Simpson Manufacturing Co., Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company designs, manufactures and sells building construction products across North America, Europe and Asia/Pacific. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $326.1 | $304.9 | $609.7 | $564.1 |
| Gross profit | $149.8 | $134.2 | $279.5 | $244.4 |
| Gross margin | 45.9% | 44.0% | 45.8% | 43.3% |
| Income from operations | $72.2 | $53.7 | $121.6 | $83.7 |
| Net income | $53.5 | $39.6 | $90.3 | $62.2 |
| Diluted EPS | $1.22 | $0.88 | $2.05 | $1.38 |
| Operating cash flow | Not presented by quarter | $42.8 | $53.6 |
Q2 sales rose 7.0% year over year and six-month sales rose 8.1%. Higher sales and gross margins supported earnings growth. Q2 operating expenses declined to $77.7 million from $81.1 million; year-to-date expenses declined to $158.0 million from $161.0 million. The effective tax rate was 25.8% in Q2 and 24.0% for the first half.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $315.4 million at June 30, 2020, compared with $230.2 million at December 31, 2019. Working capital was $641.5 million.
- The company had $150.0 million outstanding under its revolving credit facility, drawn in March to preserve financial flexibility amid COVID-19 uncertainty. Total available credit was $153.6 million; the facility was extended to July 2022. The company reported compliance with financial covenants.
- First-half operating cash flow was $42.8 million, down from $53.6 million. Increased receivables ($95.9 million cash use) and inventory ($14.4 million cash use) weighed on cash generation.
- First-half capital expenditures were $14.1 million. Financing cash flow was $57.7 million, primarily reflecting credit-facility borrowings; the company also repurchased $62.7 million of stock and paid $20.2 million of dividends.
- The share repurchase program was temporarily suspended as of March 31. About $37.3 million remained under the $100 million authorization, which expires December 31, 2020. A $0.23-per-share dividend was declared in July, payable October 22, 2020.
Material changes and operating trends
- North America sales increased 10.7% in Q2 and 11.5% for the first half, driven principally by higher volumes and the return of a nationwide home-center customer. North America margins improved with lower material and factory-overhead costs and higher production.
- Europe sales declined 14.4% in Q2 and 11.7% for the first half, reflecting COVID-related closures and weaker volumes; currency translation also reduced reported sales. Lower production pressured margins and operating income.
- Wood construction products represented 86% of first-half sales, up from 84% a year earlier. Concrete products represented 14%, down from 16%.
- The company repurchased 902,340 shares during the first half at an average price of $69.46 per share. The share count was lower than a year earlier.
Outlook, risks and unusual items
- Management withdrew its prior full-year 2020 guidance on April 27 because of pandemic uncertainty, then provided updated estimates with its Q2 results: full-year net sales growth of 1.5%–4.0% versus 2019; gross margin of approximately 43%–45%; operating expenses of 27%–29% of sales; and an effective tax rate of 24%–26%.
- Management said the first half was not significantly adversely affected overall, citing the home-center customer’s return and continued operations at most facilities. Two major European facilities had temporarily ceased nearly all operations in late March but reopened. July sales were reported above July 2019, but future housing activity and pandemic effects remained uncertain.
- COVID-19 could affect construction demand, operations, customers, suppliers, transportation, costs and margins. The company adopted cash-preservation measures, including a hiring freeze, adjusted employee hours and suspension of repurchases. It reported no COVID-related supply-chain disruptions through the period.
- Other risks include housing-market cyclicality, steel and other input costs, foreign exchange exposure (not hedged), variable-rate debt, regulatory requirements and the ongoing SAP ERP rollout. SAP completion was targeted for the end of 2021, subject to travel restrictions; implementation-related operating expenses are expected to continue increasing through 2024.
- In the Gentry Homes litigation concerning alleged corrosion of hurricane straps and anchors, the company denies liability and intends to defend itself. It could not estimate the likelihood or range of loss; insurance may cover some or all claims. Management stated it did not expect currently identified legal proceedings to have a material adverse effect, while noting litigation outcomes are uncertain.
Investor verification priorities
- Track whether updated full-year guidance is achieved and how pandemic developments affect housing demand, sales and margins.
- Assess whether receivables and inventory growth reverse and operating cash flow strengthens.
- Monitor credit-facility borrowings, interest expense, covenant compliance and remaining liquidity.
- Evaluate the durability of North America growth and the recovery of Europe sales and margins.
- Follow developments in the Gentry litigation, insurance coverage, SAP implementation costs and timeline, and the status of share repurchases.