Simpson Manufacturing Co., Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The company designs, manufactures and sells building construction products, reported across North America, Europe and Asia/Pacific. Results are unaudited; management cautions that quarterly results are seasonal and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $176.5 million | $168.3 million |
| Gross profit / gross margin | $77.5 million / 43.9% | $77.8 million / 46.2% |
| Income from operations | $16.3 million | $19.6 million |
| Net income | $10.1 million | $12.1 million |
| Diluted earnings per share | $0.20 | $0.25 |
| Cash used in operating activities | $10.3 million | $29.0 million |
| Capital expenditures | $6.4 million | $4.2 million |
At March 31, cash and cash equivalents were $233.6 million, working capital was $507.2 million, and total liabilities were $97.4 million. The company had no debt outstanding and reported $304.3 million of available credit, including its $300 million revolving facility, which expires in July 2017. Management said cash from operations and available borrowing capacity should cover working capital and planned capital spending for the next 12 months.
Gross margin was 43.9%, compared with 46.2%; operating margin was approximately 9.2%, versus 11.6%. The effective tax rate was 38.1%, compared with 38.6%. Cash fell by $26.7 million during the quarter, including the effects of operating outflows, capital spending, dividends and a $7.1 million adverse exchange-rate effect.
Changes versus the prior comparable period
- Sales grew 4.9%, led by North America, where sales increased 9.8% to $150.3 million. Europe sales fell 17.6% to $22.8 million, and Asia/Pacific sales fell 10.1% to $3.4 million.
- Net income declined 16.8% and diluted EPS fell from $0.25 to $0.20. The comparison is affected by a Q1 2014 out-of-period correction that increased that quarter’s net income by $1.3 million, or approximately $0.026 per share.
- Management attributed lower gross margin primarily to that prior-year $2.3 million workers’ compensation correction, higher North American factory overhead, material and warehousing costs, and product mix. Europe’s gross margin improved to 38.2% from 35.3%; North America’s declined to 45.7% from 49.2%.
- Currency translation reduced Q1 2015 comprehensive income by $16.3 million. Management estimated currency weakness reduced reported sales by approximately $1.0 million in Canada and $4.0 million in Europe.
- Operating cash outflow improved from $29.0 million to $10.3 million. Management cited seasonal working-capital movements, including higher receivables and payments of accrued liabilities and profit-sharing contributions.
Outlook, commentary and risks
- Management estimated 2015 gross margin of 44%–46%, an effective tax rate of 36%–38%, and capital spending of $30 million–$33 million, excluding software development and potential additional spending for long-term growth.
- Management expected North American sales trends to continue into Q2, subject to future conditions. It estimated Europe would report an operating profit for 2015, while Asia/Pacific was expected to report an operating loss.
- The company committed to close sales offices in China, Thailand and Dubai and reduce Hong Kong selling activity due to continued regional losses. It recorded $0.8 million of severance expense and $0.1 million of accelerated depreciation in Q1; it estimated a further $1.9 million of severance, retention and professional costs. Leases have $1.3 million of remaining minimum obligations; any early-termination costs were not yet determined.
- Steel is the company’s main raw material; higher prices could pressure margins if costs cannot be recovered through pricing. Steel prices declined in Q1, but management said the Q2 outlook was highly uncertain. Other risks include construction and housing conditions, competition, customer and supplier health, foreign exchange, and international political and trade conditions. The company does not hedge its foreign exchange exposure.
- Four Hawaii lawsuits concerning alleged corrosion of strap tie holdown products and related insurance disputes are subject to a settlement with preliminary court approval. If final approval and other conditions are met, the company expects no liability in those proceedings; an unfavorable outcome could result in liability substantially exceeding the settlement, which the company could not reasonably estimate. A separate Hawaii case was closed after summary judgment but remained subject to appeal.
- Cash of $82.9 million held in foreign countries could face additional taxation if repatriated; the company said it had no plans to repatriate it. A $50 million 2015 share-repurchase authorization remained unused at March 31. A subsequent dividend of $0.16 per share was declared in April, payable July 23, 2015.
Investor verification points
- Track whether sales growth and margin performance support management’s 2015 gross-margin outlook, particularly given regional weakness, product mix and steel-price uncertainty.
- Monitor the Asia/Pacific office closures, remaining restructuring and lease costs, and whether the segment’s expected 2015 operating loss is realized.
- Review operating cash flow and seasonal working-capital changes against the company’s capital-spending plans and dividend commitments.
- Confirm final court approval and effectiveness of the Hawaii-related settlement, and assess any developments in the remaining appeal.
- Assess foreign-currency effects on reported sales, comprehensive income and cash, along with the company’s plan to retain foreign-held cash overseas.