UFP Industries, Inc. (Universal Forest Products, Inc.) — Q3 2014 Form 10-Q
Business context and period: The company supplies wood, wood-composite and related products to retail, housing and construction, and industrial markets. This unaudited quarterly report covers the three and nine months ended September 27, 2014; comparisons are with periods ended September 28, 2013. Financial amounts below are in U.S. dollars.
Financial performance
- Third quarter: Net sales were $713.5 million, up 9.5% year over year, reflecting a 4% increase in unit sales and a 6% increase in selling prices. Gross profit rose 14.4% to $89.6 million; gross margin expanded to 12.6% from 12.0%. Operating earnings increased 31.4% to $32.2 million, and net earnings attributable to controlling interest rose to $19.2 million from $14.1 million. Diluted EPS was $0.96 versus $0.71.
- First nine months: Net sales were $2.040 billion, up 4.9%; gross profit increased to $252.6 million from $215.7 million, with gross margin improving to 12.4% from 11.1%. Operating earnings were $81.6 million versus $60.7 million. Net earnings attributable to controlling interest were $48.2 million versus $35.1 million; diluted EPS was $2.40 versus $1.76.
- Cash flow: Nine-month operating cash flow was $70.5 million, compared with $47.7 million. Investing cash use was $33.7 million, including $31.7 million of capital expenditures and $7.1 million for acquisitions; financing cash use was $10.4 million. Cash ended at $26.2 million, versus $5.2 million at the comparable 2013 date. Management notes that cash flow is seasonal, typically strengthening in the third and fourth quarters.
- Liquidity and debt: At September 27, 2014, current assets were $585.4 million and current liabilities were $192.9 million. Long-term debt was $84.7 million, unchanged from the prior-year date. No balance was drawn on the $265 million revolving credit facility, and the company reported compliance with its debt covenants.
Material changes and operating drivers
- Q3 sales increased across all primary markets. Retail building materials sales rose 10.2%, industrial sales 13.4%, and commercial construction sales 35.3%. Residential construction sales fell 2.2%; the company said unit sales declined 10% as it became more selective in the business it pursued.
- Management attributed improved gross profit to selectivity and operational improvements in residential construction, growth in retail and industrial markets, and commercial market gains. First-quarter weather-related productivity issues partly offset year-to-date improvement.
- SG&A rose 13% in Q3, mainly due to higher compensation and benefits and incentive compensation. Net interest costs declined year over year, which management attributed to lower interest expense and higher interest income.
- Segment operating profit improved in Eastern and Western, Site-Built, and All Other segments in Q3. For the first nine months, Corporate reported a $3.2 million operating loss, compared with $2.6 million of operating profit in 2013.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided. The company planned capital spending of up to $40 million for 2014 and expected to fund remaining expenditures from operating cash flow.
- Commodity lumber prices remain a key exposure: changes can affect selling prices, sales levels, working capital and margins. Management said prolonged price trends may affect profitability and expects lumber-price fluctuations to continue. Other cited risks include adverse weather or economic conditions, regulation, and acquisition execution.
- A real-estate sale by a 50%-owned consolidated subsidiary contributed to a Q3 net gain on disposition and impairment of assets of $2.6 million. After noncontrolling interest and taxes, management estimated the transaction added about $0.7 million to controlling-interest earnings. Nine-month results included a $4.6 million asset-sale gain offset by a $1.2 million impairment loss.
- The company recorded $1.6 million of anti-dumping duty assessment expense in the first nine months and reported a $2.2 million accrual for assessments on Chinese steel nails. Environmental remediation reserves were approximately $3.2 million; management did not expect the Michigan unclaimed-property audit or other ordinary-course claims to cause a material loss.
- Outstanding commitments included $8.5 million for capital projects, $26.9 million in letters of credit, and payment and performance bonds of $8.7 million for projects in progress and $21.7 million for completed projects still under warranty.
Important facts for investors to verify
- Whether sales and margin gains persist if lumber prices, housing activity, or market mix change; in particular, monitor residential construction unit volumes and pricing.
- How much of reported earnings growth depends on asset-sale gains and whether recurring operating performance supports the improvement.
- Working-capital and seasonal cash-flow trends, planned capital expenditures, and the company’s ability to maintain liquidity without drawing its revolver.
- Potential cash or earnings effects of anti-dumping assessments, environmental remediation, guarantees, and outstanding bonds or letters of credit.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting during the quarter.