Business context and reporting period
Universal Forest Products, Inc. (UFP Industries) filed this unaudited Form 10-Q for the quarter ended March 31, 2012. The company designs, manufactures, and markets wood and wood-alternative products for retail, construction, industrial, and manufactured-housing customers, with operations across North America. The comparable quarter ended March 26, 2011.
Key financial results
Dollar amounts below are in millions unless stated otherwise.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $457.1 | $387.2 |
| Gross profit / margin | $53.7 / 11.7% | $41.4 / 10.7% |
| Operating earnings (loss) | $7.8 | $(5.1) |
| Net earnings (loss) attributable to controlling interest | $4.2 | $(3.7) |
| Diluted EPS | $0.21 | $(0.19) |
| Cash from operating activities | $(44.6) | $(109.5) |
| Capital expenditures | $7.9 | $6.3 |
Gross margin improved by 1.0 percentage point; operating margin was 1.7% versus negative 1.3%. SG&A declined 1.5% to $45.8 million despite higher sales. Net interest expense was $0.7 million. The effective tax rate was 38.1%; the prior-year period recorded a tax benefit.
Balance sheet and liquidity
At March 31, 2012, cash and cash equivalents were zero and the company reported a $4.3 million cash overdraft. Current assets were $434.7 million and current liabilities were $170.1 million. Total debt and capital lease obligations were $86.4 million, including $42.8 million current and $43.7 million long-term, compared with $52.5 million at December 31, 2011. The company had $34.0 million outstanding on its $265 million revolving credit facility, which also supported $31.3 million of letters of credit. It reported compliance with lending requirements. Total assets were $839.4 million and equity was $590.5 million.
Operating cash use reflected the seasonal build in working capital, including increases in receivables and inventory. Management said negative or modest operating cash flow is typical in the first half of the year. The cash cycle improved to 51 days from 64 days a year earlier.
Material changes and management commentary
- Net sales rose 18%, primarily from higher unit volumes, improved customer demand, and more favorable weather than in Q1 2011, when inclement weather reduced production days. Gross profit dollars increased 30%.
- Sales increased across all markets: retail building materials 12%, residential construction 9%, commercial construction and concrete forming 38%, industrial 21%, and manufactured housing 34%. The company cited industrial customer additions and stronger HUD-code home shipments, including demand related to FEMA orders and temporary housing.
- Management attributed improved gross margin to sales growth, operating leverage, and production efficiency, partly offset by pricing pressure. The company lost some share with a major retail customer, primarily in lower-margin products, and said it expected the full impact in Q2, partly offset by other sales. It also said it had lost share in residential construction while prioritizing profitability and cash flow.
- Operating results included $95,000 of net disposition, impairment, early-retirement, and exit charges. Twelve operations were reporting operating losses and negative cash flow for the quarter; their long-lived assets had a $15.7 million net book value.
Outlook, risks, and contingencies
The filing provides no specific earnings or sales guidance. Management planned 2012 capital expenditures of up to $40 million, including $19.2 million of outstanding project commitments, primarily for expansion, and intended to fund spending through operating cash flow for the rest of the year. The board approved a subsequent semiannual dividend of $0.20 per share, payable June 15, 2012 to shareholders of record June 1.
Management highlighted exposure to lumber-price fluctuations, weather, economic trends, competition, and regulation. Lumber prices can affect selling prices, sales volume, margins, and profitability; management said the market had a minor impact on overall selling prices and gross margins in Q1. Variable-rate debt also exposes earnings and cash flows to interest-rate changes; the company did not use derivatives to hedge this risk.
Environmental remediation reserves were approximately $3.4 million, with an additional $0.6 million recorded for probable closure costs at wood-treating facilities. The company disclosed outstanding payment and performance bonds of $10.0 million for ongoing projects and $22.6 million for completed projects still under warranty. Management did not expect normal-course lawsuits and claims to materially affect the financial statements. No significant off-balance-sheet transactions were reported other than operating leases.
Important facts for investors to verify
- Whether sales and margin gains persist after favorable weather and the Q1 demand improvement, and how the major retail customer loss affects Q2.
- Whether seasonal working-capital needs and planned capital spending can be funded without materially increasing borrowings, given zero cash and the quarter-end overdraft.
- Performance and remediation exposure at the 12 loss-making operations, including possible future asset impairment charges.
- Future effects of lumber-price movements, interest rates, and environmental or warranty-related claims.
- Whether management’s planned capital expenditures and operating-cash-flow expectations are achieved.