UFP Industries, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 29, 2019. Dollar amounts below are in millions unless stated otherwise. The company supplies wood, wood-composite and other products to retail, industrial and construction markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,239.8 | $1,294.4 | $2,254.9 | $2,288.3 |
| Gross profit | $186.7 | $165.7 | $341.0 | $296.6 |
| Operating earnings | $74.2 | $60.6 | $122.7 | $104.8 |
| Net earnings attributable to controlling interest | $54.5 | $44.0 | $90.1 | $76.9 |
| Diluted EPS | $0.88 | $0.71 | $1.46 | $1.24 |
- Sales decreased 4.2% in Q2 and 1.5% in the first half. In Q2, unit sales rose 5%, while selling prices fell 9%, primarily reflecting lower lumber prices. First-half unit sales increased 6%, offset by an 8% decrease in selling prices.
- Gross margin improved to 15.1% from 12.8% in Q2 and to 15.1% from 13.0% for the first half. Operating margin was 6.0% versus 4.7% in Q2 and 5.4% versus 4.6% for the first half.
- Management attributed improved profitability primarily to a greater share of value-added products and lower lumber costs on products sold at fixed prices. Value-added products were 66.9% of sales in Q2, up from 60.1%.
- SG&A increased 7.7% in Q2 and 10.5% for the first half, reflecting higher bonuses, wages and benefits, and other costs. The effective tax rate rose to 24.0% from 22.9% in Q2 and to 24.1% from 22.6% for the first half.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $70.9, compared with cash use of $36.1 in 2018. Management cited a smaller seasonal working-capital increase, lower lumber prices and inventory purchased opportunistically in late 2018. Investing cash use was $47.7; financing cash use was $30.3.
- Cash, cash equivalents and restricted cash totaled $21.5 at period-end, down from $28.2 at the start of the year. Capital expenditures were $42.5; dividends paid were $12.3, or $0.20 per share.
- At June 29, current assets were $1,097.1 and current liabilities were $379.6. Long-term debt was $187.5, with a further $0.2 current portion. The company reported $70.8 of lease liabilities following adoption of the new lease standard.
- The $375 revolving credit facility had $37.7 outstanding, including approximately $9.8 of letters of credit, and $337.3 of remaining availability after letters of credit. An additional $150 of shelf-agreement availability was reported. The company said it was in compliance with debt covenants.
- Seasonality typically increases working-capital needs and constrains operating cash flow in the first half, with stronger cash generation generally expected in the second half. The cash cycle was 53 days in Q2, versus 49 days a year earlier; higher inventory days reflected safety stock and prior opportunistic purchases.
Changes, outlook and key commentary
- Random Lengths lumber prices averaged $343/MBF in Q2 2019, down 36.6% year over year. Management said lower lumber prices reduced reported sales but helped margins; lumber-price movements can also affect working capital and profitability.
- Market performance was mixed: Q2 gross sales declined 4.3% in retail and 9.9% in construction, while industrial sales rose 2.9%. For the first half, industrial sales increased 8.6%; retail declined 4.0% and construction declined 6.8%.
- New product sales were $175.3 in Q2 and $290.3 for the first half. The company stated a 2019 goal of at least $525 in annual new product sales.
- Management planned up to $100 in 2019 capital expenditures, including capacity replacement in South Florida, expansion of Deckorators capacity and projects for industrial customers and automation. Capital-project purchase commitments were approximately $48.3 at period-end.
- The company acquired Wolverine Wood Products on May 1, 2019, for $5.0 cash. Acquisitions completed since June 2018 contributed $20.3 of Q2 revenue and $1.8 of Q2 operating profit.
- Management estimated that favorable lumber buying contributed approximately $6–$7 of additional gross profit in Q1 2019. The prior-year comparison also included a $7 pretax gain on the 2018 sale of the Medley, Florida facility.
Risks, contingencies and unusual items
- Key risks described include lumber-price volatility, adverse weather and economic conditions, environmental and safety regulation, and acquisition execution. Variable-rate debt exposes earnings and cash flows to interest-rate changes; international operations also face foreign-currency risk.
- Environmental remediation reserves were approximately $2.0. Management said the outcome of ordinary-course lawsuits and claims was not expected to materially affect the financial statements.
- Other disclosed exposures included $14.8 of bonds for open projects, $10.0 of bonds for completed projects still under warranty, and $37.4 of outstanding letters of credit. The filing reported no significant off-balance-sheet transactions.
- The company adopted lease accounting in 2019, recognizing right-of-use assets and lease liabilities; it reported no cumulative adjustment to retained earnings. The filing reported no material change in critical accounting policies and no material weakness or material change in internal controls.
Important facts for investors to verify
- Whether unit growth, value-added product mix and margin improvement persist as lumber prices and customer pricing adjust.
- Whether the planned capital spending and $525 new-product sales goal are achieved, and how effectively the $48.3 of committed projects is funded and deployed.
- Seasonal working-capital needs, inventory levels and cash conversion, including the effect of the longer cash cycle.
- Debt-facility availability, covenant compliance, and the cost and obligations associated with leases, letters of credit and project bonds.
- Progress on environmental remediation and any changes in litigation, warranty or other contingencies.