Simpson Manufacturing Co., Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; amounts below are in U.S. dollars unless noted.
Business context
Simpson manufactures and sells connector products through North American, European and Asia/Pacific segments. Its venting products business was sold in 2010 and is reported as discontinued operations.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $162.4m | $146.4m | $472.7m | $435.9m |
| Gross profit | $75.4m | $65.7m | $215.9m | $196.5m |
| Gross margin | 46.5% | 44.9% | 45.7% | 45.1% |
| Operating income | $24.9m | $29.3m | $68.4m | $80.3m |
| Continuing-operations net income | $19.4m | $18.4m | $46.0m | $49.3m |
| Net income | $19.4m | $17.2m | $46.0m | $33.1m |
| Diluted EPS | $0.40 | $0.35 | $0.93 | $0.67 |
- Q3 sales rose 10.9%; management attributed growth to higher volume and average prices, which increased 4.2%. Nine-month sales grew 8.5%, with average prices up 4.7%.
- Q3 gross margin improved mainly from lower manufacturing costs, partly offset by higher factory overhead. Operating income nevertheless fell 14.9%, as operating expenses increased and the prior-year quarter included a $5.2m gain on asset sales.
- Q3 net income included a $4.5m equity-method investment gain, primarily associated with the Keymark transaction, and a lower effective tax rate (34.2% versus 37.0%). Nine-month continuing-operations income declined despite sales growth; 2010 total net income was reduced by a $16.2m after-tax discontinued-operations loss.
- Cash and cash equivalents were $265.2m at September 30, 2011, versus $335.0m at year-end 2010. Working capital was $477.7m. The company reported no borrowings outstanding and $204.5m of unused credit facilities.
- For the first nine months, the cash-flow statement reports $24.1m provided by operating activities, versus $39.9m in 2010; capital expenditures were $23.5m. Investing activities used $19.8m and financing activities used $70.4m, including $53.2m of share repurchases and $17.3m of dividends paid.
- At September 30, total liabilities were $93.2m and stockholders’ equity was $762.3m. The company declared a $0.125-per-share dividend in October, payable in January 2012.
Material changes, outlook and unusual items
- Operating expenses increased year over year: Q3 research and engineering, selling, and general and administrative expenses rose, with higher personnel, profit-sharing, professional and legal costs among the cited factors. G&A included $1.1m accrued for an anticipated legal settlement.
- In Q3, Simpson acquired Keymark’s software assets for $6.2m in net cash and its equity interest, recognizing a $4.3m gain. It no longer held an interest in or receivables from Keymark at quarter-end.
- The company recorded a $1.1m impairment on its vacant San Leandro facility, which remained held for sale. Management estimated 2011 capital spending of approximately $30m and expected steel prices to remain at then-current levels for the rest of 2011.
- In October, Simpson agreed to acquire S&P Clever for 54m Swiss francs (approximately $61.4m at the cited exchange rate), subject to adjustments; closing was expected in January 2012. Management said operating cash and available borrowings should cover working capital and planned capital spending for the next 12 months, while noting future growth or acquisitions could require additional financing.
- Risks include challenging construction-market conditions, steel-cost increases that may pressure margins, unhedged foreign-exchange exposure, and product-performance litigation. Multiple Hawaii lawsuits allege premature corrosion of connector products; damages and potential liability were undetermined, and an insurer separately disputed coverage. Management intended to defend the claims. The filing also notes that litigation could materially affect results, cash flows or financial condition.
Important facts for investors to verify
- Reconcile the MD&A statement that operating activities used $24.1m with the cash-flow statement, which reports $24.1m provided.
- Assess the sustainability of sales and margin gains against rising operating expenses and construction-market conditions.
- Review the Keymark gain and the $1.1m legal-settlement accrual when evaluating recurring earnings.
- Track the Hawaii corrosion claims, insurance coverage dispute, and any developments affecting potential liability.
- Confirm the S&P Clever acquisition’s closing, final purchase price and financing, and compare capital spending with the $30m estimate.
- Monitor cash use from repurchases and dividends, steel prices, and foreign-exchange movements.