10-Q

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:  September 30, 2015
 
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:  1-13429
 
Simpson Manufacturing Co., Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
94-3196943
(State or other jurisdiction of incorporation
 
(I.R.S. Employer
or organization)
 
Identification No.)
 
5956 W. Las Positas Blvd., Pleasanton, CA 94588
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
ý
 
 
Accelerated filer
o
 
 
 
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
 
Smaller reporting company
o
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
The number of shares of the registrant’s common stock outstanding as of September 30, 2015:   48,277,229




PART I — FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, unaudited)
 
 
September 30,
 
December 31,
 
2015
 
2014
 
2014
ASSETS
 

 
 

 
 

Current assets
 

 
 

 
 

Cash and cash equivalents
$
242,795

 
$
258,238

 
$
260,307

Trade accounts receivable, net
132,727

 
127,495

 
92,015

Inventories
200,282

 
198,420

 
216,545

Deferred income taxes
14,782

 
13,141

 
14,662

Other current assets
10,302

 
12,985

 
20,789

Total current assets
600,888

 
610,279

 
604,318

 
 
 
 
 
 
Property, plant and equipment, net
202,885

 
206,134

 
207,027

Goodwill
123,277

 
125,228

 
123,881

Intangible assets, net
28,570

 
34,782

 
32,587

Other noncurrent assets
4,426

 
5,420

 
5,252

Total assets
$
960,046

 
$
981,843

 
$
973,065

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
 

Current liabilities
 

 
 

 
 

Line of credit and notes payable
$
—

 
$
38

 
$
18

Trade accounts payable
24,934

 
24,729

 
22,860

Accrued liabilities
52,881

 
56,913

 
56,078

Income taxes payable
2,000

 
—

 
—

Accrued profit sharing trust contributions
4,383

 
4,663

 
5,384

Accrued cash profit sharing and commissions
12,566

 
13,721

 
6,039

Accrued workers’ compensation
4,486

 
4,432

 
4,101

Total current liabilities
101,250

 
104,496

 
94,480

 
 
 
 
 
 
Deferred income tax and other long-term liabilities
14,415

 
13,224

 
15,120

Total liabilities
115,665

 
117,720

 
109,600

Commitments and contingencies (Note 7)


 


 


Stockholders’ equity
 

 
 

 
 

Common stock, at par value
493

 
490

 
489

Additional paid-in capital
225,788

 
217,011

 
220,982

Retained earnings
679,673

 
648,608

 
649,174

Treasury stock
(39,529
)
 
(2,981
)
 
—

Accumulated other comprehensive income (loss)
(22,044
)
 
995

 
(7,180
)
Total stockholders’ equity
844,381

 
864,123

 
863,465

Total liabilities and stockholders’ equity
$
960,046

 
$
981,843

 
$
973,065



The accompanying notes are an integral part of these condensed consolidated financial statements
2

Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands except per-share amounts, unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net sales
$
216,139

 
$
209,320

 
$
609,295

 
$
585,518

Cost of sales
115,798

 
113,767

 
333,138

 
316,285

Gross profit
100,341

 
95,553

 
276,157

 
269,233

Operating expenses:
 

 
 

 
 
 
 
Research and development and other engineering
13,935

 
9,711

 
34,648

 
29,505

Selling
22,535

 
23,592

 
68,156

 
69,623

General and administrative
28,648

 
29,557

 
86,875

 
85,993

Impairment of goodwill
—

 
492

 
—

 
492

Gain on sale of assets
(26
)
 
(17
)
 
(57
)
 
(336
)
 
65,092

 
63,335

 
189,622

 
185,277

Income from operations
35,249

 
32,218

 
86,535

 
83,956

Interest (expense) income, net
(175
)
 
(27
)
 
(264
)
 
44

Income before taxes
35,074

 
32,191

 
86,271

 
84,000

Provision for income taxes
13,479

 
11,577

 
33,115

 
30,849

Net income
$
21,595

 
$
20,614

 
$
53,156

 
$
53,151

 
 
 
 
 
 
 
 
Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.44

 
$
0.42

 
$
1.08

 
$
1.09

Diluted
$
0.44

 
$
0.42

 
$
1.08

 
$
1.08

 
 
 
 
 
 
 
 
Number of shares outstanding
 

 
 

 
 
 
 
Basic
48,998

 
49,010

 
49,157

 
48,972

Diluted
49,239

 
49,227

 
49,377

 
49,172

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.160

 
$
0.140

 
$
0.460

 
$
0.405

 


The accompanying notes are an integral part of these condensed consolidated financial statements
3

Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(In thousands, unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
21,595

 
$
20,614

 
$
53,156

 
$
53,151

Other comprehensive loss:
 

 
 

 
 

 
 

Translation adjustment, net of tax expense of ($36) and ($63), and ($33) and ($19), respectively
(6,162
)
 
(15,897
)
 
(14,864
)
 
(17,091
)
Comprehensive income
$
15,433

 
$
4,717

 
$
38,292

 
$
36,060

 


The accompanying notes are an integral part of these condensed consolidated financial statements
4

Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
For the nine months ended September 30, 2014 and 2015, and for the three months ended December 31, 2014
(In thousands except per-share amounts, unaudited)
 
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Treasury
 
 
 
Shares
 
Par Value
 
Capital
 
Earnings
 
Income (Loss)
 
Stock
 
Total
Balance, January 1, 2014
48,712

 
$
486

 
$
207,418

 
$
615,289

 
$
18,086

 
$
—

 
$
841,279

Net income
—

 
—

 
—

 
53,151

 
—

 
—

 
53,151

Translation adjustment, net of tax
—

 
—

 
—

 
—

 
(17,091
)
 
—

 
(17,091
)
Stock options exercised
144

 
2

 
4,176

 
—

 
—

 
—

 
4,178

Stock-based compensation
—

 
—

 
8,789

 
—

 
—

 
—

 
8,789

Tax effect of options exercised
—

 
—

 
(275
)
 
—

 
—

 
—

 
(275
)
Shares issued from release of Restricted Stock Units
176

 
2

 
(3,499
)
 
—

 
—

 
—

 
(3,497
)
Repurchase of common stock
(95
)
 
—

 
—

 
—

 
—

 
(2,981
)
 
(2,981
)
Cash dividends declared on common stock, $0.405 per share
—

 
—

 
—

 
(19,832
)
 
—

 
—

 
(19,832
)
Common stock issued at $35.87 per share for stock bonus
11

 
—

 
402

 
—

 
—

 
—

 
402

Balance, at September 30, 2014
48,948

 
490

 
217,011

 
648,608

 
995

 
(2,981
)
 
864,123

Net income
—

 
—

 
—

 
10,380

 
—

 
 

 
10,380

Translation adjustment, net of tax
—

 
—

 
—

 


 
(7,805
)
 
—

 
(7,805
)
Pension adjustment, net of tax
—

 
—

 
—

 
—

 
(370
)
 
—

 
(370
)
Stock options exercised
17

 
—

 
404

 
—

 
—

 
—

 
404

Stock-based compensation
—

 
—

 
3,565

 
—

 
—

 
—

 
3,565

Tax effect of options exercised
—

 
—

 
7

 
—

 
—

 
—

 
7

Shares issued from release of Restricted Stock Units
1

 
—

 
(5
)
 
—

 
—

 
—

 
(5
)
Retirement of common stock
—

 
(1
)
 
—

 
(2,980
)
 
—

 
2,981

 
—

Cash dividends declared on common stock, $0.14 per share
—

 
—

 
—

 
(6,834
)
 
—

 
—

 
(6,834
)
Balance, December 31, 2014
48,966

 
489

 
220,982

 
649,174

 
(7,180
)
 
—

 
863,465

Net income
—

 
—

 
—

 
53,156

 
—

 
—

 
53,156

Translation adjustment, net of tax
—

 
—

 
—

 
—

 
(14,864
)
 
—

 
(14,864
)
Stock options exercised
239

 
2

 
7,017

 
—

 
—

 
—

 
7,019

Stock-based compensation
—

 
—

 
8,744

 
—

 
—

 
—

 
8,744

Tax effect of options exercised
—

 
—

 
(244
)
 
—

 
—

 
—

 
(244
)
Shares issued from release of Restricted Stock Units
205

 
2

 
(3,648
)
 
—

 
—

 
—

 
(3,646
)
Repurchase of common stock
(1,149
)
 
—

 
(7,615
)
 
—

 
—

 
(39,529
)
 
(47,144
)
Cash dividends declared on common stock, $0.46 per share
—

 
—

 
—

 
(22,657
)
 
—

 
—

 
(22,657
)
Common stock issued at $34.32 per share for stock bonus
16

 
—

 
552

 
—

 
—

 
—

 
552

Balance, September 30, 2015
48,277

 
$
493

 
$
225,788

 
$
679,673

 
$
(22,044
)
 
$
(39,529
)
 
$
844,381



The accompanying notes are an integral part of these condensed consolidated financial statements
5

Simpson Manufacturing Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Cash flows from operating activities
 

 
 

Net income
$
53,156

 
$
53,151

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Gain on sale of assets
(57
)
 
(336
)
Depreciation and amortization
21,664

 
22,105

Write-off of software development project
3,140

 
—

Impairment loss on assets
—

 
492

Gain on contingent consideration adjustment
(245
)
 
(386
)
Deferred income taxes
1,701

 
1,324

Noncash compensation related to stock plans
9,528

 
9,508

Excess tax benefit of options exercised and restricted stock units vested
(67
)
 
(66
)
Provision for doubtful accounts
153

 
25

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Trade accounts receivable
(42,851
)
 
(39,357
)
Inventories
13,567

 
(3,235
)
Trade accounts payable
3,026

 
(9,121
)
Income taxes payable
8,151

 
5,652

Accrued profit sharing trust contributions
(997
)
 
(1,103
)
Accrued cash profit sharing and commissions
6,577

 
7,743

Other current assets
4,293

 
(2,307
)
Accrued liabilities
(6,716
)
 
3,102

Long-term liabilities
(3,093
)
 
2,728

Accrued workers’ compensation
385

 
(159
)
Other noncurrent assets
954

 
(603
)
Net cash provided by operating activities
72,269

 
49,157

Cash flows from investing activities
 

 
 

Capital expenditures
(19,163
)
 
(17,517
)
Asset acquisitions, net of cash acquired
(779
)
 
—

Proceeds from sale of property and equipment
136

 
612

Loan made to customer
—

 
(281
)
Loan repayment by customer
244

 
22

Net cash used in investing activities
(19,562
)

(17,164
)
Cash flows from financing activities
 

 
 

Deferred and contingent consideration paid for asset acquisition
(1,177
)
 
(1,293
)
Repurchase of common stock
(47,144
)
 
(2,981
)
Repayment of debt and line of credit borrowings
(18
)
 
(60
)
Issuance of common stock
7,019

 
4,178

Excess tax benefit of options exercised and restricted stock units vested
67

 
66

Dividends paid
(21,628
)
 
(19,065
)
Net cash used in financing activities
(62,881
)
 
(19,155
)
Effect of exchange rate changes on cash and cash equivalents
(7,338
)
 
(5,808
)
Net increase (decrease) in cash and cash equivalents
(17,512
)
 
7,030

Cash and cash equivalents at beginning of period
260,307

 
251,208

Cash and cash equivalents at end of period
$
242,795

 
$
258,238

Noncash activity during the period
 

 
 

Noncash capital expenditures
$
—

 
$
501

Dividends declared but not paid
7,872

 
6,862

Issuance of Company’s common stock for compensation
552

 
402

 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements
6
Simpson Manufacturing Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)




1.    Basis of Presentation
 
Principles of Consolidation
 
The condensed consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries (the “Company”). There were no investments in affiliates that would be considered variable interest entities. All significant intercompany transactions have been eliminated.
 
Interim Period Reporting
 
The accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These interim statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
 
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 period presented are not necessarily indicative of the results to be expected for any future period.

Out-of-Period Adjustment

In the first quarter of 2014, the Company recorded an out-of-period adjustment, which increased gross profit, income from operations and net income by $2.3 million, $2.0 million and $1.3 million, respectively. The adjustment resulted from an over-statement of prior periods' workers compensation expense, net of cash profit sharing expense, and was not material to the first quarter of 2014 or any prior period's financial statements. While the adjustment was not material to the first quarter of 2014 or any period’s financial statements prior to the first quarter of 2014, such adjustment does affect certain line items for the nine-month period ended September 30, 2014.

Revenue Recognition
 
The Company recognizes revenue when the earnings process is complete, net of applicable provision for discounts, returns and incentives, whether actual or estimated, based on the Company’s experience. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectability is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, and title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement. Service sales, representing after-market repair and maintenance, engineering activities and software license sales and services, though significantly less than 1% of net sales and not material to the condensed consolidated financial statements, are recognized as the services are completed or the software products and services are delivered. If actual costs of sales returns, incentives and discounts were to significantly exceed the recorded estimated allowance, the Company’s sales would be adversely affected.
 
Net Earnings Per Common Share
 
Basic earnings per common share are computed based on the weighted-average number of common shares outstanding. Potentially dilutive securities, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive.
 

7


The following is a reconciliation of basic earnings per common share to diluted earnings per share:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except per share amounts)
2015
 
2014
 
2015
 
2014
Net income available to common stockholders
$
21,595

 
$
20,614

 
$
53,156

 
$
53,151

Basic weighted-average shares outstanding
48,998

 
49,010

 
49,157

 
48,972

Dilutive effect of potential common stock equivalents — stock options and
   restricted stock units
241

 
217

 
220

 
200

Diluted weighted-average shares outstanding
49,239

 
49,227

 
49,377

 
49,172

Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.44

 
$
0.42

 
$
1.08

 
$
1.09

Diluted
$
0.44

 
$
0.42

 
$
1.08

 
$
1.08

Potentially dilutive securities excluded from earnings per diluted share because
their effect is anti-dilutive
—

 
—

 
—

 
—


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 “Original 2011 Plan”). With the approval of the Company's stockholders on April 21, 2015, the Company adopted, the amended and restated Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the "2011 Plan"), which amended and restated in its entirety, and incorporated and superseded, the Original 2011 Plan. The Original 2011 Plan amended and restated in their entirety, and incorporated and superseded, both the Simpson Manufacturing Co., Inc. 1994 Stock Option Plan (the “1994 Plan”), which was principally for the Company’s employees, and the Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan (the “1995 Plan”), which was for the Company's directors who are not employees. Options previously granted under the 1994 Plan or the 1995 Plan were not affected by the adoption of the Original 2011 Plan or the 2011 Plan and 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, 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 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 has not awarded, and 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 issued) pursuant to all awards, 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.


8


The following table represents the Company’s stock option and restricted stock unit activity for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Stock-based compensation expense recognized in operating expenses
$
2,794

 
$
3,041

 
$
8,869

 
$
8,781

Less: Tax benefit of stock-based compensation expense in provision for
          income taxes
1,005

 
1,075

 
3,144

 
3,142

Stock-based compensation expense, net of tax
$
1,789

 
$
1,966

 
$
5,725

 
$
5,639

Fair value of shares vested
$
2,749

 
$
3,098

 
$
8,744

 
$
8,789

Proceeds to the Company from the exercise of stock-based compensation
$
1,443

 
$
1,551

 
$
7,019

 
$
4,178

Tax effect from the exercise of stock-based compensation, including shortfall
         tax benefits
$
(58
)
 
$
(89
)
 
$
(244
)
 
$
(275
)
 
 
At September 30,
(in thousands)
2015
 
2014
Stock-based compensation cost capitalized in inventory
$
464

 
$
525

 
The amounts related to the restricted stock units and stock options 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 stock options granted or restricted stock units awarded 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 (“ASC”) establishes a valuation hierarchy for disclosure of the inputs used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company’s investments consisted of only United States Treasury securities and money market funds, which are the Company’s primary financial instruments, maintained in cash equivalents and carried at cost, approximating fair value, based on Level 1 inputs. The balances of the Company’s primary financial instruments were as follows:
 
 
At September 30,
 
At December 31,
(in thousands)
2015
 
2014
 
2014
Financial instruments
$
76,488

 
$
98,568

 
$
99,024

 
The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments.
 

9


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 was higher in the third quarter and first nine months of 2015 than in the third quarter and first nine months of 2014, primarily due to $2.6 million in year-to-date operating losses, mostly occurring in the Asia/Pacific segment, for which no tax benefit was recorded. The following table presents the Company’s effective tax rates and income tax expense for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except percentages)
2015
 
2014
 
2015
 
2014
Effective tax rate
38.4
%
 
36.0
%
 
38.4
%
 
36.7
%
Provision for income taxes
$
13,479

 
$
11,577

 
$
33,115

 
$
30,849

 
Acquisitions
 
In the first quarter of 2015, the Company paid $0.7 million in deferred consideration and $0.3 million in contingent consideration related to the Company's 2012 acquisition of S&P Clever Reinforcement Company AG and S&P Clever International AG and paid $0.2 million in contingent consideration related to the Company's 2013 acquisition of Bierbach GmbH & Co. KG.

Under the business combinations topic of the FASB ASC, the Company accounts for acquisitions as business combinations and ascribes acquisition-date fair values to the acquired assets and assumed liabilities. Provisional fair value measurements are made at the time of the acquisitions. Adjustments to those measurements may be made in subsequent periods, up to one year from the acquisition date, as information necessary to complete the analysis is obtained. Fair value of intangible assets are based on Level 3 inputs.
 
Sales Office Closing

During the first quarter of 2015, the Company committed to a plan to close its sales offices located in China, Thailand and Dubai, as well as to reduce its selling activities in Hong Kong, due to continued losses in the regions. The closures are expected to be substantially completed by December 2015. As of September 30, 2015, the Company had recorded employee severance obligation expenses of $1.9 million and made corresponding payments totaling $1.5 million. Most of the severance obligation expense was charged to operating expenses, with less than $0.7 million recorded to cost of sales. The following table provides a rollforward of the liability balance for these costs, as well as other non-employee costs associated with the sales office closing, incurred as of September 30, 2015:

In thousands
Employee Severance Obligation
 
 Other Associated Costs
 
 Total
 Balance at June 30, 2015
$
235

 
$
476

 
$
711

Charges
536

 
—

 
536

Cash payments
(418
)
 
(92
)
 
(510
)
Balance at September 30, 2015
$
353

 
$
384

 
$
737


Until the office closings are finalized, estimated additional severance expense, retention bonuses and professional fees of $0.6 million will be recorded as commitment requirements are met or services are performed. The estimated costs disclosed are based on a number of assumptions, and actual results could differ materially.

All of the office locations that are being closed are leased, with remaining future minimum lease obligations of $0.7 million, and will continue to be occupied while the Company considers options for early termination of the leases. If the Company terminates a lease early with no sub-lease or concessions received from the landlord and the location is no longer in use, the remaining obligation will be determined and expensed at that time. As of September 30, 2015, the remaining long-lived assets which were

10


close to full amortization, consisted mostly of office equipment and vehicles and will either be sold or depreciated on an accelerated basis to their salvage value. For the nine months ended September 30, 2015, total accelerated depreciation expense of $0.2 million was recorded in operating expenses.

Settlement of Pension Withdrawal Liability

In September of 2015, the defined-benefit pension plan trustees and the Company agreed to settle the $3.0 million long-term pension withdrawal liability for $2.0 million. As a result of the settlement, the Company reduced the long-term pension withdrawal liability by $1.0 million with a corresponding defined benefit expense reduction in cost of sales. The $2.0 million long-term pension withdrawal liability was fully paid as of September 30, 2015.

Stock Repurchase Program

The Company announced a stock repurchase program for 2015 authorizing it to repurchase up to $50.0 million of the Company’s common stock. The stock repurchase program expires on December 31, 2015.

In September 2015, the Company entered into a Master Confirmation and a Supplemental Confirmation for an accelerated share repurchase program (the “ASR Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”).  Pursuant to the terms of the ASR Agreement, Wells Fargo made an initial delivery of 498,700 shares of the Company’s common stock in September 2015, which represented approximately 70% of the total shares expected to be delivered under the ASR Agreement. The Company recorded the $25.0 million payment as a reduction to stockholders’ equity, consisting of a $17.4 million increase in treasury stock and a $7.6 million reduction in additional paid-in capital. At the completion of the program, the Company may be entitled to receive additional shares of its common stock from Wells Fargo, or, under certain circumstances, may be required to make a cash payment or, at the Company’s option, deliver shares to Wells Fargo. Final settlement of the ASR Agreement is expected to be completed by the end of the fourth quarter of 2015, although the settlement may be accelerated, at Wells Fargo’s option, to an earlier date after a specified minimum period.

For the nine months ended September 30, 2015. the Company purchased a total of 1,148,410 shares of its common stock, which includes the initial delivery of 498,700 shares pursuant to the ASR agreement. The total spent on the 1,148,410 shares during the nine months ended September 30, 2015 was approximately $39.5 million, at an average price of $34.42.

Recently Issued Accounting Standards
 
There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s consolidated financial statements, from those disclosed in the Company’s 2014 Annual Report on Form 10-K, except for the following:

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, (Topic 330), Simplifying the Measurement of Inventory (“ASU 2015-11”). The objective is to reduce the complexity related to inventory subsequent measurement and disclosure requirements. ASU 2015-11 amendments do not apply to inventory that is measured using last-in, first-out or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out or average cost. Inventory within the scope of the new guidance should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments more closely align with the measurement of inventory in International Financial Reporting Standards. ASU 2015-11 will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in ASU 2015-11 should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the effect (if any) that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosure.

In April 2015, the FASB issued Accounting Standards Update No. 2015-05 (Subtopic 340-40), Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (“ASU 2015-05"). The guidance in this Subtopic applies only to internal-use software that a customer obtains access to in a hosting arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. With an election to adopt prospectively or retrospectively, this ASU will be effective for annual periods beginning after

11


December 15, 2015. The Company does not believe ASU 2015-11 will have a material effect on its consolidated financial statements and footnote disclosures.

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.


2.    Trade Accounts Receivable, Net
 
Trade accounts receivable consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2015
 
2014
 
2014
Trade accounts receivable
$
136,748

 
$
131,323

 
$
95,033

Allowance for doubtful accounts
(919
)
 
(836
)
 
(929
)
Allowance for sales discounts and returns
(3,102
)
 
(2,992
)
 
(2,089
)
 
$
132,727

 
$
127,495

 
$
92,015

 

3.    Inventories
 
Inventories consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2015
 
2014
 
2014
Raw materials
$
82,194

 
$
77,845

 
$
97,732

In-process products
19,485

 
19,646

 
19,496

Finished products
98,603

 
100,929

 
99,317

 
$
200,282

 
$
198,420

 
$
216,545

 


4.    Property, Plant and Equipment, Net
 
Property, plant and equipment, net, consisted of the following: 
 
At September 30,
 
At December 31,
(in thousands)
2015
 
2014
 
2014
Land
$
28,899

 
$
29,624

 
$
29,390

Buildings and site improvements
172,300

 
174,343

 
175,058

Leasehold improvements
5,593

 
5,404

 
5,602

Machinery, equipment, and software
231,467

 
230,534

 
228,440

 
438,259

 
439,905

 
438,490

Less accumulated depreciation and amortization
(255,431
)
 
(246,287
)
 
(245,383
)
 
182,828

 
193,618

 
193,107

Capital projects in progress
20,057

 
12,516

 
13,920

 
$
202,885

 
$
206,134

 
$
207,027

 


12

5.    Goodwill and Intangible Assets, Net
 
Goodwill was as follows: 
 
At September 30,
 
At December 31,
(in thousands)
2015
 
2014
 
2014
North America
$
84,074

 
$
84,647

 
$
84,526

Europe
37,863

 
38,918

 
37,788

Asia/Pacific
1,340

 
1,663

 
1,567

Total
$
123,277

 
$
125,228

 
$
123,881

 
Amortizable and indefinite-lived intangible assets, net, were as follows: 
 
At September 30, 2015
 
Gross
 
 
 
Net
 
Carrying
 
Accumulated
 
Carrying
(in thousands)
Amount
 
Amortization
 
Amount
North America
$
29,402

 
$
(17,143
)
 
$
12,259

Europe
30,070

 
(13,759
)
 
16,311

Total
$
59,472

 
$
(30,902
)
 
$
28,570

 
 
At September 30, 2014
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
34,490

 
$
(18,941
)
 
$
15,549

Europe
31,766

 
(12,533
)
 
19,233

Total
$
66,256

 
$
(31,474
)
 
$
34,782

 
 
At December 31, 2014
 
Gross
 
 
 
Net
(in thousands)
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
North America
$
29,455

 
$
(14,719
)
 
$
14,736

Europe
29,419

 
(11,568
)
 
17,851

Total
$
58,874

 
$
(26,287
)
 
$
32,587

 
Intangible assets consist of definite-lived and indefinite-lived assets. Definite-lived intangible assets include customer relationships, patents, unpatented technology and non-compete agreements. Amortization expense for definite-lived intangible assets during the three months ended September 30, 2015 and 2014, totaled $1.5 million and $1.8 million, respectively, and during the nine months ended September 30, 2015 and 2014, totaled $4.6 million and $5.5 million, respectively.

Indefinite-lived intangible assets include an in-process research and development asset and a trade name totaling $2.2 million, $2.2 million and $2.1 million at September 30, 2015, September 30, 2014 and December 31, 2014, respectively.


13

At September 30, 2015, estimated future amortization of definite-lived intangible assets was as follows: 
(in thousands)
 
Remaining three months of 2015
$
1,503

2016
5,662

2017
4,198

2018
3,308

2019
3,245

2020
3,215

Thereafter
5,281

 
$
26,412

 
The changes in the carrying amount of goodwill and intangible assets for the nine months ended September 30, 2015, were as follows: 
 
 
 
Intangible
(in thousands)
Goodwill
 
Assets
Balance at December 31, 2014
$
123,881

 
$
32,587

Acquisitions
556

 
653

Amortization
—

 
(4,613
)
Foreign exchange
(1,160
)
 
(57
)
Balance at September 30, 2015
$
123,277

 
$
28,570



6.    Debt
 
The Company has revolving lines of credit with various banks in the United States and Europe. Total available credit at September 30, 2015, was $304.3 million including revolving credit lines and an irrevocable standby letter of credit in support of various insurance deductibles.
 
The Company’s primary credit facility is a revolving line of credit with $300 million in available credit. This credit facility will expire in July 2017. Amounts borrowed under this credit facility will bear interest at an annual rate equal to either, at the Company’s option, (a) the rate for Eurocurrency deposits for the corresponding deposits of U.S. dollars appearing on Reuters LIBOR1screen page (the “LIBOR Rate”), adjusted for any reserve requirement in effect, plus a spread of 0.60% to 1.45%, determined quarterly based on the Company’s leverage ratio (at September 30, 2015, the LIBOR Rate was 0.20%), or (b) a base rate, plus a spread of 0.00% to 0.45%, determined quarterly based on the Company’s leverage ratio. The base rate is defined in a manner such that it will not be less than the LIBOR Rate. The Company will pay fees for standby letters of credit at an annual rate equal to the LIBOR Rate plus the applicable spread described above, and will pay market-based fees for commercial letters of credit. The Company is required to pay an annual facility fee of 0.15% to 0.30% of the available commitments under the credit agreement, regardless of usage, with the applicable fee determined on a quarterly basis based on the Company’s leverage ratio.
 
The Company’s unused borrowing capacity under other revolving credit lines and a term note totaled $4.3 million at September 30, 2015. The other revolving credit lines and term note charge interest ranging from 0.76% to 7.25% have maturity dates from December 2015 to July 2017, and had $38 thousand and $18 thousand outstanding balances at September 30, 2014 and December 31, 2014, respectively, and no outstanding balances at September 30, 2015. The Company was in compliance with its financial covenants at September 30, 2015.


7.    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 Company’s financial condition, cash flows and results of operations.
 

14


Pending Claims
  
The Company is not engaged in any legal proceedings as of the date hereof, which the Company expects individually or in the aggregate to have a material adverse effect on the Company’s 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 Company’s financial condition, cash flows or results of operations.
 
Other
 
Corrosion, hydrogen enbrittlement, cracking, material hardness, wood pressure-treating chemicals, misinstallations, misuse, design and assembly flaws, manufacturing defects, labeling defects, product formula defects, inaccurate chemical mixes, adulteration, environmental conditions, or other factors can contribute to failure of fasteners, connectors, anchors, adhesives, specialty chemicals, such as fiber reinforced polymers, and tool products.  In addition, inaccuracies may occur in product information, descriptions and instructions found in catalogs, packaging, data sheets, and the Company’s website.  The Company has not incurred any material liability resulting from any such failures and/or inaccuracies.


8.    Stock-Based Incentive Plans
 
The Company currently has one stock-based incentive plan, which incorporates and supersedes its two previous plans (see Note 1 “Basis of Presentation — Accounting for Stock-Based Compensation”). Participants are granted stock-based awards only if the applicable Company-wide or profit-center operating goals, or both, established by the Compensation and Leadership Development Committee of the Board of Directors at the beginning of the year, are met. Certain participants may have additional goals based on strategic initiatives of the Company.
 
The fair value of each restricted stock unit award is estimated on the date of the award, based on the closing market price of the underlying stock on the day preceding the date of the award. On February 2, 2015, 330,497 restricted stock units were awarded to employees and 8,550 were awarded to the Company’s non-employee directors, at an estimated value of $32.64 per share, based on the closing price on January 30, 2015. The restrictions on these awards generally lapse one quarter on the date of the award and one quarter on each of the first, second and third anniversaries of the date of the award. On April 21, 2015, 1,950 restricted stock units were awarded to each of the Company’s six non-employee directors at an estimated value of $36.33 per share based on the closing price on April 20, 2015. There are no restrictions on the non-employee directors’ restricted stock units granted on April 21, 2015.

The following table summarizes the Company’s unvested restricted stock unit activity for the nine months ended September 30, 2015: 
 
Shares
 
Weighted-
Average Price
 
Aggregate
Intrinsic
Value *
Unvested Restricted Stock Units (RSUs)
(in thousands)
 
 
(in thousands)
Outstanding at January 1, 2015
504

 
$
31.67

 
 

Awarded
351

 
 

 
 

Vested
(317
)
 
 

 
 

Forfeited
(2
)
 
 

 
 

Outstanding at September 30, 2015
536

 
$
31.56

 
$
17,950

Outstanding and expected to vest at September 30, 2015
524

 
$
31.56

 
$
17,541

             
*
The intrinsic value is calculated using the closing price per share of $33.49 as reported by the New York Stock Exchange on September 30, 2015.
 
Based on the market value on the award date, the total intrinsic value of vested restricted stock units during the nine-month periods ended September 30, 2015 and 2014, was $10.1 million and $9.0 million, respectively.
 

15

No stock options were granted in 2014 or in the first nine months of 2015. As of September 30, 2015, there were no unvested options outstanding. The following table summarizes the Company’s stock option activity for the nine months ended September 30, 2015: 
 
 
Shares
 
Weighted-
Average
Exercise Price
 
Weighted-
Average
Remaining
Contractual Life
 
Aggregate
Intrinsic
Value *
Non-Qualified Stock Options
 
(in thousands)
 
 
 
(in years)
 
(in thousands)
Outstanding at January 1, 2015
 
855

 
$
29.48

 
 
 
 

Exercised
 
(238
)
 
 

 
 
 
 

Forfeited
 
(2
)
 
 

 
 
 
 

Outstanding and exercisable at September 30, 2015
 
615

 
$
29.51

 
2.3
 
$
2,447

            
*
The intrinsic value represents the amount, if any, by which the fair market value of the underlying common stock exceeds the exercise price of the stock option, using the closing price per share of $33.49 as reported by the New York Stock Exchange on September 30, 2015.
 
The total intrinsic value of stock options exercised during the nine-month periods ended September 30, 2015 and 2014, was $1.6 million and $0.7 million, respectively.

As of January 1, 2015, there were 99 thousand unvested stock options with a weighted average grant-date fair value of $10.33 per share. These stock options vested in the first quarter of 2015 and, as of September 30, 2015, the Company had no unvested stock options.

As of September 30, 2015, $17.4 million of total unrecognized compensation cost was related to unvested stock-based compensation arrangements under the 2011 Plan for awards made through February 2015 and those expected to be made through February 2016. The portions of this cost related to restricted stock units awarded through February 2015 are expected to be recognized over a weighted-average period of 2.0 years.
 

9.    Segment Information
 
The Company is organized into three reportable segments. The segments are defined by the regions where the Company’s products are manufactured, marketed and distributed to the Company’s customers. The three regional segments are the North America segment, comprising primarily the United States and Canada, the Europe segment, comprising continental Europe and the United Kingdom, and the Asia/Pacific segment, comprising the Company’s operations in China, Hong Kong, the South Pacific and the Middle East. These segments are similar in several ways, including the types of materials, the production processes, the distribution channels and the product applications.
 
The Company’s measure of profit or loss for its reportable segments is income (loss) from operations. The reconciling amount between consolidated income before tax and consolidated income from operations is interest expense, which is primarily attributed to Administrative and All Other.


16

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Net Sales
 

 
 

 
 

 
 

North America
$
184,515

 
$
171,064

 
$
518,221

 
$
476,546

Europe
29,728

 
34,609

 
83,143

 
97,297

Asia/Pacific
1,896

 
3,647

 
7,931

 
11,675

Total
$
216,139

 
$
209,320

 
$
609,295

 
$
585,518

Sales to Other Segments*
 

 
 

 
 

 
 

North America
$
680

 
$
1,058

 
$
2,284

 
$
3,151

Europe
250

 
308

 
641

 
934

Asia/Pacific
5,623

 
5,890

 
16,287

 
13,218

Total
$
6,553

 
$
7,256

 
$
19,212

 
$
17,303

Income (Loss) from Operations
 

 
 

 
 

 
 

North America
$
33,432

 
$
29,914

 
$
89,148

 
$
82,598

Europe
3,563

 
3,447

 
5,259

 
6,283

Asia/Pacific
(945
)
 
(148
)
 
(3,119
)
 
(1,783
)
Administrative and all other
(801
)
 
(995
)
 
(4,753
)
 
(3,142
)
Total
$
35,249

 
$
32,218

 
$
86,535

 
$
83,956

            
* The sales to other segments are eliminated in consolidation.
 
 
 
 
 
 
At
 
At September 30,
 
December 31,
(in thousands)
2015
 
2014
 
2014
Total Assets
 

 
 

 
 

North America
$
730,333

 
$
684,820

 
$
679,844

Europe
176,208

 
190,359

 
180,005

Asia/Pacific
25,586

 
29,379

 
29,552

Administrative and all other
27,919

 
77,285

 
83,664

Total
$
960,046

 
$
981,843

 
$
973,065

 
Cash collected by the Company’s United States subsidiaries is routinely transferred into the Company’s cash management accounts and, therefore, has been included in the total assets of “Administrative and all other.” Cash and cash equivalent balances in the “Administrative and all other” segment were $153.8 million, $166.8 million, and $167.4 million, as of September 30, 2015 and 2014, and December 31, 2014, respectively.

The following table illustrates the distribution of the Company’s net sales by product group for the following periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Wood Construction Products
$
182,869

 
$
175,522

 
$
518,381

 
$
496,564

Concrete Construction Products
33,229

 
33,704

 
90,614

 
88,735

Other
41

 
94

 
300

 
219

Total
$
216,139

 
$
209,320

 
$
609,295

 
$
585,518

 

17

Wood construction products include connectors, truss plates, fastening systems, fasteners and pre-fabricated shearwalls and are used for connecting and strengthening wood-based construction primarily in the residential construction market. Concrete construction products include adhesives, chemicals, mechanical anchors, carbide drill bits, powder actuated tools and fiber reinforcing materials and are used for restoration, protection or strengthening concrete, masonry and steel construction in residential, industrial, commercial and infrastructure construction.


10.    Subsequent Events
 
In October 2015, the Company’s Board of Directors declared a cash dividend of $0.16 per share, estimated to total $7.7 million, to be paid on January 28, 2016, to stockholders of record on January 7, 2016. The Board of Directors also scheduled the Company’s 2016 annual meeting of stockholders for Wednesday, April 20, 2016.
 





18

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This document contains forward-looking statements, based on numerous assumptions and subject to risks and uncertainties, such as statements below regarding sales, sales trends, profits (including as to the Europe and Asia/Pacific segment), losses, 2015 gross profit margin, 2015 effective tax rate, capital spending and steel prices for any future period. Although the Company believes that the forward-looking statements are reasonable, it does not and cannot give any assurance that its beliefs and expectations will prove to be correct. Many factors could significantly affect the Company’s operations and cause the Company’s actual results to be substantially different from the Company’s expectations. Those factors include, but are not limited to: (i) general economic and construction business conditions; (ii) customer acceptance of the Company's products; (iii) relationships with key customers; (iv) materials and manufacturing costs; (v) the financial condition of customers, competitors and suppliers; (vi) technological developments; (vii) increased competition; (viii) changes in capital and credit market conditions; (ix) governmental and business conditions in countries where the Company's products are manufactured and sold; (x) changes in trade regulations; (xi) the effect of acquisition activity; (xii) changes in the Company's plans, strategies, objectives, expectations or intentions; (xiii) material weaknesses, if any, in the Company's disclosure controls and procedures; and (xiv) other risks and uncertainties indicated from time to time in the Company's filings with the U.S. Securities and Exchange Commission. 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 and nine months ended September 30, 2015. 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 North America, Europe and Asia/Pacific segments all sell both wood construction products and concrete construction products. The Company’s 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 strategic initiatives, such as expanding its offering of concrete construction products, particularly specialty chemicals, and wood construction products, particularly fasteners, truss plates and truss design software.
 
The North America segment sells more wood construction product than concrete construction product. Due to improved economic conditions, including an increase in housing starts, net sales in most regions of the segment have been trending up, primarily due to increases in unit sales volumes. Based on current information and subject to future events and circumstances, the Company expects this sales trend to continue in the fourth quarter of 2015. In the second quarter of 2015, the Company signed a contract to acquire a facility in West Chicago, Illinois, for the purposes of consolidating into one location its two leased United States chemical manufacturing operations and its concrete products research and development activities. The acquisition of the facility is expected to close before the end of the fourth quarter of 2015 and the consolidation of two chemical manufacturing operations into one location should occur by December 2016.

The Europe segment sells more wood construction product than concrete construction product. While net sales decreased in U.S. dollar terms, net sales reported in local currencies were relatively flat in the third quarter of 2015 compared to the third quarter of 2014. Given the number of factors influencing the Europe segment, the Company cannot predict whether this is a trend that will continue into the fourth quarter of 2015 or into 2016. Based on current information and subject to future events and circumstances, the Company estimates that the Europe segment will report an operating profit in 2015.

Due to the closure of the Asia sales offices, the Asia/Pacific segment has incurred additional expenses in 2015. Based on this and other factors, the Company expects the Asia/Pacific segment to report an operating loss for 2015. See Note 1 "Sales Office Closing."
 
Admin and all other includes expenses such as stock compensation for certain members of management, interest expense, self-insured workers compensation claims, if any, for certain members of management, 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 Company’s facility in Vacaville, California, which the Company has leased to a third party for a term expiring in August 2020.
 
The Company has continued to benefit from steady housing starts, primarily in the North American segment, with increased sales volumes in the third quarter of 2015. Unlike lumber or other products that have a more direct correlation to housing starts, however, the Company’s products are used to a greater extent in areas that are subject to natural forces, such as seismic or wind events. The

19

Company’s 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 Company’s products flow into a project or a house according to these schedules. Foundation product sales could be considered a leading indicator for the Company. Sales of these products in the third quarter of 2015 increased slightly compared to the same period in 2014.

The Company’s sales also tend to be seasonal, with operating results varying from quarter to quarter. With some exceptions, the Company’s 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 Company’s products, could negatively affect the Company’s results of operations. Political and economic events can also affect the Company’s sales and profitability.


Results of Operations for the Three Months Ended September 30, 2015, Compared with the Three Months Ended September 30, 2014
 
Net sales increased 3.3% to $216.1 million in the third quarter of 2015 from $209.3 million in the third quarter of 2014. The Company had net income of $21.6 million in the third quarter of 2015 compared to $20.6 million in the third quarter of 2014. Diluted net income per common share was $0.44 for the third quarter of 2015 compared to $0.42 for the third quarter of 2014.

The following table illustrates the differences in the Company’s operating results in the three months ended September 30, 2015, from the three months ended September 30, 2014 and the increases or decreases for each category by segment:
 
 
Three Months Ended
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
Increase (Decrease) in Operating Segment
 
 
September 30,
 
North
 
 
 
Asia/
 
Admin &
 
September 30,
(in thousands)
2014
 
America
 
Europe
 
Pacific
 
All Other
 
2015
Net sales
$
209,320

 
$
13,451

 
$
(4,881
)
 
$
(1,751
)
 
$
—

 
$
216,139

Cost of sales
113,767

 
6,484

 
(3,470
)
 
(998
)
 
15

 
115,798

Gross profit
95,553

 
6,967

 
(1,411
)
 
(753
)
 
(15
)
 
100,341

Research and development and other engineering expense
9,711

 
4,476

 
(117
)
 
(135
)
 
—

 
13,935

Selling expense
23,592

 
(194
)
 
(312
)
 
(540
)
 
(11
)
 
22,535

General and administrative expense
29,557

 
(922
)
 
(601
)
 
742

 
(128
)
 
28,648

Impairment of goodwill
492

 
—

 
(492
)
 
—

 
—

 
—

Gain on sale of assets
(17
)
 
18

 
(6
)
 
(21
)
 
—

 
(26
)
Income from operations
32,218


3,589


117


(799
)

124

 
35,249

Interest expense, net
(27
)
 
(21
)
 
(13
)
 
1

 
(115
)
 
(175
)
Income before income taxes
32,191

 
3,568

 
104

 
(798
)
 
9

 
35,074

Provision for income taxes
11,577

 
2,640

 
(82
)
 
(592
)
 
(64
)
 
13,479

Net income
$
20,614

 
$
928

 
$
186

 
$
(206
)
 
$
73

 
$
21,595

 

20

Net sales
 
The following table represents net sales by segment for the three-month periods ended September 30, 2014 and 2015:
 
 
North
 
 
 
Asia/
 
 
(in thousands)
America
 
Europe
 
Pacific
 
Total
Three Months Ended
 

 
 

 
 

 
 

September 30, 2014
171,064

 
34,609

 
3,647

 
$
209,320

September 30, 2015
184,515

 
29,728

 
1,896

 
216,139

Increase (decrease)
$
13,451

 
$
(4,881
)
 
$
(1,751
)
 
$
6,819

Percentage increase (decrease)
7.9
%
 
(14.1
)%
 
(48.0
)%
 
3.3
%

The following table represents segment net sales as percentages of total net sales for the three-month periods ended September 30, 2014 and 2015:
 
 
North
America
 
Europe
 
Asia/
Pacific
 
Total
Percentage of total 2014 net sales
81.7
%
 
16.5
%
 
1.7
%
 
100.0
%
Percentage of total 2015 net sales
85.4
%
 
13.8
%
 
0.8
%
 
100.0
%
 
The Company's net sales increased in the North America segment and decreased in the Europe segment in the third quarter of 2015 compared to the third quarter of 2014.

•
Segment net sales:
•
North America - Net sales increased 7.9% in the third quarter of 2015 compared to the third quarter of 2014 due to increased unit sales volumes in the United States on improved economic activity, partly offset by a slight decrease in average sales prices. Canadian net sales decreased mostly due to the effects of foreign currency translations and by a slight decrease in unit sales volumes. The Company calculated that Canada's third quarter 2015 net sales were negatively affected by approximately $1.9 million due to the Canadian dollar weakening against the United States dollar.
•
Europe - Net sales decreased 14.1% in the third quarter of 2015 compared to the third quarter of 2014, mostly due to the effects of foreign currency translations. The Company calculated that Europe's third quarter 2015 net sales were negatively affected by approximately $4.7 million due to European currencies weakening against the United States dollar. Net sales were also affected by a slight decrease in average sales prices. In local currencies, Europe's overall net sales were relatively flat in the third quarter of 2015 compared to the third quarter 2014.

•
Consolidated net sales channels and product groups:
•
Net sales to contractor distributors, lumber dealers, dealer distributors and home centers increased in the third quarter of 2015 compared to the third quarter of 2014, primarily due to increased home construction activity.
•
Wood construction product net sales, including connectors, truss plates, fastening systems, fasteners and shearwalls, represented 85% of total Company net sales in the third quarter of 2015 and 84% in the third quarter of 2014.
•
Concrete construction product sales, including adhesives, chemicals, mechanical anchors, powder actuated tools and reinforcing fiber materials, represented 15% of total Company net sales in the third quarter of 2015 and 16% in the third quarter of 2014.


21


Gross profit
 
The following table represents gross profit by segment for the three-month periods ended September 30, 2014 and 2015:
 
 
North
 
 
 
Asia/
 
Admin &
 
 
(in thousands)
America
 
Europe
 
Pacific
 
All Other
 
Total
Three Months Ended
 

 
 

 
 

 
 

 
 

September 30, 2014
$
80,906

 
13,757

 
931

 
(41
)
 
$
95,553

September 30, 2015
87,873

 
12,346

 
178

 
(56
)
 
100,341

Increase (decrease)
$
6,967

 
$
(1,411
)
 
$
(753
)
 
$
(15
)
 
$
4,788

Percentage increase (decrease)
8.6
%
 
(10.3
)%
 
(80.9
)%
 
*

 
5.0
%
                         
* The statistic is not meaningful or not material.
 
The following table represents gross profit as a percentage of sales by segment for the three months ended September 30, 2014 and 2015:
 
(in thousand)
North
America
 
Europe
 
Asia/
Pacific
 
Admin &
All Other
 
Total
2014 gross profit percentage
47.3
%
 
39.7
%
 
25.5
%
 
*
 
45.6
%
2015 gross profit percentage
47.6
%
 
41.5
%
 
9.4
%
 
*
 
46.4
%
                         
* The statistic is not meaningful or not material.
 
Gross profit increased to $100.3 million in the third quarter of 2015 from $95.6 million in the third quarter of 2014. Gross profit as a percentage of net sales increased to 46.4% in the third quarter of 2015 from 45.6% in the third quarter of 2014.

•
North America - Gross profit margin increased to 47.6% in the third quarter of 2015 from 47.3% in the third quarter of 2014, primarily as a result of a decrease in factory overhead and shipping costs, both as a percentage of net sales, partly offset by increases in material costs as a percentage of net sales. Factory overhead, as a percentage of net sales, for the third quarter of 2015 was affected by a non-reoccurring settlement of a union-based defined-benefit pension withdrawal liability that increased the third quarter of 2015 gross profit margin by 0.5%.
•
Europe - Gross profit margin increased to 41.5% in the third quarter of 2015 from 39.7% in the third quarter of 2014, as a result of decreases in material costs and factory overhead, on increased production volumes, both as a percentage of sales, partly offset by increases in labor and shipping costs, as a percentage of sales.
•
Product mix - The gross profit margin differential between wood construction products and concrete construction products, which have lower gross profit margins, was 15% and 12% in the third quarters of 2015 and 2014, respectively.

Research and development and engineering expense

Research and development and engineering expense increased 43.5% to $13.9 million in the third quarter of 2015 from $9.7 million in the third quarter of 2014, primarily due to a $4.1 million write-off of a software development project, which occurred in the North America segment.

Selling expense

Selling expense decreased 4.5% to $22.5 million in the third quarter of 2015 from $23.6 million in the third quarter of 2014, primarily due to decreases of $0.6 million in personnel costs and $0.3 million in professional fees.

•
North America - Selling expense decreased $0.2 million, primarily due to a decrease of $0.2 million in professional fees.
•
Europe - Selling expense decreased $0.3 million, primarily due to decreases of $0.2 million in personnel costs and $0.1 million in professional fees, both related to the effects of foreign currency translations.
•
Asia/Pacific - Selling expense decreased $0.5 million, primarily due to a decrease of $0.4 million in personnel costs, related to the closing of three sales offices and downsizing one sales office earlier this year.


22


General and administrative expense

General and administrative expense decreased 3.1% to $28.6 million in the third quarter of 2015 from $29.6 million in the third quarter of 2014, primarily due to decreases of $0.9 million in cash profit sharing expense and $0.3 million in intangible amortization expense, partly offset by a net decrease of $0.3 million in miscellaneous gains, which was primarily due to a 2014 reduction of an acquisition contingent liability.

•
North America - General and administrative expense decreased $0.9 million, primarily due to decreases of $0.6 million in cash profit sharing expense and $0.2 million in intangible amortization expense.
•
Europe - General and administrative expense decreased by $0.6 million, primarily due to a net decrease of $0.6 million in unrealized foreign currency losses and a $0.1 million decrease in intangible amortization expense, partly offset by a $0.4 million decrease in miscellaneous gains recorded in the third quarter 2014.
•
Administrative and Other - General and administrative expense decreased by $0.1 million, primarily due to a decrease of $0.2 million in cash profit sharing expense.

Income taxes

The effective income tax rate for the third quarter of 2015 was 38.4% as compared to 36.0% for the third quarter of 2014. The effective income tax rate was higher mostly due to increased third quarter 2015 operating losses in the Asia/Pacific segment for which no tax benefit was recorded.


Results of Operations for the Nine Months Ended September 30, 2015, Compared with the Nine Months Ended September 30, 2014
 
Net sales increased 4.1% to $609.3 million in the first nine months of 2015 from $585.5 million in the first nine months of 2014. The Company had net income of $53.2 million in both the first nine months of 2015 and 2014. Diluted net income per common share was $1.08 for both the first nine months of 2015 and 2014. An out of period adjustment recorded in the first nine months of 2014 relating to a non-reoccurring correction had the effect of increasing that period's net income by $1.3 million or the equivalent of $0.026 per share.

The following table illustrates the differences in the Company’s operating results in the nine months ended September 30, 2015, from the nine months ended September 30, 2014 and the increases or decreases for each category by segment:
 
 
Nine Months Ended
 
 
 
 
 
 
 
 
 
Nine Months Ended
 
 
Increase (Decrease) in Operating Segment
 
 
September 30,
 
North
 
 
 
Asia/
 
Admin &
 
September 30,
(in thousands)
2014
 
America
 
Europe
 
Pacific
 
All Other
 
2015
Net sales
$
585,518

 
$
41,675

 
$
(14,154
)
 
$
(3,744
)
 
$
—

 
$
609,295

Cost of sales
316,285

 
27,245

 
(9,451
)
 
(1,588
)
 
647

 
333,138

Gross profit
269,233

 
14,430

 
(4,703
)
 
(2,156
)
 
(647
)
 
276,157

Research and development and other engineering expense
29,505

 
5,729

 
(345
)
 
(241
)
 
—

 
34,648

Selling expense
69,623

 
592

 
(1,177
)
 
(895
)
 
13

 
68,156

General and administrative expense
85,993

 
1,213

 
(1,589
)
 
309

 
949

 
86,875

Impairment of goodwill
492

 
—

 
(492
)
 
—

 
—

 
—

Gain on sale of assets
(336
)
 
347

 
(75
)
 
7

 
—

 
(57
)
Income from operations
83,956

 
6,549

 
(1,025
)
 
(1,336
)
 
(1,609
)
 
86,535

Interest income (expense), net
44

 
(21
)
 
(153
)
 
(1
)
 
(133
)
 
(264
)
Income before income taxes
84,000

&#