UFP Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparative period ended March 30, 2019. The interim financial statements are unaudited. Shareholders approved changing the company’s name from Universal Forest Products, Inc. to UFP Industries, Inc. on April 22, 2020.
Business context and results
The company supplies wood, wood-composite and related products to retail, industrial and construction markets. Effective January 1, 2020, it reorganized reporting around those markets; prior-period segment data was recast.
| Metric | Q1 2020 | Q1 2019 | Change / note |
|---|---|---|---|
| Net sales | $1,032.1 million | $1,015.1 million | +1.7%; unit sales rose 5%, while selling prices fell 3%, mainly reflecting lumber-market effects. |
| Gross profit / margin | $167.2 million / 16.2% | $154.3 million / 15.2% | Margin expanded 1.0 percentage point. |
| Operating earnings / margin | $58.6 million / 5.7% | $48.4 million / 4.8% | Operating earnings increased 21%. |
| Net earnings attributable to controlling interest | $40.2 million | $35.5 million | +13%; diluted EPS was $0.65 versus $0.58. |
| Operating cash flow | $(46.2) million | $(55.8) million | Seasonal working-capital investment; cash use improved by $9.7 million. |
| Cash, cash equivalents and restricted cash | $32.9 million at quarter-end | $18.1 million | Cash and restricted cash were $168.7 million at December 28, 2019. |
| Debt, excluding lease liabilities | $163.3 million | $266.6 million | Balance-sheet debt at March 28; lease liabilities were an additional $81.1 million. |
Capital expenditures were $27.3 million; acquisitions and purchases of noncontrolling interests used $18.5 million. Financing cash use included $29.2 million of share repurchases and $7.7 million of dividends. The company reported $3.7 million drawn on its $375 million revolving facility and approximately $361.5 million of remaining availability after letters of credit. It also had $150 million available under a shelf agreement and was in compliance with debt covenants.
Segment performance and material changes
- Retail: Sales were $352.2 million versus $333.1 million; operating earnings were $15.5 million versus $11.0 million. Organic unit sales grew 8%; margin improvement reflected inventory positioning, product mix and fixed-cost leverage.
- Industrial: Sales were $256.5 million versus $274.8 million; operating earnings were $18.1 million versus $18.8 million. Unit sales were flat, with lower selling prices largely reflecting lumber-market changes.
- Construction: Sales were $381.2 million versus $365.1 million; operating earnings were $17.1 million versus $15.3 million. Unit sales grew 6%; gross margin edged down to 16.6% from 16.8%, primarily due to commercial customer and product mix.
The company completed the Quest acquisition on March 13, 2020, for $21.9 million in cash paid and estimated contingent consideration. Acquisitions completed since the end of March 2019 and not consolidated with other operations contributed approximately $9.1 million of Q1 2020 revenue and $0.4 million of operating profit.
Liquidity, outlook, risks and unusual items
- Management attributes first- and second-quarter operating cash outflows primarily to seasonal working-capital needs. The cash cycle improved to 59 days from 65 days a year earlier.
- At quarter-end, management cited total liquidity of approximately $393 million. It reported liquidity of $433 million at the end of April 2020.
- Management said COVID-19 had reduced demand for many customers and that the pandemic’s duration and financial impact could not be reasonably estimated. As of the filing, all but three of approximately 150 plant locations remained operating; two operations had been temporarily idled and one permanently idled.
- No formal quarterly earnings forecast was provided. Management expected positive cash flow and net earnings for full-year 2020, based on its economic and sales assumptions, and said it expected to strengthen liquidity. It reduced the 2020 capital expenditure budget from $100 million to $80 million.
- The CARES Act allowed deferral of an estimated $20 million of payroll taxes, payable in equal installments on December 31, 2021 and December 31, 2022. Management estimated a consolidated decremental operating margin of 10%–15% of sales, while noting actual results depend on demand, pricing, product mix, lumber costs and cost actions.
- Ardellis, the captive insurer, recorded a $3.2 million unrealized investment loss, compared with a $1.3 million gain a year earlier. The effective tax rate was 24.7%, versus 24.3%.
- Risks include COVID-19-related disruption, customer credit deterioration, supplier availability, lumber-price volatility, foreign-exchange and variable-rate interest exposure, and possible impairment charges if operations are idled. Management continued to monitor idX, whose goodwill and identifiable intangibles totaled $12.3 million and $4.5 million, respectively; it said no impairment was then required, but a future charge remained possible.
- Environmental remediation reserves were approximately $2.0 million. Management said ordinary-course lawsuits and claims were not expected to materially affect the financial statements. Outstanding purchase commitments for capital projects were $26.3 million.
Important facts for investors to verify
- How COVID-19 affected subsequent-quarter demand, plant operations, collections and full-year cash generation relative to management’s assumptions.
- Whether reported April liquidity of $433 million and the quarter-end revolving-facility availability remain sufficient as working capital and capital spending change.
- Whether margin gains from inventory positioning and mix persist, particularly amid lumber-price volatility and lower customer demand.
- Progress and purchase accounting for Quest, performance of idX, and any subsequent goodwill or asset-impairment assessments.
- Whether the reduced $80 million capital budget, $26.3 million of project commitments, dividends and buybacks remain consistent with liquidity and operating conditions.