Simpson Manufacturing Co., Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unless otherwise noted, amounts are in U.S. dollars. Continuing operations primarily comprise connector products; the venting-products business is reported as discontinued operations.
Key financial results
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Continuing net sales | $165.6 million | $152.2 million | $289.4 million | $261.3 million |
| Gross profit | $76.8 million | $59.2 million | $130.8 million | $90.0 million |
| Gross margin | 46.4% | 38.9% | 45.2% | 34.4% |
| Operating income | $33.9 million | $19.7 million | $51.0 million | $12.3 million |
| Continuing income, net of tax | $21.1 million | $11.2 million | $30.9 million | $4.7 million |
| Net income, including discontinued operations | $6.7 million | $10.7 million | $15.9 million | $2.3 million |
| Diluted continuing EPS | $0.42 | $0.23 | $0.62 | $0.10 |
Management attributed higher sales to volume growth, despite average prices falling 4.5% in Q2 and 5.2% in the first half year over year. Lower material and labor costs and improved fixed-cost absorption lifted gross margins. Q2 sales improved across most of North America and Europe; U.S. growth was strongest in the Midwest and Northeast. European operations moved to operating income of $2.6 million in Q2 and $0.8 million for the half, versus losses in the prior-year periods.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $219.8 million at June 30, down $30.6 million from year-end 2009. Operating cash flow was $5.6 million for the first half, compared with $38.2 million a year earlier.
- Investing activities used $23.3 million, including $21.6 million of capital expenditures and the $19.2 million purchase of a California facility. Financing activities used $8.9 million, principally for $9.9 million of dividends.
- Working capital was $465.0 million. The company reported no borrowings at June 30 and $204.3 million of unused credit facilities, including a $200 million revolving facility expiring in October 2012.
- Total liabilities were $89.1 million and stockholders’ equity was $753.5 million. Inventory was $150.8 million, down from $163.8 million at December 31, 2009; accounts receivable was $104.3 million, up from $77.3 million.
Material changes, outlook and risks
- Venting-business sale: On June 30, the company agreed to sell substantially all Simpson Dura-Vent assets and liabilities for $20 million in cash, subject to a working-capital adjustment. Closing was expected in Q3 2010. The company recorded a $21.4 million pretax impairment charge in discontinued operations; the first-half discontinued-operations loss was $15.0 million after tax. The company said the sale would allow it to focus on connector products. It planned to lease retained Vacaville facilities to the buyer for about $0.9 million annually for ten years.
- Operating outlook: Management estimated 2010 capital spending of $33 million and said cash from operations and available credit should cover working capital and planned capital expenditures for the next 12 months. It could not reliably estimate full-year pretax income because of continuing uncertainty in construction markets; no earnings guidance was provided.
- Costs and demand: Management noted steel prices had fallen from early-2010 levels but could rise later in the year as supply and input-cost conditions change. Higher steel costs could pressure margins if not recovered through pricing. The company cited ongoing construction-market uncertainty.
- Legal contingency: Four Hawaii lawsuits allege premature corrosion of strap-tie holdown products and seek compensatory damages; one also seeks punitive damages. Claimed amounts, liability likelihood and potential exposure were undetermined. The company said some claims may be covered by insurance and intended to defend itself.
- Other developments: In July, the company sold its Brea properties for $14.7 million and expected to record a $5.2 million gain. The board declared a $0.10-per-share dividend payable in October. Foreign-currency translation reduced accumulated other comprehensive income by $18.0 million in the first half; the company does not hedge its currency exposure.
Important facts for investors to verify
- Whether the Dura-Vent sale closed on expected terms and how final working-capital adjustments affected proceeds.
- Cash conversion and working-capital trends, including the effect of receivables growth and capital spending.
- The extent and insurance coverage of the Hawaii litigation, and any developments in potential exposure.
- Whether steel-cost increases, construction demand and pricing affect margins in subsequent periods.
- Whether the reported Brea sale gain and declared dividend were completed or paid as described.