Simpson Manufacturing Co., Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports quarterly results; it is an annual report, not a standalone Q4 filing. The company designs and manufactures wood- and concrete-construction products through North America, Europe and Asia/Pacific operations.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $657.2 million | $603.4 million |
| Gross profit / margin | $283.5 million / 43.1% | $270.8 million / 44.9% |
| Operating income / margin | $61.7 million / 9.4% | $74.1 million / 12.3% |
| Net income | $41.9 million | $50.9 million |
| Diluted EPS | $0.87 | $1.04 |
| Cash from operating activities | $68.1 million | $35.1 million |
| Cash and cash equivalents at year-end | $175.6 million | $213.8 million |
| Working capital at year-end | $402.5 million | $430.5 million |
| Debt at year-end | $0.2 million | None reported |
For Q4 2012, net sales were $144.7 million versus $130.7 million a year earlier. Net income was $5.9 million versus $4.9 million; however, Q4 operating results were a loss of $0.9 million, including a $2.3 million goodwill impairment. The quarter also included a $6.8 million income-tax benefit, contributing to net income despite a pretax loss.
Changes versus prior periods
- FY sales increased 8.9%, driven principally by North American growth and acquisitions; North America sales rose 10.1%, Europe 3.6% and Asia/Pacific 13.8%.
- Net income fell 17.6% and operating income fell 16.7% year over year. Gross margin declined from 44.9% to 43.1%, as concrete products grew as a share of sales and carried lower margins, with higher material costs and price competition also weighing on North America.
- Concrete construction sales rose to $98.0 million from $66.0 million; wood construction sales were $558.1 million versus $536.1 million. Acquisitions included S&P Clever, CarbonWrap and a Keymark software transaction in 2012, following Fox Industries and Automatic Stamping in 2011.
- Operating cash flow increased to $68.1 million, while cash declined by $38.3 million, reflecting acquisition spending, capital expenditures, dividends and other financing activity. Inventory increased 13.3% to $204.1 million.
Outlook, risks and unusual items
- Management planned approximately $29 million of 2013 capital expenditures. It expected steel prices to rise during the first half of 2013 and warned that insufficient price recovery could further reduce margins. No earnings or revenue guidance was provided.
- The company had a $300 million revolving credit facility expiring in July 2017, with $311 million of total unused capacity across credit facilities; it reported compliance with covenants. Cash held outside the U.S. was $83.6 million, primarily intended for international growth and acquisitions rather than repatriation.
- FY results included a $9.9 million tax benefit from a worthless-stock deduction related to the Irish subsidiary; the effective tax rate was 32.3%, versus 35.4% in 2011. The company recorded $3.0 million of employee severance and other closure-related costs as it exited European heavy-duty mechanical anchors and closed its Irish facility.
- Goodwill impairment was $2.3 million in Germany. Goodwill for the Germany reporting unit was fully impaired; the Australia reporting unit passed its impairment test by 8%, and the S&P Clever unit by only 2%, leaving both sensitive to execution and market conditions.
- Product-corrosion lawsuits in Hawaii remained unresolved in part. The court granted summary judgment on specified Ocean Pointe claims in December 2012, but other claims and insurance-coverage disputes remained; the company could not estimate a probable loss and recorded no accrual. Product liability, recalls and uninsured retrofit costs are risks.
- Other significant exposures include construction-market cyclicality and seasonality, steel costs, customer concentration (Home Depot represented 10% of sales in 2012), foreign exchange, acquisition integration, and product-code compliance. The company does not hedge steel or foreign-exchange exposure.
Important facts for investors to verify
- Whether sales recovery and acquisition contributions can offset lower gross margins, rising steel costs and operating-expense growth.
- The sustainability of earnings excluding the $9.9 million tax benefit, and the reasons for weak Q4 operating performance.
- Cash conversion, inventory growth, planned capital spending and the use of offshore cash for international investment.
- Progress integrating S&P Clever and Keymark, and whether the narrow goodwill-test cushions for S&P Clever and Australia improve.
- Developments in the Hawaii product-liability cases, insurance coverage and potential closure or asset-sale costs.
- The board’s February 2013 authorization to repurchase up to $50 million of shares through year-end and the company’s dividend policy; future dividends remain discretionary.