UFP Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017 unless otherwise noted. Financial statement amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net sales | $993.9 million | $846.1 million | Up 17.5%; gross sales rose 17.8% to $1,011.7 million |
| Gross profit / margin | $130.9 million / 13.2% | $120.7 million / 14.3% | Profit up 8.4%; margin declined, which management attributed primarily to higher lumber prices |
| Operating earnings / margin | $44.2 million / 4.4% | $33.8 million / 4.0% | Up 30.7%, including a $6.5 million gain on asset dispositions; excluding the gain, operating earnings rose about 11% |
| Net earnings attributable to controlling interest | $32.8 million | $21.1 million | Up about 56% |
| Diluted EPS | $0.53 | $0.34 | Up $0.19 per share |
| Operating cash flow | $(84.2) million | $(70.7) million | Seasonal working-capital investment was the principal use of cash |
Sales growth reflected approximately 9% higher unit sales and 9% higher selling prices. Acquisitions contributed about 4% to unit growth; organic unit growth was about 5%. Retail, industrial, and construction gross sales increased 18.8%, 18.7%, and 15.7%, respectively.
Segment operating earnings were $8.7 million in North (down 12.9%, with management citing weather and higher expenses), $19.5 million in South (up 82.8%, including the property-sale gain), and $21.1 million in West (up 15.2%). All Other reported an operating loss of $3.1 million versus earnings of $0.6 million, primarily due to Alternative Materials.
Balance sheet, liquidity, and cash flow
- At March 31, 2018, total assets were $1.631 billion, total liabilities $614.5 million, and shareholders’ equity $1.017 billion.
- Cash and cash equivalents were $25.3 million; restricted cash was $32.4 million. Together, cash, cash equivalents, and restricted cash totaled $57.8 million.
- Total debt, including current maturities, was approximately $261.8 million, compared with $146.0 million at December 30, 2017 and $255.2 million at April 1, 2017. The company had $176.2 million outstanding on its $295 million revolving facility and approximately $109 million remaining availability after letters of credit. It also reported $225 million of availability under a long-term debt shelf agreement and compliance with its debt covenants.
- Investing activities provided $1.3 million, including approximately $36 million of proceeds from the Medley, Florida property sale; capital expenditures were $24.4 million and acquisition spending was $8.8 million. Financing activities provided $111.6 million, primarily from net revolving-credit borrowings.
- Management cited a $125.8 million seasonal increase in working capital since year-end, largely reflecting growth and higher lumber prices. The cash cycle improved to 57 days from 59 days a year earlier.
Material changes and notable items
- The company sold its Medley, Florida property for approximately $36 million, recording a pre-tax gain of about $7 million (reported net gain on asset dispositions was $6.5 million). It leased back only a minor portion for two years while implementing its Florida and Southeast plans.
- Two 2018 acquisitions expanded industrial packaging and concrete-forming operations. Acquisitions completed since the end of March 2017 contributed approximately $38.7 million of Q1 2018 revenue and $0.8 million of operating profit.
- The effective income tax rate fell to 22.2% from 33.2%, primarily due to the U.S. corporate tax-rate reduction under the Tax Act and a favorable share-based-compensation tax difference. The company said its Tax Act accounting remained incomplete; it had not recorded a potential deferred-tax effect for GILTI and had not selected an accounting policy for it.
- The company adopted ASC 606 revenue recognition in 2018 using the modified retrospective method and reported no material financial-statement impact or opening-retained-earnings adjustment.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management planned approximately $85 million of capital expenditures for 2018 and expected to fund remaining spending and commitments from operating cash flows.
- Management noted that the business is seasonal: working capital generally rises during the March–August selling season, often resulting in negative or modest operating cash flow in the first half, with stronger operating cash flow typically in the third and fourth quarters.
- Key exposures include lumber-price volatility, weather, economic conditions in served markets, environmental and safety regulation, interest-rate changes on variable-rate debt, foreign-exchange movements, and the execution of acquisitions. The Random Lengths framing-lumber composite averaged $483/MBF in Q1 2018 versus $383/MBF a year earlier; management said prolonged price trends can affect sales, margins, and profitability.
- Environmental remediation reserves were approximately $2.6 million, with a further $0.2 million recorded for drip-pad closure. Management stated that pending ordinary-course claims and the described investigation involving former employees were not expected to materially affect the company. The company was not named as a target in that investigation and continued to cooperate.
- At quarter-end, open-project payment and performance bonds totaled approximately $12.9 million, completed-project bonds under warranty totaled $6.8 million, and letters of credit totaled $26.4 million. Outstanding capital-project purchase commitments were approximately $28.5 million.
Important facts for investors to verify
- How much of operating and earnings growth is sustainable after excluding the property-sale gain, acquisitions, lumber-price pass-through, and tax-rate effects?
- Whether higher lumber prices and seasonal working-capital needs continue to pressure gross margins, cash flow, and revolver borrowings.
- Progress toward the planned $85 million of 2018 capital expenditures and the company’s ability to fund spending and commitments while preserving covenant headroom.
- Completion of the company’s Tax Act accounting, including its GILTI assessment and any resulting tax effects.
- Execution and expected returns from the Florida facility strategy, recent acquisitions, and the stated growth plans.