UFP Industries, Inc. — Q2 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 three and six months ended July 1, 2017, compared with periods ended June 25, 2016. Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,072.4 | $872.1 | $1,918.5 | $1,554.2 |
| Gross profit | $148.2 | $131.5 | $269.0 | $234.2 |
| Gross margin | 13.8% | 15.1% | 14.0% | 15.1% |
| Operating earnings | $53.9 | $53.7 | $87.7 | $85.6 |
| Net earnings attributable to controlling interest | $33.6 | $33.4 | $54.7 | $52.6 |
| Diluted EPS | $1.64 | $1.64 | $2.66 | $2.58 |
| Operating cash flow | Not reported separately for the quarter | $15.2 | $40.0 |
- Q2 net sales rose 23.0%; management attributed the increase to 16% higher unit sales and 7% higher selling prices. Acquired operations accounted for 12% of unit-sales growth; organic unit growth was 4%.
- For the first half, net sales rose 23.4%, while operating earnings increased 2.5% and controlling-interest earnings increased 4.0%. Diluted EPS rose from $2.58 to $2.66.
- SG&A was $94.3 million in Q2, up $16.5 million, and $181.3 million for the first half, up $32.6 million. Higher acquired-company costs contributed substantially.
- At July 1, cash and cash equivalents were $24.6 million and restricted cash was $0.9 million. Current assets were $894.9 million versus current liabilities of $311.6 million.
- Total debt, including current maturities, was approximately $207.1 million, compared with $111.7 million at December 31, 2016. The company had $119.8 million drawn on its $295 million revolver and approximately $165.4 million of remaining availability after letters of credit; it also reported $150 million available under a shelf agreement. The company said it complied with all debt covenants.
Material changes and management commentary
- Higher lumber prices lifted selling prices and sales, but volatility compressed gross margins. Random Lengths framing lumber averaged $413/MBF in Q2 2017, up 17.7% year over year; management said the rapid rise and subsequent May–June decline hurt margins across different product-pricing arrangements.
- Management said these lumber-price effects could continue into Q3 while fixed-price products are repriced and higher-cost inventory is sold. Recent British Columbia wildfires raised concerns about SPF lumber supply and prices; the company said it would seek to mitigate the impact, including by substituting other species where possible.
- Three acquisitions were completed in the first half: Robbins and Quality Hardwood Sales in March, and Go Boy Pallets in May. Acquisition-related sales supported growth, while acquired operations also added costs and comparatively high inventory needs. Goodwill increased to $213.6 million from $198.5 million at year-end.
- Seasonality typically raises working capital from March through August and results in modest or negative operating cash flow in the first half, followed by stronger cash generation later in the year. Cash from operations fell to $15.2 million from $40.0 million, reflecting a $68.0 million seasonal working-capital increase, versus $35.9 million in the prior-year period. The cash cycle lengthened to 50 days in Q2 from 43 days; excluding acquired operations, it was 45 days.
- Investing cash use was $99.9 million, including $59.7 million for acquisitions and $34.5 million for capital expenditures. Management planned approximately $70 million of 2017 capital spending and expected to fund remaining spending and commitments through operating cash flow.
- Financing provided $74.5 million, including approximately $95.3 million of net revolver borrowings, alongside $9.2 million of dividends and $9.9 million of share repurchases. The first-half dividend was $0.45 per share.
Risks, contingencies and unusual items
- Key stated risks include lumber-price fluctuations, adverse weather and economic conditions, environmental and safety regulation, acquisition execution, variable interest rates and foreign-currency movements. The company does not use interest-rate derivatives; it reported entering into foreign-exchange forward contracts in 2017.
- Environmental remediation reserves were approximately $3.6 million. The company also recorded about $0.2 million for future closure costs at wood-treating drip pads.
- The company disclosed an ongoing U.S. Attorney’s Office matter concerning two former employees, who were convicted or pleaded guilty. The company was not named as a target, continued to cooperate, and said it did not expect a material adverse impact, while noting potential financial implications were uncertain. Management said other ordinary-course claims were not expected to materially affect the financial statements.
- Outstanding capital-project purchase commitments were $29.5 million. Open-project payment and performance bonds were $8.2 million, with another $2.3 million for completed projects still under warranty. Letters of credit totaled $26.5 million.
- The filing reported no material changes in critical accounting policies, no material changes in internal control over financial reporting, and effective disclosure controls. Part II reported no new risk factors.
Important facts for investors to verify
- Whether Q3 results reflect margin recovery as customer pricing and inventory costs adjust to lumber-market movements.
- How much reported sales and earnings growth is organic versus acquisition-driven, and whether acquired businesses deliver expected operating returns.
- Whether seasonal working-capital needs ease and operating cash flow improves in the second half, alongside planned capital spending.
- Developments in lumber and SPF supply, debt levels and covenant headroom, and the status of the disclosed environmental and legal matters.