Simpson Manufacturing Co., Inc. quarterly report, Q3 FY2012

Business context and reporting period

Simpson Manufacturing Co., Inc. manufactures and sells building-construction products, including wood connectors and concrete construction products. This Form 10-Q covers the quarter and nine months ended September 30, 2012. Results are unaudited; amounts below are in millions of dollars except per-share data.

Financial performance and condition

For the nine months, operating cash flow was $56.7, investing cash outflow was $63.5, and financing cash outflow was $20.7. Cash declined $26.3 from year-end 2011 to $187.5 at September 30, 2012. Working capital was $404.1. Total liabilities were $92.8, including only $0.2 of reported borrowings; available credit facilities totaled $311.1, including a $300.0 revolving facility expiring in July 2017. The company reported compliance with its financial covenants.

Total assets were $879.0 and stockholders’ equity was $786.2 at September 30, 2012. The company declared dividends of $0.125 per share in the quarter; nine-month dividends declared were $0.375 per share.

Material changes versus the prior comparable period

• Q3 sales rose 6.0%, while operating income fell 11.6% and net income fell 33.0%. Nine-month sales rose 8.4%, while operating income fell 8.4% and net income fell 21.6%.
• Prior-year Q3 and nine-month net income included a $4.5 gain on the sale of the Keymark equity investment. The absence of that gain contributed to the year-over-year net income decline.
• Management attributed sales growth partly to acquisitions and higher volume. Recent acquisitions contributed $8.8 of Q3 sales and $23.5 for the nine-month period. North American sales rose 7.1% in Q3; European sales were nearly flat, with weakness in France and the Nordic region.
• Gross margin declined amid higher material and labor costs, competitive pricing pressure, and a greater mix of concrete products, which generally have lower margins than wood products. Q3 European margin also faced higher warehouse costs.
• Research and development and engineering expense increased 31% in Q3 and 37.5% for the nine months, largely due to truss software development and personnel costs. Acquisitions also increased depreciation and amortization expense.
• Cash declined primarily because of acquisition payments. The company paid approximately $50.7 net of cash acquired for S&P Clever and $5.3 net of contingent consideration for CarbonWrap; acquisitions also increased goodwill and intangible assets.

Outlook, risks, contingencies and unusual items

• Management estimated 2012 capital spending of $22–$24 and said operating cash generation and available credit should cover working capital and planned capital expenditures for the next 12 months. Further growth or acquisitions could require additional financing, which might not be available on reasonable terms.
• The company expects steel prices to increase in 2013 and warned that higher steel costs could pressure margins if not recovered through pricing. It had no foreign-exchange hedges; management said a 10% exchange-rate move in any one operating currency would not materially affect company-wide net income.
• In September, the company committed to close its Irish heavy-duty anchor facility and exit that European business, with closure expected as early as December 2012 or in Q1 2013. It accrued $1.0 for minimum statutory severance; additional severance may be recorded, and other closure liabilities had not yet been estimated or accrued.
• Several Hawaii lawsuits allege premature corrosion of the company’s strap tie holdown products and related property damage. Damages sought are not specified, and the company said liability and potential exposure were unknown. The court granted summary judgment for the company on additional homeowner claims on October 1, 2012; insurance coverage disputes are also pending.
• Management cited economic uncertainty across much of Europe as a factor affecting sales. It also cautioned that interim results may not indicate future results and that forward-looking statements are subject to risks and uncertainties.
• The filing’s tax-rate disclosures differ: the financial-statement table reports a Q3 2012 effective tax rate of 41.4%, while MD&A cites 41.1%. The filing attributes higher tax rates primarily to foreign-loss valuation allowances and, for the nine-month period, nondeductible acquisition costs.

Important facts for investors to verify

• Whether sales growth and the contribution from acquisitions translate into sustained operating income, given declining margins and higher operating expenses.
• Steel-cost trends, pricing recovery, and the company’s product mix and European demand.
• Final severance and other costs associated with the Irish facility closure and business exit.
• Developments in the Hawaii product-corrosion litigation and related insurance coverage disputes, including any change in potential exposure.
• Acquisition integration, purchase-price adjustments, and the recoverability of goodwill and acquired intangible assets.
• The reported Q3 effective tax rate and the effects of foreign valuation allowances and acquisition-related tax items.