UFP Industries, Inc. (Universal Forest Products) — Q3 2015 Form 10-Q
Business context and period. The company supplies wood, wood-composite and related products to retail, construction and industrial markets. This unaudited quarterly report covers the three and nine months ended September 26, 2015; comparisons are with the periods ended September 27, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Net sales | $762.3 | $713.5 | $2,233.5 | $2,040.2 |
| Gross profit / margin | $110.7 / 14.5% | $89.6 / 12.6% | $302.7 / 13.6% | $252.6 / 12.4% |
| Operating earnings / margin | $42.5 / 5.6% | $32.2 / 4.5% | $104.6 / 4.7% | $81.6 / 4.0% |
| Net earnings attributable to controlling interest | $25.6 | $19.2 | $61.7 | $48.2 |
| Diluted EPS | $1.26 | $0.96 | $3.06 | $2.40 |
- For the first nine months, operating cash flow was $121.4, versus $70.5 in 2014. Investing activities used $40.1 and financing activities used $24.9.
- At September 26, cash and cash equivalents were $55.4; current assets were $647.5 and current liabilities $214.3. Total debt was $85.6, comprising $0.8 current and $84.7 long-term debt.
- The $295 million revolving credit facility had no borrowings outstanding; reported availability after letters of credit was $150 million. The company said it was in compliance with debt covenants.
- Capital expenditures were $36.5 year to date. Management planned up to $50 million for 2015 and expected to fund remaining spending from operating cash flow. Outstanding commitments on commenced capital projects were $4.9.
Changes versus comparable periods
- Q3 net sales rose 6.8%; gross sales rose 6.9%, reflecting a 12% increase in unit volume partly offset by a 5% decrease in selling prices. First-nine-month net sales increased 9.5%.
- Q3 operating earnings increased 32.0%, and operating margin improved by 1.1 percentage points. Management attributed improved gross margin to unit growth and fixed-cost leverage, favorable product mix, and lower lumber costs on fixed-price products.
- Industrial gross sales grew 10.9% in Q3 and 16.5% year to date; retail grew 9.2% and 10.1%, respectively. Construction increased 0.7% in Q3 and 2.4% year to date.
- Acquisitions completed since Q3 2014 contributed $24.4 million, or 3.4%, to Q3 sales growth and $71.1 million, or 3.4%, to year-to-date growth. The company completed two acquisitions during the first nine months of 2015.
- Q3 SG&A increased 13.3% to $68.0 million, including higher compensation and incentive pay; year-to-date SG&A increased 14.6% to $198.1 million.
Outlook, management commentary and risks
- Management reported improving demand and market-share gains in retail and construction, and organic growth alongside acquisition contributions in industrial. No quantified earnings or revenue guidance was provided.
- Seasonality is significant: working capital typically falls and operating cash flow rises in the third and fourth quarters. Management said safety-stock inventory, adverse weather at some operations and transportation-resource constraints lengthened the cash cycle to 54 days.
- Lumber is about half of cost of goods sold. Management generally passes lumber costs through to customers, but price levels and trends can affect reported sales, margins and working capital. Q3 average Random Lengths framing lumber prices were down 17.5% year over year; Southern Yellow Pine was down 22.4%. The company said prolonged price movements could affect results.
- Other identified risks include adverse weather or economic conditions, regulation and the ability to execute acquisitions. The company does not use derivatives to hedge interest-rate risk on variable-rate debt.
- Environmental remediation reserves were approximately $3.4 million, with another $0.6 million accrued for potential closure costs at wood-treatment facilities. Management did not expect pending ordinary-course claims to materially affect the financial statements. Letters of credit totaled $25.4 million.
- Q3 2014 included a $2.7 million real-estate gain; the prior-year nine-month period also included asset-sale gains and a property impairment. These items make comparisons of reported earnings less directly comparable.
Important facts for investors to verify
- Whether volume growth and margin gains persist if lumber prices, selling prices or product mix change.
- How much growth is organic versus acquisition-related, and whether acquired businesses meet expected performance.
- Working-capital and cash-flow trends, including the seasonal unwind and the reported 54-day cash cycle.
- Remaining 2015 capital spending, covenant headroom and liquidity after letters of credit and other commitments.
- Potential changes in environmental remediation costs, contingent claims, and warranty or project obligations.