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Nov. 3, 2021, 4:08 p.m. EDT

10-Q: UFP INDUSTRIES INC

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(EDGAR Online via COMTEX) -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UFP Industries, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and Australia that supply wood, wood composite and other products to three markets: retail, industrial, and construction. We are headquartered in Grand Rapids, Michigan. For more information about UFP Industries, Inc., or our affiliated operations, go to www.ufpi.com .

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management's beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like "anticipates," "believes," "confident," "estimates," "expects," "forecasts," "likely," "plans," "projects," "should," variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations, government imposed "stay at home" orders and directives to cease or curtail operations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of the third quarter of 2021.

OVERVIEW

Our results for the third quarter of 2021 include the following highlights:

Our net sales were up 41% compared to the third quarter of 2020, which was comprised of a 28% increase in selling prices primarily due to the commodity lumber market (see Historical Lumber Prices below), a 16% increase in unit ? sales due to acquisitions completed since September of last year, and a 3% decline in organic unit sales. Organic unit growth of 16% in our construction segment was offset an organic unit decline of 19% in our retail segment, while industrial units were flat.

Our operating profits increased $61.5 million, or 58%, compared to the third quarter of 2020. This increase resulted from a variety of factors including strong demand from our industrial and construction segments, leveraging our fixed costs, and increased sales of value-added and new products that have higher margins. These favorable factors more than offset the impact that falling lumber prices had on the gross profits of commodity-based products sold ? on a variable price that are not purchased through a vendor managed inventory program, particularly our pressure-treated lumber products sold in the retail segment. Acquisitions contributed approximately $2.6 million to our increase in operating profits. Excluding the impact of acquisitions, we estimate that value-added products contributed $93 million to our quarter over quarter increase in gross profits, which was offset by a decrease of approximately $23 million in commodity-based products.

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UFP INDUSTRIES, INC.

Our cash flows provided by operations for the first nine months of 2021 was $282 million compared to $185 million during the first nine months of 2020 in spite of an increase in our net working capital, which increased $133 million compared to the prior year. The increase in our net working capital during 2021 is due to a combination of unusually high lumber prices and strong market demand in our industrial and construction segments. In addition, our investment in net working capital at the end of the third quarter of 2020 was unusually ? low due to unexpectedly strong demand in our retail segment and difficulty maintaining an adequate supply of inventory due to supply chain constraints.

Our net debt (debt and cash overdraft less cash) at the end of September 2021 was $182 million compared to net cash of $32 million at the end of September ? 2020. Our unused borrowing capacity under revolving credit facilities and cash surplus resulted in total liquidity of approximately $668 million at the end of the third quarter of 2021.







                                    HISTORICAL LUMBER PRICES
        We experience significant fluctuations in the cost of commodity lumber products
        from primary producers ("Lumber Market"). The following table presents the
        Random Lengths framing lumber composite price:
                                              Random Lengths Composite
                                                   Average $/MBF
                                                2021              2020
        January                            $           890      $     377
        February                                       954            402
        March                                        1,035            420
        April                                        1,080            358
        May                                          1,428            394
        June                                         1,344            455
        July                                           690            530
        August                                         443            716
        September                                      412            934
        Third quarter average              $           515      $     727
        Year-to-date average               $           920      $     510
        Third quarter percentage change             (29.2) %
        Year-to-date percentage change                80.4 %
        


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                                      UFP INDUSTRIES, INC.
        In addition, a Southern Yellow Pine ("SYP") composite price, which we prepare
        and use, is presented below. Our purchases of this species comprise almost
        two-thirds of our total lumber purchases.
                                             Random Lengths SYP
                                               Average $/MBF
                                               2021         2020
        January                            $        858     $ 346
        February                                    903       345
        March                                       938       360
        April                                       922       333
        May                                       1,150       412
        June                                      1,052       494
        July                                        564       552
        August                                      448       729
        September                                   438       886
        Third quarter average              $        483     $ 722
        Year-to-date average               $        808     $ 495
        


Third quarter percentage change (33.1) % Year-to-date percentage change 63.2 %

The sequential increase in overall lumber prices for the first half of the year was primarily due to strong market demand as well as certain constraints in the supply chain of lumber. Prices began to fall in June 2021 as pandemic related restrictions were lifted, the economy re-opened, and consumers shifted their spending to other areas. We believe prices in the third quarter of 2021 reflect normalized levels. A decline in lumber prices impacts our profitability of products sold with fixed and variable prices, as discussed below.

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 58.0% and 48.7% of our sales in the first nine months of 2021 and 2020, respectively. The increase from the prior year ratio reflects the impact of higher lumber prices and the results of PalletOne's subsidiaries, Sunbelt and Spartanburg Forest Products.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

Products with fixed selling prices. These products include value-added products, such as manufactured items, sold within all segments. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time. In order to reduce any exposure to adverse trends in ? the price of component lumber products, we attempt to lock in costs with our suppliers or purchase necessary inventory for these sales commitments. The time period limitation eventually allows us to periodically re-price our products for changes in lumber costs from our suppliers. We believe our percentage of sales of fixed price items is usually greatest in our third and fourth quarters.

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UFP INDUSTRIES, INC.

Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profit. These products primarily include treated lumber, panel goods, other commodity-type items, and trusses sold to the manufactured housing industry. For these products, we estimate the ? customers' needs and we carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins. We believe our sales of these products are at their highest relative level in our second quarter, primarily due to pressure-treated lumber sold in our retail segment.

For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.

The greatest risk associated with changes in the trend of lumber prices is on the following products:

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprised approximately 20% of our total annual sales in 2020. This exposure is less significant with remanufactured lumber, panel goods, other commodity-type items, and trusses sold to the manufactured housing market due to the higher rate of inventory turnover. We attempt to mitigate the risk associated with ? treated lumber through inventory consignment programs with our vendors. Our annual purchases of inventory through these consignment programs totaled approximately 19% of our total lumber purchases in 2020. Our new Sunbelt and Spartanburg Forest Products plants operated with limited amounts of vendor consignment inventory and were more exposed to the impact of falling lumber prices during the second and third quarters of 2021. We anticipate increasing their use of these programs in future periods in a manner consistent with our ProWood pressure-treating operations. (Please refer to the "Risk Factors" section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)

Products with fixed selling prices sold under long-term supply arrangements, ? particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices and longer vendor commitments.

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.







                            Period 1      Period 2
        Lumber cost        $      300    $      400
        Conversion cost            50            50
        = Product cost            350           450
        Adder                      50            50
        = Sell price       $      400    $      500
        Gross margin             12.5 %        10.0 %
        


As is apparent from the preceding example, the level of lumber prices does not impact our overall profits but does impact our margins. Gross margins and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.

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UFP INDUSTRIES, INC.

BUSINESS COMBINATIONS

We completed five business acquisitions during the first nine months of fiscal 2021 and five during all of fiscal 2020. The annual historical sales attributable to acquisitions completed in the first nine months of fiscal 2021 is approximately $1.3 billion, while acquisitions completed during the last quarter of 2020 have annual sales of approximately $48 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2021 and 2020 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, "Business Combinations" for additional information.







                                     RESULTS OF OPERATIONS
        The following table presents, for the periods indicated, the components of our
        Unaudited Condensed Consolidated Statements of Earnings as a percentage of net
        sales.
                                                      Three Months Ended                   Nine Months Ended
                                               September 25,    September 26,      September 25,    September 26,
                                                   2021             2020               2021             2020
        Net sales                                      100.0 %          100.0 %            100.0 %          100.0 %
        Cost of goods sold                              84.4             83.8               84.4             83.7
        Gross profit                                    15.6             16.2               15.6             16.3
        Selling, general, and administrative
        expenses                                         8.1              9.1                7.6              9.5
        Other gains, net                               (0.5)                -              (0.2)            (0.1)
        Earnings from operations                         8.0              7.2                8.2              6.9
        Other expense, net                               0.2              0.1                0.1              0.1
        Earnings before income taxes                     7.8              7.1                8.1              6.7
        Income taxes                                     1.8              1.8                1.9              1.7
        Net earnings                                     6.0              5.3                6.1              5.0
        Less net earnings attributable to
        noncontrolling interest                        (0.2)            (0.1)              (0.1)            (0.1)
        Net earnings attributable to
        controlling interest                             5.8 %            5.2 %              6.0 %            4.9 %
        


Note: Actual percentages are calculated and may not sum to total due to rounding.

As a result of the impact of the level of lumber prices on the percentages displayed in the table above (see Impact of the Lumber Market on Our Operating Results), we believe it is useful to compare our change in units sold with our change in gross profits, selling, general, and administrative expenses, and operating profits as presented in the following table. The percentages displayed below represent the percentage change from the prior year comparable period.







                                                                              Percentage Change
                                                          Three Months Ended                     Nine Months Ended
                                                   September 25,       September 26,      September 25,      September 26,
                                                       2021                2020               2021               2020
        Units sold                                     13.0 %               8.0 %             30.0 %              3.0 %
        Gross profit                                   35.9                28.7               68.8               16.1
        Selling, general, and administrative
        expenses                                       25.9                16.1               40.9                7.1
        Earnings from operations                       57.7                51.3              110.6               33.4
        


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UFP INDUSTRIES, INC.

The following table presents, for the periods indicated, our selling, general, and administrative (SG&A) costs as a percentage of gross profit. Given our strategies to enhance our capabilities and improve our value-added product offering, and recognizing the higher relative level of SG&A costs these strategies require, we believe this ratio provides an enhanced view of our effectiveness in managing these costs and mitigates the impact of changing lumber prices.







                                                Three Months Ended                     Nine Months Ended
                                           September 25,      September 26,      September 25,      September 26,
                                               2021               2020               2021               2020
        Gross profit                    $        327,555   $        241,074   $      1,035,403   $        613,241
        Selling, general, and
        administrative expenses         $        169,467   $        134,649   $        504,104   $        357,770
        SG&A as percentage of gross
        profit                                     51.7%              55.9%              48.7%              58.3%
        


Operating Results by Segment:

Our business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. The Company manages the operations of its individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our retail, industrial, and construction segments. In the case of locations which serve multiple segments, results are allocated and accounted for by segment. The exception to this market-centered reporting and management structure is the Company's International segment, which comprises our Mexico, Canada, Australia, and Italy operations and sales and purchasing offices in other parts of the world. Our International segment and Ardellis (our insurance captive) have been included in the "All Other" column of the table below. The "Corporate" column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates.

The following tables present our operating results, for the periods indicated, by segment (in thousands).







                                                      Three Months Ended September 25, 2021
                               Retail       Industrial      Construction     All Other     Corporate        Total
        Net sales            $  696,201    $    573,234    $      722,872   $    98,689   $     2,788    $ 2,093,784
        Cost of goods
        sold                    685,369         446,822           568,809        63,082         2,147      1,766,229
        Gross profit             10,832         126,412           154,063        35,607           641        327,555
        Selling, general,
        administrative
        expenses                 36,899          55,723            70,663        15,996       (9,814)        169,467
        Other                        86             281             (805)         (672)       (8,927)       (10,037)
        Earnings from
        operations           $ (26,153)    $     70,408    $       84,205   $    20,283   $    19,382    $   168,125
        


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                                      UFP INDUSTRIES, INC.
                                                      Three Months Ended September 26, 2020
                               Retail       Industrial      Construction     All Other     Corporate        Total
        Net sales            $  700,522    $    282,124    $      447,103   $    56,700   $     (222)    $ 1,486,227
        Cost of goods
        sold                    594,896         233,971           385,028        38,543       (7,285)      1,245,153
        Gross profit            105,626          48,153            62,075        18,157         7,063        241,074
        Selling, general,
        administrative
        expenses                 43,515          26,080            45,411        10,499         9,144        134,649
        Other                      (70)              36               151           209         (502)          (176)
        Earnings from
        operations           $   62,181    $     22,037    $       16,513   $     7,449   $   (1,579)    $   106,601
        








                                                  Nine Months Ended September 25, 2021
                             Retail      Industrial     Construction    All Other    Corporate       Total
        Net sales          $ 2,714,440   $ 1,633,289   $    2,021,106   $  243,736   $    6,758   $ 6,619,329
        Cost of goods
        sold                 2,480,804     1,292,102        1,644,069      160,853        6,098     5,583,926
        Gross profit           233,636       341,187          377,037       82,883          660     1,035,403
        Selling,
        general,
        administrative
        expenses               144,375       150,739          193,144       40,021     (24,175)       504,104
        Other                    (182)           104            (437)      (1,703)      (9,030)      (11,248)
        Earnings from
        operations         $    89,443   $   190,344   $      184,330   $   44,565   $   33,865   $   542,547
        








                                                   Nine Months Ended September 26, 2020
                             Retail       Industrial     Construction     All Other    Corporate       Total
        Net sales          $ 1,661,873   $    763,046   $    1,187,429   $   148,503   $    (561)   $ 3,760,290
        Cost of goods
        sold                 1,429,229        635,424        1,002,932       101,240     (21,776)     3,147,049
        Gross profit           232,644        127,622          184,497        47,263       21,215       613,241
        Selling,
        general,
        administrative
        expenses               110,596         73,662          134,098        28,228       11,186       357,770
        Other                     (34)            123            (145)       (1,538)        (526)       (2,120)
        Earnings from
        operations         $   122,082   $     53,837   $       50,544   $    20,573   $   10,555   $   257,591
        


The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.







                                               Three Months Ended September 25, 2021
                              Retail     Industrial    Construction   All Other   Corporate    Total
        Net sales               100.0 %       100.0 %         100.0 %     100.0 %       N/A      100.0 %
        Cost of goods
        sold                     98.4          77.9            78.7        63.9           -       84.4
        Gross profit              1.6          22.1            21.3        36.1           -       15.6
        Selling, general,
        administrative
        expenses                  5.3           9.7             9.8        16.2           -        8.1
        Other                       -             -           (0.1)       (0.7)           -      (0.5)
        Earnings from
        operations              (3.8) %        12.3 %          11.6 %      20.6 %         -        8.0 %
        


Note: Actual percentages are calculated and may not sum to total due to rounding.

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                                      UFP INDUSTRIES, INC.
                                               Three Months Ended September 26, 2020
                              Retail     Industrial    Construction   All Other   Corporate    Total
        Net sales               100.0 %       100.0 %         100.0 %     100.0 %       N/A      100.0 %
        Cost of goods
        sold                     84.9          82.9            86.1        68.0           -       83.8
        Gross profit             15.1          17.1            13.9        32.0           -       16.2
        Selling, general,
        administrative
        expenses                  6.2           9.2            10.2        18.5           -        9.1
        Other                       -             -               -         0.4           -          -
        Earnings from
        operations                8.9 %         7.8 %           3.7 %      13.1 %         -        7.2 %
        


Note: Actual percentages are calculated and may not sum to total due to rounding.







                                               Nine Months Ended September 25, 2021
                              Retail     Industrial    Construction   All Other   Corporate    Total
        Net sales               100.0 %       100.0 %         100.0 %     100.0 %       N/A      100.0 %
        Cost of goods
        sold                     91.4          79.1            81.3        66.0           -       84.4
        Gross profit              8.6          20.9            18.7        34.0           -       15.6
        Selling, general,
        administrative
        expenses                  5.3           9.2             9.6        16.4           -        7.6
        Other                       -             -               -       (0.7)           -      (0.2)
        Earnings from
        operations                3.3 %        11.7 %           9.1 %      18.3 %         -        8.2 %
        


Note: Actual percentages are calculated and may not sum to total due to rounding.

. . .

Nov 03, 2021

COMTEX_396311754/2041/2021-11-03T16:07:31

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