Simpson Manufacturing Co., Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Simpson designs, manufactures and sells building construction products, reported across North America, Europe and Asia/Pacific.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $207.9 million | $195.3 million | $376.2 million | $349.6 million |
| Gross profit | $95.9 million | $89.2 million | $173.7 million | $153.9 million |
| Gross margin | 46.1% | 45.6% | 46.2% | 44.0% |
| Operating income | $32.1 million | $29.7 million | $51.7 million | $38.7 million |
| Net income | $20.5 million | $18.5 million | $32.5 million | $23.3 million |
| Diluted EPS | $0.42 | $0.38 | $0.66 | $0.48 |
| Operating cash flow | Not separately stated for Q2 | $(9.5) million | $18.9 million |
- Second-quarter sales rose 6.4%; first-half sales rose 7.6%. Growth reflected higher sales volumes across all regions, partly offset in North America and Europe by lower average selling prices and currency effects. North America contributed the largest increase in sales dollars.
- First-half operating cash flow declined year over year and was negative despite higher net income. The filing attributes the cash use largely to seasonal increases in receivables and inventory, and payments of payables and profit-sharing contributions.
- Cash and cash equivalents were $221.2 million at June 30, down from $251.2 million at year-end 2013. Working capital was $498.7 million, versus $464.9 million at year-end.
- Debt was minimal: $0.1 million in outstanding borrowings and notes. The company reported $304.7 million of total available credit, including its $300 million revolving facility expiring July 2017, and compliance with financial covenants.
- First-half capital expenditures were $9.3 million. The company estimated full-year 2014 capital spending of $20–$23 million. Dividends paid in the first half were $12.2 million; a $0.14-per-share dividend, estimated at $6.9 million, was declared for payment in October.
Material changes and segment performance
- Gross margin improved year over year in both the quarter and first half. Management cited lower material and labor costs and improved factory overhead absorption in North America, and improved overhead and shipping costs in Europe. Product mix remained a headwind because concrete construction products carry lower margins.
- Q2 sales increased 5.5% in North America, 9.1% in Europe and 21.9% in Asia/Pacific. Europe generated $3.8 million of operating income in Q2, compared with $2.2 million a year earlier; Asia/Pacific reported a $0.5 million operating loss.
- First-half operating income increased to $52.7 million in North America and $2.8 million in Europe; Asia/Pacific reported a $1.6 million operating loss. The company expects Asia/Pacific operating losses in 2014 and 2015.
- Operating expenses increased, including selling expense, research and development and engineering, and general and administrative expense. The filing cites higher personnel, professional-fee and profit-sharing costs among the drivers.
Outlook, risks and unusual items
- Management estimated full-year 2014 gross margin of 44%–46% and an effective tax rate of 37%–39%. It expected Europe to report an operating profit for 2014 if second-half economic conditions were consistent with the first half.
- Steel prices had risen slightly since March; management expected market steel prices to increase in the second half of 2014. Higher steel costs could pressure margins if not recovered through pricing.
- Seasonality, weather, construction activity, competition, customer and supplier financial condition, foreign exchange, and acquisition activity are identified risks. The company does not currently hedge foreign-exchange exposure.
- In Q2, the company recorded a $2.9 million pension expense and long-term liability after notifying a multi-employer defined-benefit plan of its intent to withdraw. The plan administrator had not yet issued its demand letter; the company estimated annual payments of $142,000 in perpetuity and will reassess the estimate.
- In Q1, an 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. The first-half gross margin also included an atypical $2.5 million workers’ compensation expense correction.
- Several Hawaii lawsuits involve alleged corrosion of strap tie holdown products. The company reported a tentative settlement in principle, not yet finalized; if finalized and conditions are met, it expects no uninsured liability. An adverse outcome could create uninsured liability substantially exceeding the tentative settlement, and the company said the possible excess could not be reasonably estimated.
- Disclosure controls were deemed ineffective because material weaknesses in controls over goodwill and indefinite-lived intangible-asset impairment assessments remained unremediated at June 30. Management’s remediation plan was expected to be completed after the 2014 annual impairment assessments, in Q4.
Most important facts for investors to verify
- Whether the tentative Hawaii litigation settlement became final, its conditions, and any resulting company payment or insurance recovery.
- The pension plan administrator’s withdrawal-liability demand and how the estimate and recorded liability change.
- Whether operating cash flow recovers as seasonal receivables and inventory convert to cash, and whether inventory levels remain appropriate.
- Full-year gross margin, tax-rate and capital-spending outcomes versus management’s estimates, particularly as steel prices rise.
- Completion and effectiveness of the planned impairment-control remediation, and the results of goodwill and indefinite-lived intangible-asset assessments.