Simpson Manufacturing Co., Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Simpson designs, manufactures and sells building construction products, principally wood and concrete products, across North America, Europe and Asia/Pacific. Results are seasonal and management cautions that one quarter is not indicative of future periods.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $493.6 million | $347.6 million | +42.0% |
| Gross profit / margin | $236.8 million / 48.0% | $162.3 million / 46.7% | Margin +1.3 points |
| Income from operations | $124.4 million | $68.4 million | +81.9% |
| Net income | $94.6 million | $50.4 million | +87.7% |
| Diluted EPS | $2.18 | $1.16 | +87.9% |
| Operating cash flow | $44.7 million | $17.8 million | +$26.8 million |
| Capital expenditures | $17.8 million | $10.5 million | +$7.3 million |
Revenue growth was primarily attributed to four product price increases implemented during 2021. Those increases also supported the improved gross margin, partly offset by higher raw-material costs. Operating income included $7.0 million of ETANCO acquisition-related costs and a $1.1 million gain on asset disposal. The effective tax rate declined to 23.7% from 24.3%. Cash dividends declared were $0.25 per share, versus $0.23.
Segments and material changes
- North America: Sales rose 46.0% to $438.7 million; operating income increased $62.7 million. Higher pricing was the main sales driver.
- Europe: Sales rose 16.2% to $51.5 million, partly offset by an estimated $3.7 million foreign-currency translation impact. The segment recorded a $1.4 million operating loss, primarily reflecting ETANCO-related professional fees.
- Asia/Pacific: Sales rose 21.8% to $3.4 million; management describes this segment as not significant to overall performance.
- Wood products accounted for 88% of sales, compared with 87% a year earlier; concrete products accounted for 12%, compared with 13%.
Management said 2021 price increases could contribute approximately $300 million of additional 2022 net sales compared with 2021. It expects raw-material costs to catch up with pricing as higher-cost inventory flows through cost of sales; margin compression was anticipated in the latter half of 2022.
Liquidity, debt and capital allocation
At March 31, cash and cash equivalents were $984.4 million, current assets were $1.788 billion and current liabilities were $306.8 million. Debt was $693.2 million net of issuance costs, including $22.5 million current and $670.7 million long term; the company reported $700.0 million outstanding before issuance costs. The company was in compliance with its financial covenants. Operating cash flow was partly constrained by working capital, including an $89.8 million increase in receivables. Cash flow from operations less capital expenditures was approximately $26.9 million, calculated from reported figures.
On March 30, the company entered a five-year amended credit facility with a $450 million term loan and a $450 million revolving facility; it borrowed $450 million under the term loan and $250 million under the revolver to fund part of ETANCO’s purchase price. The variable-rate debt is partly hedged with interest-rate swaps. On April 1, the company acquired French fastener and fixing-products manufacturer ETANCO for $800 million net of cash and used approximately $800 million of funds held in foreign operations. The filing does not provide a clear post-acquisition cash or debt balance.
Q1 share repurchases totaled $21.3 million for 194,745 shares at an average $109.28 per share; approximately $78.7 million remained under the $100 million authorization. The board changed its capital-return target to 35% of free cash flow from 50%. A $0.26-per-share dividend was declared May 4, payable July 28, 2022.
Outlook, risks and contingencies
- For full-year 2022, management expected an operating margin of 19.0%–20.0%, including ETANCO and $15 million–$17 million of integration and transaction costs; approximately $8 million–$10 million of those costs were described as incremental.
- Expected 2022 interest expense was approximately $12 million, including hedges and bank-fee amortization. The expected effective tax rate was 25.5%–26.5%; capital expenditures were projected at $65 million–$70 million, subject to reassessment for ETANCO.
- Management identified housing-market uncertainty, rising interest rates and inflation, steel and other raw-material costs, logistics and sourcing constraints, labor tightness, currency movements, and ETANCO integration as risks. It warned that unoffset higher steel prices could reduce 2022 operating margin by 200–300 basis points versus 2021. Europe could also be affected by Ukraine-related sourcing complications; sales and distribution to Russia and Belarus were suspended, with estimated annual sales to those countries below $5 million.
- Management expected approximately $30 million of annualized ETANCO operating-income synergies within 36 months and an approximately 500-basis-point improvement in Europe operating margin by 2025. These are expectations, not achieved results.
- The company reported no environmental matters expected to have a material adverse effect and no pending legal proceedings expected to have such an effect; it cautioned that product claims and litigation outcomes remain uncertain. No material changes to previously reported risk factors were identified.
Important facts for investors to verify
- ETANCO’s post-close contribution to revenue, earnings, cash, debt and integration costs, and progress toward projected synergies.
- Whether pricing continues to offset steel, logistics and labor inflation as higher-cost inventory flows through cost of sales.
- Actual full-year operating margin, interest expense and capital spending versus management’s outlook.
- Post-acquisition liquidity, foreign-cash availability and debt levels, including interest-rate exposure and covenant headroom.
- Housing demand, European sourcing and currency trends, and any developments in product-related claims or litigation.