Simpson Manufacturing Co., Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; financial statements are unaudited and consolidated. The company designs, manufactures and sells building construction products across North America, Europe and Asia/Pacific.
Financial performance and position
- Third quarter: Net sales were $216.1 million, up 3.3% year over year. Gross profit was $100.3 million, with gross margin of 46.4% versus 45.6%. Operating income rose to $35.2 million from $32.2 million; net income was $21.6 million versus $20.6 million, and diluted EPS was $0.44 versus $0.42.
- First nine months: Net sales were $609.3 million, up 4.1%; gross profit was $276.2 million, up 2.6%. Gross margin declined to 45.3% from 46.0%. Operating income increased to $86.5 million from $84.0 million. Net income was essentially unchanged at $53.2 million; diluted EPS was $1.08 in both periods.
- Regional results: Q3 sales increased 7.9% in North America and decreased 14.1% in Europe and 48.0% in Asia/Pacific. Europe’s sales were relatively flat in local currencies; currency translation reduced Q3 sales by an estimated $4.7 million. North America generated $33.4 million of Q3 operating income; Asia/Pacific recorded a $0.9 million operating loss. For the first nine months, North America sales rose 8.7%, while Europe fell 14.5% and Asia/Pacific fell 32.1%.
- Cash flow and liquidity: Operating cash flow for the first nine months was $72.3 million, compared with $49.2 million. Capital expenditures were $19.2 million; financing activities used $62.9 million, including share repurchases and dividends. Cash and equivalents were $242.8 million at September 30, down from $260.3 million at December 31, 2014. Working capital was $499.6 million. The company reported no borrowings at quarter-end and $304.3 million of available credit, including a $300 million revolving facility expiring in July 2017.
- Balance sheet and shareholder returns: Total assets were $960.0 million, total liabilities $115.7 million and stockholders’ equity $844.4 million. The company repurchased 1.15 million shares for approximately $39.5 million in the first nine months, including an accelerated share repurchase, and declared dividends of $0.46 per share for the period.
Changes, outlook and notable items
- Management attributed North America’s sales growth mainly to higher U.S. unit volumes and improved construction activity. It expects this sales trend to continue in Q4 2015. Europe’s local-currency sales were relatively flat, and the company estimated Europe would be profitable for 2015. Asia/Pacific was expected to report an operating loss for the year.
- 2015 outlook ranges were gross margin of 44%–46%, effective tax rate of 37%–39%, depreciation and amortization of $29–$30 million, and capital spending of $35–$40 million, including the West Chicago real estate project but excluding software development.
- Management cited higher material costs and a wider margin differential between wood and concrete products as pressures on year-to-date gross margin. Steel-price uncertainty was expected to continue at least into early 2016. The effective tax rate increased to 38.4% for the nine months, partly because no tax benefit was recorded on $2.6 million of operating losses, mostly in Asia/Pacific.
- The company is closing sales offices in China, Thailand and Dubai and reducing activity in Hong Kong due to continued losses. Closures were expected to be substantially complete by December 2015. It had recorded $1.9 million of severance expense, with an estimated further $0.6 million of severance, retention and professional costs; remaining lease obligations were $0.7 million.
- A September settlement reduced a $3.0 million pension withdrawal liability to $2.0 million, which was paid, and reduced expense by $1.0 million. The company also recorded a $4.1 million software-development project write-off in R&D and engineering expense. Separately, the cash flow statement lists a $3.14 million software-project write-off adjustment.
- The West Chicago facility acquisition was expected to close before year-end 2015, with consolidation of two chemical operations targeted by December 2016. Management said operating cash flow and available borrowings should fund working capital and planned capital expenditures for the next 12 months. Approximately $90.5 million of foreign-held cash could face additional tax if repatriated; the company said it had no plans to repatriate it.
- Foreign-currency translation reduced comprehensive income by $6.2 million in Q3 and $14.9 million for the first nine months. The company does not currently hedge foreign-exchange risk. Management identified construction conditions, customer acceptance, competition, material costs, trade rules, and product performance or installation failures among relevant risks. No pending legal proceedings were expected to have a material adverse effect; management noted that claims and litigation remain inherently uncertain.
- Results are seasonal and interim results are not necessarily indicative of full-year performance. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile the $4.1 million project write-off described in MD&A with the $3.14 million adjustment shown in the cash flow statement.
- Track North America’s sales and margin trends against material and steel costs, and assess whether the 44%–46% full-year gross-margin outlook remains achievable.
- Monitor Asia/Pacific losses, completion costs and timing for the office closures, and whether the expected 2015 Europe profit is realized.
- Review final settlement of the accelerated share repurchase agreement, remaining repurchase authorization, and effects of buybacks and dividends on cash and share count.
- Assess the West Chicago facility closing, total project spending, and the use and potential tax implications of foreign-held cash.
- Consider the prior-period comparison: a 2014 out-of-period adjustment increased nine-month gross profit by $2.3 million and net income by $1.3 million.