UFP Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparative period ended March 31, 2018. The company supplies wood, wood-composite and other products to retail, industrial and construction markets. Amounts below are in millions of dollars unless otherwise stated.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1,015.1 | $993.9 | +2.1% |
| Gross profit / margin | $154.3 / 15.2% | $130.9 / 13.2% | Margin +2.0 pts |
| Operating earnings | $48.4 | $44.2 | +9.6% reported |
| Net earnings attributable to controlling interest | $35.5 | $32.8 | +8.2% |
| Diluted EPS | $0.58 | $0.53 | +$0.05 |
| Cash used in operating activities | $55.8 | $84.2 | Use reduced by $28.3 |
| Capital expenditures | $15.9 | $24.4 | Lower |
Gross margin improvement reflected lower lumber prices, favorable purchasing of lumber during Q4 2018, and a higher share of value-added products. Management estimated the favorable purchasing benefit at $6–$7 million. Excluding the approximately $6.5 million gain on a real-estate disposition in Q1 2018, operating earnings increased about 30% year over year.
Unit sales rose 7%, while selling prices fell 5%, principally due to lumber-market declines. Gross sales increased 2%; organic unit growth contributed 4% and acquisitions 3%. Value-added products were 66.4% of sales, versus 61.7% a year earlier. By market, industrial gross sales rose 15.5%, while retail fell 3.5% and construction fell 3.2%.
SG&A increased 13.7% to $105.9 million, outpacing unit growth, reflecting higher bonus expense, acquired operations, wages and benefits, sales incentives, and marketing. The effective tax rate was 24.3%, compared with 22.2%, partly because of discrete state tax items that reduced the prior-year rate.
Operating cash flow was negative as seasonal working capital absorbed $107.2 million; the filing notes this is typical in the first half of the year. Receivables and inventory increased, and the cash cycle lengthened to 65 days from 57. Cash, cash equivalents and restricted cash totaled $18.1 million at quarter end, including $17.1 million unrestricted cash. The company had $106.8 million outstanding under its $375 million revolver and approximately $258.3 million of remaining availability after letters of credit. It also reported $150 million of availability under a shelf agreement. Long-term debt was $266.4 million; the filing states the company was in compliance with debt covenants.
Material changes, outlook and risks
- Total liabilities increased to $683.0 million from $558.9 million at December 29, 2018. The quarter-end balance sheet included $66.1 million of operating lease liabilities following adoption of the new lease standard, with no cumulative retained-earnings adjustment.
- Management planned capital expenditures of up to $95 million for 2019 and expected to fund the remainder through operating cash flows. No formal earnings or revenue guidance was provided.
- Management cited favorable organic growth across its primary markets, improved product mix, and stronger industrial sales. Acquisitions completed since Q1 2018 contributed $28.5 million in revenue and $1.2 million in operating profit in Q1 2019.
- Key exposures include lumber-price fluctuations, seasonality and working-capital needs, economic and weather conditions, interest-rate exposure on variable-rate debt, foreign-currency movements, and environmental and safety regulation. Management cautioned that prolonged lumber-price trends can affect sales volume, margins and profitability.
- Environmental remediation reserves were approximately $2.0 million. Outstanding capital-project purchase commitments were $18.5 million. The company reported $13.6 million of payment and performance bonds for open projects, $9.1 million for completed projects under warranty, and $30.6 million in letters of credit. Management stated that pending claims and contingencies were not expected to materially affect the financial statements.
Most important facts for investors to verify
- Whether the estimated $6–$7 million lumber-purchasing benefit and higher value-added mix are sustainable as lumber prices and inventory costs change.
- Whether receivables, inventory and the 65-day cash cycle unwind as seasonality typically suggests, supporting the 2019 capital-spending plan.
- How industrial-market growth and acquired-operation contributions develop, alongside weaker retail and construction sales and higher SG&A.
- Debt levels, revolver availability, covenant compliance, variable-rate exposure and the company’s ability to fund planned capital expenditures.
- Environmental remediation estimates, project commitments, guarantees and bond exposures, and lease obligations.