Business context and reporting period
Simpson Manufacturing Co., Inc. filed this Form 10-K for the fiscal year ended December 31, 2014; it is an annual report, not a standalone fourth-quarter filing. Through Simpson Strong-Tie, the company designs and manufactures wood- and concrete-construction products, serving residential, commercial, industrial and infrastructure markets. Its reporting segments are North America, Europe and Asia/Pacific. Results are seasonal and sensitive to construction activity.
Key financial metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net sales | $752.1 million | $705.3 million | +6.6% |
| Gross profit / margin | $342.0 million / 45.5% | $313.5 million / 44.5% | Margin +1.0 percentage point |
| Income from operations / margin | $99.3 million / 13.2% | $81.5 million / 11.6% | Operating income +21.8% |
| Net income | $63.5 million | $51.0 million | +24.6% |
| Diluted EPS | $1.29 | $1.05 | +$0.24 |
| Operating cash flow | $67.2 million | $106.5 million | Down $39.3 million |
| Cash and cash equivalents | $260.3 million | $251.2 million | Up $9.1 million |
| Working capital | $509.8 million | $464.9 million | Up $44.9 million |
| Debt and available credit | $18,000 outstanding; $304.3 million unused capacity | $103,000 outstanding | Low reported borrowings |
FY 2014 investing cash use was $23.5 million, including $23.7 million of capital expenditures; financing cash use was $25.6 million, including $25.9 million in dividends and $3.0 million in share repurchases. Inventory rose 9.5% to $216.5 million and was a significant operating-cash use. About $94.9 million, or 36.5% of cash, was held outside the United States.
Fourth-quarter sales were $166.6 million versus $160.1 million in Q4 2013; net income was $10.4 million versus $7.7 million. Quarterly results are unaudited.
Changes versus prior period
- Sales growth was led by North America, up 7.2% year over year, chiefly on higher unit volumes; average selling prices there declined 0.6%. Europe sales rose 4.6%, partly from currency translation, while Asia/Pacific sales rose 2.3%.
- Wood products generated 85% of sales and concrete products 15%, both broadly unchanged as a share of sales. Improved margins reflected lower material, labor and warehousing costs and better concrete-product profitability.
- Operating expenses increased in dollars but declined as a share of sales, to 32.3% from 32.9% in 2013. Net income and diluted EPS increased.
- Operating cash flow fell from $106.5 million to $67.2 million, primarily amid a $22.4 million inventory increase and lower accounts payable. Cash nevertheless increased.
- Foreign-currency translation reduced accumulated other comprehensive income by $24.9 million, primarily as the U.S. dollar strengthened late in the year.
Outlook, commentary, risks and unusual items
- Management estimated 2015 gross margin of 44.5%–46% and an effective tax rate of 36%–38%; planned 2015 capital expenditures were approximately $33 million. It expected steel prices to remain relatively stable in Q1 2015, while describing European economic conditions as challenging and potentially adverse to Q1 sales. No specific sales or EPS guidance was provided.
- Management plans continued investment in concrete products, truss-plate products and software, including additional personnel and resources in 2015. The company’s long-term strategy includes acquisitions and geographic and product diversification.
- FY 2014 North America gross profit included a non-recurring $3.3 million pension charge related to withdrawal from a multi-employer plan, partly offset by a non-recurring $2.5 million workers’ compensation expense correction. A separate Q1 out-of-period adjustment increased gross profit by $2.3 million, operating income by $2.0 million and net income by $1.3 million; management said it was not material to the current or prior periods.
- A $0.5 million goodwill impairment fully impaired goodwill associated with the German Bierbach acquisition, following weaker customer retention and increased competition. Goodwill was $123.9 million at year-end; the S&P Clever reporting unit had $17.5 million of goodwill and passed its impairment test by an 8% margin, but depended on planned growth and margin improvements.
- Four Hawaii lawsuits concerning alleged corrosion of strap-tie holdown products were covered by a settlement signed by the parties and given preliminary court approval. Final approval and effectiveness remained uncertain; an unfavorable outcome could result in liability substantially exceeding the settlement, with any possible excess not reasonably estimable. A separate related case was closed following summary judgment but remained appealable.
- Key risks include dependence on construction and housing activity (management estimated 55%–65% of wood-product sales depended on housing starts), steel-cost volatility, customer concentration, competition, product liability and recalls, software/design liability, foreign exchange, international operations, natural disasters and regulatory compliance. No customer represented 10% or more of 2014 sales. The company reported no borrowings on its primary revolving facility and compliance with its covenants.
- The board authorized up to $50 million of share repurchases through year-end 2015 and declared a $0.14-per-share dividend in February 2015. The auditor issued an unqualified opinion and concluded internal control over financial reporting was effective; prior goodwill and in-process R&D control weaknesses were reported as remediated.
Important facts for investors to verify
- Whether the Hawaii settlement receives final court approval, becomes effective and resolves the related insurance disputes.
- Whether inventory growth converts into sales and cash flow, and whether operating cash generation recovers from the 2014 decline.
- Whether 2015 gross margins and tax-rate estimates are achieved, including the effect of steel prices, product mix and European conditions.
- Whether S&P Clever meets its growth and profitability assumptions and whether any further goodwill or intangible-asset impairment is required.
- How the $33 million planned capital program, $50 million repurchase authorization and dividends affect liquidity and capital allocation.