UFP Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter ended September 29, 2018; comparisons are with the quarter ended September 30, 2017. Year-to-date figures cover the first nine months. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context
UFP manufactures, treats and distributes wood, wood-composite and other products to retail, industrial and construction markets. It reported results across North, South, West and All Other segments. Management cited higher unit sales and lumber-driven selling prices as the main drivers of revenue growth.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $1,212.7 | $1,056.6 | $3,501.0 | $2,975.1 |
| Gross profit | $158.7 | $144.7 | $455.3 | $413.7 |
| Earnings from operations | $57.0 | $52.3 | $161.8 | $140.0 |
| Net earnings attributable to controlling interest | $41.2 | $33.7 | $118.1 | $88.4 |
| Diluted earnings per share | $0.66 | $0.55 | $1.91 | $1.44 |
| Gross margin | 13.1% | 13.7% | 13.0% | 13.9% |
| Operating margin | 4.7% | 4.9% | 4.6% | 4.7% |
- Q3 net sales rose 14.8%; management attributed gross sales growth to 7% higher unit sales and 8% higher selling prices. Organic unit growth was 5%, with acquisitions contributing 2%.
- Q3 operating earnings increased 9.0%, while gross margin declined. Management said falling lumber prices during the quarter benefited fixed-price products but pressured products with variable, lumber-indexed pricing.
- For the first nine months, net sales increased 17.7%, operating earnings 15.6%, and controlling-interest earnings 33.6%. Diluted EPS increased 32.6%.
- Operating cash flow was $60.1 million for the first nine months, versus $97.4 million a year earlier. The company cited a $100.5 million seasonal increase in working capital, including inventory above internal targets.
- Capital expenditures were $74.5 million; acquisitions used $39.0 million. Investing cash outflow was $85.6 million. Financing cash inflow was $23.8 million, including $75 million of new senior notes and net revolving-credit repayments of about $32.1 million.
- At September 29, cash and cash equivalents were $26.3 million; current assets were $1,046.9 million and current liabilities $358.3 million. Long-term debt was $186.5 million and current debt $0.1 million. Total liabilities were $585.4 million.
- The company had $37 million outstanding on its $295 million revolver, including approximately $9.8 million of letters of credit, and reported about $258 million of remaining availability after letters of credit. It was compliant with debt covenants. On November 2, it renewed the facility for five years and increased availability to $375 million.
Material changes and management commentary
- Q3 revenue increased in all three markets: retail 13.3%, industrial 14.8%, and construction 17.0%. The South segment had the strongest sales growth, while North operating profit declined 14.1% and All Other operating profit fell 20.7%. West operating profit increased 11.5%.
- Year-to-date operating profit rose in South and West, was essentially flat in North, and declined 49.7% in All Other, primarily reflecting idX performance.
- Random Lengths framing lumber averaged $472/MBF in Q3 2018, up 13.7% year over year; the year-to-date average was $499/MBF, up 23.5%. The company said lumber price levels and trends affect sales, margins and working capital.
- Inventory levels at many locations exceeded internal targets. Management anticipated reducing inventory in Q4 and using the resulting cash to reduce revolver borrowings. It planned up to $100 million of capital expenditures for 2018.
- Management anticipated a 23.5% effective tax rate for full-year 2018. The Q3 rate was 23.8%, versus 31.9% a year earlier, primarily reflecting U.S. tax-law changes; accounting for certain Tax Act provisions, including GILTI, remained under evaluation.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management described growth initiatives including expanding value-added products, industrial packaging, concrete forming and engineered construction products.
- The $7 million pretax gain on the first-quarter sale of the Medley, Florida property increased reported results. The company leased back the facility for two years while planning replacement capacity and other Florida operations.
- Six acquisitions were completed in the first nine months of 2018. Acquisitions completed since September 2017 and not yet consolidated contributed approximately $21.1 million of Q3 revenue and an operating loss of $0.8 million.
- Key exposures include lumber-price volatility, interest-rate changes on variable-rate debt, foreign exchange, adverse weather or economic conditions, environmental and safety regulation, acquisition execution, and potential tariffs or trade disputes. U.S. imports of Canadian softwood lumber were approximately $243 million in 2017.
- Environmental remediation reserves were approximately $2.5 million. The company disclosed a continuing federal investigation concerning two former employees; it said the company was not a target and did not expect the matter to materially affect its financial condition or results. Management also did not expect ordinary-course lawsuits and claims to have a material impact.
- Outstanding purchase commitments on commenced capital projects were approximately $23.4 million. The company also disclosed $30.6 million of letters of credit and payment and performance bonds for open projects of approximately $19.7 million.
Most important facts for investors to verify
- Whether Q4 inventory reductions materialized and improved operating cash flow and revolver borrowings.
- Whether margin pressure from lumber prices, product mix and pricing trends persisted after the quarter.
- How the lower effective tax rate and unresolved Tax Act accounting, including GILTI, affected subsequent results.
- Whether recent acquisitions and the idX business delivered improved operating performance.
- Capital spending, debt levels and liquidity following the revolver renewal, and progress on the Florida capacity plan.
- Potential effects of tariffs, environmental obligations, contingent guarantees, and the disclosed former-employee investigation.