Simpson Manufacturing Co., Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Simpson designs and manufactures wood- and concrete-construction products, with operations reported in North America, Europe, and Asia/Pacific.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $1,136.5 million | $1,078.8 million | +5.4% |
| Gross profit / margin | $492.1 million / 43.3% | $480.3 million / 44.5% | Profit +2.5%; margin -1.2 pts |
| Operating income / margin | $181.3 million / 15.9% | $172.6 million / 16.0% | Income +5.0% |
| Net income / margin | $134.0 million / 11.8% | $126.6 million / 11.7% | +5.8% |
| Diluted EPS | $2.98 | $2.72 | +9.6% |
| Operating cash flow | $205.7 million | $160.1 million | +$45.6 million |
- Product sales were approximately 84% wood construction ($948.8 million) and 16% concrete construction ($187.5 million). Concrete sales rose 13.4%; wood sales rose 3.9%.
- North America sales grew 6.8% to $972.8 million; Europe sales declined 2.4% to $155.1 million, including an approximately $9.2 million adverse currency-translation effect. Asia/Pacific sales declined 7.1% to $8.5 million.
- Cash and equivalents were $230.2 million, up from $160.2 million; working capital was $482.0 million. Inventories fell to $251.9 million from $276.1 million.
- Investing activities used $28.0 million, including $32.7 million of capital expenditures and $4.8 million for intangible assets, partly offset by asset-sale proceeds. Financing activities used $108.2 million, primarily for $60.8 million of repurchases and $40.2 million of dividends.
- Liquidity included a $300 million revolving credit facility expiring July 2021. The filing’s liquidity discussion says no amounts were outstanding, while the debt note reports $0.8 million outstanding under the primary facility and $0.7 million under other revolving lines. Verify this disclosure. The selected-data table reports $46.3 million of line-of-credit and long-term liabilities, a measure that may include lease obligations.
Fourth-quarter comparison
For Q4 2019, net sales were $262.5 million versus $241.8 million in Q4 2018; gross profit was $110.1 million versus $98.2 million; operating income was $36.6 million versus $18.8 million; and net income was $28.1 million versus $12.8 million. Gross margin was approximately 41.9% versus 40.6%. Management attributed FY 2019 gross-margin pressure to higher raw-material and labor costs; Q4 margin was also below the company’s expected range because of a sales shortfall and increased warehousing costs.
Material changes, outlook, and notable items
- Operating expenses rose 1.7% to $316.9 million, but declined as a share of sales to 27.9% from 28.9%. Research and engineering spending increased, partly reflecting employee reclassification and continued product and software investment.
- Management said organic sales had grown at a 9.7% compound annual rate since 2016 and expected to meet the 2020 Plan’s approximately 8% sales-growth objective. It revised the plan’s 2020 operating-margin target to 16%–17% and ROIC target to 15%–16%; reported FY 2019 ROIC was 15.3%. The prior four-times inventory-turn objective was no longer considered achievable by 2020.
- For FY 2020, management estimated gross margin of 43.5%–44.5% and an effective tax rate of 25%–26%. It expected low-single-digit growth in U.S. single-family housing starts. Estimated capital spending was $40–$43 million; depreciation and amortization was estimated at $39–$41 million.
- The SAP ERP rollout was ongoing: most North American locations were operational by November 2019, with remaining U.S. branches targeted by mid-2020 and company-wide completion targeted by year-end 2021. Management expected implementation-related expenses to continue increasing through 2024. The company had capitalized $19.3 million and expensed $25.8 million of SAP costs by year-end 2019.
- Unusual items included a $5.6 million pre-tax gain on a 2019 Canadian facility sale. FY 2018 included an $8.8 million property-sale gain and a $6.7 million Denmark goodwill impairment; the impairment was not repeated in 2019. The effective tax rate declined to 24.9% from 26.4%, partly due to releases of foreign valuation allowances.
- The board authorized up to $100 million of repurchases for 2020 and declared a $0.23-per-share quarterly dividend in January 2020. The company said it remained committed to returning 50% of operating cash flow through the end of 2020, subject to conditions.
Risks and contingencies
- Results depend significantly on housing and construction activity, are seasonal, and can be affected by weather, interest rates, customer demand, steel prices, tariffs, labor, and transportation costs. Steel is the primary raw material; the company historically has not hedged raw-material prices.
- Home Depot represented approximately 11.1% of FY 2019 sales. Losing a major customer could materially affect sales and profits.
- The company identified supply-chain and delivery risks related to its China manufacturing operations, including the Wuhan coronavirus outbreak and potential tariffs, as risks at the time of filing.
- A Hawaii product-related lawsuit, Gentry Homes, seeks damages tied to alleged corrosion of hurricane straps and anchors. The company disputes liability, says insurance may cover some or all claims, and cannot reasonably estimate the likelihood or range of loss.
- Product liability, engineering and software-design claims, recalls, environmental compliance, cyber and privacy incidents, foreign-exchange movements, and execution of the 2020 Plan and SAP implementation are identified risks. The company reported no off-balance-sheet arrangements and said it was in compliance with financial covenants.
Investor verification priorities
- Reconcile the credit-facility balance disclosures and the selected-data debt/liability figure.
- Track gross-margin recovery, including steel, labor, and warehousing costs, and compare FY 2020 outcomes with the 43.5%–44.5% guidance.
- Assess progress on the 2020 Plan’s sales, operating-margin, ROIC, expense, and working-capital objectives.
- Monitor SAP rollout timing, implementation expenses, and any effect on operating controls or customer service.
- Review Home Depot concentration, the Gentry litigation and insurance coverage, and China/tariff-related supply-chain exposure.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Inventory valuation was identified as a critical audit matter because estimates depend on projected demand and obsolescence judgments.