Simpson Manufacturing Co., Inc. — Q1 2011 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2011. Simpson manufactures connector products and reports North America, Europe and Asia/Pacific segments. After selling substantially all of its venting business in August 2010, the company presents that business as discontinued operations; results below are generally for continuing operations. Financial amounts are in U.S. dollars.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $132.5 million | $123.8 million |
| Gross profit / gross margin | $56.9 million / 43.0% | $54.0 million / 43.6% |
| Income from operations | $12.3 million | $17.1 million |
| Net income | $7.1 million | $9.2 million |
| Diluted EPS | $0.14 | $0.19 |
| Cash used in operating activities | $22.4 million | $19.5 million |
| Capital expenditures | $10.1 million | $20.3 million |
At March 31, cash and equivalents were $301.2 million, current assets $590.7 million, current liabilities $78.3 million, working capital $512.4 million and total liabilities $86.1 million. The company had no borrowings outstanding and reported $204.7 million of unused credit facilities. Total assets were $883.2 million and stockholders’ equity was $797.1 million. The company held $215.4 million in U.S. Treasury securities and money market funds within cash equivalents.
Material changes versus the prior comparable period
- Sales increased 7.0%, reflecting higher sales volume and a 4.0% increase in average prices. North America sales rose 4.1% and Europe rose 22.2%; Asia/Pacific sales fell 13.8%.
- Operating income declined 28.1%, and net income fell from $9.2 million to $7.1 million. Diluted EPS decreased to $0.14 from $0.19.
- Gross margin edged down to 43.0% from 43.6%, primarily due to higher factory overhead costs. Operating expenses rose, including research and engineering, selling, and general and administrative costs.
- Operating cash use increased to $22.4 million from $19.5 million, with increases in receivables and inventories contributing to the outflow. Cash declined $33.8 million from year-end 2010.
- Q1 2010 included a $0.6 million after-tax loss from discontinued operations; Q1 2011 had no discontinued-operations loss.
Outlook, commentary and risks
- Management estimated 2011 capital spending of $33–35 million and said cash from operations and available borrowing capacity should cover working capital and planned capital expenditures for the next 12 months. No specific earnings or revenue guidance was provided.
- Management expected steel prices to remain at current levels or increase during 2011; higher steel costs could pressure margins if not recovered through pricing. Inventories rose 9.6% from year-end, primarily due to raw-material purchases.
- The company cited persistently challenging economic conditions, despite broad-based sales increases across many product lines and customer channels. It also identified potential financing needs if future growth or acquisitions require funding beyond available resources.
- Four Hawaii lawsuits allege premature corrosion of strap-tie holdown products and related property damage; damages sought are unspecified, and the company said potential liability is unknown. The company believes some or all claims may be insured, but an insurer separately sought a ruling on defense and indemnity obligations.
- A patent infringement action concerning the Steel Strong-Wall product remained pending, with trial scheduled for April 2012; liability was unknown. The vacant San Leandro facility remained held for sale, and any impairment was not expected to be material. The facility in France was sold in April 2011 for approximately carrying value.
- Foreign-currency exposure was not hedged; management said a 10% exchange-rate change in any one country or currency would not materially affect company-wide net income. Q1 currency translation increased accumulated other comprehensive income by $6.9 million.
Important facts for investors to verify
- Whether sales growth and pricing can offset steel-cost increases and the lower gross margin.
- Whether higher operating expenses persist and how they affect operating profitability.
- Receivables, inventory levels and operating cash conversion, given the Q1 cash outflow.
- Progress and potential exposure in the Hawaii product-corrosion cases, insurance coverage dispute and patent litigation.
- Execution of the $33–35 million capital-spending plan, liquidity sufficiency and any material developments in the San Leandro asset sale.