UFP Industries, Inc. (Universal Forest Products) — Q2 2013 Form 10-Q
Reporting period: Quarter ended June 29, 2013; comparisons are with the quarter ended June 30, 2012. The company designs, manufactures, and markets wood and wood-alternative building, construction, manufactured-housing, consumer, and industrial packaging products. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $738.4 | $593.7 | $1,292.9 | $1,050.8 |
| Gross profit | $80.2 | $72.1 | $137.4 | $125.7 |
| Gross margin | 10.9% | 12.1% | 10.6% | 12.0% |
| Operating earnings | $27.1 | $29.5 | $36.2 | $37.3 |
| Net earnings attributable to controlling interest | $15.8 | $17.5 | $21.0 | $21.7 |
| Diluted EPS | $0.79 | $0.88 | $1.05 | $1.10 |
- Sales drivers: Q2 sales rose 24.4%, reflecting a 15% increase in overall prices, largely from higher lumber prices, and 9% unit growth. First-half sales rose 23.0%, with unit sales up 6%.
- Cash flow: First-half operating cash use was $28.9 million, versus $19.6 million used a year earlier. Investing activities used $24.9 million; financing provided $42.9 million, including $46.7 million of net revolving-credit borrowings. Cash and cash equivalents were zero at quarter-end, with a $3.4 million cash overdraft. Management attributed negative first-half operating cash flow to seasonal working-capital needs and a $67.6 million working-capital increase since year-end.
- Debt and liquidity: Long-term debt was $142.5 million at June 29, 2013, with no current portion reported. The company had $57.8 million drawn on its $265 million revolving facility, compared with $23.3 million drawn at June 30, 2012. The facility also supported $28.7 million of letters of credit. The company reported covenant compliance and said it was below its internal capital-structure targets.
- Investment and distributions: First-half capital expenditures were $21.5 million. The company planned up to $40 million of 2013 capital spending and paid $4.0 million of dividends in the first half.
Material changes and operating performance
- Despite higher sales and gross-profit dollars, gross margin declined year over year. Management attributed the margin pressure to higher year-over-year lumber prices and a sharp sequential lumber-price decline during Q2, which reduced realized margins on inventory purchased earlier. Management estimated that, at prior-year lumber price levels, Q2 2013 gross margin would have been about 12.5%.
- Q2 operating earnings were below the prior year, which included a $6.9 million net gain on real estate and other property dispositions. In the first half of 2013, such net gains were approximately $0.1 million, compared with $6.9 million in the first half of 2012. Excluding the prior-year gain, management said operating performance benefited from unit growth and operating leverage, partly offset by lumber-price effects.
- Q2 Site-Built segment operating profit increased to $2.2 million from $1.1 million. For the first half, the segment recorded an operating loss of $1.8 million, versus profit of $0.5 million, primarily due to higher commodity and labor costs on fixed-price construction contracts. Management also cited unexpected labor-cost increases on certain projects.
- Housing-related demand improved: Q2 residential-construction unit sales increased 27%, while national housing starts rose about 28% in the relevant comparison period. Manufactured-housing unit sales increased 14%, and company sales to commercial construction and concrete forming grew strongly. Retail unit sales were up about 2% in Q2.
- The company acquired Millry Mill Company and Premier Laminating in 2013, in addition to Custom Caseworks acquired late in 2012. First-half cash spent on acquisitions was $9.3 million.
Outlook, risks, and contingencies
- Outlook: No specific revenue or earnings guidance is provided. The company planned up to $40 million in 2013 capital expenditures, primarily for expansion, and expected to fund remaining spending from operating cash flow. Management noted that the business is seasonal: working capital typically rises from March through August, with stronger operating cash flow generally expected in the third and fourth quarters.
- Commodity exposure: Lumber-price movements can affect selling prices, sales, working-capital needs, and margins. The company said prolonged price trends can affect sales volume and profitability; it does not hedge this exposure with derivative instruments. Variable-rate debt also exposes earnings and cash flows to interest-rate changes.
- Contract and operating risks: Fixed-price construction contracts typically run 6–18 months and expose results to labor and commodity-cost increases. Eight operations had operating losses and negative cash flow for the first half; their long-lived assets had a net book value of $18.4 million and future fixed lease payments of $0.5 million, creating potential future impairment or closure exposure.
- Environmental and other contingencies: Environmental remediation reserves were approximately $3.5 million. The company also reported $14.4 million of capital-project purchase commitments, $30.9 million of outstanding payment and performance bonds for projects in progress, and $21.0 million of bonds for completed projects still under warranty. Management did not expect normal-course lawsuits and claims to materially affect the financial statements.
- Other notable items: The company changed its annual goodwill and indefinite-lived intangible-asset impairment testing date to the first day of the fourth fiscal quarter, prospectively; it said the change does not defer, accelerate, or avoid impairment charges. Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subsequent lumber-price movements and inventory turnover support or further pressure gross margins and working capital.
- Whether seasonal cash generation reduces revolving-credit borrowings and the quarter-end cash overdraft, and whether debt covenants remain satisfied.
- Whether the Site-Built segment’s fixed-price projects recover profitability as labor and commodity costs evolve, and whether the eight loss-making operations require impairment or restructuring.
- Whether the planned capital spending and recent acquisitions deliver the expected growth and returns without further weakening cash flow.
- Whether environmental remediation costs, project bonds, and other commitments remain within recorded reserves and management’s expectations.