Simpson Shares Up on Q4 Earnings Beat

Shares of Simpson Manufacturing Co., Inc. (SSD) gained 0.41% on reporting upbeat third-quarter 2013 earnings on Feb 6. Results improved 33% to 16 cents per share from 12 cents in the year-earlier quarter and were ahead of the Zacks Consensus Estimate of 12 cents.

Operational Update

Total revenue increased 10.8% to $195.9 million from $160 million in the year-ago quarter, surpassing the Zacks Consensus Estimate of $159 million. The rise was primarily attributable to improved sales in Asia Pacific and North America. North American sales benefited from improved economic conditions, including an increase in housing starts compared with the prior-year quarter. However, reduced home-center sales in the United States and slightly lower selling prices in Europe were an offset.

Cost of sales edged up 1% year over year to $90 million. Gross profit was $70 million, up 27% from $55 million in the year-ago quarter. Gross margin improved 550 basis points to 43.7% in the quarter compared with the prior-year quarter.

Research and development and engineering expenses increased 12% year over year to $9.8 million. Selling expenses increased 2% to $21.4 million from $21.1 million in the prior-year quarter. General and administrative expenses increased 7% year over year to $25.4 million. Income from operations improved to $11.9 million from a loss of $0.9 million in the prior-year quarter.

Segment Performance

Revenues in the North American segment grew 13% to $128 million from $113 million in the year-ago quarter. The growth was led by increased sales in the U.S., despite the softness in home center business. Net sales in Canada declined year over year, dragged down by lower volumes. Segment profit rose 125% year over year to $11.3 million.

Total revenue for the European segment declined 1% year over year to $27.9 million. The decline was mainly due to the $1.8 million liquidation of heavy-duty mechanical anchor inventory in the fourth quarter of 2012, which was related to the plant closure in Ireland. Excluding heavy-duty mechanical anchor sales, sales in Europe increased 5.2%, driven by increased sales volumes. The segment reported a loss of $484 million, narrower than the year ago quarter’s loss of $8.9 million in the prior-year quarter.

Asia/Pacific segment’s total revenue increased 45% to $4.2 million from $2.9 million in the year-ago quarter. The segment reported a loss of $324 million compared with $939 million in the fourth quarter of 2012.

Fiscal 2013 Performance

Simpson Manufacturing reported earnings per share of $1.05, up 21% from 87 cents in the prior year and ahead of the Zacks Consensus Estimate of $1.01. Revenues increased 7.5% year over year to $706 million, surpassing the Zacks Consensus Estimate of $705 million. The improvement was mainly driven by increased sales in North America, which benefited from improved economic conditions, including an increase in housing starts compared with 2012, despite reduced home center sales and lower selling prices.

Financial Position & Other Updates

Cash and short-term investments amounted to $251 million as of Dec 31, 2013, against $175 million as of Dec 31, 2012. Simpson’s board of directors declared a cash dividend of 12.50 cents per share. The dividend will be paid on Apr 24, 2014. The board has also authorized a share repurchase program of up to $50 million of the Company's common stock. The authorization will remain in effect through the end of 2014.

In Dec 2013, the company's North America segment sold its CarbonWrap product line to DowAksa USA, LLC for $3.8 million. The integrated CarbonWrap product line had assets of $2.0 million, which included $1.5 million of intangible assets and $0.5 million of associated goodwill. As part of the transaction, the company incurred severance costs of $0.5 million and recognized a gain of $1.4 million, before income taxes.

During the month, Simpson also completed the liquidation of its Irish subsidiary, which included nearly all of its assets and settled most of its debts. The company reclassified $2.8 million of its accumulated other comprehensive income, related to foreign exchange losses from its Irish subsidiary, to its results.

Outlook

For fiscal 2014, Simpson expects its gross margin to be between 44% and 45%. Effective 2014, tax rate will be between 37% and 39%.

Peer Performance

Among Simpson’s peers, Headwaters Incorporated (HW) reported upbeat first-quarter fiscal 2014 (ended Dec 31, 2013) results on Feb 4. Adjusted earnings improved 40% to 7 cents per share from 5 cents in the prior-year quarter. The results were also favorable when compared with the Zacks Consensus Estimate of a loss of one cent per share.

Our Take

Simpson will benefit from its strategic initiatives, which include an expanded offering of concrete construction products, specialty chemicals and wood construction products, particularly truss plate and software offerings. To support these initiatives, the company expects to hire additional personnel and provide additional resources in 2014. However, sales could be adversely affected in the first quarter of 2014 if construction starts are delayed due to prolonged cold and wet conditions

Pleasanton, Calif.-based Simpson is a leading manufacturer of wood construction products, which include connectors, truss plates, fastening systems, fasteners and shear walls. The company, through its subsidiary, Simpson Strong-Tie Company Inc., designs and engineers concrete construction products comprising adhesives, specialty chemicals, mechanical anchors and powder actuated tools.

Simpson currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include USG Corporation (USG), United Rentals, Inc. (URI). While USG Corporation holds a Zacks Rank #1 (Strong Buy), United Rentals holds a Zacks Rank #2 (Buy).