Simpson Manufacturing Co., Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. The company designs, manufactures and sells building construction products across North America, Europe and Asia/Pacific. Results include ETANCO from its April 1, 2022 acquisition date.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $553.7 million | $396.7 million | $1,640.5 million | $1,154.7 million |
| Gross profit | $244.5 million | $198.0 million | $740.6 million | $556.8 million |
| Gross margin | 44.2% | 49.9% | 45.1% | 48.2% |
| Income from operations | $122.8 million | $100.6 million | $380.3 million | $270.7 million |
| Net income | $88.2 million | $73.8 million | $276.4 million | $196.7 million |
| Diluted EPS | $2.06 | $1.70 | $6.40 | $4.52 |
- Sales increased 39.6% in Q3 and 42.1% year to date. Growth reflected 2021 product price increases and ETANCO sales of $67.5 million in Q3 and $147.8 million year to date.
- Gross margin contracted as ETANCO has a lower margin profile, acquired-inventory fair-value step-up costs weighed on results, and raw-material costs increased. The company reported $2.9 million of Q3 and $12.2 million of nine-month inventory step-up expense.
- Q3 operating margin was approximately 22.2%, versus 25.4% a year earlier; nine-month operating margin was approximately 23.2%, versus 23.4%.
- Cash provided by operating activities was $263.4 million for the nine months, versus $122.1 million. Investing activities used $845.5 million, primarily for ETANCO; financing activities provided $586.4 million.
- At September 30, cash and equivalents were $309.3 million. Total debt was $688.8 million, including $22.5 million current and $660.2 million long-term net of issuance costs. The company reported $205.1 million of available revolving credit lines across its credit facilities and compliance with financial covenants.
- Cash dividends paid in the first nine months were $32.8 million; $74.6 million was spent repurchasing shares. A $0.26-per-share dividend was declared after quarter-end.
Material changes and business developments
- The company acquired French fastener and fixing-products manufacturer ETANCO for $805.4 million net of cash. The preliminary purchase-price allocation included substantial goodwill and intangible assets and remained subject to measurement-period changes.
- ETANCO contributed to Europe’s reported sales growth, but Europe’s Q3 operating income declined year over year. Integration costs, acquired-intangible amortization, inventory step-up charges and foreign-exchange translation affected results. Management said integration was progressing and continued to expect approximately $30 million of annual run-rate operating-income synergies, while noting that macroeconomic conditions could delay opportunities.
- North America sales increased, but segment gross margin fell to 47.5% in Q3 from 52.1%, reflecting higher raw-material, factory, overhead and labor costs.
- CEO Karen Colonias was scheduled to step down effective December 31, 2022; President and COO Michael Olosky was elected to succeed her beginning January 1, 2023.
Outlook, risks and contingencies
- For fiscal 2022, management expected an operating margin of 20.0%–21.0%, including $16–$18 million of ETANCO integration and transaction costs; interest expense of approximately $9.8 million; an effective tax rate of 25.0%–26.0%; and capital expenditures of $55–$65 million.
- Management anticipated continued raw-material cost pressure and margin compression for the remainder of 2022. It cited declining single-family housing demand amid supply-chain constraints, inflation and higher interest rates, partly offset by stronger multifamily starts. Higher input and logistics costs, labor tightness, steel-price changes, foreign-exchange movements and construction-market cyclicality were identified as risks.
- Interest-rate and currency derivatives were used to hedge exposures; the company stated it did not use steel-price hedges. It reported no material adverse environmental matter expected and no legal proceedings expected to materially harm its financial condition, cash flows or results, while noting product claims and litigation outcomes are uncertain.
- Management reported effective disclosure controls and internal control over financial reporting. ETANCO was being integrated and was expected to be excluded from the 2022 internal-control assessment under the applicable acquisition guidance.
Key facts for investors to verify
- Whether ETANCO integration delivers the expected synergies, and how its margins, acquired intangible amortization and integration costs evolve.
- Whether pricing continues to offset steel, other raw-material, labor and logistics costs, particularly as construction demand changes.
- Debt repayment, interest expense and available borrowing capacity under the credit facilities, including the effects of hedging and variable-rate exposure.
- Performance against the stated 2022 outlook and capital-expenditure range; the filing provides no specific 2023 financial guidance.
- Progress on the CEO transition, share repurchases and the remaining authorization, which was scheduled to expire December 31, 2022.