1. Operations and Summary of Significant Accounting Policies

Nature of Operations

Simpson Manufacturing Co., Inc., through its subsidiary Simpson Strong-Tie Company Inc. (“Simpson Strong-Tie”) and its other subsidiaries (collectively, the “Company”), designs, engineers and is a leading manufacturer of wood construction products, including connectors, truss plates, fastening systems, fasteners and shearwalls, and concrete construction products, including adhesives, specialty chemicals, mechanical anchors, powder actuated tools and fiber reinforcing materials. The Company markets its products to the residential construction, industrial, commercial and infrastructure construction, remodeling and do-it-yourself markets.

The Company operates exclusively in the building products industry. The Company’s products are sold primarily in the United States, Canada, Europe, Asia and the South Pacific. Revenues have some geographic market concentration on the west coast of the United States. A portion of the Company’s business is therefore dependent on economic activity within this region and market. The Company is dependent on the availability of steel, its primary raw material.

Principles of Consolidation

The consolidated financial statements include the accounts of Simpson Manufacturing Co., Inc. and its subsidiaries. Investments in 50% or less owned entities are accounted for using either cost or the equity method. The Company consolidates all variable interest entities (VIEs) where it is the primary beneficiary. There were no VIEs as of December 31, 2013 or 2012. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting 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, collectability is reasonably assured and pricing is fixed or determinable. The Company’s general shipping terms are F.O.B. shipping point, where title is transferred and revenue is recognized when the products are shipped to customers. When the Company sells F.O.B. destination point, title is transferred and the Company recognizes revenue on delivery or customer acceptance, depending on terms of the sales agreement. Service sales, representing after-market repair and maintenance, engineering activities, software license sales and service and lease income, though significantly less than 1% of net sales and not material to the consolidated financial statements, are recognized as the services are completed or the software products and services are delivered. If actual costs of sales returns, incentives and discounts were to significantly exceed the recorded estimated allowances, the Company’s sales would be adversely affected.

Reclassification

The Company reclassified $0.7 million from the 2011 write down of excess and obsolete inventory to changes in inventories, net of effect of acquisitions and dispositions, in the Consolidated Statements of Cash Flows.

Cash Equivalents

The Company considers all highly liquid investments with an original or remaining maturity of three months or less at the time of purchase to be cash equivalents.

Investments

In 2011, the Company disposed of its only minority investment. Minority investments are carried either at cost or by the equity method of accounting, depending on the Company’s ownership interest and its ability to influence the operating or financial decisions of the investee, and are classified as long-term investments.

The Company periodically reviews its investments for impairment. If the carrying value of an investment exceeds its fair value and the decline in fair value is determined to be other-than-temporary, the Company writes down the value of the investment to its fair value.

Allowance for Doubtful Accounts

The Company assesses the collectability of specific customer accounts that would be considered doubtful based on the customer’s financial condition, payment history, credit rating and other factors that the Company considers relevant, or accounts that the Company assigns for collection. The Company reserves for the portion of those outstanding balances that the Company believes it is not likely to collect based on historical collection experience. The Company also reserves 100% of the amounts that it deems uncollectable due to a customer’s deteriorating financial condition or bankruptcy. If the financial condition of the Company’s customers were to deteriorate, resulting in probable inability to make payments, additional allowances may be required.

Inventory Valuation

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; and

· 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 impairs slow-moving products by comparing inventories on hand to projected demand. If on-hand supply of a product exceeds projected demand or if the Company believes the product is no longer marketable, the product is considered obsolete inventory. The Company revalues obsolete inventory to its net realizable value. The Company has consistently applied this methodology. The Company believes that this approach is prudent and makes suitable impairments for slow-moving and obsolete inventory. When impairments are established, a new cost basis of the inventory is created. Unexpected change in market demand, building codes or buyer preferences could reduce the rate of inventory turnover and require the Company to recognize more obsolete inventory.

Sales Incentive and Advertising Allowances

The Company records estimated reductions to revenues for sales incentives, primarily rebates for volume discounts, and allowances for co-operative advertising.

Allowances for Sales Discounts

The Company records estimated reductions to revenues for discounts taken on early payment of invoices by its customers.

Warranties

The Company provides product warranties for specific product lines and accrues for estimated future warranty costs, none of which has been material to the consolidated financial statements, in the period in which the sale is recorded. In a limited number of circumstances, the Company may also agree to indemnify customers against legal claims made against those customers by the end users of the Company’s products. Historically, payments made by the Company, if any, under such agreements have not had a material effect on the Company’s consolidated results of operations, cash flows or financial position.

Fair Value of Financial Instruments

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

As of December 31, 2013, the Company’s investments consisted of only United States Treasury securities and money market funds, which are the Company’s primary financial instruments, maintained in cash equivalents and carried at cost, approximating fair value, based on Level 1 inputs. The balance of the Company’s primary financial instruments was as follows:

(in thousands)

At December 31,
2013		2012

$	117,571	$	76,130

The carrying amounts of trade accounts receivable, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s line of credit is classified as Level 2 within the fair value hierarchy and is calculated based on borrowings with similar maturities, current remaining average life to maturity and current market conditions.

Property, Plant and Equipment

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

The “Intangibles—Goodwill and Other” topic of the FASB ASC provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company capitalizes substantially all external costs and qualifying internal costs related to the purchase and implementation of software projects used for business operations and engineering design activities. Capitalized software costs primarily include purchased software and external consulting fees. Capitalized software projects are amortized over the estimated useful lives of the software.

Depreciation and Amortization

Depreciation of software, machinery and equipment is provided using accelerated methods over the following estimated useful lives:

Software		3 to 5 years
Machinery and equipment		3 to 10 years

Buildings and site improvements are depreciated using the straight-line method over their estimated useful lives, which range from 15 to 45 years. Leasehold improvements are amortized using the straight-line method over the shorter of the expected life or the remaining term of the lease. Amortization of purchased intangible assets with finite useful lives is computed using the straight-line method over the estimated useful lives of the assets.

In-Process Research and Development Assets

In-process research and development (“IPR&D”) assets represent capitalized incomplete research projects that the Company acquired through business combinations. Such assets are initially measured at their acquisition-date fair values and are required to be classified as indefinite-lived assets until the successful completion of the associated research and development efforts. During the development period after the date of acquisition, these assets will not be amortized until the research and development projects are completed and the resulting assets are ready for their intended use. The Company performs an impairment test annually and more frequently if events or changes in circumstances indicate it that is more likely than not that the asset is impaired. On successful completion of the research and development project the Company makes a determination about the then-remaining useful life and begins amortization.

In connection with the 2012 S&P Clever acquisition, the Company recorded $4.8 million of in-process research and development assets, which were classified as indefinite-lived intangibles assets.

Cost of Sales

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

Tool and Die Costs

Tool and die costs are included in product costs in the year incurred.

Shipping and Handling Fees and Costs

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

Product and Software Research and Development Costs

Product research and development costs, which are included in operating expenses and are charged against income as incurred, were $10.7 million, $11.5 million and $6.1 million in 2013, 2012 and 2011, respectively. The types of costs included as product research and development expenses are typically related to salaries and benefits, professional fees and supplies. In 2013 and 2012, the Company incurred software development expenses related to its expansion into the plated truss market. The Company amortizes acquired patents over their remaining lives and performs periodic reviews for impairment. The cost of internally developed patents is expensed as incurred.

Selling Costs

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

Advertising Costs

Advertising costs are included in selling expenses, are expensed when the advertising occurs, and were $7.0 million, $7.2 million and $6.3 million in 2013, 2012 and 2011, respectively.

General and Administrative Costs

General and administrative costs include personnel, information technology related costs, facility costs such as rent, depreciation and utilities, professional services, amortization of intangibles and bad debt charges.

Income Taxes

Income taxes are calculated using an asset and liability approach. The provision for income taxes includes federal, state and foreign taxes currently payable and deferred taxes, due to temporary differences between the financial statement and tax bases of assets and liabilities. In addition, future tax benefits are recognized to the extent that realization of such benefits is more likely than not.

Sales Taxes

The Company presents taxes collected and remitted to governmental authorities on a net basis in the accompanying consolidated statements of operations.

Foreign Currency Translation

The local currency is the functional currency of the Company’s operations in Europe, Canada, Asia, Australia, New Zealand and South Africa. Assets and liabilities denominated in foreign currencies are translated using the exchange rate on the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the year. The translation adjustment resulting from this process is shown separately as a component of stockholders’ equity. Foreign currency transaction gains or losses are included in general and administrative expenses.

Plant Closure

In September 2012, the Company decided to discontinue manufacturing heavy-duty mechanical anchors made in its facility in Ireland, which were sold mainly in Europe, to focus on selling light-duty and medium-duty anchors and its fastener products in conjunction with its connector products. In December 2012, the Company ceased producing and selling heavy-duty mechanical anchors and terminated employees in Europe, primarily in Ireland and Germany, who were manufacturing, selling or supporting the product line. In the third quarter of 2013, the Company concluded remaining activities associated with the terminated product line, including transferring remaining inventories and certain fixed assets to its other operating locations and preparing the site for lease. All costs associated with the closure were reported in the Europe segment.

At December 31, 2012, the long-lived assets of the Ireland facility had a net book value of $2.8 million, including land and building with a net book value of $2.7 million. In the first quarter of 2013, the Company concluded that the carrying value of its Ireland facility, associated with the Europe segment, exceeded its net estimated realizable value, and therefore recorded an impairment charge of $1.0 million, within general and administrative expenses. The net realizable value was based on the Company’s intent to lease the facility. In September 2013, after receiving an offer that exceeded expectations, the Company reconsidered leasing the facility and decided to accept the offer. The facility had a remaining net book value of $1.7 million and was sold for $1.0 million, resulting in a $0.7 million loss on sales of assets. Remaining equipment with a net book value of $0.1 million was sold to outside parties, transferred to other branches within the Company or scrapped. See note 5.

In 2012, the Company recorded employee severance obligations of $3.0 million, of which $2.4 million was paid in 2012, and $0.6 million was accrued at December 31, 2012. In the first nine months of 2013, severance payments of $0.3 million were made and severance charges of $0.2 million were reversed due to a court decision requiring the Company to retain an employee until 2014. No additional severance obligations were recorded in 2013. The remaining balance, of less than $0.1 million to be paid in 2014, represents the statutory and discretionary amounts due to employees that were or will be involuntarily terminated. The Company does not expect to record additional severance expense in 2014.

Closure liabilities are recognized when a transaction or event has occurred that leaves little or no discretion to avoid future settlement of the liability. As of December 31, 2012, the Company had recorded $0.3 million in plant closure expenses, of which $0.2 million was paid in 2012 and $0.1 million was paid in 2013. In 2013, the Company had recorded an additional $0.1 million in plant closure costs and paid $0.2 million in accrued plant closure costs.

In December 2013, the Company had substantially completed the liquidation of its Irish subsidiary, which included liquidating nearly all of its assets and settling most of its debts. As a result, the Company reclassified $2.8 million of its accumulated other comprehensive income, related to foreign exchange losses from its Irish subsidiary, to its consolidated statement of operations. This amount is classified as a loss on disposal of assets and was recorded in the Administrative & All Other segment.

Sale of Product Line

In December 2013, the Company sold its CarbonWrap product line to The DowAksa USA, LLC for $3.8 million. The CarbonWrap product line had assets of $2.0 million, consisting of $1.5 million in intangible assets and $0.5 million in goodwill. As part of the transaction, the Company also incurred severance costs of $0.5 million. As a result of this transaction the Company recognized a pre-tax gain of $1.4 million.

Because the CarbonWrap assets constituted an integrated business in the US reporting unit, a portion of the US reporting unit’s goodwill must be included in the carrying amount of the asset group disposed. The amount of goodwill from the US reporting unit included in the CarbonWrap asset group was $0.5 million, which was proportionate to the fair value of the CarbonWrap asset group compared to the estimated fair value of the US reporting unit.

The Company continues to invest in related product lines, such as those acquired from Fox Industries, Inc. in 2011 and S&P Clever in 2012. See note 2.

Common Stock

Subject to the rights of holders of any preferred stock that may be issued in the future, holders of common stock are entitled to receive such dividends, if any, as may be declared from time to time by the Company’s Board of Directors (the “Board”) out of legally available funds, and in the event of liquidation, dissolution or winding-up of the Company, to share ratably in all assets available for distribution. The holders of common stock have no preemptive or conversion rights. Subject to the rights of any preferred stock that may be issued in the future, the holders of common stock are entitled to one vote per share on any matter submitted to a vote of the stockholders, except that, subject to compliance with pre-meeting notice and other conditions pursuant to the Company’s Bylaws, stockholders may cumulate their votes in an election of directors, and each stockholder may give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such stockholder or may distribute such stockholder’s votes on the same principle among as many candidates as such stockholder thinks fit. A director is elected if the votes cast “for” such director’s election exceed the votes cast “against” such director’s election, except that, if a stockholder properly nominates a candidate for election to the Board, the candidates with the highest number of affirmative votes (up to the number of directors to be elected) are elected. There are no redemption or sinking fund provisions applicable to the common stock.

In 1999, the Company declared a dividend distribution of one Right to purchase Series A Participating preferred stock per share of common stock. The Rights will be exercisable, unless redeemed earlier by the Company, if a person or group acquires, or obtains the right to acquire, 15% or more of the outstanding shares of common stock or commences a tender or exchange offer that would result in it acquiring 15% or more of the outstanding shares of common stock, either event occurring without the prior consent of the Company. The amount of Series A Participating preferred stock that the holder of a Right is entitled to receive and the purchase price payable on exercise of a Right are both subject to adjustment. Any person or group that acquires 15% or more of the outstanding shares of common stock without the prior consent of the Company would not be entitled to this purchase. Any stockholder who held 25% or more of the Company’s common stock when the Rights were originally distributed would not be treated as having acquired 15% or more of the outstanding shares unless such stockholder’s ownership is increased to more than 40% of the outstanding shares.

The Rights will expire on June 14, 2019, or they may be redeemed by the Company at one cent per Right prior to that date. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the Company. One million shares of the Company’s preferred stock have been designated Series A Participating preferred stock and reserved for issuance on exercise of the Rights. No event during 2013 made the Rights exercisable.

Preferred Stock

The Board has the authority to issue the authorized and unissued preferred stock in one or more series with such designations, rights and preferences as may be determined from time to time by the Board. Accordingly, the Board is empowered, without stockholder approval, to issue preferred stock with dividend, redemption, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Company’s common stock.

Net Income per Common Share

Basic net income per common share is computed based on the weighted average number of common shares outstanding. Potentially dilutive shares, using the treasury stock method, are included in the diluted per-share calculations for all periods when the effect of their inclusion is dilutive.

The following shows a reconciliation of basic earnings per share (“EPS”) to diluted EPS:

(in thousands, except per-share amounts)

	Year Ended December 31,
	2013		2012		2011

Net income available to common stockholders	$	50,971	$	41,918	$	50,900

Basic weighted average shares outstanding	48,521		48,339		48,974

Dilutive effect of potential common stock equivalents — stock options	152		73		49

Diluted weighted average shares outstanding	48,673		48,412		49,023

Net earnings per share:
Basic	$	1.05	$	0.87	$	1.04
Diluted	$	1.05	$	0.87	$	1.04

Potentially dilutive securities excluded from earnings per diluted share because their effect is anti-dilutive	—		1,700		1,363

Anti-dilutive shares attributable to outstanding stock options were excluded from the calculation of diluted net income per share.

The potential tax benefits derived from the amount of the average stock price for the period in excess of the grant date fair value of stock options, known as the windfall tax benefit, is added to the proceeds of stock option exercises under the treasury stock method for computing the amount of dilutive securities used to determine the outstanding shares for the calculation of diluted earnings per share.

Comprehensive Income

Comprehensive income is defined as net income plus other comprehensive income. Other comprehensive income consists of changes in cumulative translation adjustments and changes in unamortized pension adjustments recorded directly in accumulated other comprehensive income within stockholders’ equity. The following shows the components of accumulated other comprehensive income as of December 31, 2013 and 2012:

(in thousands)

	December 31,
	2013			2012

Translation adjustments, net of tax of $854 and $883 as of 2013 and 2012, respectively	$	18,283		$	12,342
Unamortized pension adjustments, net of tax of $43 and $46 as of 2013 and 2012, respectively	(197		)	(243		)
Total accumulated other comprehensive income	$	18,086		$	12,099

The 2013 translation adjustments activity included the realization of $2.8 million in cumulative currency translation adjustments related to the liquidation of the Irish subsidiary as a net loss on disposal of assets in the Consolidated Statements of Operations.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash in banks, short-term investments in United States Treasury securities, money market funds and trade accounts receivable. The Company maintains its cash in demand deposit and money market accounts held primarily at eleven banks.

Accounting for Stock-Based Compensation

With the approval of the Company’s stockholders on April 26, 2011, the Company adopted the Simpson Manufacturing Co., Inc. 2011 Incentive Plan (the “2011 Plan”). The 2011 Plan amended and restated in their entirety, and incorporated and superseded, both the Simpson Manufacturing Co., Inc. 1994 Stock Option Plan (the “1994 Plan”), which was principally for the Company’s employees, and the Simpson Manufacturing Co., Inc. 1995 Independent Director Stock Option Plan (the “1995 Plan”), which was for its independent directors. Options previously granted under the 1994 Plan or the 1995 Plan will not be affected by the adoption of the 2011 Plan and will continue to be governed by the 1994 Plan or the 1995 Plan, respectively.

Under the 1994 Plan, the Company could grant incentive stock options and non-qualified stock options, although the Company granted only non-qualified stock options under the 1994 Plan and the 1995 Plan. The Company generally granted options under each of the 1994 Plan and the 1995 Plan once each year. The exercise price per share of each stock option granted in February 2011 under the 1994 Plan equaled the closing market price per share of the Company’s common stock as reported by the New York Stock Exchange on the day preceding the day that the Compensation and Leadership Development Committee of the Company’s Board of Directors met to approve the grant of the options. The exercise price per share under each option granted under the 1995 Plan was at the fair market value on the date specified in the 1995 Plan. Options vest and expire according to terms established at the grant date. Options granted under the 1994 Plan typically vest evenly over the requisite service period of four years and have a term of seven years. The vesting of options granted under the 1994 Plan will be accelerated if the grantee ceases to be employed by the Company after reaching age 60 or if there is a change in control of the Company. Options granted under the 1995 Plan were fully vested on the date of grant. Shares of common stock issued on exercise of stock options under the 1994 Plan and the 1995 Plan are registered under the Securities Act of 1933.

Under the 2011 Plan, the Company may grant incentive stock options, non-qualified stock options, restricted stock and restricted stock units, although the Company currently intends to award primarily restricted stock units and to a lesser extent, if at all, non-qualified stock options. The Company does not currently intend to award incentive stock options or restricted stock. Under the 2011 Plan, no more than 16.3 million shares of the Company’s common stock may be issued (including shares already sold) pursuant to all awards under the 2011 Plan, including on exercise of options previously granted under the 1994 Plan and the 1995 Plan. Shares of common stock to be issued pursuant to the 2011 Plan are registered under the Securities Act of 1933.

The following table shows the Company’s stock-based compensation activity for the years ended December 31, 2013, 2012 and 2011:

(in thousands)

	Years Ended December 31,
	2013			2012			2011

Stock-based compensation expense recognized in operating expenses	$	12,053		$	10,205		$	6,133

Tax benefit of stock-based compensation expense in provision for income taxes	4,225			3,610			2,261

Stock-based compensation expense, net of tax	$	7,828		$	6,595		$	3,872

Fair value of shares vested	$	12,090		$	10,195		$	6,194

Proceeds to the Company from the exercise of stock-based compensation	$	15,057		$	4,925		$	214

Tax benefit from exercise of stock-based compensation, including shortfall tax benefits	$	(2,645	)	$	(233	)	$	(1,554	)

(in thousands)

	At December 31,
	2013		2012		2011

Stock-based compensation cost capitalized in inventory	$	374	$	335	$	345

The stock-based compensation expense included in cost of sales, research and development and engineering expense, selling expense, or general and administrative expense depends on the job functions performed by the employees to whom the stock options were granted, or the restricted stock units were awarded.

The assumptions used to calculate the fair value of options or restricted stock units are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

Goodwill Impairment Testing

The Company tests goodwill for impairment at the reporting unit level on an annual basis (in the fourth quarter for the Company). The Company also reviews goodwill for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or disposition or relocation of a significant portion of a reporting unit.

The reporting unit level is generally one level below the operating segment and is at the country level except in the United States and Australia and except for S&P Clever Reinforcement Company AG and S&P Clever International AG, both companies incorporated under the laws of Switzerland (collectively, “S&P Clever”).

The Company has determined that the United States reporting unit includes four components: Northwest United States, Southwest United States, Northeast United States and Southeast United States (collectively the “U.S. Components”). The Company aggregates the U.S. Components into a single reporting unit because management concluded that they are economically similar and that the goodwill is recoverable from the U.S. Components working in concert. The U.S. Components are economically similar because of a number of factors, including, selling similar products to shared customers and sharing assets and services such as intellectual property, manufacturing assets for certain products, research and development projects, manufacturing processes, management of inventory excesses and shortages and administrative services. These activities are managed centrally at the U.S. Components level and costs are allocated among the four U.S. Components.

The Company determined that the Australia reporting unit includes three components: Australia, New Zealand and South Africa (collectively the “AU Components”). The Company aggregates the AU Components into a single reporting unit because management concluded that they are economically similar and that the goodwill is recoverable from the AU Components working in concert. The AU Components are economically similar because of a number of factors, including that New Zealand and South Africa operate as extensions of their Australian parent company selling similar products and sharing assets and services such as intellectual property, manufacturing assets for certain products, management of inventory excesses and shortages and administrative services. These activities are managed centrally at the AU Components level and costs are allocated among the AU Components.

The Company has determined that the S&P Clever reporting unit includes seven components: S&P Switzerland, S&P Poland, S&P Austria, S&P The Netherlands, S&P Portugal, S&P Germany and S&P France (collectively the S&P Components”). The Company aggregates the S&P Components into a single reporting unit because management concluded that they are economically similar and that the goodwill is recoverable from the S&P Components working in concert. The S&P Components are economically similar because of a number of factors, including sharing assets and services such as intellectual property, manufacturing assets for certain products, research and development projects, manufacturing processes, management of inventory excesses and shortages and administrative services. These activities are managed centrally at the S&P Components level and costs are allocated among the S&P Components.

The Company determined that the Denmark reporting unit includes two components: Denmark and Poland (collectively the “DK Components”). The Company aggregates the DK Components into a single reporting unit because management concluded that they are economically similar and that the goodwill is recoverable from the DK Components working in concert. The DK Components are economically similar because of a number of factors, including that Poland sells similar products and shares assets, such as intellectual property, manufacturing assets for certain products and management of inventory excesses and shortages.

For certain reporting units, the Company may first assess qualitative factors related to the goodwill of the reporting unit to determine whether it is necessary to perform a two-step impairment test. If the Company judges that it is more likely than not that the fair value of the reporting unit is greater than the carrying amount of the reporting unit, including goodwill, no further testing is required. If the Company judges that it is more likely than not that the fair value of the reporting unit is less than the carrying amount of the reporting unit, including goodwill, the Company will perform a two-step impairment test on goodwill. In the first step, the Company compares the fair value of the reporting unit to its carrying value. The fair value calculation uses a discounted cash flow model and may be supplemented by market approaches if information is readily available. If the Company judges that the carrying value of the net assets assigned to the reporting unit, including goodwill, exceeds the fair value of the reporting unit, a second step of the impairment test must be performed to determine the implied fair value of the reporting unit’s goodwill. If the Company judges that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, the Company would record an impairment charge equal to the difference between the implied fair value of the goodwill and the carrying value.

Determining the fair value of a reporting unit or an indefinite-lived purchased intangible asset is a judgment involving significant estimates and assumptions. These estimates and assumptions include revenue growth rates, operating margins and working capital requirements used to calculate projected future cash flows, risk-adjusted discount rates, and future economic and market conditions (Level 3 fair value inputs). The Company bases its fair value estimates on assumptions that it believes to be reasonable, but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

Assumptions about a reporting unit’s operating performance in the first year of the discounted cash flow model used to determine whether or not the goodwill related to that reporting unit is impaired are derived from the Company’s budget. The fair value model considers such factors as macro-economic conditions, revenue and expense forecasts, product line changes, material, labor and overhead costs, tax rates, working capital levels and competitive environment. Future estimates, however derived, are inherently uncertain but the Company believes that this is the most appropriate source on which to base its estimates.

The Company uses these parameters only to provide a basis for the determination of whether or not the goodwill related to a reporting unit is impaired. No inference whatsoever should be drawn from these parameters about the Company’s future financial performance and they should not be taken as projections or guidance of any kind.

The impairment charge taken in 2012 resulting from the Company’s annual impairment test in the fourth quarter of 2012 was associated with assets in the Germany reporting unit that were acquired in the years 2002 and 2008. The Germany reporting unit’s carrying value, including goodwill, exceeded the fair value, primarily due to reduced future expected net cash flows from weakening profit margins due to European economic conditions, specifically in Germany. The goodwill associated with the Germany reporting unit was fully impaired. The Company’s 2011 annual goodwill impairment analysis resulted in impairment charges associated with the U.K. reporting unit.

The Company’s S&P Clever reporting unit passed step one of the annual 2013 impairment test by a 9% margin indicating an estimated value greater than its net book value. The S&P Clever reporting unit is sensitive to management’s plans for increasing sales, margins and cash flows by expanding its sales into France, other European countries and selling into the Company’s Asia/Pacific segment, as well as the release of new products. The S&P Clever reporting unit’s failure to meet management’s objectives could result in future impairment of some or all of the S&P Clever reporting unit’s goodwill, which was $19.0 million at December 31, 2013.

The Company’s France reporting unit passed step one of the annual 2013 impairment test by a 10% margin. The France reporting unit is highly sensitive to management’s plans for increasing sales at or slightly above inflation in a recovering European economy, while maintaining operating margins and increasing cash flows. The France reporting unit’s failure to meet management’s objectives could result in future impairment of some or all of the France reporting unit’s goodwill, which was $14.9 million at December 31, 2013.

The Company’s Australia reporting unit passed step one of the annual 2013 impairment test by a 4% margin. The Australia reporting unit is highly sensitive to management’s plans for increasing sales, margins and cash flows by expanding activities in Australia, New Zealand and South Africa. The Australia reporting unit’s failure to meet management’s objectives could result in future impairment of some or all of the Australia reporting unit’s goodwill, which was $1.7 million at December 31, 2013.

Key Assumptions Used in the Annual Goodwill Impairment Testing

Key assumptions used in the annual goodwill impairment test (“Step 1”) using discounted cash flow models for the Company’s reporting units included compound annual growth rates (“CAGR”) and average annual pre-tax operating margins during the forecast period, and discount rates. Sensitivity assessment of key assumptions for the reporting unit annual impairment tests are presented in the table below for reporting units that passed Step 1 with a margin of 10% or less. The margin by which the reporting units passed the annual goodwill impairment test is noted in the table below.

							Pre-Tax
	Step 1		Discount				Operating
	Pass		Rate (1)		CAGR (2)		Margin (3)
	Margin		Increases		Decreases		Decreases

S&P Clever	9	%	7	%	6	%	10	%
France	10	%	13	%	19	%	15	%
Australia	4	%	2	%	2	%	6	%

(1) Hypothetical percentage increases noted in the discount rates, holding all other assumptions constant, would not have decreased the fair values of the reporting units below their carrying values, and thus it would not result in the reporting unit failing Step 1 of the goodwill impairment test.

(2) Hypothetical percentage decreases noted in the CAGR, holding all other assumptions constant, would not have decreased the fair values of the reporting units below their carrying values.

(3) Hypothetical annual average percentage decreases noted in average annual pre-tax operating margins, holding all other assumptions constant, would not have decreased the fair value of the reporting units below their carrying values.

The changes in the carrying amount of goodwill, by segment, as of December 31, 2012 and 2013, were as follows:

(in thousands)

	North						Asia
	America			Europe			Pacific			Total

Balance as of January 1, 2012:
Goodwill	$	84,567		$	34,538		$	1,948		$	121,053
Accumulated impairment losses	(10,666		)	(10,538		)	—			(21,204		)

	73,901			24,000			1,948			99,849
Goodwill acquired	3,581			19,245			—			22,826
Foreign exchange	101			364			31			496
Impairment	—			(2,346		)	—			(2,346		)
Reclassifications (1)	1,156			—			—			1,156

Balance as of December 31, 2012:
Goodwill	89,405			54,147			1,979			145,531
Accumulated impairment losses	(10,666		)	(12,884		)	—			(23,550		)

	78,739			41,263			1,979			121,981
Goodwill acquired	918			674			—			1,592
Goodwill disposed	(480		)	—			—			(480		)
Foreign exchange	(248		)	1,393			(273		)	872
Impairment	—			—			—			—
Reclassifications (2)	5,893			(640		)	—			5,253

Balance as of December 31, 2013:
Goodwill	95,488			55,574			1,706			152,768
Accumulated impairment losses	(10,666		)	(12,884		)	—			(23,550		)
	$	84,822		$	42,690		$	1,706		$	129,218

(1)(2) See footnotes following table entitled Indefinite-Lived Intangibles, below.

Amortizable Intangible Assets

The total gross carrying amount and accumulated amortization of intangible assets, most of which are or will be, subject to amortization at December 31, 2013, were $67.7 million and $26.0 million, respectively. The aggregate amount of amortization expense of intangible assets for the years ended December 31, 2013, 2012 and 2011 was $7.1 million, $7.8 million and $4.3 million, respectively.

The changes in the carrying amounts of patents, unpatented technologies and non-compete agreements and other intangible assets subject to amortization as of December 31, 2012 and 2013, were as follows:

(in thousands)

	Gross					Net
	Carrying		Accumulated			Carrying
Patents	Amount		Amortization			Amount

Balance at January 1, 2012	$	6,681	$	(4,767	)	$	1,914
Amortization	—		(610		)	(610		)
Foreign exchange	3		—			3
Balance at December 31, 2012	6,684		(5,377		)	1,307
Amortization	—		(611		)	(611		)
Foreign exchange	5		—			5
Balance at December 31, 2013	$	6,689	$	(5,988	)	$	701

	Gross						Net
	Carrying			Accumulated			Carrying
Unpatented Technology	Amount			Amortization			Amount

Balance at January 1, 2012	$	4,129		$	(1,395	)	$	2,734
Amortization	—			(622		)	(622		)
Foreign exchange	32			—			32
Reclassifications (3)	1,200			—			1,200
Balance at December 31, 2012	5,361			(2,017		)	3,344
Disposals	(1,530		)	158			(1,372		)
Amortization	—			(3,398		)	(3,398		)
Foreign exchange	799			—			799
Reclassifications (4)	14,347			—			14,347
Balance at December 31, 2013	$	18,977		$	(5,257	)	$	13,720

	Gross						Net
Non-Compete Agreements,	Carrying			Accumulated			Carrying
Trademarks and Other	Amount			Amortization			Amount

Balance at January 1, 2012	$	16,276		(5,361		)	10,915
Acquisition	32,355			—			32,355
Disposal	(2,212		)	1,628			(584		)
Amortization	—			(4,309		)	(4,309		)
Foreign exchange	(2		)	—			(2		)
Reclassifications (1)(3)(5)	(4,426		)	—			(4,426		)
Removal of fully amortized asset	(5,040		)	5,040			—
Balance at December 31, 2012	36,951			(3,002		)	33,949
Acquisition	4,130			—			4,130
Disposal	(200		)	74			(126		)
Amortization	—			(636		)	(636		)
Foreign exchange	(728		)	—			(728		)
Reclassifications (2)(4)(6)(7)	(26,588		)	—			(26,588		)
Removal of fully amortized asset	(10		)	10			—
Balance at December 31, 2013	$	13,555		$	(3,554	)	$	10,001

	Gross					Net
	Carrying		Accumulated			Carrying
Customer Relationships	Amount		Amortization			Amount

Balance at January 1, 2012	$	18,940	(6,647		)	12,293
Amortization	—		(2,052		)	(2,052		)
Foreign exchange	57		—			57
Reclassifications (5)	1,700		—			1,700
Balance at December 31, 2012	20,697		(8,699		)	11,998
Amortization	—		(2,465		)	(2,465		)
Foreign exchange	229		—			229
Reclassifications (6)	1,923		—			1,923
Balance at December 31, 2013	$	22,849	$	(11,164	)	$	11,685

(1)(2)(3)(4)(5)(6)(7) See footnotes following table entitled Indefinite-Lived Intangibles, below.

At December 31, 2013, estimated future amortization of intangible assets was as follows:

(in thousands)

2014	$	7,078
2015	6,162
2016	5,905
2017	3,953
2018	3,059
Thereafter	9,950
	$	36,107

Indefinite-Lived Intangible Assets

As of December 31, 2013, two unrelated IPR&D assets totaled $5.1 million and were included in the Company’s Consolidated Balance Sheets as intangible assets. One IPR&D asset was valued at $3.4 million and has been substantially completed, with the Company anticipating sales in early 2014. The other IPR&D asset of $1.7 million requires further field testing and the Company anticipates substantial completion in 2015. The Company’s asset impairment assessment of these two IPR&D assets did not result in impairment in 2013.

The changes in the carrying amounts of indefinite-lived trade name and IPR&D assets not subject to amortization as of December 31, 2013, were as follows:

					Net
					Carrying
Indefinite-Lived Intangibles	Trade Name		IPR&D		Amount

Balance at December 31, 2012	$	—	$	—	$	—
Reclassifications (7)	616		4,742		5,358
Foreign exchange	—		308		308
Balance at December 31, 2013	$	616	$	5,050	$	5,666

(1) Reclassifications in 2012 related to finalizing accounting for acquisitions, including a $1.7 million increase to goodwill with a corresponding decrease in non-compete agreements, trademarks and other related to the Automatic Stamping acquisition, partly offset by $0.5 million decrease to goodwill with a corresponding increase in other noncurrent assets non-compete agreements, trademarks and other related to the Fox Industries acquisition.

(2) Revisions related to the Keymark acquisition included a $5.9 million increase in goodwill with a corresponding decrease in non-compete agreements, trademarks and other.

(3) Reclassifications in 2012 related to finalizing accounting for acquisitions, including a $1.2 million increase to unpatented technology with a corresponding decrease in non-compete agreements, trademarks and other related to the Keymark acquisition.

(4) Reclassifications in 2013 related to finalizing accounting for acquisitions, including increases of $12.8 million and $1.5 million related to the S&P Clever and CarbonWrap acquisitions, respectively, with a corresponding decrease in non-compete agreements, trademarks and other.

(5) Reclassifications in 2012 related to finalizing accounting for acquisitions, including increases of $1.3 million and $0.4 million to customer relations related to the Fox Industries and Automatic Stamping acquisitions, respectively, with a corresponding decrease in non-compete agreements, trademarks and other.

(6) Reclassifications in 2013 related to finalizing accounting for acquisitions, including a $1.9 million increase to customer relations related to the S&P Clever acquisition with a corresponding decrease in non-compete agreements, trademarks and other.

(7) Reclassifications in 2013 related to finalizing accounting for the S&P Clever acquisition, including increases to IPR&D indefinite-lived assets as well as the reclassification of the Quik-Drive trade name from other non-current assets.

Amortizable and indefinite-lived assets, net, by segment were as follows:

	At December 31, 2012
	Gross					Net
	Carrying		Accumulated			Carrying
Total Intangible Assets	Amount		Amortization			Amount

North America	$	37,992	$	(12,012	)	$	25,980
Europe	31,701		(7,083		)	24,618
Total	$	69,693	$	(19,095	)	$	50,598

	At December 31, 2013
	Gross					Net
	Carrying		Accumulated			Carrying
Total Intangible Assets	Amount		Amortization			Amount

North America	$	34,520	$	(15,909	)	$	18,611
Europe	33,217		(10,055		)	23,162
Total	$	67,737	$	(25,964	)	$	41,773

Adoption of Statements of Financial Accounting Standards

In February 2013, the FASB issued an amendment to the comprehensive income guidance requiring reporting of the effect of significant reclassifications out of other comprehensive income on the respective lines in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional information about these amounts. This amendment is effective for fiscal years beginning after December 15, 2012, and interim periods within those years. The implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

In July 2013, the FASB issued an amendment to the income taxes guidance that applies to all entities. It is expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits. The amendment is intended to better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position related to net operating loss carryforwards, similar tax losses, or tax credit carryforwards. The Company’s early adoption and implementation of this amended accounting guidance did not have a material effect on the Company’s consolidated financial position and results of operations.

Recently Issued Accounting Standards

Recent authoritative guidance issued by the FASB (including technical corrections to the ASC), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or is not expected to have a material effect on the Company’s consolidated financial statements.