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Text: Such statements are based on certain estimates and expectations and are subject to a number of risks and uncertainties.
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Now I would like to turn the conference over to Karen Colonias, Simpson's President and Chief Executive Officer.
I'd like to provide a high-level overview of our third quarter financial results and the associated performance drivers.
I'll then wrap up by summarizing our key growth initiatives.
Brian will then walk you through our financials and full-year 2021 business outlook in greater detail.
Our third quarter net sales of $396.7 million were once again very strong and increased 8.9% over the prior-year period.
Sales growth was primarily driven by product price increases to offset rising raw material costs.
While the macroeconomic landscape remained challenged throughout the third quarter due to ongoing global supply chain constraints, limited steel availability and a tight labor market, we continued to deliver on the key elements of our business model to ensure our customers' needs were met.
This includes but is not limited to ensuring availability of our trusted product solutions typically within 48 hours or less.
To date, we have implemented four price increases in 2021; in early April, mid-June, mid-August, and our fourth price increase in mid-October.
These price increases ranged from mid-single digits to mid-teens depending on the product mix for certain of our wood connector, fasteners and concrete products in the United States.
Looking at our sales results in greater detail, although third quarter net sales benefited primarily from a full quarter of the first two price increases, our top line moderately declined by 3.3% compared to the second quarter of 2021, predominantly due to decreases in sales volumes from our home center channel, which I'll discuss in more detail shortly.
These price increases were primary contributors to another quarter of strong gross margins, which increased to 49.9% from 47.9% in the prior quarter and 47.6% in the year-ago period.
As a result, our income from operations improved to $100.6 million and led to strong earnings per diluted share of $1.70.
As we highlighted on our last call, we currently anticipate significant gross margin compression beginning in fiscal 2022 as we continue to acquire higher priced raw materials, thereby raising our average cost of steel on hand.
Brian will discuss this impact in more detail during his remarks.
Turning back to our sales performance.
We experienced decline in sales volume during the third quarter throughout the various forms of distribution channels we serve, including our home center channel and other distribution channels to contractors and lumberyards.
As a reminder, the home center channel includes both our home center and co-op customers, and is where we see much of our repair and remodel and DIY business.
We experienced a slowdown in this channel during the third quarter as we believe there may be a releveling of inventory for our customers.
Additionally, our sales reflected an as expected decline year-over-year related to the return of Lowe's as a home center customer.
As you may recall, we experienced elevated volume in both Q2 and Q3 of 2020 as we've loaded in our products at the Lowe's locations, resulting in a difficult comp in both quarter two and quarter three of this year.
We expect volume levels in the home center channel to become normalizing in the fourth quarter as demand increases and we pass the elevated volumes from last year's product rolling into Lowe's.
Similar to the home center channel, we experienced modest volume decline in our other distribution channels to contractors and lumberyards during the quarter.
We are confident this decline in volume is not due to a loss of customer or market share and attribute this primarily to customers adopting a more cautious stance in regard to their inventory levels given tightening labor and supply chain conditions and the potential impact on the building industry.
With that said, U.S. housing starts continue to show promise, improving by 19.5% during the first nine months of 2021 versus comparable period last year.
And finally in Europe, our third quarter sales improved over the prior year on a local currency basis, primarily from strengthening demand compared to the prior year where we experienced government-mandated COVID-19-related closures and to a lesser extent from price increases.
Sales in Europe also improved from our ability to continue meeting our customers' needs due to our solid inventory management practices amid broader supply chain shortage.
I'll now turn to a high-level discussion on our key growth initiatives, which we first unveiled in late March of this year.
We are focused on growing in the OEM, repair/remodel, DIY and mass timber markets, where we are striving to be a leader in engineered low-graded construction fastening solutions, given that each of these markets have a broader product opportunity within the fastening solutions.
We are also focused on building our presence in concrete construction as well as structural steel, which is a new market for Simpson.
While we are looking to grow our presence in each of these key growth areas, it's important to realize that we already have existing products, testing results, distribution and manufacturing capacities in place for all five of these initiatives.
To bolster our growth, we remain focused on organic opportunities through expansion into new markets within our core competencies of wood and concrete products, as well as inorganic opportunities through licensing, purchasing IP and traditional M&A.
While we are pleased that we are continuing to build out these product lines and inherit new customer wins to improve our market share, we recognize this will be a multi-year endeavor to ensure we have the proper testing, the validation of our product lines, and to ensure we provide our customers with the highest-quality solution sets to build safer, stronger structures.
Currently, each of our key growth initiatives remains in different phases of implementation.
However, we believe that these are the right areas to pursue to position Simpson for above-market growth based on our ability to execute given the core tenants of our business model.
That includes our strong long-standing relationship with top builders, engineers, contractors, code officials and distributors, as well as our significant engineering expertise and our ongoing commitment to testing, research and innovation.
Finally, we are working to become a leader in building technology space, which hits upon all of our key growth initiatives.
As we continue to develop innovative new tools and solutions for our customers to help with design and options management, we'll also be able to easily specify the right Simpson solution for the job, helping to drive enhanced growth across our business.
Our strong earnings and effective working capital management have enabled us to continue generating strong cash flow to fuel our growth and stockholder return priorities.
In regard to growth, we are dual focused on both organic growth and M&A opportunities, facilitate growth organically, we are investing in areas such as engineering, marketing and sales personnel, as well as testing capabilities across all areas of our business, including the aforementioned five adjacencies where we are looking to expand.
We may also invest in facility expansions to support our growth.
In regards to M&A, we are more broadly focused on product line expansions in order to develop complete solutions for the markets in which we operate.
This may also include opportunities in areas that support our key growth initiatives.
In summary, despite broader market challenges, we are very pleased with our continued strong results, both financially and operational for the third quarter.
I'm pleased to discuss our third quarter financial results with you today.
Now turning to our results.
As Karen highlighted, our consolidated net sales increased 8.9% to $396.7 million.
Within the North America segment, net sales increased 6.8% to $338.6 million, primarily due to product price increases that took effect through the third quarter of 2021 in an effort to address rising material costs and were partially offset by a decline in sales volumes, primarily in our home center channel.
In Europe, net sales increased 22.5% to $54.8 million, primarily due to higher sales volumes compared to last year's COVID-19-related slowdown.
Europe sales also benefited by approximately $900,000 of positive foreign currency translations, resulting from some Europe currencies strengthening against the United States dollar.
Wood construction products remained consistent at 85% of total sales and concrete construction products also remained consistent at 15% of total sales.
Consolidated gross profit increased by 14.3% to $198 million, which resulted in another strong gross margin quarter at 49.9%.
Gross margin increased by 230 basis points, primarily due to the aforementioned price increases, which were partially offset by higher material costs.
On a segment basis, our gross margin in North America increased to 52.1% compared to 48.9%, while in Europe our gross margin declined slightly to 37.7% compared to 37.9%.
From a product perspective, our third quarter gross margin on wood products was 50.2% compared to 48% in the prior-year quarter, and was 44.6% for concrete products compared to 42.1% in the prior-year quarter.
Now turning to our third quarter costs and operating expenses.
As a reminder, last year, we implemented various cost-saving and other measures in light of the uncertainty surrounding the impact of the COVID-19 pandemic.
As a result, total operating expenses were $97.4 million, an increase of $15.4 million or approximately 18.8%.
As a percentage of net sales, total operating expenses were 24.6% compared to 22.5.
Research and development and engineering expenses increased 18.5% to $14.6 million, primarily due to increased salaries and expenses on patents.
Selling expenses increased 19.3% to $35.1 million due to increased salaries, commissions and travel expenses.
On a segment basis, selling expenses in North America were up 18.9% and in Europe they were up 22.4%.
General and administrative expenses increased 18.6% to $47.8 million, primarily due to increased salaries, a variable compensation and travel expenses.
Our solid top-line performance, combined with our stronger Q3 gross margin, helped drive a 10.2% increase in consolidated income from operations to $100.6 million compared to $91.3 million.
In North America, income from operations increased 11% to $97 million, primarily due to the increase in gross profit, partly offset by higher operating expenses.
In Europe, income from operations increased 23.8% to $7.5 million, primarily due to the increase in sales volumes and gross profit.
On a consolidated basis, our operating income margin of 25.4% increased by approximately 30 basis points from 25.1%.
Our effective tax rate decreased slightly to 26.1% from 26.2%.
Accordingly, net income totaled $73.8 million or $1.70 per fully diluted share, compared to $67.1 million or $1.54 per fully diluted share.
Now turning to our balance sheet and cash flow.
Our balance sheet remained healthy with ample liquidity to operate our day-to-day operations.
At September 30th, cash and cash equivalents totaled $294.2 million, a decrease of $17.3 million compared to September 30, 2020.
And as of September 30, 2021, the full $300 million on our primary credit line was available for borrowing and we remained debt free.
Our inventory position of $385.5 million at September 30th increased by $75.3 million from our balance at June 30th, primarily due to the increases we saw in steel prices over the first nine months of the year.
We continue to be highly selective in regard to inventory purchases through careful management and purchasing practices, while at the same time ensuring we maintain ample product availability in order to provide our customers continued high levels of customer service and on-time delivery standards, which are key cornerstones to our value proposition.
As a result of our improved profitability and effective working capital management, we generated strong cash flow from operations of $40.5 million for the third quarter of 2021.
Turning to capital allocation.
We remain dedicated to supporting the growth of our business as well as providing strong capital returns to our stockholders through both dividends and share repurchases.
Our strong cash generation enabled us to invest $12 million for capital expenditures during the quarter as well as pay $10.9 million in dividends and repurchase 222,060 shares of our common stock at an average price of $108.64 per share for a total of $24.1 million.
On October 19, 2021, our Board of Directors declared a quarterly cash dividend of $0.25 per share.
The dividend will be payable on January 27, 2022 to stockholders of record as of January 6, 2022.
And as of September 30, 2021, we had $75.9 million of our share repurchase authorization available, which remains in effect through the end of 2021.
Given our confidence in our business and our expectation that our strategic initiatives will continue to drive improved operational performance and a higher return on invested capital, we expect we will remain both active and opportunistic as it relates to share repurchase activity.
Finally, I'd like to discuss our 2021 financial outlook.
Based on business trends and conditions as of today, October 25th, we are updating certain elements of our guidance for the full year ending December 31, 2021 as follows.
We are updating our operating margin outlook to be in the range of 20% to 22% from our previous estimate of 19.5% to 21%.
Our current outlook reflects three quarters of actual results as well as our latest expectations regarding demand trends, raw material input costs, and operating expenses.
We are reiterating the remaining elements of our outlook for fiscal 2021 as follows.
We continue to expect our effective tax rate to be in the range of 25% to 26%, including both federal and state income tax rates.
And our capital expenditures outlook remains in the range of $55 million to $60 million, including approximately $15 million to $20 million that will be used for safety and maintenance capex.
At this time, only a small amount of our capex spend is related to implementing our key growth initiatives.
Further, I'd like to provide some additional color on our margin expectations for fiscal 2022.
Based on our current expectations, we are anticipating continued raw material cost pressure for the remainder of 2021 and into fiscal 2022.
Our gross margins thus far in 2021 reflect an average cost of steel sourced prior to and during the increasing steel price market.
As we work through our on-hand inventory and continue to buy raw material at these much higher prices, our anticipated cost of goods sold are expected to increase significantly in late 2021 and into 2022, even if prices for raw material begin to decline, which will adversely affect our margins as the impacts from averaging raw material costs typically lags our price increases.
As a result and based on our updated fiscal 2021 operating margin outlook, we currently expect our operating margin for the full year of 2022 will decline by approximately 400 basis points to 500 basis points year-over-year.
However, despite near-term macroeconomic pressures, we continue to believe we can maintain an industry-leading operating margin in the high-teens range annually in the long term, a key goal of our five-year Company ambitions.
In summary, we were pleased with our strong third quarter financial results and remain focused on executing against our strategic, operational and financial initiatives.
We believe our industry-leading position, geographic reach and diverse product offerings, combined with our strong balance sheet and liquidity position, gives us confidence in our ability to maintain operational excellence to support current and future demand trends.
We look forward to updating you on our progress in the coming quarters.
Again, we are very pleased with our third quarter financial and operational results that we've achieved despite ongoing macroeconomic challenges.
While we cannot control elements of the economy, we are dedicated to managing the key areas of our business that we can control, and we remain confident in our ability to execute on our five-year Company ambitions.
These include strengthening our values-based culture, being the partner of choice in all aspects of our business, being an innovative leader in our product categories, to continue our above-market growth relative to U.S. housing starts, and maintaining an operating income margin and return on invested capital target within the top quartile of our proxy peers.

user
compname reports q3 earnings per share of $1.70.
q3 earnings per share $1.70.
q3 sales rose 8.9 percent to $396.7 million.
fy capital expenditures are estimated to be in the range of $55 million to $60 million.

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