UFP Industries, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 30, 2024; comparisons are to the three months ended April 1, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
UFP designs, manufactures and supplies wood and wood-alternative products through Retail, Packaging and Construction segments, with international and captive insurance operations included in All Other. Sales are seasonal, with working capital generally building during the first half of the year. The company says its diversified end markets and value-added products help moderate exposure to business cycles and lumber-price volatility.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1,639.0 | $1,822.5 | Down 10.1% |
| Gross profit / margin | $326.1 / 19.9% | $358.3 / 19.7% | Profit down 9.0% |
| Operating earnings / margin | $133.8 / 8.2% | $161.7 / 8.9% | Down 17.2% |
| Net earnings | $121.1 | $125.6 | Down 3.6% |
| Controlling-interest earnings | $120.8 | $126.1 | Down 4.2% |
| Diluted EPS | $1.96 | $1.98 | Down 1.0% |
| Cash used in operating activities | $16.8 | $37.1 | Use narrowed by $20.3 |
Interest and investment income was $16.5 million, compared with $6.5 million, contributing to lower earnings before tax despite weaker operating earnings. The effective tax rate fell to 17.4% from 23.7%, primarily because of a larger tax deduction for stock-based compensation. SG&A declined slightly to $192.1 million, but increased as a share of gross profit to 58.9% from 54.3%.
Cash, cash equivalents and restricted cash were $980.5 million at quarter-end, compared with $424.1 million a year earlier. Cash used in investing was $56.1 million, including $49.1 million of capital expenditures; cash used in financing was $69.0 million, including dividends, share repurchases, tax withholding payments and other items. Total assets were $4.08 billion and shareholders’ equity was $3.12 billion. Current assets were $2.51 billion versus current liabilities of $525.0 million.
Current and long-term debt totaled approximately $277.1 million on the balance sheet; the company separately reported $3.5 million outstanding on its $750 million revolving credit facility. It had approximately $709 million of remaining revolver availability after letters of credit, plus up to $535 million of remaining shelf borrowing capacity. Management reported total liquidity of approximately $2.2 billion and compliance with debt covenants.
Material changes versus the prior-year quarter
- Sales declined 10.1%, reflecting a 9.1% decrease in selling prices and a 1.0% decrease in total unit sales. Organic unit sales fell 13%, partly offset by 12% acquisition-related unit growth. Lower lumber prices and competitive pricing pressure weighed on selling prices.
- Gross profit fell $32.3 million, primarily because of lower unit sales and unfavorable fixed-cost absorption, particularly in Packaging. Gross margin nevertheless edged up to 19.9%, partly reflecting lower cost of goods sold as a share of sales.
- Operating earnings decreased $27.9 million. Management reported a 15.2% decremental operating margin, meaning operating earnings fell about 15 cents for each dollar of lower sales.
- Retail sales fell 17%, but segment operating earnings rose 14.2% to $46.0 million, supported by improved gross profit and operating efficiencies.
- Packaging sales fell 13% and operating earnings declined 42.9% to $31.2 million, driven by weaker structural and protective packaging demand, competitive pricing, and unfavorable fixed-cost variances.
- Construction sales were broadly flat, with organic unit growth offset by lower prices and segment transfers. Operating earnings fell 16.4% to $45.3 million; site-built backlog was $79 million versus $91 million a year earlier.
- Operating cash use improved to $16.8 million from $37.1 million. The cash cycle shortened to 62 days from 71 days; management cited improved working-capital management and lower volumes and lumber prices.
Outlook, commentary and risks
- Management’s long-term goals include annual unit-sales growth of 7%–10%, a sustained adjusted EBITDA margin of 12.5%, returns on new investment above the cost of capital, and a conservative capital structure. These are long-term goals, not specific 2024 earnings guidance.
- For 2024, management expects demand in Retail and Packaging to be down mid-single digits. It expects manufactured-housing shipments to be flat to slightly up, and commercial construction and concrete-forming demand to be flat to slightly up. Independent site-built housing-start forecasts cited range from slightly up to slightly down.
- Management expects lumber prices to remain at lower levels until supply and demand materially change. It cautions that lumber-price trends can affect selling prices, margins, sales volumes and working-capital needs; treated lumber was approximately 21% of Q1 sales.
- The 2024 capital expenditure target is $250 million–$300 million. Quarter-end commitments on commenced capital projects were approximately $88.7 million; management intends to fund capital spending through operating cash flows for the balance of the year.
- The board approved a quarterly dividend of $0.33 per share in April 2024, a 32% increase from the prior year. The company repurchased 319,295 shares during Q1 and reported $137 million remaining under its repurchase authorization at March 30. Subsequent to quarter-end, it repurchased additional shares for approximately $40.2 million.
- Risks identified include lumber-price and currency fluctuations, weak end-market demand, customer concentration, supply-chain or capacity issues, acquisition execution, regulation, weather, transportation costs, product substitutes, cybersecurity, tariffs and pandemics. Management said ordinary-course claims and contingencies were not expected to materially affect the financial statements; no material off-balance-sheet transactions were reported.
- Other items to note: the company had $88.7 million of capital-project commitments, $47.8 million of outstanding letters of credit, and $23.4 million of bonds on open projects. The 50%-owned Dempsey investment had a carrying value of $60.3 million; seller put and company call rights are first exercisable in June 2025.
Important facts for investors to verify
- Whether weak Packaging demand and competitive pricing persist, and whether fixed-cost absorption improves as volumes change.
- Whether Retail and Packaging demand track management’s 2024 mid-single-digit decline expectations, and whether Construction growth and backlog translate into earnings.
- Whether operating cash flow rebounds after the seasonal first-half working-capital build, while funding the stated capital expenditure plan and project commitments.
- How lumber-price movements affect margins and inventory exposure, especially in treated lumber and other indexed-price products.
- Whether reported liquidity, debt capacity and covenant compliance remain adequate after subsequent share repurchases, dividends and capital spending.
- Progress toward the long-term growth and adjusted EBITDA margin goals, which are not near-term earnings guidance.