(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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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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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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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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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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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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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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