Simpson(SSD) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Presents Simpson Manufacturing Co., Inc.'s unaudited condensed consolidated financial statements and detailed notes for specified periods Condensed Consolidated Balance Sheets | ASSETS (in thousands) | June 30, 2021 | December 31, 2020 | June 30, 2020 | | :---------------------- | :------------ | :---------------- | :------------ | | Cash and cash equivalents | $305,796 | $274,639 | $315,448 | | Trade accounts receivable, net | $249,931 | $165,128 | $233,867 | | Inventories | $310,254 | $283,742 | $265,365 | | Total current assets | $901,703 | $753,139 | $834,902 | | Total assets | $1,373,974 | $1,232,569 | $1,284,503 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | June 30, 2021 | December 31, 2020 | June 30, 2020 | | :---------------------- | :------------ | :---------------- | :------------ | | Total current liabilities | $232,454 | $194,061 | $193,414 | | Long term debt, net of current portion | — | — | $150,000 | | Total liabilities | $287,069 | $251,626 | $390,291 | | Total stockholders' equity | $1,086,905 | $980,943 | $894,212 | | Total liabilities and stockholders' equity | $1,373,974 | $1,232,569 | $1,284,503 | - Total assets increased by $141.4 million (11.5%) from December 31, 2020, to June 30, 2021, primarily driven by increases in current assets, particularly trade accounts receivable and inventories[10] - Long-term debt, net of current portion, was reduced to zero as of June 30, 2021, from $150 million at June 30, 2020[10] - Total stockholders' equity increased by $105.9 million (10.8%) from December 31, 2020, to June 30, 2021[10] Condensed Consolidated Statements of Earnings and Comprehensive Income | (in thousands except per-share amounts) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $410,281 | $326,076 | $757,922 | $609,744 | | Gross profit | $196,446 | $149,800 | $358,727 | $279,466 | | Income from operations | $101,728 | $72,212 | $170,112 | $121,562 | | Net income | $72,483 | $53,479 | $122,872 | $90,305 | | Diluted EPS | $1.66 | $1.22 | $2.82 | $2.05 | | Cash dividends declared per common share | $0.25 | $0.23 | $0.48 | $0.46 | - Net sales increased by 25.8% for the three months ended June 30, 2021, and by 24.3% for the six months ended June 30, 2021, compared to the respective prior-year periods[12] - Net income increased by 35.5% to $72.5 million for the three months ended June 30, 2021, and by 36.1% to $122.9 million for the six months ended June 30, 2021, year-over-year[12] - Diluted EPS grew by 36.1% to $1.66 for the three months and by 37.6% to $2.82 for the six months ended June 30, 2021, compared to the same periods in 2020[12] Condensed Consolidated Statements of Stockholders' Equity | (in thousands) | Balance at Dec 31, 2020 | Net Income | Dividends Declared | Stock-based Compensation | Other Changes | Balance at Jun 30, 2021 | | :------------- | :---------------------- | :--------- | :----------------- | :----------------------- | :------------ | :---------------------- | | Total Stockholders' Equity | $980,943 | $122,872 | $(20,816) | $9,826 | $(5,920) | $1,086,905 | - Total stockholders' equity increased from $980.9 million at December 31, 2020, to $1,086.9 million at June 30, 2021, primarily due to net income of $122.9 million, partly offset by cash dividends declared of $20.8 million[17] - For the six months ended June 30, 2021, stock-based compensation added $9.8 million to additional paid-in capital[17] Condensed Consolidated Statements of Cash Flows | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------- | :----------------------------- | :----------------------------- | | Operating activities | $81,632 | $42,766 | | Investing activities | $(26,214) | $(13,444) | | Financing activities | $(25,603) | $57,733 | | Net increase in cash and cash equivalents | $31,157 | $85,238 | | Cash and cash equivalents at end of period | $305,796 | $315,448 | - Net cash provided by operating activities significantly increased to $81.6 million for the six months ended June 30, 2021, from $42.8 million in the prior-year period[19] - Cash used in investing activities increased to $26.2 million, primarily due to capital expenditures and an investment in a venture capital fund[19] - Cash used in financing activities was $25.6 million, mainly for dividends paid and taxes on employee stock, a shift from $57.7 million provided in the prior year which included proceeds from lines of credit[19] Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation - The financial statements are prepared in conformity with GAAP, requiring management estimates and assumptions, particularly in the context of COVID-19 impacts[22] - Revenue is recognized when control of a product is transferred to a customer, typically at the F.O.B. shipping point[25] - The Company uses derivative instruments (foreign currency forward contracts) as cash flow hedges to mitigate foreign currency exchange rate risk, with fair value changes included in accumulated other comprehensive loss[29] - The Company does not expect a material impact from the transition from LIBOR to alternative reference interest rates, but will continue to monitor the impact[36] 2. Revenue from Contracts with Customers - Wood construction products accounted for 87% of total net sales in the six months ended June 30, 2021, and 86% in the same period of 2020[38] - Concrete construction products represented 13% and 14% of total net sales for the six months ended June 30, 2021 and 2020, respectively[39] - Service sales (after-market repair, engineering, software licenses) were less than 1.0% of net sales[41] 3. Net Income Per Share | (in thousands, except per share amounts) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income available to common stockholders | $72,483 | $53,479 | $122,872 | $90,305 | | Basic weighted-average shares outstanding | 43,434 | 43,471 | 43,406 | 43,787 | | Diluted weighted-average shares outstanding | 43,641 | 43,663 | 43,620 | 43,980 | | Basic EPS | $1.67 | $1.23 | $2.83 | $2.06 | | Diluted EPS | $1.66 | $1.22 | $2.82 | $2.05 | 4. Stockholders' Equity - As of June 30, 2021, the Company held 150,974 shares of its common stock as treasury shares[45] 5. Stock-Based Compensation | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Expense | $3,300 | $5,200 | $9,800 | $5,400 | - During the six months ended June 30, 2021, the Company granted 133,717 restricted stock units (RSUs) to employees, with an estimated weighted average fair value of $100.93 per share[47] - As of June 30, 2021, the aggregate unamortized stock compensation expense was approximately $21.3 million, to be recognized over a weighted-average period of 2.5 years[49] 6. Trade Accounts Receivable, Net | (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :------------- | :--------------- | :------------------- | :--------------- | | Trade accounts receivable | $255,077 | $170,001 | $239,220 | | Allowance for doubtful accounts | $(1,446) | $(2,110) | $(2,007) | | Allowance for sales discounts and returns | $(3,700) | $(2,763) | $(3,346) | | Total | $249,931 | $165,128 | $233,867 | - Net trade accounts receivable increased by $84.8 million from December 31, 2020, to June 30, 2021[50] 7. Inventories | (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :------------- | :--------------- | :------------------- | :--------------- | | Raw materials | $101,163 | $95,777 | $110,883 | | In-process products | $24,117 | $21,803 | $18,661 | | Finished products | $184,974 | $166,162 | $135,821 | | Total | $310,254 | $283,742 | $265,365 | - Total inventories increased by $26.5 million from December 31, 2020, to June 30, 2021, primarily in finished products[51] 8. Derivative Instruments - The Company uses short-term foreign currency forward contracts to hedge currency exposures, primarily for Chinese Yuan (CNY) transactions[52][53] - As of June 30, 2021, outstanding foreign currency derivative contracts had an aggregate notional amount to buy CNY36.9 million by selling $5.4 million[53] - For the six months ended June 30, 2021, gains of $0.2 million on these contracts were recognized as a reduction of cost of sales[54] 9. Property, Plant and Equipment, Net | (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :------------- | :--------------- | :------------------- | :--------------- | | Land | $28,373 | $28,553 | $28,068 | | Buildings and site improvements | $202,573 | $203,421 | $200,205 | | Machinery, equipment, and software | $392,860 | $372,923 | $359,997 | | Less accumulated depreciation and amortization | $(393,653) | $(377,460) | $(360,719) | | Capital projects in progress | $19,239 | $20,656 | $13,751 | | Total | $255,353 | $255,184 | $247,119 | - Net property, plant and equipment remained relatively stable at $255.4 million as of June 30, 2021, compared to $255.2 million at December 31, 2020[55] 10. Goodwill and Intangible Assets, Net | Goodwill (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :---------------------- | :--------------- | :------------------- | :--------------- | | North America | $96,393 | $96,311 | $96,099 | | Europe | $36,296 | $38,059 | $34,929 | | Asia/Pacific | $1,432 | $1,474 | $1,307 | | Total | $134,121 | $135,844 | $132,335 | | Intangible Assets, Net (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :------------------------------------ | :--------------- | :------------------- | :--------------- | | North America | $16,288 | $18,089 | $12,857 | | Europe | $7,461 | $8,711 | $9,282 | | Total | $23,749 | $26,800 | $22,139 | - Amortization expense for definite-lived intangible assets was $3.4 million for the six months ended June 30, 2021, with a weighted-average amortization period of 6.4 years[57] 11. Leases | (in thousands) | At June 30, 2021 | At December 31, 2020 | At June 30, 2020 | | :------------- | :--------------- | :------------------- | :--------------- | | Operating lease right-of-use assets | $43,374 | $45,792 | $36,930 | | Total operating lease liabilities | $43,864 | $46,342 | $36,992 | | Total finance lease liabilities | $48 | $384 | $998 | | Lease Expense (in thousands) | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | | :--------------------------- | :------------------------------- | :----------------------------- | | Operating lease cost | $3,055 | $6,017 | | Total finance lease cost | $108 | $216 | - The weighted-average remaining lease term for operating leases was 6.91 years as of June 30, 2021, with a weighted-average discount rate of 5.28%[65] 12. Debt - The Company's primary credit facility is a $300.0 million unsecured revolving credit facility with Wells Fargo Bank, which was extended to July 12, 2026, in July 2021[66][78] - As of June 30, 2021, there were no outstanding balances on the Credit Facility, and the Company was in compliance with its financial covenants[66][67] 13. Commitments and Contingencies - The Company accrues for environmental liabilities when probable and estimable, not expecting a material adverse effect on financial condition[68] - The Company is involved in various legal proceedings, including the Gentry Homes, Ltd. v. Simpson Strong-Tie Company Inc. case, where a settlement in principle has been reached[69][71] - The Company believes that all or part of the damages for claims in the Gentry case may be covered by its insurance policies[72] 14. Segment Information - The Company operates in three geographic segments: North America, Europe, and Asia/Pacific[73] | Net Sales by Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $350,557 | $286,807 | $651,120 | $535,857 | | Europe | $56,438 | $37,379 | $100,734 | $70,111 | | Asia/Pacific | $3,286 | $1,890 | $6,068 | $3,776 | | Total | $410,281 | $326,076 | $757,922 | $609,744 | | Income (Loss) from Operations by Segment (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | North America | $95,123 | $72,196 | $164,533 | $125,757 | | Europe | $5,873 | $2,696 | $8,164 | $1,026 | | Asia/Pacific | $203 | $(75) | $628 | $(679) | | Total | $101,728 | $72,212 | $170,112 | $121,562 | | Net Sales by Product Group (in thousands) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Wood construction products | $355,787 | $280,724 | $657,365 | $523,244 | | Concrete construction products | $54,305 | $45,304 | $99,828 | $86,316 | | Other | $189 | $48 | $729 | $184 | | Total | $410,281 | $326,076 | $757,922 | $609,744 | 15. Subsequent Events - On July 14, 2021, the Board declared a quarterly cash dividend of $0.25 per share, totaling an estimated $10.8 million, payable on October 28, 2021[77] - In July 2021, the Credit Facility term was extended from July 23, 2022, to July 12, 2026, and certain covenants were modified for additional flexibility[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Company's financial condition, operational results, growth initiatives, COVID-19 impacts, and performance analysis Overview - The Company designs, manufactures, and sells high-quality building construction products across three geographic segments: North America, Europe, and Asia/Pacific[87] - Key growth initiatives focus on expanding into new markets (OEM, repair & remodel, mass timber, concrete, structural steel) within core wood and concrete product competencies[88] - The Company's Five-year Ambitions include strengthening its values-based culture, being the business partner of choice, striving for innovation, achieving above-market growth relative to U.S. housing starts, and maintaining top quartile operating income margins and return on invested capital[90][93] - Despite COVID-19 challenges, the Company has not experienced significant supply chain disruptions and continues to meet customer needs[93] - Increased selling prices are expected to boost net sales, but rising material costs (especially steel, with a projected 300-400 basis point impact on operating margins over 12-18 months), sourcing complications, and a tight labor market could negatively affect operating margins for the remainder of 2021[95][96] Factors Affecting Our Results of Operations - The Company's results are influenced by U.S. housing starts, residential construction activity, and demand in areas prone to natural forces (seismic/wind events)[95][97] - Sales are seasonal, typically lower in Q1 and Q4, and can be affected by weather conditions, political/economic events (e.g., tariffs), and volatile raw material costs, particularly steel[98] ERP Integration - The Company is implementing a fully integrated SAP ERP platform, with North America operations completed in 2021 and company-wide completion expected in 2022[101] - Annual operating expenses are expected to increase through 2024 due to SAP implementation, primarily from training costs and depreciation of capitalized costs[101] Business Segment Information - North America wood construction product net sales increased 23.2% and concrete construction product net sales increased 15.2% for Q2 2021, primarily due to higher product prices[102] - Europe net sales increased for Q2 2021, with wood construction product sales up 53.7% and concrete construction product sales up 40.6%, driven by higher sales volumes and positive foreign currency translation[104] - Increased steel costs and product sourcing complications are expected to negatively affect operating margins in North America and Europe in the second half of 2021 and into 2022[103][104] Business Outlook - For the full fiscal year ending December 31, 2021, the Company estimates an operating margin in the range of 19.5% to 21.0%[107] - The estimated effective tax rate for 2021 is between 25.0% and 26.0%[107] - Capital expenditures for fiscal year 2021 are estimated to be in the range of $55 million to $60 million[107] Results of Operations for the Three Months Ended June 30, 2021, Compared with the Three Months Ended June 30, 2020 | (in thousands) | Q2 2020 | Q2 2021 | Change ($) | Change (%) | | :------------- | :------ | :------ | :--------- | :--------- | | Net sales | $326,076 | $410,281 | $84,205 | 25.8% | | Gross profit | $149,800 | $196,446 | $46,646 | 31.1% | | Income from operations | $72,212 | $101,728 | $29,516 | 40.9% | | Net income | $53,479 | $72,483 | $19,004 | 35.5% | - Gross margins increased to 47.9% from 45.9%, primarily due to product price increases[109] - Total operating expenses increased by 22.0% to $94.7 million, driven by increases in personnel costs, professional fees, and commissions across R&D, selling, and G&A[110][111] - North America net sales increased 22.2% due to product price increases and marginally higher sales volumes, with Canada benefiting from foreign currency translation[116] - Europe net sales increased 51.0% due to higher sales volumes and a positive foreign currency translation effect of approximately $5.3 million[120] Results of Operations for the Six Months Ended June 30, 2021, Compared with the Six Months Ended June 30, 2020 | (in thousands) | H1 2020 | H1 2021 | Change ($) | Change (%) | | :------------- | :------ | :------ | :--------- | :--------- | | Net sales | $609,744 | $757,922 | $148,178 | 24.3% | | Gross profit | $279,466 | $358,727 | $79,261 | 28.4% | | Income from operations | $121,562 | $170,112 | $48,550 | 39.9% | | Net income | $90,305 | $122,872 | $32,567 | 36.1% | - Gross profit margins increased to 47.3% from 45.8%, driven by lower labor costs and factory expense, and product price increases, partly offset by higher material, warehouse, and shipping costs[122] - Total operating expenses increased by 19.4% to $188.7 million, primarily due to higher personnel costs, professional fees, and stock-based compensation across all categories[123][124][125] - North America net sales increased 21.5% due to higher sales volumes and product price increases, with Canada benefiting from $3.3 million in foreign currency translation[130] - Europe net sales increased 43.7% due to higher sales volumes and positive $8.8 million foreign currency translations[131] Effect of New Accounting Standards - Refer to Note 1 for details on accounting standards not yet adopted, specifically ASU 2020-04 (Reference Rate Reform) related to LIBOR transition[133][35][36] Liquidity and Sources of Capital - The Company's $300.0 million unsecured revolving credit facility was extended to July 12, 2026, with no outstanding balances as of June 30, 2021[134][135] - Principal uses of liquidity include operating costs, working capital, capital expenditures, share repurchases, cash dividends, and other investments[136] | Cash Flow Indicators (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $81,632 | $42,766 | | Net cash used in investing activities | $(26,214) | $(13,444) | | Net cash used in financing activities | $(25,603) | $57,733 | - Capital expenditures for fiscal year 2021 are projected to be $55 million to $60 million, primarily for safety, equipment replacement, and productivity improvements[140] - The Board approved changing the capital return threshold from 50% of cash flow from operations to 50% of free cash flow (cash flow from operations minus capital expenditures)[142] - From 2015 to 2020, the Company returned $637.7 million to stockholders through stock repurchases and dividends, representing 70.2% of total cash flow from operations[143] - In July 2021, the Company repurchased 182,752 shares for $20.0 million[144] Off-Balance Sheet Arrangements - The Company did not have any off-balance sheet arrangements as of June 30, 2021[145] Inflation and Raw Materials - While general inflation rates have been low, the cost of steel, lumber, and petroleum products have increased, potentially affecting future inflation rates[146] - Increased steel prices, the Company's main raw material, may adversely affect gross profit margins if higher costs cannot be recovered through timely price increases[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the Company's exposure to market risks, specifically foreign exchange risk and interest rate risk, and the strategies employed to manage them Foreign Exchange Risk - The Company is exposed to foreign exchange rate risk from international operations and foreign vendor purchases[148] - Foreign currency forward contracts are used to hedge transactional exposures, particularly for the Chinese Yuan[149] - Foreign currency translation adjustments resulted in an accumulated other comprehensive loss of $1.8 million for the six months ended June 30, 2021, due to the weakening U.S. dollar[150] Interest Rate Risk - The primary interest rate risk arises from variable-rate borrowings under the Credit Facility, exposing the Company to short-term market interest rate fluctuations[151] Item 4. Controls and Procedures This section details the effectiveness of the Company's disclosure controls and procedures and discusses changes in internal control over financial reporting, particularly in relation to the ongoing SAP ERP implementation Disclosure Controls and Procedures - As of June 30, 2021, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level[152] - Internal controls, while designed to provide reasonable assurance, cannot prevent all fraud and material errors due to inherent limitations[153] Changes in Internal Control over Financial Reporting - The ongoing SAP ERP implementation, operational in North America and parts of Europe, is causing changes to processes and internal control over financial reporting[154] - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, internal control during the three months ended June 30, 2021[156] PART II — OTHER INFORMATION Item 1. Legal Proceedings This section addresses the Company's involvement in legal proceedings, noting that no current proceedings are expected to have a material adverse effect, but acknowledges the inherent uncertainty of litigation outcomes - The Company is not currently a party to any legal proceedings expected to have a material adverse effect on its financial condition, cash flows, or results of operations[158] - The resolution of any claim or litigation is subject to inherent uncertainty and could materially impact the Company's financial condition[158] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes or new risk factors have been identified since the filing of the Annual Report on Form 10-K for the year ended December 31, 2020[159] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the Company's common stock repurchase program, including the authorized amount and the remaining value available for repurchases - The Board authorized the repurchase of up to $100.0 million of common stock, expiring December 31, 2021[160] - As of June 30, 2021, $100.0 million remained available under this authorization, with no repurchases made during the six months ended June 30, 2021[160] Item 3. Defaults Upon Senior Securities This section confirms that there have been no defaults upon senior securities - There were no defaults upon senior securities[161] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company[163] Item 5. Other Information This section indicates that there is no other information to report - There is no other information to report[165] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including certificates of incorporation, bylaws, CEO/CFO certifications, and XBRL-related documents - The exhibit index includes the Certificate of Incorporation, Amended and Restated Bylaws, CEO/CFO Certifications, Section 1350 Certifications, and various XBRL documents[168]