UFP Industries, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 24, 2016; comparisons are with the quarter and nine months ended September 26, 2015, unless noted. Amounts are in millions of dollars except per-share data.
Business context and results
UFP supplies wood, wood-composite and other products to retail, industrial and construction markets. Operations are seasonal, with working-capital needs typically peaking during the spring and summer selling season. The company completed five acquisitions in the first nine months of 2016, including idX Holdings on September 16; idX’s post-close operating results were excluded as immaterial.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $826.7 | $762.3 | $2,380.9 | $2,233.5 |
| Gross profit | $118.1 | $110.7 | $352.3 | $302.7 |
| Gross margin | 14.3% | 14.5% | 14.8% | 13.6% |
| Operating earnings | $43.6 | $42.5 | $129.1 | $104.6 |
| Operating margin | 5.3% | 5.6% | 5.4% | 4.7% |
| Net earnings attributable to controlling interest | $27.8 | $25.6 | $80.4 | $61.7 |
| Diluted EPS | $1.36 | $1.26 | $3.94 | $3.06 |
Cash flow, debt and liquidity
- Nine-month operating cash flow was $136.4 million, up from $121.4 million. Investing used $200.5 million, principally reflecting acquisitions and idX debt/other-obligation repayment, plus $35.7 million of capital expenditures. Financing provided $14.0 million; cash decreased $51.1 million to $36.7 million.
- At September 24, cash was $36.7 million, investments $10.5 million, and cash overdraft $13.9 million. Total debt, including current maturities, was approximately $111.9 million, compared with $85.9 million at year-end 2015.
- The $295 million revolving facility had $25.3 million outstanding and approximately $260 million available after letters of credit. The company also reported $150 million available under a debt shelf agreement and compliance with debt covenants.
- Cash cycle improved to 47 days from 54 days in the comparable nine-month period. The company paid $8.5 million in dividends during the period.
Material changes and management commentary
- Q3 net sales rose 8.4%; management attributed gross-sales growth to 5% higher unit sales and 4% higher selling prices, primarily reflecting lumber costs. Retail sales increased 14.8%, construction 9.8%, while industrial sales declined 0.7%.
- Q3 operating earnings increased 2.4%, but operating margin declined to 5.3% from 5.6%. Management cited the absence of prior-year benefits from opportunistic lumber purchases and low lumber costs on fixed-price products, partly offset by improved higher-margin product mix.
- For the first nine months, gross margin improved to 14.8% and operating earnings rose 23.5%. Retail and construction growth, improved product mix and selective pursuit of higher-margin work contributed; SG&A also increased, including higher compensation, commissions and incentive compensation.
- Capital spending was planned at $65–$70 million for 2016, reduced from prior plans as the company pursued acquisitions. Management expected to fund remaining capital expenditures and commitments from operating cash flow. No earnings or revenue guidance is provided.
Risks, contingencies and unusual items
- Lumber-price volatility can affect sales, working capital and margins; lumber prices rose 10.2% year over year in Q3 on the Random Lengths composite and 20.1% for Southern Yellow Pine. Management said substantial, prolonged price trends could affect profitability.
- Other disclosed risks include adverse weather and economic conditions, environmental and safety regulation, interest-rate exposure on variable-rate debt, foreign-currency movements and acquisition execution.
- Environmental remediation reserves were approximately $3.4 million, with an additional $0.6 million recorded for anticipated drip-pad closure costs. Capital-project purchase commitments were $22.3 million. Outstanding letters of credit totaled $25.5 million.
- The company continues to cooperate with a federal investigation involving former employees; it stated it has not been named as a target, but potential adverse financial implications are uncertain. Management said other ordinary-course claims are not expected to materially affect the financial statements.
Important facts for investors to verify
- Whether retail and construction growth, and the improvement in nine-month margins, continue as lumber prices and end-market conditions change.
- How the idX acquisition affects future reported sales, earnings, cash flow and debt after purchase accounting is completed.
- Whether planned capital spending, acquisition-related obligations and seasonal working-capital needs remain covered by operating cash flow and available borrowing capacity.
- Developments in the federal investigation and environmental remediation obligations, whose ultimate financial effects are uncertain.