UFP Industries, Inc. — Q1 2013 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 quarter ended March 30, 2013; comparisons are with the three months ended March 31, 2012 unless stated otherwise. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $554.5 million | $457.1 million |
| Gross profit / margin | $57.2 million / 10.3% | $53.7 million / 11.7% |
| Operating earnings / margin | $9.1 million / 1.6% | $7.8 million / 1.7% |
| Net earnings attributable to controlling interest | $5.2 million | $4.2 million |
| Diluted earnings per share | $0.26 | $0.21 |
| Cash from operating activities | $(64.6) million | $(44.8) million |
| Cash from investing activities | $(10.1) million | $(5.5) million |
| Cash from financing activities | $59.1 million | $34.6 million |
Net sales rose 21.3%, driven substantially by higher lumber prices; management reported unit sales increased 2% overall. Lumber costs pressured reported margins: the first-quarter framing lumber composite averaged $413/MBF versus $289/MBF, while Southern Yellow Pine averaged $423/MBF versus $282/MBF. Management said higher lumber prices can lift sales and working-capital needs while reducing margins as a percentage of sales.
Balance sheet and liquidity
- At March 30, 2013, total assets were $967.0 million, total liabilities $351.3 million, and shareholders’ equity $615.7 million.
- Cash and cash equivalents were nil; cash overdraft was $7.7 million. Accounts receivable were $233.0 million and inventory was $290.8 million.
- Long-term debt was $155.2 million, up from $95.8 million at December 29, 2012. The company reported $70.5 million drawn on its $265 million revolving credit facility; it was in compliance with debt covenants.
- Operating cash use reflected a $78.6 million increase in working capital since year-end, including higher receivables and inventory. Management noted the business is seasonal and higher lumber prices increased working-capital requirements. The cash cycle lengthened to 55 days from 51 days a year earlier.
- Capital expenditures were $8.1 million for the quarter. The company planned up to $40 million for 2013 and reported $28.8 million in outstanding capital-project commitments.
Material changes and management commentary
- Sales rose across all listed markets, led by commercial construction and concrete forming (+54%), residential construction (+43%), and manufactured housing (+43%). Retail building-material unit sales fell about 10%, which management attributed primarily to unfavorable weather; retail sales dollars nevertheless rose 5% due mainly to pricing.
- Gross profit dollars increased 7%, but gross margin declined from 11.7% to 10.3%. Management cited the higher lumber-price level and rising labor and commodity costs in turnkey framing work.
- Site-Built segment operating loss widened to $4.1 million from $0.6 million, primarily due to rising commodity and labor costs on fixed-price construction contracts. Eastern and Western segment operating profit improved to $14.1 million from $12.5 million.
- Management said it gained market share during retail customer quoting for 2013 and was optimistic about unit-sales growth for the rest of the year. It also reported improving housing and commercial-market activity, while emphasizing selective bidding to protect profitability and cash flow.
- The company acquired Millry Mill Company in February for $2.3 million and reported $8.6 million of total acquisition cash outlays in the quarter, including Custom Caseworks. Acquisitions contributed to industrial sales growth.
- The effective tax rate was 28.1%, versus 38.1%, including about $0.7 million of tax credits related to 2012 that were enacted in Q1 2013. The board subsequently approved a $0.20-per-share semiannual dividend, payable June 15, 2013.
Outlook, risks and contingencies
- No specific earnings or revenue forecast was provided. Management planned to fund remaining 2013 capital spending from operating cash flows and said it would manage its capital structure conservatively.
- Key exposures include volatile lumber prices, weather and economic conditions, and interest-rate changes on variable-rate debt. The company does not use derivatives to mitigate interest-rate risk. Fixed-price construction contracts also expose results to labor and commodity cost increases.
- Seventeen operations had operating losses and negative cash flow in Q1. Their long-lived assets had a $24.9 million net book value and they had $1.8 million of future fixed lease payments; future impairment charges are possible.
- Environmental remediation reserves were approximately $3.5 million. Management said the outcome of ordinary-course lawsuits and claims was not expected to materially affect the financial statements. Outstanding payment and performance bonds totaled about $24.3 million for projects in progress and $19.7 million for completed projects still under warranty; letters of credit totaled $28.7 million.
- The company identified potential adverse effects from restrictions on CCA-treated lumber products. It reported no material changes to internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether working-capital investment and debt decline as seasonal demand and lumber prices evolve.
- Whether unit-sales growth—especially in retail, residential and commercial markets—translates into improved margins and cash generation.
- Whether Site-Built fixed-price contract costs, the 17 loss-making operations, or asset impairments create further losses.
- How the $40 million capital-spending plan, $28.8 million commitments, acquisitions and dividend affect liquidity and leverage.
- Developments in lumber-price volatility, environmental remediation, CCA regulation, guarantees and other disclosed contingencies.