Simpson Manufacturing Co., Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; comparisons are with Q1 2022 unless otherwise noted.
Business context
Simpson designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific. Its products primarily serve wood and concrete construction markets. Q1 2023 includes ETANCO, acquired April 1, 2022; the prior-year comparison does not, making acquisition-driven growth an important factor in reported results.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $534.4 million | $493.6 million | Up 8.3%; ETANCO contributed $80.0 million |
| Gross profit / margin | $252.9 million / 47.3% | $236.8 million / 48.0% | Profit up 6.8%; margin down 0.7 percentage points |
| Operating income / margin | $118.4 million / 22.1% | $124.4 million / 25.2% | Income down 4.9% |
| Net income | $88.0 million | $94.6 million | Down 7.0% |
| Diluted EPS | $2.05 | $2.18 | Down 6.0% |
| Operating cash flow | $3.0 million | $44.7 million | Lower mainly due to working-capital outflows |
| Capital expenditures | $18.8 million | $17.8 million | Cash used in investing activities was $27.0 million |
| Cash and cash equivalents | $252.5 million | $984.4 million | March 31, 2022 balance reflected acquisition financing proceeds; down from $300.7 million at December 31, 2022 |
| Debt | $577.5 million | $700.0 million | $427.5 million term loan and $150.0 million revolver; $22.5 million current portion |
Current assets were $1.223 billion and current liabilities $330.7 million at March 31, 2023. Working capital excluding cash was $639.3 million. The company reported $300.0 million available under its revolving facility and $305.7 million in total available borrowing capacity across credit facilities. It was in compliance with financial covenants. Q1 dividends declared were $0.26 per share; a $0.27 per-share dividend was declared after quarter-end.
Material changes and operating performance
- North America sales fell 7.4% to $406.3 million, primarily on lower volumes. Operating income declined $21.3 million year over year.
- Europe sales rose 141.4% to $124.2 million, primarily reflecting ETANCO’s $80.0 million contribution, as well as pricing; lower volumes and approximately $2.8 million of unfavorable currency translation partly offset growth. ETANCO contributed $9.4 million of operating income, after acquired-intangible amortization and integration costs.
- Wood construction products accounted for 85% of sales, compared with 88% a year earlier; concrete products accounted for 14%, compared with 12%.
- Operating expenses rose to $133.1 million from $106.5 million, including higher personnel, selling, engineering, depreciation and amortization costs. Acquisition and integration costs declined to $1.4 million from $7.0 million.
- Reported gross margin was lower partly because ETANCO’s gross margin was 38.3%, below the company’s prior-year consolidated margin. North America gross margin improved to 50.6% from 49.7%, primarily due to lower raw-material costs.
Outlook, commentary and risks
- Management’s fiscal 2023 outlook, updated based on first-quarter results, calls for operating margin of 19%–21%, an effective tax rate of 25%–26%, and capital expenditures of $90–$95 million. The filing does not provide a revenue or EPS forecast.
- Annual interest expense on the $577.5 million outstanding under the amended credit facility was expected to be approximately $9.7 million, including benefits from interest-rate and cross-currency swaps.
- Management expects 2023 operating-margin compression versus 2022, citing product price decreases and higher operating expenses, partly offset by lower average steel costs. It also cited tight labor markets and unusually wet winter weather in the western U.S. as potential margin pressures.
- Demand is exposed to housing and construction cycles, interest rates, inflation, construction activity and weather. Steel-price volatility may pressure margins; the company does not hedge steel prices and may not be able to offset cost increases with pricing.
- ETANCO integration is ongoing, with further planned costs in 2023. Management reported progress on integration and some realized synergies, while noting macroeconomic conditions may delay some opportunities.
- Variable-rate debt, foreign-exchange movements, supply and demand volatility, and the ability to access capital are additional stated risks. Derivatives are used to manage foreign-currency and interest-rate exposures, not for speculation.
- The company reported no legal proceedings it expected to have a material adverse effect, but noted uncertainty around product-related claims and litigation. It does not expect environmental matters to materially affect results.
- Disclosure controls were assessed as effective at the reasonable-assurance level; no material change in internal control over financial reporting was identified during the quarter.
Investor verification points
- Separate organic performance from ETANCO’s contribution when assessing reported sales and earnings growth.
- Track North America volumes, pricing and operating income, and whether lower steel costs offset price reductions and expense growth.
- Monitor operating cash conversion: Q1 operating cash flow was $3.0 million, with receivables and inventory increases among the major uses of cash.
- Check progress against the 19%–21% operating-margin outlook, $90–$95 million capital-spending plan and ETANCO integration costs and synergies.
- Review debt, interest-rate exposure, borrowing capacity and covenant compliance, alongside product-liability contingencies and construction-market conditions.