UFP Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 24, 2022; comparisons are with the quarter ended September 25, 2021. Financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars.
Business context and results
UFP manufactures and distributes wood, wood-composite, and other products for retail, industrial, and construction markets. For Q3, net sales rose 10.9% to $2.323 billion, reflecting higher selling prices and unit growth. For the first nine months, net sales increased 16.5% to $7.713 billion.
- Q3 gross profit increased 37.4% to $450.2 million; gross margin rose to 19.4% from 15.6%.
- Q3 operating earnings increased 41.0% to $237.0 million; operating margin was 10.2%, versus 8.0%.
- Q3 net earnings attributable to controlling interest rose to $167.2 million from $121.0 million. Diluted EPS was $2.66, up from $1.94.
- For the first nine months, operating earnings increased 44.1% to $781.6 million; net earnings attributable to controlling interest rose to $560.1 million from $397.7 million. Diluted EPS was $8.89, versus $6.38.
- Q3 sales increased in Retail, Industrial, and Construction. Segment operating earnings were $28.9 million, $77.3 million, and $110.4 million, respectively. Retail returned to operating profit from a $26.2 million loss in the year-earlier quarter.
Cash flow, balance sheet, and capital allocation
- Nine-month operating cash flow was $533.0 million, versus $281.8 million in 2021. Capital expenditures were $113.7 million; acquisitions and an equity-method investment used $105.2 million in investing cash.
- Cash and cash equivalents were $449.1 million at September 24, 2022. Total debt was $317.0 million, including $41.5 million current and $275.4 million long-term. Management reported a $134.6 million cash surplus and approximately $1.5 billion of total liquidity, including available revolving and shelf borrowing capacity.
- Working capital was affected by seasonal demand. The cash cycle was 55 days in Q3, compared with 57 days a year earlier, principally due to lower inventory days.
- The company repurchased approximately 1.21 million shares for $93.2 million during the first nine months, at an average $77.06 per share. Dividends paid totaled $43.4 million; the quarterly dividend was increased to $0.25 per share.
- Planned 2022 capital spending was approximately $175 million, subject to supplier lead times. Outstanding commitments on commenced capital projects were $65.4 million.
Changes, outlook, and risks
- Management attributed Q3 growth to a 5.9% increase in selling prices and 5.0% unit growth (2.0% from acquisitions and 3.0% organic). Improved value-added product mix, pricing discipline, and fixed-cost leverage supported profit growth. Value-added products represented 66.3% of Q3 sales, versus 64.1% a year earlier.
- Lumber prices fell during Q3 from earlier 2022 levels, while Q3 average framing-lumber and Southern Yellow Pine prices were still 16.7% and 15.1% above their respective prior-year averages. Management cautioned that lumber price levels and trends can affect sales, working capital, and margins.
- Management cited possible U.S. recession conditions and did not provide specific near-term earnings guidance. Long-term goals include 5–7% annual unit sales growth, a sustained 10% EBITDA margin, returns above cost of capital, and a conservative capital structure. Management estimated consolidated decremental operating margins of 15–20% of sales declines, with higher ranges for Industrial and Construction than Retail.
- Risks highlighted include lumber-price volatility, adverse economic conditions and weather, regulation, and acquisition execution. Higher interest rates, inflation, labor costs, capacity constraints, and supplier lead times may also affect results. The filing reports no material off-balance-sheet transactions and says management does not expect ordinary-course claims and lawsuits to materially affect the financial statements.
- Other commitments include $22.7 million of payment and performance bonds for open projects, $30.6 million for completed projects still under warranty, and $59.9 million of letters of credit, primarily for insurance and industrial development bonds. The company was in compliance with debt covenants. It had $38.7 million of debt maturities due in December 2022, which it expected to repay with operating cash and available balances.
- The company acquired businesses and invested in Dempsey Wood Products, in which it owns 50% and applies the equity method. The other owners hold put rights and the company holds a call right, first exercisable in June 2025; the investment’s carrying value was $67.0 million.
Important facts for investors to verify
- Whether operating cash flow, working-capital trends, and seasonal inventory turns remain favorable as demand changes.
- How falling or volatile lumber prices, pricing lags, and product mix affect margins and inventory values.
- Whether the company’s recession assumptions, segment demand, and estimated decremental margins prove accurate.
- Execution and returns on acquisitions, capacity projects, and the Dempsey investment, including the future put/call terms.
- Debt repayment, borrowing availability, capital spending, share repurchases, and dividends relative to future cash generation.
- The filing presents cash-flow amounts of $533.0 million in the financial statements and approximately $535 million in an MD&A highlight; confirm the intended rounded figure when comparing disclosures.