Simpson Manufacturing Co., Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The company designs, manufactures and sells building construction products, including wood and concrete construction products, through North America, Europe and Asia/Pacific segments. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $216.7 | $207.9 | $393.2 | $376.2 |
| Gross profit | $98.3 | $95.9 | $175.8 | $173.7 |
| Gross margin | 45.4% | 46.1% | 44.7% | 46.2% |
| Operating income | $35.0 | $32.1 | $51.3 | $51.7 |
| Net income | $21.5 | $20.5 | $31.6 | $32.5 |
| Diluted EPS | $0.43 | $0.42 | $0.64 | $0.66 |
- Q2 revenue rose 4.2%, operating income rose about 9%, and net income rose about 5%. First-half revenue rose 4.5%, while operating income and net income declined slightly year over year.
- Q2 margin pressure reflected higher material, labor and warehousing costs in North America and higher material and labor costs in Europe, along with product mix. The lower first-half 2015 gross margin also compares with a 2014 workers’ compensation expense correction that benefited prior-year gross profit by $2.3 million.
- First-half operating cash flow was $24.8 million, versus cash used of $9.5 million in the prior-year period. Investing activities used $14.0 million, including $13.5 million of capital expenditures; financing activities used $17.8 million, including dividends and share repurchases. Cash declined $11.7 million to $248.6 million from year-end 2014.
- At June 30, cash was $248.6 million, current assets $629.0 million and current liabilities $107.7 million; working capital was $521.3 million. The company had no outstanding debt and reported $304.4 million of available credit, including a $300 million revolving facility expiring in July 2017. It was in compliance with financial covenants.
- Long-term debt was not reported. The company stated that cash from operations and available borrowing capacity should fund working capital and planned capital expenditures for the next 12 months.
- The board authorized repurchases of up to $50 million in 2015; $8.5 million was repurchased in the first half, with $41.5 million remaining authorized at June 30. First-half dividends paid were $13.8 million. A $0.16-per-share dividend was declared in July for payment in October.
Material changes and management outlook
- North America sales grew 8.8% in Q2 and 9.2% in the first half, primarily from higher U.S. unit volumes amid improved construction activity. Europe sales fell 12.6% in Q2 and 14.8% in the first half in reported dollars, mainly from currency translation; management said local-currency sales increased. Asia/Pacific sales declined and the segment remained loss-making.
- North America generated Q2 operating income of $35.2 million; Europe generated $3.3 million; Asia/Pacific recorded a $1.4 million operating loss. For the first half, North America operating income was $55.7 million, Europe $1.7 million and Asia/Pacific a $2.2 million loss.
- Management expected the North America sales trend to continue into Q3, but could not predict whether Europe’s local-currency sales trend would continue. It estimated Europe would be profitable for 2015 and Asia/Pacific would report an operating loss for the year.
- Full-year 2015 estimates: gross margin of 44%–46%; effective tax rate of 37%–39%; depreciation and amortization of $29–$31 million; and capital spending of $30–$33 million, excluding software development and a U.S. real-estate project. The project to consolidate two leased chemical facilities and concrete-product R&D into one owned location was estimated to cost $12–$15 million in 2015 and $7–$10 million in 2016.
- Steel prices were expected to rise in Q3, but management cited uncertainty, including U.S. steel trade cases. Higher steel costs may pressure margins if not offset through pricing. The business is seasonal and can be affected by construction activity, weather, foreign exchange, material costs and customer or supplier conditions.
Unusual items, contingencies and other disclosures
- The company committed to close sales offices in China, Thailand and Dubai and reduce Hong Kong selling activity because of continuing regional losses. Closures were expected to be substantially complete by December 2015. It recorded $1.4 million of severance expense; $0.7 million of related costs remained accrued at June 30, and an estimated additional $1.1 million of severance, retention and professional costs was expected as requirements were met. Remaining minimum lease obligations were $1.0 million.
- A 2014 out-of-period adjustment increased first-half 2014 gross profit by $2.3 million, operating income by $2.0 million and net income by $1.3 million. Management said it was not material to the affected prior-period financial statements, but it affects comparability with first-half 2015.
- Ocean Pointe product-corrosion litigation and related insurance coverage lawsuits were settled; the company reported no uninsured liability. A separate Hawaii corrosion case had no claims pending against the company at the reporting date, though it remained subject to appeal. The filing describes potential product-failure factors and states no material product-failure liability had been incurred.
- Foreign-currency translation reduced first-half comprehensive income by $8.7 million; Q2 translation increased it by $7.6 million. The company does not currently hedge foreign-exchange risk. It reported $84.2 million of cash held abroad that could face additional tax if repatriated, and said it had no plans to repatriate it.
- Management stated disclosure controls were effective at the reasonable-assurance level and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether North American construction-driven growth and the expected Q3 sales trend persist, and whether Europe’s local-currency improvement offsets reported-dollar declines.
- Whether steel and other input-cost increases, product mix and operating expenses keep gross margin within management’s 44%–46% full-year estimate.
- The actual total cost and timing of the Asia/Pacific office closures, including remaining severance and lease obligations, and progress toward the expected regional operating losses.
- Execution and final cost of the facility consolidation and capital-spending plans, as well as cash generation relative to dividends and repurchases.
- How foreign-exchange movements, overseas cash taxation and litigation or product-performance developments affect reported results and cash flows.