Simpson Manufacturing Co., Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The company designs, manufactures and sells building construction products, principally wood and concrete construction products, through North America, Europe and Asia/Pacific. Results are seasonal and the company cautions that the quarter is not necessarily indicative of future periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Net sales | $219.9 | $199.5; up 10% |
| Gross profit / margin | $100.2 / 46% | $92.5 / 46% |
| Operating income / margin | $22.6 / 10.3% | $26.6 / 13.4% |
| Net income | $23.1 | $16.3; up 42% |
| Diluted EPS | $0.48 | $0.34 |
| Operating cash flow | $(7.5) | $(9.9) |
| Cash and cash equivalents at period end | $167.1 | $232.0 at March 31, 2016; $226.5 at December 31, 2016 |
| Total assets / stockholders’ equity | $1,018.2 / $887.0 | $980.0 / $865.8 at December 31, 2016 |
- Operating cash use reflected working-capital investment, including a $30.3 million increase in receivables and a $9.8 million increase in inventory. Investing cash use was $42.0 million, including $26.3 million for acquisitions and $15.8 million for capital expenditures. Financing cash use was $11.3 million, primarily dividends and employee tax withholding on vested shares.
- The company reported no outstanding debt and had $303.8 million of available credit at March 31, 2017. A new equipment capital lease resulted in approximately $2.1 million of lease obligations. Working capital was $462.0 million.
- Quarterly dividends declared were $0.18 per share. In April, the board declared a subsequent quarterly dividend of $0.21 per share, a 17% increase from the prior declaration.
Material changes and drivers
- Acquisitions contributed $12.6 million of sales growth: CG Visions in North America and Gbo Fastening Systems in Europe were acquired in January 2017; MS Decoupe was acquired in August 2016. Europe sales rose 45% to $34.4 million, largely due to acquisitions. North America sales increased 5% to $183.8 million.
- Despite higher sales and gross profit, operating income fell $4.0 million. Operating expenses increased, including higher personnel, advertising, professional fees and stock-based compensation. Stock-based compensation expense rose $5.1 million, partly due to accelerated recognition following a change in retirement eligibility for awards.
- Net income included a preliminary, nonrecurring $8.4 million bargain-purchase gain from the Gbo acquisition. This gain increased diluted EPS by approximately $0.18 and was not taxable. The effective tax rate fell to 24.9% from 38.1%; management attributes the decrease to the gain and adoption of new stock-compensation tax accounting.
- Gross margin was unchanged at 46%. Management cited lower wood-product margin (47% versus 48% on its product-group basis) and acquired businesses’ lower margins as factors; Europe segment gross margin declined to 32% from 36%.
Outlook, commentary and risks
- Management estimated full-year 2017 gross margin of 45%–46%, depreciation of $25–$26 million, amortization of $6–$7 million, and an effective tax rate of 34%–36%. Steel prices were expected to remain relatively stable in Q2.
- Estimated 2017 capital spending was $50–$55 million. The company expected to spend approximately $30 million over three to four years on its SAP ERP implementation; rollout was expected to begin in Q1 2018. Management estimated eventual annual savings of about 1% of net sales, while implementation costs are expected to raise operating expenses in 2017–2019.
- A North America factory-efficiency project had relocated about 90% of targeted high-volume connector production by March 31. Management expected completion by the end of Q3 2017 and estimated annual savings of approximately $3 million; factory utilization had risen from about 45% to about 60%, with a 75% target.
- The Home Depot product rollout was expected to continue through 2017 and beyond; management estimated it could potentially add approximately $30 million in annualized sales once complete. These are forward-looking estimates, not reported results.
- Risks include construction cycles and weather-related seasonality, steel and other input costs, foreign-exchange movements, product liability and litigation. The company was not a party to the described Hawaii corrosion cases, but potential appeals or third-party claims could arise; it could not estimate a possible loss or range. Management said no currently identified proceeding was expected to have a material adverse effect.
- Cash held in foreign operations was $72.6 million and could incur additional tax if repatriated; the company had no current repatriation plans. The company did not hedge foreign-exchange risk. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of sales growth and future profitability comes from acquired businesses versus underlying organic growth, and how acquired margins develop.
- Whether operating expenses, including stock-based compensation and integration costs, moderate after the reported increase, and whether operating margins recover.
- Whether working-capital needs and planned acquisition, ERP and facility spending affect cash generation, liquidity and the stated capital-spending outlook.
- Final purchase accounting for Gbo Fastening Systems and whether the preliminary $8.4 million bargain-purchase gain changes.
- Progress on the factory consolidation and Home Depot rollout against management’s savings and sales estimates.
- Developments in the Hawaii corrosion matters, including any claims against the company and the extent of insurance coverage.