UFP Industries, Inc. (Universal Forest Products) — Q2 2015 Form 10-Q
Reporting period: Second quarter and six months ended June 27, 2015. Figures below are in millions of dollars except per-share data and percentages.
Business context
The company supplies wood, wood-composite and other products to retail, construction and industrial markets. Results reflect seasonal working-capital needs and exposure to lumber prices. The company completed two acquisitions in the first half of 2015.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $838.2 | $772.8 | $1,471.2 | $1,326.8 |
| Gross profit | $112.4 | $97.0 | $192.0 | $163.0 |
| Operating earnings | $44.2 | $36.7 | $62.1 | $49.4 |
| Net earnings attributable to controlling interest | $26.0 | $21.8 | $36.1 | $29.0 |
| Diluted EPS | $1.28 | $1.08 | $1.79 | $1.44 |
| Gross margin | 13.4% | 12.6% | 13.0% | 12.3% |
| Operating margin | 5.3% | 4.8% | 4.2% | 3.7% |
- Q2 net sales rose 8.5%; unit sales increased 10%, partly offset by a 1.5% decline in selling prices. First-half net sales rose 10.9%, with unit sales up 11% and overall selling prices broadly flat.
- Q2 operating earnings increased 20.3%; first-half operating earnings increased 25.7%. SG&A rose 16% in Q2 and 15.3% in the first half, reflecting higher compensation, incentive pay and acquisition costs.
- By market, Q2 sales increased 8.3% in Retail, 16.9% in Industrial and 1.3% in Construction. Industrial growth reflected acquisitions and organic gains; Retail benefited from market-share gains and improving demand.
- Net cash from operating activities was $36.8 versus $22.8 in the first half of 2014. Investing activities used $26.9; financing activities provided $15.1. Capital expenditures were $27.8.
Financial position and liquidity
- At June 27, 2015, cash and cash equivalents were $24.8; total assets were $1,139.7 and shareholders’ equity was $732.8.
- Total debt was approximately $123.2, including $122.3 of long-term debt and $0.9 current portion. The company also reported a $21.9 cash overdraft.
- The $295 million revolving credit facility had $37.6 outstanding; it also supported approximately $9.8 of letters of credit. The company reported compliance with all debt covenants.
- Seasonality and higher safety-stock inventory contributed to a cash cycle of 56 days, up from 52 days in the prior-year first half. Management noted that working capital typically weighs on cash flow in the first half and releases cash in the latter part of the year.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management planned up to $45 million of capital spending in 2015 and expected to fund remaining spending through operating cash flows.
- Management attributed improved gross profit to Industrial growth and mix, Retail gains, selective residential-construction business, and effective inventory positioning amid falling lumber prices.
- Commodity lumber prices were lower year over year: the Q2 framing-lumber composite average fell 12.6%, while the Southern Yellow Pine average fell 6.5%. The company said prolonged price trends may affect sales, gross margins and profitability; lumber represents about half of cost of goods sold.
- Other stated risks include adverse weather or economic conditions, regulation, and the ability to make successful acquisitions. Seasonality, transportation challenges, and fixed-price construction contracts with estimated completion costs may also affect results.
- Environmental remediation reserves were approximately $3.4 million; management said the Florida testing costs were not expected to be material. Outstanding letters of credit totaled $25.4 million. Management did not expect ordinary-course litigation and claims to materially affect the financial statements.
- The company paid dividends of $0.40 per share during the first half. The effective tax rate was 37.4% for Q2 and 37.0% for the first half, slightly below prior-year rates.
Important facts for investors to verify
- Whether Industrial and Retail growth and margin improvement persist, and how much growth is organic versus acquisition-related.
- Exposure of margins and working capital to lumber-price changes, safety-stock levels and seasonal cash-flow patterns.
- Debt, revolving-credit availability, covenant headroom and the company’s ability to fund planned capital expenditures from operating cash flow.
- Integration and performance of recent acquisitions, plus the adequacy of environmental and other contingency reserves.