UFP Industries, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 28, 2013. Financial amounts below are in millions of dollars unless stated otherwise. The company designs, manufactures and markets wood and wood-alternative products for retail, construction, housing and industrial markets.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $651.8 | $533.4 | $1,944.7 | $1,584.2 |
| Gross profit | $78.3 | $55.2 | $215.7 | $181.0 |
| Gross margin | 12.0% | 10.4% | 11.1% | 11.4% |
| Operating earnings | $24.5 | $8.3 | $60.7 | $45.6 |
| Net earnings attributable to controlling interest | $14.1 | $4.2 | $35.1 | $25.9 |
| Diluted EPS | $0.71 | $0.21 | $1.76 | $1.31 |
- Q3 sales increased 22%, reflecting a 9% increase in prices, primarily related to lumber, and 13% higher unit sales. Nine-month sales increased 23%, with unit sales up 8%.
- Q3 operating margin was 3.8%, versus 1.6%; nine-month operating margin was 3.1%, versus 2.9%. Q3 net margin attributable to controlling interest was approximately 2.2%, versus 0.8%.
- Q3 gross-margin improvement reflected higher unit volumes, operating leverage and lower material costs as a percentage of sales in certain markets. Nine-month gross margin declined year over year, which management attributed primarily to higher lumber prices.
- Cash from operating activities was $47.7 million for the nine months, versus $2.5 million a year earlier. Cash used in investing was $34.6 million, including $32.1 million of capital expenditures and $9.3 million for acquisitions; financing used $15.7 million. Cash and cash equivalents ended at $5.2 million. Operating cash flow less capital expenditures was approximately $15.6 million.
- At September 28, 2013, current assets were $509.6 million and current liabilities $164.3 million; the approximate current ratio was 3.1x. Long-term debt was $84.7 million, with no amount outstanding on the $265 million revolving credit facility. The company reported covenant compliance. Cash flow and working capital are seasonal.
Changes, operations and capital
- Q3 sales rose across all five market classifications. Commercial construction and concrete forming sales increased 52%; residential construction 29%; retail building materials 22%; industrial 21%; and manufactured housing 12%.
- Q3 Eastern and Western segment operating profit increased to $18.6 million from $6.1 million; Site-Built increased to $4.0 million from $0.4 million. All Other moved to $0.6 million profit from a $2.9 million loss. Corporate operating contribution declined to $1.3 million from $4.6 million.
- UFP acquired Premier Laminating Services and Millry Mill Company in 2013 and completed the Custom Caseworks acquisition at the end of 2012. Acquisitions contributed to industrial-market sales growth.
- Debt was lower than at December 29, 2012, when long-term debt was $95.8 million, but higher than at September 29, 2012, when total reported debt was approximately $55.9 million. Management attributed higher interest costs year over year to working-capital needs associated with higher lumber prices and sales.
- Capital expenditures were $32.1 million for the first nine months. Management planned up to $40 million in 2013 and expected to fund remaining spending through operating cash flow. Outstanding capital-project commitments were approximately $12.3 million.
- The board approved a semiannual dividend of $0.21 per share, payable December 15, 2013.
Outlook, risks and unusual items
- The filing gives no specific numerical earnings or sales guidance. Management described improving sales and profitability, citing housing recovery, market-share gains, higher unit volumes and operating leverage. It also said residential construction remains competitive and that selective bidding may cause sales to trail market growth.
- Lumber prices are a key risk: they affect selling prices, revenue, working-capital needs and margins. Fixed-price commitments and inventory held before customer repricing can expose margins to price trends. Management expects lumber-price fluctuations to continue.
- Other stated risks include adverse weather and economic conditions, environmental and safety regulation, and the ability to make successful acquisitions. The filing also identifies possible effects on operations if marketing of certain CCA-treated products were restricted.
- The company accrued $0.9 million for estimated U.S. anti-dumping duties on certain plywood and steel nails imported from China and is working with authorities to mitigate potential charges. The comparable 2012 period included a separate $2.0 million Canadian anti-dumping contingency relating to Chinese extruded aluminum products.
- Environmental remediation reserves were approximately $3.5 million. The company also recorded about $0.6 million for probable closure costs at wood-treatment facilities. Management stated that ordinary-course claims and lawsuits were not expected to materially affect the financial statements.
- No significant off-balance-sheet transactions were reported other than operating leases. The company had $26.5 million of letters of credit and outstanding payment and performance bonds, including $32.2 million for projects in progress and $17.7 million for completed projects still under warranty.
- Management changed the annual impairment-testing date for goodwill and indefinite-lived intangible assets prospectively to the first day of the fourth fiscal quarter; it stated this does not delay, accelerate or avoid impairment charges. Disclosure controls were assessed as effective, with no material internal-control changes reported.
Important facts for investors to verify
- Whether unit-volume gains and improved operating leverage persist, particularly in residential construction and commercial construction.
- How lumber-price levels and direction affect gross margins, inventory values, working capital and cash generation.
- The extent and timing of any anti-dumping duty assessments, and the outcome of the Michigan unclaimed-property audit.
- Whether planned capital spending and acquisition activity can be funded while maintaining liquidity, covenant compliance and conservative leverage.
- Potential environmental, product-liability, bond and warranty exposures; the filing does not quantify a clear maximum exposure for all such contingencies.