Simpson Manufacturing Co., Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The company designs, manufactures and sells building-construction products, including wood and concrete construction products, across North America, Europe and Asia/Pacific.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $199.5 million | $176.5 million | +13% |
| Gross profit | $92.5 million | $77.5 million | +19% |
| Gross margin | 46% | 44% | +2 percentage points |
| Operating income | $26.6 million | $16.3 million | +64% |
| Operating margin | 13.4% | 9.2% | +4.2 percentage points |
| Net income | $16.3 million | $10.1 million | +63% |
| Diluted EPS | $0.34 | $0.20 | +$0.14 |
| Operating cash flow | $(13.8) million | $(10.3) million | More cash used |
| Capital expenditures | $7.0 million | $6.4 million | Higher |
Operating expenses rose less quickly than sales overall. The effective tax rate was 38.1% in both periods. Comprehensive income was $25.8 million, including a $9.5 million favorable currency translation adjustment, versus a $6.3 million comprehensive loss in Q1 2015.
Revenue and material changes
- North America sales increased 16% to $174.5 million, primarily on higher unit volumes associated with improved economic activity and home construction; slight price declines and currency translation partly offset growth.
- Europe sales increased 4% to $23.7 million, mainly on higher unit volumes, partly offset by lower average prices and unfavorable currency translation. The segment recorded a $1.6 million operating loss, little changed from Q1 2015.
- Asia/Pacific sales decreased 59% to $1.4 million, largely following the closure of sales offices in China, Thailand and Dubai. Management expects a smaller segment operating loss in 2016 than in 2015.
- Wood products represented 86% of sales and concrete products 14%, broadly unchanged from the prior-year quarter. North America operating income rose to $30.5 million from $20.5 million.
- Consolidated gross margin improved, primarily from North American manufacturing overhead leverage on higher production and lower material costs. Europe margin declined to 36% from 38% amid higher material, labor and shipping costs.
Cash, debt and liquidity
- Cash and cash equivalents were $232.0 million at March 31, 2016, down from $258.8 million at year-end 2015. Working capital was $491.7 million; current assets were $591.2 million and current liabilities $99.5 million.
- Operating cash use reflected seasonal working-capital needs, including increases in receivables and inventory, despite net income and noncash adjustments. Investing cash use was $6.9 million, principally capital expenditures. Financing cash use was $10.2 million, mainly dividends and share repurchases.
- No debt was outstanding. Available credit totaled $304.4 million, including a $300 million principal revolving facility expiring in July 2017; the company reported covenant compliance.
- Cash held in foreign currencies was $77.6 million and could incur additional tax if repatriated. The company had no current plan to repatriate it.
Outlook, risks and unusual items
- Management estimated 2016 gross margin of approximately 46%–47%, an effective tax rate of 37%–39%, capital spending of $48–$52 million, depreciation of $23–$25 million and amortization of approximately $5 million. It estimated Europe would be profitable for 2016. Management said it could not determine whether North American and European sales trends would continue into Q2.
- Steel prices rose during Q1; management anticipated further increases in Q2. Higher steel costs could pressure margins if not recovered through pricing.
- Results are seasonal and exposed to construction cycles, weather, customer demand, competition, product-liability claims, manufacturing costs and foreign exchange. The company does not hedge its foreign-exchange exposure and said a 10% currency move in any one operating country would not materially affect results overall.
- The company recorded $0.1 million of additional compensation and lease costs related to Asia sales-office closures in Q1. At March 31, it had $0.3 million of accrued severance and related costs and estimated $0.2 million of additional compensation and professional fees, plus $0.4 million of remaining lease obligations to be expensed before lease cessation. A $0.2 million software-project write-off was recorded in Q1 cash-flow adjustments.
- Management said no pending legal proceedings were expected to have a material adverse effect, while noting that claims and product-related issues remain inherently uncertain. No off-balance-sheet arrangements were reported.
- In April, the board raised the quarterly dividend 12.5% to $0.18 per share, estimated at $8.7 million. A $50 million 2016 repurchase authorization was in place; $46.5 million remained available at March 31.
Most important facts for investors to verify
- Whether revenue growth and North American volume trends persist, given management’s stated uncertainty about Q2 trends.
- Whether the 46%–47% full-year gross-margin estimate withstands expected steel-cost increases and regional cost pressures.
- How seasonal working-capital requirements affect cash generation, and whether the planned $48–$52 million of capital spending proceeds as expected.
- Whether Europe achieves full-year profitability and Asia/Pacific reduces its operating loss as management anticipates.
- The July 2017 maturity of the primary credit facility and the tax implications of foreign-held cash; also note that adoption of deferred-tax presentation guidance affected current assets and working-capital comparability.