UFPI Beats Estimate, Outlook Dark

Universal Forest Products Inc. (UFPI - Analyst Report) reported its financial results for the second quarter 2011 on July 13. Earnings per share, excluding 11 cents per share of severance and early retirement charges were 33 cents compared with 70 cents in the year-ago quarter. However, results were above the Zacks Consensus Estimate of 15 cents per share.

Revenue

Universal Forest's top line in the second quarter decreased 14.8% year over year to $544.1 million. However, compared with the previous quarter the company fared well; registering an increase of 40.5%.

The year-over-year downfall can be primarily attributed to weak consumer spending on home-improvement items, like fencing and decking. In the quarter, unit sales fell 5% while selling prices moved south by 10%. Yearly comparison was also impacted by the expiration of the federal stimulus program, including the housing tax credit, at the end of April 2010.

In the second quarter, the company reclassified its markets to better depict its scope of work. Earlier, per market, sales were classified under Do-It-Yourself/retail, Industrial packaging/components, Site-built construction and Manufactured housing heads. Current market segments are as follows:

Retail Building Materials revenue (51% of second quarter total revenue) plummeted 18.6% year over year to $287.5 million. Residential Construction sales (10% of total revenue) declined 15.5% year over year to $56.7 million. Commercial Construction and Concrete Forming sales (4% of total revenue) were $20.8 million, up 23.2% year over year.

Industrial sales (23% of total revenue) were $126.5 million, down 2% year over year. Manufactured Housing and Recreation Vehicles sales (12% of total revenue) were down 22.0% year over year to $64.6 million.

Margins

In the second quarter, Universal Forest's cost of goods sold represented 89.6% of total revenue, up 180 basis points year over year. Thus gross margin fell by the same magnitude to 10.4%. Selling, general and administrative expenses were roughly $45.3 million and represented 8.3% of total revenue, a decrease of 20 basis points year over year.  

In June 2011, the company announced stringent economic measures including job cuts to align its costs with the current business trend. The cost saving measures are deemed to save roughly $10 million annually for the company.

Balance Sheet

Exiting the second quarter, Universal Forest's cash and cash equivalents were completely exhausted compared with a balance of approximately $43.4 million in the previous quarter. Cash overdraft balance was at $8.7 million at the end of the quarter. While long-term debt balance decreased slightly to $52.2 million compared with $54.6 million in the first quarter 2011.

Cash Flow

Cash flow from operating activities in the second quarter 2011 stood at ($57.9) million  compared with ($56.0) million in the year-ago quarter. Capital expenditure increased 5.3% y/y to $12.2 million. Share repurchase in the quarter were nil while dividend payments amounted to $3.9 million.

Outlook

Universal Forest expects challenging conditions to persist going forward, and thus refrained from providing any financial guidance for the year. Customer demand is likely to remain soft for the remainder of fiscal year 2011.

Universal Forest Products engineers, manufacturers, treats, distributes, and installs lumber, composite wood, plastic and other building products. The company faces stiff competition from its peers like Bluelinx Holdings Inc. (BXC - Snapshot Report), Builders FirstSource Inc. (BLDR - Snapshot Report), and Louisiana-Pacific Corp. (LPX - Snapshot Report).

We currently maintain an Underperform recommendation on the stock.

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