UFP Industries, Inc. — Q2 2021 Form 10-Q
Business and period: UFP supplies wood, wood-composite and other products to retail, industrial and construction markets. The quarter ended June 26, 2021; comparisons are with the quarter ended June 27, 2020. Financial figures below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2,700.5 million | $1,242.0 million | $4,525.5 million | $2,274.1 million |
| Gross profit | $421.3 million | $204.9 million | $707.8 million | $372.2 million |
| Operating earnings | $236.9 million | $92.4 million | $374.4 million | $151.0 million |
| Net earnings attributable to controlling interest | $173.4 million | $66.5 million | $276.7 million | $106.6 million |
| Diluted EPS | $2.78 | $1.08 | $4.45 | $1.73 |
| Gross margin | 15.6% | 16.5% | 15.6% | 16.4% |
| Operating margin | 8.8% | 7.4% | 8.3% | 6.6% |
- Q2 sales rose 117.4%: management attributed the increase to 70% higher selling prices, 11% organic unit growth and 36% acquisition-related unit growth. Q2 operating earnings increased 156.5%.
- Six-month operating cash flow was negative $115.7 million, versus positive $147.2 million a year earlier. The company attributed the shift principally to a $443.9 million working-capital investment, including increases in receivables and inventory.
- Cash, cash equivalents and restricted cash totaled $44.9 million at period-end, down from $436.6 million at year-end 2020. Total debt was approximately $572.0 million, plus a $34.2 million cash overdraft; management reported net debt of approximately $562 million. Total liquidity was approximately $288 million, including revolving-credit availability.
- Investing cash outflow was $514.0 million, including $433.2 million for acquisitions and $79.0 million of capital expenditures. Financing provided $237.9 million, principally from net borrowings.
- At June 26, the company had $265 million drawn on its $550 million revolving facility and approximately $277.9 million of remaining availability after letters of credit. It reported compliance with debt covenants.
Material changes and operating drivers
- Random Lengths framing lumber averaged $1,284 per thousand board feet in Q2 2021, up 219.4% year over year. Management said the sharp rise in lumber prices and strong demand drove higher selling prices, revenue and working-capital needs.
- Q2 organic unit sales increased 26% in Industrial and Construction, while Retail organic unit sales declined 4%. Acquisitions contributed substantially to reported growth.
- Operating earnings increased in each principal segment: Retail to $62.1 million from $45.8 million; Industrial to $79.5 million from $15.4 million; and Construction to $67.1 million from $19.5 million.
- Gross margin fell year over year despite higher operating margin. Management cited the sales mix and lumber-price effects; SG&A declined to 43.8% of gross profit from 55.5%.
- Acquisitions included PalletOne, Spartanburg Forest Products, J.C. Gilmore, Endurable Building Products and Walnut Hollow. Acquisitions completed since June 2020 contributed approximately $698.2 million of six-month sales and $28.9 million of operating profit, according to the filing.
Outlook, risks and unusual items
- Management expected lumber prices and demand to normalize in the second half of 2021 and anticipated seasonal working capital would convert to cash, increasing liquidity. These are expectations, not a quantified earnings forecast.
- Management warned that continued lumber-price declines could pressure variable-priced commodity products, particularly pressure-treated lumber, while expecting benefits for fixed-price value-added products to more than offset that impact.
- The company recorded a $23.2 million lower-of-cost-or-net-realizable-value inventory adjustment at quarter-end, primarily related to falling lumber prices. The Retail segment’s acquisition-related results included a $20.9 million inventory adjustment; ProWood recorded a separate $2.3 million adjustment.
- Management set a 2021 goal of at least $575 million in annual new-product sales. Six-month new-product sales were $396.9 million, up 63.1% year over year. Planned 2021 capital spending was approximately $140 million; $45.1 million of capital-project purchase commitments were outstanding.
- Risks discussed include lumber-price volatility, weather and economic conditions, supply-chain constraints, regulatory matters and acquisition execution. The filing reported no material off-balance-sheet transactions and stated that pending ordinary-course claims were not expected to materially affect the financial statements. Outstanding payment and performance bonds were approximately $38.5 million; letters of credit totaled $52.7 million.
- A June 30, 2021 subsequent event: UFP Real Estate sold property for $13.4 million and recognized a $6.7 million gain.
Important facts for investors to verify
- Whether the anticipated second-half normalization in lumber prices, demand and working capital occurred, and how it affected cash generation and margins.
- The sustainability of unusually strong earnings amid lower gross margins, high lumber-price volatility and the recorded inventory valuation adjustment.
- Acquisition contribution, integration results and the associated increase in debt and goodwill.
- Actual liquidity, revolver usage and covenant headroom as seasonal working capital unwinds.
- Progress toward the $575 million new-product sales goal and approximately $140 million capital-spending plan.