Simpson Manufacturing Co., Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. The company designs, manufactures and sells building construction products, reported across North America, Europe and Asia/Pacific. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $195.9 | $172.1 | $546.0 | $512.6 |
| Gross profit / margin | $90.2 / 46.0% | $75.7 / 44.0% | $244.5 / 44.8% | $228.3 / 44.5% |
| Income from operations | $30.9 | $22.0 | $69.6 | $62.6 |
| Net income | $20.0 | $13.0 | $43.3 | $36.0 |
| Diluted EPS | $0.41 | $0.27 | $0.89 | $0.74 |
| Effective tax rate | 35.2% | 41.1% | 37.8% | 42.6% |
Q3 sales rose 13.8%; operating income rose 40.4%. For the first nine months, sales increased 6.5% and operating income 11.1%. Operating margin was approximately 15.8% in Q3 versus 12.8% a year earlier, and 12.7% year to date versus 12.2%.
- Cash flow: Nine-month operating cash flow was $71.9, up from $56.7. Capital expenditures were $12.9; investing cash outflow was $15.8, including $5.3 for the ShearBrace product-line acquisition. Financing cash outflow was $15.8, including $12.1 of dividends and $9.8 of share repurchases. Cash increased $40.2 to $215.8.
- Liquidity and debt: Working capital was $442.9. Total available credit was $305.3, including a $300.0 revolving facility expiring in July 2017. Borrowings and notes outstanding were approximately $1.0; the company reported compliance with financial covenants.
- Balance sheet: At September 30, cash was $215.8, receivables $118.9, inventory $187.3, total assets $934.2 and total liabilities $111.7. Stockholders’ equity was $822.5.
Material changes and operating drivers
- North America Q3 sales increased 14.7%; Europe sales increased 6.3%; Asia/Pacific sales increased 56.9% from a smaller base. Year to date, North America sales rose 8.6%, Europe declined 4.6%, and Asia/Pacific rose 33.5%.
- Management attributed growth chiefly to improved economic conditions and higher estimated housing starts, particularly in North America. Home-center sales and selling prices declined; the company had lost Lowe’s as a customer in Q2 2012. Sales to its largest customer fell 5.1% in Q3.
- Q3 gross margin improved, notably in Europe following the exit from heavy-duty mechanical anchors, and from lower material and labor costs in North America. Year-to-date North America margin declined to 46.9% from 47.5%, reflecting price pressure and higher factory overhead and distribution costs; Europe margin rose to 37.4% from 33.8%.
- General and administrative expense increased 20.7% in Q3, principally from higher cash profit sharing, personnel, stock compensation and technology costs. The Ireland facility sale generated a $0.7 loss in Q3; the company had also recorded a $1.0 impairment in Q1.
Outlook, risks and unusual items
- Management estimated 2013 full-year gross margin of 43%–44%, an effective tax rate of 38%–40%, and capital spending of $22–$24. It expected Europe to report a small operating profit and Asia/Pacific an operating loss for 2013. Europe’s economic conditions were expected to remain weak in Q4.
- The company expected steel prices to rise moderately in Q4 if industry inventories remained low; higher steel costs could pressure margins if not offset by pricing. Results are seasonal and may also be affected by weather, economic and political conditions.
- Management said operating cash and available credit should cover working capital and planned capital expenditures for the next 12 months. Foreign-held cash was $95.7; repatriation could result in additional taxes, and management said it had no plans to repatriate it.
- Q3 included a $0.7 after-tax out-of-period adjustment that increased net income, related to the Keymark acquisition and software-cost capitalization. The filing says the correction was not material to Q3 or prior periods. The company also capitalized $1.6 of internal-use software development costs in Q3.
- Hawaii lawsuits allege premature corrosion of certain products, including Ocean Pointe claims and the Nishimura case. The company said liability and loss amounts could not be determined, so no amounts were accrued or disclosed; some claims may be covered by insurance. An unfavorable outcome could materially affect results or financial condition.
- The board declared a subsequent dividend of $0.125 per share, estimated at $6.0, payable January 23, 2014. Of the $50.0 share-repurchase authorization, $40.2 remained at September 30; there were no repurchases in Q3.
Key facts for investors to verify
- Whether North American growth and housing-start improvements persist, and whether lower home-center sales and pricing continue.
- Whether management achieves its full-year margin, tax-rate and capital-spending estimates, particularly amid expected steel-cost increases.
- Progress in Europe after exiting heavy-duty anchors, and the expected scale and duration of Asia/Pacific operating losses.
- Developments in the corrosion lawsuits, potential insurance coverage and any future ability to estimate or accrue losses.
- Cash generation, planned capital investment and the effects of foreign-held cash and any future repurchases or dividends.