UFP Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 25, 2016; comparative periods ended June 27, 2015. UFP supplies wood, wood-composite and other products to retail, industrial and construction markets. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $872.1 | $838.2 | $1,554.2 | $1,471.2 |
| Gross profit / margin | $131.5 / 15.1% | $112.4 / 13.4% | $234.2 / 15.1% | $192.0 / 13.0% |
| Operating earnings / margin | $53.7 / 6.2% | $44.2 / 5.3% | $85.6 / 5.5% | $62.1 / 4.2% |
| Net earnings attributable to controlling interest | $33.4 | $26.0 | $52.6 | $36.1 |
| Diluted EPS | $1.64 | $1.28 | $2.58 | $1.79 |
- Q2 net sales increased 4.0%; gross sales growth reflected 3% higher unit sales and 1% higher selling prices. Six-month net sales rose 5.6%, with 7% unit growth partly offset by 1% lower prices.
- Q2 gross profit increased 16.9%, outpacing unit growth. Management attributed improved margins to sales growth, stronger product mix, value-added products and favorable lumber purchasing relative to selling prices. Value-added products were 60.3% of Q2 sales versus 59.4% a year earlier.
- SG&A rose 13.6% in Q2 and 14.2% year to date, driven notably by higher compensation, incentive and bonus costs. Lower debt levels reduced net interest costs. The six-month effective tax rate was 35.0%, versus 37.0%, primarily reflecting tax-credit extensions.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $40.0 million, compared with $36.8 million; investing cash outflow was $29.7 million and financing cash outflow was $10.0 million. Capital expenditures were $24.3 million. Cash ended the period at $87.5 million.
- At June 25, 2016, total assets were $1,194.5 million, current assets $729.7 million and current liabilities $239.2 million. Cash and cash equivalents were $87.5 million; investments were $9.7 million; inventories were $297.8 million.
- Total debt was approximately $85.6 million, including $1.1 million current and $84.5 million long term, versus $123.2 million at June 27, 2015. The $295 million revolver had no borrowings; after letters of credit, $285 million remained available. An additional $150 million was available under a shelf agreement. The company reported covenant compliance.
- Seasonality typically increases working capital during the March–August selling season. The cash cycle improved to 48 days from 56 days, principally on lower inventory days. Management reported a $35.9 million seasonal working-capital increase since year-end, including higher receivables and payables.
Changes, outlook and risks
- Retail and construction sales advanced; industrial sales declined 2.9% in Q2 and 2.8% for the first half. Management cited softer industrial demand, partly associated with a strong U.S. dollar and weaker exports, and said it was prioritizing higher-margin business.
- Operating earnings increased across North, South, West and All Other segments. Corporate costs rose substantially year over year, partly reflecting incentive compensation and differences in cost allocations.
- No specific earnings or sales guidance was provided. Management planned $70–$75 million of 2016 capital spending and stated an objective to deploy approximately $100–$200 million for acquisitions, subject to available opportunities. It expected to fund remaining-year capital spending through operating cash flows.
- After quarter-end, the company completed the acquisition of Idaho Western Inc. for approximately $11 million; the business had $21 million of 2015 annual sales. During the first half, it also acquired Capital Components & Millwork and purchased the remaining interest in Packnet.
- Principal disclosed risks include lumber-price volatility, weather, economic conditions, environmental and safety regulation, and execution of acquisitions. Lumber prices affect sales, working capital and margins; prolonged price trends may affect profitability. The company reported environmental remediation reserves of approximately $3.4 million and a further $0.6 million estimated drip-pad closure liability.
- A federal investigation concerning projects served by one operation continued. Two former employees were convicted in 2016; the company said it was not a target, continued cooperating, and could not estimate any potential adverse financial implications. Management said other ordinary-course claims were not expected to materially affect the financial statements.
Key facts for investors to verify
- Whether margin improvement from product mix, purchasing and value-added sales persists, particularly as lumber prices and customer selling prices change.
- Whether industrial-market softness and higher SG&A and incentive costs affect future earnings growth.
- Execution, financing and returns on the stated capital-spending and acquisition objectives, including the post-period Idaho Western acquisition.
- Seasonal working-capital needs, cash conversion and availability under credit facilities; also review covenant terms and contingent letters of credit.
- Updates on the federal investigation and environmental remediation estimates; the filing states potential financial implications of the investigation are uncertain.