Simpson Manufacturing Co., Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company designs, manufactures and sells building construction products, primarily wood and concrete products, through North America, Europe and Asia/Pacific segments. Financial statements are unaudited.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $396.7 million | $364.3 million | $1,154.7 million | $974.0 million |
| Gross profit / margin | $198.0 million / 49.9% | $173.2 million / 47.6% | $556.8 million / 48.2% | $452.7 million / 46.5% |
| Operating income | $100.6 million | $91.3 million | $270.7 million | $212.9 million |
| Net income | $73.8 million | $67.1 million | $196.7 million | $157.4 million |
| Diluted EPS | $1.70 | $1.54 | $4.52 | $3.59 |
- Q3 net sales grew 8.9%; nine-month sales grew 18.5%. Management attributed growth to product price increases and, year to date, higher sales volumes. Q3 volume was marginally higher overall, with lower home-center channel sales partly offsetting growth elsewhere.
- Q3 gross margin rose 2.3 percentage points; nine-month margin rose 1.7 points. Price increases were the principal driver, partly offset by higher material costs. Nine-month operating expenses increased to $286.1 million from $240.0 million, including higher personnel, professional-fee and stock-compensation costs.
- North America generated $338.6 million of Q3 sales, up 6.8%; Europe generated $54.8 million, up 22.5%, largely on higher volumes and favorable currency translation. Asia/Pacific sales were $3.3 million. Wood products represented 85% of Q3 sales; concrete products represented 15%.
Cash flow, liquidity and capital
- Nine-month operating cash flow was $122.1 million, compared with $129.6 million. Working-capital investment included $104.2 million more inventory and $73.2 million more receivables; higher accrued liabilities and payables provided partial offsets.
- Investing cash outflow was $41.2 million, including $31.3 million of capital expenditures and $9.8 million of equity-method investments. Financing cash outflow was $61.3 million, including $30.8 million of dividends and $24.1 million of share repurchases.
- At September 30, cash and equivalents were $294.2 million; current assets were $949.7 million and current liabilities were $245.5 million. Inventory was $385.5 million, up from $283.7 million at December 31, 2020.
- The company reported $300 million available under its revolving credit facility, extended in July 2021 to July 2026, and compliance with its financial covenants. The debt disclosures are not fully consistent: MD&A says the company was debt-free, while Note 12 reports a $0.6 million outstanding balance across credit facilities. The filing reports no debt subject to interest-rate fluctuations at quarter-end.
- The company repurchased 222,060 shares for $24.1 million during the first nine months at an average $108.64 per share; approximately $75.9 million remained under its $100 million authorization, which was set to expire December 31, 2021. The board declared a $0.25-per-share dividend payable January 27, 2022.
Outlook, risks and notable items
- Updated FY2021 outlook: operating margin of 20.0%–22.0%, effective tax rate of 25.0%–26.0%, and capital expenditures of $55–$60 million.
- Management expected full-year 2022 operating margin to decline approximately 400–500 basis points year over year. It cited higher steel and other raw-material costs, the lag between input costs and selling-price changes, sourcing and logistics complications, and tight labor conditions. North American steel cost per pound in inventory was reported approximately 61% higher than in September 2020, despite a 5% decline in inventory pounds.
- Management described COVID-19 as an ongoing source of uncertainty, including possible effects from variants and supplier operations, but reported no significant supply-chain disruptions to date. Other risks include construction cyclicality and seasonality, weather, foreign exchange, commodity-price volatility, tariffs and product-related claims.
- The filing identifies no legal proceedings expected to have a material adverse effect. A Hawaii product-related case was settled without admission of liability or uninsured liability to the company; dismissal was expected by January 4, 2022. Management stated environmental matters were not expected to materially affect results.
- The company reported effective disclosure controls. Its phased SAP ERP implementation was ongoing; management said no Q3 internal-control changes materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- Whether subsequent steel, freight and other input costs, and the timing or effectiveness of price increases, support or worsen the projected 2022 margin decline.
- Whether inventory and receivables growth converts into sales and operating cash flow, and whether working-capital needs remain elevated.
- The exact quarter-end borrowing balance, given the difference between the $0.6 million balance in Note 12 and management’s “debt free” statements.
- Progress against the stated FY2021 margin and capital-spending outlook, alongside demand and volume trends by segment and channel.
- Developments in the product-related settlement and any other claims, as well as potential operating or control risks as SAP implementation continues.