UFP Industries, Inc. — Q3 2017 Form 10-Q
Business context and period. The company supplies wood, wood-composite and other products to retail, industrial and construction markets. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are to periods ended September 24, 2016. Financial amounts below are in millions of dollars unless otherwise indicated.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,056.6 | $826.7 | $2,975.1 | $2,380.9 |
| Gross profit | $144.7 | $118.1 | $413.7 | $352.3 |
| Operating earnings | $52.3 | $43.6 | $140.0 | $129.1 |
| Net earnings attributable to controlling interest | $33.7 | $27.8 | $88.4 | $80.4 |
| Diluted EPS | $1.64 | $1.36 | $4.31 | $3.94 |
| Operating cash flow | Not separately shown | Not separately shown | $97.4 | $136.4 |
- Sales increased 27.8% in Q3 and 25.0% year to date. Management attributed Q3 gross-sales growth to 22% higher unit volume and 6% higher selling prices; acquisitions contributed 15% of unit-sales growth and organic growth contributed 7%.
- Gross margin declined to 13.7% from 14.3% in Q3 and to 13.9% from 14.8% year to date. Operating margin was 4.9% versus 5.3% in Q3 and 4.7% versus 5.4% year to date. Management cited lumber-price volatility and acquired operations’ lower proportional operating contribution.
- SG&A rose 24.0% in Q3 and 22.6% year to date. Net interest expense also increased, reflecting higher debt and slightly higher short-term borrowing rates. Effective tax rates were 31.9% in Q3 and 33.0% year to date, compared with 32.5% and 34.2%, respectively.
- Nine-month operating cash flow fell to $97.4 million from $136.4 million, primarily reflecting a $34.9 million increase in cash invested in working capital since year-end, alongside sales growth and higher lumber prices. Investing cash use was $121.4 million; financing provided $11.2 million. Cash, cash equivalents and restricted cash ended at $22.9 million.
- At September 30, total reported debt was $148.1 million, including $2.2 million current and $145.9 million long-term. Revolver borrowings were $70.8 million; after letters of credit, approximately $224.2 million remained available on the $295 million facility. An additional $150 million was available under a shelf agreement. The company reported compliance with debt covenants.
- Total assets were $1,486.9 million and shareholders’ equity was $950.1 million. Current assets were $888.6 million and current liabilities $339.0 million. Cash and cash equivalents were $22.0 million; restricted cash was $0.9 million.
Material changes and operating developments
- Three acquisitions were completed in the first nine months of 2017 for approximately $59.9 million: Robbins Manufacturing, Quality Hardwood Sales and Go Boy Pallets. Acquisitions completed since September 2016 contributed approximately $292.1 million of 2017 revenue and $5.3 million of operating profit.
- Industrial gross sales rose 59.3% in Q3 and 48.5% year to date, with a substantial portion of volume growth from acquisitions. Retail sales grew 15.5% in Q3; construction sales grew 15.8%. Commercial construction unit sales declined 5% in Q3, despite overall construction-market growth.
- Random Lengths framing lumber averaged $415/MBF in Q3 2017, up 16.2% year over year; the year-to-date average was up 18.5%. Management said hurricane damage and British Columbia wildfires contributed to sharp Q3 lumber-price increases. It cautioned that price trends could continue to pressure margins into Q4.
- The cash cycle increased to 49 days in Q3 from 44 days and to 52 days year to date from 47 days, largely because acquired operations carried higher inventory. Excluding acquisitions, the company reported 44 days for Q3 and 47 days year to date.
- The board declared a three-for-one stock split on October 17, 2017, after quarter-end, with record date October 31 and distribution November 14. Reported share and EPS figures are pre-split; the filing provides pro forma split-adjusted EPS.
Outlook, risks and contingencies
- No specific earnings or sales guidance is provided. Management planned approximately $70 million of capital expenditures for 2017, including expansion, efficiency, automation and acquired-operation needs; it intended to fund remaining spending through operating cash flows. Capital-project purchase commitments were $26.1 million at quarter-end.
- Management described lumber-price movements as a material margin risk: rising prices can reduce margins on fixed-price products, while falling prices can pressure indexed-price products as higher-cost inventory is sold. Other identified risks include weather, economic conditions, environmental and safety regulation, interest-rate changes on variable-rate debt, foreign currency exposure and acquisition execution.
- Environmental remediation reserves were approximately $3.6 million; an additional $0.2 million was recorded for probable closure costs at wood-treating drip pads. The company also disclosed open-project bonds of $8.8 million, warranty-related bonds of $1.7 million and letters of credit totaling $26.5 million. Management did not expect routine claims or contingencies to materially affect the financial statements.
- The company said it was not a target in a federal investigation concerning former employees, who were indicted and convicted or pleaded guilty; it continued to cooperate and did not expect a material adverse effect. It also disclosed no significant off-balance-sheet transactions other than operating leases.
- The company planned to adopt the new revenue-recognition standard in Q1 2018 using the modified retrospective method and was still evaluating its impact. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether lumber-price movements and the timing of customer repricing affect Q4 and subsequent gross margins.
- How acquired businesses contribute to operating profit and cash generation relative to their sales growth, and whether integration benefits materialize.
- Working-capital needs, inventory levels and operating cash flow as the seasonal selling period ends.
- Capital spending, revolver usage, covenant headroom and the effect of variable interest rates on financing costs.
- The final effect of ASC 606 adoption and the status or cost evolution of environmental, bond and other contingent exposures.