UFP Industries, Inc. — Q3 2012 Form 10-Q
Business and period: Universal Forest Products designs, manufactures and markets wood and wood-alternative products for retail, construction, manufactured housing and industrial customers. This unaudited filing covers the quarter and nine months ended September 29, 2012; comparisons are with periods ended September 24, 2011. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $533.4 | $468.9 | $1,584.2 | $1,400.3 |
| Gross profit / margin | $55.2 / 10.4% | $54.4 / 11.6% | $180.6 / 11.4% | $152.4 / 10.9% |
| Operating earnings / margin | $8.3 / 1.6% | $10.1 / 2.2% | $45.6 / 2.9% | $12.8 / 0.9% |
| Net earnings attributable to controlling interest | $4.2 | $5.6 | $25.9 | $6.2 |
| Diluted earnings per share | $0.21 | $0.29 | $1.31 | $0.32 |
- Revenue and markets: Q3 net sales rose 13.7%, while gross sales increased 13.1% for the first nine months. Management attributed much of the growth to higher lumber prices; unit sales also increased in residential construction, industrial and manufactured housing. Q3 residential construction unit sales rose 20%; manufactured housing rose 14% and industrial rose 9%. Retail building-material sales declined 3% in the quarter, including a 10% unit-sales decline.
- Margins and earnings: Q3 gross profit dollars increased about 2%, but gross margin fell 1.2 percentage points as lumber prices were higher than the prior-year quarter. Q3 operating earnings declined about 18% and controlling-interest net earnings declined about 25%. Nine-month operating earnings benefited from stronger gross profit and a $7.2 million gain on real-estate and asset sales; 2011 included $3.7 million of impairment, exit and early-retirement charges.
- Cash flow and liquidity: Nine-month operating cash flow was $2.8 million, investing cash flow was negative $10.0 million, and financing cash flow was positive $0.7 million. Cash fell $6.4 million from year-end 2011 to $4.9 million. Management cited a $42.0 million increase in working capital since year-end, partly reflecting higher lumber prices. The cash cycle improved to 46 days from 51 days.
- Debt and capital: Total debt and capital lease obligations were $55.9 million, including $40.0 million classified as current and due in December 2012. The company had $6.2 million drawn on its $265 million revolving facility and was in compliance with covenants. Equity was $611.7 million. Capital expenditures were $22.2 million for the nine months; the company planned up to $38 million for 2012, including approximately $13 million of outstanding project commitments.
Material changes, outlook and risks
- Management said higher lumber prices boost reported sales but generally reduce gross margin as a percentage of sales under its pricing model. Lumber price level and direction can affect margins, sales volume and working-capital needs.
- Management expected to refinance the $40 million Series 2002-A Senior Notes due December 2012. The filing does not provide a formal earnings or revenue forecast.
- The board approved a $0.20-per-share semiannual dividend after quarter-end, payable December 15, 2012. The company also announced a planned acquisition of Nepa Pallet and Container, expected to close in early November; closing was not yet complete as of the filing.
- A $2.0 million Q3 contingency charge was recorded for retroactive Canadian anti-dumping and countervailing duties related to certain extruded aluminum products imported from China. The company said the accrual represented the maximum amount of its exposure while it sought clarification.
- Nine operations reported operating losses and negative cash flow for the first nine months; their long-lived assets had a $19.3 million net book value and they had $0.8 million in future fixed lease payments. Management noted potential future impairment risk.
- Environmental remediation reserves were approximately $3.4 million. The company also disclosed CCA-treated product regulatory contingencies for which it had not accrued a potential loss, noting that estimates are difficult and subject to change. Management said ordinary-course lawsuits and claims were not expected to materially affect the financial statements.
- Management identified consumer demand, weather, economic conditions, competition, regulation and lumber-price volatility as risks. It also cited uncertainty around consumer demand and growth assumptions supporting Consumer Products goodwill. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $40 million debt maturity was refinanced on acceptable terms and whether covenant compliance continued.
- Whether working-capital needs and cash generation improved after quarter-end, particularly as lumber prices and seasonal demand changed.
- Whether the Canadian duty assessment, environmental matters or other contingencies changed in amount or status.
- Whether the nine loss-making operations or Consumer Products goodwill assumptions led to impairment, restructuring or other charges.
- Whether planned 2012 capital spending and the Nepa acquisition were completed, and their effect on liquidity and returns.