UFP Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 27, 2021; comparisons are with the three months ended March 28, 2020. UFP designs, manufactures, and distributes wood, wood-composite, and other products to retail, industrial, and construction markets.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Net sales | $1.825 billion | $1.032 billion | Up 76.8%; selling prices increased 43.8%, units sold increased 33.0% (23.0% from acquisitions and 10.0% organic). |
| Gross profit / margin | $286.6 million / 15.7% | $167.2 million / 16.2% | Gross profit up 71.3%; margin declined 0.5 percentage points. |
| Operating earnings / margin | $137.5 million / 7.5% | $58.6 million / 5.7% | Operating earnings up 134.5%. |
| Net earnings attributable to controlling interest | $103.3 million | $40.2 million | Basic and diluted EPS were $1.67 versus $0.65. |
| Operating cash flow | $(196.7) million | $(46.2) million | Seasonal working-capital investment was a major use of cash. |
| Investing cash flow | $(296.5) million | $(48.2) million | Included $261.1 million for acquisitions and $34.7 million for capital expenditures. |
| Cash, cash equivalents, and restricted cash | $45.0 million at quarter-end | $32.9 million | Cash and cash equivalents alone were $44.4 million. |
| Debt and liquidity | $426.4 million long-term and current debt; $47.1 million cash overdraft | — | Management reported net debt of $429 million and total liquidity of approximately $420.8 million, including cash surplus and revolving-facility availability. |
| Effective tax rate | 23.3% | 24.7% | Decrease attributed primarily to an anticipated lower U.S. tax rate and discrete items. |
Material changes and business drivers
- Management attributed the sales increase to a 44% rise in selling prices, primarily reflecting lumber costs, plus organic and acquisition-related unit growth. Average framing lumber prices rose 140% year over year; the Southern Yellow Pine composite rose 157.1%.
- Operating profit increased by $78.9 million. Acquisitions contributed approximately $25.5 million of gross-profit growth and $14.2 million of operating-profit growth; other drivers included organic volume, fixed-cost leverage, product mix, and the ability to pass through lumber cost increases.
- Retail, Industrial, and Construction segment operating profit was $53.5 million, $40.4 million, and $33.0 million, respectively, compared with $15.5 million, $18.1 million, and $17.1 million a year earlier.
- SG&A increased 37.3% to $150.1 million, but declined to 52.4% of gross profit from 65.4%.
- Q1 included the PalletOne acquisition, completed in December 2020 for approximately $259 million, and the March 2021 acquisition of Gilmores. Acquisitions completed since the end of March 2020 contributed approximately $242.8 million in Q1 sales and $14.2 million in operating profit.
- Cash-cycle days improved to 48 from 59 a year earlier. The company cited higher lumber prices, strong demand, and PalletOne as factors behind the unusually large working-capital investment.
Outlook, risks, and other notable items
- Management anticipated lumber prices would normalize in the second half of 2021 as supply constraints eased, while warning that a sequential price decline could affect profitability on both fixed- and variable-priced products.
- The company’s 2021 goal for annual new-product sales was at least $575 million. Q1 new-product sales rose 58% to $159.4 million. Planned 2021 capital spending was approximately $115.5 million; Q1-end commitments on commenced capital projects were $41.3 million.
- Management intended to use liquidity to fund growth, including subsequent acquisitions of Spartanburg Forest Products, Walnut Hollow Farm, and Endurable Building Products. Their disclosed purchase amounts were approximately $163.0 million for Spartanburg’s property, plant, equipment, and net working capital combined, $8.7 million for Walnut Hollow, and $10.5 million for Endurable.
- Key risks discussed include lumber-price volatility, weather and economic conditions, supply-chain constraints, environmental and safety regulation, foreign-exchange exposure, variable-rate interest costs, and the execution and integration of acquisitions. The company said prolonged lumber-price trends can affect sales volume, margins, and profitability.
- Environmental remediation reserves were approximately $1.9 million. Outstanding payment and performance bonds were approximately $31.0 million; letters of credit totaled $50.9 million. Management stated that normal-course claims and contingencies were not expected to materially affect the financial statements. No significant off-balance-sheet transactions were reported.
- The company was in compliance with debt covenants at quarter-end. It reported no legal proceedings or new risk factors in this filing. Management said disclosure controls were effective and that a share-based bonus-award control weakness disclosed in the 2020 Form 10-K was remediated in Q1.
Investor verification points
- Assess whether the exceptional lumber-price-driven sales and profit growth is sustainable, and how falling or normalizing lumber prices could affect margins and inventory values.
- Monitor working-capital needs and seasonal cash conversion, particularly receivables and inventory, alongside the substantial Q1 operating cash outflow.
- Verify debt, revolving-credit availability, and covenant headroom after the PalletOne acquisition and subsequent acquisitions.
- Track acquisition integration, purchase-price allocation, and the acquired businesses’ contribution to sales, earnings, and cash flow.
- Compare actual capital spending and new-product sales with management’s stated 2021 plans and goal.