Business context and reporting period
Simpson Manufacturing Co., Inc. designs, manufactures and sells building construction products. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Its reportable segments are North America, Europe and Asia/Pacific; wood construction products generated about 85% of nine-month sales.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $284.2 million | $262.5 million | $837.0 million | $745.3 million |
| Gross profit | $133.9 million | $119.1 million | $382.1 million | $341.5 million |
| Gross margin | 47.1% | 45.4% | 45.7% | 45.8% |
| Income from operations | $60.9 million | $46.7 million | $154.5 million | $114.5 million |
| Net income | $44.4 million | $28.2 million | $113.9 million | $79.5 million |
| Diluted EPS | $0.95 | $0.59 | $2.43 | $1.66 |
- Q3 sales increased 8.3%; operating income increased 30.5%. Nine-month sales rose 12.3% and operating income rose 34.9%. Management attributed growth principally to increased sales volumes and prices.
- Q3 margin expansion reflected higher average prices and lower material and factory overhead costs as a share of sales. Nine-month gross margin was approximately flat, with higher material and shipping costs weighing on North America.
- Operating cash flow for the first nine months was $108.0 million, versus $84.6 million. Capital expenditures were $24.7 million, versus $45.1 million. Operating cash flow less capital expenditures was approximately $83.3 million, versus $39.5 million.
- Cash and equivalents were $167.0 million at September 30, compared with $168.5 million at December 31, 2017 and $204.2 million a year earlier. Working capital was $493.5 million. The company had no outstanding debt and reported $304.1 million of available credit, including revolving lines and a standby letter of credit.
- Current assets included $193.0 million of receivables and $279.5 million of inventory. Inventory rose from $253.0 million at year-end; receivables rose from $136.0 million.
Material changes versus the prior period
- North America sales increased 12.5% in Q3 and 15% year to date, driving the consolidated increase. Europe sales declined 10.9% in Q3 and 2.1% year to date, mainly reflecting the 2017 sale of Gbo Fastening Systems subsidiaries in Poland and Romania and currency effects. Asia/Pacific remained a small share of sales.
- Effective tax rates fell to 27.1% from 37.0% for Q3 and to 26.1% from 34.0% year to date, primarily following the U.S. Tax Cuts and Jobs Act. The prior-year nine-month comparison included a nontaxable $6.3 million bargain-purchase gain; Q3 2017 included a $2.1 million adjustment to that gain.
- Share repurchases totaled $49.5 million in the first nine months, versus $20.0 million. Dividends paid were $29.7 million, versus $27.0 million. Diluted weighted-average shares declined to 46.8 million from 47.8 million year to date.
- Operating cash flow improved, but cash was absorbed by growth in receivables and inventory. Cash used in investing fell to $21.2 million from $62.8 million, as the prior-year period included acquisitions.
Outlook, management commentary, risks and unusual items
- For full-year 2018, management estimated gross margin of 45.5%–46.0%, operating expenses at a mid-28% share of sales, an effective tax rate of 26%–27%, capital spending of $30–$32 million and depreciation and amortization of $39–$40 million. It did not provide full-year sales or EPS guidance.
- The 2020 Plan targets approximately 8% annual sales growth from the 2016 base through 2020, operating expenses of 26%–27% of sales by 2020, and a 17%–18% return on invested capital. Management said achievement depended on assumptions including mid-single-digit growth in U.S. housing starts and repair and remodel, improved European performance, and gains in truss and concrete products.
- Management cited steel-price volatility and tariffs as risks to costs and margins; the company raised U.S. prices on most wood connectors by an average 11.5% effective July 1, 2018. Housing and construction cycles, weather, competition, foreign exchange and cyber or system disruptions were also identified as risks.
- The SAP ERP rollout took longer than expected to stabilize; completion was revised to the end of 2021, with estimated total implementation costs increased about 15% to $38–$40 million. 2018 ERP costs were estimated at $9–$10 million. Management expects ongoing expense effects from the project.
- The company contracted to sell its Vacaville property, with a cost basis of $8.6 million. The filing gives differing estimates of proceeds: approximately $18 million after closing costs and adjustments in the notes, versus approximately $16 million net in MD&A. A separate Edenton property was also classified as held for sale.
- The company repatriated $20 million of foreign cash in Q3 and planned additional repatriation. Foreign-held cash was $76.8 million; some remaining balances could face additional tax if repatriated.
- In Q3 the company recorded out-of-period depreciation reclassifications between cost of sales and G&A: $0.7 million for Q3 2017 and $1.8 million and $2.1 million for the respective 2018 and 2017 nine-month periods. The adjustments did not affect operating income or net income.
- A Hawaii product-corrosion lawsuit seeks damages that the company cannot reasonably estimate; the company denies liability and believes some or all claims may be insured. A separate potential third-party matter could involve the company, but it was not a party to that action at filing. The company stated it did not expect current proceedings to have a material adverse effect, while noting litigation uncertainty.
- After quarter-end, the board declared a $0.22-per-share dividend payable in January 2019. From October 1–29, the company repurchased 528,100 shares for $36.0 million.
Important facts for investors to verify
- Whether price increases can offset steel, tariff, shipping and other input-cost pressures without weakening demand.
- Progress on inventory and working-capital discipline, given the year-to-date inventory and receivables build.
- Updated SAP completion timing and total cost, and the effect of implementation expenses on margins.
- The expected net proceeds and closing status of the Vacaville sale, including the filing’s $16 million versus $18 million estimates.
- Potential exposure, insurance coverage and developments in the Hawaii corrosion-related claims.
- Execution assumptions behind the 2020 Plan and the company’s continued repurchases, dividends and cash-repatriation plans.