Simpson Manufacturing Co., Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Simpson designs, manufactures and sells construction products through North American, European and Asia/Pacific segments, with products primarily for wood and concrete construction.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $154.5 million | $158.7 million; down 2.6% |
| Gross profit / margin | $65.0 million / 42.0% | $69.4 million / 43.7% |
| Operating income | $9.0 million | $13.5 million; down 33.3% |
| Net income | $4.8 million | $7.2 million |
| Diluted EPS | $0.10 | $0.15 |
| Operating cash flow | $(18.7) million | $0.6 million |
| Capital expenditures | $4.6 million | $3.2 million |
| Cash and cash equivalents | $142.0 million at March 31 | $175.6 million at December 31, 2012 |
Cash decreased $33.6 million during the quarter. Operating cash use reflected seasonal working-capital movements, including higher receivables and payments of accrued liabilities and profit-sharing contributions. Investing activities used $9.3 million, including $5.3 million for the ShearBrace product-line acquisition; financing activities used $4.5 million, principally dividends.
Working capital was $405.8 million, versus $402.5 million at December 31, 2012. Total liabilities were $83.1 million; outstanding line-of-credit and note balances were $1.2 million, with no long-term debt reported. The company had $307.4 million of unused credit facilities and stated that cash and available borrowing should cover working capital and planned capital spending for the next 12 months. It was in compliance with financial covenants.
The effective tax rate was 47.0%, broadly flat against 46.9% a year earlier. The filing attributes the 2013 rate partly to valuation allowances on $3.5 million of foreign losses, primarily in Europe. Comprehensive loss was $1.0 million, including a $5.8 million foreign-currency translation loss.
Material changes and management commentary
- Europe sales declined 15.3% to $23.9 million; North America was nearly flat at $127.7 million, and Asia/Pacific increased 11.5% to $2.6 million. Management cited weak European conditions, inclement weather, lower selling prices and reduced home-center sales.
- Home-center sales were affected by the loss of Lowe’s as a customer in Q2 2012. Excluding Lowe’s, home-center sales fell 15%; sales to the company’s largest customer fell 12% year over year.
- Gross margin fell 1.7 percentage points. Management cited competitive pricing, higher material and distribution costs, and lower-volume factory overhead; a greater share of lower-margin concrete products also weighed on margin.
- Management said housing starts had recently increased and foundation-product sales through April 2013 were up in the low double digits year over year. It noted that construction-product demand is seasonal and can be delayed by weather.
- Management estimated 2013 capital spending of $29 million and said steel prices could rise in Q2 and Q3 2013 with expected demand. No formal earnings or revenue guidance was provided.
Unusual items, risks and contingencies
- A $1.0 million impairment charge was recorded for the Ireland facility amid weak real-estate conditions. The charge was included in general and administrative expense.
- The company continued closing its European heavy-duty mechanical-anchor operation. It expected approximately $0.4 million of additional closure costs in 2013, and did not expect further severance expense in 2013.
- Hawaii lawsuits allege premature corrosion of strap tie holdown products and related property damage. The court granted summary judgment on certain Ocean Pointe claims in December 2012, but in April 2013 allowed amended negligent-misrepresentation claims. A separate Hawaii class action remains. Management said liability and potential loss could not be determined; no amounts were accrued.
- Insurance coverage disputes related to the corrosion cases are ongoing. The company says some claims may be covered but the outcome is uncertain.
- Foreign exchange translation reduced accumulated other comprehensive income by $5.8 million. The company does not currently hedge foreign-exchange exposure and noted that a significant portion of cash is held outside the United States, with no current plan to repatriate it.
- The board authorized up to $50 million of share repurchases through year-end 2013; no shares were repurchased in Q1. In April, it declared a $0.125-per-share dividend, estimated at $6.1 million, payable in July.
Important facts for investors to verify
- Whether the decline in sales and gross margin persists, particularly in Europe and home-center channels.
- Whether operating cash flow improves as seasonal working-capital requirements unwind, and whether the $29 million capital-spending estimate is maintained.
- Steel-cost trends and the company’s ability to offset higher material, distribution and overhead costs through pricing or mix.
- Developments in the corrosion litigation, insurance coverage disputes and any potential financial exposure.
- Progress and remaining costs of the Ireland facility and European product-line closure, as well as foreign-loss valuation allowances.