Simpson Manufacturing Co., Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial amounts below are in millions unless stated otherwise. The company designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific segments.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Net sales | $309.9 | $284.2 | $874.0 | $837.0 |
| Gross profit | $137.6 | $133.9 | $382.1 | $382.1 |
| Gross margin | 44.4% | 47.1% | 43.7% | 45.7% |
| Operating income | $61.0 | $59.7 | $144.6 | $153.8 |
| Net income | $43.7 | $44.4 | $105.9 | $113.9 |
| Diluted EPS | $0.97 | $0.95 | $2.35 | $2.43 |
- Q3 sales rose 9.1%, led by higher volumes and average prices. Operating income increased modestly, but net income declined 1.5%; diluted EPS rose as weighted-average diluted shares fell to 44.8 million from 46.6 million.
- For the first nine months, sales grew 4.4%, while gross profit was essentially flat. Operating income fell 5.9% and net income fell 7.0%; diluted EPS decreased 3.3%.
- Q3 gross margin fell 2.7 percentage points, primarily due to higher material, labor, factory and overhead costs. Nine-month gross margin declined 2.0 points.
- Q3 North America sales increased 10.7%; Europe sales were nearly flat, including approximately $2.3 million of unfavorable currency translation. Nine-month North America sales rose 5.7%, while Europe sales fell 2.0%, including approximately $8.2 million of unfavorable currency translation.
Cash flow, balance sheet and capital allocation
- Nine-month operating cash flow was $149.2 million, compared with $108.0 million in 2018. Investing cash outflow was $25.5 million, including $24.5 million of capital expenditures; financing cash outflow was $88.4 million.
- Cash less capital expenditures, a simple cash-flow measure, was approximately $124.7 million for the first nine months, versus $83.3 million in 2018.
- At September 30, cash and cash equivalents were $194.1 million, working capital was $469.4 million, and total assets were $1.086 billion. Cash included $55.8 million held in foreign operations that could face additional taxation if repatriated.
- The company reported $0.5 million outstanding under its various credit lines in the debt note; MD&A separately states no amounts outstanding under the $300 million credit facility. Total available credit, including other lines and a standby letter of credit, was $303.2 million. The company reported covenant compliance and no variable-rate debt outstanding.
- Nine-month share repurchases totaled $51.4 million for 854,349 shares; $48.6 million remained under the $100 million authorization, which was due to expire December 31, 2019. Dividends paid were $30.0 million. The company stated its commitment to return 50% of operating cash flow through 2020.
- Operating lease adoption in January 2019 added approximately $34.3 million of right-of-use assets and $35.1 million of lease liabilities at adoption; the company reported $34.3 million of operating lease liabilities at September 30.
Outlook, commentary and risks
- Fiscal 2019 outlook: gross margin of approximately 43.5%–44.0%; operating expenses of 27.5%–28.5% of net sales; and an effective tax rate of 25.5%–26.5%. The filing does not provide a specific full-year revenue or earnings forecast.
- Management expected U.S. single-family housing starts to be flat or grow in the low single digits for the remainder of 2019, and described near-term demand as cautiously steady, subject to winter weather.
- The company said it expected to achieve its 2020 Plan sales-growth goal of approximately 8% CAGR from 2016. It revised its 2020 operating-margin target to 16%–17% from 21%–22%, citing material-cost pressures, and revised its return-on-invested-capital target to 15%–16% from 17%–18%. It no longer expects to reach its prior inventory-turn target of four times annually by 2020.
- Steel is the principal raw material; higher steel costs, tariffs and the ability to recover costs through pricing could pressure margins. Management cited unusually wet weather and lower-than-projected housing starts as factors affecting nine-month wood-product volumes.
- The SAP rollout continued, with remaining U.S. branches targeted for early 2020 and company-wide completion during 2021. Management expects ERP-related operating expenses to continue increasing through 2024; nine-month SAP implementation and support costs were $9.4 million.
- Legal matters include Hawaii claims alleging premature corrosion of certain galvanized connectors and anchors. The company recorded an additional approximately $0.1 million charge during the period, bringing the recorded charge for one matter to approximately $3.0 million net of tax. Management did not expect pending matters, after reserves and indemnification, to have a material adverse effect, but outcomes remain uncertain.
- After quarter-end, the company sold its British Columbia facility in November for approximately $9.5 million net proceeds and estimated a $5.6 million gain; it leased the site back temporarily. The board also declared a $0.23-per-share quarterly dividend payable in January 2020.
Key facts for investors to verify
- Whether sales growth and pricing can offset persistent material, labor and overhead cost pressure on gross margins.
- Progress against fiscal 2019 guidance and revised 2020 margin and return targets, including sensitivity to housing demand, weather, steel costs and tariffs.
- The timing, cost and control implications of the SAP implementation, including its expected expense burden through 2024.
- Developments, insurance coverage and potential financial exposure in the Hawaii product-corrosion litigation.
- Actual use of remaining repurchase authorization and the consistency of dividends and repurchases with cash generation.
- The final proceeds and gain from the post-quarter British Columbia property sale and any related transition costs.