Simpson Manufacturing Co., Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. The company designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $263.0 | $230.0 | $482.9 | $429.5 |
| Gross profit / margin | $123.5 / 47% | $111.5 / 48% | $223.7 / 46% | $204.0 / 47% |
| Income from operations | $45.1 | $40.9 | $67.8 | $67.6 |
| Net income | $28.2 | $26.2 | $51.3 | $42.5 |
| Diluted EPS | $0.59 | $0.54 | $1.07 | $0.88 |
- Q2 sales rose 14%; net income rose 8%. Six-month sales rose 12%, while operating income was nearly flat.
- Six-month net income included a preliminary, nonrecurring $8.4 million bargain-purchase gain on the Gbo Fastening Systems acquisition. Management said it added about $0.18 to diluted EPS; the gain was nontaxable and lowered the reported six-month effective tax rate.
- Q2 sales growth included $15.0 million from recent acquisitions; six-month growth included $27.6 million. Europe sales grew 47% in Q2 and 46% in the first half, largely due to acquisitions. North America sales grew 9% and 7%, respectively.
- Q2 gross margin declined to 47% from 48%; first-half margin declined to 46% from 47%. Acquired businesses had average gross margins of 32% in Q2 and 31% in the first half.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $7.7 million, versus $21.7 million a year earlier. Receivables increased $52.1 million and inventories increased $16.4 million, weighing on cash generation.
- Investing cash outflow was $58.5 million, including $32.3 million of capital expenditures and $26.3 million for acquisitions, net of acquired cash. Financing cash outflow was $39.2 million, including $20.0 million of share repurchases and $17.1 million of dividends.
- Cash and equivalents were $141.0 million at June 30, down from $226.5 million at December 31, 2016. Working capital was $462.1 million. The company reported no outstanding debt; capital lease obligations totaled approximately $2.0 million.
- Available credit was $304.0 million, including a $300 million revolving facility expiring in July 2021. The company reported compliance with financial covenants.
- First-half dividends declared were $0.39 per share. In July, the board declared a further $0.21 per-share dividend. In August, after quarter-end, it increased and extended the share-repurchase authorization to as much as $275 million through December 31, 2018.
Outlook, management commentary and risks
- Management estimated full-year 2017 gross margin of 45%–46%, effective tax rate of 34%–36%, depreciation of $26–$27 million, amortization of $6–$7 million, and capital spending of $50–$55 million. Steel prices were expected to be volatile in Q3.
- Management expects U.S. single-family housing starts to grow at a mid- to high-single-digit percentage over the next few years. It also cited potential annualized sales of about $30 million from a Home Depot mechanical-anchor rollout once completed; this is an estimate, not a guarantee.
- The ERP implementation was described as on track and on budget. Estimated total project cost is $30–$34 million through 2019, with expected annual savings of about 1% of net sales once fully implemented. First locations were expected to go live in Q1 2018.
- In July, the company agreed to sell Gbo Poland and Gbo Romania for $9.6 million, subject to customary closing conditions and adjustments; closing was expected by early Q4 2017.
- Key exposures include construction-market cyclicality and seasonality, steel costs, foreign-exchange movements (which the company does not hedge), acquisition integration, and ERP execution. The company discussed potential corrosion-related third-party claims involving products in Hawaii proceedings; it was not then a party to those cases and could not reasonably estimate a possible loss. It stated that some claims may be covered by insurance.
Investor facts to verify
- How much of future sales and profit growth is organic versus acquired, particularly in Europe, and how acquired businesses affect margins.
- Whether working-capital investment continues to constrain operating cash flow and how planned capital spending affects cash balances.
- The final purchase-price allocation and any changes to the $8.4 million preliminary bargain-purchase gain.
- Progress, costs, savings and implementation risks for the ERP project and North American factory-efficiency plan.
- Completion and final settlement of the Gbo Poland/Romania sale and June 2017 accelerated share repurchase; monitor the status of the Hawaii-related claims.