Simpson Manufacturing Co., Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Simpson designs and manufactures structural connectors, anchors, fasteners, shearwalls and related building products, principally through Simpson Strong-Tie. Results are exposed to construction cycles, especially North American residential construction.
Financial performance
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Net sales | $603.4 million | $555.5 million | +8.6% |
| Gross profit / margin | $270.8 million / 44.9% | $244.1 million / 44.0% | +10.9%; margin +0.9 pts |
| Operating income / margin | $74.1 million / 12.3% | $78.4 million / 14.1% | −5.6% |
| Continuing-operations net income | $50.9 million | $44.8 million | +13.6% |
| Net income | $50.9 million | $28.6 million | +78.0% |
| Diluted EPS | $1.04 | $0.58 | Continuing-operations EPS: $1.04 vs. $0.90 |
| Cash from operations | $35.1 million | $77.2 million | −54.5% |
FY 2011 gross-margin improvement reflected higher production volumes and fixed-overhead absorption. Operating income fell as research and engineering, selling, and general and administrative expenses rose; 2010 also included a $4.8 million gain on asset sales. The effective tax rate declined to 35.4% from 42.6%. FY 2010 net income included a $16.2 million after-tax loss from the discontinued venting business, sold in 2010.
In Q4 2011, sales were $130.7 million versus $119.6 million in Q4 2010 (+9.3%); gross profit was $54.9 million versus $47.6 million, and operating income was $5.7 million versus an operating loss of $1.9 million. Net income was $4.9 million versus a net loss of $4.5 million. Q4 2011 included a $1.3 million goodwill impairment charge; Q4 2010 included a $6.3 million goodwill impairment charge.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $213.8 million at year-end, down from $335.0 million; working capital was $430.5 million, down from $511.6 million.
- No borrowings were outstanding. Unused capacity under credit facilities was $204.4 million; the primary $200 million revolving facility was due to expire in October 2012. The company planned to negotiate a replacement and expected terms might be less favorable.
- Operating cash flow declined as inventory rose $26.9 million and accounts payable fell $10.1 million. Inventory increased 18.3% to $180.1 million.
- Investing activities used $74.3 million, including $51.9 million for the Fox Industries and Automatic Stamping acquisitions and $26.1 million of capital expenditures. Management estimated 2012 capital expenditures of approximately $27 million.
- Financing activities used $76.3 million, including $53.2 million for repurchases and $23.3 million of dividends. The 2011 dividend was $0.50 per share; a $0.125-per-share dividend was declared for April 2012. A new authorization permitted up to $50 million of repurchases through year-end 2012.
- Of year-end cash, $144.7 million was held outside the United States; repatriation could result in additional taxation.
Changes, outlook and key risks
- Sales rose across regions: North America +6.8% and Europe +16.7%. North America represented 78.7% of sales. The largest customer, The Home Depot, accounted for 10% of FY 2011 sales.
- December 2011 acquisitions: Automatic Stamping for $43.5 million and Fox Industries for $8.7 million. Purchase-price allocations were preliminary. In January 2012, the company acquired S&P Clever for $56.5 million.
- Management expected steel prices to rise in the first half of 2012. If price increases cannot be passed through to customers, margins could decline. No full-year revenue or earnings guidance is provided in the filing.
- The UK reporting unit’s goodwill was fully impaired in 2011, with a $1.3 million charge, due to weaker expected cash flows and margins. German reporting-unit goodwill of $2.3 million was sensitive to planned margin improvements and operational consolidation.
- Four Hawaii Ocean Pointe lawsuits and a separate putative class action allege premature corrosion of strap tie holdowns or related products. Liability and potential losses were not estimable; no accrual was recorded. Insurance coverage was disputed in related proceedings.
- Other material risks include construction-market weakness and seasonality, steel cost and availability, customer concentration, product liability and recalls, acquisition integration, foreign-exchange exposure, and possible facility-related impairment. The company does not hedge steel-price or foreign-exchange risk.
Important facts for investors to verify
- Whether sales growth and improved gross margin can continue as construction activity and steel costs change.
- Whether the decline in operating cash flow and increase in inventories reverse or persist.
- Integration progress, final purchase-price allocations, and returns from the 2011 and January 2012 acquisitions.
- Renewal terms for the revolving credit facility expiring in October 2012 and the effect of cash held overseas.
- Developments in the Hawaii corrosion litigation, insurance coverage disputes, and any resulting exposure.
- Whether German operations meet management’s margin and consolidation plans, and whether further goodwill or asset impairments arise.