Simpson Manufacturing Co., Inc. — Q1 2021 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2021, compared with Q1 2020. Simpson designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific. Wood construction products generated 87% of sales.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $347.6 million | $283.7 million |
| Gross profit / margin | $162.3 million / 46.7% | $129.7 million / 45.7% |
| Operating income / margin | $68.4 million / 19.7% | $49.4 million / 17.4% |
| Net income | $50.4 million | $36.8 million |
| Diluted earnings per share | $1.16 | $0.83 |
| Operating cash flow | $17.8 million | $12.7 million |
- Net sales rose 22.6%, primarily on higher volumes. North America sales increased 20.7%; Europe rose 35.3%, including about $3.6 million of favorable foreign-exchange translation; Asia/Pacific rose 47.5% from a small base.
- Gross margin improved mainly because factory and labor costs were lower as a percentage of sales, partly offset by higher material costs. Operating expenses rose 16.9% to $94.0 million, including higher stock-based compensation, professional fees and personnel costs.
- Cash and cash equivalents were $257.4 million at quarter-end, down from $274.6 million at December 31, 2020. Current assets were $819.0 million and current liabilities $224.8 million. Operating cash flow was affected by increases in receivables, inventory and other current assets.
- No debt was outstanding at March 31, 2021. The company reported $304 million of revolving credit lines and compliance with financial covenants. Its $300 million primary facility matures July 23, 2022.
- Investing cash outflow was $15.7 million, including $10.5 million of capital expenditures and a $5.3 million venture-capital-fund investment. Financing cash outflow was $15.4 million, chiefly dividends and employee tax payments related to vested stock awards.
Changes, outlook and risks
- Compared with Q1 2020, sales, gross profit, operating income and net income increased. Net sales benefited from the return of Lowe’s, higher housing starts, favorable weather and home repair and remodeling activity. The effective tax rate rose to 24.3% from 21.3%.
- Management said Q1 and part of 2020 benefited from Lowe’s returning; it does not expect the remaining 2021 quarters to match Q1’s year-over-year sales growth rate. Management expected short-term operating profit improvement from announced price increases and lower average material costs, while warning that higher steel costs and sourcing/logistics complications could pressure margins toward year-end 2021 or early 2022.
- Updated full-year 2021 outlook: operating margin of 19.5%–22.0%; effective tax rate of 25.0%–26.0%; capital expenditures of $50–$55 million. Management said outlook reflected Q1 actual results and improved visibility on pandemic restrictions.
- Key risks include construction-market cyclicality and seasonality, steel and other raw-material price increases, supply and sourcing constraints, foreign-exchange movements, and continuing COVID-19 uncertainty. SAP implementation was completed across North America in 2021; company-wide completion was expected during 2022, with related operating expenses expected to rise through 2024.
- A settlement in principle had been reached in the Gentry product case, but a definitive agreement was still being negotiated. The company said some or all damages may be covered by insurance; the filing does not provide a clear settlement amount. Management did not expect environmental matters or current litigation to have a material adverse effect, while noting litigation outcomes are uncertain.
- The Board declared a quarterly dividend of $0.25 per share on May 4, 2021, up from $0.23, payable July 22 to holders of record July 1. The filing reported $100 million available under the share-repurchase authorization, which expires December 31, 2021.
Most important facts for investors to verify
- Whether demand, housing activity and Lowe’s-related sales remain strong, and how management’s expectation for slower year-over-year growth in later quarters develops.
- Whether price increases offset steel, material and logistics cost pressures, and whether the full-year operating-margin outlook remains achievable.
- Working-capital trends: receivables and inventories rose substantially during the quarter and reduced operating cash generation relative to net income.
- Final terms and insurance coverage for the Gentry settlement, as well as any material developments in other product-related claims.
- Progress, cost and control effects of the SAP rollout, and the planned $50–$55 million of 2021 capital expenditures.