| SIMPSON MANUFACTURING CO INC /CA/ Item 1A Risk Factors |
| You should carefully consider the following risks before you decide to buy shares of our common stock |
| If any of the following risks actually occurs, our business, results of operations or financial condition would likely suffer |
| In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our stock |
| This and other public reports may contain forward-looking statements based on current expectations, assumptions, estimates and projections about us and our industry |
| These forward-looking statements involve risks and uncertainties |
| Our actual results could differ materially from those forward-looking statements as a result of many factors, as more fully described below and elsewhere in our public reports |
| We do not undertake to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future |
| Failure to comply with industry regulations could harm our business and financial condition |
| The design, capacity and quality of most of our products and manufacturing processes are subject to numerous and extensive regulations and standards promulgated by governmental, quasi-governmental and industry organizations |
| These regulations and standards are highly technical, complex and subject to frequent revision |
| If our products or manufacturing processes fail to comply with any regulations or standards, we may not be able to manufacture and market our products profitably |
| Failure to comply with regulations and standards could therefore materially and adversely affect our business and financial condition |
| If we fail to compete effectively, our revenue and profit margins could decline |
| We face a variety of competition in all of the markets in which we participate |
| Many of our competitors have greater financial and other resources than we do |
| In addition, other technologies may be the bases for competitive products that could render our products obsolete or noncompetitive |
| Other companies may find the our markets attractive and enter those markets |
| Competitive pricing, including price competition or the introduction of new products, could have material adverse effects on our revenues and profit margins |
| Our ability to compete effectively depends to a significant extent on the specification or approval of our products by architects, engineers, building inspectors, building code officials and customers |
| If a significant segment of those communities were to decide that the design, materials, manufacturing, testing or quality control of our products is inferior to that of any of our competitors, our sales and profits would be materially and adversely affected |
| If we lose a large customer, our sales and profits would decline |
| In particular, one customer accounted for 17prca of our net sales in 2005 |
| Loss of all or a part of our sales to a large customer would have a material adverse effect on our revenues and profits |
| Our customers include retailers and distributors |
| Retail and distribution businesses have consolidated over time, which could exacerbate the material adverse effect of losing any of them |
| 12 ______________________________________________________________________ An increase in the price of raw materials could negatively affect our sales and profits |
| Our principal raw material is steel, including stainless steel |
| The steel industry is highly cyclical |
| Numerous factors beyond our control, such as general economic conditions, competition, worldwide demand, labor costs, energy costs, and import duties and other trade restrictions, influence prices for our raw materials |
| In March 2002, for example, the United States imposed tariffs on several types of imported steel, which increased our cost of steel |
| In addition, consolidation among domestic integrated steel producers, changes in supply and demand in steel markets, the weakening United States dollar and other events have led to increased steel costs |
| The domestic steel market is heavily influenced by three major United States manufacturers |
| We have not always been able, and in the future we might not be able, to increase our product prices in amounts that correspond to increases in costs of raw materials, without materially and adversely affecting our sales and profits |
| If we cannot protect our technology, we will not be able to compete effectively |
| Our ability to compete effectively with other companies depends in part on our ability to maintain the proprietary nature of our technology, in part through patents |
| Patents might not issue pursuant to pending patent applications |
| Others might independently develop the same or similar technology, develop around the patented aspects of any of our products or proposed products, or otherwise obtain access to our proprietary technology |
| We also rely on unpatented proprietary technology to maintain our competitive position |
| We might not be able to protect our know-how or other proprietary information |
| If we are unable to maintain the proprietary nature of our significant products, our business and financial condition could be materially and adversely affected |
| In attempting to protect our proprietary information, we sometimes initiate lawsuits against competitors and others that we believe have infringed or are infringing our rights |
| In such an event, the defendant may assert counterclaims to complicate or delay the litigation, or for other reasons |
| Litigation may be very costly and may result in adverse judgments that affect our business and financial condition materially and adversely |
| Integrating acquired businesses may divert management’s attention away from our day-to-day operations |
| In the future, we may pursue acquisitions of product lines or businesses |
| Acquisitions involve numerous risks, including, for example: • difficulties assimilating the operations and products of acquired businesses; • diversion of management’s attention from other business concerns; • overvaluation of acquired businesses; • acceptance of acquired businesses’ products by our customers; • risks of entering markets in which we have little or no prior experience; • litigation involving activities, properties or products of acquired businesses; • consumer claims related to products of acquired businesses; and • the potential loss of key employees of acquired businesses |
| The integration of our acquired operations, products and personnel may place a significant burden on management and our internal resources |
| The diversion of management attention and any difficulties encountered in the transition and integration process could harm our business |
| In addition, future acquisitions may cause us to issue additional equity securities that dilute the value of our existing equity securities, increase our debt, and cause impairment and amortization expenses related to goodwill and other intangible assets |
| These actions could adversely affect our profitability |
| Any acquisition could adversely affect our business and operating results |
| 13 ______________________________________________________________________ Significant costs to integrate our acquired operations may negatively affect our financial condition and the market price of our stock |
| We will incur costs from integrating acquired business operations, products and personnel |
| These costs may be significant and may include expenses and other liabilities for employee redeployment, relocation or severance, combining teams and processes in various functional areas, reorganization or closures of facilities, and relocation or disposition of excess equipment |
| The integration costs that we incur may negatively affect our financial condition and the market price of our stock |
| Our future growth may depend on our ability to penetrate new domestic and international markets, which could reduce our profitability |
| International construction customs, standards, techniques and methods differ from those in the United States |
| Laws and regulations applicable in new markets may be unfamiliar to us |
| Compliance may be substantially more costly than we anticipate |
| As a result, we may need to redesign products, or invent or design new products, to compete effectively and profitably in new markets |
| We expect that we will need significant time, which may be years, to generate substantial sales or profits in new markets |
| Other significant challenges to conducting business in foreign countries include, among other factors, local acceptance of our products, political instability, currency controls, changes in import and export regulations, changes in tariff and freight rates, and fluctuations in foreign exchange rates |
| We might not be able to penetrate these markets and any market penetration that occurs might not be timely or profitable |
| If we do not penetrate these markets within a reasonable time, we will be unable to recoup part or all of the significant investments we will have made in attempting to do so |
| Our sales are seasonal, with operating results varying from quarter to quarter |
| With some exceptions, our 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 unseasonably warm, cold or wet weather, which affect, and sometimes delay or accelerate, installation of some of our products, significantly affect our results of operations |
| We have little control over the timing of customer purchases |
| Sales that we anticipate in one quarter may occur in another quarter, affecting both quarters’ results |
| In addition, we incur significant expenses as we develop, produce and market our products in anticipation of future orders |
| We maintain high inventory levels and typically ship orders as we receive them, so we operate with little backlog |
| As a result, net sales in any quarter generally depend on orders booked and shipped in that quarter |
| A significant portion of our operating expenses is fixed |
| Planned expenditures are based primarily on sales forecasts |
| When sales do not meet our expectations, our operating results will be reduced for the relevant quarters, as we will have already incurred expenses based on those expectations |
| Our principal markets are in the building construction industry |
| That industry is subject to significant volatility due to fluctuations in interest rates, the availability of credit to builders and developers, inflation rates, weather, and other factors and trends |
| Declines in commercial and residential construction may well reduce the demand for our products |
| Future negative economic or construction industry performance could adversely affect our business |
| Declines in construction activity or demand for our products could materially and adversely affect our business and financial condition |
| Product liability claims and product recalls could harm our reputation, sales and financial condition |
| We design and manufacture most of our standard products and expect to continue to do so, although we buy raw materials and some manufactured products from others |
| We have on occasion found flaws and deficiencies in the manufacturing, design or testing of our products |
| We also have on occasion found flaws and deficiencies in raw materials and finished goods produced by others |
| Some flaws and deficiencies have not been apparent until after the products were installed by customers |
| Many of our products are integral to the structural soundness or safety of the structures in which they are used |
| If any flaws or deficiencies exist in our products and if such flaws or deficiencies are not discovered and corrected before 14 ______________________________________________________________________ our products are incorporated into structures, the structures could be unsafe or could suffer severe damage, such as collapse or fire, and personal injury could result |
| Errors in the installation of our products, even if the products are free of flaws and deficiencies, could also cause personal injury and unsafe structural conditions |
| To the extent that such damage or injury is not covered by our product liability insurance and we are held to be liable, we could be required to correct such damage and to compensate persons who might have suffered injury, and our reputation, business and financial condition could be materially and adversely affected |
| Even if a flaw or deficiency is discovered before any damage or injury occurs, we may need to recall products, and we may be liable for any costs necessary to replace recalled products or retrofit the affected structures |
| Any such recall or retrofit could entail substantial costs and adversely affect our reputation, sales and financial condition |
| We do not carry insurance against recall costs or the adverse business effect of a recall, and our product liability insurance may not cover retrofit costs |
| Claims resulting from a natural disaster might be made against us with regard to damage or destruction of structures incorporating our products |
| Any such claims, if asserted, could materially and adversely affect our business and financial condition |
| Complying or failing to comply with environmental, health and safety laws and regulations could affect us materially and adversely |
| We are subject to environmental laws and regulations governing emissions into the air, discharges into water, and generation, handling, storage, transportation, treatment and disposal of waste materials |
| We are also subject to other federal and state laws and regulations regarding health and safety matters |
| Our manufacturing operations involve the use of solvents, chemicals, oils and other materials that are regarded as hazardous or toxic |
| We also use complex and heavy machinery and equipment that can pose severe safety hazards, especially if not properly and carefully used |
| Some of our products also incorporate materials that are hazardous or toxic in some forms, such as zinc and lead used in some steel galvanizing processes and chemicals used in our acrylic and epoxy anchoring products |
| The gun powder used in our powder actuated tools is explosive |
| Misuse of other materials in some of our products could also cause injury or sickness |
| If we do not obtain all material licenses and permits required by environmental, health and safety laws and regulations, we may be subject to regulatory action by governmental authorities |
| If our policies and procedures do not comply in all respects with existing environmental, health and safety laws and regulations, our activities might violate such laws and regulations |
| Even if our policies and procedures do comply, but our employees fail or neglect to follow them in all respects, we might incur similar liability |
| Relevant laws and regulations could change or new ones could be adopted that require us to obtain additional licenses and permits and cause us to incur substantial expense |
| Our generation, handling, use, storage, transportation, treatment or disposal of hazardous or toxic materials, machinery and equipment might cause injury to persons or to the environment |
| We may need to take remedial action if properties that we occupy are contaminated by hazardous or toxic substances |
| Any change in laws or regulations, any legal or regulatory violations, or any contamination, could materially and adversely affect our business and financial condition |
| New appliance efficiency standards could materially and adversely affect our operating results and financial condition |
| The Department of Energy regulates energy efficiency under the authority of the National Appliance Energy Conservation Act |
| Under this Act, the Department of Energy periodically reviews the need for increased efficiency standards with respect to gas furnaces and gas water heaters |
| A substantial percentage of our Type B Gas Vent sales are for gas furnaces and gas water heaters |
| The Department of Energy might adopt minimum appliance efficiency standards that negatively affect sales of Type B Gas Vents, which could materially and adversely affect our operating results and financial condition |
| 15 ______________________________________________________________________ We depend on key management and technical personnel, the loss of whom could harm our business |
| We depend on certain key management and technical personnel, including, among others, Thomas J Fitzmyers, Michael J Herbert, Stephen B Lamson, Barclay Simpson and Stephen P Eberhard |
| The loss of one or more key employees could materially and adversely affect us |
| Our success also depends on our ability to attract and retain additional highly qualified technical, marketing and management personnel necessary for the maintenance and expansion of our activities |
| We face strong competition for such personnel |
| Any work stoppage or interruption by employees could materially and adversely affect our business and financial condition |
| A significant number of our employees are represented by labor unions and are covered by collective bargaining agreements that will expire in 2007 and early 2008 |
| A work stoppage or interruption by a significant number of our employees could have a material and adverse effect on our business and financial condition |
| International operations expose us to foreign exchange rate risk |
| We have foreign exchange rate risk in our international operations and through purchases from foreign vendors |
| We do not currently hedge this risk |
| Natural disasters could decrease our manufacturing capacity |
| Most of our current and planned manufacturing facilities are located in geographic regions that have experienced major natural disasters, such as earthquakes, floods and hurricanes |
| For example, the 1989 Loma Prieta earthquake in Northern California destroyed a freeway and caused other major damage within a few miles of our facilities in San Leandro, California |
| The earthquakes in Northridge, California, in January 1994, destroyed several freeways and numerous buildings in the region in which our facilities in Brea are located |
| Our disaster recovery plan may not be adequate or effective |
| We do not carry earthquake insurance |
| Other insurance that we carry is limited in the risks covered and the amount of coverage |
| Our insurance would not be adequate to cover all of our resulting costs, business interruption and lost profits when a major natural disaster occurs |
| A natural disaster rendering one or more of our manufacturing facilities totally or partially unusable, whether or not covered by insurance, would materially and adversely affect our business and financial condition |
| Control by our principal stockholders will prevent other stockholders from influencing management |
| Barclay Simpson, the Chairman of our Board of Directors, controls approximately 22prca of the outstanding shares of our Common Stock |
| Thomas J Fitzmyers, our President and Chief Executive Officer, owns approximately 1prca of the outstanding shares of our Common Stock |
| Simpson and Fitzmyers have substantial influence with respect to the election of the directors and are also expected to continue to exercise substantial control over fundamental changes affecting us, such as a merger or sale of assets or amendment of our Certificate of Incorporation or Bylaws |
| Barclay Simpson, Thomas J Fitzmyers and Stephen B Lamson, three of our executive officers, have had conflicts of interest regarding properties that we have leased from partnerships in which those officers participate |
| Two of those partnerships lease to us manufacturing and warehouse facilities that we currently use |
| Based on formal and informal third-party appraisals, we believe that some of the rent and other terms under these leases are less favorable to us than terms that could be obtained from unrelated persons in the current real estate markets |
| The leases may be amended, renewed or replaced at any time or from time to time |
| Simpson, Fitzmyers and Lamson would be subject to conflicting interests in their capacities as partners in the partnerships and as officers, directors and stockholders of Simpson Manufacturing Co, Inc |
| 16 ______________________________________________________________________ Any issuance of preferred stock may dilute your investment and reduce funds available for dividends |
| Our Board of Directors is authorized by our Certificate of Incorporation to determine the terms of one or more series of preferred stock and to authorize the issuance of shares of any such series on such terms as our Board of Directors may approve |
| Any such issuance could be used to impede an acquisition of our business that our Board of Directors does not approve, further dilute the equity investments of holders of our Common Stock and reduce funds available for the payment of dividends to holders of our Common Stock |
| Our stock price is likely to be volatile and could drop |
| The trading price of our Common Stock could be subject to wide fluctuations in response to quarter to quarter variations in operating results, changes in earnings estimates by analysts, announcements of technological innovations or new products by us or our competitors, general conditions in the construction and construction materials industries, relatively low trading volume in our Common Stock and other events or factors |
| In addition, in recent years the stock market has experienced extreme price fluctuations |
| This volatility has had a substantial effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of those companies |
| Securities market fluctuations may adversely affect the market price of our Common Stock |
| Future sales of common stock could adversely affect our stock price |
| Sales of substantial amounts of our Common Stock in the public market could adversely affect the prevailing market price for the Common Stock |
| All of the outstanding shares of our Common Stock are freely tradable without restriction under the Securities Act of 1933, other than 11dtta5 million shares held (as of February 23, 2006) by our “affiliates,” as that term is defined in Rule 144 under the Securities Act of 1933 |
| Options to purchase 3dtta0 million shares of our Common Stock were outstanding as of December 31, 2005, including options to purchase 1dtta7 million shares that were exercisable |
| If a substantial number of shares were sold in the public market pursuant to Rule 144 or on exercise of options, the trading price of our Common Stock in the public market could be adversely affected |
| Delaware law and our stockholder rights plan contain anti-takeover provisions that could deter takeover attempts that might otherwise be beneficial to our stockholders |
| Provisions of Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| Section 203 of the Delaware General Corporation Law may make the acquisition of Simpson Manufacturing Co, Inc |
| and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15prca or more of our outstanding voting stock from acquiring Simpson Manufacturing Co, Inc |
| without the consent of our Board of Directors for at least three years from the date they first hold 15prca or more of the voting stock |
| Barclay Simpson and his affiliates are not subject to this provision of Delaware law with respect to their investment in Simpson Manufacturing Co, Inc |
| In addition, our Stockholder Rights Plan has significant anti-takeover effects by causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors |
| We are subject to a number of significant risks that might cause the our actual results to vary materially from our forecasts, targets, or projections, including: • lack of market acceptance of new products; • increased labor costs, including significant increases in worker’s compensation insurance premiums and health care benefits; • failing to continue to increase net revenues and operating income in our operating segments; • failing to anticipate, appropriately invest in and effectively manage the human, information technology and logistical resources necessary to support the growth of our business, including managing the costs associated with such resources; • failing to integrate, leverage and generate expected rates of return on investments, including expansion of existing businesses and expansion through domestic and foreign acquisitions; 17 ______________________________________________________________________ • failing to generate sufficient future positive operating cash flows and, if necessary, secure adequate external financing to fund our growth; and • interruptions in service by common carriers that ship goods within our distribution channels |
| Our management is responsible for establishing and maintaining adequate internal control over financial reporting |
| Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States |
| Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of the consolidated financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements would be prevented or detected on a timely basis |
| Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected |
| Our growth and entry into new, globally dispersed markets will place significant additional pressure on our system of internal control over financial reporting |
| Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud |