Simpson Manufacturing Co., Inc. — Q2 2016 Form 10-Q
Business context and reporting period: The filing covers the three and six months ended June 30, 2016. Simpson designs, manufactures and sells building construction products, reported through North America, Europe and Asia/Pacific segments. Results are seasonal and can vary with construction activity, weather and economic conditions.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $230.0 | $216.7 | $429.5 | $393.2 |
| Gross profit | $111.5 | $98.3 | $204.0 | $175.8 |
| Gross margin | 48% | 45% | 47% | 45% |
| Operating income | $40.9 | $35.0 | $67.6 | $51.3 |
| Net income | $26.2 | $21.5 | $42.5 | $31.6 |
| Diluted EPS | $0.54 | $0.43 | $0.88 | $0.64 |
| Cash dividends declared per share | $0.18 | $0.16 | $0.34 | $0.30 |
- Q2 sales increased 6%; first-half sales increased 9%. Higher North American volumes were the main driver. Q2 Europe sales were nearly flat, while Asia/Pacific sales fell 30% amid prior sales-office closures.
- North America generated 86% of Q2 sales and 87% of first-half sales. First-half segment sales rose 11% there and 2% in Europe, but declined 46% in Asia/Pacific.
- Gross-margin improvement reflected lower material costs and, in North America, better factory overhead absorption from higher production volumes. Operating expenses rose: Q2 G&A increased 17%, including higher professional and legal fees, profit sharing and foreign-currency losses.
Cash, liquidity and capital
- At June 30, cash and cash equivalents were $246.3 million, versus $258.8 million at December 31, 2015. Working capital was $508.6 million. Current assets were $620.9 million and current liabilities $112.3 million.
- Six-month operating cash flow was $17.7 million, down from $24.8 million. Investing used $16.4 million, including $17.5 million of capital expenditures; financing used $16.4 million, including $15.4 million of dividends and $3.5 million of share repurchases.
- The company reported no outstanding borrowings at June 30. Total available credit was $303.9 million, including a $300 million primary revolving facility. It was compliant with financial covenants. A July 25, 2016 amendment extended the primary facility’s maturity to July 23, 2021.
- Foreign operations held $79.6 million of cash that could incur additional tax if repatriated; the company reported no current plan to repatriate it.
Outlook, management commentary and risks
- Management estimated 2016 gross margin of approximately 46%–47.5%, an effective tax rate of 37%–38%, capital spending of $50–$55 million, depreciation of $23–$25 million and amortization of approximately $6 million.
- Management said Q2 sales growth moderated after stronger growth in late 2015 and Q1 2016, partly attributed to a mild winter, and was uncertain whether the moderation would persist. Europe was expected to report an operating profit in 2016; Asia/Pacific was expected to break even or incur a smaller operating loss than in 2015.
- A multi-year North American factory-efficiency plan aims for 75% utilization on two full shifts and estimated annual savings of about $3 million after transition. Separately, a newly approved SAP ERP replacement was expected to take three to four years and cost about $30 million; management anticipated eventual annual savings of roughly 1% of net sales.
- Steel prices rose significantly in Q2 and could rise further in Q3, potentially pressuring margins if higher costs cannot be recovered through pricing. Other risks include construction cycles, sales trends, seasonality and weather, foreign exchange, competition, customer and supplier conditions, and product failure or liability claims. The filing reported no legal proceedings expected to have a material adverse effect, while noting litigation outcomes remain uncertain.
- In Q2, the company recorded a $0.7 million gain on asset disposals. Asia sales-office closure costs continued: $0.4 million of estimated severance and other costs remained accrued at quarter-end, with about $0.1 million of further compensation, retention and professional fees expected as requirements are met. Management said significant additional closure costs were not expected.
- Early adoption of deferred-tax balance-sheet classification guidance changed presentation of deferred tax balances; management reported no material effect from early adoption of the inventory measurement standard.
Important facts for investors to verify
- Whether the recent moderation in sales persists, particularly given the company’s seasonal exposure and the Q2 decline in foundation-product sales.
- Whether steel-cost increases affect the guided 2016 gross-margin range and the company’s ability to pass costs through to customers.
- Execution, implementation costs and timing of the SAP project and North American factory-efficiency plan, including whether anticipated savings are realized.
- Working-capital cash use and the sustainability of operating cash flow relative to dividends, capital spending and share repurchases.
- Currency effects, foreign-held cash and the reported segment outlook, especially Europe and Asia/Pacific.
- Post-quarter credit-facility amendment terms and the company’s ongoing covenant compliance; the filing states no borrowings were outstanding at June 30.