UFP Industries, Inc. — Q3 2019 Form 10-Q
Business context and period. The filing covers the quarter ended September 28, 2019, and the nine months then ended. UFP manufactures, treats, and distributes wood, wood-composite, and other products serving retail, industrial, and construction markets. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,163.0 | $1,212.7 | $3,418.0 | $3,501.0 |
| Gross profit / margin | $187.3 / 16.1% | $158.7 / 13.1% | $528.3 / 15.5% | $455.3 / 13.0% |
| Operating earnings | $70.5 | $57.0 | $193.2 | $161.8 |
| Net earnings attributable to controlling interest | $51.9 | $41.2 | $141.9 | $118.1 |
| Diluted earnings per share | $0.84 | $0.66 | $2.30 | $1.91 |
- Sales and volume: Net sales declined 4.1% in Q3 and 2.4% year to date. Management attributed the decline mainly to lower lumber-related selling prices: Q3 unit sales rose 7% while prices fell 11%; nine-month unit sales rose 6% while prices fell 8%. Organic unit growth was 6% in Q3 and 4% year to date.
- Profitability: Operating earnings increased 23.6% in Q3 and 19.4% year to date; controlling-interest earnings rose about 25.8% and 20.2%, respectively. Management cited improved value-added product mix, lower lumber costs, favorable lumber-price trends, organic growth, and fixed-cost leverage. Value-added products were 67.6% of Q3 sales, versus 62.1% a year earlier.
- Expenses and interest: SG&A rose 13.4% in Q3 and 11.3% year to date, including higher incentive compensation, wages, benefits, sales incentives, and acquisition-related costs. The nine-month effective tax rate was 24.0%, versus 23.1%; Q3 rates were 23.8% and 23.9%, respectively.
- Cash flow: Operating cash flow for the first nine months was $198.1 million, versus $60.1 million in 2018. Management attributed the improvement principally to lower working-capital investment, lower lumber prices, and sales of inventory purchased opportunistically in late 2018. Investing cash outflow was $106.0 million, including $66.3 million of capital expenditures and $38.7 million for acquisitions. Financing cash outflow was $55.2 million. Cash, cash equivalents, and restricted cash ended at $65.2 million. Management also said Q3 operating cash flow improved $138 million year over year.
- Balance sheet and liquidity: At September 28, cash was $64.5 million, current assets $1,092.1 million, and current liabilities $385.4 million. Long-term debt was $162.9 million and current debt $0.2 million; operating lease liabilities totaled $75.4 million following adoption of the lease standard. The company reported $3.3 million drawn on its $375 million revolver and approximately $361.9 million of remaining availability after letters of credit. It was in compliance with debt covenants. Long-term debt was down from $202.1 million at December 29, 2018.
Material changes and management commentary
- Random Lengths framing lumber averaged $355/MBF in Q3 2019, down 24.8% from Q3 2018; the year-to-date average was down 29.7%. Management said lower lumber prices reduce reported sales but can support margins, depending on product pricing and inventory timing.
- Three acquisitions were completed in the first nine months of 2019. Acquisitions completed since September 2018 contributed $7.9 million of Q3 revenue and $56.8 million for the first nine months of 2019, according to the filing.
- The All Other segment recorded operating losses of $0.5 million in Q3 and $0.4 million year to date, principally related to idX construction-market losses; management also cited 2019 Deckorators advertising expense. The company continued to monitor idX, which was performing below expectations, but said it considered its longer-term projections reasonable and did not record goodwill impairment.
- Effective January 1, 2020, the company planned to reorganize reporting segments around markets served—UFP Retail, UFP Construction, and UFP Industrial—instead of geography.
Outlook, risks, contingencies, and unusual items
- No company-wide earnings or revenue forecast is provided in the filing. Management set a 2019 goal of at least $525 million in annual new-product sales; year-to-date new-product sales were $428.8 million, up 12.4%.
- Management planned up to $100 million of capital expenditures for 2019, including capacity and productivity projects for Deckorators, replacement capacity in South Florida, and industrial expansion and automation. Capital-project purchase commitments were approximately $46.1 million.
- Key risks include lumber-price fluctuations, weather and economic conditions, transportation, environmental and safety regulation, interest-rate exposure on variable-rate debt, foreign-currency exposure, and the execution and integration of acquisitions. The company noted that prolonged lumber-price trends can affect sales, margins, and profitability.
- Environmental remediation reserves were approximately $2.0 million. Management said pending ordinary-course lawsuits and claims were not expected to materially affect the financial statements. Outstanding payment and performance bonds were $14.6 million for open projects and $9.0 million for completed projects still under warranty; letters of credit totaled $37.3 million.
- Seasonality materially affects working capital and cash flows; the company typically generates significant operating cash flow in the third and fourth quarters. No significant off-balance-sheet transactions were reported.
Important facts for investors to verify
- Whether unit growth and improved value-added mix can sustain earnings if lumber prices, customer demand, or product pricing trends change.
- Progress and performance of idX, including whether future results require a goodwill impairment charge.
- Delivery against the 2019 capital-spending plan and the new-product sales goal, and the returns from recent acquisitions.
- Liquidity, revolver availability, covenant compliance, and the effects of seasonal working-capital needs and lease obligations.
- Potential changes in environmental remediation costs, project-bond and warranty claims, and other disclosed contingencies.