Simpson Manufacturing Co., Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context
Simpson sells connector products used in construction. On August 31, 2010, it completed the sale of substantially all assets and liabilities of its venting-products business, Simpson Dura-Vent, and classified that business as discontinued operations. Management said the sale was intended to focus the company on its profitable connector-products business.
Key financial metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Continuing-operations sales | $146.4m | $150.1m | $435.9m | $411.4m |
| Gross profit / margin | $65.7m / 44.9% | $57.4m / 38.2% | $196.5m / 45.1% | $147.4m / 35.8% |
| Operating income | $29.3m | $20.2m | $80.3m | $32.5m |
| Continuing-operations income, net of tax | $18.4m | $12.2m | $49.3m | $16.9m |
| Net income, including discontinued operations | $17.2m | $12.8m | $33.1m | $15.0m |
| Diluted EPS, continuing operations | $0.37 | $0.25 | $0.99 | $0.34 |
| Diluted EPS, total | $0.35 | $0.26 | $0.67 | $0.31 |
For the nine months, continuing sales increased 5.9%, primarily on higher volume, while average prices declined 2.4%. Q3 continuing sales declined 2.4% as lower volume more than offset a 2.5% increase in average prices. Gross-margin improvement was attributed mainly to lower material, labor and overhead costs; higher production volumes also improved fixed-cost absorption in the nine-month period. Q3 operating income included a $5.2m gain, primarily from selling Brea, California, real estate; the comparable 2009 quarter had a $0.2m loss on asset sales.
Cash flow, balance sheet and liquidity
- Operating cash flow: $39.9m for the first nine months, versus $88.7m in 2009. Reported net income included substantial noncash discontinued-operation impairment charges; working-capital movements also affected cash flow.
- Investing cash flow: $15.7m provided, including $27.7m proceeds from the Dura-Vent sale and $14.8m from asset sales, partly offset by $25.1m of capital expenditures and the $19.2m San Bernardino facility purchase.
- Financing cash flow: $13.8m used, mainly for $14.8m of dividends. Cash dividends declared were $0.10 per share in Q3.
- Cash and liquidity: Cash was $291.8m at September 30, up from $250.4m at December 31, 2009. Working capital was $496.8m. The company reported $204.7m of unused credit facilities.
- Debt and equity: No borrowings were outstanding at September 30; the primary $200m revolving facility expires in October 2012. Total liabilities were $82.7m and stockholders’ equity was $779.1m.
- Other balance-sheet items: Inventories were $150.7m, down from $163.8m at year-end 2009. The company held $7.9m of assets classified as held for sale.
Material changes, outlook and risks
- Dura-Vent generated a $16.2m after-tax loss for the first nine months, including a $21.4m pre-tax impairment charge in Q2 and a $0.7m loss on sale. The sale price was approximately $28.3m, subject to post-closing adjustments. The company retained its Vacaville real estate and leased it to the buyer for about $0.9m annually for ten years.
- Management expected 2010 capital spending of $33m–$39m and said cash from operations plus available credit should fund working capital and planned capital expenditures for the next 12 months. The company could need additional financing depending on growth or acquisitions.
- Management could not reliably estimate full-year or remainder-of-2010 pretax income, citing continued uncertainty in construction markets. No earnings or revenue guidance was provided in the filing text.
- Management said steel prices had fallen from early-2010 levels, but might rise in late 2010 or 2011. Higher steel costs could pressure margins if not recovered through pricing.
- Regional sales were mixed in Q3: U.S. sales declined overall, with weakness in the West and Southeast partly offset by Midwest and Northeast growth; Canada and Europe increased. For the first nine months, sales rose across most of North America and Europe. European operating results improved to $3.5m income in Q3 and $4.2m income for nine months, compared with $0.5m and a $5.1m loss, respectively, in 2009.
- Four Hawaii lawsuits allege premature corrosion of strap-tie holdown products and seek compensatory damages; one also seeks punitive damages. No specific damages amount was stated. The company said liability and potential exposure were unknown, believed some claims might be insured, and intended to defend itself.
- The company had a 40.6% equity interest in Keymark. Keymark’s other owner defaulted on a $0.7m loan repayment due in October 2010; the company was negotiating an extension. The filing says the company had no obligation to make additional capital contributions.
Important facts for investors to verify
- How much of continuing-operations profit growth reflects sustainable operating performance versus the $5.2m real-estate gain and lower input costs.
- Whether construction demand, sales volume, pricing and steel costs support margins after the reporting period.
- The final Dura-Vent sale adjustments and the continuing economics of the Vacaville lease.
- Developments, insurance coverage and potential exposure in the Hawaii product-liability cases.
- Collection or revised repayment terms for the $0.7m Keymark-related loan, and the timing and cost of the planned facility consolidation.
- Cash conversion: nine-month operating cash flow was materially below the prior-year period despite higher continuing income.