Universal Forest Products Inc. (UFPI) reported disappointing results for the second quarter of 2010 with net income falling despite healthy top-line growth. Net income slipped 14.9% year-over-year to $13.7 million or 70 cents per share compared with $16.1 million or 83 cents per share in the second quarter of 2009. Earnings per share also fell short of the Zacks Consensus Estimate of 89 cents.
Revenue
Net sales in the second quarter 2010 increased 24% year-over-year to $638.6 million primarily based on healthy growth in all the markets served.
Do-It-Yourself/retail sales increased 8.5% year-over-year to $315.8 million, representing 48% of total sales in the second quarter, primarily due to a solid product portfolio. Unit sales declined 3.0% due to weak demand.
Industrial packaging/components sales jumped 36.0% year-over-year to $179.2 million, representing 28% of total sales based on the company’s continuous effort to improve services in the segment. Unit sales increased in excess of 20% in the quarter.
Site-built construction revenue in the quarter was $72.2 million, up 19.1% year-over-year and represented 11% of total sales. The increase was driven by the improvement in the housing industry and the company’s focus on profitable ventures like commercial, government and turnkey projects. During the quarter, the company closed down several plants to achieve improved profitability and cash flows.
Manufactured housing sales, representing 13% of total sales, shot up 82.5% to $81.6 million in the quarter. Healthy demand increased unit sales by 41%.
Cost of goods sold increased to 88% of sales from 84% of sales in the second quarter of 2009 due to volatile lumber prices, which were roughly at $367 in the month of April and then fell to $247 in late June. The company’s gross margin dropped to 12.2% from 16.0% in the second quarter of 2009. Operating margin was 3.7% versus 5.3% in the comparable quarter last year.
Balance Sheet
At the end of the quarter, Universal Forest had cash and cash equivalents of approximately $21.2 million compared with $32.6 million in the second quarter of 2009. The company secured additional finances through debt issuances with its long-term debt (net of current portion) balance increasing 23.3% year-over-year to $67.9 million.
Cash Flow
Cash flow from operating activities improved leading to an inflow of roughly $27.9 million in the second quarter versus an outflow of $78.1 million in the first quarter of 2010. Capital expenditure totaled $6.9 million versus $4.6 million in the first quarter of 2010.
Outlook
Universal Forest expects challenging conditions to persist throughout 2010 and thus refrained from providing any financial guidance for the year.
Michigan-based, Universal Forest Products engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products. Prime competitors of the company include International Paper Co. (IP), Louisiana-Pacific Corp. (LPX) and Georgia-Pacific LLC.
We remain cautious of the company’s growth prospects in the second half of 2010 and believe Universal Forest will perform roughly in line with the market. Hence, we currently maintain a Neutral recommendation on the stock, which is supported by Zacks #3 (Hold) Rank.
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