Simpson Manufacturing Co., Inc. — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020. The filing compares results with Q1 2019. Simpson designs, manufactures and sells building construction products across North America, Europe and Asia/Pacific.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $283.7 million | $259.2 million | +9.4% |
| Gross profit / margin | $129.7 million / 45.7% | $110.3 million / 42.5% | Margin +3.2 percentage points |
| Income from operations | $49.4 million | $30.0 million | Increased |
| Net income | $36.8 million | $22.7 million | Increased |
| Diluted EPS | $0.83 | $0.50 | Increased |
| Operating cash flow | $12.7 million | $9.6 million | Increased |
Gross-margin improvement reflected lower material and factory overhead costs, with higher warehouse, labor and shipping costs partly offsetting those benefits. The effective tax rate was 21.3%, versus 22.5%, largely due to a windfall tax credit on vested restricted stock units.
Segments and material changes
- North America: Sales rose 12.5% to $249.1 million; operating income increased to $53.6 million from $32.8 million. Higher sales volumes and improved gross margin were key contributors.
- Europe: Sales fell 8.5% to $32.7 million, and the segment reported a $1.7 million operating loss versus a $0.4 million loss. COVID-19 disruptions, lower concrete-product sales and currency translation weighed on results.
- Asia/Pacific: Sales decreased 7.2% to $1.9 million; the segment recorded a $0.6 million operating loss.
- Wood construction products made up 86% of sales, compared with 84% in Q1 2019. Wood-product sales increased 11.4%; concrete-product sales decreased 1.4%.
Cash, debt and capital allocation
- Cash and cash equivalents were $301.7 million at March 31, 2020, versus $230.2 million at year-end 2019. Working capital was $589.1 million.
- The company drew $150.0 million on its revolving credit facility in March to preserve flexibility amid COVID-19 uncertainty. Long-term debt was $150.0 million; the filing reports an average annualized rate of approximately 1.9%. It states available credit as both $153.8 million and $153.6 million in different sections.
- Operating cash flow was $12.7 million; investing activities used $6.2 million, including $6.8 million of capital expenditures. Financing activities provided $68.6 million, primarily reflecting the credit-facility draw, partly offset by $62.7 million in share repurchases and $10.2 million in dividends paid.
- Simpson repurchased 902,340 shares during the quarter at an average $69.46 per share. It suspended the share-repurchase program as of March 31; approximately $37.3 million remained under the authorization. The board declared a $0.23-per-share dividend payable July 23, 2020.
Outlook, risks and unusual items
- Management withdrew full-year 2020 guidance and the financial targets in its 2020 Plan, citing uncertainty about the duration and economic effects of COVID-19. It said it could not provide updated guidance.
- April 2020 sales were approximately 15% lower than March sales. Management anticipated weaker housing starts and construction activity, and reported that two large European facilities had temporarily ceased most operations under government orders. North American facilities continued operating; no COVID-related supply-chain disruption had been experienced through the filing date.
- Mitigation measures included postponing nonessential capital expenditures, reducing operating costs and discretionary spending, aligning production with demand, a hiring freeze, and adjusting employee hours. Management also emphasized cash preservation.
- The company drew on its credit facility and temporarily suspended repurchases to maintain financial flexibility. COVID-19 impacts on future results, liquidity and operations could not be reasonably estimated.
- A product-related suit, Gentry Homes v. Simpson Strong-Tie, alleges warranty and negligent-misrepresentation claims involving corrosion of certain products. The company disputes liability, says some claims may be insured, and cannot reasonably estimate the likelihood or range of loss.
- Foreign-currency translation reduced other comprehensive income by $7.6 million. The filing also identifies variable-rate debt, steel-price exposure, construction-market cyclicality and ongoing SAP ERP implementation as risks.
Important facts for investors to verify
- How COVID-19 affected monthly sales, demand, plant operations and margins after April 2020, particularly in Europe and North America.
- The company’s cash use, debt repayment plans, covenant headroom and actual available revolving credit; the filing gives two different available-credit amounts.
- Whether the suspension of share repurchases continues and whether the declared quarterly dividend is maintained.
- Developments in the Gentry litigation, including potential insurance coverage and any estimable exposure.
- Progress, cost and timing of the SAP rollout, which management said could be affected by travel restrictions.