Simpson Manufacturing Co., Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are included below. The company designs and manufactures wood- and concrete-construction products, with operations in North America, Europe and Asia/Pacific.
Financial performance
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net sales | $977.0 million | $860.7 million | Up 14%; acquired businesses contributed $47.9 million of the increase. |
| Gross profit / margin | $446.3 million / 45.7% | $412.5 million / 47.9% | Profit rose 8%, while margin declined 2.2 percentage points. |
| Income from operations / margin | $139.2 million / 14.2% | $139.5 million / 16.2% | Operating income was nearly flat despite sales growth. |
| Net income / diluted EPS | $92.6 million / $1.94 | $89.7 million / $1.86 | Net income increased 3%; FY2017 included a nonrecurring $6.3 million bargain-purchase gain from the Gbo acquisition. |
| Operating cash flow | $119.1 million | $99.0 million | As reported in the consolidated cash-flow statement. |
| Capital expenditures | $58.0 million | $42.0 million | FY2017 included facility improvements, ERP software and equipment. |
| Cash and working capital | $168.5 million cash; $447.5 million working capital | $226.5 million cash; $476.5 million working capital | Cash decreased $58.0 million; working capital decreased $29.0 million. |
| Debt and credit availability | No revolving-credit borrowings; $3.7 million capital-lease obligations | No revolving-credit borrowings | $300 million primary revolving facility available, expiring July 2021; company reported covenant compliance. |
Revenue growth was strongest in Europe: segment sales rose 48% to $165.2 million, largely reflecting acquisitions. North America sales rose 8% to $803.7 million; its operating income declined $4.4 million amid higher expenses. Asia/Pacific sales rose 11% to $8.2 million, but segment gross profit fell. Wood products generated 85% of consolidated sales and concrete products 15%.
Operating cash flow less capital expenditures was approximately $61.0 million in FY2017. Cash used in financing was $106.7 million, principally $70.0 million of stock repurchases and $37.0 million of dividends. The company repurchased shares through accelerated programs and declared $0.81 per share in dividends during the year.
Selected Q4: Sales were $231.7 million versus $200.2 million in Q4 2016; net income was $13.1 million versus $17.4 million; diluted EPS was $0.27 versus $0.36.
Material changes and unusual items
- Gross margin fell as acquired businesses had lower average margins and North America faced higher material, factory-overhead and labor costs. Acquired businesses contributed $47.9 million of sales growth but had a reported average gross margin of 30%.
- Operating expenses increased to $307.1 million from $273.0 million, including higher selling, personnel, software, professional-fee and severance costs.
- The January 2017 acquisitions were CG Visions, for approximately $20.8 million, and Gbo Fastening Systems, for approximately $10.2 million. The Gbo acquisition generated a $6.3 million bargain-purchase gain. The company later sold Gbo’s Poland and Romania subsidiaries, recording a $0.2 million loss.
- The Tax Reform Act produced provisional FY2017 amounts: a $2.8 million deferred-tax benefit from remeasurement and a $3.8 million transition-tax expense on deemed repatriation of foreign earnings. The reported effective tax rate was 35.9%, versus 35.4% in 2016.
- Goodwill was $137.1 million, with no impairment recorded in 2017. Denmark was the closest reporting unit to its impairment threshold, passing the annual test with an 8.3% fair-value cushion.
Outlook, risks and contingencies
- The 2020 Plan targets approximately 8% annualized net-sales growth from FY2016 through FY2020, operating expenses of 26%–27% of sales by FY2020, a 25%–30% reduction in product SKUs, and an additional 30% reduction in raw-material and finished-goods inventory over three years. Management targets FY2020 ROIC of 17%–18%; execution and results are not assured.
- For FY2018, management estimated gross margin of 45%–46%, an effective tax rate of 26%–27%, capital spending of $30–$32 million and depreciation and amortization of $39–$40 million. It anticipated steel prices rising in Q1 2018. These estimates are subject to change, including further tax-law guidance.
- Management expects mid-to-high-single-digit growth in U.S. single-family housing starts over the next few years. A Home Depot mechanical-anchor rollout, if completed as planned, could represent approximately $30 million in annualized sales; this is an opportunity estimate, not guaranteed revenue.
- ERP implementation is planned through 2019, with expected total project costs of $30–$34 million. Management said the project was on track and on budget at year-end; FY2018 ERP-related expense was estimated at approximately $7–$8 million.
- Key risks include exposure to construction and housing cycles, seasonality and weather; steel-price and transportation-cost volatility; product, software and engineering liability; acquisition and ERP execution; foreign-exchange and international risks; and potential litigation. The Gentry Homes product-related case seeks damages that the company could not reasonably estimate; the company said some or all claims may be insured. Potential Vitale-related claims had not been asserted against the company.
- Approximately $86.5 million of cash was held in foreign operations and could be subject to additional tax if repatriated; the company reported no imminent repatriation plans. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the consolidated cash-flow statement reports FY2016 operating cash flow of $99.0 million, while MD&A narrative elsewhere cites $94.9 million.
- Assess whether organic growth, margin recovery and the 2020 Plan’s cost and inventory targets are achievable, particularly given acquisition-related growth and lower acquired-business margins.
- Monitor steel costs, housing activity, Home Depot rollout progress, ERP spending and expected savings from manufacturing consolidation.
- Review the final accounting and tax effects of the Tax Reform Act, including the provisional transition-tax and deferred-tax estimates, and track the Gentry litigation and insurance coverage.
- Consider capital allocation and liquidity: FY2017 cash declined amid repurchases, dividends, acquisitions and higher capital spending; the company also had substantial unused revolving-credit capacity.