Simpson Manufacturing Co., Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company designs, manufactures and sells building construction products across North America, Europe and Asia/Pacific. Financial statements are unaudited.
Financial performance
- Q2 revenue: $593.2 million, up 44.6% year over year. Growth reflected 2021 price increases and ETANCO, acquired April 1, 2022, which contributed $80.3 million of Q2 sales.
- Q2 profitability: Gross profit was $259.3 million, up 32.0%; gross margin declined to 43.7% from 47.9%. Operating income rose to $133.1 million from $101.7 million. Net income was $93.6 million versus $72.5 million; diluted EPS was $2.16 versus $1.66.
- Six-month results: Revenue was $1.087 billion, up 43.4%; gross profit was $496.1 million, up 38.3%. Gross margin decreased to 45.6% from 47.3%. Net income increased to $188.1 million from $122.9 million, and diluted EPS to $4.34 from $2.82.
- Cash flow: For the first six months, operating activities provided $138.5 million, compared with $81.6 million a year earlier. Investing activities used $833.6 million, principally for ETANCO; financing activities provided $631.5 million, largely from acquisition-related borrowings. Cash declined to $246.1 million from $301.2 million at year-end 2021.
- Liquidity and debt: Current assets were $1.205 billion and current liabilities $361.4 million. Debt was $694.4 million outstanding under the amended credit facility, excluding deferred financing costs; balance-sheet debt was approximately $687.9 million net of issuance costs. The company reported $203.1 million of available revolving credit lines across its credit facilities and compliance with financial covenants.
- Capital returns: The company repurchased 455,030 shares for $46.3 million in the first half and declared $0.51 per share in dividends. A further $0.26 quarterly dividend was declared after quarter-end.
Material changes and unusual items
- ETANCO, a French fastener and fixing-products company, was acquired for $805.4 million net of cash acquired. The preliminary purchase-price allocation added substantial goodwill and intangible assets; it remains subject to change. ETANCO recorded $80.3 million in post-acquisition sales and a $2.0 million net loss for the period included in Q2.
- Q2 results included $9.2 million of acquired-inventory fair-value expense, $5.9 million of acquisition and integration costs, and acquired-intangible amortization. Management said ETANCO integration was progressing to plan but no synergies had yet been realized; approximately $30 million of annual run-rate operating-income synergies remain expected following integration.
- Higher raw-material costs and ETANCO’s lower gross-margin profile pressured consolidated margins. Foreign-currency translation also reduced European sales. Q2 comprehensive income included a sizable negative translation adjustment, partly offset by hedge-related gains.
- Goodwill rose to $492.3 million and intangible assets to $357.7 million, principally due to the acquisition. The company also increased debt substantially to fund the transaction.
Outlook, risks and contingencies
- Updated FY2022 outlook: operating margin of 19.0%–21.0%, including $20–$25 million of ETANCO integration and transaction costs; interest expense of approximately $10.4 million; effective tax rate of 25.5%–26.5%; and capital expenditures of $80–$90 million.
- Management expected sales to increase in Q3 year over year even if demand weakened, supported by pricing. It anticipated margin pressure in the second half as higher-cost raw materials flowed through inventory. U.S. housing demand had begun to soften amid supply constraints, inflation and rising interest rates.
- Key risks include construction-market cyclicality, steel and other input-cost volatility, logistics and labor pressures, foreign-exchange movements, acquisition integration and realization of expected synergies, and the effects of COVID-19 and geopolitical events. The company suspended sales and distribution to Russia and Belarus; estimated annual sales to those countries would have been under $5 million.
- The company reported no legal proceedings expected to have a material adverse effect, while noting product-liability and other claims could have uncertain outcomes. Disclosure controls and internal control over financial reporting were assessed as effective; ETANCO was being integrated and was expected to be excluded from the 2022 internal-control assessment.
Investor verification priorities
- Track organic demand, pricing, volume and gross-margin trends separately from ETANCO’s contribution.
- Verify ETANCO’s final purchase-price allocation, integration costs, operating performance and progress toward the stated synergy target.
- Monitor raw-material and logistics costs, inventory levels, and whether pricing offsets cost inflation as management expects.
- Review debt, interest expense, covenant headroom and available liquidity following the acquisition financing.
- Compare full-year results with the stated margin, tax, interest and capital-spending outlook, and assess the impact of housing-market and currency changes.