UFP Industries, Inc. (Universal Forest Products, Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparative quarter ended March 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Business context and key financial metrics
The company supplies wood, wood-composite and related products to retail, construction and industrial markets. It reported flat net sales but higher gross profit and earnings. Seasonal working-capital needs resulted in negative operating cash flow.
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $554.0 | $554.5 |
| Gross profit / margin | $66.0 / 11.9% | $57.8 / 10.4% |
| Operating earnings / margin | $12.6 / 2.3% | $9.1 / 1.6% |
| Net earnings | $7.7 | $5.8 |
| Net earnings attributable to controlling interest | $7.2 | $5.2 |
| Basic and diluted EPS | $0.36 | $0.26 |
| Cash from operating activities | $(54.7) | $(64.6) |
| Cash from investing activities | $(14.4) | $(10.1) |
| Cash from financing activities | $58.2 | $59.1 |
- At March 29, 2014, total assets were $1,006.8 million, total liabilities $346.4 million and shareholders’ equity $660.4 million. Cash and cash equivalents were reported as zero; cash overdraft was $12.2 million.
- Long-term debt, less current portion, was $143.5 million. The company had $58.8 million drawn on its $265 million revolving credit facility and was in compliance with its debt covenants. Restricted cash was $0.7 million.
- Current assets were $582.4 million and current liabilities $160.2 million. Receivables were $242.4 million and inventories $312.0 million.
Material changes versus prior comparable period
- Net sales declined 0.1%; gross sales rose 0.3%. Management attributed the flat outcome to 3% unit-sales growth offset by roughly 3% lower selling prices, reflecting lower lumber prices.
- Gross profit increased 14.2%, and operating earnings rose 39.5%. Improvements in framing operations, business selectivity and industrial-market sales were partly offset by weather-related lost production days and adverse cost variances.
- SG&A increased 11.8% to $53.9 million, primarily due to higher compensation and benefits, incentive compensation and bad-debt expense.
- Effective tax rate was 35.6%, versus 28.1%. The prior-year rate benefited from approximately $0.7 million of research and other tax credits related to 2012.
- Operating cash use improved by $9.8 million year over year, but working capital increased by $70.4 million from year-end 2013. The cash cycle lengthened to 62 days from 55 days a year earlier.
- Sales by market were mixed: industrial rose 6.7% and commercial construction/concrete forming 10.7%; retail building materials fell 1.8%, manufactured housing 7.5%, and residential construction 1.8%.
Outlook, management commentary, risks and contingencies
- Management said seasonal working-capital investment typically produces negative or modest operating cash flow in the first half and stronger cash flow in the second half. The company planned up to $40 million of 2014 capital expenditures and expected to fund them and existing commitments from operating cash flows.
- Management expected a manufactured-housing customer’s vertical-integration strategy to continue limiting the company’s sales growth to that market for the balance of the year. No formal earnings or revenue guidance was provided.
- Inclement weather hampered retail and construction sales and caused lost production days. The company cited lumber-price fluctuations, weather, economic conditions, regulation and acquisition execution among factors that could affect results. Lumber prices may affect sales, working capital and margins; treated lumber is particularly exposed to price trends.
- Two 2014 acquisitions were completed: Upshur Forest Products and Container Systems, for combined stated purchase prices of approximately $4.2 million. Upshur’s purchase-price allocation remained preliminary. Management said acquisitions were not significant to results individually or in aggregate.
- Environmental remediation reserves were approximately $3.5 million; a further estimated $0.5 million was accrued for potential closure costs at wood-treating facilities. The Michigan unclaimed-property audit was expected to conclude in 2014, with no material loss expected. Management did not expect pending ordinary-course claims to materially affect the financial statements.
- Outstanding payment and performance bonds were approximately $15.8 million for ongoing projects and $19.8 million for completed projects still under warranty. Letters of credit totaled $26.5 million. Capital-project purchase commitments were approximately $5.0 million.
- The filing reported no significant off-balance-sheet transactions other than operating leases. Disclosure controls were concluded to be effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether gross-margin improvement and higher operating earnings persist after weather disruptions ease, given the simultaneous rise in SG&A.
- How seasonal receivables and inventory needs affect cash generation, revolver utilization and debt through the remainder of 2014.
- Whether lumber-price movements, transportation constraints and customer vertical integration alter sales volumes, margins or working capital.
- Progress against the up-to-$40 million capital-spending plan and the stated intention to fund it from operating cash flow.
- Final valuation and integration outcomes for Upshur, and developments in environmental reserves, bonds, letters of credit and the unclaimed-property audit.