UFP Industries, Inc. — Q3 2020 Form 10-Q
Business context and period. The company supplies wood, wood-composite and other products to retail, industrial and construction markets. This unaudited quarterly report covers the three and nine months ended September 26, 2020; comparisons are with the periods ended September 28, 2019. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $1,486.2 | $1,163.0 | $3,760.3 | $3,418.0 |
| Gross profit / margin | $241.1 / 16.2% | $187.3 / 16.1% | $613.2 / 16.3% | $528.3 / 15.5% |
| Operating earnings / margin | $106.6 / 7.2% | $70.5 / 6.1% | $257.6 / 6.9% | $193.2 / 5.7% |
| Net earnings attributable to controlling interest | $77.2 | $51.9 | $183.8 | $141.9 |
| Diluted EPS | $1.25 | $0.84 | $2.98 | $2.30 |
| Operating cash flow | Not separately reported | Not separately reported | $185.1 | $198.1 |
Q3 net sales rose 27.8%, operating earnings 51.3%, and controlling-interest earnings 48.8% year over year. For the first nine months, sales increased 10.0%, operating earnings 33.4%, and controlling-interest earnings 29.5%. Q3 earnings growth reflected strong Retail performance, fixed-cost leverage and favorable effects of rising lumber prices on certain variable-priced products. Lumber prices also pressured margins in several product lines.
Liquidity, debt and capital
- At September 26, cash and cash equivalents were $346.2; total current assets were $1,512.1 and current liabilities $493.6. The current ratio was approximately 3.1.
- Total debt was approximately $314.0, including $2.8 current and $311.3 long-term. Management reported cash exceeding debt by about $32 million and total liquidity of approximately $700 million.
- The $375 million revolving facility had $4.4 million drawn and approximately $360.6 million available after letters of credit. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $100.9, including $67.0 of capital expenditures and $34.8 for acquisitions and purchases of noncontrolling interests. Financing cash inflow was $95.2, including $150 million of long-term debt issuance; the company also paid $23.0 in dividends and repurchased approximately 756,000 shares for $29.2 million.
Segments and material changes
- Retail: Q3 sales increased approximately 76%, with unit sales up 34% and selling prices up 42%. Operating earnings rose to $62.2 from $14.3. Strong home-improvement demand drove results.
- Industrial: Q3 sales increased 4%; unit sales fell 2%. Operating earnings rose to $22.0 from $20.8. Nine-month operating earnings declined to $53.8 from $60.2 as unit sales weakened.
- Construction: Q3 sales were approximately flat as higher prices offset a 9% unit-sales decline. Operating earnings fell to $16.5 from $21.4. Nine-month operating earnings declined to $50.5 from $56.3.
- The Random Lengths framing lumber composite averaged $727/MBF in Q3 2020 versus $355/MBF in Q3 2019. Management attributed the increase to production curtailments and stronger-than-expected demand. Higher prices lifted reported sales but affected margins and working capital differently across fixed- and variable-priced products.
- The company reorganized reporting around markets effective January 1, 2020; prior segment results were recast. It acquired T&R Lumber and Quest during 2020. Acquisitions since September 2019 contributed $10.8 million in Q3 sales and $17.8 million in nine-month sales.
Outlook, risks and contingencies
- Management expected lumber prices to normalize lower in Q4 as supply catches up and seasonal demand slows. Lower prices could reduce per-unit profit on variable-priced products, potentially benefit fixed-priced products, and release working capital.
- Management set a 2020 capital-expenditure budget of $100 million, focused on growth, capacity and automation. Its stated long-term goals include unit-sales growth exceeding U.S. GDP by 4–6%, operating-earnings growth above unit-sales growth, and returns on invested capital above the cost of capital. These are goals, not specific quarterly guidance.
- COVID-19 remains a material uncertainty: renewed restrictions could reduce customer demand, disrupt employees or suppliers, and lead to additional facility idling or impairment charges. Retail demand had been exceptionally strong, with no assurance it would persist. Industrial and construction customers had experienced shutdowns and weaker demand.
- Other principal risks include lumber-price volatility, materials availability and cost, labor costs, adverse economic and weather conditions, environmental and safety regulation, and acquisition execution. Management estimated a 10%–15% decremental operating margin under its stated assumptions, while noting actual results depend on mix, prices and cost flexibility.
- Environmental remediation reserves were approximately $1.9 million. Management said ordinary-course lawsuits and claims were not expected to materially affect the financial statements. Outstanding commitments included $21.3 million for commenced capital projects, $43.8 million of letters of credit, and payment/performance bonds of approximately $14.6 million in total for open and completed projects under warranty.
- Subsequent events: a 50% interest in Enwrap Logistic & Packaging was acquired for $5.3 million on September 30, 2020; FRCT was acquired for $5.9 million on October 1, 2020.
Most important facts for investors to verify
- Whether unusually strong Retail demand continued after Q3 and how much growth was pandemic-related.
- Whether lumber-price normalization affected margins as management anticipated, especially across fixed- and variable-priced products.
- Working-capital and operating-cash-flow trends as lumber prices and seasonal demand changed.
- Progress and returns on the $100 million capital budget, acquisitions and the newly issued long-term notes.
- COVID-19 impacts on customer demand, suppliers, operations and potential asset impairment; also monitor Industrial and Construction recovery.