UFP Industries - 10-Q quarterly report FY2012 Q3

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

For the quarterly period ended September 29, 2012

 

OR

 

UNIVERSAL FOREST PRODUCTS, INC.

Registrant's telephone number, including area code (616) 364-6161

(Former name or former address, if changed since last report.)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x   No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes  o   No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

(Unaudited)

 

(in thousands, except share and per share data)

(Unaudited)

See notes to unaudited consolidated condensed financial statements

 

Universal Forest Products, Inc. (“the Company”) is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for retail building materials home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the residential construction market, and specialty wood packaging and components and packing materials for various industries. The Company’s subsidiaries also provide framing services for the residential market and forming products for concrete construction. The Company's consumer products operations offer a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide. The Company is headquartered in Grand Rapids, Michigan, and its subsidiaries operate facilities throughout North America. For more about Universal Forest Products, Inc., go to www.ufpi.com.

Please be aware that: Any statements included in this report that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by, and information currently available to, the Company at the time such statements were made. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: adverse Lumber Market trends, competitive activity, negative economic trends, government regulations and weather. Certain of these risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission.  We are pleased to present this overview of 2012.

Our results for the third quarter of 2012 were impacted by the following:

 

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). The following table presents the Random Lengths framing lumber composite price:

In addition, a Southern Yellow Pine ("SYP") composite price, which we prepare and use, is presented below.  Sales of products produced using this species, which primarily consists of our preservative-treated products, may comprise up to 50% of our sales volume.

 

 

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market").  We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide.  As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products.  Lumber costs are a significant percentage of our cost of goods sold.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently.  Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits.  Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

Changes in the trend of lumber prices have their greatest impact on the following products:

 

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins.  Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.

 

See Notes to Unaudited Consolidated Condensed Financial Statements, Note G, “Business Combinations.”

 

 

 

 

GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries.  Our strategic long-term sales objectives include:

The following table presents, for the periods indicated, our gross sales (in thousands) and percentage change in gross sales by market classification.

Gross sales in the third quarter of 2012 increased 13% compared to the same period of 2011, primarily due to the impact of the higher level of the Lumber Market on our selling prices.

Gross sales in the first nine months of 2012 increased 13% compared to the same period of 2011, due to higher lumber prices in the second and third quarters and an increase in unit sales in the first quarter primarily resulting from improved demand in each of our markets and more favorable weather compared to inclement weather in 2011.

Changes in our gross sales by market are discussed below.

Gross sales to the retail building materials market decreased 3% in the third quarter of 2012 compared to the same period of 2011, primarily due to a 10% decrease in our overall unit sales, offset by higher lumber prices.  Unit sales decreased primarily due to the loss of sales of low-margin products to a major retail customer.  This loss of market share was offset somewhat by increased sales to other retail customers. Within this market, sales to our big box customers decreased 16% while our sales to other retailers increased 16%.

Gross sales to the retail building materials market increased 1% in the first nine months of 2012 compared to the same period of 2011, primarily due to the same factors discussed above and an increase in consumer spending in the first quarter.

 

 

Gross sales to the residential construction market increased 34% in the third quarter of 2012 compared to the same period of 2011 due to an increase in lumber prices and a 20% increase in our unit sales.   By comparison, national housing starts increased approximately 24% in the period of June through August of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  Gross sales to the residential construction market increased 16% in the first nine months of 2012 compared to the same period of 2011 primarily due to a 10% increase in unit sales (plant closures since July of 2011 had the effect of decreasing unit sales by 3%) combined with an increase in selling prices due to the Lumber Market.  By comparison, national housing starts increased approximately 26% in the period of December through August of 2012 (our sales trail housing starts by about a month), compared to the same period of 2011.  We continue to be selective in the business that we pursue in order to maximize profitability.  As a result, we have lost some share of this market.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 11% in the third quarter of 2012 compared to the same period of 2011.  Within this market, sales to commercial builders increased 10% and sales of products used to make concrete forms increased 13%. Gross sales to the commercial construction and concrete forming market increased 19% in the first nine months of 2012 compared to the same period of 2011.  Within this market, sales to commercial builders increased 13% as a result of our ability to supply “turnkey” (components and framing) services to our customers, and sales of products used to make concrete forms increased 25% due to the sales and capital resources we’ve dedicated to growing our share of this market.

Industrial:

Gross sales to the industrial market increased 20% in the third quarter of 2012 compared to the same period of 2011, due a 9% increase in unit sales and an 11% increase in selling prices due to the Lumber Market.  We added over 40 new customers this quarter and our sales to existing customers increased as we gained share with our top customers and demand improved.

Gross sales to the industrial market increased 22% in the first nine months of 2012 compared to the same period of 2011, primarily due an increase in unit sales as a result of the same factors discussed above.

Manufactured Housing and Recreation Vehicles:

Gross sales to the manufactured housing market increased 36% in the third quarter of 2012 compared to 2011, primarily due to an increase in selling prices due to the Lumber Market and combined with a 14% increase in unit sales.  Unit sales to this market increased due to a rise in industry production of HUD-code homes related to orders from FEMA and strong demand for temporary housing in some areas of the country related to shale oil and gas development. In addition, we continued to add product lines and expand share in our distribution business. Shipments of HUD-code homes in July and August 2012 were up 11% compared to 2011.

Gross sales to the manufactured housing market increased 31% in the first nine months of 2012 compared to 2011, primarily due to an increase in selling prices due to the Lumber Market and combined with a 19% increase in unit sales.  Unit sales to this market increased due to the factors discussed above. Shipments of HUD-code homes in January through August 2012 were up 17% compared to 2011.

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales.  Value-added products generally carry higher gross margins than our commodity-based products.

Our gross profit percentage decreased to 10.4% from 11.6% comparing the third quarter of 2012 to the same period of 2011.  Our gross profit dollars increased by 2%, which is slightly better than our 1% increase in unit sales.  Our lower gross profit percentage in 2012 reflects the impact the higher level of the Lumber Market this year compared to 2011.  See Historical Lumber Prices.

Our gross profit percentage increased to 11.4% from 10.9% comparing the first nine months of 2012 to the same period of 2011.  In addition, our gross profit dollars increased by 19%, which compares favorably to our 6% increase in unit sales. This improvement is primarily due to the impact of the Lumber Market combined with our increase in unit sales in the first quarter and the operating leverage we have in our cost structure.  In addition, more favorable weather in the first quarter of 2012 compared to 2011, when we lost many production days due to inclement weather, impacted our production efficiency and improved our gross profit percentage.  These increases were offset to some extent by pricing pressure experienced during the first nine months of the year.  In addition, we lost some market share with a major retail customer this year, primarily in product lines with lower gross margins.

Selling, general and administrative ("SG&A") expenses increased by approximately $0.4 million, or 0.9%, in the third quarter of 2012 compared to the same period of 2011, while we reported a 1% increase in unit sales.  The increase in SG&A was primarily due to small increases in compensation and related expenses, costs to prepare a new plant for production of our Eovations product line, and various selling costs.  These increases were offset by a decrease in accrued bonus and other incentive compensation, which is based on profitability and the efficient use of capital.

Selling, general and administrative ("SG&A") expenses increased by approximately $3.5 million, or 2.6%, in the first nine months of 2012 compared to the same period of 2011, while we reported a 6% increase in unit sales.  The increase in SG&A was primarily due to increases in accrued bonus and other incentive compensation, which is based on profitability and the efficient use of capital.  Also, SG&A expenses in 2011 were impacted by a bad debt recovery in 2011, while our bad debt expense for 2012 remained consistent with our normal trends.  These increases were offset by decreases in compensation and related expenses, amortization expense, and several other expenses as a result of our continuing efforts to reduce our cost structure.

 

 

In the third quarter, we recorded a $2.0 million loss contingency for a Canadian anti-dumping duty. The Canadian government has imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China.  While we continue to work with the government to clarify the applicability of these rules to our products, we recorded a charge in the third quarter for this matter such that our accrued liability is the maximum amount of our exposure.

In the first nine months of 2012, we incurred approximately $0.2 million of severance costs which were offset by net gains on the sale or disposal of real estate and other property, plant and equipment totaling approximately $7.2 million.

In the first nine months of 2011, we recorded charges totaling $3.7 million relating to asset impairments and other costs associated with idled facilities and down-sizing efforts combined with early retirement expense.   On June 20, 2011 our chief executive officer resigned and we entered into a consulting and non-competition agreement with him. We accrued for the present value of the future payments under the agreement totaling $2.6 million in June 2011.

We regularly review the performance of each our operations and make decisions to permanently or temporarily close operations based on a variety of factors including:

We currently have 9 operations which are experiencing operating losses and negative cash flow for the first nine months of 2012.  The net book value of the long-lived assets of these operations, which could be subject to an impairment charge in the future, was $19.3 million at the end of September of 2012.  In addition, these operations had future fixed operating lease payments totaling $0.8 million at the end of September of 2012.

 

Net interest costs were comparable in the third quarter and first nine months of 2012 compared to the same periods of 2011. Our debt levels in 2012 were lower but our borrowing rates were slightly higher compared to 2011.

 

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 37.9% in the third quarter of 2012 compared to 35.4% for same period of 2011. Our effective tax rate was 37.3% in the first nine months of 2012. Our effective tax rate was 33.1% in the first nine months of 2011.  The increase in our effective tax rate is primarily due to the expiration of the R&D tax credit offset by a combination of several small permanent differences.

We have no significant off-balance sheet transactions other than operating leases.

 

 

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):

In general, we financed our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable.  We have not issued equity to finance growth except in the case of a large acquisition.  We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization.  We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.  We are currently below our internal targets but plan to manage our capital structure conservatively in light of current economic conditions.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the September 24, 2011 balances in the accompanying unaudited consolidated condensed balance sheets.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management.  Our cash cycle decreased to 46 days in the first nine months of 2012 from 51 days in the first nine months of 2011, due to a 5 day decrease in our days supply of inventory. In 2012, consumer demand and weather were unexpectedly good resulting in strong sales increases and higher inventory turnover.  Conversely, in 2011 demand and weather were poor, resulting in weak sales and lower inventory turnover.

Cash provided by operating activities was $2.8 million in the first nine months of 2012, which was comprised of net earnings of $27.2 million and $24.8 million of non-cash expenses, offset by a $7.2 million gain on the sale of property, plant and equipment and a $42.0 million increase in working capital since the end of 2011.  Working capital at the end of September 2012 is higher than the end of September 2011 primarily due to the impact of higher lumber prices.

Capital expenditures were $22.2 million in the nine months of 2012.  We currently plan to spend up to $38 million in 2012, which includes outstanding purchase commitments on existing capital projects totaling approximately $13.0 million on September 29, 2012, primarily for expansion to support new product offerings and sales growth into new geographic markets.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.

Cash flows used in investing activities included $2.1 million spent to acquire assets of an operation that produces products for the manufactured housing industry. See Notes to Unaudited Consolidated Condensed Financial Statements, Note G “Business Combinations”.

On September 29, 2012, we had $6.2 million outstanding on our $265 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $28.7 million on September 29, 2012.  Financial covenants on the unsecured revolving credit facility and unsecured notes include a minimum net worth requirement, minimum interest and fixed charge coverage tests, and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold.  We were in compliance with all of our covenant requirements on September 29, 2012.

Our Series 2002-A Senior Notes totaling $40 million is due in December 2012. We expect to refinance this obligation in the fourth quarter.

 

See Notes to Unaudited Consolidated Condensed Financial Statements, Note F, "Commitments, Contingencies, and Guarantees."

 

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures.  There have been no material changes in our policies or estimates since December 31, 2011.

We evaluate long-lived assets for indicators of impairment when events or circumstances indicate that this risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance and estimated future cash flows. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded to adjust the asset to its fair value. Changes in forecasted operations and changes in discount rates can materially affect these estimates. In addition, we test goodwill annually for impairment by utilizing the discounted cash flow method. The first step of the goodwill impairment test requires that the estimated fair value of the applicable reporting unit be compared with its recorded value.  The fair value of the Consumer Products Division exceeded its net book value including goodwill by 27% as of the last impairment test date, December 31, 2011.

The amount of goodwill allocated to the Consumer Products Division is $8.4 million. Key assumptions that were used in determining the fair value of the reporting unit, included: additional sales of our composite decking product with a key customer; retention of existing business and replacement of any lost business; and profitability improvements based on covering our fixed costs sooner as a result of higher sales volumes running through the plants.  Uncertainties exist in achieving key assumptions in the short term due to lower than expected consumer demand for the product offering and slower growth of replacement business, which has resulted in lower than forecasted leverage of our fixed costs to date.  However, we currently view these lower than forecasted profits to be temporary, and long-term forecasts at December 31, 2011 to still be achievable.

 

 

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds.  We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.

For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows.  Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows.  We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.

We are subject to fluctuations in the price of lumber.  We experience significant fluctuations in the cost of commodity lumber products from primary producers (the "Lumber Market").  A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices.  While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability.  We anticipate that these fluctuations will continue in the future.  (See “Impact of the Lumber Market on Our Operating Results.”)

 

 

 

(a)           None.

(b)           None.

(c)           Issuer purchases of equity securities.

 

None.

 

The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:

*  Indicates a compensatory arrangement.

 

 

 

 

 

*  Indicates a compensatory arrangement.