Simpson Manufacturing Co., Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Simpson designs, manufactures and sells building construction products through its North America, Europe and Asia/Pacific segments. Unless noted, dollar figures are in millions.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $244.8 | $219.9 | Up 11% |
| Gross profit | $108.5 | $100.2 | Up 8%; gross margin 44.3%, down from 45.6% |
| Operating income | $32.8 | $22.6 | Up $10.2 |
| Net income | $25.4 | $23.1 | 2017 included an $8.4 bargain-purchase gain |
| Diluted EPS | $0.54 | $0.48 | 2017 EPS included about $0.18 from the bargain-purchase gain |
| Operating cash flow | $17.1 | $(7.5) | Improved year over year; receivables absorbed substantial cash |
| Cash and cash equivalents | $137.4 | $167.1 | Down from $168.5 at December 31, 2017 |
| Working capital | $440.3 | $462.0 | Down year over year |
Operating expenses were 31% of sales versus 35% a year earlier. Net sales rose in all regions: North America 12%, Europe 6%, and Asia/Pacific 33% (from a small base). North America generated $206.2 of sales; wood construction products represented about 87% of total sales and concrete products 13%.
Cash used in investing was $9.7, mainly capital expenditures of $10.9, partly offset by asset-sale proceeds of $1.2. Cash used in financing was $39.3, principally $25.0 of share repurchases and $9.8 of dividends. The company had no outstanding debt under its credit facilities; total available credit was $304.2, including a $300.0 revolving facility expiring July 2021. Capital lease obligations totaled about $3.5. The company reported compliance with financial covenants.
Material changes versus Q1 2017
- Revenue growth reflected increased construction activity, sales volume and average selling prices; milder weather supported North American sales.
- Gross margin declined, primarily as North American material and shipping costs increased. Wood-product margin fell to 45% from 47%; concrete-product margin improved to 35% from 32%.
- Operating income rose despite higher general and administrative expense, including SAP implementation costs. The prior-year comparison also included the nonrecurring $8.4 bargain-purchase gain; excluding that item, reported net income growth is not directly comparable.
- The effective tax rate was 22.2%, versus 24.9%, mainly reflecting the lower U.S. corporate tax rate under the Tax Cuts and Jobs Act.
- Adoption of ASC 606 on January 1, 2018 increased opening retained earnings by $0.8 net of tax and had no material impact on revenue measurement or recognition.
Outlook, management commentary and risks
- 2020 Plan: Management remained on track, subject to assumptions including mid-single-digit growth in U.S. housing starts and repair/remodel, Home Depot distribution expansion, and gains in Europe, truss and concrete products. Targets include approximately 8% net-sales CAGR from 2016 through 2020, operating expenses of 26%–27% of sales by 2020, and 17%–18% return on invested capital by 2020. Management expects 2018 operating expenses at or below 2017 levels.
- 2018 estimates: Gross margin of approximately 45%–46%; effective tax rate of 26%–27%; capital spending of $30–$32; depreciation and amortization of $39–$40. These are estimates, not guarantees.
- Pricing and materials: The company announced an average 11.5% U.S. wood-connector price increase, expected mid-June 2018, to offset higher raw-material costs. Management expected steel prices to continue rising in Q2 amid tariff uncertainty.
- Growth initiatives: The Home Depot mechanical-anchor rollout covered 330 stores at quarter-end, with about 1,900 locations targeted by 2020; management estimates a potential $30 annualized sales opportunity at full rollout. The company also purchased LotSpec software and partnered with Hyphen Solutions.
- Systems implementation: The first SAP implementation wave went live in February and took longer than expected to stabilize. Management was reviewing the timing of future waves; estimated 2018 ERP project costs were revised to $8–$9, including amortization. SAP implementation and conversion risks remain relevant.
- Contingencies: Simpson is defending the Gentry Homes product-related lawsuit and cannot reasonably estimate the likelihood or amount of any substantial loss; it believes some or all claims may be insured. The company is not a party to the Vitale case but could potentially face related third-party claims. Management said it knew of no proceedings expected to have a material adverse effect, while noting litigation outcomes are uncertain.
- Other risks: Construction seasonality and weather, steel costs and tariffs, competition, product liability, foreign exchange, and execution of the 2020 Plan could affect results. The company does not currently hedge foreign-exchange exposure. It held $81.9 of cash in foreign currencies and had no current plan to repatriate it.
The board declared a subsequent quarterly dividend of $0.22 per share, a 5% increase over the prior declared dividend, payable July 26, 2018. The share-repurchase authorization had approximately $126.5 remaining through December 31, 2018.
Important facts for investors to verify
- Whether price increases offset steel, shipping and other input-cost pressure, and whether gross margin approaches management’s 45%–46% full-year estimate.
- Progress and economics of the Home Depot rollout, alongside actual growth and profitability in truss, concrete and European products.
- SAP stabilization, revised implementation timing and costs, and any effects on operations or financial controls.
- Cash conversion and working-capital performance, particularly receivables and inventory, against the 2020 Plan’s inventory-reduction objectives.
- Developments in the Gentry litigation, possible Vitale-related claims, and the scope of available insurance coverage.
- Execution of the 2020 Plan’s growth, expense, inventory and return-on-invested-capital targets; these depend on stated assumptions and are forward-looking.