Simpson Manufacturing Co., Inc. — Q1 2014 Form 10-Q
Business context and period: The company designs, manufactures and sells building construction products, principally wood- and concrete-construction products. This summary covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Results are unaudited and in millions of dollars except per-share data.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $168.3 | $154.3; up 9.1% |
| Gross profit / margin | $77.8 / 46.2% | $64.7 / 41.9% |
| Operating income / margin | $19.6 / 11.6% | $9.0 / 5.8% |
| Net income | $12.1 | $4.8 |
| Diluted EPS | $0.25 | $0.10 |
| Effective tax rate | 38.6% | 47.0% |
| Operating cash flow | $(29.0) | $(18.7) |
| Capital expenditures | $4.2 | $4.6 |
Sales rose across all regions: North America $136.9 million, up 7.2%; Europe $27.6 million, up 15.7%; and Asia/Pacific $3.8 million, up 42.2%. North America generated $22.6 million of operating income; Europe recorded a $0.9 million operating loss and Asia/Pacific a $1.2 million loss.
At March 31, cash and cash equivalents were $212.0 million, versus $251.2 million at year-end 2013 and $142.0 million a year earlier. Working capital was $476.2 million. Current assets were $571.7 million against current liabilities of $95.5 million. Debt and line-of-credit balances were negligible at $83,000. Available credit was approximately $304.6 million, including a $300 million revolving facility expiring July 2017; the company reported covenant compliance.
Operating cash use reflected seasonal increases in receivables and inventory and payments of accrued liabilities and profit-sharing contributions. Cash declined $39.2 million during the quarter. The company paid $6.1 million in dividends; $0.125 per share was declared for the quarter. Stockholders’ equity was $847.5 million.
Material changes and unusual items
- Revenue increased 9.1%, with higher volumes the principal driver in North America and Europe. North American average selling prices were slightly lower; Europe’s higher volumes and currency translation were partly offset by lower prices.
- Gross margin improved to 46.2%, reflecting lower costs as a percentage of sales, higher-volume factory overhead absorption and material-cost effects. Management also cited a one-time $2.3 million correction to workers’ compensation expense, net of cash profit-sharing expense.
- The filing identifies an out-of-period adjustment for prior-period overstatement of workers’ compensation expense, net of cash profit-sharing expense. It increased Q1 gross profit by $2.3 million, operating income by $2.0 million and net income by $1.3 million; management said it was not material to the current or prior periods.
- Operating income more than doubled, also benefiting from the prior-year $1.0 million fixed-asset impairment and lower foreign-currency losses. R&D and engineering expense rose 16.8% to $9.7 million, primarily due to professional fees, profit-sharing and personnel costs.
- Cash was down from year-end despite higher earnings, primarily because of working-capital needs and cash payments. Foreign subsidiaries held $96.6 million that could face additional tax if repatriated; the company said it had no plans to repatriate those funds.
Outlook, risks and contingencies
- Management estimated full-year 2014 gross margin of 44%–45%, an effective tax rate of 37%–39%, and capital spending of $22–$24 million. It gave no clear numerical full-year sales or profit guidance.
- The company expected Asia/Pacific to report an operating loss for 2014; management said it was too early to estimate whether Europe would achieve an operating profit.
- Management expected steel prices to increase during Q2 2014. Steel is a major raw material, and higher costs may pressure margins if not offset by pricing. Results are seasonal, and adverse weather can delay construction activity.
- A tentative settlement in principle was reached in April 2014 regarding Hawaii product-corrosion litigation and related insurance disputes. No final, enforceable agreement existed; potential uninsured liability could substantially exceed the tentative settlement, and the amount or range could not be reasonably estimated. A separate Nishimura case was closed after summary judgment for the company, subject to appeal.
- Disclosure controls were concluded to be ineffective because of unremediated material weaknesses in controls over goodwill valuation and indefinite-lived in-process research and development impairment assessments. Management stated the weaknesses had not caused a misstatement of the reported statements; remediation was expected to be completed in Q4 2014.
- Other disclosed risks include economic and construction conditions, competition, customer and supplier health, foreign-exchange exposure (not currently hedged), acquisition activity and international trade or political conditions.
Investor verification points
- Assess the sustainability of margin and earnings growth, including the $1.3 million net-income benefit from the out-of-period adjustment and prior-year impairment comparison.
- Track cash conversion, receivables and inventory as seasonal working capital builds unwind, and compare capital spending with the $22–$24 million estimate.
- Monitor steel prices, selling-price trends and whether North America’s volume-led growth can offset lower average selling prices.
- Verify progress on internal-control remediation and the company’s next goodwill and indefinite-lived intangible impairment assessments.
- Follow whether the tentative litigation settlement becomes final and enforceable, its conditions and insurance coverage.
- Review segment operating performance, especially the expected Asia/Pacific loss and uncertain Europe profitability, and the use or tax implications of foreign-held cash.