Universal Forest Products, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; comparisons are to the periods ended June 25, 2011. The filing identifies the registrant as Universal Forest Products, Inc. (the company associated with the supplied UFP Industries metadata). Financial amounts below are in millions of dollars unless stated otherwise.
Business context and results
The company designs, manufactures and markets wood and wood-alternative products serving retail building materials, construction, industrial, and manufactured-housing markets. It reported that sales growth reflected higher lumber prices and stronger unit demand in most markets; retail building materials was the exception in the second quarter.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $593.7 | $544.1 | $1,050.8 | $931.4 |
| Gross profit / margin | $71.7 / 12.1% | $56.6 / 10.4% | $125.4 / 11.9% | $98.0 / 10.5% |
| Operating earnings | $29.5 | $7.8 | $37.3 | $2.7 |
| Net earnings attributable to controlling interest | $17.5 | $4.3 | $21.7 | $0.6 |
| Diluted EPS | $0.88 | $0.22 | $1.10 | $0.03 |
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $19.7 million, an improvement from negative $57.9 million. Management attributed the outflow primarily to seasonal working-capital growth of $50.7 million since year-end, including higher receivables and inventory.
- Investing cash flow was negative $3.5 million; capital expenditures were $15.8 million. Financing cash flow was positive $17.2 million, including $23.2 million of net revolving-credit borrowings. Cash ended the period at $5.3 million, down from $11.3 million at year-end.
- At June 30, current assets were $449.0 million and current liabilities were $179.0 million. Total debt and capital lease obligations were $72.9 million, including $40.0 million current. The company had $23.2 million outstanding on its $265 million revolving facility and was within its lending requirements.
- The $40 million Series 2002-A Senior Notes were due in December 2012; management expected to refinance them in the fourth quarter. The company planned capital spending of up to $38 million for 2012.
Material changes and management commentary
- Second-quarter net sales rose 9.1%; six-month sales rose 12.8%. Gross sales gains were strongest in manufactured housing and industrial markets. Q2 retail-building-materials sales fell 2.3%, including a 10% decline in unit sales, partly due to lost low-margin business with a major retail customer.
- Management said gross-margin improvement reflected selling into a rising lumber market in 2012 versus a falling market in 2011, a focus on higher-margin products, productivity gains and, for the six-month period, improved weather and operating leverage. Q2 unit sales increased 1%, compared with 9% growth in net sales.
- Q2 operating earnings included a $6.9 million net gain on asset dispositions, principally the sale of Fontana, California real estate for approximately $12.1 million, producing a reported pretax gain of approximately $7.2 million. Prior-year first-half results included $3.5 million of impairment, exit and early-retirement charges, including $2.6 million related to a former CEO agreement.
- Eleven operations had operating losses and negative cash flow in the first half. Their long-lived assets had a $14.8 million net book value and they had $0.9 million of future fixed operating lease payments; management noted potential future impairment charges.
- The company acquired MSR Forest Products on May 16 for $3.2 million. MSR supplies roof trusses and cut-to-size lumber to manufactured-housing customers and reported $10 million of 2011 sales; the purchase-price allocation remained preliminary.
Outlook, risks and contingencies
- No specific earnings or sales forecast was provided. Management warned that falling lumber prices in the third quarter could adversely affect gross margin and profitability. Lumber-price fluctuations can affect sales, working capital and margins; the company noted exposure for lumber-price-indexed products and inventory, particularly treated lumber.
- Management described seasonality: working capital typically rises from March through August, resulting in negative or modest operating cash flow in the first two quarters, with cash generation generally stronger from September through February. The cash cycle improved to 47 days from 53 days a year earlier.
- Other stated risks include weaker consumer demand or economic conditions, competition, weather, government regulation and changes in housing and lumber markets. The company reported no significant off-balance-sheet transactions other than operating leases.
- Environmental remediation reserves were approximately $3.4 million. The filing also disclosed $28.7 million of letters of credit, $24.9 million of outstanding payment and performance bonds for projects in progress, and $22.6 million of bonds for completed projects still under warranty. Management said pending ordinary-course lawsuits and claims were not expected to materially affect the financial statements; potential CCA-related liabilities were not accrued and were described as difficult to estimate.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the earnings improvement persists excluding the real-estate gain, and whether gross margins hold if lumber prices decline.
- Whether the company refinanced the $40 million notes due December 2012 on acceptable terms and maintained revolver availability and covenant compliance.
- Whether seasonal working-capital needs, especially receivables and inventory, convert to cash in the second half as management expects.
- Progress and performance of the 11 loss-making operations, and any resulting impairment or restructuring charges.
- Final purchase accounting and subsequent performance for MSR, along with developments in environmental, bond, warranty and other contingencies.