UFP Industries (Universal Forest Products, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 26, 2016. The company manufactures, treats and distributes wood, wood-composite and other products for retail, industrial and construction markets. Comparisons are with the three months ended March 28, 2015, unless stated otherwise. Amounts are in U.S. dollars.
Financial results and liquidity
- Revenue: Net sales were $682.2 million, up 7.8% from $633.0 million. Gross sales rose 8.1%; unit sales increased 13%, partly offset by a 5% decline in selling prices, primarily reflecting lower lumber prices.
- Profitability: Gross profit was $102.7 million, up 29.1%, and gross margin improved to 15.1% from 12.6%. Operating earnings rose 78.6% to $31.9 million; operating margin was 4.7% versus 2.8%. Net earnings were $20.3 million versus $10.8 million; controlling-interest earnings were $19.2 million versus $10.2 million. Basic and diluted EPS were each $0.95, compared with $0.51.
- Expenses and taxes: SG&A increased 14.8% to $70.8 million, including higher incentive compensation, personnel costs and bad-debt expense. The effective tax rate declined to 34.7% from 36.1%.
- Cash flow: Operating cash use was $30.0 million, improving from $50.5 million used a year earlier. Seasonal working-capital growth used $60.6 million. Investing activities used $13.4 million, including $12.9 million of capital expenditures. Financing activities used $1.3 million, versus $87.0 million provided in Q1 2015, when revolving-credit borrowing was substantially higher.
- Balance sheet and debt: At March 26, cash and cash equivalents were $43.1 million, down from $87.8 million at December 26, 2015. Total debt was $85.4 million, including $0.9 million current and $84.5 million long-term, versus $85.9 million at year-end and $187.0 million a year earlier. Total assets were $1.146 billion and shareholders’ equity was $794.9 million.
- Credit capacity: There was no outstanding balance on the $295 million revolving credit facility. The company reported $150 million of availability after letters of credit and stated it was compliant with financial covenants. Cash-flow seasonality is typical: working capital generally rises from March through August and falls from September through February.
Material changes and management commentary
- Retail sales grew 17.0%, construction sales 9.3%, while industrial sales declined 2.7%. Unit sales rose across all markets; retail and construction benefited from more favorable weather compared with 2015.
- Value-added products increased to 61.0% of sales from 57.6%. Management attributed the margin expansion to organic volume growth, product mix, fixed-cost leverage and opportunistic lumber purchasing. The company estimated lower lumber prices contributed approximately 20 basis points to operating-margin improvement.
- The Random Lengths framing lumber composite averaged $316/MBF, down 11.2% year over year; the Southern Yellow Pine composite averaged $360/MBF, down 10.0%. Management cautioned that lumber-price levels and trends can affect sales, working capital and margins, with exposure varying by product and inventory turnover.
- Cash-cycle duration improved to 54 days from 65 days a year earlier, which management linked in part to better inventory management and strong demand.
- No acquisitions were completed in Q1 2016. Management planned up to $75 million of capital expenditures in 2016 and stated a goal of deploying approximately $100 million to $200 million for acquisitions, subject to opportunities and other factors.
Risks, contingencies and unusual items
- Risks identified include lumber-price fluctuations, adverse weather and economic conditions, environmental and safety regulation, and the ability to complete suitable acquisitions. For fixed-price construction contracts, labor and commodity-cost changes can affect results; construction-contract revenue was $32.5 million versus $25.8 million.
- Environmental remediation reserves were approximately $3.5 million, with a further estimated $0.6 million for future closure of certain wood-treatment drip pads. An accrual of $1.6 million remained for anti-dumping duties on Chinese steel nails.
- A federal investigation concerning projects served by one operation continued. The company said it was not named as a target and was cooperating; one former employee pleaded guilty in April 2016. Potential adverse financial implications to the company were described as uncertain.
- Outstanding capital-project purchase commitments were approximately $21.1 million. Letters of credit totaled $25.5 million; payment and performance bonds included approximately $1.7 million for projects in progress and $7.6 million for completed projects still under warranty.
- Management reported no material changes in critical accounting policies, no significant off-balance-sheet transactions other than operating leases, and effective disclosure controls. Part II listed no risk-factor updates or legal proceedings, while the notes describe the investigation and ordinary-course claims.
Important facts for investors to verify
- Whether the strong margin gains and higher value-added mix are sustainable, particularly as lumber prices and product mix change.
- How seasonal working-capital needs affect cash and revolver usage through the remainder of the year.
- Whether planned 2016 capital spending and acquisition deployment are completed, and their effects on returns and leverage.
- Developments in the federal investigation, environmental remediation, anti-dumping duty accrual and outstanding bond or letter-of-credit exposures.
- The stated $150 million of revolver availability and covenant headroom; the filing provides the availability figure but not a detailed reconciliation of it.