UFP Industries, Inc. — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended April 1, 2023, compared with the three months ended March 26, 2022. UFP designs, manufactures, and supplies wood and alternative-material products through Retail, Packaging, and Construction segments, with international and captive-insurance operations included in “All Other.”
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,822.5 million | $2,489.3 million | Down 26.8% |
| Gross profit | $358.3 million | $478.4 million | Down 25.1% |
| Operating earnings | $161.7 million | $259.0 million | Down 37.6% |
| Net earnings attributable to controlling interest | $126.1 million | $189.7 million | Down 33.5% |
| Diluted EPS | $1.98 | $3.00 | Down 34.0% |
| Cash used in operating activities | $37.1 million | $245.0 million | $207.9 million less used |
Margins: Gross margin was 19.7%, versus 19.2% a year earlier; operating margin was 8.9%, versus 10.4%; net margin attributable to controlling interest was 6.9%, versus 7.6%. SG&A fell 11.6% to $194.7 million, but rose to 54.3% of gross profit from 46.0%.
Cash, debt, and liquidity: At April 1, cash and cash equivalents were $423.3 million. Total debt was approximately $278.0 million, including $3.0 million current and $275.0 million long-term, implying cash in excess of debt of about $145 million. The company reported approximately $1.7 billion of total liquidity, including cash surplus, revolving-credit availability, and remaining shelf capacity. It had $5 million outstanding on its $750 million revolving facility and was in compliance with debt covenants.
Other metrics: Total assets were $3.70 billion and shareholders’ equity was $2.71 billion. Capital expenditures were $38.2 million. The cash cycle increased to 71 days from 61 days, reflecting higher inventory days and slower customer payments; 93% of receivables were current. The effective tax rate was 23.7%, compared with 24.0%.
Material changes and segment results
- Management attributed the 26.8% sales decline to a 19.8% decrease in selling prices, primarily from lower lumber prices, and a 7.5% decline in organic unit sales, partially offset by 0.5% acquisition-related unit growth. Overall units sold fell 7.0%.
- Average framing-lumber prices fell 66.3% year over year; Southern Yellow Pine prices fell 60.2%. Management cited increased North American supply and weaker demand.
- Retail sales were $749.6 million and operating earnings were $41.1 million, down 25% and 42.5%, respectively. Organic unit sales declined 2%; big-box unit sales rose 6%, while independent-retailer unit sales fell 17%.
- Packaging sales were $486.6 million and operating earnings were $54.7 million, down 20% and 33.6%, respectively. Organic unit sales declined 4%; acquisitions contributed 2% unit growth.
- Construction sales were $515.6 million and operating earnings were $54.2 million, down 34% and 31.2%, respectively. Organic unit sales declined 16%, including declines in factory-built housing and site-built construction attributed partly to higher interest rates.
- Gross-profit declines reflected lower volumes, fixed-cost under-absorption, more competitive pricing, and the prior-year benefit from rising lumber prices in certain retail products. Lower incentive compensation helped reduce SG&A.
- Cash used in operations improved substantially year over year, primarily because the seasonal increase in working capital was $270 million lower than in Q1 2022. Operations still consumed cash, consistent with the company’s stated seasonal pattern.
Outlook, risks, and notable items
- Management expects lumber prices to remain at lower levels in 2023 and follow more typical seasonal patterns. It anticipates 2023 demand to be flat to slightly down in Retail and industrial production flat to slightly down in Packaging. It cites consensus expectations for housing starts to fall 15%–20% and manufactured-home shipments to decline 24%.
- Management’s long-term goals include annual unit-sales growth of 5%–7%, a sustained 10% EBITDA margin, returns on new investment above the cost of capital, and a conservative capital structure. These are goals, not quarterly or full-year earnings guidance.
- For 2023, management estimates a consolidated annual decremental operating margin of 15%–20% of sales; Packaging and Construction estimates are each 20%–25%. It anticipates Retail operating-profit improvement, citing less volatile lumber prices and operational improvements.
- Planned 2023 capital spending is $200–$225 million, subject to supplier lead times. Outstanding purchase commitments on commenced capital projects were $63.8 million.
- The company paid a $0.25-per-share quarterly dividend, a 25% increase from the prior-year quarterly dividend, and authorized the same $0.25 dividend for Q2. It repurchased 450,597 shares for approximately $35 million during the quarter; about 1.5 million shares remained authorized. After quarter-end, it repurchased another 150,000 shares for approximately $12 million.
- Risks discussed include economic weakness, interest rates and housing demand, lumber-price changes, inflation, customer concentration, supply-chain and transportation issues, weather, regulation, foreign exchange, cybersecurity, and acquisition execution. Management cautions that actual results may differ from forward-looking statements.
- Management says ordinary-course lawsuits and claims are not expected to materially affect the financial statements. Outstanding payment and performance bonds were approximately $39.8 million, and letters of credit totaled $55.3 million. The filing reports no significant off-balance-sheet transactions and no material change in accounting policies or estimates.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting. Part II lists no risk factors for this quarter; the filing nevertheless discusses risks relevant to future results.
Important facts for investors to verify
- Whether weaker demand, lower lumber prices, and competitive pricing continue to pressure sales and operating earnings, particularly in Construction and Retail.
- Whether the longer cash cycle and seasonal working-capital needs remain manageable, and whether expected cash generation later in the year materializes.
- Execution of the $200–$225 million capital-spending plan and the impact of supplier lead times and capacity investments on returns.
- Whether management’s demand assumptions, decremental-margin estimates, and expected Retail improvement remain consistent with subsequent results.
- Liquidity calculations, borrowing availability, covenant compliance, and the company’s ability to fund capital spending, dividends, and repurchases while maintaining its targeted conservative capital structure.
- Exposure to construction-project estimates, warranties, bonds, letters of credit, and the Dempsey equity-method investment, including its future put and call rights.