Universal Forest Products, Inc. — Q2 2014 Form 10-Q
Business and period: The company supplies wood, wood-composite and other products to retail, construction and industrial markets. This unaudited report covers the quarter and six months ended June 28, 2014; comparisons are with the periods ended June 29, 2013. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2014 | Q2 2013 | First six months 2014 | First six months 2013 |
|---|---|---|---|---|
| Net sales | $772.8 | $738.4 | $1,326.8 | $1,292.9 |
| Gross profit | $97.0 | $80.2 | $163.0 | $138.0 |
| Operating earnings | $36.7 | $27.1 | $49.4 | $36.2 |
| Net earnings attributable to controlling interest | $21.8 | $15.8 | $29.0 | $21.0 |
| Diluted EPS | $1.08 | $0.79 | $1.44 | $1.05 |
- Growth and margins: Q2 net sales rose 4.6%, reflecting 6% higher unit sales offset by approximately 1% lower selling prices. Gross margin increased to 12.6% from 10.9%; operating margin rose to 4.8% from 3.7%. For the six months, sales increased 2.6%, gross margin was 12.3% versus 10.7%, and operating margin was 3.7% versus 2.8%.
- Cash flow: First-half operating cash flow was $22.8, versus cash used of $25.5 in 2013. Investing used $28.0, including $20.1 of capital spending and $7.1 for acquisitions; financing provided $5.3. Cash and cash equivalents were zero at period end, and the balance sheet showed a $13.7 cash overdraft.
- Liquidity and debt: Current assets were $591.4 and current liabilities $204.4. Long-term debt on the balance sheet was $95.1. The company reported $10.4 outstanding on its $265 revolving facility and $9.8 of letters of credit supporting industrial development bonds. It reported compliance with debt covenants.
- Other metrics: Total assets were $1,021.9 and shareholders’ equity $679.7. The first-half effective tax rate was 37.2%, up from 35.3%, mainly because approximately $0.7 of prior-year tax credits had been recorded in 2013. The company paid $4.2 in dividends during the first half.
Material changes and management commentary
- Profitability improved substantially, with management citing more selective and profitable residential framing work, better product mix, industrial and retail growth, and a more favorable lumber-price pattern than in Q2 2013. First-half gains were partly offset by weather-related productivity costs in Q1.
- Market results were mixed. Q2 retail building-material sales increased 10.9%, industrial 5.3%, and commercial construction 29.4%; manufactured housing fell 9.2% and residential construction 8.2%. Residential unit sales declined 11% in Q2 despite higher housing starts; management said selective pricing and customer choices were deliberate.
- The company’s cash cycle lengthened to 52 days from 49, mainly due to higher inventory days. Management attributed inventory pressure to first-quarter weather and additional safety stock amid transportation challenges. Seasonal working-capital needs typically weigh on cash flow from March through August.
- Three acquisitions were completed in the first half, with approximately $19 million of annual revenue in aggregate. Management said they were not significant individually or collectively to reported results.
Outlook, risks and contingencies
- Management planned up to $40 million of capital expenditures in 2014 and intended to fund remaining spending and commitments from operating cash flow. Capital-project purchase commitments were approximately $6.5 million at quarter end. No numerical earnings or sales guidance was provided.
- Management expected a key manufactured-housing customer’s vertical-integration strategy to continue weighing on sales in that market for the balance of 2014. It also expected selective residential-construction pricing to constrain sales growth relative to market growth, while sales to other manufactured-housing customers were expected to track industry production.
- Risks discussed include lumber-price volatility, adverse weather and economic conditions, environmental and safety regulation, and successful acquisition execution. Lumber-price trends may affect sales, working capital and margins; the company does not use derivatives to hedge interest-rate risk.
- Unusual items and exposures include a $1.6 Q2 accrual for anti-dumping duties on Chinese steel nails, bringing the accrual to $2.2; environmental remediation reserves of approximately $3.2 and a separate $0.6 estimated closure liability for wood-treatment drip pads; and an ongoing Michigan unclaimed-property audit, which management did not expect to result in a material loss.
- Outstanding payment and performance bonds were approximately $11.7 for projects in progress and $23.8 for completed projects still under warranty. Letters of credit totaled $26.9, primarily for insurance and industrial development bonds. Management said ordinary-course claims were not expected to materially affect the financial statements. No significant off-balance-sheet transactions were reported other than operating leases.
Investor facts to verify
- Whether improved gross and operating margins persist as lumber prices, product mix and demand change.
- Whether lower residential and manufactured-housing sales, including the key customer’s vertical integration, continue to affect growth.
- Seasonal working-capital requirements, receivables and inventory levels, and the ability to generate cash to fund planned capital spending.
- The final amount and timing of anti-dumping duties, environmental remediation costs, and outcomes of the unclaimed-property audit and other claims.
- Revolver availability, covenant headroom and the composition and maturity of reported debt; the filing does not provide a clear total-debt figure in the text presented.