Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**(Mark One)**
| **x** | ** ** | **Annual Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------|------------|-------------------------------------------------------------------------------------------|

 

**for the fiscal year ended December 31, 2008**

 

**OR**

 
| **o** | ** ** | **Transition Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------|

 

**for the transition period from                      to                     .**

 

**Commissionfile number:  1-13429**

 

**Simpson Manufacturing Co., Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **94-3196943**      |
|----------------------------------|------------|---------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer    |
| incorporation or  organization)  |       | Identification No.) |

 

**5956 W. Las Positas Blvd., Pleasanton, CA 94588**

(Address of principalexecutive offices)

 

Registrant’s telephone number, including areacode:  **(925)560-9000**

 

Securities registered pursuant to Section 12(b) of theAct:

 

| **Common Stock, par value $0.01** | ** ** | **New York Stock Exchange, Inc.**            |
|-----------------------------------|------------|----------------------------------------------|
| (Title of each class)             |       | (Name of each exchange on  which registered) |

 

Securities registered pursuant to Section 12(g) of theAct:

** **

**None**

(Title of class)

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yes  o   No  x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or 15(d) of the Exchange Act.

Yes  o   No  x

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x   No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 

| Large accelerated filer  | x      |                                          | Accelerated filer         | o      |
|-------------------------------|--------|-----------------------------------------------|---------------------------|--------|
|                          |   |                                          |                      |   |
| Non-accelerated filer         | o      | (Do not check if a smaller reporting company) | Smaller reporting company | o      |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o   No  x

 

As of June 30, 2008, there were outstanding 48,599,104shares of the registrant’s common stock, par value $0.01, which is the onlyoutstanding class of common or voting stock of the registrant. The aggregatemarket value of the shares of common stock held by nonaffiliates of theregistrant (based on the closing price for the common stock on the New YorkStock Exchange on June 30, 2008) was approximately $892,224,076. As of February23, 2009, 48,986,689 shares of the registrant’s common stock were outstanding.

 

**Documents Incorporated by Reference**

 

The information called for by Part III is incorporatedby reference to the definitive Proxy Statement for the Annual Meeting ofStockholders of the Company to be held April 17, 2009, which will be filed withthe Securities and Exchange Commission not later than 120 days after December 31,2008.

 

 

 

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*Thisdocument contains forward-looking statements, based on numerous assumptions andsubject to risks and uncertainties. Although the Company believes that theforward-looking statements are reasonable, it does not and cannot give anyassurance that its beliefs and expectations will prove to be correct. Manyfactors could significantly affect the Company’s operations and cause theCompany’s actual results to be substantially different from the Company’sexpectations. Those factors include, but are not limited to: (i) generaleconomic and construction business conditions; (ii) customer acceptance of theCompany’s products; (iii) relationships with key customers; (iv) materials andmanufacturing costs; (v) the financial condition of customers, competitors andsuppliers; (vi) technological developments; (vii) increased competition; (viii)changes in capital and credit markets; (ix) governmental and business conditionsin countries where the Company’s products are manufactured and sold; (x) changesin trade regulations; (xi) the effect of acquisition activity; (xii) changes inthe Company’s plans, strategies, objectives, expectations or intentions; and(xiii) other risks and uncertainties indicated from time to time in the Company’sfilings with the Securities and Exchange Commission. Actual results mightdiffer materially from results suggested by any forward-looking statements inthis report. The Company does not have an obligation to publicly update anyforward-looking statements, whether as a result of the receipt of newinformation, the occurrence of future events or otherwise. See “Item 1A –  Risk Factors.”*

 

**PART I**

 

**Item 1. Business.**

 

**Background**

 

Simpson Manufacturing Co.,Inc., a Delaware Corporation, (the “Company”), through its subsidiary, SimpsonStrong-Tie Company Inc. (“Simpson Strong-Tie” or “SST”), designs, engineers andis a leading manufacturer of wood-to-wood, wood-to-concrete and wood-to-masonryconnectors, SST Quik Drive screw fastening systems and collated screws,stainless steel fasteners, and pre-fabricated shearwalls. SST Anchor Systemsalso offers a full line of adhesives, mechanical anchors, carbide drill bitsand powder actuated tools for concrete, masonry and steel. SST is the Company’sconnector products segment. The Company’s subsidiary, Simpson Dura-Vent Company,Inc. (“Simpson Dura-Vent” or “SDV”), designs, engineers and manufacturesventing systems for gas, wood, oil, pellet and other alternative fuel burningappliances. The Company markets its products to the residential construction,light industrial and commercial construction, remodeling and do-it-yourself (“DIY”)markets. SDV is the Company’s venting products segment. The Company believesthat SST benefits from strong brand name recognition among architects andengineers who frequently specify in building plans the use of SST products, andthat SDV benefits from strong brand name recognition among contractors,dealers, distributors and SDV’s relationships with original equipmentmanufacturers (“OEMs”) to which SDV markets its products. SST has continuouslymanufactured structural connectors since 1956. See Note 14 to the Company’sConsolidated Financial Statements for information regarding the net sales,income (loss) from operations, depreciation and amortization, significantnon-cash charges, income tax expense (benefit), capital expenditures andacquisitions and total assets for the Company’s two operating segments. See “Item1A – Risk Factors.”

 

Connectors produced bySimpson Strong-Tie typically are steel devices that are used to strengthen,support and connect joints in residential and commercial construction and DIYprojects. SST’s Anchor Systems product line is included in the connectorproduct segment. SST’s connector products enhance the safety and durability ofthe structures in which they are installed and can save time and labor costs.SST’s connector products contribute to structural integrity and resistance toseismic, wind and other forces. Applications range from commercial andresidential building, to deck construction, to DIY projects. SST produces andmarkets over 11,000 standard and custom products.

 

Simpson Dura-Vent’sventing systems are used to vent gas furnaces, water heaters, fireplaces andstoves, wood and oil burning appliances and wood pellet and corn stoves. SDV’smetal vents, chimneys and chimney liner systems exhaust combustion products tothe exterior of the building. SDV designs its products for ease of assembly andsafe operation and to achieve a high level of performance. SDV produces andmarkets approximately 4,000 different venting products.

 

The Company emphasizescontinuous new product development and often obtains patent protection for itsnew products. The Company’s products are marketed in all 50 states of theUnited States and in Europe, Canada, Asia, Australia, New Zealand, Mexico andseveral countries in Central and South America and the Middle East. BothSimpson Strong-Tie and Simpson Dura-Vent products are distributed to homecenters, through wholesale distributors and to contractors and dealers. SimpsonDura-Vent also sells to OEMs.

 

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The Company has developedand uses automated manufacturing processes. Its innovative manufacturingsystems and techniques have allowed it to control manufacturing costs, whiledeveloping both new products and products that meet customized requirements andspecifications. The Company’s development of specialized manufacturingprocesses has also permitted increased operating flexibility and enhancedproduct design innovation. The Company has 20 manufacturing locations in theUnited States, Canada, France, Denmark, Ireland, Germany, China andEngland.  SST is constructing a newmanufacturing facility in Zhangjiagang, China, to be completed in early 2009,and began to move its production of mechanical anchors to the new facility fromits facility in Brampton, Ontario, in late 2008. SDV consolidated itsproduction of venting products in Vacaville, California, and discontinuedproduction at its Vicksburg, Mississippi, facility. SDV also added amanufacturing facility in Albany, New York, with the acquisition of ProTechSystems, Inc. in June 2008.

 

**Industryand Market Trends**

 

Based on tradeperiodicals, participation in trade and professional associations andcommunications with governmental and quasi-governmental organizations and withcustomers and suppliers, the Company believes that a variety of events andtrends have resulted in significant developments in the markets that theCompany serves. The Company’s products are designed to respond to increasingdemand resulting from these trends. Some of these events and trends arediscussed below.

 

Natural disastersthroughout the world have focused attention on safety concerns relating to thestructural integrity of homes and other buildings. The 1995 earthquake in Kobe,Japan, the 1994 earthquake in Northridge, California, the 1989 Loma Prietaearthquake in Northern California, Hurricanes Hugo in 1989 and Andrew in 1992and a series of hurricanes in 2004 and 2005, including Katrina, in thesoutheastern United States, and other less cataclysmic natural disasters,damaged and destroyed innumerable homes and other buildings, resulting inheightened consciousness of the fragility of some of those structures.

 

In recent years,architects, engineers, model code agencies, contractors, building inspectorsand legislators have continued efforts to improve structural integrity andsafety of homes and other buildings in the face of disasters of various types,including seismic events, storms and fires. Based on ongoing participation intrade and professional associations and communications with governmental andquasi-governmental regulatory agencies, the Company believes that buildingcodes are being more uniformly applied around the country and their enforcementis becoming more rigorous.

 

Recently, there has beenconsolidation among several of the Company’s customer groups. The industry hasexperienced increased complexity in home design, and builders are moreaggressively trying to reduce their costs. The Company has responded to thesetrends by marketing its products as systems, in addition to individual parts.In some cases, the Company uses sophisticated design and specification softwareto facilitate systems marketing.

 

The requirements of theEndangered Species Act, the Federal Lands Policy Management Act and theNational Forest Management Act have reduced the amount of timber available forharvest from public lands. Over the past several years, this and other factorshave led to the increased use of engineered wood products. Engineered woodproducts, which substitute for strong, clear-grained lumber historicallyobtained from logging older, large-diameter trees, have been developed toconserve lumber. Engineered wood products frequently require specializedconnectors and fasteners. Sales of Simpson Strong-Tie’s engineered woodconnector and fastener products have contributed significant revenues over thepast several years.

 

Concerns about energyconservation and air quality have led to increasing recognition of theadvantages of natural gas as a heating fuel, including its clean burningcharacteristics. Use of natural gas for home heating has been increasing in theUnited States over a number of years. The cyclical nature of natural gas costshas resulted in fluctuating demand for Simpson Dura-Vent’s natural gas productsand its products for alternative fuel appliances.

 

The Company continues todevelop its distribution through home centers throughout the United States. TheCompany’s sales to home centers were flat in 2006 and 2007 and declined in2008. See “Item 7 –  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

The Company’s principalmarkets are in the building construction industry. That industry is subject tosignificant volatility due to real estate market cycles, fluctuations ininterest rates, the availability, or lack thereof, of credit to builders,developers and consumers, inflation rates, weather, and other factors andtrends. The world-wide recession 

 

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and the declines inresidential construction that began in 2007 have reduced the demand for theCompany’s products. See “Item 1A –  RiskFactors.”

 

**BusinessStrategy**

 

The Company designs,manufactures and sells products that are of high quality and performance, easyto use and cost-effective for customers. The Company provides rapid delivery ofits products and prompt engineering and sales support. Based on its communicationswith customers, engineers, architects, contractors and other industryparticipants, the Company believes that its products have strong brand-namerecognition, and the Company seeks to continue to develop the value of itsbrand names through a variety of customer-driven strategies. Informationprovided by customers has led to the development of many of the Company’sproducts, and the Company expects that customer needs will continue to shapethe Company’s product development, marketing and services.

 

Specification inarchitects’ and engineers’ plans and drawings influences which products will beused for particular purposes and therefore is key to the use of the Company’sproducts in construction projects. The Company encourages architects and engineersto specify the installation of the Company’s products in projects they designand supervise, and encourages construction contractors to accept the Company’sproducts. The Company maintains frequent contacts with architects, engineersand contractors, as well as private organizations that provide information tobuilding code officials, both to inform them regarding the quality, properinstallation, capabilities and value of the Company’s products and to updatethem about product modifications and new products that may be useful ornecessary. The Company sponsors seminars to inform architects, engineers,contractors and building officials on appropriate use and proper installationof the Company’s products. Additionally, the Company maintains relationshipswith home builders throughout the country to promote the use of its products.

 

The Company seeks toexpand its product and distribution coverage through several channels:

 

*Distributors.*The Company regularly evaluates its distribution coverage andservice levels provided by its distributors and from time to time modifies itsdistribution strategy and implements changes to address weaknesses andopportunities. The Company has various programs to evaluate distributor productmix and conducts promotions to encourage distributors to add Company productsthat complement the mix of product offerings in their markets.

 

Through its efforts toincrease specifications by architects and engineers, and through increasing thenumber of products sold to particular contractors, the Company seeks toincrease sales to channels that serve building contractors. The Companycontinuously seeks to expand the number of contractors served by eachdistributor through such sales efforts as demonstrations of product cost-effectivenessand information programs.

 

*HomeCenters.*The Company intends to increase penetration of theDIY markets by solicitation of home centers. The Company’s sales forcemaintains on-going contact with home centers to work with them in a broad rangeof areas including inventory levels, retail display maintenance, and productknowledge training. To satisfy specialized requirements of the home centermarket, the Company has developed extensive bar coding and merchandising aidsand has devoted a portion of its research efforts to the development of DIYproducts.

 

*Dealers.*In some markets, the Company sells its products directly to lumber dealers.

* *

*OEMRelationships.*The Company works closely with manufacturersof engineered wood products and OEMs in developing and expanding theapplication and sales of Simpson Strong-Tie’s engineered wood connector andfastener products and Simpson Dura-Vent’s gas, wood and pellet stove ventingproducts. SST has relationships with several of the largest manufacturers ofengineered wood products, and SDV has OEM relationships with major fireplaceand stove manufacturers.

 

While the Company isexpanding its established facilities outside of California to increase itspresence and sales in these markets, sales of some products may relateprimarily to certain regions. For example, sales of SST’s line of shearwalls,which the Company expanded with the introduction of a steel wall, areconcentrated in the western region of the United States, because their use isprimarily intended to resist the effects of seismic forces. Since 1993 theCompany – 

 

·                  has established operations in theUnited Kingdom,

·                  opened warehouse and distributionfacilities in western Canada and the midwestern, northeastern, and easternseaboard regions of the United States,

 

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·                  purchased anchor productsmanufacturers in Illinois, eastern Canada and Ireland and connector productmanufacturers in France, Denmark, Germany and Canada,

·                  acquired the assets of a leadingmanufacturer and distributor of screw fastening systems and collated screwswith manufacturing and distribution operations in Tennessee and distribution inCanada, Europe, Australia and New Zealand, and acquired a German manufacturerwith manufacturing in Germany, Czech Republic and China,

·                  acquired a manufacturer anddistributor of stainless steel fasteners with manufacturing in Maryland anddistribution in Maryland, Florida, Oregon and Massachusetts,

·                  purchased a venting productsmanufacturer in New York and acquired the assets of a specialized ventingmanufacturing line, and

·                  is building a manufacturing facilityin China and opened sales offices in Hong Kong, Beijing and Shanghai fordistribution in Asia and the Middle East.

 

The Company intends itsEuropean investments to establish a presence in the European Community throughcompanies with existing customer bases and through servicing UnitedStates-based customers operating there. The Company also distributes connector,anchor and epoxy products in Mexico, Australia, New Zealand, Asia and theMiddle East. The Company intends to continue to pursue and expand operationsboth inside and outside of the United States (see Note 14 to the Company’sConsolidated Financial Statements).

 

A Company goal is tomanufacture and warehouse its products in geographic proximity to its marketsto provide availability and rapid delivery of products to customers and promptresponse to customer requests for specially designed products and services.With respect to the DIY and dealer markets, the Company’s strategy is to keepthe customer’s retail stores continuously stocked with adequate supplies of thefull line of the Company’s products that those stores carry. The Companymanages its inventory to help assure continuous product availability. Mostcustomer orders are filled within a few days. High levels of manufacturingautomation and flexibility allow the Company to maintain its quality standardswhile continuing to provide prompt delivery.

 

The Company’s productresearch and development is based largely on needs that customers communicateto the Company. The Company typically has developed 10 to 25 new productsannually (some of which may be produced in a range of sizes). The Company’sstrategy is to develop new products on a proprietary basis, to patent them whenappropriate and to seek trade secret protection for others.

 

The Company’s long-termstrategy is to develop, acquire or invest in product lines or businesses that –

 

·                  complement the Company’s existingproduct lines,

·                  can be marketed through its existingdistribution channels,

·                  might benefit from use of the SimpsonStrong-Tie or Simpson Dura-Vent brand names and expertise,

·                  are responsive to needs of theCompany’s customers,

·                  expand the Company’s marketsgeographically and

·                  reduce the Company’s dependence onthe United States residential construction market.

 

**SimpsonStrong-Tie**

 

*Overview*

 

Connectors produced bySimpson Strong-Tie typically are steel devices that are used to strengthen,support and connect joints in residential and commercial construction and DIYprojects. These products enhance the safety and durability of the structures inwhich they are installed and can save time and labor costs for the contractor.SST’s connector products increase structural integrity and improve structural resistanceto seismic, wind and other forces. Applications range from building framing todeck construction to DIY projects. SST produces and markets over 11,000standard and custom products.

 

In the United States,connector usage developed faster in the West than elsewhere due to the low costand abundance of timber and to local construction practices. Increasingly, themarket has been influenced both by a growing awareness that the devastationcaused by seismic, wind and other disasters can be reduced through improvedbuilding codes and construction practices and by environmental concerns thatcontribute to the increasing cost and reduced availability of wood. MostSimpson Strong-Tie products are listed by recognized building standardsagencies as complying with model building codes and are specified by architectsand engineers for use in projects they are designing or supervising. Theengineered wood products industry continues to develop in response to 

 

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concerns about theavailability of wood, and the Company believes that SST is the leading supplierof connectors for use with engineered wood products.

 

Metal connectors, anchorsand fasteners will corrode and lose load carrying capacity when installed incorrosive environments or exposed to corrosive materials. There are manyenvironments and materials that may cause corrosion, including ocean salt air,fire retardants, preservative-treated wood, dissimilar metals, fumes andfertilizers. The variables present in a single building environment make itimpossible to predict accurately if, or when, significant corrosion will beginor reach a critical level. This relative uncertainty makes it crucial that thespecifiers be knowledgeable of the potential risks and select a product coatingor metal that is suitable for the intended use. Changes in thepreservative-treated wood industry have created additional concerns. Effective December31, 2003, the preservative-treated wood industry voluntarily transitioned fromChromated Copper Arsenate (“CCA-C”) used in residential applications toalternative treatments. Testing has shown that certain alternative replacementtreatments are generally more corrosive than CCA-C. SST publishes technicalbulletins on subjects such as this and others that affect the installation anduse of its products. SST makes its technical bulletins available on its websiteat www.strongtie.com.

 

*Products*

 

Simpson Strong-Tie is arecognized brand name in the markets it serves. SST manufactures and marketsproducts that strengthen the three types of connections typically found inresidential and commercial construction: wood-to-wood, wood-to-concrete and wood-to-masonry. The Company’sconnector products, including its pre-fabricated shearwalls, are installed in acontinuous load path from the foundation to the roof system. SST also marketsspecialty screws and nails for proper installation of certain of its connectorproducts. These products have seismic, retrofit and remodeling applications forboth new construction and DIY markets. Through its Anchor Systems product line,SST offers a full line of adhesives, mechanical anchors and powder-actuatedtools for numerous anchoring applications in concrete, masonry and steel inboth standard and metric sizes. SST also offers screw fastening systems andcollated screws for various construction applications through the Quik Driveproduct line and a line of stainless steel fasteners through the Swan Secureproduct line.

 

Most of SimpsonStrong-Tie’s products are listed by recognized model building code agencies. Toachieve such listings, SST conducts extensive product testing, which iswitnessed and certified by independent testing engineers. The tests alsoprovide the basis for publication of load ratings for SST structuralconnectors, and this information is used by architects, engineers, contractorsand homeowners. The information is useful across the range of applications ofSST’s products, from the deck constructed by a homeowner to a multi-storystructure designed by an architect or engineer in an earthquake zone.

 

Simpson Strong-Tie alsomanufactures connector products specifically designed for use with engineered woodproducts, such as wood I-joists. With increased timber costs and reducedavailability of trees suitable for making traditional solid sawn lumber,construction with engineered wood products has increased substantially in thelast several years. Sales of Simpson Strong-Tie’s engineered wood connector andfastener products have contributed significant revenues over the past severalyears.

 

*NewProduct Development*

 

Simpson Strong-Tiecommits substantial resources to new product development. The majority ofproducts have been developed through SST’s internal research and developmentprogram. SST’s research and development expense for the three years ended December31, 2008, 2007 and 2006, was $6,148,000, $5,206,000 and $5,075,000,respectively. SST is the only known United States manufacturer with thecapability to test multi-story wall systems, thus enabling testing rather thancalculations to prove system performance. SST engineering, sales, productmanagement, and marketing teams work together with architects, engineers,building inspectors, code officials and customers in the new productdevelopment process.

 

SST typically develops 10to 20 new products each year. This year, SST introduced the Strong FrameTMOrdinary Moment Frame, a high capacity lateral force resistance product for usein both non-residential and residential construction. SST also developed newproducts for Cold Form Steel truss bracing, mudsill anchor bolt replacement,Hawaiian wind tie retrofit, mechanical and adhesive anchors for use in crackedconcrete, as well as several other products for general construction and DIY.SST also developed fasteners and collated delivery systems for several sectorsincluding, steel pan decking, tile backer board, hardwood decking andtruck/trailer/RV bed wood to steel attachment.

 

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While continuing toservice the new single-family residential housing market, SST has increaseddevelopment efforts for products used in DIY, multi-family residential, andsome light commercial and industrial markets.

 

*Salesand Marketing*

 

Simpson Strong-Tie’s salesand marketing programs are implemented through SST’s branch system. SSTcurrently maintains branches in Northern and Southern California, Texas, Ohio,Canada, England, France, Germany, Denmark and China. Each branch is served byits own sales force, as well as manufacturing, warehouse and office facilities.Each branch is responsible for a broad geographic area. Each is responsible forsetting and executing sales and marketing strategies that are consistent withthe markets that the branch serves and the goals of SST. The domestic branchesclosely integrate their manufacturing activities to enhance productavailability. Branch sales forces in the United States are supported bymarketing managers in the home office in Pleasanton, California. The home officealso coordinates issues affecting customers that operate in multiple regions.The sales force maintains close working relationships with customers, developsnew business, calls on architects, engineers and building officials andparticipates in a range of educational seminars.

 

Simpson Strong-Tie sellsits products through an extensive distribution system comprising dealerdistributors supplying thousands of retail locations nationwide, contractordistributors, home centers, lumber dealers, manufacturers of engineered woodproducts, and specialized contractors such as roof framers. In recent years,home centers have been one of the SST’s fastest growing distribution channels.A large part of that growth was sales to The Home Depot, which exceeded 10% ofthe Company’s consolidated net sales in both 2006 and 2007 (see “Item 1A –  Risk Factors,” “Item 7 –  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and Note 14 to the Company’sConsolidated Financial Statements). SST’s DIY and dealer products are used tobuild projects such as decks, patio covers and garage organization systems.

 

Simpson Strong-Tiededicates substantial resources to customer service. SST produces numerouspublications and point-of-sale marketing aids to serve specifiers,distributors, retailers and users for the various markets that it serves. Thesepublications include general catalogs, as well as various specific catalogs,such as those for its Anchor System products. The catalogs and publicationsdescribe the products and provide load and installation information. SST alsomaintains several linked websites centered on www.strongtie.com, which includecatalogs, product and technical information, code reports and other general informationrelated to SST’s product lines and promotional programs.

 

Simpson Strong-Tie’sengineers not only design and test products, but also provide engineeringsupport for customers. This support might range from the discussion of a loadvalue in a catalog to testing a unique application for an existing product. SST’ssales force communicates with customers in each of its marketing channels,through its publications, seminars and frequent sales calls.

 

Based on itscommunications with customers, Simpson Strong-Tie believes that its productsare important to its customers’ businesses, and it is SST’s policy to shipproducts within a few days of receiving the order, with many of the ordersshipped the same day as the order is received. Many of SST’s customers servecontractors that require rapid delivery of needed products. Home centers anddealers also require superior service because of fluctuating demand and toserve the needs of a broad base of customers. To satisfy these requirements,SST maintains high inventory levels, has redundant manufacturing capability andsome multiple dies to produce the same parts. SST also maintains informationsystems that provide sales and inventory control and forecasting capabilitiesthroughout its network of factories and warehouses. SST also has specialprograms for contractors intended to ensure the prompt manufacture and deliveryof custom products.

 

Simpson Strong-Tiebelieves that dealer and home center sales of SST products are significantlygreater when the bins and racks at large dealer and home center locations areadequately stocked with appropriate products. Various retailers carry varyingnumbers of SST products. SST’s sales force is engaged in ongoing efforts toinform retailers about SST’s merchandising programs and the appeal of the SSTbrand.

 

**SimpsonDura-Vent**

 

*Overview*

 

Simpson Dura-Vent’sventing systems are used to vent gas furnaces, water heaters, fireplaces andstoves, wood and oil burning appliances and wood pellet and corn stoves. SDV’smetal vents, chimneys and chimney liner systems 

 

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exhaust the products ofcombustion to the exterior of the building. SDV’s products have been designedfor ease of assembly and safe operation and to achieve a high level ofperformance. SDV produces and markets approximately 4,000 different ventingproducts.

 

The clean burningcharacteristics of natural gas have gained public recognition, resulting inincreased market share for natural gas appliances in the new construction andthe appliance replacement markets. As a result, Simpson Dura-Vent has developedventing systems, such as Direct-Vent, to address changes in appliancetechnology. Fluctuations in natural gas prices, however, affect demand for gasappliances. Historically, during periods of high oil and natural gas prices andenergy shortages, sales of wood and pellet burning stoves, consideredalternative energy sources, have increased, while sales of gas burningappliances have tended to decline.

 

Simpson Dura-Vent’sobjective is to expand market share in all of its distribution channels byentering expanding markets that address energy and environmental concerns. SDV’sstrategy is to capitalize on its strengths in new product development and itsestablished distribution network and to continue its commitment to high qualityand service. SDV operates manufacturing and warehouse facilities in California,Mississippi, Minnesota, and New York. In January 2008, SDV decided to close itsVicksburg, Mississippi, facility and consolidate its manufacturing operationsin Vacaville, California.

 

In June 2008, SDVacquired the equity of ProTech Systems, Inc. (“ProTech”) which is based inAlbany, New York. ProTech manufactures special gas vent for condensingappliances including tankless water heaters and boilers. In July 2008, SDVacquired the assets and trademarks of Ventinox relining systems from AmericanBOA, Inc.

 

*Products*

 

Simpson Dura-Vent is aleading supplier of double-wall Type B Gas Vent systems, used for venting gasfurnaces, water heaters, boilers and decorative gas fireplaces. SDV’s Type BGas Vent product line features heavy-duty quality construction and a twist-lockdesign that provides for fast and easy job-site assembly compared toconventional snap-together designs. The twist-lock design has broaderapplications and has been incorporated into SDV’s gas, pellet and Direct-Ventproduct lines. SDV also markets a patented flexible vent connector, Dura/Connect,for use between the gas appliance flue outlet and the connection to the Type BGas Vent installed in the ceiling. Dura/Connect offers a simple twist, bend andconnect installation for water heaters and gas furnaces. As a result of theacquisition of ProTech in July 2008, SDV offers special gas vent and reliningproducts.

 

Consumer concerns overthe rising costs of natural gas and home heating oil in 2003 through the firsthalf of 2006 increased demand for alternative fuel appliances. This resulted inincreased demand for SDV’s all-fuel chimney and pellet vent products, althoughdemand for these and other SDV products declined along with the slowdown inhome building activity in the first half of 2006 and again in late 2007 and2008. The gas fireplace market has evolved into two basic types of fireplace:top-vent fireplaces that are vented with the standard Type B Gas Vent anddirect-vent fireplaces that use a special double-wall venting system. SDV’sDirect-Vent system is designed not only to exhaust the flue products, but alsoto draw in outside air for combustion, an important feature in modernenergy-efficient home construction. The Direct-Vent gas fireplace systemsprovide ease of installation, permitting horizontal through-the-wall venting orstandard vertical through-the-roof venting. SDV has established relationshipswith several large manufacturers of gas stoves and gas fireplaces to supplyDirect-Vent venting products.

 

*NewProduct Development*

 

Simpson Dura-Vent hasgained industry recognition by offering innovative new products that meetchanging needs of customers. SDV representatives serve on industry committeesconcerned with issues such as new appliance standards and governmentregulations. SDV’s research and development expense for the three years ended December31, 2008, 2007 and 2006, was $812,000, $816,000 and $601,000, respectively. SDValso maintains working relationships with research and development departmentsof major appliance manufacturers, providing prototypes for field testing andconducting tests in SDV’s testing laboratory. SDV believes that suchrelationships provide competitive advantages. For example, SDV introduced thefirst venting system for Direct-Vent gas appliances. In 2004, SDV completedtesting for a new chimney product line, Dura-Plus HTC, which is designed tomeet Canadian standards for chimney systems, and began marketing in Canada in2005. In 2006, SDV launched a new, improved PelletVent for venting pelletburning stoves. SDV manufactures the new PelletVent product line using laserwelding equipment. SDV has filed a patent application for the new PelletVentproduct line. In 2007, SDV determined that the exhaust gases that result fromburning corn pellets and other bio fuels can be corrosive and has begun usingmaterial that is more suited to this application. Also in 2007, SDV launchedimprovements in its Direct-

 

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Vent categories, applyinglaser weld techniques, and launched a new air-cooled large diameter (10”through 16”) chimney product line, Dura-Chimney 2, for venting very largewood-burning fireplaces.

 

*Salesand Marketing*

 

Simpson Dura-Vent’s salesand marketing programs are implemented through SDV’s sales and marketing staffand a network of independent manufacturer’s agents. SDV markets venting systemsfor both gas and wood burning appliances through wholesale distributors in theUnited States, Canada and Australia to the HVAC (heating, ventilating and airconditioning) and PHC (plumbing, heating and cooling) contractor markets, andto fireplace specialty distributors. These customers sell to contractor and DIYmarkets. SDV also markets venting products to home center and hardware storechains. SDV has established OEM relationships with several major gas fireplaceand gas stove manufacturers, which SDV believes are leaders in the direct-ventgas appliance market.

 

Simpson Dura-Ventresponds to technological changes occurring in the industry through new productdevelopment and has developed a reputation for quality and service to itscustomers. To reinforce its reputation for quality, SDV produces extensivesales support literature and advertising materials. Recognizing the difficultythat customers and users may have in understanding correct sizing for venting,SDV publishes a sizing handbook to assist contractors, building officials andretail outlets.  Advertising and promotionalmaterials have been designed to be used by distributors and their customers, aswell as home centers and hardware chains.

 

To enhance its marketingeffort, SDV maintains a website, www.duravent.com, that includes productdescriptions, catalogs and installation instructions, as well as a direct linkto SDV’s customer service and engineering departments. SDV also regularlypublishes and sends e-mail newsletters to its distributors and authorizedDura-Pro dealers.

 

**ManufacturingProcess**

 

The Company designs andmanufactures most of its standard products. The Company has concentrated onmaking its manufacturing processes as efficient as possible withoutcompromising the quality or flexibility necessary to serve the needs of itscustomers. The Company has developed and uses automated manufacturingprocesses. The Company’s innovative manufacturing systems and techniques haveallowed it to control manufacturing costs, even while developing both newproducts and products that meet customized requirements and specifications. TheCompany’s development of specialized manufacturing processes also has permittedincreased operating flexibility and enhanced product design innovation. TheCompany sources some products from third party vendors, both domestically andinternationally.

 

The Company is committedto helping people build safer structures economically through the design,engineering and manufacturing of structural connectors, pre-fabricatedshearwalls, anchors, fasteners and related products. With the support andinvolvement of management, the Company has developed a quality system thatmanages defined procedures to ensure consistent product quality and also meetsthe requirements of International Code Council (ICC) product evaluationreports. Simpson Strong-Tie is recognized in its industry as a manufacturer ofhigh quality products.  Since 1996, SST’squality system has been registered under ISO 9001, an internationallyrecognized set of quality-assurance standards. The Company believes that ISOregistration is a valuable tool for maintaining its high qualitystandards.  As SST establishes newbusiness locations through expansion or acquisitions, projects are establishedto integrate SST’s quality systems and achieve ISO 9001 registration.  In addition, SST has five testinglaboratories accredited to ISO standard 17025, an internationally acceptedstandard that provides requirements for the competence of testing andcalibration laboratories.

 

Simpson Strong-Tieoperates manufacturing or warehouse facilities in California, Texas, Ohio,Florida, Connecticut, Illinois, Washington, Tennessee, Minnesota, NorthCarolina, Maryland, Oregon, Massachusetts, British Columbia, Ontario, England,France, Denmark, Germany, Australia, Scotland, Poland, Ireland, Czech Republicand China. Most of SST’s products are produced with a high level of automation,using progressive dies run in automatic presses making parts from coiled sheetsteel at rates that often exceed 100 strokes per minute. SST estimates that itproduces over 1 billion product pieces per year. Most of SST’s products (SKUs)are bar coded with UPC numbers for easy identification, and nearly all of theproducts sold to home centers are labeled with bar codes. SST has significantpress capacity and has multiple dies for some of its high volume productsbecause of the need to produce these products close to the customer and toprovide backup capacity. The balance of production is accomplished through acombination of manual, blanking and numerically controlled (NC) processes thatinclude robotic welders, lasers and turret punches. This capability allows SSTto produce products with little redesign or set-up time,

 

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facilitating rapid turnaround for customers. Newtooling is also highly automated. Dies are designed and produced using computeraided design (CAD) and computer aided machining (CAM) systems. CAD/CAMcapability enables SST to create multiple dies quickly and design them to highstandards. The Company is constantly reviewing its product line to reducemanufacturing costs, increase automation, and take advantage of new types ofmaterials.

 

Simpson Strong-Tie also manufactures chemicalanchoring products at its facility in Addison, Illinois. The chemicals aremixed in batches and are then loaded in two-part dispensers. These dispensersmix the product on the job site because set up times are usually very short. Inaddition, SST purchases a number of products, primarily fasteners, powderactuated tools and accessories and certain of its mechanical anchoringproducts, from various sources around the world. These purchased productsundergo inspections on a sample basis for conformance with orderedspecifications and tolerances before being distributed.

 

Simpson Dura-Vent operates manufacturing or warehousefacilities in California, Mississippi, Minnesota, and New York. SDV producescomponent parts for venting systems using NC-controlled punch presses equippedwith high-speed progressive and compound tooling. SDV’s vent pipe and elbowassembly lines are automated, to produce finished products efficiently fromlarge coils of steel and aluminum. UPC bar coding and computer tracking systemsprovide SDV’s industrial engineers and production supervisors with real-timeproductivity tools to measure and evaluate current production rates, methodsand equipment.

 

**Regulation**

 

Simpson Strong-Tie’s product lines are subject tofederal, state, county, municipal and other governmental and quasi-governmentalregulations that affect product design, development, testing, applications,marketing, sales, installation and use. Most SST products are recognized bybuilding code and standards agencies. Agencies that recognize Company productsinclude the International Code Council Evaluation Service (ICC-ES), theInternational Association of Plumbing and Mechanical Officials (IAPMO), theCity of Los Angeles, the State of Florida, and the California Division of theState Architect. These and other agencies adopt various testing and designstandards and incorporate them into their related building codes. With theadoption of the International Residential Code and the International BuildingCode, these standards are being applied more uniformly, and these Codes arerecognized throughout most of the United States. SST considers code recognitionto be a significant marketing tool and devotes considerable effort to obtainingand maintaining appropriate approvals for its products. SST believes thatarchitects, engineers, contractors and other customers are more likely topurchase structural products that have the appropriate code acceptance thancompetitive products that lack code acceptance. SST actively participates inindustry related professional associations to keep abreast of regulatorychanges and to provide information to regulatory agencies.

 

Simpson Dura-Vent operates under a regulatoryenvironment that includes appliance and venting performance standards relatedto safety, energy efficiency and air quality. Gas venting regulations arecontained in the National Fuel Gas Code (“NFGC”), while safety and performanceregulations for wood burning appliances and chimney systems are contained in aNational Fire Protection Association standard (“NFPA 211”). Standards fortesting gas vents and chimneys are developed by testing laboratories such asUnderwriter’s Laboratories (“UL”) in compliance with the American NationalStandards Institute. The Environmental Protection Agency (“EPA”) regulatesclean air standards for both gas and wood burning appliances. The Department ofEnergy (“DOE”) regulates energy efficiency standards under the authority of theNational Appliance Energy Conservation Act. Under this Act, the DOEperiodically reviews the necessity for increased efficiency standards withrespect to gas furnaces and gas water heaters. A substantial percentage ofSDV’s Type B Gas Vent sales are for gas furnaces and gas water heaters. Minimumappliance efficiency standards have been enacted that could negatively affectsales of Type B Gas Vents, which could adversely affect the Company’s operatingresults. In turn, the various building codes could be adopted by localauthorities, resulting in enforcement through the building permit process.Safety, air quality and energy efficiency requirements are enforced by localair quality districts and municipalities by requiring proper UL, EPA and DOElabels on appliances and venting systems.

 

**Competition**

 

The Company faces a variety of competition in all ofthe markets in which it participates. This competition ranges from subsidiariesof large national or international corporations to small regionalmanufacturers. While price is an important factor, the Company competes on thebasis of quality, breadth of product line, technical support, availability ofinventory, service (including custom design and manufacturing), field supportand product innovation. As a result of differences in structural design andbuilding practices and codes, Simpson Strong-Tie’s markets tend to

 

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differ by region. Within these regions, SST competeswith companies of varying size, several of which also distribute their productsnationally.

 

The venting industry is highly competitive. SDV’scompetitors include a variety of manufacturers that have operations in theUnited States, Canada, China and Mexico. Most of its competitors do not competein all of SDV’s product lines, and some have additional product lines that SDVdoes not offer. SDV competes on the basis of quality, service, breadth ofproduct line, availability of inventory, technical support and productinnovation.

 

**Raw Materials**

 

The principal raw material used by both SimpsonStrong-Tie and Simpson Dura-Vent is steel, including stainless steel. TheCompany generally orders steel to specific American Society of Testing andMaterials (“ASTM”) standards. SST also uses materials such as epoxies andacrylics in the manufacture of its chemical anchoring products. SDV also usesraw materials such as aluminum, aluminum alloys and ceramic and other insulationmaterials, and both SST and SDV use cartons. The Company purchases rawmaterials from a variety of commercial sources. The Company’s practice is toseek cost savings and enhanced quality by purchasing from a limited number ofsuppliers.

 

The steel industry is highly cyclical and prices forthe Company’s raw materials are influenced by numerous factors beyond theCompany’s control, including general economic conditions, competition, laborcosts, foreign exchange rates, import duties, raw material shortages and traderestrictions. Steel prices increased in 2006 and, after easing early in 2007,rose again mid-year 2007. Steel prices have declined from their peak in July 2008,but the Company believes that they may have reached bottom and does not expectthem to decrease further for the balance of the first quarter of 2009. Thesteel market continues to be dynamic, however, with a high degree ofuncertainty about future pricing trends. Demand for steel has recently declineddue to the weakening of the global economy and tightening of financial creditmarkets. Numerous factors may cause steel prices to increase in the future. Inaddition to increases in steel prices, mills have added surcharges for zinc,energy and freight in response to increases in their costs. These and otherfactors could adversely affect the Company’s cost and access to steel in 2009.If steel prices increase and the Company is not able to maintain its prices orincrease them sufficiently, the Company’s margins could deteriorate. See “Item1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.” The Company historically hasnot attempted to hedge against changes in prices of steel or other rawmaterials.

 

**Patents and Proprietary Rights**

 

The Company’s subsidiaries have United States andforeign patents, the majority of which cover products that they currentlymanufacture and market. These patents, and applications for new patents, covervarious design aspects of the subsidiaries’ products, as well as processes usedin their manufacture. The Company’s subsidiaries are continuing to develop newpotentially patentable products, product enhancements and product designs.Although the Company’s subsidiaries do not intend to apply for additionalforeign patents covering existing products, the Company has developed aninternational patent program to protect new products that its subsidiaries maydevelop. In addition to seeking patent protection, the Company relies onunpatented proprietary technology to maintain its competitive position. See“Item 1A – Risk Factors.”

 

**Acquisitions and Expansion into NewMarkets**

 

The Company’s future growth, if any, may depend tosome extent on its ability to penetrate new markets, both domestically andinternationally. See “Industry and Market Trends” and “Business Strategy.”Therefore, the Company may in the future pursue acquisitions of product linesor businesses. See “Item 1A – Risk Factors” and “Item 7 – Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

In July 2007, the Company purchased the stock ofSwan Secure Products, Inc. (“Swan Secure”) for $42.1 million in cash, netof cash received. Swan Secure is a manufacturer and distributor of fasteners,largely stainless steel, and its products are marketed throughout the UnitedStates.

 

In April 2008, the Company’s subsidiary, SimpsonStrong-Tie Ireland Limited, purchased certain assets of Liebig InternationalLtd., an Irish company, Heinrich Liebig Stahldübelwerke GmbH, Liebig GmbH &Co. KG and Liebig International Verwaltungsgesellschaft GmbH, all Germancompanies, Liebig Bolts Limited, an English company, and Liebig InternationalInc., a Virginia corporation (collectively “Liebig”). Liebig manufacturesmechanical anchor

 

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products in Ireland and distributes them primarilythroughout Europe through warehouses located in Germany and the United Kingdom.Liebig expands the Company’s anchor product offerings in its connector productsegment. The purchase price was $19.2 million in cash, including due diligenceand transaction costs. The Company recorded goodwill of $7.6 million and intangibleassets subject to amortization of $2.7 million as a result of the acquisition.Tangible assets, including real estate, machinery and equipment, inventory andtrade accounts receivable, accounted for the balance of the purchase price.

 

In June 2008, the Company’s subsidiary, SimpsonDura-Vent Company, Inc., purchased the equity of ProTech Systems, Inc.,a New York corporation. ProTech manufactures venting products in New York anddistributes them throughout North America. ProTech expands the Company’s productofferings in the venting product segment. The purchase price (subject topost-closing adjustment) was $8.3 million in cash, including due diligence andtransaction costs and $1.4 million to be paid in the future, plus an additionalearn-out of up to $2.25 million if certain future performance targets are met.The Company recorded goodwill of $3.7 million and intangible assets subject toamortization of $3.0 million as a result of the acquisition. Net tangibleassets, including machinery and equipment, inventory and trade accountsreceivable, accounted for the balance of the purchase price, but the purchaseprice allocation has not been finalized. In July 2008, Simpson Dura-Ventalso purchased certain assets to produce the Ventinox stainless steel chimneyliner product line from American BOA Inc. ProTech had been the distributor ofVentinox products. The purchase price was $1.6 million in cash, including duediligence and transaction costs. The Company recorded goodwill of $0.7 million.The Ventinox purchase price allocation has not been finalized.

 

In July 2008, Simpson Strong-Tie purchased theequity of Ahorn-Geräte & Werkzeuge Vertriebs GmbH, a German company,and its subsidiaries Ahorn Upevnovaci Technika s.r.o., a Czech company, andAhorn Pacific Fasteners (Kunshan) Co., Ltd., a Chinese company (collectively“Ahorn”). The acquisition broadened Simpson Strong-Tie’s collated fastenerproduct line and added production capacity in both Europe and China. Thepurchase price was $9.2 million in cash, including due diligence andtransaction costs. The Company recorded goodwill of $6.9 million as a result ofthe acquisition. Net tangible assets, including machinery and equipment,inventory and trade accounts receivable, accounted for the balance of the purchaseprice, but the purchase price allocation has not been finalized.

 

In January 2009, the Company acquired thebusiness of RO Design Corp, a Florida corporation doing business as DeckTools,which licenses deck design and estimation software. The software providesprofessional deck builders, home centers and lumber yards a simple,graphics-driven, solution for designing decks and estimating material and laborcosts for the project. The purchase price was $4.0 million in cash, including$2.5 million to be paid in the future.

 

**Seasonality and Cyclicality**

 

The Company’s sales are seasonal and cyclical, andoperating results vary from quarter to quarter. The Company’s sales are alsodependent, to a large degree, on the North American residential homeconstruction industry and operating results vary with economic cycles. See“Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

**Environmental, Health and SafetyMatters**

 

The Company is subject to environmental laws andregulations governing emissions into the air, discharges into water, andgeneration, handling, storage, transportation, treatment and disposal of wastematerials. The Company is also subject to other federal and state laws and regulationsregarding health and safety matters. The Company believes that it has obtainedall material licenses and permits required by environmental, health and safetylaws and regulations in connection with the Company’s operations and that itspolicies and procedures comply in all material respects with existingenvironmental, health and safety laws and regulations. See “Item 1A – RiskFactors.”

 

**Employees and Labor Relations**

 

As of January 1, 2009, the Company had 2,504full-time employees, of whom 1,399 were hourly employees and 1,105 weresalaried employees. The Company believes that its overall compensation andbenefits for the most part meet or exceed industry averages and that itsrelations with its employees are good.

 

A significant number of the employees at three of theCompany’s facilities are represented by labor unions and are covered bycollective bargaining agreements. Two of the Company’s collective bargainingagreements cover the

 

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Company’s tool and die craftsmen and maintenanceworkers in Brea, California, and its sheetmetal workers in Brea and Ontario,California. These two contracts expire February 2011 and June 2011,respectively. Simpson Strong-Tie’s facility in Stockton, California, is also aunion facility with two collective bargaining agreements, which cover its tooland die craftsmen and maintenance workers, and its sheetmetal workers. These twocontracts will expire June 2011 and September 2011,respectively.  See “Item 1A – RiskFactors.”

 

**Available Information**

 

The SEC maintainsan internet site (http://www.sec.gov) that contains reports, proxy andinformation statements, and other information regarding issuers that fileelectronically with the SEC. The Company makes available, free of charge,copies of its recent annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, proxy statement, company governance guidelinesand code of ethics and the charters of the Audit, Compensation, and Governanceand Nominating Committees of its Board of Directors on its website atwww.simpsonmfg.com. Printedcopies of any of these materials will be provided on request.

 

**Item 1A. Risk Factors.**

 

*You should carefully consider thefollowing risks before you decide to buy or hold shares of our common stock. Ifany of the following risks actually occurs, our business, results of operationsor financial condition would likely suffer. In such case, the trading price ofour common stock could decline, and you may lose all or part of the money youpaid to buy our stock.*

 

*This and other public reports maycontain forward-looking statements based on current expectations, assumptions,estimates and projections about us and our industry. Those forward-lookingstatements involve risks and uncertainties. Our actual results could differmaterially from those forward-looking statements as a result of many factors,as more fully described below and elsewhere in our public reports. We do notundertake to update publicly any forward-looking statements for any reason,even if new information becomes available or other events occur in the future.*

 

**Worldwide economic conditions andcredit tightening materially and adversely affect our business.**

 

Our business has been materially and adverselyaffected by changes in regional, national or global economic conditions.  Such changes have included or may includereduced consumer spending, reduced availability of capital, inflation,deflation, adverse changes in interest rates, reduced energy availability andincreased energy costs, and government initiatives to manage economicconditions. Continuing instability in financial markets and the deteriorationof other national and global economic conditions may have further materiallyadverse effects on our operations, financial results or liquidity, includingthe following:

 

·                  the financialstability of our customers or suppliers may be compromised, which could resultin additional bad debts for us or non-performance by suppliers;

·                  one or more ofthe financial institutions that make available our revolving credit facilitymay become unable to fulfill their funding obligations, which could materiallyand adversely affect our liquidity;

·                  it may becomeeven more costly or difficult for us to obtain the agreed or additionalfinancing or to refinance our existing credit facility; or

·                  our assets maybe impaired or subject to write down or write off.

 

Uncertainty about current global economic conditionsmay cause consumers of our products to postpone or refrain from spending inresponse to tighter credit, negative financial news, declines in income orasset values, or other adverse economic events or conditions, which could materiallyreduce demand for our products and materially and adversely affect ourfinancial condition and operating results. Further deterioration of economic conditions would likely exacerbatethese adverse effects, result in wide-ranging, adverse and prolonged effects ongeneral business conditions, and materially and adversely affect ouroperations, financial results and liquidity.

 

**Failure to comply with industryregulations could result in reduced sales and increased costs.**

 

The design, capacity and quality of most of ourproducts and manufacturing processes are subject to numerous and extensiveregulations and standards promulgated by governmental, quasi-governmental andindustry organizations. These regulations and standards are highly technical,complex and subject to frequent revision. If our products or manufacturingprocesses fail to comply with any regulations or standards, we may not be ableto manufacture and

 

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market our products profitably. Failure to comply withregulations and standards could therefore materially reduce our sales andincrease our costs.

 

**If we fail to compete effectively,our revenue and profit margins could decline.**

 

We face a variety of competition in all of the marketsin which we participate. Many of our competitors have greater financial andother resources than we do. In addition, other technologies may be the basesfor competitive products that could render our products obsolete ornoncompetitive. Other companies may find our markets attractive and enter thosemarkets. Competitive pricing, including price competition or the introductionof new products, could have material adverse effects on our revenues and profitmargins.

 

Our ability to compete effectively depends to asignificant extent on the specification or approval of our products byarchitects, engineers, building inspectors, building code officials andcustomers. If a significant segment of those communities were to decide thatthe design, materials, manufacturing, testing or quality control of ourproducts is inferior to that of any of our competitors, our sales and profitswould be materially reduced.

 

**If we lose all or part of a largecustomer, our sales and profits would decline.**

 

We have substantial sales to a few large customers.Loss of all or part of our sales to a large customer would have a materialadverse effect on our revenues and profits. Our largest customer accounted forslightly less than 10% of net sales for the year ended December 31, 2008.In August 2007, this customer sold a division, which is now a separatecustomer of the Company. As a combined company in 2007, these two customersaccounted for 15% of our net sales. As two separate customers, neither wouldhave accounted for more than 10% of our consolidated net sales for  2007. See Note 14 to the Company’sConsolidated Financial Statements. This customer may endeavor to replace, insome or all markets, our products with lower-priced products supplied by othersor may otherwise reduce its purchases of our products. We also might reduce ourdependence on our largest customer by reducing or terminating sales to one ormore of the customer’s subsidiaries. Any reduction in, or termination of, oursales to this customer would at least temporarily, and possibly longer, cause amaterial reduction in our net sales, income from operations and net income. Areduction in or elimination of our sales to our largest customer, or another ofour larger customers, would increase our relative dependence on our remaininglarge customers.

 

In addition, our customers include retailers anddistributors. Retail and distribution businesses have consolidated over time,which could increase the material adverse effect of losing any of them.

 

**Increases in prices of raw materialscould negatively affect our sales and profits.**

 

Our principal raw material is steel, includingstainless steel. The steel industry is highly cyclical. Numerous factors beyondour control, such as general economic conditions, competition, worldwidedemand, labor costs, energy costs, foreign exchange rates, import duties andother trade restrictions, influence prices for our raw materials. Consolidationamong domestic integrated steel producers, changes in supply and demand insteel markets, changes in foreign currency exchange rates and economicconditions, and other events have led to volatility in steel costs. Thedomestic steel market is heavily influenced by three major United Statesmanufacturers. We have not always been able, and in the future we might not beable, to increase our product prices in amounts that correspond to increases incosts of raw materials, without materially and adversely affecting our salesand profits.

 

We have not attempted to hedge against changes inprices of steel or other raw materials. In recent years, however, we haveincreased our steel purchases in an effort to mitigate the effects of risingsteel prices. At the same time, since 2007 our sales have declined with thedeclines in the housing and financial markets. As a result, our inventory ofraw materials has increased substantially. Inventory increases can materiallyand adversely affect our margins, cash flow and profits.

 

**If we cannot protect our technology,we will not be able to compete effectively.**

 

Our ability to compete effectively with othercompanies depends in part on our ability to maintain the proprietary nature ofour technology, in part through patents. We might not be able to protect orrely on our patents. Patents might not issue pursuant to pending patentapplications. Others might independently develop the same or similartechnology, develop around the patented aspects of any of our products orproposed products, or otherwise obtain access to or circumvent our proprietarytechnology. We also rely on unpatented proprietary technology to maintain ourcompetitive position. We might not be able to protect our know-how or otherproprietary information. If we are

 

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unable to maintain the proprietary nature of oursignificant products, our sales and profits could be materially reduced.

 

In attempting to protect our proprietary information,we sometimes initiate lawsuits against competitors and others that we believehave infringed or are infringing our rights. In such an event, the defendantmay assert counterclaims to complicate or delay the litigation or for otherreasons. Litigation may be very costly and may result in adverse judgments thataffect our sales and profits materially and adversely.

 

**Integrating acquired businesses maydivert management’s attention away from our day-to-day operations.**

 

In the future, we may pursue acquisitions of productlines or businesses. Acquisitions involve numerous risks, including, forexample:

 

·                  difficultiesassimilating the operations and products of acquired businesses;

·                  diversion ofmanagement’s attention from other business concerns;

·                  overvaluation ofacquired businesses;

·                  undisclosedexisting or potential liabilities of acquired businesses;

·                  slow acceptanceor rejection of acquired businesses’ products by our customers;

·                  risks of enteringmarkets in which we have little or no prior experience;

·                  litigationinvolving activities, properties or products of acquired businesses;

·                  consumer andother claims related to products of acquired businesses; and

·                  the potentialloss of key employees of acquired businesses.

 

In addition, future acquisitions may cause us to issueadditional equity securities that dilute the value of our existing equitysecurities, increase our debt, and cause impairment and amortization expensesrelated to goodwill and other intangible assets, which could materially andadversely affect our profitability. Any acquisition could materially andadversely affect our business and operating results.

 

**Significantcosts to integrate our acquired operations may negatively affect our financialcondition and the market price of our stock.**

 

We will incur costs fromintegrating acquired business operations, products and personnel. These costsmay be significant and may include expenses and other liabilities for employeeredeployment, relocation or severance, combining teams and processes in variousfunctional areas, reorganization or closures of facilities, and relocation ordisposition of excess equipment. The integration costs that we incur maynegatively affect our profitability and the market price of our stock.

 

**Our future growth may depend on ourability to penetrate new domestic and international markets, which could reduceour profitability.**

 

International construction customs, standards,techniques and methods differ from those in the United States. Laws andregulations applicable in new markets may be unfamiliar to us. Compliance maybe substantially more costly than we anticipate. As a result, we may need toredesign products, or invent or design new products, to compete effectively andprofitably in new markets. We expect that we will need significant time, whichmay be years, to generate substantial sales or profits in new markets.

 

Other significant challenges to conducting business inforeign countries include, among other factors, local acceptance of ourproducts, political instability, changes in import and export regulations,changes in tariff and freight rates, fluctuations in foreign exchange rates andcurrency controls. We might not be able to penetrate these markets and anymarket penetration that occurs might not be timely or profitable. If we do notpenetrate these markets within a reasonable time, we will be unable to recouppart or all of the significant investments we will have made in attempting todo so.

 

**Seasons and business cycles affectour operating results.**

 

Our sales are seasonal, with operating results varyingfrom quarter to quarter. With some exceptions, our sales and income havehistorically been lower in the first and fourth quarters than in the second andthird quarters of the year, as customers purchase construction materials in thelate spring and summer months for the construction season. In addition, weatherconditions, such as unseasonably warm, cold or wet weather, which affect, andsometimes delay or

 

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accelerate, installation of some of our products,significantly affect our results of operations. Political and economic eventscan also affect our revenues.

 

We have little control over the timing of customerpurchases. Sales that we anticipate in one quarter may occur in anotherquarter, affecting both quarters’ results. In addition, we incur significantexpenses as we develop, produce and market our products in anticipation offuture orders. We maintain high inventory levels and typically ship orders aswe receive them, so we operate with little backlog. As a result, net sales inany quarter generally depend on orders booked and shipped in that quarter. Asignificant portion of our operating expenses is fixed. Planned expendituresare based primarily on sales forecasts. When sales do not meet ourexpectations, 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 constructionindustry. That industry is subject to significant volatility due to real estatemarket cycles, fluctuations in interest rates, the availability, or lackthereof, of credit to builders and developers, inflation rates, weather, andother factors and trends. None of these factors or trends is within ourcontrol. Declines in commercial and residential construction, such as housingstarts, and remodeling projects have reduced, and in the future can be expectedto reduce, the demand for our products. Negative economic or constructionindustry performance adversely affects our business. Declines in constructionactivity or demand for our products have materially and adversely affected, andcould in the future materially and adversely affect, our sales andprofitability.

 

**Product liability claims and productrecalls could harm our reputation, sales and financial condition.**

 

We design and manufacture most of our standardproducts and expect to continue to do so, although we buy raw materials andsome manufactured products from others. We have on occasion found flaws anddeficiencies in the manufacturing, design or testing of our products. We alsohave on occasion found flaws and deficiencies in raw materials and finishedgoods produced by others. Some flaws and deficiencies have not been apparentuntil after the products were installed by customers.

 

Many of our products are integral to the structuralsoundness or safety of the structures in which they are used. If any flaws ordeficiencies exist in our products and if such flaws or deficiencies are notdiscovered and corrected before our products are incorporated into structures,the structures could be unsafe or could suffer severe damage, such as collapseor fire, and personal injury could result. Errors in the installation of ourproducts, even if the products are free of flaws and deficiencies, could alsocause personal injury and unsafe structural conditions. To the extent that suchdamage or injury is not covered by our product liability insurance and we areheld to be liable, we could be required to correct such damage and tocompensate persons who might have suffered injury, and our reputation, businessand financial condition could be materially and adversely affected.

 

Even if a flaw or deficiency is discovered before anydamage or injury occurs, we may need to recall products, and we may be liablefor any costs necessary to replace recalled products or retrofit the affectedstructures. Any such recall or retrofit could entail substantial costs andadversely affect our reputation, sales and financial condition. We do not carryinsurance against recall costs or the adverse business effect of a recall, andour product liability insurance may not cover retrofit costs.

 

Claims resulting from a natural disaster might be madeagainst us with regard to damage or destruction of structures incorporating ourproducts. Any such claims, if asserted, could materially and adversely affectour business and financial condition.

 

**Complying or failing to comply withenvironmental, health and safety laws and regulations could affect usmaterially and adversely.**

 

We are subject to environmental laws and regulationsgoverning 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 healthand safety matters.

 

Our manufacturing operations involve the use ofsolvents, chemicals, oils and other materials that are regarded as hazardous ortoxic. We also use complex and heavy machinery and equipment that can posesevere safety hazards, especially if not properly and carefully used. Some ofour products also incorporate materials that are hazardous or toxic in someforms, such as zinc and lead used in some steel galvanizing processes andchemicals used in our

 

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acrylic and epoxy anchoring products. The gun powderused in our powder-actuated tools is explosive. Misuse of other materials insome of our products could also cause injury or sickness.

 

If we do not obtain all material licenses and permitsrequired by environmental, health and safety laws and regulations, we may besubject to regulatory action by governmental authorities. If our policies and proceduresdo not comply in all respects with existing environmental, health and safetylaws and regulations, our activities might violate such laws and regulations.Even if our policies and procedures do comply, but our employees fail orneglect to follow them in all respects, we might incur similar liability.Relevant laws and regulations could change or new ones could be adopted thatrequire us to obtain additional licenses and permits and cause us to incursubstantial 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. Wemay need to take remedial action if properties that we occupy are contaminatedby hazardous or toxic substances.

 

Any change in laws or regulations, any legal orregulatory violations, or any contamination, could materially and adverselyaffect our business and financial condition.

 

**New appliance efficiency standardscould materially and adversely affect our operating results and financialcondition.**

 

The Department of Energy regulates energy efficiencyunder the authority of the National Appliance Energy Conservation Act. Underthis Act, the Department of Energy periodically reviews the need for increasedefficiency standards with respect to gas furnaces and gas water heaters. Asubstantial percentage of our Type B Gas Vent sales are for gas furnaces andgas water heaters. The Department of Energy might adopt minimum applianceefficiency standards that negatively affect sales of Type B Gas Vents, whichcould materially and adversely affect our operating results.

 

**We depend on key management andtechnical personnel, the loss of whom could harm our business.**

 

We depend on certain key management and technicalpersonnel, including, among others, Thomas J Fitzmyers, Michael J. Herbert,Phillip “Terry” Kingsfather, Barclay Simpson, Stephen P. Eberhard, Karen W.Colonias and Jeffrey E. Mackenzie. The loss of one or more key employees couldmaterially and adversely affect us.

 

Our success also depends on our ability to attract andretain additional highly qualified technical, marketing and managementpersonnel necessary for the maintenance and expansion of our activities. Weface strong competition for such personnel. We might not be able to attract orretain such personnel. In addition, when we experience periods with little orno profits, a decrease in compensation based on our profits may make itdifficult to attract and retain highly qualified personnel.

 

**Any work stoppage orinterruption by employees could materially and adversely affect our businessand financial condition.**

 

A significant number of our employees are representedby labor unions and are covered by collective bargaining agreements that willexpire in 2011. A work stoppage or interruption by a significant number ofour employees could have a material and adverse effect on our sales andprofitability.

 

**International operations expose us toforeign exchange rate risk.**

 

We have foreign exchange rate risk in ourinternational operations and through purchases from foreign vendors. We do notcurrently hedge this risk. Changes in currency exchange rates could materiallyand adversely affect our sales and profitability.

 

**Natural disasters could decrease ourmanufacturing capacity.**

 

Most of our current and planned manufacturingfacilities are located in geographic regions that have experienced majornatural disasters, such as earthquakes, floods and hurricanes. For example, theearthquakes in Northridge, California, in January 1994, destroyed severalfreeways and numerous buildings in the region in which our facilities in Breaare located. Our disaster recovery plan may not be adequate or effective. We donot carry earthquake

 

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insurance. Other insurance that we carry is limited inthe risks covered and the amount of coverage. Our insurance would not beadequate to cover all of our resulting costs, business interruption and lostprofits when a major natural disaster occurs. A natural disaster rendering oneor more of our manufacturing facilities totally or partially unusable, whetheror not covered by insurance, would materially and adversely affect our businessand financial condition.

 

**Control by our principal stockholderwill prevent other stockholders from influencing management.**

 

Barclay Simpson, the Chairman of our Board ofDirectors, controls approximately 22% of the outstanding shares of our commonstock. Mr. Simpson and Thomas J Fitzmyers, our President and ChiefExecutive Officer (even though he owns less than 1% of the outstanding sharesof our common stock), have substantial influence with respect to the electionof our directors and are also expected to continue to exercise substantialcontrol over some fundamental changes affecting us, such as a merger or sale ofassets or amendment of our Certificate of Incorporation or Bylaws.

 

**Additional financing, if needed, tofund our working capital, growth or acquisitions may not be available onreasonable terms, or at all.**

 

If our cash requirements for working capital or tofund our growth increase to a level that exceeds the amount of cash that wegenerate from operations, or if we should decide to make an acquisition thatrequires more cash than we have available internally and through our currentcredit arrangements, we will need to seek additional resources.  In that event, we may need to enter intoadditional or new borrowing arrangements or consider equity financing.  Additional or new borrowings may not beavailable on reasonable terms, or at all, especially under current conditionsin the financial markets.  Our ability toraise money by selling and issuing shares of our common or preferred stockwould depend on general market conditions and the demand for our stock.  We may be unable to raise adequate capital onreasonable terms by selling stock.  If wesell stock, our existing stockholders could experience substantialdilution.  Our inability to secureadditional financing could prevent the expansion of our business, internallyand through acquisitions.

 

**Any issuance of preferred stock maydilute your investment and reduce funds available for dividends.**

 

Our Board of Directors is authorized by ourCertificate of Incorporation to determine the terms of one or more series ofpreferred stock and to authorize the issuance of shares of any such series onsuch terms as our Board of Directors may approve. Any such issuance could beused to impede an acquisition of our business that our Board of Directors doesnot approve, further dilute the equity investments of holders of our commonstock and reduce funds available for the payment of dividends to holders of ourcommon stock.

 

**Our stock price is likely to bevolatile and could drop.**

 

The trading price of our common stock could be subjectto wide fluctuations in response to period to period variations in operatingresults, changes in earnings estimates by analysts, announcements oftechnological innovations or new products by us or our competitors, generalconditions in the construction and construction materials industries,relatively low trading volume in our common stock and other events or factors.In addition, the stock market is subject to extreme price fluctuations. Thisvolatility has had a substantial effect on the market prices of securitiesissued by many companies for reasons unrelated to the operating performance ofthose companies. Securities market fluctuations may materially and adverselyaffect the market price of our common stock.

 

**Future sales of common stock couldadversely affect our stock price.**

 

Sales of substantial amounts of our common stock inthe public market could adversely affect the prevailing market price for ourcommon stock. All of the outstanding shares of our common stock are freelytradable without restriction under the Securities Act of 1933, other than 10.9million shares held (as of February 23, 2009) by our “affiliates,” as thatterm is defined in Rule 144 under the Securities Act of 1933. Options topurchase 2.2 million shares of our common stock were outstanding as of December 31,2008, including options to purchase 2.0 million shares that were exercisable.If a substantial number of shares were sold in the public market pursuant to Rule 144or on exercise of options, the trading price of our common stock in the publicmarket could be adversely affected.

 

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**Delaware law and our stockholderrights plan contain anti-takeover provisions that could deter takeover attemptsthat might otherwise be beneficial to our stockholders.**

 

Provisions of Delaware law could make it moredifficult for a third party to acquire us, even if doing so could be beneficialto our stockholders. Section 203 of the Delaware General Corporation Lawmay make the acquisition of Simpson Manufacturing Co., Inc. and the removalof incumbent officers and directors more difficult by prohibiting stockholdersholding 15% or more of our outstanding voting stock from acquiring SimpsonManufacturing Co., Inc. without the consent of our Board of Directors forat least three years from the date they first hold 15% or more of the votingstock. Barclay Simpson and his affiliates are not subject to this provision ofDelaware law with respect to their investment in Simpson Manufacturing Co., Inc.In addition, our Stockholder Rights Plan has significant anti-takeover effectsby causing substantial dilution to a person or group that attempts to acquireus on terms not approved by our Board of Directors.

 

**We are subject to a number ofsignificant risks that might cause our actual results to vary materially fromour plans, targets or projections, including:**

 

·                  lack of marketacceptance of new products;

·                  failing todevelop new products with significant market potential;

·                  increased laborcosts, including significant increases in worker’s compensation insurancepremiums and health care benefits;

·                  failing toincrease, or even maintain, net revenues and operating income;

·                  failing toanticipate, appropriately invest in and effectively manage the human,information technology and logistical resources necessary to support the growthof our business, including managing the costs associated with such resources;

·                  failing tointegrate, leverage and generate expected rates of return on investments,including expansion of existing businesses and expansion through acquisitions;

·                  failing togenerate sufficient future positive operating cash flows and, if necessary,secure adequate external financing to fund our growth; and

·                  interruptions inservice by common carriers that ship goods within our distribution channels.

 

**If we change significantly thelocation, nature or extent of some of our manufacturing operations, we mayreduce our net income.**

 

If we decide to change significantly the location,nature or extent of a portion of our manufacturing operations, we may need torecord an impairment of our goodwill. Our goodwill totaled $68.6 million at December 31,2008. Recording an impairment of our goodwill correspondingly reduces our netincome. In 2007, for example, we decided to move part of our Canadian manufacturingoperations to China in 2008 or 2009, and as a result, we recorded a goodwillimpairment of $10.7 million, which materially reduced our net income in 2007.Other changes or events in the future could further impair our recordedgoodwill, which could also materially and adversely affect our profitability.

 

**Impairment charges on goodwill orother intangible assets would adversely affect our financial position andresults of operations.**

 

We are required to perform impairment tests on ourgoodwill and other intangible assets annually or at any time when events occurthat could affect the value of our business segments.  To determine whether a goodwill impairmenthas occurred, we compare fair value of each of our reporting units with itscarrying value.  Significant andunanticipated changes in circumstances, such as significant adverse changes inbusiness climate, adverse actions by regulatory authorities, unanticipatedcompetition, loss of key customers or changes in technology or markets, canrequire a charge for impairment that can materially and adversely affect ourreported net income and our stockholders’ equity.  For example, in 2008, our annual impairmenttest resulted in goodwill impairment charge of $3.0 million associated withassets acquired in England in 1999 as part of our U.K. reporting unit.  Our U.K. reporting unit’s carrying valueexceeded its fair value, primarily due to reduced future expected net cashflows.

 

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**Failure of our internal controlover financial reporting could harm our business and financial results.**

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting. Internal control over financial reporting isa process to provide reasonable assurance regarding the reliability offinancial reporting for external purposes in accordance with accountingprinciples generally accepted in the United States. Internal control overfinancial 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 our consolidated financial  statements would be prevented or detected on a timely basis. |

 

Becauseof the inherent limitations of internal control, our internal control overfinancial reporting might not detect or prevent misstatement of ourconsolidated financial statements. Our growth and entry into new, globallydispersed markets puts significant additional pressure on our system ofinternal control over financial reporting. Failure to maintain an effectivesystem of internal control over financial reporting could limit our ability toreport our financial results accurately and timely or to detect and preventfraud.

 

**Failure of our accounting systems could harm ourbusiness and financial results.**

 

Wehave recently implemented a new commercially available Microsoft third-partyaccounting software system, initially focused on replacing our internallydeveloped general ledger and purchasing and payables systems, for use in ouroperations in the United States and Europe. We are also implementing the fullversion of our enterprise resource planning (“ERP”) system in our operations inAsia and plan to convert our United States and European  operations to our full ERP system over thenext two to three years. Any errors or defects in, or unavailability of,third-party software or our implementation of the systems, could result inerrors in our financial statements, which could materially and adversely affectour business. If we continue to use our other internally developed accountingsystems and they are not able to accommodate our future business needs, or ifwe find that they or any new systems we may implement contain errors ordefects, our business and financial condition could be materially and adverselyaffected.

 

**Our international operations may be materially and adverselyaffected by factors beyond our control.**

 

Economic,social and political conditions, laws, practices and customs vary widely amongthe countries where we  produce or sellour products. Our operations outside of the United States are subject to anumber of risks and potential costs, including, for example, lower profitmargins, less protection of intellectual property and economic, political andsocial uncertainty in some countries, especially in emerging markets. Our salesand profits depend, in part, on our ability to develop and implement policiesand strategies that effectively anticipate and manage these and other risks inthe countries where we do business. These and other risks may have a materialadverse effect on our operations in any particular country and on our businessas a whole. Inflation in emerging markets also makes our products moreexpensive there and increases the market and credit risks to which we areexposed.

 

**Our international operations depend on our successfulmanagement of our subsidiaries outside of the United States.**

 

Weconduct most of our international business through wholly owned subsidiaries.Managing distant subsidiaries and fully integrating them into our business ischallenging. We cannot directly supervise every aspect of the operations of oursubsidiaries operating outside the United States. As a result, we rely on localmanagers and staff. Cultural factors and language differences can result inmisunderstandings among internationally dispersed personnel. The risk thatunauthorized conduct may go undetected may be greater in subsidiaries outsideof the United States. These problems could adversely affect our sales and profits.

 

**Our newmanufacturing facilities in China complicate our inventory management.**

 

Wemaintain manufacturing capability in various parts of the world, in part toallow us to serve our customers with prompt delivery of needed products. Suchcustomer service is a significant factor in our efforts to compete with 

 

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largercompanies that have greater resources than we have. We have recently begun, andplan to expand substantially, our manufacturing in China. Much of the output ofour manufacturing in China is and will be intended for export to other parts ofAsia and elsewhere. Because of the unusually great distances between ourmanufacturing facilities in China and the markets to which the products madethere will be shipped, we may have difficulty providing adequate service to ourcustomers, which may put us at a competitive disadvantage. Our attempts toprovide prompt delivery may necessitate that in China we produce and keep onhand substantially more inventory of finished products than would otherwise beneeded. Inventory increases can materially and adversely affect our margins,cash flow and net income.

 

**If we fail to keep pace with advances in our industry or failto persuade customers to adopt new products we introduce, customers may not buyour products, which would adversely affect our sales and profits.**

 

Constantdevelopment of new technologies and techniques, frequent new productintroductions and strong price competition characterize the constructionindustry. The first company to introduce a new product or technique to themarket gains a competitive advantage. Our future growth depends, in part, onour ability to develop products that are more effective, safer, or incorporateemerging technologies better than our competitors’ products. Sales of ourexisting products may decline rapidly if a competitor were to introducesuperior products, or even if we announce a new product of our own. If we failto make sufficient investments in research and development or if we focus ontechnologies that do not lead to better products, our current and plannedproducts could be surpassed by more effective or advanced products. If we failto manufacture our products economically and market them successfully, oursales and profits would be materially and adversely affected.

 

**Changes in accounting standards could materially andadversely affect our financial results.**

 

Theaccounting rules applicable to public companies are subject to frequentrevision. Future changes in accounting standards and interpretations couldrequire us to change the way we calculate revenue, expense or balance sheetamounts, which could result in material and adverse change to our reportedresults of operations or financial condition.

 

**Global warming could materially and adversely affect ourbusiness.**

 

Scientificreports indicate that, as a result of human activity:

 
| · | temperatures  around the world have been increasing and are likely to continue to increase  as a result of increasing atmospheric concentrations of carbon dioxide and  other carbon compounds, |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | the frequency  and severity of storms, and flooding, are likely to increase,                                                                                                                    |
| · | severe weather  is likely to occur in places where the climate has historically been more  mild, and                                                                                            |
| · | average sea  levels have risen and are likely to rise more, threatening worldwide coastal  development.                                                                                         |

 

Wecannot predict the effects that these phenomena may have on our business. Theymight, for example:

 
| · | depress or  reverse economic development,                                                                   |
|--------|-------------------------------------------------------------------------------------------------------------|
| · | reduce the  demand for construction,                                                                        |
| · | increase the  cost and reduce the availability of fresh water,                                              |
| · | destroy forests,  increasing the cost and reducing the availability of wood products used in  construction, |
| · | increase the  cost and reduce the availability of raw materials and energy,                                 |
| · | increase the  cost of capital,                                                                              |
| · | increase the  cost and reduce the availability of insurance covering damage from natural  disasters, and    |
| · | lead to new laws  and regulations that increase our expenses and reduce our sales.                          |

 

Any ofthese consequences, and other consequences of global warming that we do notforesee, could materially and adversely affect our sales, profits and financialcondition.

 

**We are subject to international tax laws that could affectour financial results.**

 

Weconduct international operations through our subsidiaries. Tax laws affectinginternational operations are complex and subject to change. Our income taxliabilities in the different countries where we operate depend in part oninternal settlement prices and administrative charges among us and oursubsidiaries. These arrangements require us to make judgments with which taxauthorities may disagree. Tax authorities may impose additional taxes, 

 

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penaltiesand interest on us. In addition, transactions that we have arranged in light ofcurrent tax rules could have material and adverse consequences if tax rules change.

 

**If we are unable to protect our information systems againstdata corruption, cyber-based attacks or network security breaches, our operationscould be disrupted.**

 

We depend on informationtechnology networks and systems, including the Internet, to process, transmitand store electronic information. We depend on our information technologyinfrastructure for electronic communications among our locations around theworld and between our personnel and our subsidiaries, customers and suppliers.Security breaches of this infrastructure could create system disruptions,shutdowns or unauthorized disclosure of confidential information. Security breachescould disrupt our operations, and we could suffer financial damage or lossbecause of lost or misappropriated information.

 

**Item 1B. Unresolved Staff Comments.**

 

None.

 

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**Item 2.Properties.**

 

TheCompany maintains its home office in Pleasanton, California, and other offices,manufacturing and warehouse facilities elsewhere in California and in Texas,Ohio, Florida, Mississippi, Illinois, Connecticut, Washington, Tennessee,Minnesota, North Carolina, Oregon, Massachusetts, Maryland, New York,Australia, British Columbia, Ontario, England, Scotland, Ireland, France,Denmark, Germany, Poland, Czech Republic, China and Hong Kong. As of February 27,2009, the Company’s facilities were as follows:

 

 
|                       | ** ** | **Approximate** |   |          |   |       |       |        |       |                                          |       |
|----------------------------|------------|-----------------|--------|---------------|--------|------------|------------|-------------|------------|-----------------------------------------------|------------|
|                       | ** ** | **Square**      |   | **Owned  or** |   | ** ** | ** ** | **Lease**   | ** ** | **Segment**                                   | ** ** |
| **Location**               | ** ** | **Footage**     |   | **Leased**    |   | **Lessee** | ** ** | **Expires** | ** ** | **and  Function**                             | ** ** |
|                       |       |            |   |          |   |       |       |        |       |                                          |       |
| Pleasanton, California     |       | 89,000          |   | Owned         |   |       |       |        |       | Company Office,  SST Research and Development |       |
| Stockton, California       |       | 802,000         |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Stockton, California       |       | 25,000          |   | Owned         |   |       |       |        |       | SST Research and Development                  |       |
| San Leandro, California    |       | 47,100          |   | Owned (1)     |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| San Leandro, California    |       | 71,000          |   | Owned (1)     |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| San Leandro, California    |       | 57,000          |   | Owned (1)     |   |       |       |        |       | SST Manufacturing and Warehouse               |       |
| San Leandro, California    |       | 27,000          |   | Owned (1)     |   |       |       |        |       | SST Manufacturing and Warehouse               |       |
| Brea, California           |       | 50,700          |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Brea, California           |       | 78,000          |   | Owned         |   |       |       |        |       | SST Office and Warehouse                      |       |
| Brea, California           |       | 30,500          |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Brea, California           |       | 42,900          |   | Owned         |   |       |       |        |       | SST Warehouse                                 |       |
| Brea, California           |       | 19,200          |   | Owned         |   |       |       |        |       | SST Warehouse                                 |       |
| Brea, California           |       | 20,000          |   | Owned         |   |       |       |        |       | SST Warehouse                                 |       |
| Ontario, California        |       | 181,000         |   | Leased        |   | SST        |       | 2009        |       | SST Office and Warehouse                      |       |
| McKinney, Texas            |       | 317,000         |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Columbus, Ohio             |       | 300,500         |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Jacksonville, Florida      |       | 112,000         |   | Leased        |   | SST        |       | 2011        |       | SST Office and Warehouse                      |       |
| High Point, North Carolina |       | 50,150          |   | Leased        |   | SST        |       | 2011        |       | SST Office and Warehouse                      |       |
| Addison, Illinois          |       | 52,400          |   | Leased        |   | SST        |       | 2013        |       | SST Office,  Manufacturing and Warehouse      |       |
| Enfield, Connecticut       |       | 55,100          |   | Leased        |   | SST        |       | 2013        |       | SST Office and Warehouse                      |       |
| Kent, Washington           |       | 28,800          |   | Leased        |   | SST        |       | 2012        |       | SST Office,  Manufacturing and Warehouse      |       |
| Visalia, California        |       | 92,000          |   | Owned         |   |       |       |        |       | SST Office,  Manufacturing and Warehouse      |       |
| Eagan, Minnesota           |       | 54,000          |   | Leased        |   | SST        |       | 2011        |       | SST & SDV Office and Warehouse       |       |
| Jessup, Maryland           |       | 39,600          |   | Leased        |   | SST        |       | 2013        |       | SST Office and Warehouse                      |       |
| Tamworth, England          |       | 78,100          |   | Leased        |   | SST (2)    |       | 2012        |       | SST Office,  Manufacturing and Warehouse      |       |
| Tamworth, England          |       | 30,000          |   | Leased        |   | SST (2)    |       | 2012        |       | SST Office,  Research and Development         |       |
| Livingston, Scotland       |       | 2,800           |   | Leased        |   | SST (2)    |       | 2009        |       | SST Warehouse                                 |       |

 

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|                           | ** ** | **Approximate** |   |          |   |       |       |        |       |                                                    |       |
|--------------------------------|------------|-----------------|--------|---------------|--------|------------|------------|-------------|------------|---------------------------------------------------------|------------|
|                           | ** ** | **Square**      |   | **Owned  or** |   | ** ** | ** ** | **Lease**   | ** ** | **Segment**                                             | ** ** |
| **Location**                   | ** ** | **Footage**     |   | **Leased**    |   | **Lessee** | ** ** | **Expires** | ** ** | **and  Function**                                       | ** ** |
|                           |       |            |   |          |   |       |       |        |       |                                                    |       |
| Vacaville,  California         |       | 159,000         |   | Owned         |   |       |       |        |       | SDV Office, Manufacturing and Warehouse                 |       |
| Vacaville,  California         |       | 120,300         |   | Owned         |   |       |       |        |       | SDV Office, Manufacturing and Warehouse                 |       |
| Vicksburg,  Mississippi        |       | 302,000         |   | Owned (3)     |   |       |       |        |       | SDV Office, Manufacturing and Warehouse                 |       |
| Gallatin,  Tennessee           |       | 48,000          |   | Leased        |   | SST        |       | 2009        |       | SST Office, Manufacturing and Warehouse                 |       |
| Gallatin,  Tennessee           |       | 194,000         |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Maple Ridge,  British Columbia |       | 36,400          |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Maple Ridge, British  Columbia |       | 2,300           |   | Leased        |   | SST (4)    |       | 2009        |       | SST Warehouse                                           |       |
| Maple Ridge, British  Columbia |       | 2,400           |   | Leased        |   | SST (4)    |       | 2009        |       | SST Warehouse                                           |       |
| Langley, British  Columbia     |       | 19,700          |   | Leased        |   | SST (4)    |       | 2010        |       | SST Warehouse                                           |       |
| Brampton,  Ontario             |       | 158,000         |   | Leased        |   | SST (4)    |       | 2009        |       | SST & SDV Office, Manufacturing and  Warehouse |       |
| Odder, Denmark                 |       | 162,500         |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Warsaw, Poland                 |       | 8,300           |   | Leased        |   | SST (5)    |       | 2009        |       | SST Office and  Warehouse                               |       |
| St. Gemme La  Plaine, France   |       | 99,000          |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Blacktown, NSW,  Australia     |       | 9,800           |   | Leased        |   | SST (6)    |       | 2011        |       | SST Warehouse                                           |       |
| Mulgrave, NSW,  Australia      |       | 700             |   | Leased        |   | SST (6)    |       | 2011        |       | Office                                                  |       |
| Frankfurt,  Germany            |       | 42,100          |   | Leased        |   | SST (7)    |       | 2011        |       | SST Office and  Warehouse                               |       |
| Hong Kong, China               |       | 3,500           |   | Leased        |   | SST (8)    |       | 2010        |       | SST Office                                              |       |
| Beijing, China                 |       | 2,300           |   | Leased        |   | SST (9)    |       | 2009        |       | SST Office                                              |       |
| Shanghai, China                |       | 1,400           |   | Leased        |   | SST (9)    |       | 2010        |       | SST Office                                              |       |
| Baltimore,  Maryland           |       | 60,750          |   | Leased        |   | SST        |       | 2012        |       | SST Office, Manufacturing and Warehouse                 |       |
| Portland, Oregon               |       | 5,000           |   | Leased        |   | SST        |       | 2010        |       | SST Warehouse                                           |       |
| Canton,  Massachusetts         |       | 5,000           |   | Leased        |   | SST        |       | 2010        |       | SST Warehouse                                           |       |
| Albany, New York               |       | 64,400          |   | Leased        |   | SDV        |       | 2013        |       | SDV Office, Manufacturing and Warehouse                 |       |
| Kilorglin,  Ireland            |       | 46,300          |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Hungen, Germany                |       | 26,400          |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Pfungstad,  Germany            |       | 20,100          |   | Leased        |   | SST (10)   |       | 2009        |       | SST Office and  Warehouse                               |       |
| Havlikuv Brod,  Czech Republic |       | 17,200          |   | Owned         |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |
| Kunshan, China                 |       | 26,900          |   | Leased        |   | SST (11)   |       | 2009        |       | SST Office, Manufacturing and Warehouse                 |       |
| Zhangjiagang, China            |       | 175,000         |   | Owned (12)    |   |       |       |        |       | SST Office, Manufacturing and Warehouse                 |       |

 

----

| (1) | The Company has  classified its facilities in San Leandro, California, as assets held for sale  and intends to sell this property in 2009.                                                                                                                                                                          |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Lessee is  Simpson Strong-Tie International, Inc., a wholly-owned subsidiary of  SST.                                                                                                                                                                                                                          |
| (3) | The Company  intends to sell its facility in Vicksburg, Mississippi, and will close it at  that time. On the sale of the Vicksburg facility, if it is sold below its  carrying value, the Company will record an impairment charge equal to the  amount by which its carrying value exceeds its net realized value. |

 

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| (4)  | Lessee is  Simpson Strong-Tie Canada, Ltd., a wholly-owned subsidiary of SST.                                    |
|------|------------------------------------------------------------------------------------------------------------------|
| (5)  | Lessee is ****Simpson Strong-Tie  Sp.z,o.o.****, a wholly-owned subsidiary of SST.                               |
| (6)  | Lessee is  Simpson Strong-Tie Australia Pty. Ltd., a wholly-owned subsidiary of SST.                             |
| (7)  | Lessee is  Simpson Strong-Tie GmbH, a wholly-owned subsidiary of SST.                                            |
| (8)  | Lessee is  Simpson Strong-Tie Asia Limited, a wholly-owned subsidiary of SST.                                    |
| (9)  | Lessee is  Simpson Strong-Tie (Beijing) Company Limited, a wholly owned subsidiary of  SST.                      |
| (10) | Lessee is  Simpson Strong-Tie Ireland Limited, a wholly-owned subsidiary of SST.                                 |
| (11) | Lessee is Ahorn  Pacific Fasteners (Kunshan), a wholly-owned subsidiary of SST.                                  |
| (12) | The Company is  constructing a new manufacturing facility in Zhangjiagang, China, to be completed in early 2009. |

 

The Company’smanufacturing facilities are equipped with specialized equipment and useextensive automation. The Company considers its existing and planned facilitiesto be suitable and adequate for its operations as currently conducted and asplanned through 2009. The manufacturing facilities currently are being operatedwith one full shift. The Company anticipates that it may require additionalfacilities to accommodate possible future growth.

 

**Item 3. Legal Proceedings.**

 

From time to time, the Company is involved in litigationthat it considers to be in the normal course of its business. No suchlitigation within the last five years resulted in any material loss. TheCompany is not engaged in any legal proceedings as of the date hereof, whichthe Company expects individually or in the aggregate to have a material adverseeffect on the Company’s financial condition, cash flows or results ofoperations.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders.**

 

No matters were submitted to a vote of security holdersduring the fourth quarter of the fiscal year covered by this report.

 

##### **PART II**

##### ** **

**Item 5. Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

The Company’s common stock islisted on the New York Stock Exchange (“NYSE”) under the symbol “SSD.”  The following table shows the range of high andlow closing sale prices per share of the common stock as reported by the NYSEand dividends paid per share of common stock for the calendar quarters indicated:

 
| ** **  | ** ** | **Market Price** | ** ** | **Dividends** | ** ** |
|-------------|------------|------------------|------------|---------------|------------|
| **Quarter** | ** ** | **High**         | ** ** | **Low**       | ** ** | **Paid** | ** ** |
| **2008**    |       |             |       |          |       |   |   |
| Fourth      |       | $                | 29.23      |          | $          | 19.70 |   | $ | 0.10 |   |
| Third       |       | 31.90            |       | 20.72         |       | 0.10 |   |
| Second      |       | 28.25            |       | 23.26         |       | 0.10 |   |
| First       |       | 28.43            |       | 22.97         |       | 0.10 |   |
| **2007**    |       |             |       |          |       |   |   |
| Fourth      |       | $                | 33.55      |          | $          | 25.59 |   | $ | 0.10 |   |
| Third       |       | 37.15            |       | 28.78         |       | 0.10 |   |
| Second      |       | 33.88            |       | 31.16         |       | 0.10 |   |
| First       |       | 35.58            |       | 29.49         |       | 0.08 |   |

 

The Company estimates that as of February 23, 2009,approximately 48,000 persons beneficially owned shares of the Company’s commonstock either directly or through nominees.

 

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In February 2009, the Company’s Board of Directorsdeclared a dividend of $0.10 per share to be paid on April 24, 2009, tostockholders of record on April 3, 2009. The Company began declaringquarterly dividends of $0.05 per common share in January 2004. Futuredividends, if any, will be determined by the Company’s Board of Directors,based on the Company’s earnings, cash flows, financial condition and otherfactors deemed relevant by the Board of Directors.

 

In December 2008, the Board of Directors authorized theCompany to repurchase up to $50.0 million of the Company’s common stock. The authorizationwill remain in effect through the end of 2009. This replaces the $50.0 millionrepurchase authorization from December 2007. The Company did notrepurchase any shares in 2008. In February 2007, the Company repurchased122,500 shares of its common stock for $4.2 million, which the Company retiredin March 2007, with the excess over the par value of the repurchasedshares recorded against retained earnings. During 2006, the Company repurchased500,000 shares of its common stock for $17.2 million, which the Company retiredin June 2006, with the excess over the par value of the repurchased sharesrecorded against retained earnings. The Company did not repurchase any sharesin 2005.

 

The followingtable sets forth certain information as of December 31, 2008, concerning (a) allequity compensation plans of the Company previously approved by thestockholders and (b) all equity compensation plans of the Company notpreviously approved by the stockholders.

 
| ** **                                              | ** ** | **(a)**                        | ** ** | **(b)**                        | ** ** | **(c)**                      | ** ** |
|---------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                              | ** ** | ** **                     | ** ** | ** **                     | ** ** | **Number of**                | ** ** |
| ** **                                              | ** ** | ** **                     | ** ** | ** **                     | ** ** | **securities remaining**     | ** ** |
| ** **                                              | ** ** | **Number of securities**       | ** ** | ** **                     | ** ** | **available for future**     | ** ** |
| ** **                                              | ** ** | **to be issued**               | ** ** | **Weighted-average**           | ** ** | **issuance under equity**    | ** ** |
| ** **                                              | ** ** | **upon exercise of**           | ** ** | **exercise price of**          | ** ** | **compensation plans**       | ** ** |
| ** **                                              | ** ** | **outstanding options,**       | ** ** | **outstanding options,**       | ** ** | **(excluding securities**    | ** ** |
| **Plan Category**                                       | ** ** | **warrants & rights** | ** ** | **warrants & rights** | ** ** | **reflected in column (a))** | ** ** |
|                                                    |       |                           |       |                           |       |                         |       |
| Equity  compensation plans approved by stockholders     |       | 2,249,516                      | (1)        | $                              | 29.70      |                         | 7,233,989  | (2) |
|                                                    |       |                           |       |                           |       |                         |       |
| Equity  compensation plans not approved by stockholders |       | 0                              |       | N/A                            |       | 94,200                       | (3)        |
|                                                    |       |                           |       |                           |       |                         |       |   |
| Total                                                   |       | 2,249,516                      |       | $                              | 29.70      |                         | 7,328,189  |   |

 

----

| (1) | Excludes  an additional 53,000 shares subject to options granted under the Company’s  1994 Stock Option Plan on February 4, 2009, and February 23, 2009.                                                                                                                                                             |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Reflects  53,000 shares subject to options granted under the Company’s 1994 Stock  Option Plan on February 4, 2009, and February 23, 2009.                                                                                                                                                                           |
| (3) | Excludes  an additional 10,700 shares issued on January 2, 2009, under the  Company’s 1994 Employee Stock Bonus Plan. As of December 31, 2008, the  Company had reserved 200,000 shares of common stock for issuance as bonuses  under the 1994 Employee Stock Bonus Plan, of which 105,800 shares had been  issued. |

 

In accordance with section 303A.12(a) of the New YorkStock Exchange Listed Company Manual, the Company’s Chief Executive Officersubmitted to the NYSE an unqualified certification. In addition, the Companyfiled as Exhibit 31 to its Annual Report on Form 10-K for the yearended December 31, 2007, the Sarbanes-Oxley Act of 2002 Section 302certification regarding the quality of the Company’s public disclosure.

 

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**Company Stock Price Performance**

 

The graph below compares the cumulative total stockholderreturn on the Company’s common stock from December 31, 2003, through December 31,2008, with the cumulative total return on the S & P 500 Index and theDow Jones Building Materials Index over the same period (assuming theinvestment of $100 in the Company’s common stock and in each of the indices on December 31,2003, and reinvestment of all dividends).

 

**COMPARISON OF 5 YEAR CUMULATIVETOTAL RETURN***

Among SimpsonManufacturing Co., Inc., The S&P 500 Index

And The Dow Jones USBuilding Materials & Fixtures Index

 

 

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*$100 invested on 12/31/03 in stock &index-including reinvestment of dividends. Fiscal year ended December 31.

 

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**Item6. Selected Financial Data.**

 

The following table sets forth selected consolidatedfinancial information with respect to the Company for each of the five yearsended December  31, 2008, 2007, 2006,2005 and 2004 (presented in thousands, except per share amounts), derived fromthe audited Consolidated Financial Statements of the Company, the most recentthree years of which appear elsewhere herein. The Company adopted Financial   Accounting Standards   Board (“FASB”)   Interpretation No.  48, “Accounting for   Uncertainty in   Income Taxes, an interpretation of FASBStatement No.  109”   (“FIN   48”), on January  1, 2007. The presentation of the informationin the tables below complies with the accounting pronouncements, but is notnecessarily comparable with prior years. These results include acquired companyresults of operations beginning on the dates of acquisition. For a summary ofrecent acquisitions, see “Note  2  – Acquisitions” to the consolidated financialstatements included herein. The data presented below should be read inconjunction with the Consolidated Financial Statements and related Notesthereto and “Item 7 – Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere herein.

 
| ** **                                              | ** ** | **Years  Ended December  31,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                              | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statement  of Operations Data:**                      |       |                                |       |   |   |   |   |   |   |   |   |
| Net sales                                               |       | $                                   | 756,499    |   | $ | 816,988 |   | $ | 863,180 |   | $ | 846,256 |   | $ | 698,053 |   |
| Cost of sales                                           |       | 474,190                             |       | 511,499 |   | 517,885 |   | 515,420 |   | 404,388 |   |
| Gross profit                                            |       | 282,309                             |       | 305,489 |   | 345,295 |   | 330,836 |   | 293,665 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Research and  development and other engineering expense |       | 21,327                              |       | 20,115 |   | 19,254 |   | 14,573 |   | 13,029 |   |
| Selling expense                                         |       | 80,703                              |       | 75,954 |   | 72,199 |   | 64,317 |   | 58,869 |   |
| General and  administrative expense                     |       | 89,897                              |       | 88,618 |   | 91,975 |   | 100,261 |   | 90,959 |   |
| Impairment of  goodwill                                 |       | 2,964                               |       | 10,666 |   | — |   | — |   | — |   |
| Loss (gain) on  sale of assets                          |       | (124                                | )          | (713 | ) | 457 |   | (2,044 | ) | (409 | ) |
| Income from  operations                                 |       | 87,542                              |       | 110,849 |   | 161,410 |   | 153,729 |   | 131,217 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Income (loss) in  equity method investment, before tax  |       | (486                                | )          | (33 | ) | (97 | ) | 284 |   | — |   |
| Interest income,  net                                   |       | 2,596                               |       | 5,759 |   | 3,719 |   | 1,551 |   | 385 |   |
| Income before  income taxes                             |       | 89,652                              |       | 116,575 |   | 165,032 |   | 155,564 |   | 131,602 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Provision for  income taxes                             |       | 35,718                              |       | 47,833 |   | 62,370 |   | 57,170 |   | 50,094 |   |
| Minority  interest                                      |       | —                              |       | — |   | 166 |   | — |   | — |   |
| Net income                                              |       | $                                   | 53,934     |   | $ | 68,742 |   | $ | 102,496 |   | $ | 98,394 |   | $ | 81,508 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Basic net income  per share of common stock             |       | $                                   | 1.11       |   | $ | 1.42 |   | $ | 2.12 |   | $ | 2.05 |   | $ | 1.70 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Diluted net  income per share of common stock           |       | $                                   | 1.10       |   | $ | 1.40 |   | $ | 2.10 |   | $ | 2.02 |   | $ | 1.67 |   |
|                                                    |       |                                |       |   |   |   |   |   |   |   |   |
| Cash dividends  declared per share of common stock      |       | $                                   | 0.40       |   | $ | 0.40 |   | $ | 0.32 |   | $ | 0.23 |   | $ | 0.20 |   |

 
| ** **                                                    | ** ** | **December 31,** |       |
|---------------------------------------------------------------|------------|------------------|------------|
| ** **                                                    | ** ** | **2008**         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** |   |
| ** **                                                    | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| **Balance  Sheet Data:**                                      |       |             |       |   |   |   |   |   |   |   |   |
| Working capital                                               |       | $                | 455,703    |   | $ | 438,538 |   | $ | 399,082 |   | $ | 342,496 |   | $ | 268,711 |   |
| Property, plant  and equipment, net                           |       | 193,318          |       | 198,117 |   | 197,180 |   | 166,480 |   | 137,609 |   |
| Total assets                                                  |       | 830,200          |       | 817,679 |   | 735,334 |   | 659,715 |   | 545,137 |   |
| Line of credit  and long-term debt, including current portion |       | 26               |       | 1,029 |   | 665 |   | 5,114 |   | 2,976 |   |
| Total  liabilities                                            |       | 81,174           |       | 94,279 |   | 82,459 |   | 96,249 |   | 82,212 |   |
| Minority  interest in consolidated VIEs                       |       | —           |       | — |   | — |   | 5,337 |   | — |   |
| Total  stockholders’ equity                              |       | 749,026          |       | 723,400 |   | 652,875 |   | 558,129 |   | 462,925 |   |
|                                                               |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

*This document containsforward-looking statements, based on numerous assumptions and subject to risksand uncertainties. Although the Company believes that the forward-lookingstatements are reasonable, it does not and cannot give any assurance that itsbeliefs and expectations will prove to be correct. Many factors could significantlyaffect the Company’s operations and cause the Company’s actual results to besubstantially different from the Company’s expectations. See “Item 1A - RiskFactors.” Actual results might differ materially from results suggested by anyforward-looking statements in this report. The Company does not have anobligation to publicly update any forward-looking statements, whether as aresult of the receipt of new information, the occurrence of future events orotherwise.*

 

The following is a discussion and analysis of theconsolidated financial condition and results of operations for the Company forthe years ended December  31, 2008, 2007and 2006, and of certain factors that may affect the Company’s prospectivefinancial condition and results of operations. The following should be read inconjunction with the Consolidated Financial Statements and related Notesappearing elsewhere herein.

 

**Overview**

 

The Company’s net sales decreased to $756.5 million in2008 from $863.2 million in 2006, reflecting slower homebuilding activity. Netsales decreased in 2008 from 2006 in all regions of the United States with theexception of the northeast, with above average rates of decline in Californiaand the western and southeastern portions of the country, and net sales to homecenters decreased over the same period. Expansion into international marketshelped to offset in part the sales decline in the United States over the lastthree years. Sales outside of the United States have increased significantly,due in part to the acquisitions of:

 

·                  Certain assetsof Liebig International Ltd., an Irish company, Heinrich Liebig StahldübelwerkeGmbH, Liebig GmbH  & Co. KG andLiebig International Verwaltungsgesellschaft GmbH, all German companies, LiebigBolts Limited, an English company, and Liebig International Inc., a Virginiacorporation (collectively “Liebig”) in April 2008, and

·                  Ahorn-Geräte  & Werkzeuge Vertriebs GmbH, a Germancompany, and its subsidiaries Ahorn Upevnovaci Technika s.r.o., a Czechcompany, and Ahorn Pacific Fasteners (Kunshan) Co., Ltd., a Chinese company(collectively “Ahorn”) in July  2008.

 

Gross profit margin decreased to 37.3% in 2008 from40.0% in 2006 primarily due to increased costs of steel and other materials, ahigher proportion of fixed overhead costs and higher distribution costs, partlyoffset by reduced labor costs.

 

In recent years, home centers have been one of theCompany’s fastest growing distribution channels. A large part of that growthwas sales to The Home Depot, which exceeded 10% of the Company’s consolidatednet sales in the years ended December  31,2007, and 2006, but not in the year ended December  31, 2008. (see “Item 1A – Risk Factors” andNote 14 to the Company’s Consolidated Financial Statements). Consolidation ofretailers and distributors has occurred over time. While the consolidation ofthese large retailers and distributors provides the Company with opportunitiesfor growth, the increasing size and importance of individual customers exposesSimpson Strong-Tie to potential over-dependence. The loss of any of the largerhome centers and distributors as customers would have a material adverse effecton SST, unless and until either such customers are replaced or SST makes thenecessary adjustments (if possible) to compensate for the loss of business.

 

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** **

**Results of Operations**

 

The following table sets forth, for the yearsindicated, the percentage of net sales of certain items in the Company’sConsolidated Statements of Operations.

 
| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                       |       | 100.0                                       | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                   |       | 62.7                                        | %          | 62.6 | % | 60.0 | % |
| Gross profit                                    |       | 37.3                                        | %          | 37.4 | % | 40.0 | % |
| Research and  development and other engineering |       | 2.8                                         | %          | 2.5 | % | 2.2 | % |
| Selling expense                                 |       | 10.7                                        | %          | 9.3 | % | 8.4 | % |
| General and  administrative expense             |       | 11.9                                        | %          | 10.8 | % | 10.7 | % |
| Impairment of  goodwill                         |       | 0.4                                         | %          | 1.3 | % | — |   |
| Loss (gain) on  sale of assets                  |       | —                                      |       | (0.1 | )% | — |   |
| Income from operations                          |       | 11.5                                        | %          | 13.6 | % | 18.7 | % |
| Income (loss) in  equity method Investment      |       | (0.1                                        | )%         | — |   | — |   |
| Interest income,  net                           |       | 0.4                                         | %          | 0.7 | % | 0.4 | % |
| Income before  income taxes                     |       | 11.8                                        | %          | 14.3 | % | 19.1 | % |
| Provision for  income taxes                     |       | 4.7                                         | %          | 5.9 | % | 7.2 | % |
| Net income                                      |       | 7.1                                         | %          | 8.4 | % | 11.9 | % |

 

In December  2008,the Board of Directors authorized the Company to repurchase up to $50.0 millionof the Company’s common stock. The authorization will remain in effect throughthe end of 2009. This replaced the $50.0 million repurchase authorization from December  2007. The Company made no repurchases during2008. In February  2007, the Companyrepurchased 122,500 shares of its common stock for $4.2 million, which theCompany retired in March  2007. During2006, the Company purchased 500,000 shares of its common stock for $17.2million, which the Company retired in June 2006.

 

**Comparison of the Years Ended December  31, 2008 and 2007**

 

*Net Sales*

 

In 2008, net sales decreased 7.4% to $756.5 millioncompared to net sales of $817.0 million for 2007. In 2008, sales declinedthroughout the United States, with the exception of the northeastern region ofthe country. California and the western states had the largest decrease insales. Sales during the year in continental Europe, Canada and Asia increased,while sales were down in the United Kingdom. Simpson Strong-Tie’s sales tocontractor distributors had the largest percentage rate decrease and sales todealer distributors and home centers also decreased. Reflecting thedeterioration of construction markets and economic conditions generally, salesdecreased across all of Simpson Strong-Tie’s major product lines, particularlythose used in new home construction. Sales of the Swan Secure product line,acquired in July  2007, accounted forslightly more than 4% of Simpson Strong-Tie’s 2008 sales. Anchor Systems sales,while down slightly, benefited from the acquisition of the Liebig companies aswell as Simpson Strong-Tie’s increasing presence in Asia and the Middle East.Sales of Simpson Dura-Vent’s pellet vent, chimney, special gas vent andrelining products increased, a significant portion of the increase havingresulted from the ProTech acquisition. Sales of SDV’s Direct-Vent and gas ventproduct lines decreased as a result of several factors, including the continuingweakness in new home construction.

 

*Gross Profit*

 

Gross profit decreased 7.6% from $305.5 million in2007 to $282.3 million in 2008. As a percentage of net sales, gross profitdecreased slightly to 37.3% in 2008 from 37.4% in 2007. The decrease in grossmargins was primarily due to higher distribution costs, partly offset by lowermanufacturing costs. The Company continues to face uncertainty in the cost andavailability of steel. Several factors are contributing to this uncertainty.Steel prices have declined from their peak in July  2008, but management believes that they mayhave reached bottom and does not expect them to decrease further for thebalance of the first quarter of 2009. The steel market continues to be dynamic,however, with a high degree of uncertainty about future pricing trends. Demandfor steel has recently declined due to the weakening of the global economy andtightening of financial credit markets. If steel prices

 

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increase and the Company is not able to maintain itsprices or increase them sufficiently, the Company’s margins could deterioratefurther.

 

*Selling Expense*

 

Selling expenses increased 6.3% from $76.0 million in2007 to $80.7 million in 2008. The increase was driven primarily by an increasein expenses associated with sales and marketing personnel of $7.4 million,including those at businesses acquired since July  2007. This increase was partly offset bydecreases in promotional expenses of $1.6 million and donations of $0.5million, primarily related to the gift made to Habitat for HumanityInternational,  Inc. in 2007.

 

*General and Administrative Expense*

 

General and administrative expenses increased 1.4%from $88.6 million in 2007 to $89.9 million in 2008. The major components ofthe increase were increases in administrative personnel expenses of $8.5million, including those at businesses acquired since July  2007, increased legal and professionalservice expenses of $2.8 million, higher amortization expense of $1.9 millionand higher bad debt expense of $1.7 million. These increases were mostly offsetby a decrease in cash profit sharing of $14.2 million, resulting primarily fromdecreased operating profit. The Company believes that the pre-tax stock optionexpense for 2009 will be $1.7 million related to stock options granted during2006, 2007, 2008 and through February  2009.

 

*Impairment of Goodwill*

 

Impairment of goodwill decreased 72.2% from $10.7million in 2007 to $3.0 million in 2008. The impairment charge taken in 2008,which was a result of the Company’s annual impairment test in the fourthquarter of 2008, was associated with assets that were acquired in England in1999 and is associated with the Company’s U.K. reporting unit. The reportingunit’s carrying value exceeded the fair value, primarily due to reduced futureexpected net cash flows. In 2007, the Company recorded a goodwill impairmentcharge of $10.7 million, primarily as a result of decreased expected futurecash flows from its Canadian unit that resulted from the move of productionfrom Canada to China. The method to determine the fair value of the U.K.reporting unit was a discounted cash flow model. The method to determine thefair value of the Canadian reporting unit was a discounted cash flow modelsupported by market approaches, which were based on earnings multiples realizedby similar public companies and on representative merger and acquisition transactionsof a similar nature and industry. These reporting units are associated with theconnector products segment. See “Critical Accounting Policies and Estimates – *Goodwill Impairment Testing*.”

 

*Interest Income and Expense*

 

Interest income is generated on the Company’s cash andcash equivalents balances. Interest income decreased primarily as a result oflower interest rates. Interest expense includes interest, account maintenancefees and bank charges.

 

*Provision for Income Taxes*

 

The effective tax rate was 39.8% in 2008, down from   41.0  %in 2007. The decrease  in the effectivetax rate was caused primarily by the decrease of the impairment of goodwillcharge taken in the fourth quarter of 2007, the majority of which was notdeductible for tax purposes.

 

***Connector Products –Simpson Strong-Tie (SST)***

 

Simpson Strong-Tie’s income from operations decreased19.9% from $114.4 million in 2007 to $91.6 million in 2008.

 

*Net Sales*

 

In 2008, Simpson Strong-Tie’s net sales decreased 9.2%from $745.7 million in 2007 to $676.7 million in 2008. SST accounted for 89.5%of the Company’s total net sales in 2008, a decrease from 91.3% in 2007. Thedecrease in net sales at SST resulted from a decrease in sales volume, partlyoffset by an increase in average prices of 8.3%. In 2008, sales declinedthroughout the United States, with the exception of the northeastern region ofthe country,

 

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which increased slightly. California and the westernstates had the largest decrease in sales. Sales during the year in continentalEurope, Canada and Asia increased, while sales were down in the United Kingdom.Simpson Strong-Tie’s sales to contractor distributors had the largestpercentage rate decrease and sales to dealer distributors and home centers alsodecreased. Reflecting the deterioration of construction markets and economicconditions generally, sales decreased across all of Simpson Strong-Tie’s majorproduct lines, particularly those used in new home construction. Sales of theSwan Secure product line, acquired in July 2007, accounted for slightly more than 4% of Simpson Strong-Tie’s 2008sales. Anchor Systems sales, while down slightly, benefited from theacquisition of the Liebig companies as well as Simpson Strong-Tie’s increasingpresence in Asia and the Middle East.

 

*Gross Profit*

 

Simpson Strong-Tie’s gross profit decreased 8.1% from$296.2 million in 2007 to $272.2 million in 2008. As a percentage of net sales,gross profit increased from 39.7% in 2007 to 40.2% in 2008. This slightincrease was primarily due to lower manufacturing costs, including material andlabor costs, offset by higher fixed overhead costs as a percentage of sales, asa result of the lower sales volume, and higher distribution costs.

 

*Research and Development and OtherEngineering Expense*

 

Simpson Strong-Tie’s research and development andother engineering expenses increased 6.2% from $19.0 million in 2007 to $20.1million in 2008. The increase resulted primarily from a $1.5 million increasein expenses related to additional personnel from the acquisitions during 2008,partly offset by an overall reduction in other departmental overhead expenses.

 

*Selling Expense*

 

Simpson Strong-Tie’s selling expense increased 6.7%from $68.8 million in 2007 to $73.4 million in 2008. The increase resultedprimarily from a $7.3 million increase in expenses associated with sales andmarketing personnel, including those at businesses acquired since July  2007, partly offset by decreases inpromotional expenses of $1.5 million and donations of $0.5 million, primarilyrelated to the gift made to Habitat for Humanity International,  Inc. in 2007.

 

*Impairment of Goodwill*

 

Impairment of goodwill decreased 72.2% from $10.7million in 2007 to $3.0 million in 2008. The impairment charge taken in 2008,which was a result of the Company’s annual impairment test in the fourthquarter of 2008, was associated with assets that were acquired in England in1999 and is associated with the Company’s U.K. reporting unit. In 2007, theCompany recorded a goodwill impairment charge of $10.7 million, primarily as aresult of decreased expected future cash flows from its Canadian unit thatresulted from the move of production from Canada to China.

 

*European Operations*

 

For its European operations, Simpson Strong-Tierecorded after-tax loss of $3.7 million in 2008 compared to after-tax netincome of $2.4 million in 2007. The loss was primarily related to the goodwillimpairment charge associated with the U.K. reporting unit.

 

***Venting Products –Simpson Dura-Vent (SDV)***

 

Simpson Dura-Vent’s loss from operations was flat at$2.6 million in both 2007 and 2008.

 

*Net Sales*

 

In 2008, Simpson Dura-Vent’s net sales increased 11.9%from $71.3 million in 2007 to $79.8 million in 2008. SDV accounted for 10.5% ofthe Company’s total net sales in 2008, an increase from 8.7% in 2007. Theincrease in net sales at SDV resulted from an increase in sales volume, as wellas price increases that averaged 4.0%. Sales were down in California and thewestern and southeastern regions of the United States and were up in themidwestern and northeastern regions of the United States in 2008 compared to2007. Sales of Simpson Dura-Vent’s pellet vent, chimney, special gas vent andrelining products increased, a significant portion of the increase havingresulted from

 

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the ProTech acquisition. Sales of Direct-Vent and gasvent product lines decreased as a result of several factors, including thecontinuing weakness in new home construction.

 

*Gross Profit*

 

Simpson Dura-Vent’s gross profit increased 10.5% from$9.4 million in 2007 to $10.4 million in 2008. As a percentage of net sales,gross profit decreased slightly to 13.0% in 2008 from 13.1% in 2007. Thisdecrease was primarily due to higher fixed overhead costs as a percentage ofnet sales and higher distribution costs, offset by lower manufacturing costs,including material and labor costs.

 

*Administrative Expense*

 

Simpson Dura-Vent’s administrative expense increased16.7% from $4.0 million in 2007 to $4.6 million in 2008 primarily due toincreases in administrative personnel expenses of $0.5 million, including thoseat businesses acquired in 2008.

 

***Administrative andAll Other (Company)***

 

*Interest Income and Expense*

 

Interest income is generated on the Company’s cash andcash equivalents balances. Interest income decreased primarily as a result oflower interest rates. Interest expense includes interest, account maintenancefees and bank charges.

 

**Comparison of the Years Ended December  31, 2007 and 2006**

 

*Net Sales*

 

In 2007, net sales decreased 5.4% to $817.0 millionfrom $863.2 million in 2006. In 2007, sales declined throughout the UnitedStates, while sales in Europe and Canada increased. Simpson Strong-Tie’s salesto contractor and dealer distributors had the largest percentage rate decreasesin 2007, reflecting slower homebuilding activity, while sales to home centerswere flat. Sales decreased in 2007 across most of Simpson Strong-Tie’s majorproduct lines, particularly those used in new home construction. Sales of allof Simpson Dura-Vent’s product lines decreased in 2007 when compared to 2006.

 

*Gross Profit*

 

Gross profit decreased 11.5% from $345.3 million in2006 to $305.5 million in 2007. As a percentage of net sales, gross profitdecreased from 40.0% in 2006 to 37.4% in 2007. This decrease was primarily dueto higher manufacturing costs and a higher proportion of fixed overhead coststo total costs, resulting primarily from the lower sales volume. The Companycontinued to face uncertainty in the cost and availability of steel. Severalfactors contributed to this uncertainty. Global demand and high raw materialand energy prices led the Company to believe that steel prices were likely toincrease further. In addition, major domestic integrated steel producers hadconsolidated over the preceding several years. To mitigate the effect of risingsteel prices, the Company had sales price increases in 2007.

 

*Research and Development and OtherEngineering Expense*

 

Research and development and other engineeringexpenses increased 4.5% from $19.3 million in 2006 to $20.1 million in 2007.This increase was primarily due to additional staff, incentive pay, and otherpersonnel costs, totaling $0.5 million.

 

*Selling Expense*

 

Selling expenses increased 5.2% from $72.2 million in2006 to $76.0 million in 2007. The increase was driven primarily by a $5.1million increase in expenses associated with sales and marketing personnel, thepayment of a one-time $1.0 million commitment as a co-sponsor of a new exhibitat INNOVENTIONS at *Epcot**®* at the *WaltDisney World**®* Resort in Florida and the donation of $0.6million in cash and products (expensed at cost) primarily to Habitat forHumanity International,  Inc. TheINNOVENTIONS exhibit is intended to educate homeowners about

 

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severe weather preparedness and mitigation, as well asto showcase various products and techniques they can use to build weatherresistant housing. These increases were partly offset by a decrease inpromotional expenses of $2.0 million and decreased agent commissions, primarilyas a result of lower Simpson Dura-Vent sales, of $1.1 million.

 

*General and Administrative Expense*

 

General and administrative expenses decreased 3.7%from $92.0 million in 2006 to $88.6 million in 2007. The major components ofthe decrease were reduced cash profit sharing of $9.7 million and lowerexpenses related to the relocation of the Company’s home office in the secondquarter of 2006, of $0.9 million. These decreases were partly offset by anincrease in depreciation and amortization charges totaling $2.3 million andhigher administrative personnel costs of $2.1 million, both of which includedincremental expenses associated with the acquisition of Swan Secure. Legal andprofessional services fees also increased by $0.9 million over the prior year.

 

*Impairment of Goodwill*

 

In 2007, the Company recorded a goodwill impairmentcharge of $10.7 million, primarily as a result of decreased future cash flowsof its Canada unit that will result from the move of its production from Canadato its facility in China. The decision to move the production was made in October  2007. The method to determine the fair valueof the Canadian reporting unit was a discounted cash flow model supported bymarket approaches, which were based on earnings multiples realized by similarpublic companies and on representative merger and acquisition transactions of asimilar nature and industry. This reporting unit is associated with theconnector products segment. See “Critical Accounting Policies and Estimates – *Goodwill Impairment Testing*.”

 

*Interest Income and Expense*

 

Interest income is generated on the Company’s cash andcash equivalents balances. Interest income increased primarily as a result ofhigher interest rates. Interest expense includes interest, account maintenancefees and bank charges.

 

*Provision for Income Taxes*

 

The Company’s effective tax rate was 41.0% in 2007, upfrom 37.8% in 2006. The effective tax rate increased primarily because themajority of the $10.7 million goodwill impairment charge was not deductible fortax purposes.

 

***Connector Products –Simpson Strong-Tie (SST)***

 

Simpson Strong-Tie’s income from operations decreased26.6% from $155.7 million in 2006 to $114.4 million in 2007.

 

*Net Sales*

 

In 2007, Simpson Strong-Tie’s net sales decreased 3.3%to $745.7 million from $771.2 million in 2006. SST accounted for 91.3% of theCompany’s total net sales in 2007, an increase from 89.3% in 2006. The decreasein net sales at SST resulted from a decrease in sales volume, partly offset byan increase in average prices of 6%. In 2007, sales declined throughout theUnited States, with the exception of the Midwest, which was up slightly and theNortheast, which was flat, while sales in Europe and Canada increased. SimpsonStrong-Tie’s sales to contractor and dealer distributors had the largestpercentage rate decreases in 2007, reflecting slower homebuilding activity,while sales to home centers increased slightly. Sales decreased in 2007 acrossmost of Simpson Strong-Tie’s major product lines, particularly those used innew home construction.

 

*Gross Profit*

 

Simpson Strong-Tie’s gross profit decreased 8.8% from$324.9 million in 2006 to $296.2 million in 2007. As a percentage of net sales,gross profit decreased to 39.7% in 2007 from 42.1% in 2006. This decrease wasprimarily due to higher manufacturing costs, including material costs, and tohigher fixed overhead costs as a percentage of net sales as a result of the lower sales volume.

 

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*Selling Expense*

 

Simpson Strong-Tie’s selling expense increased 8.0% to$68.8 million in 2007 from $63.7 million in 2006. The increase resultedprimarily from a $3.4 million increase in expenses associated with sales andmarketing personnel, the INNOVENTIONS one-time $1.0 million commitment and thedonation of $0.6 million in cash and products (expensed at cost) primarily toHabitat for Humanity International,  Inc.

 

*General and Administrative Expense*

 

Simpson Strong-Tie’s general and administrativeexpense decreased 3.1% from $86.8 million in 2006 to $84.2 million in 2007. Thedecrease was primarily due to reduced cash profit sharing expenses included inadministrative expenses totaling $9.3 million, partly offset by increases indepreciation and amortization costs of $2.2 million, which included incrementalexpenses associated with the acquisition of Swan Secure in July  2007, bad debt expense of $0.6 million, andprofessional service expenses of $0.7 million.

 

*European Operations*

 

For its European operations, Simpson Strong-Tierecorded after-tax net income of $2.4 million in 2007 compared to after-tax netincome of $4.4 million in 2006.

 

***Venting Products –Simpson Dura-Vent (SDV)***

 

Simpson Dura-Vent’s income from operations decreasedfrom $7.2 million in 2006 to a loss of $2.6 million in 2007.

 

*Net Sales*

 

In 2007, Simpson Dura-Vent’s net sales decreased 22.5%to $71.3 million as compared to net sales of $92.0 million in 2006. SDVaccounted for 8.7% of the Company’s total net sales in 2007, a decrease from10.7% in 2006. The decrease in net sales at SDV resulted from a decrease insales volume, partly offset by price increases that averaged 6%. Sales weredown in all regions of the United States in 2007 compared to 2006. Sales to alldistribution channels were down in 2007 as compared to 2006. Sales of all ofSimpson Dura-Vent’s product lines decreased in 2007 when compared to 2006.

 

*Gross Profit*

 

Simpson Dura-Vent’s gross profit decreased 54.4% from$20.5 million in 2006 to $9.4 million in 2007. As a percentage of net sales,gross profit decreased to 13.1% in 2007 from 22.3% in 2006. This decrease wasprimarily due to higher manufacturing costs and higher fixed overhead costs asa percentage of net sales as a result of the lower sales volume.

 

*Selling Expense*

 

Simpson Dura-Vent’s selling expense decreased 15.2%from $8.2 million in 2006 to $6.9 million in 2007 primarily due to decreasedagent commissions, on lower Simpson Dura-Vent sales, of $1.0 million.

 

***Administrative andAll Other (Company)***

* *

*Interest Income and Expense*

 

Interest income is generated on the Company’s cash andcash equivalents balances. Interest income increased primarily as a result ofhigher interest rates. Interest expense includes interest, account maintenancefees and bank charges.

 

**Critical Accounting Policies andEstimates**

 

The critical policies described below affect theCompany’s more significant judgments and estimates used in the preparation ofthe Consolidated Financial Statements. If the Company’s business conditionschange or if it uses different assumptions or estimates in the application ofthese and other accounting policies, the Company’s future results of operationscould be adversely affected.

 

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* *

*InventoryValuation*

 

Inventories are stated atthe lower of cost or net realizable value (market). Cost includes all costsincurred in bringing each product to its present location and condition, asfollows:

 

·                  Raw materials and purchased finishedgoods – principally valued at cost determined on a weighted average basis.

 

·                  In-process products and finishedgoods – cost of direct materials and labor plus attributable overhead based ona normal level of activity.

 

The Company applies netrealizable value and obsolescence to the gross value of the inventory. TheCompany estimates net realizable value based on estimated selling price lessfurther costs to completion and disposal. The Company provides for slow movingproduct by comparing inventories on hand to future projected demand. Obsoleteinventory is on-hand supply of a product in excess of two years’ sales of thatproduct or a supply of that product that the Company believes is no longermarketable. The Company revalues obsolete inventory as having no net realizablevalue and reserves for its full carrying value. The Company has consistentlyapplied this methodology. The Company believes that this approach is prudentand makes suitable provisions for slow moving and obsolete inventory. Whenprovisions are established, a new cost basis of the inventory is created.

 

Comparable inventoryvalues are as follows (in thousands):

 
| ** **                     | ** ** | **December  31,** | ** ** |
|--------------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2008**          | ** ** | **2007** | ** ** |
| Gross  Inventories:            |       |              |       |   |   |
| Raw materials                  |       | $                 | 92,638     |   | $ | 82,164 |   |
| In-process  products           |       | 26,371            |       | 23,674 |   |
| Finished goods                 |       | 142,898           |       | 122,842 |   |
|                           |       |              |       |   |   |
| Less:                          |       |              |       |   |   |
| Slow moving,  obsolete and net |       |              |       |   |   |
| realizable value  provisions   |       | (10,029           | )          | (10,338 | ) |
| Net inventory  valuation       |       | $                 | 251,878    |   | $ | 218,342 |   |

 

Activity in theinventory reserve is summarized as follows (in thousands):

 
| ** **                                           | ** ** | **Years ended  December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                           | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Beginning  balance                                   |       | $                             | 10,338     |   | $ | 5,480 |   | $ | 5,399 |   |
| Provisions  released following disposal of inventory |       | (749                          | )          | 57 |   | — |   |
| Additional  provisions made                          |       | 440                           |       | 4,801 |   | 81 |   |
| Ending balance                                       |       | $                             | 10,029     |   | $ | 10,338 |   | $ | 5,480 |   |

 

Unexpected change inmarket demand, building codes or buyer preferences could reduce the rate ofinventory turnover and require the Company to increase its reserve forobsolescence.

 

*RevenueRecognition*

 

The Company recognizesrevenue when the earnings process is complete, net of applicable provision fordiscounts, returns and incentives, whether actual or estimated based on theCompany’s experience. This generally occurs when products are shipped to thecustomer in accordance with the sales agreement or purchase order, ownershipand risk of loss pass to the customer, collectibility is reasonably assured andpricing is fixed or determinable. The Company’s general shipping terms areF.O.B. shipping point, where title is transferred and revenue is recognizedwhen the products are shipped to customers. When the Company sells F.O.B.destination point, title is transferred and the Company recognizes revenue ondelivery or customer acceptance, depending on terms of the sales agreement.Service sales, representing aftermarket repair and maintenance and engineeringactivities, though significantly less

 

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than 1% of net sales andnot material to the consolidated financial statements, are recognized as theservices are completed. If the actual costs of sales returns, incentives anddiscounts were to significantly exceed the recorded estimated allowance, theCompany’s sales would be adversely affected.

 

*Allowancefor Doubtful Accounts*

 

The Company assesses the collectibility of specificcustomer accounts that would be considered doubtful based on the customer’sfinancial condition, payment history, credit rating and other factors that theCompany considers relevant, or accounts that the Company assigns forcollection. The Company reserves for the portion of those outstanding balancesthat the Company believes it is not likely to collect, based on historicalcollection experience. The Company also reserves 100% of the amount that itdeems potentially uncollectible due to a customer’s bankruptcy or deterioratingfinancial condition. If the financial condition of the Company’s customers wereto deteriorate, resulting in inability to make payments, additional allowancesmay be required.

 

Activity in the allowancefor doubtful accounts is summarized as follows (in thousands):

 
| ** **                              | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                        |       |   |   |   |   |
| Beginning  balance                      |       | $                                           | 2,724      |   | $ | 2,286 |   | $ | 2,131 |   |
| Adjustments,  recoveries and write-offs |       | (787                                        | )          | (275 | ) | (77 | ) |
| Increase to bad  debt provision         |       | 2,431                                       |       | 713 |   | 232 |   |
| Ending balance                          |       | $                                           | 4,368      |   | $ | 2,724 |   | $ | 2,286 |   |

 

*Goodwill Impairment Testing*

 

Statement of Financial Accounting Standards (“SFAS”) No.  142, “Goodwill and Other Intangible Assets,”requires that goodwill be tested for impairment at the reporting unit level(operating segment or one level below an operating segment) on an annual basis(in the fourth quarter for the Company) and between annual tests if an eventoccurs or circumstances change that would more likely than not reduce the fairvalue of a reporting unit below its carrying value. These events orcircumstances could include a significant change in the business climate, legalfactors, operating performance indicators, competition, or disposition orrelocation of a significant portion of a reporting unit. Application of thegoodwill impairment test requires judgment, including the identification ofreporting units, assignment of assets and liabilities to reporting units,assignment of goodwill to reporting units, and determination of the fair valueof each reporting unit. The fair value of each reporting unit is estimatedusing discounted cash flow methodologies or a combination of market approaches,if information is readily available, and discounted cash flow methodologies.This process requires significant judgments, including estimation of futurecash flows, which depends on internal forecasts, estimation of the long-termrate of growth for the Company’s business, the useful life over which cashflows will occur, and determination of the Company’s weighted average cost ofcapital. Changes in these estimates and assumptions could materially affect thedetermination of fair value or goodwill impairment for each reporting unit.Actual cash flows in the future may differ significantly from those assumed.The Company has allocated goodwill to reporting units based on the reportingunit expected to benefit from the acquisition.

 

The impairment charge taken in 2008, which was aresult of the Company’s annual impairment test in the fourth quarter of 2008,was associated with assets that were acquired in England in 1999 and isassociated with the Company’s U.K. reporting unit. The reporting unit’scarrying value exceeded the fair value, primarily due to  reduced future expected net cash flows. Themethod to determine the fair value of the U.K. reporting unit was a discountedcash flow model. In 2007, the Company recorded a goodwill impairment charge of$10.7 million related to its Canadian reporting unit, resulting primarily fromdecreased expected future cash flows due to the move of production from Canadato China. The method to determine the fair value of the Canadian reporting unitwas a discounted cash flow model supported by market approaches, which werebased on earnings multiples realized by similar public companies and onrepresentative merger and acquisition transactions of a similar nature andindustry. At December  31, 2008, theremaining balances of goodwill of the U.K. and Canadian reporting units were$1.2 million and $3.1 million, respectively. These reporting units areassociated with the connector products segment.

 

**Effect of New Accounting Standards**

 

On January  1,2008, the Company adopted SFAS No.  157, “FairValue Measurements,” except as amended by FASB Staff Position (“FSP”) FinancialAccounting Standard (“FAS”) 157-1, FSP FAS 157-2 and FSP FAS 157-3,

 

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SFAS No.  159, “TheFair Value Option for Financials Assets and Financial Liabilities,” and SFAS No.  162, “The Hierarchy of Generally AcceptedAccounting Principles.” See Note 1 to the Company’s Consolidated FinancialStatements. As of December  31, 2008, theCompany had not yet adopted the provisions of SFAS No.  141(R), “Business Combinations,” SFAS No.  160, “Noncontrolling Interests inConsolidated Financial Statements–an amendment of Accounting Research Bulletin No.  51,” SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities–anamendment of FASB Statement No.  133,” orFSP  FAS 142-3, “Determination of theUseful Life of Intangible Assets.”

 

**Liquidity and Sources of Capital**

 

The Company’s liquidity needs arise principally fromworking capital requirements, capital expenditures and business acquisitions. Duringthe three years ended December  31, 2008,the Company relied on internally generated funds to finance these needs. TheCompany’s working capital requirements are seasonal with the highest needtypically occurring in the second and third quarters of the year. Cash and cashequivalents were $170.8 million and $186.1 million at December  31, 2008 and 2007, respectively. Workingcapital was $455.7 million and $438.5 million at December  31, 2008 and 2007, respectively. As of December  31, 2008, the Company had $26 thousand inrevolving line of credit borrowings and had available to it unused creditfacilities of $205.8 million.

 

The Company’s operating activities provided $56.1million, $126.8 million and $99.1 million in net cash in 2008, 2007 and 2006,respectively. In 2008, cash was provided by net income of $53.9 million andnoncash expenses, including impairments of goodwill and a long-lived asset,depreciation and amortization, and noncash compensation related to stock plans,totaling $37.0 million and a decrease in trade accounts receivable of $9.9million. These increases were offset by increases in net inventories and othernoncurrent assets of $32.4 million and $1.2 million, respectively, anddecreases in trade accounts payable, other accrued liabilities and accrued cashprofit sharing of $7.5 million, $5.4 million and $1.8 million, respectively.The increase in inventories was primarily related to increases in prices of rawmaterials, primarily steel. The balance of the cash provided in 2008 resultedfrom changes in other asset and liability accounts, none of which was material.

 

The Company’s investing activities used $51.0 million,$75.2 million and $60.5 million in net cash in 2008, 2007 and 2006,respectively. Cash paid for asset acquisitions, primarily for the acquisitionsof Liebig, ProTech, Ventinox and Ahorn, was $36.3 million, down from $42.5 millionfor acquisitions in 2007 when the Company acquired Swan Secure. Cash paid forcapital expenditures was $16.0 million in 2008, down from $36.1 million in2007. The cash paid was partly offset by sales of assets, primarily the sale ofthe vacant factory in McKinney, Texas, in April 2008 for total proceeds of $1.8 million. The Company used $9.3 millionof these expenditures in 2008 to purchase or improve its real estate, primarilyto construct its new manufacturing facility in China. The Company also used$6.7 million in 2008 to purchase machinery and equipment for its facilitiesthroughout the United States and Europe. The Company’s planned capitalexpenditures for 2009 total approximately $13.5 million.

 

In April  2008,the Company’s newly formed subsidiary, Simpson Strong-Tie Ireland Limited,purchased certain assets of Liebig International Ltd., an Irish company,Heinrich Liebig Stahldübelwerke GmbH, Liebig GmbH  & Co. KG and Liebig InternationalVerwaltungsgesellschaft GmbH, all German companies, Liebig Bolts Limited, anEnglish company, and Liebig International Inc., a Virginia corporation(collectively “Liebig”). Liebig manufactures mechanical anchor products inIreland and distributes them primarily throughout Europe through warehouseslocated in Germany and in the United Kingdom. The purchase price was $19.2million in cash, including due diligence and transaction costs.

 

In June  2008,Simpson Dura-Vent purchased the equity of ProTech Systems,  Inc. (“ProTech”). ProTech manufacturesventing products in New York and distributes them throughout North America. Thepurchase price was $8.3 million in cash, including due diligence andtransaction costs and $1.4 million to be paid in the future, plus an additionalearn-out of up to $2.25 million if certain future performance targets are met.In July  2008, Simpson Dura-Vent alsopurchased certain assets to produce the Ventinox stainless steel chimney linerproduct line from American BOA Inc. ProTech had been the distributor ofVentinox products. The purchase price was $1.6 million in cash, including duediligence and transaction costs.

 

In July  2008,Simpson Strong-Tie purchased the equity of Ahorn-Geräte  & Werkzeuge Vertriebs GmbH (“Ahorn”), aGerman company, and its subsidiaries in the Czech Republic and China. Theacquisition will broaden Simpson Strong-Tie’s collated fastener product lineand add production capacity in both Europe and China. The purchase price was$9.2 million in cash, including due diligence and transaction costs.

 

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In January  2009,the Company acquired the assets of RO Design Corp, a Florida corporation doingbusiness as DeckTools, which licenses deck design and estimation software. Thesoftware provides professional deck builders, home centers and lumber yards asimple, graphics-driven, solution for designing decks and estimating materialand labor costs for the project. The purchase price was $4.0 million in cash,including $2.5 million to be paid in the future.

 

The Company’s vacant facility in San Leandro,California, has been classified as an asset held for sale. In September  2007, an environmental analysis of thisproperty indicated that it had contamination related to spilled fuel that wouldrequire an estimated $0.3 million to remediate. In June  2008, the Company performed additionalanalysis and determined that an additional $0.4 million would be needed toremediate the site. The clean-up is expected to be completed in early 2009. TheCompany is currently marketing the San Leandro property and hopes to sell itafter the remediation is completed.

 

The Company plans to sell its facility in Vicksburg,Mississippi, and will cease use of it around that time. If it is expected to besold below its carrying value, the Company will record an impairment chargeequal to the amount by which its carrying value exceeds its net realized value.As of December  31, 2008, the propertydid not qualify for held-for-sale accounting treatment and the Company expectsto record a charge in the range of $2 million to $3 million, based on currentmarket conditions, when the held-for-sale accounting treatment is met.

 

The Company’s financing activities used $13.0 million,$17.4 million, and $21.5 million in net cash in 2008, 2007 and 2006,respectively. Uses of cash for financing activities were primarily frompayments of cash dividends of $19.4 million and payments on the Company’sline-of-credit borrowings, primarily related to its European operations, of$4.7 million. Cash provided by financing activities was primarily from theissuance of the Company’s common stock through the exercise of stock optionstotaling $6.9 million and line-of-credit borrowings of $3.7 million. In February  2009, the Company’s Board of Directorsdeclared a dividend of $0.10 per share, a total of $4.9 million, to be paid on April  24, 2009, to stockholders of record on April  3, 2009.

 

In October  2007,the Company entered into an unsecured credit agreement with a syndicate ofbanks providing for a 5-year revolving credit facility of $200 million.  The Company has the ability to increase theamount available under the credit agreement by an additional $200 million, to amaximum of $400 million, by obtaining additional commitments from existinglenders or new lenders and satisfying certain other conditions. Under existingconditions in credit markets, the Company does not believe that additionalcommitments will be available on terms the Company considers reasonable. TheCompany is required to pay an annual****facilityfee of 0.08% to 0.10% of the available commitments under the credit agreement,regardless of usage, with the applicable fee determined on a quarterly basisbased on the Company’s leverage ratio. Amounts borrowed under the creditagreement will bear interest at an annual rate equal to either, at the Company’soption, (a)  the British BankersAssociation London Interbank Offered Rate for the appropriate currencyappearing on Reuters Screen LIBOR01-02 Page (the “LIBO Rate”) plus a spread of from 0.27% to 0.40%, as determined ona quarterly basis based on the Company’s leverage ratio, or (b)  the Base Rate, plus a spread of 0.50%.  The Company will pay participation fees foroutstanding standby letters of credit at an annual rate equal to the LIBO Rateplus the applicable spreads described in the preceding sentence, and will paymarket-based fees for commercial letters of credit. Loans outstanding under thecredit agreement may be prepaid at any time without penalty except for LIBORate breakage costs and expenses.

 

The proceeds of loans advanced under the creditagreement and letters of credit issued thereunder may be used for workingcapital and other general corporate needs of the Company, to pay dividends tothe Company’s stockholders or to repurchase outstanding securities of theCompany as permitted by the credit agreement, and to finance acquisitions bythe Company permitted by the credit agreement. No loans or letters of creditare currently outstanding under the credit agreement. The Company and itssubsidiaries are required to comply with various affirmative and negativecovenants. The covenants include provisions that would limit the availabilityof funds as a result of a material adverse change to the Company’s financialposition or results of operations. The Company is in compliance with itsfinancial covenants under the loan agreement.

 

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TheCompany’s contractual obligations, as of December 31, 2008, for futurepayments are as follows, in thousands:

 
| ** **                      | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **Total**                                 | ** ** | **Less** | ** ** | ** ** | ** ** | ** ** | ** ** | **More** | ** ** |
| ** **                      | ** ** | **all**                                   | ** ** | **than 1** | ** ** | **1 – 3** | ** ** | **3 – 5** | ** ** | **than 5** | ** ** |
| **Contractual Obligation** | ** ** | **periods**                               | ** ** | **year** | ** ** | **years** | ** ** | **years** | ** ** | **years** | ** ** |
|                            |       |                                      |       |   |   |   |   |   |   |   |   |
| Line of credit obligations      |       | $                                         | 26         |   | $ | 26 |   | $ | — |   | $ | — |   | $ | — |   |
| Debt interest obligations       |       | 613                                       |       | 160 |   | 320 |   | 133 |   | — |   |
| Operating lease obligations     |       | 18,274                                    |       | 7,069 |   | 8,024 |   | 3,181 |   | — |   |
| Purchase obligations            |       | 12,320                                    |       | 10,874 |   | 1,446 |   | — |   | — |   |
| Total                           |       | $                                         | 31,233     |   | $ | 18,129 |   | $ | 9,790 |   | $ | 3,314 |   | $ | — |   |

 

Purchaseobligations consist of commitments primarily related to the construction orexpansion of facilities and equipment, consulting agreements, and minimumpurchase quantities of certain raw materials. The Company is not a party to anylong-term supply contracts with respect to the purchase of raw materials orfinished goods. Debt interest obligations include interest payments on fixedterm debt, line of credit borrowings and annual maintenance fees on the Company’sprimary line-of-credit facility. Interest on line-of-credit facilities wasestimated based on historical borrowings and repayment patterns. The Company’sprimary line-of-credit facility includes annual maintenance fees from 0.08% to0.10%, depending on the Company’s leverage ratio, on the unused portion of thefacilities.

 

TheCompany adopted FIN 48 on January 1, 2007. At December 31, 2008, theCompany’s expected payment for contractual obligations includes $8.2 million ofgross liability for uncertain tax positions associated with the adoption of FIN48, although the Company cannot estimate the timing of cash settlement of thisliability. This amount does not include any amount receivable that may arisefrom the settlement of the Company’s uncertain tax positions. See Notes 1 and 10 to the Company’s ConsolidatedFinancial Statements.

 

**Inflation**

 

The Company believes that the effect of inflation onthe Company has not been material in recent years, as general inflation rateshave remained relatively low. The Company’s main raw material, however, issteel, and increases in steel prices may adversely affect the Company’s grossmargins if it cannot recover the higher costs through price increases.

 

**Item 7A. Quantitative andQualitative Disclosures About Market Risk**

 

The Company has no variable interest-rate debtinvestments.

 

The Company has foreign exchange rate risk in itsinternational operations, primarily Europe and Canada, and through purchasesfrom foreign vendors. The Company does not currently hedge this risk. If theexchange rate were to change by 10% in any one country where the Company hasoperations, the change in net income would not be material to the Company’soperations taken as a whole. The translation adjustment resulted in a decreasein accumulated other comprehensive income of $19.5 million for the year ended December 31,2008, primarily due to the effect of the strengthening of the United Statesdollar in relation to the European and Canadian currencies.

 

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**Item 8. Consolidated Financial Statements andSupplementary Data.**

 

**SIMPSON MANUFACTURING CO., INC.**

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| Consolidated financial statements                                                                                |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| Report of Independent  Registered Public Accounting Firm                                                         | 42     |
| Consolidated Balance Sheets at  December 31, 2008 and 2007                                                  | 43     |
| Consolidated  Statements of Operations for the years ended December 31, 2008, 2007 and  2006                | 44     |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31,  2006, 2007 and 2008 | 45     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008, 2007 and  2006                | 46     |
| Notes to the  Consolidated Financial Statements                                                                  | 47     |
|                                                                                                             |   |
| Financial Statement Schedule                                                                                     |   |
| Schedule II —  Valuation and Qualifying Accounts                                                            | 71     |

 

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Report of IndependentRegistered Public Accounting Firm

 

To the Board of Directorsand Stockholders of Simpson Manufacturing Co., Inc.:

 

In our opinion, the consolidated financial statements listed inthe accompanying index presentfairly, in all material respects, the financial position of SimpsonManufacturing Co., Inc. and its subsidiaries at December 31, 2008 and2007, and the results of their operations and their cash flows for each of thethree years in the period ended December 31, 2008, in conformity withaccounting principles generally accepted in the United States of America.  Inaddition, in our opinion, the financial statement schedule listed in the accompanyingindex presents fairly, in all material respects, the information set forththerein when read in conjunction with the related consolidated financialstatements.  Also in our opinion,the Company maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2008, based on criteriaestablished in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for these financial statements and financial statement schedule,for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in Item 9A of the 2008 Annual Report. Our responsibility is to express opinions on these financial statements,on the financial statement schedule, and on the Company’s internal control overfinancial reporting based on our integrated audits. We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audits of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audits provide a reasonablebasis for our opinions.

 

As discussed in Note 1 tothe consolidated financial statements, the Company changed the manner in whichit accounts for uncertainty in income taxes upon adoption of the accountingguidance of FASB Interpretation No. 48 Accounting for Uncertainty inIncome Taxes in 2007.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

As described in Item 9A of the 2008 Annual Report,management has excluded Liebig, ProTech and Ahorn from its assessment ofinternal control over financial reporting as of December 31, 2008, becausethey were purchased by the Company through business combinations during 2008.We have also excluded Liebig, ProTech and Ahorn from our audit of internalcontrol over financial reporting. Liebig and Ahorn are divisions of SimpsonStrong-Tie Company Inc. and ProTech is a division of Simpson Dura-Vent Company, Inc.The combined total assets and total revenues of the purchased businesses representapproximately 7% and 2%, respectively, of the related consolidated financialstatement amounts as of and for the year ended December 31, 2008.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
| San Francisco,  California      |   |
| February 27,  2009         |   |

 

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**Simpson Manufacturing Co., Inc. andSubsidiaries**

**Consolidated Balance Sheets**

*(Inthousands, except per share data)*

 
| ** **                                                                                                                                                     | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Current assets                                                                                                                                                 |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                     |       | $                     | 170,750    |   | $ | 186,142 |   |
| Trade accounts  receivable, net                                                                                                                                |       | 76,005                |       | 88,340 |   |
| Inventories                                                                                                                                                    |       | 251,878               |       | 218,342 |   |
| Deferred income  taxes                                                                                                                                         |       | 11,995                |       | 11,623 |   |
| Assets held for  sale                                                                                                                                          |       | 8,387                 |       | 9,677 |   |
| Other current  assets                                                                                                                                          |       | 8,582                 |       | 8,753 |   |
| Total current  assets                                                                                                                                          |       | 527,597               |       | 522,877 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Property, plant  and equipment, net                                                                                                                            |       | 193,318               |       | 198,117 |   |
| Goodwill                                                                                                                                                       |       | 68,619                |       | 57,418 |   |
| Equity method  investment                                                                                                                                      |       | 214                   |       | — |   |
| Intangible  assets                                                                                                                                             |       | 23,453                |       | 23,239 |   |
| Deferred income  taxes                                                                                                                                         |       | 8,755                 |       | 9,619 |   |
| Other noncurrent  assets                                                                                                                                       |       | 8,244                 |       | 6,409 |   |
| Total assets                                                                                                                                                   |       | $                     | 830,200    |   | $ | 817,679 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |                  |       |   |   |
| Current  liabilities                                                                                                                                           |       |                  |       |   |   |
| Line of credit                                                                                                                                                 |       | $                     | 26         |   | $ | 1,029 |   |
| Trade accounts  payable                                                                                                                                        |       | 21,675                |       | 27,226 |   |
| Accrued  liabilities                                                                                                                                           |       | 34,102                |       | 39,188 |   |
| Accrued profit  sharing trust contributions                                                                                                                    |       | 9,541                 |       | 8,651 |   |
| Accrued cash  profit sharing and commissions                                                                                                                   |       | 2,264                 |       | 4,129 |   |
| Accrued workers’  compensation                                                                                                                            |       | 4,286                 |       | 4,116 |   |
| Total current  liabilities                                                                                                                                     |       | 71,894                |       | 84,339 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Other long-term  liabilities                                                                                                                                   |       | 9,280                 |       | 9,940 |   |
| Total liabilities                                                                                                                                              |       | 81,174                |       | 94,279 |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Commitments and  contingencies (Note 9)                                                                                                                        |       |                  |       |   |   |
|                                                                                                                                                           |       |                  |       |   |   |
| Stockholders’  equity                                                                                                                                     |       |                  |       |   |   |
| Preferred stock,  par value $0.01; authorized shares, 5,000; issued and outstanding shares,  none                                                              |       | —                |       | — |   |
| Common stock,  par value $0.01; authorized shares, 160,000; issued and outstanding shares,  48,971 and 48,552 at December 31, 2008 and 2007, respectively |       | 490                   |       | 485 |   |
| Additional  paid-in capital                                                                                                                                    |       | 136,867               |       | 126,119 |   |
| Retained  earnings                                                                                                                                             |       | 605,950               |       | 571,499 |   |
| Accumulated  other comprehensive income                                                                                                                        |       | 5,719                 |       | 25,297 |   |
| Total  stockholders’ equity                                                                                                                               |       | 749,026               |       | 723,400 |   |
| Total  liabilities and stockholders’ equity                                                                                                               |       | $                     | 830,200    |   | $ | 817,679 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**Simpson Manufacturing Co., Inc. andSubsidiaries**

**Consolidated Statements of Operations**

*(In thousands, except per share data)*

 
| ** **                                      | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                       |       | $                                           | 756,499    |   | $ | 816,988 |   | $ | 863,180 |   |
| Cost of sales                                   |       | 474,190                                     |       | 511,499 |   | 517,885 |   |
| Gross profit                                    |       | 282,309                                     |       | 305,489 |   | 345,295 |   |
|                                            |       |                                        |       |   |   |   |   |
| Operating  expenses                             |       |                                        |       |   |   |   |   |
| Research and  development and other engineering |       | 21,327                                      |       | 20,115 |   | 19,254 |   |
| Selling                                         |       | 80,703                                      |       | 75,954 |   | 72,199 |   |
| General and  administrative                     |       | 89,897                                      |       | 88,618 |   | 91,975 |   |
| Impairment of  goodwill                         |       | 2,964                                       |       | 10,666 |   | — |   |
| Loss (gain) on  sale of assets                  |       | (124                                        | )          | (713 | ) | 457 |   |
|                                            |       | 194,767                                     |       | 194,640 |   | 183,885 |   |
|                                            |       |                                        |       |   |   |   |   |
| Income from  operations                         |       | 87,542                                      |       | 110,849 |   | 161,410 |   |
|                                            |       |                                        |       |   |   |   |   |
| Loss in equity  method investment, before tax   |       | (486                                        | )          | (33 | ) | (97 | ) |
| Interest income                                 |       | 2,977                                       |       | 5,988 |   | 3,927 |   |
| Interest expense                                |       | (381                                        | )          | (229 | ) | (208 | ) |
| Income before  income taxes                     |       | 89,652                                      |       | 116,575 |   | 165,032 |   |
|                                            |       |                                        |       |   |   |   |   |
| Provision for  income taxes                     |       | 35,718                                      |       | 47,833 |   | 62,370 |   |
| Minority  interest                              |       | —                                      |       | — |   | 166 |   |
|                                            |       |                                        |       |   |   |   |   |
| Net income                                      |       | $                                           | 53,934     |   | $ | 68,742 |   | $ | 102,496 |   |
|                                            |       |                                        |       |   |   |   |   |
| Net income per  common share                    |       |                                        |       |   |   |   |   |
| Basic                                           |       | $                                           | 1.11       |   | $ | 1.42 |   | $ | 2.12 |   |
| Diluted                                         |       | $                                           | 1.10       |   | $ | 1.40 |   | $ | 2.10 |   |
|                                            |       |                                        |       |   |   |   |   |
| Weighted average  number of shares outstanding  |       |                                        |       |   |   |   |   |
| Basic                                           |       | 48,636                                      |       | 48,472 |   | 48,300 |   |
| Diluted                                         |       | 48,970                                      |       | 48,928 |   | 48,891 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

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**Simpson Manufacturing Co., Inc. andSubsidiaries**

**Consolidated Statementsof Stockholders’ Equityfor the years ended December 31, 2006, 2007 and 2008**

*(In thousands, except per share data)*

 
| ** **                                                 | ** ** | ** **            | ** ** | ** **         | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **            | ** ** | ** **         | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Paid-in**        | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Treasury**    | ** ** | ** ** | ** ** |
| ** **                                                 | ** ** | **Shares**            | ** ** | **Par Value** | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income**      | ** ** | **Stock**  | ** ** | **Total**  | ** ** |
| ** **                                                 | ** ** | ** **            | ** ** | ** **         | ** ** | ** **     | ** ** | ** **        | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance,  January 1, 2006                             |       | 48,322                |       | $                  | 483        |           | $          | 94,398            |       | $               | 456,474    |       | $          | 6,774      |       | $ | — |   | $ | 558,129 |   |
| Comprehensive  income:                                     |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Net income                                                 |       | —                |       | —             |       | —         |       | 102,496           |       | —          |       | —     |       | 102,496    |       |
| Other  comprehensive income:                               |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Translation  adjustment                                    |       | —                |       | —             |       | —         |       | —            |       | 4,720           |       | —     |       | 4,720      |       |
| Comprehensive  income                                      |       |                  |       |               |       |           |       |              |       |            |       |       |       | 107,216    |       |
| Options  exercised                                         |       | 584                   |       | 6                  |       | 8,941          |       | —            |       | —          |       | —     |       | 8,947      |       |
| Stock  compensation expense                                |       | —                |       | —             |       | 7,618          |       | —            |       | —          |       | —     |       | 7,618      |       |
| Tax benefit of  options exercised                          |       | —                |       | —             |       | 3,349          |       | —            |       | —          |       |       |       | 3,349      |       |
| Cash dividends  declared on common stock ($0.32 per share) |       | —                |       | —             |       | —         |       | (15,447           | )          | —          |       | —     |       | (15,447    | )          |
| Repurchase of  common stock                                |       | (500                  | )          | —             |       | —         |       | —            |       | —          |       | (17,166    | )          | (17,166    | )          |
| Retirement of  treasury stock                              |       | —                |       | (5                 | )          | —         |       | (17,161           | )          | —          |       | 17,166     |       | —     |       |
| Common stock  issued at $36.35 per share                   |       | 6                     |       | —             |       | 229            |       | —            |       | —          |       | —     |       | 229        |       |
| Balance,  December 31, 2006                           |       | 48,412                |       | 484                |       | 114,535        |       | 526,362           |       | 11,494          |       | —     |       | 652,875    |       |
| Cumulative  effect due to adoption of FIN 48               |       | —                |       | —             |       | —         |       | (16               | )          | —          |       | —     |       | (16        | )          |
| Balance,  January 1, 2007                             |       | 48,412                |       | 484                |       | 114,535        |       | 526,346           |       | 11,494          |       | —     |       | 652,859    |       |
| Comprehensive  income:                                     |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Net income                                                 |       | —                |       | —             |       | —         |       | 68,742            |       | —          |       | —     |       | 68,742     |       |
| Other  comprehensive income:                               |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Translation  adjustment                                    |       | —                |       | —             |       | —         |       | —            |       | 13,803          |       | —     |       | 13,803     |       |
| Comprehensive  income                                      |       |                  |       |               |       |           |       |              |       |            |       |       |       | 82,545     |       |
| Options  exercised                                         |       | 252                   |       | 2                  |       | 4,830          |       | —            |       | —          |       | —     |       | 4,832      |       |
| Stock  compensation expense                                |       | —                |       | —             |       | 5,893          |       | —            |       | —          |       | —     |       | 5,893      |       |
| Tax benefit of  options exercised                          |       | —                |       | —             |       | 554            |       | —            |       | —          |       | —     |       | 554        |       |
| Cash dividends  declared on common stock ($0.40 per share) |       | —                |       | —             |       | —         |       | (19,399           | )          | —          |       | —     |       | (19,399    | )          |
| Repurchase of  common stock                                |       | (122                  | )          | —             |       | —         |       | —            |       | —          |       | (4,191     | )          | (4,191     | )          |
| Retirement of  treasury stock                              |       | —                |       | (1                 | )          | —         |       | (4,190            | )          | —          |       | 4,191      |       | —     |       |
| Common stock  issued at $31.65 per share                   |       | 10                    |       | —             |       | 307            |       | —            |       | —          |       | —     |       | 307        |       |
| Balance,  December 31, 2007                           |       | 48,552                |       | 485                |       | 126,119        |       | 571,499           |       | 25,297          |       | —     |       | 723,400    |       |
| Comprehensive  income:                                     |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Net income                                                 |       | —                |       | —             |       | —         |       | 53,934            |       | —          |       | —     |       | 53,934     |       |
| Other  comprehensive income:                               |       |                  |       |               |       |           |       |              |       |            |       |       |       |       |       |
| Translation  adjustment                                    |       | —                |       | —             |       | —         |       | —            |       | (19,578         | )          | —     |       | (19,578    | )          |
| Comprehensive  income                                      |       |                  |       |               |       |           |       |              |       |            |       |       |       | 34,356     |       |
| Options  exercised                                         |       | 410                   |       | 5                  |       | 6,876          |       | —            |       | —          |       | —     |       | 6,881      |       |
| Stock  compensation expense                                |       | —                |       | —             |       | 3,249          |       | —            |       | —          |       | —     |       | 3,249      |       |
| Tax benefit of  options exercised                          |       | —                |       | —             |       | 376            |       | —            |       | —          |       | —     |       | 376        |       |
| Cash dividends  declared on common stock ($0.40 per share) |       | —                |       | —             |       | —         |       | (19,483           | )          | —          |       | —     |       | (19,483    | )          |
| Common stock  issued at $26.59 per share                   |       | 9                     |       | —             |       | 247            |       | —            |       | —          |       | —     |       | 247        |       |
| Balance,  December 31, 2008                           |       | 48,971                |       | $                  | 490        |           | $          | 136,867           |       | $               | 605,950    |       | $          | 5,719      |       | $ | — |   | $ | 749,026 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**Simpson Manufacturing Co., Inc.and Subsidiaries**

**Consolidated Statements of Cash Flows**

*(In thousands)*

 
| ** **                                                                         | ** ** | **Years Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities**                                          | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                           | 53,934     |   | $ | 68,742 |   | $ | 102,496 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                        |       |   |   |   |   |
| Loss (gain) on  sale of assets                                                     |       | (124                                        | )          | (713 | ) | 457 |   |
| Depreciation and  amortization                                                     |       | 30,209                                      |       | 27,984 |   | 24,536 |   |
| Impairment of  long-lived assets                                                   |       | —                                      |       | 465 |   | — |   |
| Impairment of  goodwill                                                            |       | 2,964                                       |       | 10,666 |   | — |   |
| Deferred income  taxes                                                             |       | (1,079                                      | )          | (3,745 | ) | (2,141 | ) |
| Noncash  compensation related to stock plans                                       |       | 3,823                                       |       | 6,333 |   | 7,765 |   |
| Loss in equity  method investment                                                  |       | 486                                         |       | 33 |   | 97 |   |
| Excess tax  benefit of options exercised                                           |       | (515                                        | )          | (746 | ) | (3,056 | ) |
| Provision for  obsolete inventory                                                  |       | 440                                         |       | 4,801 |   | 81 |   |
| Provision for  doubtful accounts                                                   |       | 2,431                                       |       | 713 |   | 232 |   |
| Minority  interest                                                                 |       | —                                      |       | — |   | 166 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions:      |       |                                        |       |   |   |   |   |
| Trade accounts  receivable                                                         |       | 9,862                                       |       | 12,999 |   | 7,109 |   |
| Inventories                                                                        |       | (32,408                                     | )          | 5,803 |   | (34,139 | ) |
| Other current  assets                                                              |       | 174                                         |       | (1,540 | ) | (654 | ) |
| Other noncurrent  assets                                                           |       | (1,213                                      | )          | 340 |   | (35 | ) |
| Trade accounts  payable                                                            |       | (7,456                                      | )          | 3,105 |   | (8,053 | ) |
| Accrued  liabilities                                                               |       | (5,433                                      | )          | (503 | ) | 577 |   |
| Accrued profit  sharing trust contributions                                        |       | 1,070                                       |       | (77 | ) | 868 |   |
| Accrued cash  profit sharing and commissions                                       |       | (1,773                                      | )          | (3,748 | ) | (2,417 | ) |
| Other long-term  liabilities                                                       |       | (684                                        | )          | (536 | ) | 711 |   |
| Accrued workers’  compensation                                                |       | 170                                         |       | 404 |   | 450 |   |
| Income taxes  payable                                                              |       | 1,254                                       |       | (3,935 | ) | 4,017 |   |
| Net cash  provided by operating activities                                         |       | 56,132                                      |       | 126,845 |   | 99,067 |   |
|                                                                               |       |                                        |       |   |   |   |   |
| **Cash  flows from investing activities**                                          |       |                                        |       |   |   |   |   |
| Capital  expenditures                                                              |       | (15,984                                     | )          | (36,091 | ) | (51,537 | ) |
| Asset  acquisitions, net of cash acquired                                          |       | (36,346                                     | )          | (42,470 | ) | — |   |
| Acquisition of  minority interest                                                  |       | —                                      |       | — |   | (9,135 | ) |
| Distributions  from equity investment                                              |       | —                                      |       | — |   | 114 |   |
| Loan made to related  party                                                        |       | (1,300                                      | )          | — |   | — |   |
| Contribution to  equity investment                                                 |       | (700                                        | )          | — |   | — |   |
| Proceeds from  sale of capital assets                                              |       | 3,305                                       |       | 3,363 |   | 86 |   |
| Net cash used in  investing activities                                             |       | (51,025                                     | )          | (75,198 | ) | (60,472 | ) |
|                                                                               |       |                                        |       |   |   |   |   |
| **Cash  flows from financing activities**                                          |       |                                        |       |   |   |   |   |
| Line of credit  borrowings                                                         |       | 3,655                                       |       | 7,166 |   | 727 |   |
| Repayment of  debt and line of credit borrowings                                   |       | (4,659                                      | )          | (6,868 | ) | (1,599 | ) |
| Debt issuance  costs                                                               |       | —                                      |       | (687 | ) | — |   |
| Repurchase of  common stock                                                        |       | —                                      |       | (4,191 | ) | (17,166 | ) |
| Issuance of  Company’s common stock                                           |       | 6,881                                       |       | 4,832 |   | 8,947 |   |
| Excess tax  benefit of options exercised                                           |       | 515                                         |       | 746 |   | 3,056 |   |
| Dividends paid                                                                     |       | (19,440                                     | )          | (18,415 | ) | (15,444 | ) |
| Net cash used in  financing activities                                             |       | (13,048                                     | )          | (17,417 | ) | (21,479 | ) |
|                                                                               |       |                                        |       |   |   |   |   |
| Effect of  exchange rate changes on cash                                           |       | (7,451                                      | )          | 3,613 |   | (20 | ) |
|                                                                               |       |                                        |       |   |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                              |       | (15,392                                     | )          | 37,843 |   | 17,096 |   |
| Cash and cash  equivalents at beginning of period                                  |       | 186,142                                     |       | 148,299 |   | 131,203 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                           | 170,750    |   | $ | 186,142 |   | $ | 148,299 |   |
| ** **                                                                         | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Supplemental Disclosure of Cash Flow Information**                               | ** ** |
| **Cash  paid during the year for**                                                 |       |                                        |       |   |   |   |   |
| Interest                                                                           |       | $                                           | 296        |   | $ | 264 |   | $ | 91 |   |
| Income taxes                                                                       |       | 36,956                                      |       | 50,637 |   | 59,374 |   |
| **Noncash  activity during the year for**                                          |       |                                        |       |   |   |   |   |
| Noncash capital  expenditures                                                      |       | $                                           | 296        |   | $ | 1,081 |   | $ | 507 |   |
| Noncash asset  acquisition                                                         |       | 1,457                                       |       | 1,308 |   | — |   |
| Common stock  issued for compensation                                              |       | 247                                         |       | 307 |   | 229 |   |
| Dividends  declared but not paid                                                   |       | 4,897                                       |       | 4,854 |   | 3,870 |   |
| Consolidation of  VIE (Note 15)                                                    |       | —                                      |       | — |   | (5,337 | ) |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**Simpson Manufacturing Co., Inc.and Subsidiaries**

**Notesto Consolidated Financial Statements**

** **

1.             Operations and Summary of Significant AccountingPolicies

 

*Nature ofOperations*

 

SimpsonManufacturing Co., Inc., through its subsidiaries Simpson Strong-TieCompany Inc. (“Simpson Strong-Tie”) and Simpson Dura-Vent Company, Inc.and its other subsidiaries (collectively, the “Company”), designs, engineersand manufactures wood-to-wood, wood-to-concrete and wood-to-masonry connectors, screw fastening systems and collated screws,stainless steel fasteners, pre-fabricated shearwallsand moment-frames and venting systems for gas and wood burning and alternativefuel appliances. The Company markets its products to the residentialconstruction, light industrial and commercial construction, remodeling anddo-it-yourself markets. Simpson Strong-Tie also offers a line of adhesives,mechanical anchors and powder-actuated tools for concrete, masonry and steel.

 

The Company operatesexclusively in the building products industry. The Company’s products are soldprimarily throughout the United States, Canada, Europe and Asia. Revenues havesome geographic market concentration on the west coast of the United States. Aportion of the Company’s business is therefore dependent on economic activitywithin this region and market. The Company is dependent on the availability ofsteel, its primary raw material.

 

### *Principles ofConsolidation*

### * *

The consolidatedfinancial statements include the accounts of Simpson Manufacturing Co., Inc.and its subsidiaries. Investments in 50% or less owned entities are accountedfor using either cost or the equity method. The Company consolidates allvariable interest entities (VIEs) where it is the primary beneficiary. Therewere no VIEs as of December 31, 2007 or 2008. All significant intercompanytransactions have been eliminated.

 

### *Use of Estimates*

### * *

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

*Revenue Recognition*

 

The Company recognizes revenue when the earnings process is complete, net of applicable provision for discounts, returns and incentives, whether actual or estimated based on the Company’s experience. This generally occurs when products are shipped to the customer in accordance with the sales agreement or purchase order, ownership and risk of loss pass to the customer, collectibility is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement. Service sales, representing aftermarket repair and maintenance and engineering activities, though significantly less than 1% of net sales and not material to the consolidated financial statements, are recognized as the services are completed. If the actual costs of sales returns, incentives, and discounts were to significantly exceed the recorded estimated allowance, the Company’s sales would be adversely affected.

 

*CashEquivalents*

 

The Company considers allhighly liquid investments with an original or remaining maturity of threemonths or less at the time of purchase to be cash equivalents.

 

*Investments*

 

The Company has aminority investment in a privately held company. These kinds of investments arecarried either at cost or by the equity method of accounting, depending on theCompany’s ownership interest and its ability to influence the operating orfinancial decisions of the investee, and are classified as long-terminvestments.

 

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The Company periodicallyreviews its investments for impairment. If the carrying value of an investmentexceeds its fair value and the decline in fair value is determined to beother-than-temporary, the Company writes down the value of the investment toits fair value. The Company generally believes an other-than-temporary declineoccurs when the fair value of an investment is below the carrying value for twoconsecutive quarters.

 

*Allowance for Doubtful Accounts*

 

The Company assesses thecollectibility of specific customer accounts that would be considered doubtfulbased upon the customer’s financial condition, payment history, credit ratingand other factors that the Company considers relevant, or accounts that theCompany assigns for collection. The Company reserves for the portion of thoseoutstanding balances that the Company believes it is not likely to collectbased on historical collection experience. The Company also reserves 100% ofthe amount that it deems potentially uncollectible due to a customer’sdeteriorating financial condition or bankruptcy. If the financial condition ofthe Company’s customers were to deteriorate, resulting in probable inability tomake payments, additional allowances may be required. 

 

*InventoryValuation*

 

Inventories are stated at the lower of cost or net realizable value (market). Cost includes all costs incurred in bringing each product to its present location and condition, as follows:

 

·                  Raw materials and purchased finished goods for resale – principally valued at cost determined on a weighted average basis.

 

·                  In-process products and finished goods – cost of direct materials and labor plus attributable overhead based on a normal level of activity.

 

The Company applies net realizable value and obsolescence to the gross value of the inventory. The Company estimates net realizable value based on estimated selling price less further costs to completion and disposal. The Company provides for slow moving product by comparing inventories on hand to future projected demand. Obsolete inventory is on-hand supply of a product in excess of two years’ sales of that product or a supply of that product that the Company believes is no longer marketable. The Company revalues obsolete inventory as having no net realizable value and writes off its full carrying value. The Company has consistently applied this methodology. The Company believes that this approach is prudent and makes suitable provisions for slow moving and obsolete inventory. When provisions are established, a new cost basis of the inventory is created.

 

*Sales Incentive and Advertising Allowances*

 

The Company recordsestimated reductions to revenues for sales incentives, primarily rebates forvolume discounts, and allowances for co-operative advertising.

 

*Allowances for Sales Discounts*

 

The Company recordsestimated reductions to revenues for discounts taken on early payment ofinvoices by its customers.

 

*Warranties*

 

The Company providesproduct warranties for specific product lines and accrues for estimated futurewarranty costs, none of which has been material to the consolidated financialstatements, in the period in which the sale is recorded. In a limited number ofcircumstances, the Company may also agree to indemnify customers against legalclaims made against those customers by the end users of the Company’sproducts.  Historically, payments made bythe Company, if any, under such agreements have not had a material effect onthe Company’s consolidated results of operations, cash flows or financialposition.

 

*FairValue of Financial Instruments*

 

Statement of Financial Accounting Standards (“SFAS”) No. 157,“Fair Value Measurements,” establishesa valuation hierarchy for disclosure of the inputs used to measure fair value.This hierarchy prioritizes the inputs into three broad levels as follows: Level1 inputs are quoted prices (unadjusted) in active markets for identical assetsor liabilities; Level 2 inputs are quoted prices for similar assets andliabilities in active markets or inputs that are observable for the asset orliability, either directly or indirectly through market corroboration, forsubstantially the 

 

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full term of the financial instrument; Level 3 inputsare unobservable inputs based on the Company’s assumptions used to measureassets and liabilities at fair value. A financial asset’s or liability’sclassification within the hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement.

 

As of December 31, 2008, the Company’sinvestments consisted of only United States Treasury securities and moneymarket funds aggregating $61.4 million, which are maintained in cashequivalents and are carried at cost, approximating fair value, based on Level 1inputs.

 

*Property,Plant and Equipment*

 

Property, plant andequipment are carried at cost. Major renewals and betterments are capitalized.Maintenance and repairs are expensed on a current basis. When assets are soldor retired, their costs and accumulated depreciation are removed from theaccounts, and the resulting gains or losses are reflected in the consolidatedstatements of operations.

 

American Institute ofCertified Public Accountants (“AICPA”) Statement of Position (“SOP”) 98-1, “Accounting for the Costs of ComputerSoftware Developed or Obtained for Internal Use,” provides guidance oncapitalization of the costs incurred for computer software developed orobtained for internal use.  The Companycapitalizes substantially all external costs and qualifying internal costsrelated to the purchase and implementation of software projects used forbusiness operations and engineering design activities. Capitalized softwarecosts primarily include purchased software and external consulting fees.Capitalized software projects are amortized over the estimated useful lives ofthe software, typically a three-to-five year period.

 

*Depreciationand Amortization*

 

Depreciation of property,plant and equipment is provided for using accelerated methods over thefollowing estimated useful lives:

 

| System software                 |   | 3 to 5 years   |   |
|---------------------------------|--------|----------------|--------|
| Machinery and equipment         |   | 3 to 10 years  |   |
| Buildings and site improvements |   | 15 to 45 years |   |

 

Leasehold improvementsare amortized using the straight-line method over the shorter of the expectedlife or the remaining term of the lease. Amortization of purchased intangibleassets with finite useful lives is computed using the straight-line method overthe estimated useful lives of the assets.

 

*Cost ofSales*

 

The types of costsincluded in cost of sales include material, labor, factory and toolingoverhead, shipping, and freight costs. Major components of these expenses arematerial costs, such as steel, personnel, packaging and cartons and facilitycosts such as rent, depreciation and utilities related to the production anddistribution of the Company’s products. Inbound freight charges, purchasing andreceiving costs, inspection costs, warehousing costs, internal transfer costs,and other costs of the Company’s distribution network are also included in costsof sales.

 

*Tool andDie Costs*

 

Tool and die costs areincluded in product costs in the year incurred.

 

*Shippingand Handling Costs*

 

The Company’s generalshipping terms are F.O.B. shipping point. Shipping and handling fees and costsare included in  revenues and productcosts, as appropriate, in the year incurred.

 

*ProductResearch and Development Costs*

 

Product research anddevelopment costs, which are included in operating expenses and are chargedagainst income as incurred, were $7.0 million, $6.0 million and $5.7 million in2008, 2007 and 2006, respectively. The types of costs included as ProductResearch and Development expenses are typically related to salaries andbenefits and supplies. The Company amortizes acquired patents over theirremaining lives and performs periodic reviews for impairment. The cost ofinternally developed patents is expensed as incurred.

 

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*Selling Costs*

 

Sellingcosts include expenses associated with selling, merchandising and marketing theCompany’s products. Major components of these expenses are personnel, salescommissions, facility costs such as rent, depreciation and utilities,professional services, information technology related costs, sales promotion,advertising, literature and trade shows.

 

*AdvertisingCosts*

 

Advertising costs areincluded in selling expenses, are expensed when the advertising occurs, andwere $9.6 million, $9.5 million and $12.1 million in 2008, 2007 and 2006,respectively.

 

*General andAdministrative Costs*

 

Generaland administrative costs include personnel, information technology relatedcosts, facility costs such as rent, depreciation and utilities, professionalservices, amortization of intangibles and bad debt charges.

 

*IncomeTaxes*

 

Income taxes arecalculated using an asset and liability approach. The provision for incometaxes includes federal, state and foreign taxes currently payable and deferredtaxes, due to temporary differences between the financial statement and taxbases of assets and liabilities. In addition, future tax benefits arerecognized to the extent that realization of such benefits is more likely thannot.

 

*SalesTaxes*

 

Pursuant to the EmergingIssues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected and Remittedto Governmental Authorities Should Be Presented in the Income Statement (That Is,Gross versus Net Presentation),” the Company presents taxes collected andremitted to governmental authorities on a net basis in the accompanyingconsolidated statements of operations.

 

*ForeignCurrency Translation*

 

Thelocal currency is the functional currency of the Company’s operations inEurope, Canada and Asia. Assets and liabilities denominated in foreigncurrencies are translated using the exchange rate on the balance sheet date.Revenues and expenses are translated using average exchange rates prevailingduring the year. The translation adjustment resulting from this process isshown separately as a component of stockholders’ equity. Foreign currencytransaction gains or losses are included in general and administrative expensesand have not been significant in any of the years presented.

 

### *Common Stock*

### * *

Subjectto the rights of holders of any preferred stock that may be issued in thefuture, holders of common stock are entitled to receive such dividends, if any,as may be declared from time to time by the Board of Directors (the “Board”)out of legally available funds, and in the event of liquidation, dissolution orwinding-up of the Company, to share ratably in all assets available fordistribution. The holders of common stock have no preemptive or conversionrights. Subject to the rights of any preferred stock that may be issued in thefuture, the holders of common stock are entitled to one vote per share on anymatter submitted to a vote of the stockholders, except that, subject tocompliance with pre-meeting notice and other conditions pursuant to the Company’sBylaws, stockholders may cumulate their votes in an election of directors, andeach stockholder may give one candidate a number of votes equal to the numberof directors to be elected multiplied by the number of shares held by suchstockholder or may distribute such stockholder’s votes on the same principleamong as many candidates as such stockholder thinks fit. There are noredemption or sinking fund provisions applicable to the common stock.

 

In 1999, the Company declared a dividend distribution of one Right topurchase Series A Participating preferred stock per share of common stock.The Rights will be exercisable, unless redeemed earlier by the Company, if aperson or group acquires, or obtains the right to acquire, 15% or more of theoutstanding shares of common stock or commences a tender or exchange offer thatwould result in it acquiring 15% or more of the outstanding shares of commonstock, either event occurring without the prior consent of the Company. Theamount of Series A Participating preferred stock that the holder of aRight is entitled to receive and the purchase price payable on exercise of aRight are both subject to adjustment. Any person or group that acquires 15% ormore of the outstanding shares of common stock without the prior consent of theCompany would not be entitled to this purchase. Any 

 

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stockholder who holds 25% or more of the Company’s common stock whenthe Rights were originally distributed would not be treated as having acquired15% or more of the outstanding shares unless such stockholder’s ownership isincreased to more than 40% of the outstanding shares.

 

The Rights will expire on July 29, 2009, or they may be redeemedby the Company at one cent per Right prior to that date. The Rights do nothave voting or dividend rights and, until they become exercisable, have nodilutive effect on the earnings of the Company. One million shares of theCompany’s preferred stock have been designated Series A Participatingpreferred stock and reserved for issuance on exercise of the Rights. No eventduring 2008 made the Rights exercisable.

 

### *Preferred Stock*

### * *

The Board has theauthority to issue the authorized and unissued preferred stock in one or moreseries with such designations, rights and preferences as may be determined fromtime to time by the Board. Accordingly, the Board is empowered, withoutstockholder approval, to issue preferred stock with dividend, redemption,liquidation, conversion, voting or other rights that could adversely affect thevoting power or other rights of the holders of the Company’s common stock.

 

*NetIncome per Common Share*

 

Basicnet income per common share is computed based on the weighted average number ofcommon shares outstanding. Potentially dilutive shares, using the treasurystock method, are included in the diluted per-share calculations for allperiods when the effect of their inclusion is dilutive.

 

Thefollowing is a reconciliation of basic earnings per share (“EPS”) to dilutedEPS:

 
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                               | ** ** | ** **                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| **(in thousands, except**      | ** ** | **Net**                                     | ** ** | **Average** | ** ** | **Per** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per** | ** ** | **Net** | ** ** | **Average** | ** ** | **Per** | ** ** |
| **per-share amounts)**              | ** ** | **Income**                                  | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Share** | ** ** |
| **Basic  EPS**                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |       | $                                           | 53,934     |   | 48,636 |   | $ | 1.11 |   | $ | 68,742 |   | 48,472 |   | $ | 1.42 |   | $ | 102,496 |   | 48,300 |   | $ | 2.12 |   |
|                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect  of Dilutive Securities**       |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                            |       | —                                      |       | 334 |   | (0.01 | ) | — |   | 456 |   | (0.02 | ) | — |   | 591 |   | (0.02 | ) |
|                                     |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted  EPS**                         |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income available  to common stockholders |       | $                                           | 53,934     |   | 48,970 |   | $ | 1.10 |   | $ | 68,742 |   | 48,928 |   | $ | 1.40 |   | $ | 102,496 |   | 48,891 |   | $ | 2.10 |   |

 

Anti-dilutiveshares attributable to outstanding stock options were excluded from thecalculation of diluted net income per share. For the years ended December 31,2008, 2007, and 2006, 1.1 million, 1.0 million and 1.0 million shares,respectively, subject to stock options were anti-dilutive.

 

Thepotential tax benefits derived from the amount of the average stock price forthe period in excess of the grant date fair value of stock options, known asthe windfall tax benefit, is added to the proceeds of stock option exercisesunder the treasury stock method for computing the amount of dilutive securitiesused to determine the outstanding shares for the calculation of dilutedearnings per share.

 

### *Comprehensive  Income*

### * *

Comprehensive income,which is included in the consolidated statements of stockholders’ equity, isdefined as net income plus other comprehensive income. Other comprehensiveincome consists of changes in foreign currency translation adjustments recordeddirectly into stockholders’ equity. The components of accumulated othercomprehensive income as of December 31, 2008, were $5.7 million, net oftax of $0.9 million, and as of December 31, 2007, were $25.3 million, netof tax of $1.6 million, all of which comprised foreign currency translationadjustments.

 

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*Concentrationof Credit Risk*

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist of cash in banks, short-term investments in United States Treasurysecurities, money market funds and trade accounts receivable. The Companymaintains its cash in demand deposit and money market accounts held primarilyat six banks.

 

*Accountingfor Stock-Based Compensation*

 

The Company maintains twostock option plans under which it may grant incentive stock options andnon-qualified stock options, although the Company has granted onlynon-qualified stock options under these plans. The Simpson Manufacturing Co., Inc.1994 Stock Option Plan (the “1994 Plan”) is principally for the Company’semployees, and the Simpson Manufacturing Co., Inc. 1995 IndependentDirector Stock Option Plan (the “1995 Plan”) is for its independent directors.The Company generally grants options under each of the 1994 Plan and the 1995Plan once each year. The exercise price per share of each option granted in February 2008and February 2007 under the 1994 Plan equaled the closing market price pershare of the Company’s common stock as reported by the New York Stock Exchangeon the day preceding the day that the Compensation Committee of the Company’sBoard of Directors met to approve the grant of the options. In prior years,stock options were granted under the 1994 Plan with the exercise price equal toor in excess of the closing market price per share of the Company’s commonstock as reported by the New York Stock Exchange on the last trading day of thepreceding year. The exercise price per share under each option granted underthe 1995 Plan is at the fair market value on the date specified in the 1995Plan. Options vest and expire according to terms established at the grant date.

 

Under the 1994 Plan, nomore than 16 million shares of the Company’s common stock may be sold(including shares already sold) pursuant to all options granted under the 1994Plan. Under the 1995 Plan, no more than 320 thousand shares of common stock maybe sold (including shares already sold) pursuant to all options granted underthe 1995 Plan. Options granted under the 1994 Plan typically vest evenly overthe requisite service period of four years and have a term of seven years. Thevesting of options granted under the 1994 Plan will be accelerated if thegrantee ceases to be employed after reaching age sixty or if there is a changein control of the Company. Options granted under the 1995 Plan are fully vestedon the date of grant.

 

The following tablerepresents the Company’s stock option activity for the years ended December 31,2008, 2007 and 2006:

 
| ** **                                                                                    | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                                                                       | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock option  expense recognized in operating expenses                                        |       | $                                           | 3,400      |   | $ | 5,906 |   | $ | 7,353 |   |
|                                                                                          |       |                                        |       |   |   |   |   |
| Tax benefit of  stock option expense in provision for income taxes                            |       | 1,341                                       |       | 2,330 |   | 2,779 |   |
|                                                                                          |       |                                        |       |   |   |   |   |
| Stock option  expense, net of tax                                                             |       | $                                           | 2,059      |   | $ | 3,576 |   | $ | 4,574 |   |
|                                                                                          |       |                                        |       |   |   |   |   |
| Fair value of  shares vested                                                                  |       | $                                           | 3,249      |   | $ | 5,893 |   | $ | 7,618 |   |
|                                                                                          |       |                                        |       |   |   |   |   |
| Proceeds to the  Company from the exercise of stock options                                   |       | $                                           | 6,881      |   | $ | 4,832 |   | $ | 8,947 |   |
|                                                                                          |       |                                        |       |   |   |   |   |
| Tax benefit from  exercise of stock options, including windfall (shortfall) tax benefits, net |       | $                                           | 376        |   | $ | 554 |   | $ | 3,349 |   |

 
| ** **                                  | ** ** | **At December 31,** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|
| **(in thousands)**                     | ** ** | **2008**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock option  cost capitalized in inventory |       | $                             | 101        |   | $ | 252 |   | $ | 265 |   |
|                                             |            |                               |            |  |  |  |  |  |  |  |

 

The amounts included incost of sales, research and development and engineering, selling, or generaland administrative expenses depend on the job functions performed by theemployees to whom the stock options were granted. Shares of common stock issued on exercise of stock options under theplans are registered under the Securities Act of 1933.

 

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The assumptions used tocalculate the fair value of options granted are evaluated and revised, asnecessary, to reflect market conditions and the Company’s experience.

 

**Under the 1994 Plan, the Company allows for full vesting on ceasing tobe employed if the employee becomes “retirement-eligible” by reaching agesixty. Prior to the adoption of SFAS 123R, stock-based employee compensationexpense was recorded over the nominal vesting period and if aretirement-eligible employee retired before the end of the vesting period, theCompany recorded unrecognized compensation cost at the date of retirement (the “nominalvesting period approach”). The nominal vesting period is four years of servicesubsequent to the grant date. The “non-substantive vesting period approach”specifies that awards, in substance, become vested when the employee’sretention of the award is no longer contingent on providing service. Under thisapproach, the unrecorded compensation cost is expensed when that condition ismet even if the employee continues providing service to the Company. This wouldbe the case for existing grants when an employee becomes retirement-eligible,as well as when a retirement-eligible employee is granted an award.**

 

*Goodwilland Intangible Assets*

 

The Company reviews forimpairment its indefinite lived intangible assets annually, in the fourthquarter of each year, and whenever events or changes in circumstances indicatethe carrying value of an asset may not be recoverable in accordance with SFASStatement No. 142, “Goodwill and Other Intangible Assets.” These events orcircumstances could include a significant change in the business climate, legalfactors, operating performance indicators, competition, or disposition orrelocation of a significant portion of a reporting unit. SFAS No. 142requires that management perform a two-step impairment test on goodwill. In thefirst step, management compares the fair value of each reporting unit to itscarrying value. The fair value calculation uses discounted cash flow model andmay be supplemented by market approaches if information is readily available.If the carrying value of the net assets assigned to the reporting unit exceedsthe fair value of the reporting unit, a second step of the impairment test mustbe performed to determine the implied fair value of the reporting unit’sgoodwill. If the carrying value of a reporting unit’s goodwill exceeds itsimplied fair value, an impairment charge equal to the difference between theimplied fair value of the goodwill and the carrying cost would be reported.

 

Determining the fairvalue of a reporting unit or an indefinite-lived purchased intangible asset isa judgment involving significant estimates and assumptions. These estimates andassumptions include revenue growth rates and operating margins used tocalculate projected future cash flows, risk-adjusted discount rates, and futureeconomic and market conditions. The Company bases its fair value estimates onassumptions that management believes to be reasonable but that areunpredictable and inherently uncertain. Actual future results may differ fromthose estimates. The $3.0 million impairment charge taken in 2008, which was aresult of the Company’s annual impairment test in the fourth quarter of 2008,was associated with assets that were acquired in England in 1999 and isassociated with the Company’s U.K. reporting unit. The reporting unit’scarrying value exceeded the fair value, primarily due to  reduced future expected net cash flows. Themethod to determine the fair value of the U.K. reporting unit was a discountedcash flow model. The $10.7 million impairment charge taken in 2007 wasprimarily attributed to the decision by the Company, in October 2007, tomove production of certain products from the Canadian reporting unit to Chinain late 2008 and early 2009. The method to determine the fair value of theCanadian reporting unit was a combination of a discounted cash flow model andmarket approaches. The market approaches were based on multiples realized bysimilar public companies and on representative merger and acquisitiontransactions of a similar nature and industry. At December 31, 2008, the remainingbalances of goodwill of the U.K. and Canadian reporting units were $1.2 millionand $3.1 million, respectively. The Company’s annual goodwill impairmentanalysis did not result in any additional impairment charges in 2008 or 2007 orany impairment charges in 2006.

 

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The changes in thecarrying amount of goodwill as of December 31, 2007 and 2008, were as follows:

 
| **(in thousands)**            | ** ** | **Goodwill** | ** ** |
|------------------------------------|------------|--------------|------------|
| Balance at  January 1, 2007   |       | $            | 44,337     |   |
| Acquisitions                       |       | 20,143       |       |
| Impairment of  goodwill            |       | (10,666      | )          |
| Foreign exchange                   |       | 3,604        |       |
| Balance at  December 31, 2007 |       | 57,418       |       |
| Acquisitions                       |       | 18,577       |       |
| Impairment of  goodwill            |       | (2,964       | )          |
| Foreign exchange                   |       | (4,412       | )          |
| Balance at  December 31, 2008 |       | $            | 68,619     |   |

 

The carrying amount ofthe Company’s goodwill as of December 31, 2008 and 2007, was associatedwith the following operating segments:

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| **(in thousands)** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| ** **              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Connector  Products     |       | $                     | 64,205     |   | $ | 57,418 |   |
| Venting Products        |       | 4,414                 |       | — |   |
|                    |       | $                     | 68,619     |   | $ | 57,418 |   |

 

The goodwill associatedwith the venting products operating segment resulted from the acquisitions ofthe equity of ProTech Systems, Inc. (“ProTech”) and the Ventinox assetscompleted in 2008. The balance of the additions to goodwill resulted from theacquisitions related to the connector products operating segment. See Note 2.The goodwill impairment charges taken in 2008 and 2007 were associated with theconnector products operating segment.

 

The total grosscarrying amount and accumulated amortization of intangible assets subject toamortization at December 31, 2008, were $35.6 million and $12.2 million,respectively. The aggregate amount of amortization expense of intangible assetsfor the year ended December 31, 2008 was $5.1 million.

 

The changes in thecarrying amounts of patents, unpatented technologies and non-compete agreementsand other intangible assets subject to amortization as of December 31,2007 and 2008, were as follows:

 
| ** **                         | ** ** | ** **  | ** ** | **Accumulated**  | ** ** | ** **           | ** ** |
|------------------------------------|------------|-------------|------------|------------------|------------|----------------------|------------|
| **(in thousands)**            | ** ** | **Patents** | ** ** | **Amortization** | ** ** | **Net Patents** | ** ** |
| Balance at  January 1, 2007   |       | $           | 6,917      |             | $          | (1,872               | )          | $ | 5,045 |   |
| Amortization                       |       | —      |       | (628             | )          | (628                 | )          |
| Foreign exchange                   |       | 36          |       | —           |       | 36                   |       |
| Balance at  December 31, 2007 |       | 6,953       |       | (2,500           | )          | 4,453                |       |
| Amortization                       |       | —      |       | (630             | )          | (630                 | )          |
| Foreign exchange                   |       | (24         | )          | —           |       | (24                  | )          |
| Balance at  December 31, 2008 |       | $           | 6,929      |             | $          | (3,130               | )          | $ | 3,799 |   |

 
| ** **                         | ** ** | ** **     | ** ** | ** **       | ** ** | **Net**        | ** ** |
|------------------------------------|------------|----------------|------------|------------------|------------|----------------|------------|
| ** **                         | ** ** | **Unpatented** | ** ** | **Accumulated**  | ** ** | **Unpatented** | ** ** |
| ** **                         | ** ** | **Technology** | ** ** | **Amortization** | ** ** | **Technology** | ** ** |
| Balance at  January 1, 2007   |       | $              | 3,835      |             | $          | (1,694         | )          | $ | 2,141 |   |
| Amortization                       |       | —         |       | (767             | )          | (767           | )          |
| Balance at  December 31, 2007 |       | 3,835          |       | (2,461           | )          | 1,374          |       |
| Amortization                       |       | —         |       | (767             | )          | (767           | )          |
| Balance at  December 31, 2008 |       | $              | 3,835      |             | $          | (3,228         | )          | $ | 607 |   |

 

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** **
| ** **                         | ** ** | ** **         | ** ** | ** **       | ** ** | **Net**            | ** ** |
|------------------------------------|------------|--------------------|------------|------------------|------------|--------------------|------------|
| ** **                         | ** ** | **Non-Compete**    | ** ** | ** **       | ** ** | **Non-Compete**    | ** ** |
| ** **                         | ** ** | **Agreements,**    | ** ** | ** **       | ** ** | **Agreements,**    | ** ** |
| ** **                         | ** ** | **Trademarks**     | ** ** | **Accumulated**  | ** ** | **Trademarks**     | ** ** |
| ** **                         | ** ** | **and Other** | ** ** | **Amortization** | ** ** | **and Other** | ** ** |
|                               |       |               |       |             |       |               |       |
| Balance at  January 1, 2007   |       | $                  | 1,843      |             | $          | (1,265             | )          | $ | 578 |   |
| Acquisition                        |       | 5,330              |       | —           |       | 5,330              |       |
| Amortization                       |       | —             |       | (907             | )          | (907               | )          |
| Write-off fully  amortized asset   |       | (65                | )          | 65               |       | —             |       |
| Foreign exchange                   |       | 58                 |       | —           |       | 58                 |       |
| Balance at  December 31, 2007 |       | 7,166              |       | (2,107           | )          | 5,059              |       |
| Acquisition                        |       | 2,793              |       | —           |       | 2,793              |       |
| Amortization                       |       | —             |       | (1,555           | )          | (1,555             | )          |
| Write-off fully  amortized asset   |       | (1,696             | )          | 1,696            |       | —             |       |
| Foreign exchange                   |       | (270               | )          | —           |       | (270               | )          |
| Balance at  December 31, 2008 |       | $                  | 7,993      |             | $          | (1,966             | )          | $ | 6,027 |   |

 
| ** **                         | ** ** | ** **        | ** ** | ** **       | ** ** | **Net**           | ** ** |
|------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|
| ** **                         | ** ** | **Customer**      | ** ** | **Accumulated**  | ** ** | **Customer**      | ** ** |
| ** **                         | ** ** | **Relationships** | ** ** | **Amortization** | ** ** | **Relationships** | ** ** |
| ** **                         | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** |
| Balance at  January 1, 2007   |       | $                 | 1,738      |             | $          | (766              | )          | $ | 972 |   |
| Acquisition                        |       | 12,316            |       | —           |       | 12,316            |       |
| Amortization                       |       | —            |       | (976             | )          | (976              | )          |
| Foreign exchange                   |       | 41                |       | —           |       | 41                |       |
| Balance at  December 31, 2007 |       | 14,095            |       | (1,742           | )          | 12,353            |       |
| Acquisition                        |       | 2,886             |       | —           |       | 2,886             |       |
| Amortization                       |       | —            |       | (2,112           | )          | (2,112            | )          |
| Foreign exchange                   |       | (107              | )          | —           |       | (107              | )          |
| Balance at  December 31, 2008 |       | $                 | 16,874     |             | $          | (3,854            | )          | $ | 13,020 |   |

 

At December 31,2008, estimated future amortization of intangible assets was as follows:

 
| **(in thousands)** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
| 2009                    |       | $          | 4,411      |   |
| 2010                    |       | 3,411      |       |
| 2011                    |       | 3,356      |       |
| 2012                    |       | 2,501      |       |
| 2013                    |       | 1,599      |       |
| Thereafter              |       | 8,175      |       |
|                    |       | $          | 23,453     |   |

 

*Adoptionof Statements of Financial Accounting Standards*

 

In October 2008, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)Financial Accounting Standard (“FAS”) 157-3, “Determining the Fair Value of aFinancial Asset When the Market for That Asset Is Not Active.”  FSP157-3 clarifies how FAS 157 should be applied when valuing securities inmarkets that are not active by illustrating key considerations in determiningfair value.  It also reaffirms the notion of fair value as the exitprice as of the measurement date.  FSP 157-3 was effective uponissuance, which included periods for which financial statements have not yetbeen issued.  This new accounting standard has been adopted for theCompany’s consolidated financial statements ended December 31,2008.  The adoption of FSP157-3 did not have a material effect on theCompany’s consolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities.” SFAS No. 159 allows entities to choose toelect, at specified dates, to measure eligible financial 

 

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instrumentsat fair value. Entities must report unrealized gains and losses on items forwhich the fair value option has been elected in earnings. The Company did notmake any fair value elections at the date of adoption of the provisions of SFASNo. 159 for financial assets and financial liabilities during the yearended December 31, 2008.

 

In May 2008,the FASB issued SFAS No. 162, “TheHierarchy of Generally Accepted Accounting Principles.” SFAS No. 162identifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements. SFAS No. 162was effective in the fourth quarter following the Securities and ExchangeCommission’s approval of the Public Company Accounting Oversight Boardamendments to Auditing Standard (AU) Section 411, “The Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles.” The adoption of SFAS No. 162 did nothave a material effect on the Company’s financial statements.

 

*RecentlyIssued Accounting Standards*

 

In December 2007, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R),“Business Combinations.” SFAS No. 141(R) requires the acquiringentity in a business combination to recognize the full fair value of assetsacquired and liabilities assumed in the transaction (whether a full or partialacquisition); establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; requires expensingof most transaction and restructuring costs; and requires the acquirer todisclose to investors and other users the information needed to evaluate andunderstand the nature and financial effect of the business combination. SFAS No. 141(R) appliesto all transactions or other events in which the Company obtains control of oneor more businesses, including combinations achieved without the transfer ofconsideration, for example, by contract alone or through the lapse of minorityveto rights. SFAS No. 141(R) applies prospectively to businesscombinations for which the acquisition date is on or after January 1,2009, except that resolution of certaintax contingencies and adjustments to valuation allowances related to businesscombinations, which previously were adjusted to goodwill, will be adjusted toincome tax expense for all such adjustments after January 1, 2009,regardless of the date of the original business combination. Theadoption is not currently expected to have a material effect on the Company’sfinancial statements for its fiscal year ending December 31, 2009.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements—an amendment of Accounting Research Bulletin No. 51.”SFAS No. 160 requires reporting entities to present noncontrolling(minority) interests as equity (as opposed to a liability or mezzanine equity)and provides guidance on the accounting for transactions between an entity andnoncontrolling interests. SFAS No. 160 applies prospectively as of January 1,2009, except for the presentation and disclosure requirements, which will beapplied retrospectively for all periods presented. The adoption is notcurrently expected to have a material effect on the Company’s financialstatements for its fiscal year ending December 31, 2009.

 

In September 2006,the FASB finalized SFAS No. 157 which became effective January 1,2008, except as amended by FSP FAS 157-1 and FSP FAS 157-2 (see below). ThisStatement defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements, but does not require anynew fair value measurements. The provisions of SFAS No. 157 were appliedprospectively to fair value measurements and disclosures for financial assetsand financial liabilities recognized or disclosed at fair value in thefinancial statements on at least an annual basis beginning in the first quarterof 2008. The adoption of this statement did not have a material effect on theconsolidated financial statements for fair value measurements made during the yearended December 31, 2008. While the Company does not currently expect theadoption of the remaining portions of this statement to have a material effecton its consolidated financial statements in subsequent reporting periods, theCompany continues to monitor any additional implementation guidance that isissued that addresses the fair value measurements for financial andnonfinancial assets and nonfinancial liabilities not disclosed at fair value(at least annually) in the financial statements.

 

In February 2008,the FASB issued FSP FAS 157-1, “Application of FASB Statement No. 157 toFASB Statement No. 13 and Its Related Interpretive AccountingPronouncements That Address Leasing Transactions,” and FSP FAS 157-2, “EffectiveDate of FASB Statement No. 157.” FSP FAS 157-1 removes leasing from thescope of SFAS No. 157, “Fair Value Measurements.” FSP FAS 157-2 delays theeffective date of SFAS No. 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). The Company does not expect the adoption of these statementsto have a material effect on its consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities—an amendment of FASBStatement No. 133.” SFAS No. 161 expands the disclosurerequirements 

 

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includedin SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities.” SFAS No. 161 iseffective for fiscal years beginning after November 15, 2008. The Companydoes not currently expect the adoption of SFAS No. 161 to have amaterial effect on the Company’s financial statements.

 

In April 2008,the FASB issued FSP FAS 142-3, “Determination of the Useful Life ofIntangible Assets.” FSP FAS 142-3 removes the requirement of SFAS No. 142 “Goodwilland Other Intangible Assets” for an entity to consider, when determining theuseful life of a recognized intangible asset, whether an intangible asset canbe renewed without substantial cost or material modifications to the existingterms and conditions.  FSP FAS 142-3 requires an entity to consider itsown historical experience in developing renewal or extension assumptions. In the absence of entity specific experience, FSP FAS 142-3 requires an entityto consider assumptions that a marketplace participant would use about renewalor extension that are consistent with the highest and best use of the asset bya marketplace participant.  FSP FAS 142-3 is effective prospectively forall intangible assets acquired after its effective date, with additionaldisclosures required for all recognized intangible assets as of the effectivedate. FSP FAS 142-3 will be effective for financial statements issued forfiscal years beginning after December 15, 2008, and interim periods withinthose fiscal years. The Company has not yet determined the effect, if any, ofFSP FAS 142-3 on the Company’s financial statements for its fiscal year ending December 31,2009, and the fiscal quarters of that year.

 

2.             Acquisitions

 

In July 2007, theCompany’s subsidiary, Simpson Strong-Tie, purchased the stock of Swan SecureProducts, Inc. (“Swan Secure”) for $42.1 million in cash, net of cashreceived. Swan Secure is a manufacturer and distributor of fasteners, largelystainless steel, and its products are marketed throughout the United States.Swan Secure expands the Company’s fastener product offerings in its connectorproducts segment. The Company recorded goodwill of $20.1 million, all of whichis expected to be deductible for income tax purposes, and intangible assetssubject to amortization of $16.7 million as a result of the acquisition. Theweighted-average amortization period for the intangible assets is 11.1 years.Tangible assets, including inventory and trade accounts receivable, accountedfor the balance of the purchase price. Swan Secure’s results of operations havebeen included in the Company’s consolidated results of operations as of thedate of the acquisition. Through this acquisition, the Company increased itspresence in the stainless-steel fastener market. The Company believes that theadditional product line will further its position in the construction productsmarket. These factors contributed to a purchase price in excess of fair marketvalue of Swan Secure’s net tangible and intangible assets acquired, and as aresult, the Company has recorded goodwill in connection with the transaction.

 

In April 2008, theCompany’s subsidiary, Simpson Strong-Tie Ireland Limited, purchased certainassets of Liebig International Ltd., an Irish company, Heinrich LiebigStahldübelwerke GmbH, Liebig GmbH & Co. KG and Liebig InternationalVerwaltungsgesellschaft GmbH, all German companies, Liebig Bolts Limited, anEnglish company, and Liebig International Inc., a Virginia corporation(collectively “Liebig”). Liebig manufactures mechanical anchor products inIreland and distributes them primarily throughout Europe through warehouseslocated in Germany and the United Kingdom. Liebig expands the Company’s anchorproduct offerings in its connector product segment. The purchase price was$19.2 million in cash, including due diligence and transaction costs. TheCompany recorded goodwill of $7.6 million and intangible assets subject toamortization of $2.7 million as a result of the acquisition. Tangible assets,including real estate, machinery and equipment, inventory and trade accountsreceivable, accounted for the balance of the purchase price. Through thisacquisition, the Company increased its presence in the European and Asiananchor markets with metric size products. The Company believes that theadditional product line and geographic sales coverage will further its positionin the construction products market. These factors contributed to a purchaseprice in excess of fair market value of Liebig’s net tangible and intangibleassets acquired, and as a result, the Company has recorded goodwill inconnection with the transaction.

 

In June 2008, theCompany’s subsidiary, Simpson Dura-Vent Company, Inc., purchased theequity of ProTech Systems, Inc., a New York corporation. ProTechmanufactures venting products in New York and distributes them throughout NorthAmerica. ProTech expands the Company’s product offerings in the venting productsegment. The purchase price was $8.3 million in cash, including due diligenceand transaction costs and $1.4 million to be paid in the future, plus anadditional earn-out of up to $2.25 million if certain future performancetargets are met. The Company recorded goodwill of $3.7 million and intangibleassets subject to amortization of $3.0 million as a result of the acquisition.Net tangible assets, including machinery and equipment, inventory and tradeaccounts receivable, accounted for the balance of the purchase price, but thepurchase price allocation has not been finalized. In July 2008, SimpsonDura-Vent also purchased certain assets to produce the Ventinox stainless steelchimney liner product line from American BOA Inc. ProTech had been thedistributor of Ventinox products. The purchase price was $1.6 million in cash,including due diligence and transaction costs. The Company recorded goodwill of$0.7 

 

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million. The Ventinoxpurchase price allocation has not been finalized. Through these acquisitions,the Company increased its presence in the venting market with additionalproducts and geographic distribution. The Company believes that the additionalproduct line and geographic distribution will further its position in theventing products market. These factors contributed to a purchase price inexcess of fair market value of ProTech’s and Ventinox’s net tangible andintangible assets acquired, and as a result, the Company has recorded goodwillin connection with the transaction.

 

In July 2008,Simpson Strong-Tie purchased the equity of Ahorn-Geräte & WerkzeugeVertriebs GmbH, a German company, and its subsidiaries Ahorn UpevnovaciTechnika s.r.o., a Czech company, and Ahorn Pacific Fasteners (Kunshan) Co.,Ltd., a Chinese company (collectively “Ahorn”). The acquisition will broadenSimpson Strong-Tie’s collated fastener product line and add production capacityin both Europe and China. The purchase price was $9.2 million in cash,including due diligence and transaction costs. The Company recorded goodwill of$6.9 million as a result of the acquisition. Net tangible assets, includingmachinery and equipment, inventory and trade accounts receivable, accounted forthe balance of the purchase price, but the purchase price allocation has notbeen finalized.

 

The Company has notfinalized the purchase price allocations for the ProTech, Ventinox and Ahornacquisitions, as the Company is still obtaining information and analyzing thefair value of certain acquired assets and liabilities.

 

The results of operationsof the businesses acquired in 2008 are included in the Company’s consolidatedresults of operations since the respective dates of the acquisitions. Resultsof operations for periods prior to the 2008 acquisitions were not material tothe Company on either an individual or aggregate basis, and accordingly, proforma results of operations have not been presented.

 

3.             Trade Accounts Receivable, net

 

Trade accounts receivableconsisted of the following:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| **(in thousands)**          | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Trade accounts  receivable       |       | $                     | 81,929     |   | $ | 92,879 |   |
| Allowance for  doubtful accounts |       | (4,368                | )          | (2,724 | ) |
| Allowance for  sales discounts   |       | (1,556                | )          | (1,815 | ) |
|                             |       | $                     | 76,005     |   | $ | 88,340 |   |

 

 

The Company sells products on credit and generallydoes not require collateral. The Company’s largest customer accounted for 11%of trade accounts receivable as of December 31, 2008. Due to the financialcondition of another customer, the Company in 2008 reserved $2 million that itbelieves it is not likely to collect.

 

4.             Inventories

 

The components ofinventories consisted of the following:

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| **(in thousands)** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Raw materials           |       | $                     | 92,638     |   | $ | 82,164 |   |
| In-process  products    |       | 26,371                |       | 23,674 |   |
| Finished  products      |       | 132,869               |       | 112,504 |   |
|                    |       | $                     | 251,878    |   | $ | 218,342 |   |

 

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5.             Property, Plant and Equipment, net

 

Property, plant andequipment consisted of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                         | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Land                                            |       | $                     | 23,989     |   | $ | 19,820 |   |
| Buildings and  site improvements                |       | 135,992               |       | 131,166 |   |
| Leasehold  improvements                         |       | 4,287                 |       | 4,054 |   |
| Machinery and  equipment                        |       | 219,641               |       | 213,188 |   |
|                                            |       | 383,909               |       | 368,228 |   |
| Less accumulated  depreciation and amortization |       | (193,639              | )          | (175,893 | ) |
|                                            |       | 190,270               |       | 192,335 |   |
| Capital projects  in progress                   |       | 3,048                 |       | 5,782 |   |
|                                            |       | $                     | 193,318    |   | $ | 198,117 |   |

 

Includedin property, plant and equipment at December 31, 2008 and 2007, are fully depreciatedassets with an original cost of $96.7 million and $80.5 million, respectively.These fully depreciated assets are still in use in the Company’s operations.

 

Depreciationexpense of the years ended December 31, 2008, 2007 and 2006, was $25.0 million,$24.7 million and $22.3 million, respectively.

 

In April 2008, the Company completed the sale ofits vacant warehouse in McKinney, Texas, previously classified as an asset heldfor sale, for $1.8 million, and no material gain or loss was recorded.

 

The Company’s vacant facility in San Leandro,California, remains classified as an asset held for sale as of December 31,2008, consistent with the classification at December 31, 2007. Thisfacility is associated with the connector segment.

 

In September 2007, an environmental analysis ofthe San Leandro property indicated that it had contamination related to spilledfuel that would require an estimated $0.3 million to remediate. In June 2008,the Company performed additional analysis and determined that an additional$0.4 million would be needed to remediate the site. The clean-up is expected tobe completed in early 2009. The Company is currently marketing the San Leandroproperty and intends to sell it after the remediation is completed.

 

6.             Investments

 

The Company has a 35% equity interest in Keymark Enterprises, LLC (“Keymark”),for which the Company accounts using the equity method. Keymark developssoftware that assists in designing and engineering residential structures. TheCompany’s relationship with Keymark includes the specification of the Company’sproducts in the Keymark software. The Company has no obligation to make anyadditional capital contributions to Keymark. Nevertheless, in October 2008the Company made an additional voluntary capital contribution of $0.7 millionto Keymark and at the same time lent $1.3 million to Keymark’s other owner,which concurrently contributed that amount to Keymark’s capital. The loanbears interest at the annual rate of 6%, has a term of two years, is backed by apledge of an ownership interest in Keymark of 10% (subject toadjustment), and is non-recourse.

 

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7.                                       AccruedLiabilities

 

Accrued liabilitiesconsisted of the following:

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                   | ** ** | **2008**              | ** ** | **2007** |   |
|                                      |       |                  |       |   |   |
| Sales incentive  and advertising accruals |       | $                     | 14,916     |   | $ | 17,650 |   |
| Labor related  liabilities                |       | 4,667                 |       | 5,517 |   |
| Vacation  liability                       |       | 5,418                 |       | 4,991 |   |
| Dividend payable                          |       | 4,897                 |       | 4,854 |   |
| Sales tax  payable                        |       | 3,743                 |       | 5,146 |   |
| Other                                     |       | 461                   |       | 1,030 |   |
|                                      |       | $                     | 34,102     |   | $ | 39,188 |   |

 

8.                                       Debt

 

Theoutstanding debt at December 31, 2008 and 2007, and the available creditat December 31, 2008, consisted of the following:

 
| *** ***                                                                                                                                                                                                                            | ** ** | **Available  on**         | ** ** | ** **                | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                                                                                                                                                                                              | ** ** | **Credit  Facility**      | ** ** | **Debt  Outstanding**     | ** ** |
| ** **                                                                                                                                                                                                                              | ** ** | **at  December 31,** | ** ** | **at  December 31,** | ** ** |
| **(dollar amounts in thousands)**                                                                                                                                                                                                       | ** ** | **2008**                  | ** ** | **2008**                  | ** ** | **2007**   | ** ** |
| *** ***                                                                                                                                                                                                                            | ** ** | ** **                | ** ** | ** **                | ** ** | ** ** | ** ** |
| Revolving line  of credit, interest at LIBOR plus 0.27% (at December 31, 2008, LIBOR  plus 0.27% was 0.64%), matures October 2012, commitment fees payable at  the annual rate of 0.08% on the unused portion of the facility |       | $                         | 200,000    |                      | $          | —     |       | $ | — |   |
|                                                                                                                                                                                                                                    |       |                      |       |                      |       |       |       |
| Revolving line  of credit, interest at the bank’s base rate plus 3% (at December 31, 2008,  the bank’s base rate plus 3% was 5.00%), expires October 2009                                                           |       | 364                       |       | —                    |       | —     |       |
|                                                                                                                                                                                                                                    |       |                      |       |                      |       |       |       |
| Revolving lines  of credit, interest rates between 3.25% and 4.74%, expirations through  August 2009                                                                                                                               |       | 5,387                     |       | 26                        |       | 1,029      |       |
|                                                                                                                                                                                                                                    |       | 205,751                   |       | 26                        |       | 1,029      |       |
| Less current  portion                                                                                                                                                                                                                   |       |                      |       | (26                       | )          | (1,029     | )          |
|                                                                                                                                                                                                                                    |       |                      |       | $                         | —     |       | $          | — |   |
| Available credit                                                                                                                                                                                                                        |       | $                         | 205,751    |                      |       |       |       |   |

 

The revolving lines of credit are guaranteed by the Companyand its subsidiaries.

 

In October 2007, theCompany entered into an unsecured credit agreement with a syndicate of banksproviding for a 5-year revolving credit facility of $200 million.  The Company has the ability to increase theamount available under the credit agreement by an additional $200 million, to amaximum of $400 million, by obtaining additional commitments from existinglenders or new lenders and satisfying certain other conditions. Under existingconditions in credit markets, the Company does not believe that additionalcommitments will be available on terms the Company considers reasonable. TheCompany is required to pay an annual****facility feeof 0.08% to 0.10% on the available commitments under the credit agreement,regardless of usage, with the applicable fee determined on a quarterly basisbased on the Company’s leverage ratio. Amounts borrowed under the creditagreement will bear interest at an annual rate equal to either, at the Company’soption, (a) the British Bankers Association London Interbank Offered Ratefor the appropriate currency appearing on Reuters Screen LIBOR01-02 Page (the“LIBO Rate”) plus a spread of from 0.27% to 0.40%, as determined on a quarterlybasis based on the Company’s leverage ratio, or (b) the Base Rate, plus aspread of 0.50%.  The Company will payparticipation fees for outstanding standby letters of credit at an annual rateequal to the LIBO Rate plus the applicable spreads described in the precedingsentence, and will pay market-based fees for commercial letters of credit.Loans outstanding under the credit agreement may be prepaid at any time withoutpenalty except for LIBO Rate breakage costs and expenses.

 

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The proceeds of loans advanced under the credit agreement andletters of credit issued thereunder may be used for working capital and othergeneral corporate needs of the Company, to pay dividends to the Company’s stockholdersor to repurchase outstanding securities of the Company as permitted by thecredit agreement, and to finance acquisitions by the Company permitted by thecredit agreement. No loans or letters of credit are currently outstanding underthe credit agreement.

 

The Company and its subsidiaries are required to comply withvarious affirmative and negative covenants. Thecovenants include provisions that would limit the availability of funds as aresult of a material adverse change to the Company’s financial position orresults of operations. The Company is in compliance with its financial covenantsunder the loan agreement.

 

The Company incurs interestcosts, which include interest, maintenance fees and bank charges. Theamount of costs incurred, capitalized, and expensed for the years ended December 31,2008, 2007 and 2006, consisted of the following:

 
| ** **                  | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                        |       |                                        |       |   |   |   |   |
| Interest costs  incurred    |       | $                                           | 558        |   | $ | 481 |   | $ | 329 |   |
| Less: Interest  capitalized |       | (177                                        | )          | (252 | ) | (121 | ) |
| Interest expense            |       | $                                           | 381        |   | $ | 229 |   | $ | 208 |   |

 

9.                                       Commitmentsand Contingencies

 

*Leases*

 

Certain propertiesoccupied by the Company are leased. The leases expire at various dates through2014 and generally require the Company to assume the obligations for insurance,property taxes and maintenance of the facilities.

 

Through the first half of2006, some of the properties were leased from partnerships formed by currentand former Company stockholders, directors, officers and employees. The Companypaid no rent to these related party partnerships in 2007 or 2008. Rentalexpenses under these related party leases for the year ended December 31,2006, were less than $0.3 million.

 

During the year ended December 31, 2006, the Companypurchased the properties that it previously leased from Doolittle Investors andVacaville Investors for $5.0 million and $6.5 million, respectively. Thetransactions were completed in March 2006 and June 2006,respectively.

 

Rental expense for 2008, 2007 and 2006 with respect to allother leased property was approximately $6.6 million, $5.7 million and $5.5million, respectively.

 

At December 31,2008, minimum rental commitments under all noncancelable leases were asfollows:

 
| **(in thousands)** | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
|                    |       |       |       |
| 2009                    |       | $          | 7,069      |   |
| 2010                    |       | 4,490      |       |
| 2011                    |       | 3,534      |       |
| 2012                    |       | 2,676      |       |
| 2013                    |       | 505        |       |
| Thereafter              |       | —     |       |
|                    |       | $          | 18,274     |   |

 

Some of these minimumrental commitments contain renewal options and provide for periodic rentaladjustments based on changes in the consumer price index or current market rentalrates.

 

The nominal term ofSimpson Strong-Tie International Inc.’s (“SSTI’s”) lease in the United Kingdomis 25 years (expiring in 2022) but provides an option to terminate withoutpenalty in either the fifteenth year (2012) or twentieth 

 

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year (2017) on one year’swritten notice by SSTI. Future minimum rental payments associated with thefirst 15 years of this lease are included in minimum rental commitments in thetable above.

 

*EmployeeRelations*

 

Approximately14% of the Company’s employees are represented by labor unions and are coveredby collective bargaining agreements. Two of the Company’s collective bargainingagreements cover the Company’s tool and die craftsmen and maintenance workersin Brea, California, and its sheetmetal workers in Brea and Ontario,California. These two contracts expire February 2011 and June 2011,respectively. Simpson Strong-Tie’s facility in Stockton, California, is also aunion facility with two collective bargaining agreements, which cover it’s tooland die craftsmen and maintenance workers, and its sheetmetal workers. Thesetwo contracts will expire June 2011 and September 2011, respectively.

 

*Environmental*

 

TheCompany’s policy with regard to environmental liabilities is to accrue forfuture environmental assessments and remediation costs when information becomesavailable that indicates that it is probable that the Company is liable for anyrelated claims and assessments and the amount of the liability is reasonablyestimable.

 

At oneof the Company’s operating facilities, evidence of contamination resulting fromactivities of prior occupants was discovered. The Company took remedial actionsat the facility in 1990. In September 2007, the Company accrued $0.3million related to clean-up and regulatory costs associated with its facilityin San Leandro, California. In June 2008, the Company performed additionalanalysis and determined that an additional $0.4 million would be needed toremediate the site (see Note 5). The Company does not believe that any furtheraction will be required or that this matter will have a material adverse effecton its financial condition, cash flows or results of operations.

 

*Litigation*

 

From time to time, the Company is involved in litigationthat it considers to be in the normal course of its business. No suchlitigation within the last five years resulted in any material loss. TheCompany is not engaged in any legal proceedings as of the date hereof, whichthe Company expects individually or in the aggregate to have a material adverseeffect on the Company’s financial condition, cash flows or results ofoperations. Litigation is, however, subject to inherent uncertainties andactual results could differ.

 

*Other*

 

Corrosion, hydrogenenbrittlement, cracking, material hardness, wood pressure-treating chemicals,misinstallations, misuse, environmental conditions or other factors cancontribute to failure of fasteners, connectors, tools and venting products. Onoccasion, some of the fasteners and connectors that the Company sells havefailed, although the Company has not incurred any material liability resultingfrom those failures. The Company attempts to avoid such failures byestablishing and monitoring appropriate product specifications, manufacturingquality control procedures, inspection procedures and information onappropriate installation methods and conditions.

 

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10.                                 IncomeTaxes

 

The provision for incometaxes consisted of the following:

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| **(in thousands)** | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                    |       |                                        |       |   |   |   |   |
| Current                 |       |                                        |       |   |   |   |   |
| Federal                 |       | $                                           | 28,003     |   | $ | 40,429 |   | $ | 52,419 |   |
| State                   |       | 5,098                                       |       | 8,313 |   | 9,091 |   |
| Foreign                 |       | 3,696                                       |       | 2,836 |   | 3,001 |   |
| Deferred                |       |                                        |       |   |   |   |   |
| Federal                 |       | (1,544                                      | )          | (1,798 | ) | (2,414 | ) |
| State                   |       | (56                                         | )          | (119 | ) | 152 |   |
| Foreign                 |       | 521                                         |       | (1,828 | ) | 121 |   |
|                    |       | $                                           | 35,718     |   | $ | 47,833 |   | $ | 62,370 |   |
|                         |            |                                             |            |  |  |  |  |  |  |  |  |  |  |

 

Income before incometaxes for the years ended December 31, 2008, 2007 and 2006, consisted ofthe following:

 
|                    |       | **Years Ended December 31,** |       |
|-------------------------|------------|---------------------------------------------|------------|
| **(in thousands)** | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** |   |
|                    |       |                                        |       |   |   |   |   |
| Domestic                |       | $                                           | 86,635     |   | $ | 125,193 |   | $ | 155,969 |   |
| Foreign                 |       | 3,017                                       |       | (8,618 | ) | 9,063 |   |
|                    |       | $                                           | 89,652     |   | $ | 116,575 |   | $ | 165,032 |   |

 

Reconciliations betweenthe statutory federal income tax rates and the Company’s effective income taxrates as a percentage of income before income taxes were as follows:

 
|                                             |       | **Years Ended December 31,** |       |
|--------------------------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**                          | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** |   |
|                                             |       |                                        |       |   |   |   |   |
| Federal tax rate                                 |       | 35.0                                        | %          | 35.0 | % | 35.0 | % |
| State taxes, net  of federal benefit             |       | 3.7                                         | %          | 4.4 | % | 3.9 | % |
| Tax benefit of  domestic manufacturing deduction |       | (2.0                                        | )%         | (2.1 | )% | (0.9 | )% |
| Nondeductible  Canadian goodwill writedown       |       | —                                      |       | 2.3 | % | — |   |
| Change in  valuation allowance                   |       | 1.6                                         | %          | 0.4 | % | 0.1 | % |
| Other                                            |       | 1.5                                         | %          | 1.0 | % | (0.3 | )% |
| Effective income  tax rate                       |       | 39.8                                        | %          | 41.0 | % | 37.8 | % |

 

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The tax effects of thesignificant temporary differences that constitute the deferred tax assets andliabilities at December 31, 2008, 2007 and 2006, were as follows:

 
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| **(in thousands)**                          | ** ** | **2008**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current deferred  tax assets (liabilities)       |       |                  |       |   |   |   |   |
| State tax                                        |       | $                     | 1,958      |   | $ | 2,760 |   | $ | 3,131 |   |
| Workers’  compensation                      |       | 1,685                 |       | 1,624 |   | 1,459 |   |
| Health claims                                    |       | 540                   |       | 591 |   | 623 |   |
| Vacation accrual                                 |       | 611                   |       | 655 |   | 1,214 |   |
| Accounts receivable  allowance                   |       | 1,450                 |       | 806 |   | 749 |   |
| Inventories                                      |       | 5,344                 |       | 4,712 |   | 3,103 |   |
| Sales incentive  and advertising allowances      |       | 683                   |       | 813 |   | 893 |   |
| Accrued rent  reserves                           |       | —                |       | 70 |   | 359 |   |
| Other, net                                       |       | (276                  | )          | (408 | ) | (315 | ) |
|                                             |       | $                     | 11,995     |   | $ | 11,623 |   | $ | 11,216 |   |
|                                             |       |                  |       |   |   |   |   |
| Long-term  deferred tax assets (liabilities)     |       |                  |       |   |   |   |   |
| Depreciation                                     |       | $                     | (535       | ) | $ | (402 | ) | $ | (1,091 | ) |
| Goodwill and  other intangibles amortization     |       | (1,106                | )          | (795 | ) | (372 | ) |
| Deferred  compensation related to stock options  |       | 7,550                 |       | 7,512 |   | 6,139 |   |
| State tax credit  carry forward                  |       | 126                   |       | 145 |   | 289 |   |
| FIN 48  unrecognized tax benefits                |       | 1,551                 |       | 1,957 |   | — |   |
| Keymark  partnership basis difference            |       | 351                   |       | 300 |   | 232 |   |
| Non-United  States tax loss carry forward        |       | 1,048                 |       | 1,547 |   | 559 |   |
| Tax effect on  cumulative translation adjustment |       | (850                  | )          | (1,502 | ) | (1,487 | ) |
| Other, net                                       |       | 620                   |       | 857 |   | 32 |   |
|                                             |       | $                     | 8,755      |   | $ | 9,619 |   | $ | 4,301 |   |

 

Thetotal deferred tax assets for the years ended December 31, 2008, 2007 and2006, were $24.3 million, $25.3 million and $19.5 million, respectively. Thetotal deferred tax liabilities for the years ended December 31, 2008,2007, and 2006, were $3.6 million, $4.0 million and $4.0 million, respectively.

 

At December 31,2008, the Company had $9.9 million of tax loss carryforwards in variousnon-United States taxing jurisdictions. Tax loss carryforwards of $155 thousandand $864 thousand will expire in 2013 and 2014, respectively, if not utilized.The remaining tax losses can be carried forward indefinitely.

 

AtDecember 31, 2008 and 2007, the Company had deferred tax valuation allowancesof $2.4 million and $0.9 million, respectively. The change in the valuationallowance for the years ended December 31, 2008, 2007 and 2006, were $1.5million, $0.5 million and $0.1 million, respectively. 

 

The Company does notprovide for federal income taxes on the undistributed earnings of itsinternational subsidiaries because such earnings are reinvested and, in theCompany’s opinion, will continue to be reinvested indefinitely. At December 31,2008, 2007 and 2006, the Company had not provided federal income taxes onundistributed earnings of $16.2 million, $10.2 million and $7.4 million,respectively, from its international subsidiaries. Should these earnings bedistributed in the form of dividends or otherwise, the Company would be subjectto both United States income taxes and withholding taxes in variousinternational jurisdictions. These taxes may be partially offset by UnitedStates foreign tax credits. Determination of the related amount of unrecognizeddeferred United States income taxes is not practicable because of thecomplexities associated with this hypothetical calculation. United Statesfederal income taxes are provided on the earnings of the Company’s foreignbranches, which are included in the United States federal income tax return.

 

On January 1, 2007, the Company adopted FIN 48,“Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109”.  FIN 48 prescribes a recognition threshold that a taxposition is required to meet before being recognized in thefinancial statements and provides guidance on derecognition,measurement, classification, interest and penalties, accounting in interimperiods, disclosure and transition issues.

 

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A reconciliation of thebeginning and ending amounts of unrecognized tax benefits in 2008 and 2007 wasas follows*:

 
| **(in thousands)**                                   | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at January 1                                 |       | $          | 7,668      |       | $          | 7,497 |   |
| Additions based  on tax positions related to prior years  |       | 573        |       | 308        |       |
| Reductions based  on tax positions related to prior years |       | (875       | )          | (749       | )          |
| Additions for  tax positions of the current year          |       | 801        |       | 1,432      |       |
| Settlements                                               |       | —     |       | (413       | )          |
| Lapse of statute  of limitations                          |       | (1,462     | )          | (407       | )          |
| Balance at  December 31                              |       | $          | 6,705      |       | $          | 7,668 |   |

 

----

* Foreign currencytranslation amounts are included within each line as applicable.

 

Included in the balanceof unrecognized tax benefits at December 31, 2008 and 2007, and January 1,2007, are tax positions of $1.8 million, $2.0 million and $1.8 million,respectively, which, if recognized, would reduce the effective tax rate. The Company does not believe it isreasonably possible that the total amounts of unrecognized tax benefits willsignificantly increase or decrease within the next 12 months.

 

The Company recognizesaccrued interest and penalties related to unrecognized tax benefits in incometax expense, which is a continuation of the Company’s historical accountingpolicy. During the years ended December 31, 2008, and 2007, the Companyrecognized $0.2 million and $0.5 million, respectively, in potential interestpayments, before income tax benefits. At December 31, 2008 and 2007, and January 1,2007, the Company had accrued $1.7 million, $1.5 million and $1.0 million,respectively, for the potential payment of interest, before income taxbenefits.

 

At December 31,2008, the Company was subject to United States federal income tax examinationsfor the tax years 2005 through 2008. In addition, the Company was subject tostate, local and foreign income tax examinations primarily for the tax years2003 through 2008.

 

11.                                 RetirementPlans

 

The Company has six defined contribution retirement plans coveringsubstantially all salaried employees and nonunion hourly employees. Two of theplans, covering United States employees, provide for annual contributions inamounts that the Company’s Board of Directors may authorize, subject to certainlimitations, but in no event more than the amounts permitted under the InternalRevenue Code as deductible expense. The other four plans, covering the Company’sEuropean and Canadian employees, require the Company to make contributionsranging from 3% to 15% of the employees’ compensation. The total cost for theseretirement plans for the years ended December 31, 2008, 2007 and 2006, was$10.5 million, $9.6 million and $8.9 million, respectively.

 

The Company alsocontributes to various industry-wide, union-sponsored pension funds for hourlyemployees who are union members. Payments to these funds aggregated $2.6million, $2.8 million and $2.7 million for the years ended December 31,2008, 2007 and 2006, respectively.

 

12.                                 RelatedParty Transactions

 

In 2003, the Company’s Chief Executive Officer leased an airplane thatis managed by a charter company unrelated to the Company. The Company pays thecharter company standard hourly rates when this airplane is hired for use byits Chief Executive Officer in travel between his home and Company offices orby him and other Company employees in travel on business. As lessee of theairplane, the Company’s Chief Executive Officer is also responsible for itsmaintenance and receives a portion of each payment to the charter company forits use, whether by the Company or others. The total cost to the Company forthis and other airplanes that are used, including $21 thousand, $20 thousandand $24 thousand paid to the Company’s Chief Executive Officer for compensationfor the years ended December 31, 2008, 2007 and 2006, was $274 thousand,$345 thousand and $213 thousand, respectively. The independent members of theBoard unanimously approved this arrangement. The Company computes thecompensation cost of the use of airplanes using the Standard Industrial FareLevel (“SIFL”) tables prescribed under applicable Internal Revenue Serviceregulations.

 

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In January 2005, Michael Petrovic was appointed as anofficer of Simpson Strong-Tie Canada, Limited (“SSTC”), a wholly-ownedsubsidiary of Simpson Strong-Tie. Mr. Petrovic was an owner of MGAConstruction Hardware & Steel Fabricating Limited and MGA ConnectorsLimited (collectively, “MGA”), which SSTC acquired in 2003, and is a co-lessorof the property that SSTC leases in Maple Ridge, British Columbia. SSTC paid $170thousand per year to lease the property from Mr. Petrovic and hisassociates. In February 2007, the Company purchased the building from Mr. Petrovicand his associates for $4.0 million.

 

In March 2006, the Company completed the purchase, for$5.0 million, of the property in San Leandro, California, that it previouslyleased from a related party partnership, Doolittle Investors, which consistedprimarily of current and past employees and directors of the Company. In June 2006,the Company completed the purchase, for $6.5 million, of the property inVacaville, California, that it previously leased from a related partypartnership, Vacaville Investors, which consisted primarily of current and pastemployees and directors of the Company. These transactions were unanimouslyapproved by the independent members of the Board. See Note 9.

 

In December 2007,the Company extended its lease on a property in Addison, Illinois, which isco-owned by Gerald Hagel, who was appointed as a vice president of the SimpsonStrong-Tie in March 2007.  Therenewal is for an additional five years through 2012. The Company paid $270thousand per year to lease the property from Mr. Hagel and his wife SusanHagel, a former employee of Simpson Strong-Tie.

 

In October 2008, theCompany voluntarily contributed $0.7 million to Keymark, for which the Companyaccounts using the equity method, and lent $1.3 million to Keymark’s otherowner, which concurrently contributed that amount to Keymark’s capital. The loan bears interest at the annual rate of 6%, has a term of two years, isbacked by a pledge of an ownership interest in Keymark of 10% (subject toadjustment), and is non-recourse. See Note 6.

 

13.                                 StockOption and Stock Bonus Plans

 

The Company currently hastwo stock option plans (see Note 1 — *Accounting for Stock-BasedCompensation*). Participants are granted stock options only if theapplicable company-wide or profit-center operating goals, or both, establishedby the Compensation Committee of the Board at the beginning of the year, aremet.

 

The fair value of eachoption award is estimated on the date of grant using the Black-Scholes optionpricing model. Expected volatility is based on historical volatilities of theCompany’s common stock measured monthly over a term that is equivalent to theexpected life of the option. The expected term of options granted is estimatedbased on the Company’s prior exercise experience and future expectations of theexercise and termination behavior of the grantees. The risk-free rate is basedon the yield of United States Treasury zero-coupon bonds with maturitiescomparable to the expected life in effect at the time of grant. The dividendyield is based on the expected dividend rate on the grant date.

 

Black-Scholes optionpricing model assumptions for options committed to be granted in 2009, and forthose granted in 2008, 2007 and 2006, were as follows:

 
| **Number**              | ** ** | ** ** | ** ** | **Risk-**    | ** ** | ** **   | ** ** | ** **   | ** ** | ** **     | ** ** | ** **           | ** **        | **Weighted** | ** ** |
|-------------------------|------------|------------|------------|--------------|------------|--------------|------------|--------------|------------|----------------|------------|----------------------|-------------------|--------------|------------|
| **of Options**     | ** ** | ** ** | ** ** | **Free**     | ** ** | ** **   | ** ** | ** **   | ** ** | ** **     | ** ** | ** **           | ** **        | **Average**  | ** ** |
| **Granted**             | ** ** | **Grant**  | ** ** | **Interest** | ** ** | **Dividend** | ** ** | **Expected** | ** ** | ** **     | ** ** | **Exercise**         | ** **        | **Fair**     | ** ** |
| **(in thousands)** | ** ** | **Date**   | ** ** | **Rate**     | ** ** | **Yield**    | ** ** | **Life**     | ** ** | **Volatility** | ** ** | **Price Range** | ** **        | **Value**    | ** ** |
| ** **              | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** | ** **     | ** ** | ** **           | ** **        | ** **   | ** ** |
| **1994  Plan**          |       |       |       |         |       |         |       |         |       |           |       |                 |              |         |       |
| 24                      |       |       | 02/23/09   |         | 2.08%      |         | 2.48%      |         | 6.5 years  |           | 30.9%      |                 | $                 | 16.10        |       | $ | 4.06 |   |
| 29                      |       |       | 02/04/09   |         | 2.17%      |         | 1.88%      |         | 6.5 years  |           | 30.9%      |                 | $                 | 21.25        |       | $ | 5.86 |   |
| 14                      |       |       | 04/23/08   |         | 3.15%      |         | 1.55%      |         | 6.0 years  |           | 27.1%      |                 | $                 | 25.74        |       | $ | 6.92 |   |
| 40                      |       |       | 02/13/08   |         | 2.90%      |         | 1.68%      |         | 6.0 years  |           | 27.1%      |                 | $                 | 23.78        |       | $ | 6.16 |   |
| 123                     |       |       | 02/02/07   |         | 4.84%      |         | 1.19%      |         | 5.9 years  |           | 29.0%      |                 | $                 | 33.62        |       | $ | 11.11 |   |
| 1                       |       |       | 05/30/06   |         | 4.97%      |         | 0.90%      |         | 6.3 years  |           | 27.2%      |                 | $                 | 35.75        |       | $ | 12.25 |   |
| 489                     |       |       | 01/26/06   |         | 4.46%      |         | 0.79%      |         | 6.3 years  |           | 27.2%      |                 | $ 40.72 to $ | 44.79        |       | $ | 13.68 |   |
| ** **              |       |       |       |         |       |         |       |         |       |           |       |                 |              |         |       |   |
| **1995  Plan**          |       |       |       |         |       |         |       |         |       |           |       |                 |              |         |       |   |
| 5                       |       |       | 02/15/06   |         | 4.46%      |         | 0.81%      |         | 6.3 years  |           | 27.2%      |                 | $                 | 39.27        |       | $ | 13.14 |   |

 

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The following tablesummarizes the Company’s stock option activity for the year ended December 31,2008:

 
| ** **                                                  | ** ** | ** **              | ** ** | ** **    | ** ** | **Weighted-**   | ** ** | ** **              | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|---------------|------------|-----------------|------------|-------------------------|------------|
| ** **                                                  | ** ** | ** **              | ** ** | **Weighted-** | ** ** | **Average**     | ** ** | **Aggregate**           | ** ** |
| ** **                                                  | ** ** | ** **              | ** ** | **Average**   | ** ** | **Remaining**   | ** ** | **Intrinsic**           | ** ** |
| ** **                                                  | ** ** | **Shares**              | ** ** | **Exercise**  | ** ** | **Contractual** | ** ** | **Value***              | ** ** |
| **Non-Qualified Stock Options**                   | ** ** | **(in thousands)** | ** ** | **Price**     | ** ** | **Life**        | ** ** | **(in thousands)** | ** ** |
| ** **                                                  | ** ** | ** **              | ** ** | ** **    | ** ** | ** **      | ** ** | ** **              | ** ** |
| Outstanding at  January 1, 2008                        |       | 2,656                   |       | $             | 27.91      |            | 3.4        |                    | $          | 7,895 |   |
| Granted                                                     |       | 54                      |       | $             | 24.29      |            |       |                    |       |   |
| Exercised                                                   |       | (410                    | )          | $             | 16.79      |            |       |                    |       |   |
| Forfeited                                                   |       | (50                     | )          | $             | 34.93      |            |       |                    |       |   |
| Outstanding at  December 31, 2008                      |       | 2,250                   |       | $             | 29.70      |            | 2.8        |                    | $          | 5,424 |   |
| Outstanding and  expected to vest at December 31, 2008 |       | 2,241                   |       | $             | 29.67      |            | 2.7        |                    | $          | 5,418 |   |
| Exercisable at  December 31, 2008                      |       | 1,992                   |       | $             | 28.94      |            | 2.5        |                    | $          | 5,265 |   |

 

----

*The intrinsic value represents the amount by which the fair market value of theunderlying common stock exceeds the exercise price of the option, using theclosing price per share of $27.76 on December 31, 2008.

 

The total intrinsic value of optionsexercised during the three years ended December 31, 2008, 2007 and 2006,was $3.7 million, $3.5 million and $10.7 million, respectively.

 

A summary of the status of unvestedoptions as of December 31, 2008, and changes during the year ended December 31,2008, is presented below:

 
| ** **                          | ** ** | ** **              | ** ** | **Weighted-**       | ** ** |
|-------------------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                          | ** ** | ** **              | ** ** | **Average**         | ** ** |
| ** **                          | ** ** | **Shares**              | ** ** | **Grant-Date**      | ** ** |
| **Unvested Options**           | ** ** | **(in thousands)** | ** ** | **Fair Value** | ** ** |
|                                |       |                    |       |                |       |
| Unvested at  January 1, 2008   |       | 543                     |       | $                   | 12.34      |   |
| Granted                             |       | 54                      |       | $                   | 6.36       |   |
| Vested                              |       | (320                    | )          | $                   | 11.89      |   |
| Forfeited                           |       | (19                     | )          | $                   | 13.28      |   |
| Unvested at  December 31, 2008 |       | 258                     |       | $                   | 11.58      |   |

 

As of December 31, 2008, $3.0 million of total unrecognizedcompensation cost was related to unvested share-based compensation arrangementsgranted under the 1994 Plan. This cost is expected to be recognized over aweighted-average period of 2.0 years. Options granted under the 1995Plan are fully vested and recorded as expense on the date of grant.

 

The Company alsomaintains a Stock Bonus Plan whereby it awards shares to employees, who do nototherwise participate in one of the Company’s stock option plans. The number ofshares awarded, as well as the period of service, are considered by theCompensation Committee of the Board, at its discretion. In 2008, 2007 and 2006, the Company committed to issue 11thousand, 9 thousand and 10 thousand shares, respectively, which resulted inpre-tax compensation charges of $0.4 million, for each year ended December 31,2008, 2007, and 2006. These employees are also awarded cash bonuses, which areincluded in these charges, to compensate for their income taxes payable as aresult of the stock bonuses. Shares have been issued under this Plan in theyear following the year in which the employee reached the tenth anniversary ofemployment with the Company.

 

14.                                 SegmentInformation

 

The Company is organizedinto two primary operating segments. The segments are defined by types ofproducts manufactured, marketed and distributed to the Company’s customers. Thetwo product segments are connector products and venting products. Thesesegments are differentiated in several ways, including the types of materials, 

 

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the production processes,the distribution channels and the product applications. Transactions betweenthe two segments were immaterial for each of the years presented.

 

The following tableillustrates certain measurements used by management to assess the performanceof the segments described above as of December 31, 2008, 2007 and 2006, orfor the years then ended:

 
| **(in thousands)**                | ** ** | **Connector** | ** ** | **Venting**  | ** ** | **Administrative**          | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|-----------------------------|------------|------------|------------|
| **2008**                               | ** ** | **Products**  | ** ** | **Products** | ** ** | **and All Other** | ** ** | **Total**  | ** ** |
| ** **                             | ** ** | ** **    | ** ** | ** **   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales                              |       | $             | 676,724    |         | $          | 79,775                      |       | $          | —     |   | $ | 756,499 |   |
| Income (loss)  from operations         |       | 91,567        |       | (2,616       | )          | (1,409                      | )          | 87,542     |       |
| Depreciation and  amortization         |       | 24,082        |       | 4,903        |       | 1,224                       |       | 30,209     |       |
| Significant  non-cash charges          |       | 3,289         |       | 259          |       | 275                         |       | 3,823      |       |
| Goodwill  impairment                   |       | 2,964         |       |         |       |                        |       | 2,964      |       |
| Income tax  expense (benefit)          |       | 35,861        |       | (1,046       | )          | 903                         |       | 35,718     |       |
| Capital  expenditures and acquisitions |       | 41,933        |       | 9,968        |       | 429                         |       | 52,330     |       |
| Total assets                           |       | 612,733       |       | 77,218       |       | 140,249                     |       | 830,200    |       |
|                                        |            |               |            |              |            |                             |            |            |            |  |  |  |  |

 
| ** **                             | ** ** | **Connector** | ** ** | **Venting**  | ** ** | **Administrative** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|--------------------|------------|------------|------------|
| **2007**                               | ** ** | **Products**  | ** ** | **Products** | ** ** | **and All  Other** | ** ** | **Total**  | ** ** |
|                                   |       |          |       |         |       |               |       |       |       |
| Net sales                              |       | $             | 745,692    |         | $          | 71,296             |       | $          | —     |   | $ | 816,988 |   |
| Income (loss)  from operations         |       | 114,433       |       | (2,629       | )          | (955               | )          | 110,849    |       |
| Depreciation and  amortization         |       | 23,044        |       | 4,891        |       | 49                 |       | 27,984     |       |
| Significant  non-cash charges          |       | 5,246         |       | 444          |       | 643                |       | 6,333      |       |
| Goodwill  impairment                   |       | 10,666        |       | —       |       | —             |       | 10,666     |       |
| Long-lived asset  impairment           |       | 465           |       | —       |       | —             |       | 465        |       |
| Income tax  expense (benefit)          |       | 49,127        |       | (878         | )          | (416               | )          | 47,833     |       |
| Capital  expenditures and acquisitions |       | 72,418        |       | 5,664        |       | 479                |       | 78,561     |       |
| Total assets                           |       | 575,707       |       | 78,541       |       | 163,431            |       | 817,679    |       |
|                                        |            |               |            |              |            |                    |            |            |            |  |  |  |  |

 
| ** **                             | ** ** | **Connector** | ** ** | **Venting**  | ** ** | **Administrative** |       |      |       |
|----------------------------------------|------------|---------------|------------|--------------|------------|--------------------|------------|-----------|------------|
| **2006**                               | ** ** | **Products**  | ** ** | **Products** | ** ** | **and All  Other** | ** ** | **Total** | ** ** |
|                                   |       |          |       |         |       |               |       |      |       |
| Net sales                              |       | $             | 771,176    |         | $          | 92,004             |       | $         | —     |   | $ | 863,180 |   |
| Income (loss)  from operations         |       | 155,718       |       | 7,248        |       | (1,556             | )          | 161,410   |       |
| Depreciation and  amortization         |       | 20,468        |       | 3,989        |       | 79                 |       | 24,536    |       |
| Significant  non-cash charges          |       | 6,351         |       | 404          |       | 1,010              |       | 7,765     |       |
| Income tax  expense (benefit)          |       | 61,197        |       | 2,875        |       | (1,702             | )          | 62,370    |       |
| Capital  expenditures and acquisitions |       | 48,940        |       | 10,666       |       | 1,066              |       | 60,672    |       |
| Total assets                           |       | 509,705       |       | 80,143       |       | 145,486            |       | 735,334   |       |
|                                        |            |               |            |              |            |                    |            |           |            |  |  |  |  |

 

Cash collected bythe Company’s subsidiaries is routinely transferred into the Company’s cashmanagement accounts, and therefore has been included in the total assets of “Administrativeand All Other.” Cash and short-term investment balances in the Administrativeand All Other segment were $136.2 million, $159.8 million and $130.7 million asof December 31, 2008, 2007 and 2006, respectively. The significantnon-cash charges comprise compensation related to the awards under the stockoption plans and the stock bonus plan.

 

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The followingtable illustrates how the Company’s net sales and long-lived assets weredistributed geographically as of December 31, 2008, 2007 and 2006, or forthe years then ended:

 
| ** **              | ** ** | **2008**   | ** ** | **2007**       | ** ** | **2006**   | ** ** |
|-------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **              | ** ** | **Net**    | ** ** | **Long-Lived** | ** ** | **Net**    | ** ** | **Long-Lived** | ** ** | **Net** | ** ** | **Long-Lived** | ** ** |
| **(in thousands)** | ** ** | **Sales**  | ** ** | **Assets**     | ** ** | **Sales**  | ** ** | **Assets** | ** ** | **Sales** | ** ** | **Assets** | ** ** |
| ** **              | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States           |       | $          | 590,111    |           | $          | 172,185    |       | $ | 679,050 |   | $ | 185,685 |   | $ | 734,745 |   | $ | 181,572 |   |
| Denmark                 |       | 29,175     |       | 4,616          |       | 17,985     |       | 5,496 |   | 23,482 |   | 5,081 |   |
| Canada                  |       | 42,334     |       | 5,231          |       | 35,692     |       | 8,470 |   | 30,168 |   | 3,188 |   |
| United Kingdom          |       | 25,882     |       | 1,248          |       | 32,787     |       | 1,985 |   | 27,392 |   | 2,037 |   |
| France                  |       | 30,538     |       | 5,952          |       | 25,917     |       | 6,800 |   | 20,962 |   | 5,532 |   |
| Germany                 |       | 28,315     |       | 1,990          |       | 22,248     |       | 258 |   | 23,757 |   | 529 |   |
| Ireland                 |       | 3,637      |       | 4,177          |       | —     |       | — |   | — |   | — |   |
| Asia                    |       | 2,659      |       | 9,056          |       | 90         |       | 60 |   | — |   | — |   |
| Other countries         |       | 3,848      |       | 567            |       | 3,219      |       | 630 |   | 2,674 |   | 651 |   |
|                    |       | $          | 756,499    |           | $          | 205,022    |       | $ | 816,988 |   | $ | 209,384 |   | $ | 863,180 |   | $ | 198,590 |   |

 

Net sales andlong-lived assets, net of intangible assets, are attributable to the countrywhere the operations are located. In prior years, the Asia category wascombined with and reported under the other countries category. The Irelandcategory is newly formed due to the Company’s acquisition of the Liebig assetsin 2008.

 

The company’slargest customer, attributable mostly to the connector productssegment, accounted for slightly less than 10% of net sales for theyear ended December 31, 2008. In August 2007, this customer, sold adivision, which is now a separate customer of the Company attributable mostlyto the connector products segment. As a combined company in 2007, these twocustomers accounted for 15% of the Company’s net sales. As combined companiesin 2006, this customer accounted for 17% of net sales for the year ended December 31,2006. As two separate customers, neither would have accounted for net salesgreater than 10% of consolidated net sales for 2007 or 2006.

 

15.                                 Consolidationof Variable Interest Entities

 

The Companypreviously leased two facilities from related-party partnerships (see Notes 9and 12) whose primary purpose was to own and lease these properties to theCompany. The partnerships did not have any other significant assets. Thesepartnerships were considered variable interest entities under FASBInterpretation No. 46(R) “**Consolidation of Variable Interest Entities(revised December 2003)—an Interpretation of ARB No. 51”**(“FIN 46(R)”). Although the Company did not have ownership interests in thepartnerships, it was required to consolidate the partnerships, as it wasconsidered the primary beneficiary as interpreted by FIN 46(R). The Companybecame the primary beneficiary when it agreed to a fixed price purchase optionfor the properties owned by the related-party partnerships. The Companypurchased the two facilities during the year ended December 31, 2006.

 

The real estateowned by the partnerships consisted of land, buildings and buildingimprovements, which were pledged as collateral for mortgages under which thelender had no recourse to the Company. The Company had no off-balance sheetarrangements at December 31, 2008 or 2007.

 

16.                                 SubsequentEvents

 

In January 2009, the Company acquired the assets of RODesign Corp, a Florida corporation doing business as DeckTools, which licensesdeck design and estimation software. The software provides professional deckbuilders, home centers and lumber yards a simple, graphics-driven, solution fordesigning decks and estimating material and labor costs for the project. Thepurchase price was $4.0 million in cash, including $2.5 million to be paid inthe future.

 

In February 2009,the Board declared a dividend of $0.10 per share, a total currently estimatedat $4.9 million, to be paid on April 24, 2009, to stockholders of recordon April 3, 2009.

 

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17.                                 SelectedQuarterly Financial Data (Unaudited)

 

The followingtable sets forth selected quarterly financial data for each of the quarters in2008 and 2007:

 
| ** **                                      | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|-------------------------------------------------|------------|-------------|------------|-------------|------------|
| **(in thousands, except**             | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second** | ** ** | **First** | ** ** | **Fourth** | ** ** | **Third** | ** ** | **Second** | ** ** | **First** | ** ** |
| **per share amounts)**                | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                      | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                       |       | $           | 149,756    |        | $          | 219,823 |   | $ | 219,263 |   | $ | 167,656 |   | $ | 175,280 |   | $ | 217,265 |   | $ | 231,288 |   | $ | 193,155 |   |
| Cost of sales                                   |       | 97,251      |       | 130,143     |       | 135,398 |   | 111,398 |   | 115,986 |   | 136,055 |   | 137,925 |   | 121,533 |   |
| Gross profit                                    |       | 52,505      |       | 89,680      |       | 83,865 |   | 56,258 |   | 59,294 |   | 81,210 |   | 93,363 |   | 71,622 |   |
|                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and  development and other engineering |       | 4,951       |       | 5,662       |       | 5,610 |   | 5,103 |   | 4,405 |   | 4,987 |   | 5,463 |   | 5,260 |   |
| Selling expense                                 |       | 17,439      |       | 21,323      |       | 22,134 |   | 19,807 |   | 19,477 |   | 18,271 |   | 20,053 |   | 18,154 |   |
| General and administrative  expense             |       | 22,684      |       | 25,555      |       | 23,786 |   | 17,872 |   | 19,651 |   | 22,991 |   | 24,332 |   | 21,642 |   |
| Impairment of  goodwill                         |       | 2,964       |       | —      |       | — |   | — |   | 10,666 |   | — |   | — |   | — |   |
| Loss (gain) on  sale of assets                  |       | (66         | )          | (41         | )          | (19 | ) | 2 |   | (60 | ) | (561 | ) | (86 | ) | (4 | ) |
| Income from  operations                         |       | 4,533       |       | 37,181      |       | 32,354 |   | 13,474 |   | 5,155 |   | 35,522 |   | 43,601 |   | 26,570 |   |
|                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) in  equity method Investment      |       | (486        | )          | —      |       | — |   |   |   |   |   | (59 | ) | 59 |   | (33 | ) |
| Interest income,  net                           |       | 383         |       | 579         |       | 505 |   | 1,128 |   | 1,592 |   | 1,370 |   | 1,424 |   | 1,374 |   |
| Income before  income taxes                     |       | 4,430       |       | 37,760      |       | 32,859 |   | 14,602 |   | 6,747 |   | 36,833 |   | 45,084 |   | 27,911 |   |
|                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for  income taxes                     |       | 2,591       |       | 14,398      |       | 12,478 |   | 6,250 |   | 6,260 |   | 14,186 |   | 16,767 |   | 10,621 |   |
| Net income                                      |       | $           | 1,839      |        | $          | 23,362 |   | $ | 20,381 |   | $ | 8,352 |   | $ | 487 |   | $ | 22,647 |   | $ | 28,317 |   | $ | 17,290 |   |
|                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income per  common share                    |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                           |       | $           | 0.04       |        | $          | 0.48 |   | $ | 0.42 |   | $ | 0.17 |   | $ | 0.01 |   | $ | 0.47 |   | $ | 0.58 |   | $ | 0.36 |   |
| Diluted                                         |       | 0.04        |       | 0.48        |       | 0.42 |   | 0.17 |   | 0.01 |   | 0.46 |   | 0.58 |   | 0.35 |   |
|                                            |       |        |       |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash dividends  declared per common share       |       | $           | 0.10       |        | $          | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   | $ | 0.10 |   |

 

Basic and dilutedincome per common share for each of the quarters presented above is based onthe respective weighted average numbers of common and dilutive potential commonshares outstanding for each quarter, and the sum of the quarters may not necessarilybe equal to the full year basic and diluted net income per common shareamounts.

 

In the fourthquarter of 2008, the Company recorded an impairment charge of goodwill of $3.0million. In the fourth quarter of 2007, the Company recorded an impairmentcharge of goodwill of $10.7 million. See Note 1 — *“Goodwilland Intangible Assets.”*

 

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**SCHEDULE II**

 

**Simpson Manufacturing Co., Inc.and Subsidiaries**

 

**VALUATIONAND QUALIFYING ACCOUNTS**

**for the years ended December 31,2008, 2007 and 2006**

 
| **Column A**                           | ** ** | **Column B**   | ** ** | **Column C**  | ** ** | **Column D**         | ** ** | **Column E**   | ** ** |
|----------------------------------------|------------|----------------|------------|---------------|------------|----------------------|------------|----------------|------------|
| ** **                             | ** ** | ** **     | ** ** | **Additions** | ** ** | ** **           | ** ** | ** **     | ** ** |
| ** **                             | ** ** | ** **     | ** ** | **Charged**   | ** ** | **Charged**          | ** ** | ** **     | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Balance at** | ** ** | **to Costs**  | ** ** | **to Other**         | ** ** | ** **     | ** ** | **Balance** | ** ** |
| **(in thousands)**                     | ** ** | **Beginning**  | ** ** | **and**       | ** ** | **Accounts  —** | ** ** | ** **     | ** ** | **at End** | ** ** |
| **Classification**                     | ** ** | **of Year**    | ** ** | **Expenses**  | ** ** | **Write-offs**       | ** ** | **Deductions** | ** ** | **of Year** | ** ** |
| ** **                             |       |           |       |          |       |                 |       |           |       |   |   |
| **Year  Ended December 31, 2008** |       |           |       |          |       |                 |       |           |       |   |   |
| Allowance for  doubtful accounts       |       | $              | 2,724      |          | $          | 2,431                |       | $              | —     |   | $ | 787 |   | $ | 4,368 |   |
| Allowance for  obsolete inventory      |       | 10,338         |       | 440           |       | —               |       | 749            |       | 10,029 |   |
| Allowance for  sales discounts         |       | 1,815          |       | 1,600         |       | —               |       | 1,859          |       | 1,556 |   |
| Allowance for  deferred tax assets     |       | 918            |       | 1,507         |       | —               |       | 49             |       | 2,376 |   |
| ** **                             |       |           |       |          |       |                 |       |           |       |   |   |
| **Year  Ended December 31, 2007** |       |           |       |          |       |                 |       |           |       |   |   |
| Allowance for  doubtful accounts       |       | 2,286          |       | 713           |       | —               |       | 275            |       | 2,724 |   |
| Allowance for  obsolete inventory      |       | 5,480          |       | 4,801         |       | —               |       | (57            | )          | 10,338 |   |
| Allowance for  sales discounts         |       | 1,920          |       | 1,604         |       | —               |       | 1,709          |       | 1,815 |   |
| Allowance for  deferred tax assets     |       | 459            |       | 489           |       | —               |       | 30             |       | 918 |   |
| ** **                             |       |           |       |          |       |                 |       |           |       |   |   |
| **Year  Ended December 31, 2006** |       |           |       |          |       |                 |       |           |       |   |   |
| Allowance for  doubtful accounts       |       | 2,131          |       | 232           |       | —               |       | 77             |       | 2,286 |   |
| Allowance for  obsolete inventory      |       | 5,399          |       | 81            |       | —               |       | —         |       | 5,480 |   |
| Allowance for  sales discounts         |       | 2,188          |       | 2,050         |       | —               |       | 2,318          |       | 1,920 |   |
| Allowance for  deferred tax assets     |       | 337            |       | 165           |       | —               |       | 43             |       | 459 |   |
|                                        |            |                |            |               |            |                      |            |                |            |  |  |  |  |  |  |  |

 

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**Item 9. Changes in andDisagreements with Accountants on Accounting and Financial Disclosures.**

 

None.

 

**Item 9A.Controls and Procedures.**

 

*DisclosureControls and Procedures.* As of December 31, 2008, an evaluation was performed underthe supervision and with the participation of the Company’s management,including the chief executive officer (“CEO”) and the chief financial officer (“CFO”),of the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures. Based on that evaluation, the CEO and the CFOconcluded that the Company’s disclosure controls and procedures were effectiveas of that date.

 

*Changesin Internal Control over Financial Reporting.* During thethree months ended December 31, 2008, the Company made no changes to itsinternal controls over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), that have materially affected, or are reasonably likely to materiallyaffect, its internal controls over financial reporting.

 

*Management’s Report on Internal Control over FinancialReporting**.* Management is responsible forestablishing and maintaining adequate internal control over financial reporting(as defined in Exchange Act Rule 13a-15(f)). Management assessed theeffectiveness of the Company’s internal control over financial reporting as of December 31,2008, using criteria established in *InternalControl-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”) and concluded that theCompany maintained effective internal control over financial reporting as of December 31,2008.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. In addition, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies and procedures may deteriorate.

 

The Company’s management has excluded Liebig, ProTech,and Ahorn****from its assessment ofinternal control over financial reporting as of December 31, 2008, becausethey were acquired by the Company during 2008. Liebig and Ahorn are divisionsof Simpson Strong-Tie and ProTech is division of Simpson Dura-Vent. The totalassets and total revenues of these acquisitions represent approximately 7% and2%, respectively, of the related consolidated financial statement amounts as ofand for the year ended December 31, 2008.

 

PricewaterhouseCoopersLLP, an independent registered public accounting firm that audited the Company’sconsolidated financial statements included in this Form 10-K, has issued areport on the Company’s internal control over financial reporting, which isincluded herein.

 

**Item 9B.Other Information.**

 

None

 

##### **PART III**

##### ** **

**Item 10.Directors, Executive Officers and Corporate Governance.**

 

Information required bythis Item will be contained in the Company’s proxy statement for the annualmeeting of its stockholders to be held on April 17, 2009, to be filed withthe Securities and Exchange Commission not later than 120 days following theend of the Company’s fiscal year ended December 31, 2008, whichinformation is incorporated herein by reference.

 

**Item 11.Executive Compensation.**

 

Information required bythis Item will be contained in the Company’s proxy statement for the annualmeeting of its stockholders to be held on April 17, 2009, to be filed withthe Securities and Exchange Commission not later than 120 days following theend of the Company’s fiscal year ended December 31, 2008, whichinformation is incorporated herein by reference.

 

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**Item 12.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

 

Certain informationrequired by this Item will be contained in the Company’s proxy statement forthe annual meeting of its stockholders to be held on April 17, 2009, to befiled with the Securities and Exchange Commission not later than 120 daysfollowing the end of the Company’s fiscal year ended December 31, 2008,which information is incorporated herein by reference. The other informationrequired by this Item appears in this report under “Item 5 – Market for Company’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities,” which is incorporated herein by reference.

 

**Item 13.Certain Relationships and Related Transactions, and Director Independence.**

 

Informationrequired by this Item will be contained in the Company’s proxy statement for theannual meeting of its stockholders to be held on April 17, 2009, to befiled with the Securities and Exchange Commission not later than 120 daysfollowing the end of the Company’s fiscal year ended December 31, 2008,which information is incorporated herein by reference.

 

**Item 14.Principal Accounting Fees and Services.**

 

Information required bythis Item will be contained in the Company’s proxy statement for the annualmeeting of its stockholders to be held on April 17, 2009, to be filed withthe Securities and Exchange Commission not later than 120 days following theend of the Company’s fiscal year ended December 31, 2008, whichinformation is incorporated herein by reference.

 

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** **

**PART IV**

 

**Item 15.Exhibits and Financial Statement Schedules.**

 

(a)   The following documents are filed as part of thisAnnual Report:

 

1.     Consolidated financial statements

 

The following consolidatedfinancial statements are filed as a part of this report:

 
| Report of Independent Registered Public Accounting  Firm                                                        |
|-----------------------------------------------------------------------------------------------------------------|
|                                                                                                            |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                              |
|                                                                                                            |
| Consolidated Statements of Operations for the years  ended December 31, 2008, 2007 and 2006                |
|                                                                                                            |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2006, 2007 and 2008 |
|                                                                                                            |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2008, 2007 and 2006                |
|                                                                                                            |
| Notes to Consolidated Financial Statements                                                                      |

 

2.     Financial Statement Schedules

 

The followingconsolidated financial statement schedule for each of the years in thethree-year period ended December 31, 2008, is filed as part of this AnnualReport:

 
| Schedule II–Valuation and Qualifying Accounts–Years  ended December 31, 2008, 2007 and 2006 |
|------------------------------------------------------------------------------------------------------------|

 

All other schedules havebeen omitted as the required information is not present or is not present inamounts sufficient to require submission of the schedule, or because theinformation required is included in the consolidated financial statements andnotes thereto.

 

(b)      Exhibits

 

The following exhibitsare either incorporated by reference into this report or filed with this reportas indicated below.

 

3.1       Certificate of Incorporation of Simpson ManufacturingCo., Inc., as amended, is incorporated by reference to Exhibit 3.1 ofits Quarterly Report on Form 10-Q for the quarter ended September 30,2007.

 

3.2       Bylaws of Simpson Manufacturing Co., Inc., asamended through August 1, 2008, are incorporated by reference to Exhibit 3.2of its Current Report on Form 8-K dated August 4, 2008.

 

4.1      Rights Agreement dated as of July 30, 1999,between Simpson Manufacturing Co., Inc. and BankBoston, N.A., whichincludes as Exhibit B the form of Rights Certificate, is incorporated byreference to Exhibit 4.1 of Simpson Manufacturing Co., Inc.’sRegistration Statement on Form 8-A dated August 4, 1999.

 

4.2      Certificate of Designation, Preferences and Rights of Series AParticipating Preferred Stock of Simpson Manufacturing Co., Inc., dated July 30,1999, is incorporated by reference to Exhibit 4.2 of its RegistrationStatement on Form 8-A dated August 4, 1999.

 

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10.1    Simpson Manufacturing Co., Inc. 1994 Stock OptionPlan, as amended through February 13, 2008, is incorporated by referenceto Exhibit 10.1 of Simpson Manufacturing Co., Inc.’s Quarterly Reporton Form 10-Q for the quarter ended June 30, 2008.

 

10.2    Simpson Manufacturing Co., Inc. 1995 IndependentDirector Stock Option Plan, as amended through November 18, 2004, isincorporated by reference to Exhibit 10.2 of Simpson Manufacturing Co., Inc.’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

10.3    Simpson Manufacturing Co., Inc. Executive OfficerCash Profit Sharing Plan, as amended through February 25, 2008, isincorporated by reference to Exhibit 10.3 of Simpson Manufacturing Co., Inc.’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2008.

 

10.4    Credit Agreement dated as of October 10, 2007,among Simpson Manufacturing Co., Inc. as Borrower, the Lenders partythereto, Wells Fargo Bank as Agent, and Simpson Dura-Vent Company, Inc.,Simpson Strong Tie Company Inc., and Simpson Strong-Tie International, Inc.as Guarantors, is incorporated by reference to Exhibit 10.1 of SimpsonManufacturing Co., Inc.’s Current Report on Form 8-K dated October 15,2007.

 

10.5    Form of Indemnification Agreement between SimpsonManufacturing Co., Inc. and its directors and executive officers, as wellas the officers of Simpson Strong-Tie Company Inc. and Simpson Dura-VentCompany, Inc., is incorporated by reference to Exhibit 10.2 ofSimpson Manufacturing Co., Inc.’s Annual Report on Form 10-K for theyear ended December 31, 2004.

 

10.6     Stock Purchase Agreement dated as of July 23,2007, between Hobart K. Swan and Reliance Trust Company, solely in its capacityas independent trustee of the Swan Secure Products, Inc. Employee StockOwnership Plan and Trust, on the one hand, and Simpson Strong-Tie Company Inc.and Simpson Manufacturing Co., Inc., on the other hand, is incorporated byreference to Exhibit 10.1 of Simpson Manufacturing Co., Inc.’sCurrent Report on Form 8-K dated July 24, 2007.

 

21.       List of Subsidiaries of the Registrant is filed herewith.

 

23.       Consent of Independent Registered Public AccountingFirm is filed herewith.

 

31.       Rule 13a-14(a)/15d-14(a) Certifications arefiled herewith.

 

32.       Section 1350Certifications are filed herewith.

 

   99.1         Simpson Manufacturing Co., Inc. 1994 EmployeeStock Bonus Plan, as amended through November 18, 2004, is incorporated byreference to Exhibit 99.1 of Simpson Manufacturing Co., Inc.’s AnnualReport on Form 10-K for the year ended December 31, 2007.

 

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**SIGNATURES**

 

Pursuant to the requirements Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Dated:  February 27, 2009 |         | **Simpson Manufacturing Co., Inc.**     |
|--------------------------------|--------------|----------------------------------------------|
|                           | (Registrant) |
|                           |         |
|                           |         |
|                           | By           |  /s/Michael J. Herbert                  |
|                           |         | Michael J. Herbert                           |
|                           |         | Chief Financial Officer                      |
|                           |         | and Duly Authorized Officer                  |
|                           |         | of the Registrant                            |
|                           |         | (principal accounting and financial officer) |
|                                |              |                                              |  |

 

 Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated below.

 
| **Signature**                 | ** **                                    | **Title**                   | ** ** | **Date**                |
|-------------------------------|-----------------------------------------------|-----------------------------|------------|-------------------------|
|                          |                                          |                        |       |                    |
| **Chief  Executive Officer:** |                                          |                        |       |                    |
| ** **                    |                                          |                        |       |                    |
| /s/Thomas J Fitzmyers         |                                          | President, Chief  Executive |       | February 27,  2009 |
| (Thomas J Fitzmyers)          |                                          | Officer and  Director       |       |                    |
|                          |                                          |                        |       |                    |
| **Chief  Financial Officer:** |                                          |                        |       |                    |
| ** **                    | ** **                                    | ** **                  | ** ** | ** **              |
| /s/Michael J. Herbert         |                                          | Chief Financial  Officer,   |       | February 27,  2009 |
| (Michael J. Herbert)          |                                          | Treasurer and  Secretary    |       |                    |
|                          | (principal  accounting and financial officer) |                        |       |
| **Directors:**                |                                          |                        |       |                    |
| ** **                    | ** **                                    | ** **                  | ** ** | ** **              |
| /s/Barclay Simpson            |                                          | Chairman of the  Board      |       | February 27,  2009 |
| (Barclay Simpson)             |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Jennifer A. Chatman        |                                          | Director                    |       | February 27,  2009 |
| (Jennifer A. Chatman)         |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Earl F. Cheit              |                                          | Director                    |       | February 27,  2009 |
| (Earl F. Cheit)               |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Gary M. Cusumano           |                                          | Director                    |       | February 27,  2009 |
| (Gary M. Cusumano)            |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Peter N. Louras            |                                          | Director                    |       | February 27,  2009 |
| (Peter N. Louras)             |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Robin G. MacGillivray      |                                          | Director                    |       | February 27,  2009 |
| (Robin G. MacGillivray)       |                                          |                        |       |                    |
|                          |                                          |                        |       |                    |
| /s/Barry Lawson Williams      |                                          | Director                    |       | February 27,  2009 |
| (Barry Lawson Williams)       |                                          |                        |       |                    |

 

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