $65.0 million for 2005.
In May 2005, the Company completed the purchase, for approximately $4.1 million, of the facility that it previously rented from a related party in Columbus, Ohio. In March 2005, the Company began construction on an expansion facility in Columbus on land adjacent to the current facility and is planning to spend approximately $14.6 million. In February 2005, the Company signed a letter of intent to purchase two buildings in Pleasanton, California, for approximately $9.6 million. The buildings comprise approximately 89,000 square feet and will be used for the Company’s home office, replacing the facility that the Company currently leases in Dublin, California. The Company is currently in the process of due diligence and, if that is satisfactorily completed, the transaction is expected to close in August 2005. If this transaction is completed, the Company expects to move in to the new building and vacate its leased property in Dublin, California, in mid-2006. The Company has not finalized its plans at this time, but anticipates a one-time charge to income in 2005 for the remaining lease payments at the Dublin facility and a noncash charge in 2005 for the unamortized leasehold improvements related to the Dublin facility, which it estimates will total approximately $1.6 million. The Company vacated and has listed its original McKinney, Texas, facility for sale but cannot reasonably estimate when it will be sold or the proceeds of such a sale.
The Company’s financing activities used net cash of approximately $0.7 million. Cash provided by financing activities were primarily from borrowings on the Company’s credit lines of its European subsidiaries of approximately $1.1 million and the issuance of the Company’s stock through its stock option plan of approximately $0.6 million. Uses of cash for financing activities were primarily from the payment of cash dividends of approximately $2.4 million in January 2005 which were declared in September 2004. In May 2005, the Company’s Board of Directors declared a cash dividend of $0.05 per share, totaling approximately $2.4 million. The record date for the cash dividend is July 7, 2005, and it will be paid on July 27, 2005.
The Company believes that cash generated by operations and borrowings available under its existing credit agreements will be sufficient for the Company’s working capital needs and planned capital expenditures over the next twelve months. Depending on the Company’s future growth and possible acquisitions, it may become necessary to secure additional sources of financing.
The Company believes that the effect of inflation on the Company has not been material in recent years, as inflation rates have remained relatively low. However, recent increases in the price of steel, the Company’s main raw material, and the possibility of further increases may continue to adversely affect the Company’s margins if it cannot recover the higher costs through price increases.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s short-term investments consisted of debt securities of approximately $13.8 million as of March 31, 2005. These securities, like all fixed income instruments, are subject to interest rate risk and will vary in value as market interest rates fluctuate. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 2005, the decline in the fair value of the investments would not have a material effect on the Company’s financial position as of March 31, 2005, or results of operations for the three months then ended.
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 where the Company has operations, the change in net income would not be material to its operations taken as a whole. The translation adjustment resulted in a reduction in accumulated other comprehensive income of approximately $2.6 million in the three months ended March 31, 2005, primarily due to the effect of the strengthening of the U.S. dollar in relation to European and Canadian currencies.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures. As of March 31, 2005, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures was performed under the supervision and with the participation of the Company’s 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 Company’s disclosure controls and procedures were effective as of that date.
Changes in Internal Control over Financial Reporting. During the three months ended March 31, 2005, the Company made no changes to its internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that have materially affected, or are reasonably likely to materially affect, its internal controls over financial reporting.
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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. The Company does not believe that the outcomes of these matters will have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In December 2004, the Board of Directors authorized the Company to repurchase up to $50.0 million of the Company’s common stock. This replaces the $50.0 million repurchase authorization from December 2003. The authorization will remain in effect through the end of 2005. There were no purchases by the Company during the first quarter of 2005.
Dividends are determined by the Company’s Board of Directors, based on the Company’s earnings, cash flow, financial condition and other factors deemed relevant by the Board of Directors. In addition, existing loan agreements require the Company to maintain tangible net worth of $250.0 million plus 50% of net profit after taxes for each fiscal year. This requirement may limit the amount that the Company may pay out as dividends on the common stock. As of March 31, 2005, the Company had approximately $161.9 million available for the payment of dividends under these loan agreements.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.
31. Rule 13a-14(a)/15d-14(a) Certifications.
32. Section 1350 Certifications.
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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.
(Registrant)
DATE:
May 9, 2005
By
/s/ Michael J. Herbert
Michael J. Herbert
Chief Financial Officer(principal accounting and financial officer)
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