UFP Industries - 10-Q quarterly report FY2011 Q2

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

 

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 DIY/retail home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the site-built construction market, and specialty wood packaging and components and packing materials for various industries. The Company’s subsidiaries also provide framing services for the site-built market and forming products for concrete construction. The Company's consumer products subsidiary offers 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 2011.

Our results for the second quarter of 2011 were impacted by the following:

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 try to 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 both (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.

The following table presents, for the periods indicated, the components of our Consolidated Condensed Statements of Earnings as a percentage of net 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 second quarter of 2011 decreased 14% compared to the same period of 2010, primarily due to an estimated 4% decrease in overall unit sales and an estimated 10% decrease in overall selling prices due to the Lumber Market.

Gross sales in the first six months of 2011 decreased 9% compared to the same period of 2010, primarily due to an estimated 3% decrease in overall unit sales and an estimated 6% decrease in overall selling prices due to the Lumber Market.

Changes in our sales by market are discussed below.

Gross sales to the retail building materials market decreased 19% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 8% decrease in our overall unit sales and an estimated 11% decrease in our overall selling prices.  Unit sales declined primarily due to a decrease in consumer spending for “big ticket” building materials products such as decking and fencing.  As unemployment remains high and housing prices have decreased, we believe many homeowners have delayed plans for these projects.  In the long-term, we believe this business will rebound as the economy improves and housing prices stabilize.  In addition, our sales of composite decking have decreased as we are preparing to launch a new product in 2012.

Gross sales to the retail building materials market decreased 14% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 7% decrease in our overall unit sales and an estimated 7% decrease in our overall selling prices.  Unit sales declined due to the same factors mentioned in the paragraph above.

Gross sales to the residential construction market decreased 15% in the second quarter of 2011 compared to the same period of 2010 due to a combination of a 15% decrease in unit sales as a result of operations we have recently closed and an estimated 8% decrease in selling prices, offset by an estimated 8% increase in unit sales out of existing plants as we have shifted our focus to the multi-family market.  National housing starts decreased approximately 11% in the period from March through May of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Gross sales to the residential construction market decreased 13% in the first six months of 2011 compared to the same period of 2010 due to a combination of a 14% decrease in unit sales as a result of operations we have recently closed and an estimated 4% decrease in selling prices, offset by an estimated 5% increase in unit sales out of existing plants.  National housing starts decreased approximately 9% in the period from December through May of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 23% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 39% increase in our overall unit sales, offset by an estimated 16% decrease in our overall selling prices.  Volume has increased as a result of adding a few large accounts this quarter.

Gross sales to the commercial construction and concrete forming market increased 13% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 20% increase in our overall unit sales, offset by an estimated 7% decrease in our overall selling prices.

Industrial:

Gross sales to the industrial market decreased 2% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 7% increase in unit sales, offset by an estimated 9% decrease in overall selling prices.  Our rate of growth slowed this quarter primarily due to a decline in demand of existing customers, which we believe is a reflection of a slowdown in manufacturing output in the U.S. In addition, we had a decline in sales of our Mexican partnership as changes in exchange rates have made their pricing in the U.S. less competitive resulting in a loss of volume.  We added almost 300 new customers again this quarter which allowed us to continue to add market share and grow unit sales this quarter.

Gross sales to the industrial market increased 5% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 10% increase in unit sales, offset by an estimated 5% decrease in overall selling prices.  Unit sales increased due to the same factors mentioned in the paragraph above.

Manufactured Housing and Recreation Vehicles:

Gross sales to the manufactured housing market decreased 22% in the second quarter of 2011 compared to 2010, primarily due to a combination of a 13% decrease in unit sales out of existing operations and an estimated 11% decrease in overall selling prices, offset by a 2% increase in unit sales of new operations we acquired in 2010.  Shipments of HUD code manufactured homes were down 14% in April and May of 2011, compared to the same period of 2010.

Gross sales to the manufactured housing market decreased 15% in the first six months of 2011 compared to 2010, primarily due to a combination of a 14% decrease in unit sales out of existing operations and an estimated 6% decrease in overall selling prices, offset by a 5% increase in unit sales of new operations we acquired in 2010.  Shipments of HUD code manufactured homes were down 14% in January through May of 2011, compared to the same period of 2010.

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 12.2% comparing the second quarter of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 27% comparing the second quarter of 2011 with the same period of 2010, which compares unfavorably to our 4% decrease in unit sales.  The decline in our gross margin and profitability this quarter was due to several factors.

Our gross profit percentage decreased to 10.5% from 12.6% comparing the first six months of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 24% comparing the first six months of 2011 with the same period of 2010, which compares unfavorably to our 3% decrease in unit sales.  The decline in our gross margin and profitability this quarter was primarily due to the same factors discussed above.  In addition, inclement weather in the first quarter resulted in many lost production days and adversely impacted our efficiencies and profitability.

Selling, general and administrative ("SG&A") expenses decreased by approximately $8.7 million, or 16.1%, in the second quarter of 2011 compared to the same period of 2010, while we reported a 4% decrease in unit sales.  The decline in SG&A was primarily due to a decrease in accrued bonus expense, compensation and related expenses, and bad debt expense.  At the end of the second quarter, we reduced our headcount and implemented certain other cost reductions.  We estimate the annual cost savings of these actions to total about $10 million.  Approximately $8 million was completed at the end of the second quarter which should favorably impact the third and fourth quarters.

Selling, general and administrative ("SG&A") expenses decreased by approximately $10.7 million, or 10.4%, in the first six of 2011 compared to the same period of 2010, while we reported a 3% decrease in unit sales.  The decline in SG&A was primarily due to a decrease in accrued bonus expense and compensation and related expenses.

We incurred approximately $0.9 million of charges in the first six months of 2011 and $384,000 in the first six months of 2010 relating to asset impairments and other costs associated with idled facilities and down-sizing efforts combined with early retirement expenses. These costs were offset by gains on disposition of property, plant and equipment totaling approximately $47,000 in the first six months of 2011.

Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of 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 16 operations which are experiencing operating losses and negative cash flow for the first six months of 2011.  The net book value of the long-lived assets of these operations, which could be subject to an impairment charge in the future, was $16.5 million at the end of June of 2011.  In addition, these operations had future fixed operating lease payments totaling $1.3 million at the end of June of 2011.

Net interest costs were comparable in the second quarter and first six months of 2011 compared to the same period of 2010 as there have been no significant changes in our debt structure or borrowing rates.

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 35.8% in the second quarter of 2011 and 36.5% for same period of 2010. Our effective tax rate was 17.0% in the first six months of 2011, which was well below our statutory rate, primarily due to the profits of our non-U.S. subsidiaries, which have a lower tax rate, and our non-wholly owned partnerships that we consolidate, which comprised a greater percentage of our year to date profits.

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 resulted 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 June 26, 2010 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 increased to 53 days in the first six months of 2011 from 43 days in the first six months of 2010, due to a 1 day increase in our receivables cycle combined with a 9 day increase in our days supply of inventory, due to much higher inventory levels this year.  In preparation for the 2011 selling season, we changed our purchasing strategy to buy inventory earlier at opportune times in an attempt to protect margins and avoid buying as much inventory during the peak of the season when lumber prices tend to rise.

Cash used in operating activities was $57.9 million in the first six months of 2011, which was comprised of a $77.3 million increase in working capital since the end of 2010, offset by net earnings of $0.6 million and $18.8 million of non-cash expenses.  Working capital increased primarily due to the usual seasonality of our business combined with higher inventory levels than we expected at the end of June primarily due to weaker sales to the retail building materials market than we planned.  Based on the seasonality of our operations, we currently anticipate achieving strong cash flows from operations for the balance of the year as we move beyond our seasonal peak for working capital requirements and manage our inventories down to a level necessary to support current demand.

Capital expenditures were $12.2 million in the first six months of 2011.  We currently plan to spend up to $35 million in 2011, which includes outstanding purchase commitments on existing capital projects totaling approximately $4.9 million on June 25, 2011.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.

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 25, 2010.

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.”)

Item 4.  Controls and Procedures.

(a)    None.

(b)    None.

(c)    Issuer purchases of equity securities.

None.

Item 6.  Exhibits.

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