Business context and reporting period
Simpson Manufacturing Co., Inc. filed this Form 10-K for the fiscal year ended December 31, 2010. The company designs and manufactures structural connectors, anchors, fasteners and related building products, primarily through Simpson Strong-Tie. Its markets are tied to residential, commercial and light-industrial construction. The figures below are annual unless otherwise noted; the filing also reports fourth-quarter data.
On August 31, 2010, Simpson sold substantially all assets and liabilities of its venting business, Simpson Dura-Vent, and now focuses on connector products. The filing presents the venting operation as discontinued operations.
Financial results and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $555.5 million | $526.5 million |
| Gross profit / margin | $244.1 million / 44.0% | $184.9 million / 35.1% |
| Operating income / margin | $78.4 million / 14.1% | $31.5 million / 6.0% |
| Income from continuing operations | $44.8 million | $14.1 million |
| Net income, including discontinued operations | $28.6 million | $12.2 million |
| Diluted EPS | $0.58 | $0.25 |
| Cash from operating activities | $77.2 million | $126.2 million |
| Cash and cash equivalents at year-end | $335.0 million | $250.4 million |
| Working capital at year-end | $511.6 million | $458.6 million |
| Borrowings at year-end | None | None |
Capital expenditures were $28.3 million in 2010; planned 2011 capital expenditures were approximately $35 million. The company had $204.6 million of unused capacity on credit facilities. Cash and investments included $212.7 million in U.S. Treasury securities and money market funds; $60.1 million of cash was held outside the United States.
Material changes versus prior periods
- Sales rose 5.5% from 2009, with increases in North America (4.0%), Europe (8.2%) and Asia/Pacific (67.9%, from a small base). Volume increased while average prices were broadly flat. North America generated 80% of 2010 sales.
- Gross margin improved to 44.0%, versus 35.1% in 2009, reflecting lower material, labor and overhead costs and better fixed-cost absorption as production volumes increased.
- Operating cash flow fell to $77.2 million from $126.2 million, principally reflecting the prior-year benefit from inventory reductions; 2010 cash was also affected by increases in inventory and receivables.
- Net income included a $16.2 million after-tax loss from discontinued operations, primarily related to a $21.4 million pre-tax impairment of Dura-Vent assets and a $0.7 million loss on sale. Continuing operations recorded a $6.3 million goodwill impairment in Europe.
- Sales remained below 2008 levels: 2010 net sales of $555.5 million compared with $676.7 million in 2008. The company cited persistent weakness in construction and homebuilding.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management expected steel prices to remain at or rise above mid-2010 levels during 2011 and warned that margins could suffer if product pricing does not offset higher costs. Planned 2011 capital spending was approximately $35 million. The board authorized up to $100 million in share repurchases through the end of 2011; no shares were repurchased in 2008–2010. A quarterly dividend of $0.125 per share was declared in February 2011.
Key risks include construction-market cyclicality and seasonality, steel-cost volatility, customer concentration, and foreign-exchange exposure (not hedged). The largest customer accounted for 11% of 2010 sales; Home Depot alone exceeded 10% of sales in 2008–2010. The company also cited product-liability and corrosion risks, acquisition integration, goodwill impairment, labor negotiations, and international operating risks. Four Hawaii lawsuits allege premature corrosion of holdown products; damages and liability were undetermined, and the company said some claims might be insured. A separate patent-infringement case involving Steel Strong-Wall was pending; the company denied the allegations.
Fourth-quarter 2010 net sales were $119.6 million and net loss was $4.5 million, including the $6.3 million goodwill impairment. Results are seasonal, and the filing notes that first- and fourth-quarter results have historically tended to be weaker.
Most important facts for investors to verify
- Whether sales and construction demand recover, and whether the 2010 margin improvement is sustainable as steel prices rise.
- Cash-flow conversion and working-capital needs, particularly inventory levels and the decline in operating cash flow.
- Exposure to the largest customer and other concentrated retail and distributor relationships.
- Potential further goodwill or asset impairments, including developments in Europe and Ireland.
- Resolution and insurance coverage of the Hawaii corrosion litigation and outcome of the patent case.
- Execution of the Dura-Vent divestiture, planned capital spending, dividend and share-repurchase authorization.