UFP Industries, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are to the corresponding periods ended July 1, 2017. The company supplies wood, wood-composite and other products to retail, industrial and construction markets. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial results
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $1,294.4 | $1,072.4 | $2,288.3 | $1,918.5 |
| Gross profit / margin | $165.7 / 12.8% | $148.2 / 13.8% | $296.6 / 13.0% | $269.0 / 14.0% |
| Operating earnings / margin | $60.6 / 4.7% | $53.9 / 5.0% | $104.8 / 4.6% | $87.7 / 4.6% |
| Net earnings attributable to controlling interest | $44.0 | $33.6 | $76.9 | $54.7 |
| Diluted EPS | $0.71 | $0.55 | $1.24 | $0.89 |
| Operating cash flow | Not separately presented | Not separately presented | $(36.1) | $15.2 |
- Growth and drivers: Q2 net sales rose 20.7%; gross sales increased 20.9%, reflecting 8% higher unit volume and 13% higher selling prices, mainly from lumber inflation. Management reported 7% organic unit growth and 1% contribution from acquisitions. First-half net sales rose 19.3%, with 8% unit growth and 12% higher selling prices.
- Margins and costs: Gross margin contracted by 1.0 percentage point in Q2 and the first half, primarily because lumber prices were higher. Q2 operating earnings grew 12.5%, slower than sales; higher SG&A and corporate costs weighed on results. Q2 net margin was approximately 3.5%, versus 3.2% a year earlier.
- Market and segment trends: Q2 sales increased across retail (+19.0%), industrial (+18.7%) and construction (+26.3%). Operating earnings grew in North (+22.0%), South (+45.7%) and West (+20.2%); All Other operating earnings fell 25.5%, principally due to idX. Corporate costs increased to $8.1 million from $3.1 million.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $27.5 million and restricted cash was $16.8 million. Current assets totaled $1,112.6 million and current liabilities $370.4 million.
- First-half operating cash use of $36.1 million reflected a $138.9 million seasonal working-capital investment, including increases in receivables and inventory, partly offset by earnings and noncash items. The company says its first and second quarters typically use cash as seasonal working capital builds; cash generation generally improves in the third and fourth quarters.
- Investing cash use was $63.1 million, including $54.3 million of capital expenditures and $38.0 million for acquisitions, partly offset by about $36 million of proceeds from the Medley property sale. Financing provided $114.8 million, including net revolving-credit borrowings and $75 million of newly issued senior notes.
- Long-term debt was $276.3 million, plus $0.5 million current, compared with $144.7 million and $1.3 million, respectively, at December 30, 2017. The company had $116.2 million outstanding on its $295 million revolver and reported $168.9 million of remaining availability after letters of credit. It also reported $150 million of remaining shelf-agreement capacity. The company was in compliance with debt covenants.
- Cash dividends paid in the first half were $11.1 million, or $0.18 per share. Capital expenditures are planned at up to $100 million for 2018; $23.4 million of capital-project commitments were outstanding at quarter-end.
Outlook, commentary and notable items
- Management anticipated a 23.5% effective tax rate for 2018. The first-half rate was 22.6%, versus 33.7% in 2017, mainly reflecting the Tax Act. Accounting for certain Tax Act provisions, including GILTI, remained incomplete.
- Management expected seasonal working-capital investment and revolver borrowings to decline by October. This is an expectation, not a formal earnings forecast; the filing provides no full-year sales or earnings guidance.
- Random Lengths framing-lumber composite prices averaged $541/MBF in Q2 2018, up 31.0% year over year. Management noted that lumber-price levels affect reported margins and working-capital needs, while price trends can affect profitability for inventory held before customer pricing adjusts.
- The company completed five acquisitions in the first half of 2018, including North American Container Corporation. Acquisitions completed since the end of June 2017 contributed approximately $14.2 million of Q2 revenue and $0.7 million of operating profit.
- A first-quarter sale of the Medley, Florida property for approximately $36 million generated a $7 million pretax gain. The company leased back the facility for two years while planning a Florida/Southeast operating transition.
- Environmental remediation reserves were approximately $2.5 million. The company disclosed a historic federal investigation involving former employees; it stated that the company was not named as a target and did not expect a material adverse effect. Management also said ordinary-course claims were not expected to materially affect the financial statements.
- Risks highlighted include lumber-price volatility, weather and economic conditions, environmental and safety regulation, acquisition execution, and potential tariffs or trade conflicts. The filing reported no significant off-balance-sheet transactions other than operating leases.
Most important facts for investors to verify
- Whether seasonal receivables and inventory unwind as expected and operating cash flow improves after the peak selling season.
- How lumber prices, customer repricing and inventory turnover affect gross margins and working-capital requirements.
- Whether increased debt, interest costs and planned capital spending remain manageable as acquisitions are integrated.
- Progress in the underperforming All Other/idX operations and the expected costs and benefits of the Medley facility transition.
- Final Tax Act and GILTI accounting, including any resulting effects on the effective tax rate.
- Potential business effects of tariffs and trade disputes, as well as developments in environmental matters and the historic investigation.