Simpson Manufacturing Co., Inc. — Q2 2013 Form 10-Q
Business context and period. Simpson designs, manufactures and sells building-construction products, including wood- and concrete-construction products. It reports North America, Europe and Asia/Pacific segments. This filing covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $195.6 million | $181.7 million | $350.1 million | $340.4 million |
| Gross profit / margin | $89.4 million / 45.7% | $83.1 million / 45.8% | $154.4 million / 44.1% | $152.6 million / 44.8% |
| Income from operations | $29.7 million | $27.1 million | $38.7 million | $40.7 million |
| Net income | $18.5 million | $15.9 million | $23.3 million | $23.1 million |
| Diluted EPS | $0.38 | $0.33 | $0.48 | $0.48 |
- Q2 sales grew 7.6%, operating income 9.3%, and net income 16.7% year over year. First-half sales rose 2.8%, but operating income declined 4.8%; net income was nearly unchanged.
- Q2 North America sales increased 10.5%, while Europe sales decreased 5.9%; Asia/Pacific sales increased 28.1% from a small base. For the first half, North America rose 5.5%, Europe fell 10.2%, and Asia/Pacific rose 20.4%.
- At June 30, cash and cash equivalents were $165.3 million, working capital was $414.6 million, and total assets were $897.0 million. Current liabilities were $95.7 million. Outstanding debt and line-of-credit borrowings were $1.2 million; the company reported $307.5 million of unused credit availability and compliance with financial covenants.
- First-half operating cash flow was $18.9 million, versus $16.9 million in 2012. Investing activities used $12.7 million, including $8.1 million of capital expenditures and $5.3 million for the ShearBrace product-line acquisition. Financing activities used $14.0 million, including $9.8 million of share repurchases and $6.1 million of dividends. Cash declined $10.3 million during the half.
- The company declared dividends of $0.125 per share in Q2 and repurchased 342,300 shares during May and June for approximately $9.8 million. Of its $50 million 2013 repurchase authorization, $40.2 million remained at June 30.
Outlook, commentary and risks
- Management estimated 2013 gross margin at 42%–43%, effective tax rate at 40%–42%, and capital spending at $29–$30 million. It expected Europe to break even or produce a small operating profit for 2013 and Asia/Pacific to report an operating loss. It did not expect Europe’s economic conditions to improve in the second half.
- Management said improved housing starts supported North American sales; year-to-date sales of foundation products were up in the low double digits. The business is seasonal, and cold or wet weather can delay construction and reduce results.
- Price reductions and competitive pressure weighed on North American margins; concrete products generally have lower margins than wood products. Management noted steel prices had increased slightly in Q2 and could continue rising if demand strengthened, potentially pressuring margins.
- Europe’s heavy-duty mechanical-anchor business was discontinued. Management estimated the exit would save about $0.9 million of quarterly operating losses, excluding closure costs. The Ireland facility impairment contributed a $1.0 million charge in the first half; management expected no further severance expense in 2013 and estimated $0.4 million of additional closure costs in 2013.
- Hawaii lawsuits allege premature corrosion of certain products and include class-action and related claims. The company said liability and loss amounts could not be determined, recorded no accrual, and intends to defend itself. Some claims may be covered by insurance, but insurer coverage disputes are also pending. Management cautioned that litigation outcomes could materially affect results.
- Foreign-currency translation reduced accumulated other comprehensive income by $6.8 million in the first half. The company does not currently hedge foreign-exchange risk. It held $78.7 million of cash abroad that could face additional tax if repatriated; management said it had no plans to repatriate it.
- Management believed cash from operations and available credit would cover working capital and planned capital spending for the next 12 months, while noting future growth or acquisitions could require additional financing. The filing also cautions that interim results are not necessarily indicative of full-year performance.
Key facts for investors to verify
- Whether North American demand and housing-start trends persist, and whether Europe’s sales decline and expected second-half weakness worsen.
- Whether the 42%–43% full-year gross-margin estimate remains achievable amid pricing pressure, product mix and possible steel-cost increases.
- Whether the increase in receivables and working-capital requirements converts to cash; first-half operating cash flow was below net income.
- Progress and final costs of the Ireland closure, the ShearBrace acquisition, and planned capital spending.
- Developments in the corrosion lawsuits and related insurance-coverage proceedings; the company has not estimated or accrued a potential loss.
- Use of the remaining repurchase authorization, dividend payments, and any financing needs for growth or acquisitions.