Simpson Manufacturing Co., Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Simpson designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific segments. Figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $308.0 | $263.0 | $552.8 | $482.9 |
| Gross profit | $141.5 | $123.5 | $250.0 | $223.7 |
| Gross margin | 45.9% | 47.0% | 45.2% | 46.3% |
| Operating income | $60.7 | $45.1 | $93.5 | $67.8 |
| Net income | $44.1 | $28.2 | $69.5 | $51.3 |
| Diluted EPS | $0.94 | $0.59 | $1.48 | $1.07 |
| Effective tax rate | 27.2% | 37.2% | 25.4% | 32.2% |
- Q2 sales rose 17.1%; North America increased 20.4%, Europe 1.2% and Asia/Pacific 18.3%. North America contributed 84% of quarterly sales. Wood construction products were 84% of Q2 sales; concrete products were 16%.
- Q2 operating margin was approximately 19.7%, versus 17.2% a year earlier. Sales growth and operating leverage lifted operating income, while higher materials and shipping costs reduced gross margin. North America gross margin fell to 47.6% from 49.4%; concrete product margin improved, while wood product margin weakened.
- At June 30, cash was $155.0, current assets $640.2 and current liabilities $168.0; working capital was $472.2. Total liabilities were $182.1. The company reported no outstanding debt and had $304.1 of available credit, including revolving facilities and a standby letter of credit. Capital lease obligations totaled $3.2.
- Six-month operating cash flow was $55.4, versus $7.7 in 2017. Investing used $17.0, principally for $19.0 of capital expenditures; financing used $49.8, including $25.4 of share repurchases and $19.5 of dividends. Cash declined $13.5 from year-end 2017.
Changes, outlook and management commentary
- Six-month sales increased 14.5% and net income increased 35.4%. The comparison includes an $8.4 non-taxable bargain-purchase gain in 2017; 2018 had no such gain. 2018 also included a $1.3 gain on sale of assets, largely a $1.0 additional payment from a 2016 eminent-domain land taking.
- The lower 2018 tax rate primarily reflects the U.S. Tax Cuts and Jobs Act. Management estimated a full-year 2018 effective tax rate of 26%–27%.
- Management forecast full-year 2018 gross margin of approximately 45%–46%, operating expenses around the mid-28% range as a percentage of sales, capital spending of $30–$32 and depreciation and amortization of $39–$40. Effective July 1, the company raised prices on most U.S. wood connectors by an average 11.5% to offset rising raw-material costs.
- The 2020 Plan targets approximately 8% annualized net-sales growth from 2016 through 2020, operating expenses of 26%–27% of sales by 2020, and a 17%–18% return on invested capital by 2020. These goals depend on, among other things, mid-single-digit growth in U.S. housing starts and repair/remodel, European growth and share gains in truss and concrete products.
- SAP implementation costs and timing increased: completion was revised to the end of 2021, with total cost estimated at $38–$40. The first implementation wave took longer than expected to stabilize; 2018 project costs were estimated at $9–$10. Management also expected additional consulting expense in 2018–2019 related to operational initiatives.
- Steel prices were expected to remain volatile in Q3 amid tariff uncertainty. The company cited construction seasonality, weather, raw-material costs, foreign exchange, competition and execution of its strategic and systems initiatives as risks. It does not hedge foreign-exchange exposure.
- The Home Depot mechanical-anchor rollout was slower than expected because of store-space constraints: products were in 345 locations at quarter-end, with approximately 1,900 locations targeted by 2020. Management said the delay was not expected to affect the 2020 sales-growth target.
- The company is defending the Gentry Homes product-related lawsuit and could not reasonably estimate the likelihood or amount of potential loss; it believes some or all claims may be insured. It was not a party to the related Vitale matter but could potentially face third-party claims. Management stated it did not expect currently known proceedings to have a material adverse effect.
- The board declared a subsequent quarterly dividend of $0.22 per share, estimated at $10.1, payable October 25, 2018. Approximately $126.1 remained under the $275 share-repurchase authorization at June 30.
Important facts for investors to verify
- Whether post-quarter pricing actions offset steel, shipping and other input-cost pressure without materially affecting volumes or demand.
- Progress toward the 2020 Plan’s growth, expense-ratio, inventory and return-on-invested-capital targets, and the assumptions underlying those targets.
- SAP implementation stabilization, revised completion schedule and total cost, including related operating expenses and control changes.
- Cash conversion and working-capital trends, particularly the six-month $76.8 increase in receivables and the seasonal pattern of cash flows.
- Developments in the Gentry litigation and any potential third-party claims, insurance coverage and possible financial exposure.
- European segment performance, severance and restructuring costs, and the slower Home Depot rollout.