Simpson Manufacturing Co., Inc. quarterly report, Q1 FY2019

Simpson Manufacturing Co., Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise stated. Simpson designs, manufactures and sells building construction products, principally wood and concrete products, across North America, Europe and Asia/Pacific.

Financial performance

Metric	Q1 2019	Q1 2018
Net sales	$259.2 million	$244.8 million
Gross profit / margin	$110.3 million / 42.5%	$107.6 million / 44.0%
Operating expenses	$79.9 million	$76.1 million
Income from operations	$30.0 million	$32.7 million
Net income	$22.7 million	$25.4 million
Diluted earnings per share	$0.50	$0.54
Operating cash flow	$9.6 million	$17.1 million

Sales rose 5.9%. North America sales increased 7.4% to $221.4 million; Europe fell 1.4% to $35.8 million, including an approximately $2.9 million unfavorable currency-translation effect; Asia/Pacific declined 10.6% to $2.0 million.
Wood construction products generated $217.6 million in sales, up 2.4%; concrete products generated $41.6 million, up 29.2%. Concrete represented 16% of sales versus 13% a year earlier.
Gross margin declined 1.5 percentage points, primarily from higher material and labor costs as a percentage of sales. North America operating income decreased $3.6 million; Europe’s operating loss narrowed by $1.2 million.
Operating expenses were 30.8% of sales versus 31.1%. The effective tax rate was 22.5% versus 22.2%. Comprehensive income was $21.3 million versus $29.3 million, including a $1.3 million foreign-currency translation loss.

Cash, liquidity and capital allocation

Cash and cash equivalents were $113.4 million at March 31, down from $160.2 million at year-end 2018. Working capital was $425.2 million.
Operating cash flow of $9.6 million was more than offset by $10.8 million of investing outflows and $45.5 million of financing outflows; cash decreased $46.8 million during the quarter. Investing included $7.4 million of capital expenditures and $3.5 million for an acquisition.
The company repurchased 505,448 shares for $30.0 million and paid $9.9 million in dividends. Approximately $70.0 million remained under the $100 million repurchase authorization, which expires December 31, 2019. The board subsequently declared a quarterly dividend of $0.23 per share.
The filing reports $304.1 million of available credit, including revolving lines and a standby letter of credit. The debt note reports $1.5 million outstanding on credit lines at March 31, while MD&A states there were no amounts outstanding under the $300 million facility; investors should reconcile these disclosures. The company reported compliance with financial covenants and no variable-rate debt outstanding.
Adoption of lease accounting on January 1, 2019 added $34.3 million of operating lease right-of-use assets and $35.1 million of operating lease liabilities; management said adoption did not materially affect earnings or cash flows.

Outlook, strategy and risks

Management expects 2019 gross margin of approximately 44.5%–45.5%, operating expenses of 27.5%–28.5% of sales, and an effective tax rate of 25%–27%. It expects 2019 capital spending of $30–$35 million. No full-year sales or EPS guidance is provided.
Management expects U.S. single-family housing growth in the low-to-mid single digits in 2019 and anticipates improved demand in Q2; it cited a strong April start following better weather. Steel prices had fallen from 2018 highs, and management expected them to be flat or decline slightly in Q2.
The 2020 Plan targets approximately 8% sales CAGR from the 2016 base through 2020, operating expenses of 26%–27% of sales, and a 17%–18% return on invested capital by 2020. Management reported 10% organic sales CAGR since 2016 and trailing-four-quarter ROIC of 14.2%. Targets depend on assumptions including mid-single-digit U.S. housing-start growth and gains in Europe and truss and concrete products.
The Home Depot mechanical-anchor rollout was in 600 stores, with 400 more expected by the end of Q2 and roughly 1,900 targeted by end-2020. Rollout is slower than expected because of store-space limitations; management said it did not expect this to affect the 2020 sales-growth target.
SAP implementation continued: a second location went live in April 2019; rollout to remaining U.S. branches was targeted by early 2020 and company-wide completion during 2021. The company had capitalized $17.8 million and expensed $15.4 million of project costs and expects ERP-related costs to increase operating expenses over 2018–2024.
Risks include construction and housing cycles, seasonality and weather, steel and other input costs, tariffs, foreign exchange, competition, product-liability exposure, and SAP implementation. Foreign operations’ cash of $37.4 million could face additional taxation if repatriated; the company maintains a permanent reinvestment assertion for foreign earnings.
Product-corrosion litigation in Hawaii includes the Gentry and Kaneshiro matters. The company cannot reasonably estimate the likelihood of substantial damages in those cases and believes some or all claims may be insured. It recorded an additional approximately $0.1 million charge in Q1 related to a pending legal matter, bringing the total recorded charge to approximately $3.0 million net of tax. The company said it was not party to proceedings expected to have a material adverse effect, while noting litigation outcomes remain uncertain.

Most important facts for investors to verify

Whether the sales-growth and margin outlook holds as input costs, weather and housing activity evolve.
The source of the year-over-year decline in operating income and whether higher material and labor costs persist.
The credit-line disclosure difference: $1.5 million outstanding in the debt note versus no facility borrowings stated in MD&A.
Progress and costs of the SAP rollout and Home Depot distribution expansion, including any effect on inventory and working capital.
Developments in the Hawaii product-corrosion claims, insurance coverage and any changes to recorded legal reserves.