UFP Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023, compared with periods ended June 25, 2022. Amounts below are in millions of dollars except per-share data. The interim financial statements are unaudited.
Business context and reporting period
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.” Results reflect lower lumber prices and softer demand across several end markets. The company says seasonal working-capital needs typically rise during the first half of the year.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,043.9 | $2,900.9 | $3,866.4 | $5,390.2 |
| Gross profit | $400.1 | $503.5 | $758.4 | $981.8 |
| Gross margin | 19.6% | 17.4% | 19.6% | 18.2% |
| Operating earnings | $193.5 | $285.6 | $355.2 | $544.6 |
| Operating margin | 9.5% | 9.8% | 9.2% | 10.1% |
| Net earnings attributable to controlling interest | $150.8 | $203.1 | $276.8 | $392.8 |
| Diluted EPS | $2.36 | $3.23 | $4.35 | $6.22 |
Q2 sales declined 29.5%, reflecting a 21.5% decline in selling prices and an 8% decline in units. Lower lumber prices were passed through to customers; unit declines and competitive pricing also weighed on earnings. Gross margin improved year over year, but operating margin fell as SG&A declined less than gross profit.
- Cash flow: Six-month operating cash flow was $321.1, versus $90.4 a year earlier. Management attributed the improvement mainly to a $349 million smaller seasonal investment in working capital, partly offset by lower earnings and non-cash expenses. Capital expenditures were $85.0; investing cash outflow was $85.3.
- Cash, debt, and liquidity: At July 1, cash and restricted cash totaled $702.9. Current and long-term debt totaled approximately $277.2, and the company reported a $425 million net cash surplus. Total liquidity, including available credit and shelf capacity, was approximately $2.0 billion. It had $5 million drawn on its $750 million revolver and was in compliance with covenants.
- Balance sheet: Current assets were $2,415.1 and current liabilities $556.0. Inventory was $821.2, down from $973.2 at year-end 2022. Shareholders’ equity was $2,835.0.
- Shareholder returns: The company paid $31.1 in dividends and repurchased 700,597 shares for $55.5 during the first six months. The board subsequently approved a $0.30 quarterly dividend and up to $200 million of repurchases through July 31, 2024.
Material changes and segment results
- Retail: Q2 sales fell 18%, but operating earnings increased to $60.2 from $24.5. Higher Retail gross profit, particularly in treated-lumber businesses, more than offset higher SG&A. Big-box unit sales rose about 5%, while independent-retailer units fell about 20%.
- Packaging: Q2 sales fell 28% and operating earnings declined to $56.9 from $94.2. Lower demand, competitive pricing, lower volume, and fixed-cost under-absorption reduced gross profit.
- Construction: Q2 sales fell 44% and operating earnings declined to $62.0 from $132.8. Housing-related demand, lower prices, fixed-cost under-absorption, and a delayed commercial-customer shipment contributed. Site-built backlog was $113 million, versus $161 million a year earlier.
- Across the company, Q2 gross profit fell 20.5% and operating earnings fell 32.2%. Management cited lower unit sales, fixed-cost pressures, and competitive pricing; lower SG&A, mainly from incentive compensation, partly offset the decline.
Outlook, risks, and unusual items
- Management expects lumber prices to remain below 2022 levels and follow more typical seasonal patterns. It anticipates Retail demand flat to slightly down and industrial production slightly down for the remainder of 2023. Its cited industry forecasts include a 12%–15% decline in 2023 housing starts and a 24% decline in manufactured-home shipments.
- The company revised its estimated annual consolidated decremental operating margin to 10%–15% of sales, from 15%–20%; its first-half result was 12.4%. Segment estimates are 20%–25% for Packaging and 14%–19% for Construction. Management anticipates improved Retail operating profits in 2023.
- Long-term goals include 5%–7% annual unit-sales growth and a minimum 10% adjusted EBITDA margin. These are goals, not near-term earnings guidance. Management cautions that recession risk and market contraction may affect results.
- Key risks include lumber-price volatility, inflation, interest rates and housing demand, competition, customer concentration, supply-chain and transportation issues, weather, regulation, currency movements, cybersecurity, and acquisition execution. The company noted that lower lumber prices can affect selling prices, margins, and working capital.
- Outstanding capital-project purchase commitments were $66.4 million. Open-project payment and performance bonds totaled $13.2 million, with another $13.0 million for completed projects still under warranty; letters of credit totaled $54.1 million. Management said normal-course claims and lawsuits were not expected to materially affect the financial statements. No significant off-balance-sheet transactions were reported.
- There were no acquisitions in the first half of 2023. The company’s 50% Dempsey Wood Products investment is accounted for under the equity method; sellers have a $50 million put right and UFP has a $70 million call right, both first exercisable in June 2025.
- Capital expenditure expectations were lowered to $175–$200 million. Management plans to fund remaining-year capital spending and commitments from operating cash flows.
Important facts for investors to verify
- Whether volume, pricing, and competitive pressure stabilize, especially in Construction and Packaging; monitor housing indicators and the site-built backlog.
- Whether working-capital cash generation is seasonal and sustainable; the cash cycle increased to 63 days from 58 days year over year.
- Progress against the revised decremental-margin ranges, and whether Retail improvement offsets ongoing weakness in other segments.
- Execution and funding of the $175–$200 million capital-spending plan, alongside the new dividend and share-repurchase authorization.
- Revolving-credit availability, covenant compliance, and exposure under purchase commitments, letters of credit, bonds, and the Dempsey put/call arrangements.