UFP Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparisons are with the three months ended March 26, 2016. The company supplies wood, wood-composite and other products to retail, industrial and construction markets. Financial statements are unaudited.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $846.1 million | $682.2 million |
| Gross profit / margin | $120.7 million / 14.3% | $102.7 million / 15.1% |
| Operating earnings / margin | $33.8 million / 4.0% | $31.9 million / 4.7% |
| Net earnings attributable to controlling interest | $21.1 million | $19.2 million |
| Diluted EPS | $1.03 | $0.95 |
| Operating cash flow | $(70.7) million | $(30.0) million |
| Capital expenditures | $16.5 million | $12.9 million |
Balance sheet at April 1, 2017: Cash and cash equivalents were $31.0 million, with $4.7 million of restricted cash. Current assets were $899.3 million and current liabilities $277.8 million. Total debt, including current maturities, was $255.2 million; total liabilities were $580.3 million and shareholders’ equity $897.4 million.
Liquidity and funding: The company had $167.8 million outstanding on its $295 million revolving credit facility and approximately $117.4 million of remaining availability after letters of credit. It also had $150 million available under a shelf agreement for long-term debt. The company reported compliance with debt covenants.
Material changes versus prior period
- Net sales increased 24%; management attributed gross sales growth to a 17% increase in unit sales and a 6% increase in selling prices, mainly reflecting lumber prices. Acquisitions contributed 12% to unit-sales growth; organic unit-sales growth was 5%.
- Gross profit rose 17.5%, but gross margin fell from 15.1% to 14.3%. Management cited higher year-over-year lumber prices and exposure where selling prices are fixed.
- Operating earnings increased 6%, slower than unit-sales growth. SG&A rose 22.7% to $86.9 million; acquired operations accounted for approximately $13 million of the increase.
- Net earnings attributable to controlling interest increased to $21.1 million from $19.2 million; diluted EPS rose to $1.03 from $0.95. The effective tax rate declined to 33.2% from 34.7%, mainly due to a deduction related to share-based compensation and fees.
- Operating cash use increased year over year, principally reflecting seasonal working-capital needs: receivables and inventory increased by $67.8 million and $61.0 million, respectively. The cash cycle lengthened to 59 days from 54 days, primarily due to acquired operations; excluding acquisitions, it was 53 days.
- Investing cash use included $55.4 million for acquisitions. The company acquired Robbins Manufacturing and Quality Hardwood Sales in March for cash purchase prices of approximately $31.8 million and $23.6 million, respectively. Debt increased substantially from year-end, including to fund acquisitions and seasonal working capital.
Outlook, commentary and risks
- Management planned approximately $70 million of capital expenditures for 2017, with existing project commitments of approximately $24.5 million at quarter-end. It intended to fund remaining-year capital spending through operating cash flow. No specific full-year revenue or earnings guidance is provided in the filing text.
- Management said the acquired businesses’ first-quarter profit contribution was seasonally constrained and did not expect this shortfall versus sales growth to continue in future quarters.
- Business is seasonal: working capital typically builds from March through August, often producing negative or modest operating cash flow in the first half, and contracts from September through February. Lumber-price changes can affect sales, margins and profitability; first-quarter framing lumber prices averaged $383/MBF, up 21.2% year over year.
- Other disclosed exposures include interest-rate risk on variable-rate debt, foreign-currency fluctuations, weather and economic conditions, environmental regulation, and the ability to integrate or successfully execute acquisitions. The company said it did not use interest-rate derivatives; it had entered into foreign-exchange forward contracts in 2017.
- Environmental remediation reserves were approximately $3.6 million, plus an estimated $0.3 million for closure of certain drip pads. The company disclosed a continuing federal investigation involving two former employees; it stated that the company was not a target, continued to cooperate, and that any adverse financial implications were uncertain. Management believed ordinary-course lawsuits and claims would not materially affect the financial statements.
- Outstanding payment and performance bonds were approximately $8.7 million, and letters of credit totaled $25.7 million. The filing reports no new risk factors in Part II; this does not eliminate the risks described elsewhere in the filing.
Important facts for investors to verify
- Whether subsequent quarters confirm management’s expectation that acquired-operation profitability improves beyond the seasonally weak first quarter.
- How lumber-price movements, fixed-price contracts and inventory turnover affect gross margins and cash requirements.
- Acquisition integration, purchase-price allocations and the acquired businesses’ contribution to operating profit, not only sales.
- Working-capital conversion, planned capital spending, revolver utilization and covenant headroom as the seasonal cycle progresses.
- Developments in environmental remediation matters and the federal investigation involving former employees.