UFP Industries, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are to the quarter ended September 24, 2022. Financial amounts below are in U.S. dollars; “million” is abbreviated as “m.” UFP designs, manufactures and supplies wood and wood-alternative products across Retail, Packaging and Construction markets.
Financial results and liquidity
- Q3 revenue and earnings: Net sales were $1,827.6m, down 21.3%. Gross profit was $364.4m, down 19.1%; operating earnings were $167.3m, down 29.4%; net earnings attributable to controlling interest were $134.0m, down 19.9%. Diluted EPS was $2.10 versus $2.66.
- Margins: Gross margin increased to 19.9% from 19.4%, while operating margin decreased to 9.2% from 10.2%. SG&A was 10.7% of sales versus 9.2% and 53.7% of gross profit versus 47.6%.
- First nine months: Net sales were $5,694.0m, down 26.2%; operating earnings were $522.5m, down 33.1%; net earnings attributable to controlling interest were $410.9m, down 26.6%. Diluted EPS was $6.45 versus $8.89. Gross margin was 19.7% versus 18.6%; operating margin was 9.2% versus 10.1%.
- Cash flow: Nine-month operating cash flow was $711.8m versus $533.0m. Investing cash outflow was $187.5m, including $130.9m of capital expenditures; financing cash outflow was $126.2m. Cash, cash equivalents and restricted cash ended at $960.9m. Operating cash flow benefited from a $178m reduction in working capital, largely reflecting lower lumber prices and softer demand. Operating cash flow less reported capital expenditures was approximately $580.9m, a simple derived measure.
- Balance sheet and debt: Cash and cash equivalents were $957.1m; total assets were $4,004.1m. Long-term debt was $273.3m and its current portion was $1.5m. The company reported $3m drawn on its $750m revolving facility, approximately $709m of remaining availability after letters of credit, and compliance with debt covenants. Management reported a $682m net cash surplus and total liquidity of approximately $2.2bn, including available borrowing capacity under a lender shelf agreement.
- Capital returns: Nine-month dividends paid were $49.7m and common-stock repurchases were $62.1m. The board approved a quarterly dividend of $0.30 per share, payable December 15, 2023, and authorized up to $200m of repurchases through July 31, 2024; approximately $173m of authorization remained at quarter-end.
Material changes and operating drivers
- Management attributed the consolidated Q3 sales decline to a 12.3% decrease in selling prices and a 9.0% decrease in organic units. Lower lumber prices and competitive pricing pressure affected selling prices; demand and unit volumes also weakened.
- Retail: Q3 sales decreased 16%, but operating earnings rose 56.7% to $45.3m. Gross profit improved on pressure-treated lumber performance, managed inventory programs and Deckorators products and operational improvements.
- Packaging: Q3 sales decreased 23% and operating earnings fell 46.4% to $41.4m. Lower demand, competitive pricing and unfavorable fixed-cost variances weighed on gross profit; acquisitions provided some offset.
- Construction: Q3 sales decreased 25% and operating earnings fell 37.0% to $69.6m. Lower housing and commercial activity, competitive pricing and fixed-cost variances pressured results. Site-built backlog was estimated at $91m, compared with $118m a year earlier.
- Average Q3 Random Lengths lumber prices were down 27.1% year over year; Southern Yellow Pine was down 23.0%. UFP said lumber cost was 38.9% of sales in the first nine months, versus 51.9% a year earlier. Value-added products represented 68.7% of Q3 sales, up from 66.3%.
- Inventory decreased to $744.7m from $973.2m at December 31, 2022. The company noted seasonality: working capital generally builds during the spring and summer selling season and releases in the third and fourth quarters.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or EPS forecast. Management’s long-term goals include annual unit growth of 5%–7% and a sustained adjusted EBITDA margin of at least 10%.
- Management anticipated lumber prices would remain below 2022 levels for the rest of 2023 and follow more typical seasonal patterns. It expected retail demand to be slightly down and industrial production to remain consistently down for the balance of 2023. Its cited consensus housing-start outlook was a 10%–12% decline in 2023; the National Association of Home Builders forecast a 21% decline in manufactured-home shipments.
- The estimated annual consolidated decremental operating margin was revised to 11%–14%; the first-nine-month result was 12.8%. Segment estimates were 24%–27% for Packaging and 14%–17% for Construction. Management anticipated improved Retail operating profits for 2023, partly due to less volatile lumber prices and operational improvements.
- Capital expenditure guidance was reduced to $175m–$200m. Quarter-end purchase commitments on commenced capital projects were approximately $81.3m. Management intended to fund remaining-year capital spending and commitments from operating cash flow.
- Key risks cited include lumber-price and currency fluctuations, inflation, weaker market conditions, customer concentration, supply-chain or capacity issues, acquisition execution, regulation, weather, transportation costs, cybersecurity, tariffs and pandemics. The company said prolonged lumber-price trends can affect sales volume, gross margins and profitability.
- Contingencies included $47.8m of outstanding letters of credit, $14.4m of bonds for open projects and $12.6m of bonds for completed projects still under warranty. Management stated it did not expect lawsuits and claims arising in the normal course to materially affect the financial statements. No significant off-balance-sheet transactions were reported.
- UFP acquired an 80% interest in Spanish pallet business UFP Palets for approximately $54.3m, accounted for under the equity method because the minority holder’s rights prevent UFP from having control. Its carrying value was $53.6m at quarter-end. A subsequent-event disclosure reports 208,057 additional shares repurchased for $20.1m after quarter-end.
Important facts for investors to verify
- Whether demand, unit volumes and pricing stabilize across Packaging and Construction, and whether Retail’s relative performance persists.
- Whether fixed manufacturing costs, competitive pricing and lumber-market movements continue to pressure segment margins; monitor the stated decremental-margin ranges against actual results.
- Cash conversion and working-capital trends after the seasonal inventory release, alongside capital spending and the $81.3m of project commitments.
- Liquidity calculations, available revolver and shelf capacity, covenant headroom, and the treatment of letters of credit and lease liabilities in assessing leverage.
- Progress, valuation and potential future put/call obligations related to UFP Palets and the separate Dempsey equity-method investment.
- Execution of the capital allocation plan, including repurchases, the increased dividend and remaining repurchase authorization.