UFP Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 25, 2021; comparisons are with the periods ended September 26, 2020. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and financial results
UFP manufactures, treats, and distributes wood, wood-composite, and other products across retail, industrial, and construction markets. The quarter’s growth reflected higher selling prices and acquisitions, while falling lumber prices weighed on some commodity-based products, particularly retail pressure-treated lumber.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,093.8 | $1,486.2 | $6,619.3 | $3,760.3 |
| Gross profit / margin | $327.6 / 15.6% | $241.1 / 16.2% | $1,035.4 / 15.6% | $613.2 / 16.3% |
| Operating earnings / margin | $168.1 / 8.0% | $106.6 / 7.2% | $542.5 / 8.2% | $257.6 / 6.9% |
| Net earnings attributable to controlling interest | $121.0 | $77.2 | $397.7 | $183.8 |
| Diluted EPS | $1.94 | $1.25 | $6.38 | $2.98 |
| Cash from operating activities | Not separately stated for quarter | Not separately stated for quarter | $281.8 | $185.1 |
Q3 sales rose 40.9%, with selling prices up 27.9% and total units up 13.0%; acquisition-related unit growth of 16.0% more than offset a 3.0% organic unit decline. Q3 operating earnings increased 57.7%. For the first nine months, sales increased 76.0%, operating earnings rose 110.6%, and diluted EPS more than doubled.
Liquidity, debt, and cash flow
- At September 25, cash and cash equivalents were $138.6 million, restricted cash was $17.6 million, and investments were $33.7 million. Current assets totaled $1,922.8 million and current liabilities $665.7 million.
- Long-term debt was $310.1 million; current debt was $0.1 million. Management reported net debt of $182 million, compared with net cash of $32 million at September 2020.
- Management reported total liquidity of approximately $667.5 million, including cash surplus and unused revolving-credit availability. The $550 million revolver had $3.2 million drawn and approximately $539.7 million available after letters of credit. The company reported compliance with debt covenants.
- Nine-month operating cash flow of $281.8 million was offset by $528.3 million of investing outflows, including $433.3 million for acquisitions and noncontrolling-interest purchases and $110.1 million of capital expenditures. Financing used $33.6 million; cash, cash equivalents, and restricted cash declined $280.4 million from year-end.
- Working capital absorbed cash amid high lumber prices, growth, and acquisitions. The cash cycle was 57 days for Q3 versus 43 days a year earlier; management expected working capital to decline and liquidity to rise in Q4, assuming lumber prices remained at current levels.
Segments and material changes
- Retail: Q3 external sales were $696.2 million, down about 1%; operating results shifted from $62.2 million of earnings to a $26.2 million loss. The filing attributes the deterioration chiefly to falling lumber prices on pressure-treated products, weaker organic unit sales, and acquired operations’ exposure to the price decline. Nine-month operating earnings fell 26.7% to $89.4 million despite higher sales.
- Industrial: Q3 sales increased 103% to $573.2 million and operating earnings rose 219.5% to $70.4 million, supported by acquisitions, favorable mix, and lower lumber costs. Nine-month operating earnings were $190.3 million versus $53.8 million.
- Construction: Q3 sales increased 62% to $722.9 million and operating earnings rose 409.9% to $84.2 million, reflecting unit growth, fixed-cost leverage, and lower lumber costs. Nine-month operating earnings were $184.3 million versus $50.5 million.
- Overall Q3 gross margin contracted to 15.6% from 16.2%, while operating margin improved to 8.0% from 7.2%, partly as SG&A declined as a share of sales. Q3 results included $10.0 million in net other gains; the filing describes gains on real estate sales among corporate items.
- The company completed five acquisitions in the first nine months of 2021, including Spartanburg Forest Products and several businesses in retail, construction, and distribution. Acquisitions completed since September 2020 contributed approximately $903 million of nine-month sales and $26 million of operating profit, excluding operations consolidated with others, according to the filing.
Outlook, commentary, and risks
Management said third-quarter lumber prices had normalized after sharp declines from first-half peaks. It expected seasonal working-capital conversion and higher liquidity in the final months of 2021, subject to lumber prices and demand. The filing does not provide a formal earnings or revenue forecast. The company had already exceeded its 2021 goal of $575 million in new-product sales, reporting $600.2 million for the first nine months. Planned 2021 capital spending was approximately $147 million, focused on capacity, automation, and transportation; outstanding commitments on commenced capital projects were $44.1 million.
Management highlighted exposure to lumber-price volatility, including inventory and margin risks when market prices fall, as well as demand, weather, economic, regulatory, supply-chain, acquisition-integration, interest-rate, and foreign-currency risks. The company reported $52.6 million in outstanding letters of credit and $39.6 million of bonds for open projects, in addition to warranty-related bonds. Management said ordinary-course legal claims and contingencies were not expected to materially affect the financial statements. No significant off-balance-sheet transactions were reported. The filing states that no new risk factors were identified in Part II.
The board approved a Q4 dividend increase to $0.20 per share, payable December 15, 2021. The effective tax rate was 23.0% for Q3 and 24.0% for the first nine months, below the comparable 2020 rates. Management reported disclosure controls were effective and that a previously identified share-based bonus-award control weakness had been remediated in Q1 2021.
Important facts for investors to verify
- Whether lumber prices, product mix, and retail demand support a recovery in Retail profitability after its Q3 operating loss.
- Whether the expected Q4 working-capital release occurs, given elevated inventory, receivables, and the longer cash cycle.
- Acquisition performance and integration, including the contribution of recently acquired businesses to sales, margins, and working-capital needs.
- Execution and funding of planned capital projects, and ongoing liquidity and covenant headroom as business conditions change.
- The subsequent-events note gives Shelter Products’ acquisition date as “September 27, 2027,” which is inconsistent with the filing’s 2021 reporting timeline; verify the correct date. It also reports Boxpack’s acquisition on October 29, 2021.