Simpson Manufacturing Co., Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Simpson designs, manufactures and sells building construction products through North America, Europe and Asia/Pacific. Results are unaudited; dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $410.3 | $326.1 | $757.9 | $609.7 |
| Gross profit / margin | $196.4 / 47.9% | $149.8 / 45.9% | $358.7 / 47.3% | $279.5 / 45.8% |
| Operating income / margin | $101.7 / 24.8% | $72.2 / 22.1% | $170.1 / 22.4% | $121.6 / 19.9% |
| Net income | $72.5 | $53.5 | $122.9 | $90.3 |
| Diluted EPS | $1.66 | $1.22 | $2.82 | $2.05 |
Operating margins are calculated from reported operating income and sales. Q2 net sales increased 25.8%; six-month sales increased 24.3%. Management attributed growth to price increases and higher sales volumes, with Q2 volume growth described as marginal. Wood construction products generated 87% of Q2 sales; concrete products generated 13%.
- Cash flow: Six-month operating cash flow was $81.6, up from $42.8. Investing used $26.2, including $19.3 of capital expenditures and $6.8 invested in a venture capital fund. Financing used $25.6, primarily dividends of $20.0 and $5.3 of employee share-tax withholding. Cash increased $31.2 to $305.8.
- Liquidity and debt: Current assets were $901.7 and current liabilities $232.5. The company reported no outstanding borrowings at June 30; its $300.0 million primary revolver was fully available, with total revolving lines of $304.0 million. It was in compliance with credit covenants. A July amendment extended the primary facility to July 12, 2026.
- Balance sheet and shareholder returns: Total assets were $1,374.0 and stockholders’ equity $1,086.9. Six-month dividends declared were $0.48 per share. The board declared a further $0.25 quarterly dividend in July. No shares were repurchased under the authorization in the first half; in July, the company repurchased 182,752 shares for $20.0 at an average $109.44 per share.
Changes versus the prior comparable period
- Q2 gross margin rose 2.0 percentage points and six-month gross margin rose 1.5 points, with price increases and lower labor/factory costs contributing; higher material costs partly offset gains.
- Q2 operating expenses rose to $94.7 from $77.7; six-month expenses rose to $188.7 from $158.0. Higher personnel costs, professional fees, commissions and SAP costs contributed. Six-month SAP implementation and support costs were $9.3, up $3.4 year over year.
- Six-month effective tax rate increased to 25.8% from 24.0%; Q2 rate increased to 26.9% from 25.8%.
- Europe sales growth included favorable currency translation of approximately $5.3 in Q2 and $8.8 for the first half. North America remained the largest segment.
Outlook, commentary and risks
- On July 26, 2021, the company provided full-year 2021 outlook: operating margin of 19.5%–21.0%, effective tax rate of 25.0%–26.0%, and capital expenditures of $55–$60 million.
- Management warned that steel costs, sourcing and logistics complications, and a tight labor market could pressure second-half 2021 margins. Since June 2020, North American inventory pounds had fallen 23%, while weighted-average cost per pound had risen about 49%. Management estimated steel-cost increases could reduce operating margins by 300–400 basis points over the next 12–18 months.
- Demand is exposed to housing starts, construction activity, seasonality, weather and raw-material price volatility. COVID-19 effects and potential future disruptions remained uncertain; management reported no significant supply-chain disruptions to date. The filing says higher sales prices may support future sales but could be offset by rising costs.
- The company’s SAP rollout was complete in North America and underway in parts of Europe; company-wide implementation was expected during 2022. Operating expenses related to the project were expected to continue increasing through 2024.
- Contingency: In the Gentry Homes product case concerning alleged corrosion of hurricane straps and anchors, the parties had reached a settlement in principle and were negotiating a definitive agreement. If no agreement is reached, the case could proceed. The company believed some or all damages may be covered by insurance; the filing does not state a clear settlement amount or reserve.
- Other cited risks include foreign-exchange exposure, steel and other input costs, variable-rate borrowing exposure, and product-related claims. The company stated that no material risk-factor changes had occurred since its 2020 Form 10-K.
Important facts for investors to verify
- Whether price increases continue to offset steel, freight, sourcing and labor cost inflation, and how the projected 300–400 basis-point margin pressure develops.
- Progress against the 2021 operating-margin and capital-expenditure outlook, including the effect of seasonal demand and housing/construction conditions.
- Final terms and insurance coverage, if any, for the Gentry Homes settlement.
- Execution, costs and control implications of the remaining SAP implementation phases.
- Capital allocation after the July repurchase, including remaining authorization, dividends and the company’s revised policy to return 50% of free cash flow.