Simpson Manufacturing Co., Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The company manufactures and sells wood- and concrete-construction products through North American, European, and Asia/Pacific segments. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $181.7 | $177.8 | $340.4 | $310.3 |
| Gross profit | $83.1 | $83.5 | $152.6 | $140.4 |
| Gross margin | 45.8% | 47.0% | 44.8% | 45.3% |
| Operating income | $27.1 | $31.2 | $40.7 | $43.5 |
| Net income | $15.9 | $19.5 | $23.1 | $26.6 |
| Diluted EPS | $0.33 | $0.39 | $0.48 | $0.53 |
Q2 sales rose 2.2%, but included $9.7 million from acquisitions; excluding acquisition sales, revenue declined. First-half sales increased 9.7%, including $14.6 million from acquisitions. Q2 operating income fell 13.0% and first-half operating income fell 6.5%. The company attributed North American margin pressure to higher material and labor costs, product mix, and competitive pricing. European margins improved, partly due to lower costs and the acquisition. R&D and engineering expense rose 30.2% in Q2 and 41.0% for the first half, including truss-software development costs.
Cash flow, balance sheet, and capital
- First-half operating cash flow was $16.9 million, versus cash used of $3.3 million in the prior-year period. Investing activities used $58.7 million, chiefly for acquisitions and capital expenditures; financing activities used $8.8 million, mainly for dividends.
- Cash and equivalents were $162.7 million at June 30, down from $213.8 million at December 31, 2011. The company cited acquisition spending as the primary driver of the decline.
- Working capital was $394.7 million. Current assets were $494.7 million and current liabilities $100.0 million. Debt and line-of-credit balances totaled $4.8 million; the company reported covenant compliance.
- Unused credit facilities at June 30 totaled $206.3 million. On July 27, the company replaced its existing facility with a five-year, unsecured $300 million revolving facility, with an option to increase it to $500 million.
- First-half capital expenditures were $9.6 million. Management estimated full-year 2012 capital spending of $28–$30 million and said operating cash and available borrowing capacity should cover working capital and planned capital expenditures for the next 12 months.
- The declared dividend was $0.125 per share for Q2; a further $0.125 per share was declared in July, payable October 25, 2012. No shares were repurchased in Q2; $50 million remained under the 2012 repurchase authorization.
Outlook, risks, and unusual items
- Management reported ongoing pressure from the European financial crisis, particularly weaker sales in France, and uncertainty about steel prices in the second half of 2012. Higher steel costs may weigh on margins if they cannot be passed through to customers.
- Foreign-currency translation reduced comprehensive income by $10.0 million in Q2 and $2.7 million for the first half. The company does not currently hedge foreign-exchange risk; management said a 10% currency move in any one country or currency would not materially affect overall net income.
- The effective tax rate increased to 41.7% for Q2 and 43.5% for the first half, primarily due to valuation allowances on certain foreign losses and, for the first half, $2.3 million of nondeductible acquisition costs.
- January acquisitions included S&P Clever, purchased for $58.1 million subject to adjustments, and March’s CarbonWrap asset acquisition, purchased for $5.5 million subject to adjustments. Purchase-price allocations remained provisional.
- Product-corrosion lawsuits in Hawaii concern alleged premature corrosion of strap tie holdowns and related property damage. Potential liability is unknown; damages were not specified. The company intends to defend itself and believes some claims may be insured. On July 13, the court denied without prejudice a homeowner motion to certify the Ocean Pointe cases as a class action.
- The company stated that quarterly results fluctuate and are not necessarily indicative of future results. No specific revenue or earnings guidance was provided.
Most important facts for investors to verify
- How much sales growth reflects acquisitions versus underlying demand, particularly in North America and Europe.
- Whether gross margins stabilize as steel, labor, product mix, and pricing pressures evolve.
- Acquisition integration, final purchase-price allocations, and the returns generated by S&P Clever and CarbonWrap.
- Cash generation and liquidity after acquisition spending, capital expenditures, dividends, and the new credit facility’s terms.
- Developments, insurance coverage, and potential exposure in the Hawaii corrosion litigation, along with the effect of foreign losses and tax allowances on the effective tax rate.