Simpson Manufacturing Co., Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial amounts below are in millions of dollars unless otherwise noted. The filing presents unaudited interim results and cautions that quarterly performance may not indicate future results.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Net sales | $158.7 | $132.5; up 19.8% |
| Gross profit / margin | $69.4 / 43.7% | $56.9 / 43.0% |
| Operating income / margin | $13.5 / 8.5% | $12.3 / 9.3%; income up 10.0% |
| Net income / diluted EPS | $7.2 / $0.15 | $7.1 / $0.14 |
| Effective tax rate | 46.9% | 42.6% |
| Cash from operations | $0.6 | $(22.4) |
| Cash and cash equivalents | $160.1 at March 31 | $213.8 at December 31, 2011 |
| Total debt outstanding | $3.8, including $0.2 long-term | No balance at December 31, 2011 |
Operating cash flow was modest despite positive earnings, with receivables growth using $26.6 million of cash. Investing activities used $52.4 million, primarily for acquisitions; financing activities used $4.2 million, including $6.0 million in dividends. Cash declined $53.7 million during the quarter. Working capital was $388.3 million, compared with $430.5 million at year-end. Available credit facilities totaled $206.5 million; the company reported covenant compliance.
Changes versus the prior-year quarter
- Sales rose on higher volume and a 2.7% increase in average prices. Management cited a mild North American winter and broad-based sales gains across regions, distribution channels, and most major product lines.
- North America sales increased 22.3% to $128.0 million; Europe increased 9.5% to $28.2 million, partly reflecting an acquisition; Asia/Pacific increased 26.3% to $2.4 million.
- Gross margin improved 0.7 percentage points, primarily from lower warehousing and shipping costs as a share of sales and greater volume spreading fixed overhead. Material and labor costs rose as a share of sales.
- Operating expenses increased 25.2% to $55.9 million, faster than sales. R&D and engineering rose 53.5% to $9.2 million; selling expense rose 19.7% to $20.4 million; and general and administrative expense rose 21.4% to $26.2 million. Management attributed much of the increase to acquired-business integration and incremental costs.
- Net income increased only 1.7% despite sales growth; the effective tax rate increased, and operating margin declined year over year.
Acquisitions, outlook, and notable items
- In January, the company acquired Swiss-based S&P Clever for $58.1 million, subject to post-closing adjustments, including $0.6 million of contingent consideration. The acquisition expands its European infrastructure, commercial, and industrial construction presence. Provisional purchase accounting included $26.1 million of goodwill and $15.0 million of intangible assets.
- In March, the company acquired substantially all assets of CarbonWrap for $5.5 million, subject to adjustments, including $0.2 million of contingent consideration. The business develops fiber-reinforced polymer products for infrastructure and transportation.
- Management estimated 2012 capital spending at approximately $27 million, primarily for construction of a German manufacturing facility and facility improvements in France and the United States.
- Management expected steel prices to remain generally at current levels through at least the first half of 2012, while warning that higher steel costs could pressure margins if not recovered through pricing.
- The $200 million primary revolving credit agreement expires in October 2012. The company was negotiating a replacement and anticipated that new terms might be less favorable. Management believed operating cash flow and borrowing availability would meet working-capital and planned capital-expenditure needs for the next 12 months, while noting possible future financing needs for growth or acquisitions.
- The board declared a $0.125-per-share dividend in April, estimated at $6.0 million, payable July 26, 2012. A $50 million share repurchase authorization remained for 2012; no shares were repurchased in Q1.
- Four Hawaii lawsuits concern alleged premature corrosion of strap tie holdown products at the Ocean Pointe development; a separate putative class action alleges corrosion and building-code issues at Ewa Beach. Liability and potential damages were unknown, and no specific damages were stated. The company intends to defend the cases and believes some claims may be covered by insurance; coverage disputes are also pending. Management said resolution could take an extended period.
- The company reported a $0.5 million impairment related to sale of its San Leandro facility. The sale generated approximately $6.4 million net of closing costs. Foreign-currency translation increased other comprehensive income by $7.2 million; the company does not currently hedge foreign-exchange risk.
Important facts for investors to verify
- Whether the replacement credit agreement was completed before the October 2012 expiry, and its cost, covenants, and available borrowing capacity.
- Acquisition integration, subsequent purchase-price adjustments, and the acquired businesses’ contribution to sales, margins, and cash flow.
- Whether operating cash generation improves as receivables and working capital normalize, and whether capital spending stays near the $27 million estimate.
- Steel-price trends and the company’s ability to maintain pricing and gross margins as input costs change.
- Developments in the Hawaii product-liability cases, estimated exposure, and the scope and availability of insurance coverage.
- The drivers of the higher effective tax rate and whether it is expected to persist.