Simpson Manufacturing Co., Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Amounts are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and reporting period
Simpson designs, manufactures and sells wood- and concrete-construction products, including connectors, fasteners, anchors and related software and engineering services. It reports North America, Europe and Asia/Pacific segments. Wood products accounted for about 85% of 2018 sales and concrete products 15%. Demand is seasonal and substantially exposed to North American housing and construction activity.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $1,078.8 million | $977.0 million |
| Gross profit / margin | $480.5 million / 44.5% | $443.4 million / 45.4% |
| Income from operations / margin | $172.3 million / 16.0% | $137.9 million / 14.1% |
| Net income / diluted EPS | $126.6 million / $2.72 | $92.6 million / $1.94 |
| Cash provided by operating activities | $160.1 million | $119.1 million |
| Cash and cash equivalents | $160.2 million | $168.5 million |
| Working capital | $447.9 million | $447.5 million |
Current assets were $599.5 million and current liabilities $151.6 million at year-end. The company had no borrowings under its $300 million primary revolving credit facility, which expires in July 2021; $0.8 million was outstanding under other revolving lines. Operating cash flow was supported by earnings and noncash items, partly offset by higher inventory and receivables. Capital expenditures were $29.3 million. Financing cash outflows included $110.5 million of share repurchases and $39.9 million of dividends.
Fourth-quarter 2018 sales were $241.8 million versus $231.7 million in Q4 2017. Gross profit was $98.4 million versus $101.9 million; operating income was $18.9 million versus $24.4 million; net income was $12.8 million versus $13.1 million. Diluted EPS was $0.28 in both quarters.
Material changes versus prior period
- Full-year sales rose 10.4%, led by North America, where sales increased 13.3%; Europe sales fell 3.7%, partly reflecting the 2017 sale of subsidiaries in Poland and Romania.
- Gross margin declined 0.9 percentage points. Management cited December’s unexpected sales decline and higher labor, factory and tooling costs; North America also faced higher material, labor and shipping costs.
- Operating expenses increased $6.5 million in dollars but decreased as a share of sales to 28.9% from 31.3%. Higher consulting, legal and SAP-related costs contributed to general and administrative expense growth.
- Net income increased 36.7%, aided by the lower effective tax rate of 26.4% versus 35.9%, following U.S. tax reform, and by higher operating income. FY 2017 included a nonrecurring $6.3 million bargain-purchase gain.
- Operating cash flow increased to $160.1 million from $119.1 million. Cash declined by $8.3 million during 2018, compared with a $58.0 million decline in 2017.
Outlook, management commentary, risks and unusual items
- For 2019, management estimated gross margin of 44.5%–45.5%, operating expenses of 27.5%–28.5% of sales, and an effective tax rate of 25%–27%. It expected steel prices to be flat in Q1 and U.S. single-family housing activity to grow at a low- to mid-single-digit rate.
- The 2020 Plan targets approximately 8% net-sales CAGR from FY 2016 through FY 2020, operating expenses at 26%–27% of sales by 2020, a further 25%–30% reduction in raw-material and finished-goods inventory, and ROIC of 17%–18%. Reported 2018 ROIC was 14.3%; achieving the targets is not assured.
- The SAP ERP rollout was slower than expected: completion was pushed to the end of 2021, with estimated costs about 15% higher than prior estimates. Management expected annual operating expenses to rise from 2018 through 2024 partly due to amortization of capitalized project costs.
- Unusual 2018 items included an $8.8 million gain on the sale of a Vacaville property and a $6.7 million goodwill impairment that fully impaired goodwill for the Denmark reporting unit. Q4 also included the impairment and most of the property-sale gain.
- After year-end, a tentative settlement in a pending legal matter led to a $2.9 million after-tax charge, reducing reported diluted EPS from $2.78 in the February 4 earnings release to $2.72; the filing states no material balance-sheet or cash-flow impact.
- Material risks include housing and construction cyclicality, steel-price and tariff uncertainty, product and engineering liability, software and ERP execution, foreign exchange exposure, and litigation. The company could not reasonably estimate potential losses in the Gentry corrosion lawsuit; it said insurance may cover all or part of claims. No customer accounted for 10% or more of annual sales.
- The board authorized up to $100 million of share repurchases for 2019 and declared a $0.22-per-share dividend payable in April 2019. Auditors issued unqualified opinions on the financial statements and internal control; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether gross-margin pressure and elevated costs persist, and whether 2019 guidance and 2020 Plan targets remain achievable.
- Progress and final cost, timing and operational impact of the SAP implementation.
- Inventory growth, working-capital trends and the impact of the planned inventory-reduction program on customer service and cash generation.
- Developments, insurance coverage and potential financial exposure in the Gentry and related Hawaii corrosion matters, as well as the subsequent settlement charge.
- Effects of steel prices, tariffs, housing activity and currency movements on demand, margins and cash flow.
- Capital allocation trade-offs among repurchases, dividends, business investment and liquidity; confirm execution under the 2019 repurchase authorization.