UFP Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
UFP Industries supplies wood, wood-composite and other products to retail, industrial and construction markets. The company reorganized its segments around these markets effective January 1, 2020, and recast prior-period segment data. Shareholders approved the company’s name change from Universal Forest Products, Inc. to UFP Industries, Inc. on April 22, 2020.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,242.0 million | $1,239.8 million | $2,274.1 million | $2,254.9 million |
| Gross profit | $204.9 million | $186.7 million | $372.2 million | $341.0 million |
| Gross margin | 16.5% | 15.1% | 16.4% | 15.1% |
| Operating earnings | $92.4 million | $74.2 million | $151.0 million | $122.7 million |
| Net earnings attributable to controlling interest | $66.5 million | $54.5 million | $106.6 million | $90.1 million |
| Diluted EPS | $1.08 | $0.88 | $1.73 | $1.46 |
- Q2 net sales were up 0.2%, while operating earnings rose 24.4% and diluted EPS rose 22.7%. First-half net sales increased 0.8%, operating earnings 23.0%, and diluted EPS 18.5%.
- Operating margin was 7.4% in Q2 versus 6.0% a year earlier; first-half operating margin was 6.6% versus 5.4%. The effective tax rate was 25.3% for Q2 and 25.1% for the first half, up from 24.0% and 24.1%, respectively.
- Cash from operations for the first half was $147.2 million versus $70.9 million. Investing activities used $66.2 million and financing activities used $47.0 million. Cash, cash equivalents and restricted cash totaled $201.3 million at period-end.
- Cash and cash equivalents were $200.5 million. Debt totaled approximately $163.8 million, including current maturities, leaving cash in excess of debt by about $36.7 million. Management reported total liquidity of approximately $562 million. The $375 million revolving facility had $4.2 million drawn and about $361 million available after letters of credit; a further $150 million was available under a long-term debt shelf agreement. The company was in compliance with its debt covenants.
- Capital expenditures were $46.7 million in the first half. The company paid $15.4 million in dividends and repurchased approximately 756,000 shares for $29.2 million, at an average $38.62 per share.
- Segment operating earnings in Q2: Retail $45.8 million, Industrial $15.4 million and Construction $19.5 million. Retail earnings increased substantially year over year; Industrial and Construction earnings declined.
Material changes versus the prior comparable period
- Q2 unit sales declined 3% overall: Retail increased 22%, while Industrial and Construction declined 27% and 16%, respectively. Management attributed the declines mainly to pandemic-related demand weakness; consumer home-improvement demand supported Retail.
- Higher lumber prices increased selling prices, but the main reported profit drivers were strong organic Retail growth, fixed-cost leverage, inventory positioning and product mix. The Random Lengths framing lumber composite averaged $402/MBF in Q2 2020, up 17.2% year over year; the company said the higher lumber-price level can reduce reported gross margins.
- First-half operating cash flow improved by approximately $76.3 million. Management cited higher earnings, non-cash expenses and accrued liabilities, including accrued income taxes and compensation. Working capital increased seasonally by $1.3 million from year-end.
- Retail Q2 net sales increased approximately 26%, helped by demand for pressure-treated lumber, fencing and home décor products. Industrial sales fell 23%; Construction sales fell 13%. First-half sales decreased 15% in Industrial and 5% in Construction, while Retail sales increased 18%.
- Acquisitions completed since mid-2019 contributed approximately $13.8 million of Q2 sales and $1.3 million of Q2 operating profit. The March 2020 Quest acquisition added to the Construction segment. A further acquisition, T&R Lumber and affiliates for $17 million, closed on July 14, after quarter-end.
Outlook, commentary and risks
- The company did not provide specific 2020 earnings or sales guidance. It said COVID-19 could adversely affect achievement of its long-term goals and that the duration and severity of the pandemic and restrictions could not be reasonably estimated.
- Most operations and customers were deemed essential. The filing reports that all but three of more than 150 plants remained operating; two operations had been temporarily idled and one permanently idled. Further idling could result in lost sales, impairment charges or exit costs.
- Retail demand was strong, while Industrial and Construction demand had weakened. Management cautioned that retail strength might not persist and that renewed pandemic restrictions could further affect demand. Suppliers’ earlier capacity reductions had constrained product availability, although suppliers were taking steps to increase capacity.
- The company’s stated long-term objectives are unit sales growth 4%–6% above positive U.S. GDP, operating earnings growth above unit sales growth, and return on invested capital above weighted average cost of capital. Management estimated a 10%–15% decremental operating margin based on 2019 results and mix, subject to factors including pricing, mix, lumber costs and cost flexibility.
- The 2020 capital expenditure budget was raised to $100 million from $80 million to pursue growth opportunities. The company expected to fund capital spending and existing commitments through operating cash flow or cash surplus. Approximately $20 million of payroll taxes could be deferred under the CARES Act, payable in equal installments in December 2021 and December 2022.
- Key risks include COVID-19 and customer credit, lumber price volatility, supplier availability, economic and construction-market weakness, weather, environmental regulation, foreign currency exposure, and acquisition execution. Environmental remediation reserves were approximately $1.9 million. Management said ordinary-course lawsuits and claims were not expected to materially affect the financial statements; no legal proceedings were listed in Part II.
- Goodwill and identifiable intangible assets associated with the idX commercial reporting unit were $12.3 million and $4.5 million, respectively. Management said impairment risk exists but did not consider an impairment necessary at quarter-end.
Important facts for investors to verify
- Whether the strong Retail demand and reported margin gains continued, and whether Industrial and Construction volumes recovered after quarter-end.
- How lumber-price movements, inventory costs and product mix affected margins after June 27, including potential exposure in treated lumber and fixed-price construction arrangements.
- Whether operating cash flow remains strong as seasonal working capital reverses, and how the $100 million capital budget and acquisition spending affect liquidity.
- COVID-19 impacts on plant operations, customer credit and supplier capacity, as well as any subsequent restrictions or demand changes.
- Progress and performance of recent acquisitions, the post-quarter T&R purchase, and the ongoing impairment risk at the idX reporting unit.