Simpson Manufacturing Co., Inc. — Q3 2020 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Simpson designs, manufactures, and sells building construction products through North America, Europe, and Asia/Pacific segments. Wood construction products accounted for 85% of Q3 sales; concrete products accounted for 15%.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $364.3 million | $309.9 million | $974.0 million | $874.0 million |
| Gross profit / margin | $173.2 million / 47.6% | $137.6 million / 44.4% | $452.7 million / 46.5% | $382.1 million / 43.7% |
| Operating income | $91.3 million | $61.0 million | $212.9 million | $144.6 million |
| Net income | $67.1 million | $43.7 million | $157.4 million | $105.9 million |
| Diluted EPS | $1.54 | $0.97 | $3.59 | $2.35 |
Cash flow and liquidity. Nine-month operating cash flow was $129.6 million, versus $149.2 million a year earlier; capital expenditures were $20.9 million. Cash and equivalents totaled $311.5 million at September 30, 2020, and working capital was $629.2 million. The company had $75.0 million outstanding under its credit facility and $227.5 million of available credit. It repaid another $25.0 million on October 30. Cash exceeded reported debt by approximately $236.5 million.
Other key items. Nine-month cash returned to shareholders included $62.7 million of share repurchases and $30.2 million of dividends paid. The quarterly dividend was $0.23 per share. The company repurchased 902,340 shares during the first nine months at an average $69.46 per share; approximately $37.3 million remained under the authorization, which expires December 31, 2020.
Material changes versus prior periods
- Q3 sales rose 17.5%; nine-month sales rose 11.4%. North America drove the gains, with Q3 sales up 19.4% and nine-month sales up 14.3%. Management cited the return of a nationwide home-center customer, higher housing starts, and stronger repair-and-remodel activity.
- Q3 gross margin increased to 47.6% from 44.4%; the nine-month margin rose to 46.5% from 43.7%. Lower material costs and factory overhead, including effects of higher production, were partly offset by higher labor, warehouse, and shipping costs.
- Europe nine-month sales fell 5.6%, with management citing lower volumes associated with COVID-related plant closures and unfavorable currency translation. Europe Q3 sales increased 6.0%, including approximately $2.1 million of favorable currency translation.
- Operating cash flow declined despite higher earnings, primarily reflecting working-capital movements, including an $87.2 million increase in receivables. Cash used for financing was lower year over year, in part reflecting net credit-facility borrowing.
Outlook, commentary, and risks
- Management reinstated and updated its 2020 outlook. It estimated full-year sales growth of 9.0%–10.0%, gross margin of approximately 45.0%–46.0%, operating expenses of 25.0%–26.5% of sales, and an effective tax rate of 24.5%–26.0%.
- Management expected 2021 gross and operating margins to pull back from 2020 expectations, citing anticipated higher material, production headcount, customer-engagement, and growth-investment costs.
- COVID-19 had not significantly adversely affected results through Q3, according to management, but its duration and effects remained uncertain. The company reported that facilities were operating and it had not experienced significant supply-chain disruption; it warned that future restrictions, economic weakness, or disruptions could affect demand, costs, and operations.
- Key exposures include the cyclicality and seasonality of construction and U.S. housing, steel and other raw-material costs, foreign exchange, variable-rate debt, and SAP system implementation. The SAP rollout was targeted for company-wide completion in 2022, dependent in part on travel restrictions; implementation and support costs were $9.1 million for the first nine months.
- The company disclosed the Gentry Homes litigation over alleged corrosion of hurricane straps and anchors. It denied liability and said it would vigorously defend the claims; it could not reasonably estimate the likelihood or range of loss, and noted that some or all claims might be insured.
- The company reported compliance with credit covenants and effective disclosure controls. It stated there were no material changes to previously reported risk factors and no off-balance-sheet arrangements at quarter-end.
Important facts for investors to verify
- Whether the sales rebound and strength in housing and repair-and-remodel demand continued after the quarter, and how much growth depended on the returning home-center customer.
- Whether the 2020 outlook was achieved and whether the anticipated 2021 margin decline materialized, particularly as materials, labor, and shipping costs changed.
- Cash conversion and working-capital trends, especially receivables and inventory, alongside capital spending and shareholder returns.
- Subsequent credit-facility repayments, remaining borrowing availability, and the timing of any share repurchases under the authorization expiring at year-end.
- Developments in the Gentry Homes case, including insurance coverage and any ability to estimate potential exposure.