Simpson Manufacturing Co., Inc. — Q2 2011 Form 10-Q
Business context and period. This filing covers the quarter and six months ended June 30, 2011. Simpson’s continuing business is focused on connector products, reported in North America, Europe, and Asia/Pacific. The venting-products business was sold in August 2010; its 2010 results are classified as discontinued operations.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $177.8 million | $165.6 million | $310.3 million | $289.4 million |
| Gross profit / margin | $83.5 million / 47.0% | $76.8 million / 46.4% | $140.4 million / 45.3% | $130.8 million / 45.2% |
| Operating income / margin | $31.2 million / 17.5% | $33.9 million / 20.5% | $43.5 million / 14.0% | $51.0 million / 17.6% |
| Continuing-operations net income | $19.5 million | $21.1 million | $26.6 million | $30.9 million |
| Diluted EPS, continuing operations | $0.39 | $0.42 | $0.53 | $0.62 |
- Sales rose 7.4% in Q2 and 7.2% in the first half, reflecting higher volume and average prices. Average prices increased 5.3% in Q2 and 4.8% in the first half.
- European sales grew 25.2% in Q2 and 23.9% in the first half; North American sales increased 3.1% and 3.5%, respectively. Asia/Pacific sales were comparatively small.
- Operating income declined despite sales growth as operating expenses rose faster than gross profit. Q2 research and engineering, selling, and general and administrative expenses increased; first-half G&A rose 25.7%.
- Reported net income was $19.5 million for Q2 2011 versus $6.7 million in Q2 2010, and $26.6 million versus $15.9 million for the first half. The 2010 comparisons include after-tax losses from discontinued operations of $14.4 million and $15.0 million, respectively.
Cash, liquidity, and capital
- Cash and cash equivalents were $262.0 million at June 30, down $73.0 million from year-end 2010. First-half operating cash flow was negative $3.3 million, compared with positive $5.6 million a year earlier; working-capital growth, especially receivables and inventory, used cash.
- Working capital was $480.5 million, versus $511.6 million at December 31, 2010. Current assets were $573.4 million and current liabilities $92.9 million.
- No borrowings were outstanding. Available credit was $204.9 million, including a $200 million revolving facility expiring in October 2012. The company reported compliance with financial covenants.
- Investing activities used $10.9 million, including $14.1 million of capital expenditures. Management estimated 2011 capital spending of $33–$35 million.
- Financing activities used $61.2 million, primarily for a $50.1 million repurchase of 1.8 million shares and $11.3 million of dividends paid. $49.9 million remained under the 2011 repurchase authorization. A $0.125-per-share dividend was declared in July for payment in October.
- Total liabilities were $100.1 million and stockholders’ equity was $764.5 million. The company held $171.6 million in U.S. Treasury securities and money market funds within cash equivalents.
Outlook, commentary, and risks
- Management said cash from operations and available borrowing capacity should fund working capital and planned capital expenditures for the next 12 months. Additional financing could be needed depending on growth or acquisitions, and may not be available on reasonable terms.
- Management expected steel prices to remain at current levels or increase for the rest of 2011. Steel cost increases could pressure margins if not offset by pricing. The filing also notes challenging construction-market conditions.
- A $1.1 million impairment charge was recorded for the vacant San Leandro facility, which management expected to sell below carrying value. Two facilities were sold during the period.
- Four Hawaii lawsuits concern alleged premature corrosion of strap tie holdown products and alleged property damage; damages sought are unspecified, and liability and insurance coverage remain uncertain. The insurer separately sought a declaration concerning its defense and indemnity obligations.
- A patent infringement case involving the Steel Strong Wall product was scheduled for trial in April 2012. Management said potential liability was unknown but was unlikely to be material.
- The company does not hedge its foreign-exchange exposure and said a 10% exchange-rate change in any one operating currency would not materially affect overall net income. Foreign-currency translation increased accumulated other comprehensive income by $10.3 million in the first half.
Most important facts for investors to verify
- Whether sales growth can translate into improved operating income as selling, administrative, and engineering costs increase.
- Whether higher steel prices can be passed through without weakening demand or gross margins.
- Receivables, inventory, and operating cash-flow trends, including the reversal of first-half working-capital cash use.
- Progress and potential financial exposure from the Hawaii corrosion cases, insurance dispute, and patent litigation.
- Execution of the $33–$35 million capital-spending plan and use of remaining share-repurchase authorization.