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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2003
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number 0-22684
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UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
- ----------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
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NONE
--------------------------------------------------------------
(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
--- ----
Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Exchange Act). Yes X No
--- ----
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of June 28, 2003
- ----------------------------------- -------------------------------
Common stock, no par value 17,738,188
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Page 1 of 29
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 28, 2003,
December 28, 2002, and June 29, 2002. 3
Consolidated Condensed Statements of Earnings for the Three
and Six Months Ended June 28, 2003 and June 29, 2002. 4
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 28, 2003 and June 29, 2002. 5
Notes to Consolidated Condensed Financial Statements. 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25
Item 4. Controls and Procedures. 26
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities and Use of Proceeds. 27
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 27
Item 5. Other Information. 28
Item 6. Exhibits and Reports on Form 8-K. 28
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 28, December 28, June 29,
2003 2002 2002
--------- ------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 16,139 $ 13,454 $ 18,020
Restricted cash equivalents..................................... 1,383
Accounts receivable (net of allowances of $3,123, $2,427
and $2,137)................................................ 200,033 105,217 178,017
Inventories:
Raw materials.............................................. 78,071 83,557 46,920
Finished goods............................................. 88,671 82,449 91,079
--------- --------- ---------
166,742 166,006 137,999
Other current assets............................................ 4,944 8,037 3,425
--------- --------- ---------
TOTAL CURRENT ASSETS................................... 387,858 294,097 337,461
OTHER ASSETS......................................................... 6,401 6,738 6,334
GOODWILL............................................................. 124,395 126,299 120,569
NON-COMPETE AND LICENSING AGREEMENTS (net of
accumulated amortization of $3,331, $2,463 and $1,965).......... 7,463 4,516 5,014
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment................................... 347,685 328,499 303,622
Accumulated depreciation and amortization....................... (136,408) (125,355) (114,945)
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET..................... 211,277 203,144 188,677
--------- --------- ---------
TOTAL ASSETS......................................................... $ 737,394 $ 634,794 $658,055
========= ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt................................................. $ 1,679 $ 1,758 $ 2,001
Accounts payable................................................ 110,001 57,515 90,904
Accrued liabilities:
Compensation and benefits.................................. 32,053 36,610 31,368
Other ..................................................... 15,747 6,463 18,427
Current portion of long-term debt and capital lease obligations. 6,271 6,495 19,025
--------- --------- ---------
TOTAL CURRENT LIABILITIES.............................. 165,751 108,841 161,725
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion............................................ 255,975 235,319 219,675
DEFERRED INCOME TAXES................................................ 12,656 13,328 10,315
MINORITY INTEREST.................................................... 7,818 7,040 7,020
OTHER LIABILITIES.................................................... 9,345 5,832 6,344
--------- --------- ---------
TOTAL LIABILITIES...................................... 451,545 370,360 405,079
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares authorized 1,000,000; issued
and outstanding, none
Common stock, no par value; shares authorized 40,000,000; issued
and outstanding, 17,738,188, 17,741,982 and 17,906,447........ 17,738 17,742 17,906
Additional paid-in capital...................................... 83,936 82,139 81,913
Deferred stock compensation..................................... 1,424 1,434 1,501
Retained earnings............................................... 183,178 164,221 152,782
Accumulated other comprehensive earnings........................ 1,627 299 275
--------- --------- ---------
287,903 265,835 254,377
Employee stock notes receivable................................. (2,054) (1,401) (1,401)
TOTAL SHAREHOLDERS' EQUITY................................. 285,849 264,434 252,976
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 737,394 $ 634,794 $ 658,055
========= ========= =========
See notes to consolidated condensed financial statements.
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
------------------------- --------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------
NET SALES.............................................. $ 552,463 $ 504,944 $ 908,082 $ 846,600
COST OF GOODS SOLD..................................... 473,721 436,321 777,536 726,700
---------- ---------- ---------- ----------
GROSS PROFIT........................................... 78,742 68,623 130,546 119,900
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................................... 46,697 41,345 86,885 79,143
---------- ---------- ---------- ----------
EARNINGS FROM OPERATIONS............................... 32,045 27,278 43,661 40,757
OTHER EXPENSE (INCOME):
Interest expense.................................. 3,958 3,047 7,745 5,955
Interest income................................... (84) (52) (131) (165)
Gain on sale of assets............................ (1,082) (1,082)
---------- ---------- ---------- ----------
3,874 1,913 7,614 4,708
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST................................. 28,171 25,365 36,047 36,049
INCOME TAXES........................................... 10,458 9,400 13,249 13,373
---------- ---------- ---------- ----------
EARNINGS BEFORE MINORITY INTEREST...................... 17,713 15,965 22,798 22,676
MINORITY INTEREST...................................... (551) (611) (1,136) (1,240)
---------- ---------- ---------- ----------
NET EARNINGS........................................... $ 17,162 $ 15,354 $ 21,662 $ 21,436
========== ========== ========== ==========
EARNINGS PER SHARE - BASIC............................. $ 0.97 $ 0.86 $ 1.22 $ 1.19
EARNINGS PER SHARE - DILUTED........................... $ 0.94 $ 0.82 $ 1.19 $ 1.14
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 17,741 17,884 17,735 18,047
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS........................ 18,193 18,705 18,222 18,865
See notes to consolidated condensed financial statements.
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
--------------------------
June 28, June 29,
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................... $ 21,662 $ 21,436
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................. 12,202 11,322
Amortization of intangible assets............................................ 1,033 587
Deferred income taxes........................................................ (1,438) (251)
Loss (gain) on sale or impairment of property, plant, and equipment.......... 640 (949)
Changes in:
Accounts receivable........................................................ (94,237) (89,290)
Inventories................................................................ (736) (15,194)
Accounts payable........................................................... 52,039 43,027
Accrued liabilities and other.............................................. 11,755 9,598
---------- ----------
NET CASH FROM OPERATING ACTIVITIES........................................... 2,920 (19,714)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (20,689) (13,481)
Purchase of licensing agreements.................................................. (150) (2,000)
Acquisitions, net of cash received................................................ (187) (359)
Proceeds from sale of property, plant and equipment............................... 1,147 2,545
Other............................................................................. 1,961 1,094
-------- --------
NET CASH FROM INVESTING ACTIVITIES........................................... (17,918) (12,201)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable and revolving credit facilities................... 26,437 71,827
Repayment of long-term debt....................................................... (6,167) (7,557)
Proceeds from issuance of common stock............................................ 873 716
Distributions to minority shareholder............................................. (633) (585)
Dividends paid to shareholders.................................................... (798) (806)
Repurchase of common stock........................................................ (2,029) (36,547)
-------- --------
NET CASH FROM FINANCING ACTIVITIES........................................... 17,683 27,048
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... 2,685 (4,867)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 13,454 22,887
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 16,139 $ 18,020
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 7,610 $ 5,973
Income taxes................................................................. 1,472 2,308
NON-CASH INVESTING ACTIVITIES:
Non-compete agreements in exchange for future payments............................ $ 216
Non-compete agreements with Chairman of the Board in exchange for
future payments.............................................................. $ 856
Stock exchanged for employee stock notes receivable............................... 887 300
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited, interim, consolidated, condensed financial
statements (the "Financial Statements") include our accounts and those of
our wholly-owned and majority-owned subsidiaries and partnerships, and
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the Financial Statements
do not include all of the information and footnotes normally included in
the annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States. All
significant intercompany transactions and balances have been eliminated.
In our opinion, the Financial Statements contain all material adjustments
necessary to present fairly our consolidated financial position, results
of operations and cash flows for the interim periods presented. All such
adjustments are of a normal recurring nature. These Financial Statements
should be read in conjunction with the annual consolidated financial
statements, and footnotes thereto, included in our Annual Report to
Shareholders on Form 10-K for the fiscal year ended December 28, 2002.
Certain reclassifications have been made to the Financial Statements for
2002 to conform to the classifications used in 2003.
B. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $18.2
million and $15.0 million for the quarter ended June 28, 2003 and June
29, 2002, respectively. During the six months ended June 28, 2003 and
June 29, 2002, comprehensive income was approximately $23.0 million and
$21.2 million, respectively.
C. EARNINGS PER COMMON SHARE
A reconciliation of the changes in the numerator and the denominator from
the calculation of basic EPS to the calculation of diluted EPS follows
(in thousands, except per share data):
6
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 06/28/03 Three Months Ended 06/29/02
--------------------------------------- --------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................... $17,162 $15,354
EPS - BASIC
Income available to
common stockholders.......... 17,162 17,741 $0.97 15,354 17,884 $0.86
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 452 821
------ ------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $17,162 18,193 $0.94 $15,354 18,705 $0.82
======= ====== ===== ======= ====== =====
Six Months Ended 06/28/03 Six Months Ended 06/29/02
--------------------------------------- --------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................... $21,662 $21,436
EPS - BASIC
Income available to
common stockholders.......... 21,662 17,735 $1.22 21,436 18,047 $1.19
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 487 818
------ ------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $21,662 18,222 $1.19 $21,436 18,865 $1.14
======= ====== ===== ======= ====== =====
Options to purchase 863,073 shares of common stock at exercise prices
ranging from $19.75 to $36.01 were outstanding at June 28, 2003, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 28, 2003 because the options' exercise prices were
greater than the average market price of the common stock during the
period and, therefore, would be antidilutive.
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Options to purchase 110,000 shares of common stock at exercise prices
ranging from $26.49 to $36.01 were outstanding at June 29, 2002, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 29, 2002 because the options' exercise prices were
greater than the average market price of the common stock during the
period and, therefore, would be antidilutive.
D. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 28, 2003, non-compete assets totaled $7.9 million with
accumulated amortization totaling $2.7 million, and licensing agreements
totaled $2.9 million with accumulated amortization totaling $0.6 million.
Estimated amortization expense for intangible assets as of June 28, 2003
for each of the five succeeding fiscal years is as follows (in
thousands):
2003............................... $ 674
2004............................... 1,633
2005............................... 1,477
2006............................... 1,302
2007............................... 781
Thereafter......................... 1,596
The changes in the net carrying amount of goodwill for the quarter ended
June 28, 2003 are as follows (in thousands):
Balance as of December 28, 2002............................... $126,299
Final purchase price allocation............................... (2,810)
Foreign currency translation effects and other, net........... 906
--------
Balance as of June 28, 2003................................... $124,395
========
E. BUSINESS COMBINATIONS
Acquisitions completed in 2002 and 2003 were not significant to the
operating results individually nor in aggregate, and thus pro forma
results are not presented.
The purchase price allocations for the composite manufacturing plant of
Quality Wood Treating Co., Inc. ("Quality") and J.S. Building Products,
Inc., both acquired in the fourth quarter of 2002, were completed during
the second quarter in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations.
The total purchase price for the real estate, equipment, inventory and
intangible assets of the composite plant was approximately $14.7 million,
allocating $10.1 million to net assets,
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
$2.3 million to non-compete agreements, $0.5 million to a licensing
agreement, and $1.8 million to goodwill.
The total purchase price for J.S. Building Products, Inc. was $4.1
million, allocating $2.9 million to net assets and $1.2 million to
goodwill.
F. EMPLOYEE STOCK NOTES RECEIVABLE
Employee stock notes receivable represents notes issued to us by certain
employees to finance the purchase of our common stock. Directors and
executive officers (including equivalent positions) do not, and are not
allowed to, participate in this program.
G. STOCK-BASED COMPENSATION
As permitted under SFAS No.123, Accounting for Stock-Based Compensation,
("SFAS 123"), we continue to apply the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, which recognizes compensation
expense under the intrinsic value method. Had compensation cost for the
stock options granted and stock purchased under the Employee Stock
Purchase Plan in the first quarter and first six months of 2003 and 2002
been determined under the fair value based method defined in SFAS 123,
our net earnings and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):
Three Months Ended Six Months Ended
--------------------- ----------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------
Net Earnings:
As reported................................... $ 17,162 $ 15,354 $ 21,662 $ 21,436
Deduct: compensation expense
- fair value method........................ (379) (346) (758) (665)
-------- -------- -------- --------
Pro Forma..................................... $ 16,783 $ 15,008 $ 20,904 $ 20,771
======== ======== ======== ========
EPS - Basic:
As reported................................... $0.97 $0.86 $1.22 $1.19
Pro forma..................................... $0.95 $0.84 $1.18 $1.15
EPS - Diluted:
As reported................................... $0.94 $0.82 $1.19 $1.14
Pro forma..................................... $0.94 $0.82 $1.17 $1.13
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
H. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are self-insured for environmental impairment liability through a
wholly owned subsidiary, UFP Insurance Ltd., a licensed captive insurance
company. We own and operate a number of facilities throughout the United
States that treat lumber products with chemical preservatives. In
connection with the ownership and operation of these and other real
properties, and the disposal or treatment of hazardous or toxic
substances, we may, under various federal, state and local environmental
laws, ordinances and regulations, be potentially liable for removal and
remediation costs, as well as other potential costs, damages and
expenses. Insurance reserves have been established to cover remediation
activities at our Union City, GA; Stockertown, PA; Elizabeth City, NC;
and Schertz, TX wood preservation facilities. Additionally, a reserve is
in place to cover the removal of lead and asbestos containing material
from property we purchased in Thornton, CA.
Including amounts recorded in our captive insurance company, we reserved
amounts totaling approximately $1.9 million and $2.4 million on June 28,
2003 and June 29, 2002, respectively, representing the estimated costs to
complete remediation efforts.
As part of its re-registration process and in response to allegations by
certain environmental groups that CCA poses health risks, the EPA has
been conducting a scientific review of CCA, a wood preservative we use to
extend the useful life of wood fiber. In April of 2003, the EPA announced
the re-registration of CCA preservative for certain industrial and
commercial uses. The manufacturers of CCA preservative agreed to
voluntarily discontinue the registration of CCA for certain residential
applications by December 31, 2003. All of our facilities are presently
capable of using a new preservative to treat wood products. We expect
that all of our treating facilities will be using this new preservative
on or before January 1, 2004, except those facilities which may treat
with CCA for allowed industrial and commercial applications.
In addition to the EPA review, an environmental group petitioned the
Consumer Products Safety Commission ("CPSC") to ban the use of CCA
treated wood in playsets. On February 7, 2003, the CPSC issued a staff
report on its study of the risks of children playing on treated playsets.
The study does not recommend removal of product, and proposes the CPSC
take no further action until the EPA concludes its assessment. The EPA
has previously stated that CCA treated lumber does not pose an
unreasonable risk to human health.
We have been requested by a customer to defend it from purported class
action lawsuits filed against it in Florida and Louisiana. The complaints
allege that CCA treated lumber is defective. While our customer has
charged us for certain expenses incurred in the defense of these claims,
we have not formally accepted liability of these costs. In February 2003,
the judge in the Florida case denied the plaintiff's motion for
certification of the class. In June 2003, the judge allowed the
plaintiffs to amend their complaint and again reiterated that he would
not certify a class in this case.
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
We, along with others in the industry, were previously named as a
defendant in the purported class action lawsuit in Louisiana. We have
been dismissed from this litigation.
Subsequent to quarter end, we were advised of another purported class
action filing in Texas, where a customer of ours is named as the sole
defendant. To date, no classes have been certified in any of the pending
actions.
In addition, various special interest environmental groups have
petitioned certain states requesting restrictions on the use or disposal
of CCA treated products. The State of Maine has prohibited the
manufacture and sale of CCA products after October 15, 2003. The Company
does not presently sell product in Maine. The wood preservation industry
trade groups are working with the individual states and their regulatory
agencies to provide an accurate, factual background which demonstrates
that the present method of uses and disposal is scientifically supported.
On June 28, 2003, we were parties either as plaintiff or a defendant to a
number of lawsuits and claims arising through the normal course of our
business. In the opinion of management, our consolidated financial
statements will not be materially affected by the outcome of these legal
proceedings.
On June 28, 2003, we had outstanding purchase commitments on capital
projects of approximately $9.4 million.
We provide a variety of warranties for products we manufacture.
Historically, warranty claims have not been material.
In certain cases we jointly bid on contracts with framing companies to
supply building materials to site-built construction projects. In some of
these instances we are required to post payment and performance bonds to
insure the owner that the products and installation services are
completed in accordance with our contractual obligations. We have agreed
to indemnify the surety for claims made against the bonds. Historically,
we have not had any claims for indemnity from our sureties. As of June
28, 2003, we had approximately $22.0 million in outstanding performance
bonds which expire during the next three to eighteen months.
We have entered into operating leases for certain assets that include a
guarantee of a portion of the residual value of the leased assets. If at
the expiration of the initial lease term we do not exercise our option to
purchase the leased assets and these assets are sold by the lessor for a
price below a predetermined amount, we are required to reimburse the
lessor for a certain portion of the shortfall. These operating leases
will expire periodically over the next five years. The estimated maximum
aggregate exposure of these guarantees is less than $350,000.
On June 28, 2003, we had outstanding letters of credit totaling $29.5
million, primarily related to certain insurance contracts and industrial
development revenue bonds.
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
In lieu of cash deposits, we provide irrevocable letters of credit in
favor of our insurers to guarantee our performance under certain
insurance contracts. We currently have irrevocable letters of credit
outstanding totaling approximately $11.2 million for these types of
insurance arrangements. We have reserves recorded on our balance sheet,
in accrued liabilities, that reflect our expected future liabilities
under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the
bond trustees for all of the industrial development revenue bonds that we
have issued. These letters of credit guarantee principal and interest
payments to the bondholders. We currently have irrevocable letters of
credit outstanding totaling approximately $18.3 million related to our
outstanding industrial development revenue bonds. These letters of credit
have varying terms but may be renewed at the option of the issuing banks.
Our wholly owned domestic subsidiaries have guaranteed the indebtedness
of Universal Forest Products, Inc. in certain debt agreements, including
the 1994 Senior Notes, Series 1998-A Senior Notes, Series 2002-A Senior
Notes and our revolving credit facility. The maximum exposure of these
guarantees is limited to the indebtedness outstanding under these debt
arrangements and this exposure will expire concurrent with the expiration
of the debt agreements.
We did not enter into any new guarantee arrangements during the second
quarter of 2003 which would require us to recognize a liability on our
balance sheet.
12
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth below and certain economic
and business factors which may be beyond our control. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
RISK FACTORS
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, 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 negatively
affect our sales volume, our gross margins and our profitability. We anticipate
that these fluctuations will continue in the future.
OUR GROWTH MAY BE LIMITED BY THE MARKETS WE SERVE. Our sales growth is
dependent, in part, upon the growth of the markets we serve. If our markets do
not achieve anticipated growth, or if we fail to maintain our market share,
financial results could be impaired.
The manufactured housing industry is currently hampered by market conditions,
including a high rate of repossessions and tightened credit policies.
Significant lenders who previously provided financing to consumers of these
products and industry participants have either restricted credit or exited the
market. A continued shortage of financing to this industry could adversely
affect our operating results.
Our ability to achieve growth in sales and margins to the site-built
construction market is somewhat dependent on housing starts. If housing starts
decline significantly, our financial results could be negatively impacted.
We are witnessing consolidation by our customers. These consolidations will
result in a larger portion of our sales being made to some customers and may
limit the customer base we are able to serve.
13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED WITH ONE CUSTOMER. Our sales
to The Home Depot comprised 33% of our total sales in the first six months of
2003.
OUR GROWTH MAY BE LIMITED BY OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS. A key
component of our growth strategy is to complete business combinations. Business
combinations involve inherent risks, including assimilation and successfully
managing growth. While we conduct extensive due diligence and have taken steps
to ensure successful assimilation, factors beyond our control could influence
the results of these acquisitions.
WE MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND SAFETY
REGULATIONS. We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations. There can
be no assurance that we are at all times in complete compliance with all of
these requirements. We have made and will continue to make capital and other
expenditures to comply with environmental regulations. If additional laws and
regulations are enacted in the future, which restrict our ability to manufacture
and market our products, including our treated lumber products, it could
adversely affect our sales and profits. If existing laws are interpreted
differently, it could also increase the financial cost to us. Several states
have proposed legislation to limit the uses of CCA treated lumber. (See
"Environmental Considerations and Regulations.")
SEASONALITY AND WEATHER CONDITIONS COULD ADVERSELY AFFECT US. Some aspects of
our business are seasonal in nature and results of operations vary from quarter
to quarter. Our treated lumber and outdoor specialty products, such as fencing,
decking and lattice, experience the greatest seasonal effects. Sales of treated
lumber, primarily consisting of Southern Yellow Pine ("SYP"), also experience
the greatest Lumber Market risk (see "Historical Lumber Prices"). Treated lumber
sales are generally at their highest levels between April and August. This sales
peak, combined with capacity constraints in the wood treatment process, requires
us to build our inventory of treated lumber throughout the winter and spring.
This also has an impact on our receivables balances, which tend to be
significantly higher at the end of the second and third quarters. Because sales
prices of treated lumber products may be indexed to the Lumber Market at the
time they are shipped, our profits can be negatively affected by prolonged
declines in the Lumber Market during our primary selling season. To mitigate
this risk, programs are maintained with certain vendors and customers that are
intended to decrease our exposure. These programs include those materials which
are most susceptible to adverse changes in the Lumber Market. Vendor programs
also allow us to carry a lower investment in inventories.
The majority of our products are used or installed in outdoor construction
activities; therefore, short-term sales volume, our gross margins and our
profits can be negatively affected by adverse weather conditions. In addition,
adverse weather conditions can negatively impact our productivity and costs per
unit.
14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
WE WILL BE CONVERTING TO A NEW PRESERVATIVE TO TREAT OUR PRODUCTS IN THE THIRD
AND FOURTH QUARTERS OF 2003. In February 2002, the manufacturers of CCA
preservative agreed with the EPA to voluntarily discontinue the registration of
CCA for certain residential applications by December 31, 2003. As a result,
19 of our 21 wood preservation facilities will convert to an alternate
preservative in the third and fourth quarters of 2003. The necessary capital
investments for this conversion were made in 2002. We are coordinating with our
chemical suppliers and customers to insure an orderly transition and minimize
risks associated with chemical efficiencies and inventory levels of products
treated with CCA preservative. In addition, we estimate the new preservative
will increase the cost and sales price of our treated products by up to 20%.
While we expect that this transition will not have a material impact on our
operations, certain factors, such as consumer acceptance, may adversely affect
our planned transition to this new preservative.
When analyzing this report to assess our future performance, please recognize
the potential impact of the various factors set forth above.
HISTORICAL LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price
for the six months ended June 28, 2003 and June 29, 2002:
Random Lengths Composite
Average $/MBF
------------------------
2003 2002
---- ----
January............................ $278 $297
February........................... 295 317
March.............................. 277 339
April.............................. 283 323
May ............................... 278 312
June............................... 303 302
Second quarter average............. $288 $312
Year-to-date average............... $286 $315
Second quarter percentage
decrease from 2002................ (7.7%)
Year-to-date percentage
decrease from 2002............... (9.2%)
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
In addition, a SYP composite price, which we prepare and use, is presented
below. Sales of products produced using this species comprise up to 50% of our
sales volume.
Random Lengths SYP
Average $/MBF
------------------
2003 2002
---- ----
January............................ $387 $410
February........................... 394 434
March.............................. 392 464
April.............................. 410 457
May................................ 385 408
June............................... 384 383
Second quarter average............. $393 $416
Year-to-date average............... $392 $426
Second quarter percentage
decrease from 2002................ (5.5%)
Year-to-date percentage
decrease from 2002................ (8.0%)
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
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
and services we provide. As a result, our sales levels (and working capital
requirements) are impacted by the lumber costs of our products.
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.
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
o Products with fixed selling prices. These products include value-added
products such as decking and fencing sold to do-it-yourself/retail
("DIY/retail") customers, as well as trusses, wall panels and other
components sold to the site-built construction market. Prices for these
products are generally fixed at the time of the sales quotation for a
specified period of time or are based upon a specific quantity. In order to
maintain margins and eliminate or reduce any exposure to adverse trends in
the price of component lumber products, we attempt to lock in costs for these
sales commitments with our suppliers. Also, the time periods and quantity
limitations generally allow us to reprice our products for changes in lumber
prices from our suppliers.
o Products with selling prices indexed to the reported Lumber Market with a
fixed dollar "adder" to cover conversion costs and profits. These products
include treated lumber, remanufactured lumber and trusses sold to the
manufactured housing industry. For these products, we estimate the customers'
needs and carry anticipated levels of inventory. Because lumber costs are
incurred in advance of final sale prices, subsequent increases or decreases
in the market price of lumber impact our gross margins. For these products,
our margins are exposed to changes in the trend of lumber prices.
Changes in the trend of lumber prices have their greatest impact on those
products that have significant inventory levels with low turnover rates. This
particularly impacts treated lumber, which comprises almost twenty-five percent
of our total annual sales. In other words, the longer the period of time that
products remain in inventory, the greater the exposure to changes in the price
of lumber. This exposure is less significant with remanufactured lumber, trusses
sold to the manufactured housing market and other similar products, due to the
higher rate of inventory turnover.
In addition to the impact of Lumber Market trends on gross margins, changes in
the level of the market causes 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.
Period 1 Period 2
-------- --------
Lumber cost.................................... $300 $400
Conversion cost................................ 50 50
= Product cost................................. 350 450
Adder.......................................... 50 50
= Sell price................................... 400 500
Gross margin................................... 12.5% 10.0%
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
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
lumber prices; conversely, we experience margin improvement when lumber prices
are relatively low.
BUSINESS COMBINATIONS
We completed the following business combinations and asset acquisitions in
fiscal 2002, which were accounted for using the purchase method.
Seller`s Name Acquisition Date Business Description
Quality Wood Treating Co., Inc. November 4, 2002 One facility in Prairie du Chien, WI which
("Quality") produces EverX composite decking. We also
entered into an exclusive treating services
agreement with Quality.
J.S. Building Products, Inc. September 9, 2002 One facility in Modesto, CA which
manufactures engineered roof trusses for the
site-built construction market.
Inno-Tech Plastics, Inc. ("Inno- April 10, 2002 One facility in Springfield, IL which
Tech") - Entered into exclusive manufactures "wood alternative" products.
licensing agreement and
acquired certain assets.
Pinelli-Universal S. de R.L. de January 15, 2002 One facility in Durango, Durango, Mexico
C.V. ("Pinelli") - Purchased which manufactures molding and millwork
additional 5% interest. products.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our
Consolidated Condensed Statements of Earnings as a percentage of net sales.
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
For the Three Months Ended For the Six Months Ended
-------------------------------- -------------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 85.7 86.4 85.6 85.8
-------- -------- -------- --------
Gross profit................................. 14.3 13.6 14.4 14.2
Selling, general, and
administrative expenses.................... 8.5 8.2 9.6 9.3
------- -------- -------- --------
Earnings from operations..................... 5.8 5.4 4.8 4.9
Interest, net................................ 0.7 0.6 0.8 0.7
Gain on sale of assets....................... 0.0 (0.2) 0.0 (0.1)
------- ------- -------- -------
0.7 0.4 0.8 0.6
------- ------- -------- --------
Earnings before income taxes
and minority interest....................... 5.1 5.0 4.0 4.3
Income taxes................................. 1.9 1.9 1.5 1.6
-------- -------- -------- -------
Earnings before minority interest............ 3.2 3.1 2.5 2.7
Minority interest............................ (0.1) (0.1) (0.1) (0.2)
-------- -------- -------- -------
Net earnings................................. 3.1% 3.0% 2.4% 2.5%
======== ======== ======== =======
NET SALES
We engineer, manufacture, treat, distribute and install lumber, composite,
plastic, and other building products for the DIY/retail, site-built
construction, manufactured housing, industrial and other markets. Our strategic
sales objectives include:
o Diversifying our end market sales mix by increasing sales of specialty wood
packaging to industrial users and engineered wood products to the site-built
construction market. Engineered wood products include roof trusses, wall
panels and floor systems.
o Increasing sales of "value-added" products. Value-added product sales
consist of fencing, decking, lattice and other specialty products sold to
the DIY/retail market, specialty wood packaging, engineered wood products,
and "wood alternative" products. Although we consider the treatment of
dimensional lumber with certain chemical preservatives a value-added
process, treated lumber is not presently included in the value-added sales
totals. Wood alternative products consist primarily of composite wood and
plastics.
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
o Maximizing profitable top-line sales growth while increasing DIY/retail market
share.
o Maintaining manufactured housing market share.
The following table presents, for the periods indicated, our net sales (in
thousands) and percentage of total net sales by market classification.
For the Three Months Ended For the Six Months Ended
-------------------------------------- ---------------------------------------
June 28, June 29, June 28, June 29,
Market Classification 2003 % 2002 % 2003 % 2002 %
- --------------------- -------- ----- -------- ----- -------- ----- -------- -----
DIY/Retail................... $302,613 54.7 $264,656 52.4% $459,646 50.7 $411,420 48.4%
Site-Built Construction...... 101,433 18.4 88,398 17.5 178,137 19.6 156,987 18.6
Manufactured Housing......... 70,208 12.7 81,040 16.0 127,569 14.0 148,401 17.6
Industrial and Other......... 78,209 14.2 70,850 14.1 142,730 15.7 129,792 15.4
-------- ----- -------- ----- -------- ----- -------- -----
Total........................ $552,463 100.0% $504,944 100.0% $908,082 100.0% $846,600 100.0%
======== ====== ======== ====== ======== ====== ======== ======
Note: In the first quarter of 2003, we reviewed the classification of our
customers and made certain reclassifications. Prior year information
has been restated to reflect these classifications.
Net sales in the second quarter of 2003 increased 9.4% compared to the second
quarter of 2002 resulting from an increase in units shipped of approximately
14%. Overall selling prices decreased as a result of the Lumber Market (see
"Historical Lumber Prices"). We estimate that our unit sales increased by 7% as
a result of business acquisitions and an exclusive treating services agreement
completed after June 29, 2002. Our unit sales out of existing facilities
increased by 7% in the second quarter of 2003.
Net sales in the first six months of 2003 increased 7.3% compared to the first
six months of 2002 resulting from an increase in units shipped of approximately
11%. Overall selling prices decreased as a result of the Lumber Market (see
"Historical Lumber Prices"). We estimate that our unit sales increased by 7% as
a result of business acquisitions and an exclusive treating services agreement
completed after June 29, 2002. Our unit sales out of existing facilities
increased by 4% in the first six months of 2003.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
-------- -------- -------- --------
Value-Added........................... 49.0% 47.7% 51.5% 49.7%
Commodity-Based....................... 51.0% 52.3% 48.5% 50.3%
Value-added sales increased 12.6% and 11.1%, respectively, in the second quarter
and first six months of 2003, primarily due to increased sales of EverX,
engineered wood products, industrial products and other specialty products
supplied to the DIY/retail market. Commodity-based sales increased 7.4% and
4.1%, respectively, during the second quarter and first six months of 2003
primarily due to the exclusive treating services agreement we completed in
November 2002.
DIY/Retail:
Net sales to the DIY/retail market increased $38.0 million, or 14.3%, in the
second quarter of 2003 compared to 2002, primarily due to acquiring a composite
manufacturing plant and entering into an exclusive treating services agreement
with Quality.
Net sales to the DIY/retail market increased $48.2 million, or 11.7%, in the
first six months of 2003 compared to 2002, primarily due to the composite plant
acquisition and treating services agreement mentioned above, combined with an
increase in unit sales to our largest customer out of existing facilities. The
increase in sales out of existing facilities primarily consisted of fencing
products.
Site-Built Construction:
Net sales to the site-built construction market increased 14.7% and 13.5% in the
second quarter and first six months of 2003, respectively, compared to the same
periods of 2002. These increases resulted from acquisitions completed in 2002, a
new framing joint venture, and increased sales out of several existing plants.
Manufactured Housing:
Net sales to the manufactured housing market decreased 13.4% and 14.0% in the
second quarter and first six months of 2003, respectively, compared to the same
periods of 2002. These decreases primarily resulted from a 27% decrease in
quarterly and year-to-date industry production.
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Industrial and Other:
Net sales to the industrial and other market increased 10.4% and 10.0% in the
second quarter and first six months of 2003, respectively, compared to the same
period of 2002. These increases resulted from unit sales increases out of
several existing facilities, offset partially by a decline in selling prices due
to the Lumber Market.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased in the second quarter of
2003 compared to the same period of 2002. Generally, a lower Lumber Market
results in an increase in our gross margins. (See "Impact of the Lumber Market
on our Operating Results.")
Gross profit as a percentage of net sales increased in the first six months of
2003 compared to the same period of 2002 primarily due to lower overall selling
prices and material costs due to the Lumber Market. (See "Impact of the Lumber
Market on our Operating Results.") The effect of the lower Lumber Market was
partially offset by the effect of inclement winter weather in several regions of
the country in February 2003. During this period, we lost 154 production days
while missing sales and related profits. Production inefficiencies resulted in
unfavorable cost variances totaling $2.5 million which were recorded in cost of
goods sold in the first quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales increased
to 8.5% and 9.6% in the second quarter and first six months of 2003,
respectively, compared to 8.2% and 9.3% in the same periods of 2002,
respectively. These increases were primarily due to the impact of the lower
Lumber Market on our selling prices. The dollar increase in our selling,
general, and administrative expenses was primarily due to acquisitions and new
operations, combined with higher compensation costs resulting from greater
headcount related to growth in our business.
INTEREST, NET
Net interest costs increased in the second quarter and first six months of 2003
compared to the same periods of 2002. These increases were due to a higher
average debt balance combined with an increase in our average borrowing rates as
a result of issuing $55 million of long-term unsecured notes payable in December
2002. The proceeds from the note issuance were used to reduce amounts
outstanding under our revolving credit facility, which bears interest at a lower
rate.
22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
GAIN ON SALE OF ASSETS
During the second quarter of 2002, we sold our corporate airplane and recognized
a gain of $1.1 million on the sale, and entered into an operating lease for a
replacement airplane.
INCOME TAXES
Our effective tax rate was 37.1% in the second quarter of 2003 and 2002, and
36.8% in the first six months of 2003 compared to 37.1% in the same period of
2002. Effective tax rates differ from statutory federal income tax rates,
primarily due to provisions for state and local income taxes and permanent tax
differences. The decrease in our year-to-date effective tax rate was primarily
due to a permanent tax difference associated with the effect of minority
interest in earnings of a subsidiary.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions other than operating
leases.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities increased in the first six months of 2003
compared to the same period of 2002 by almost $23 million as a result of selling
the extra inventory we carried at the end of 2002 and throughout the first
quarter from opportunistic buying and poor weather. Seasonality has a
significant impact on our working capital during the first six months of the
year which generally results in negative or modest cash flows from operations.
We expect to experience a substantial decrease in working capital and
corresponding increase in cash flows from operations in the third and fourth
quarters of 2003. For comparative purposes, we have included the June 29, 2002
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 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 49 days in the first six months of 2003
from 46 days in the first six months of 2002, primarily due to an increase in
our days supply of inventory. During the first quarter of 2003, this increase
was primarily due to a combination of "opportunity buying" by our purchasing
managers at the end of 2002 due to the low level of the Lumber Market and the
effect of winter weather on sales. During the second quarter we carried slightly
higher levels of inventory primarily due to preparations to convert to a new
preservative, slower inventory turnover of our composite manufacturing plant,
and the
23
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
impact of poor weather on our site-built operations. This increase in our days
supply of inventory was partially offset by an increase in our payables cycle.
Capital expenditures increased to $20.7 million in the first six months of 2003
compared to $13.5 million in the same period of 2002 as a result of greater
spending on expansionary projects. For example, we completed a project to expand
the manufacturing capacity of the composite manufacturing plant we purchased in
November 2002 and completed construction of three new plants. We expect to spend
approximately $19 million on capital expenditures for the balance of 2003, which
includes outstanding purchase commitments on capital projects totaling
approximately $9.4 million on June 28, 2003. We intend to fund capital
expenditures and purchase commitments through a combination of operating cash
flow and availability under our revolving credit facility.
We spent approximately $2.0 million to repurchase 123,234 shares of our common
stock in the first six months of 2003. We have authorization from the Board of
Directors to purchase an additional 1.5 million shares.
On June 28, 2003, we had $80.0 million outstanding on our $200 million revolving
credit facility. The revolving credit facility supports letters of credit
totaling approximately $27.1 million on June 28, 2003. Financial covenants on
our revolving credit facilities and senior unsecured notes include a minimum net
worth requirement, a minimum interest coverage test, a minimum fixed charge
coverage test, 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 within our requirements at June 28, 2003.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Condensed Financial Statements, Note G "Commitments,
Contingencies, and Guarantees."
CRITICAL ACCOUNTING POLICIES
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 28, 2002.
24
UNIVERSAL FOREST PRODUCTS, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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.
25
UNIVERSAL FOREST PRODUCTS, INC.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. With the participation
of management, our chief executive officer and chief financial officer,
after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a - 15 and 15d - 15) as of
June 28, 2003, have concluded that, as of such
date, our disclosure controls and procedures were adequate and effective
to ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those entities
in connection with our filing of this second quarter report on Form 10-Q
for the quarterly period ended June 28, 2003.
(b) Changes in Internal Controls. There were no significant changes in our
internal control over financial reporting (as such term is defined in
Rules 13a - 15 and 15d - 15 under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or
are reasonably likely to affect our internal control over financial
reporting.
26
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Sales of equity securities in the second quarter not registered under the
Securities Act.
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
----------- ---------- --------- ---------- -------------
Stock Gift Program Various Common 1,001 Eligible persons None
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were voted upon at our Annual Meeting of Shareholders on
April 16, 2003.
(1) Election of the following Director for a one year term expiring in
2004:
For Withheld
---------------- -----------
John M. Engler 13,774,217 434,047
Election of the following Director for a two year term expiring in
2005:
Gary F. Goode 14,112,648 95,616
Election of the following Directors for three year terms expiring in
2006:
Dan M. Dutton 14,113,713 94,551
John W. Garside 13,776,042 432,222
Peter F. Secchia 14,080,025 128,239
Other Directors whose terms of office continued after the meeting are
as follows:
William G. Currie
Philip M. Novell
Louis A. Smith
27
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 5. Other Information.
On May 7, 2003, management sent a notice to our directors and officers informing
them that between the dates of May 19, 2003 and July 1, 2003, inclusive, they
would be proscribed from trading in our common stock, due to trading limitations
in our 401(k) plan, consistent with the restrictions set forth in Section 306(a)
of the Sarbanes-Oxley Act of 2002. A copy of this notice is attached as Exhibit
99(e) to this report.
The information contained in the preceding paragraph is being furnished pursuant
to "Item 11, Temporary Suspension of Trading Under Registrant's Employee Benefit
Plans" of Form 8-K in accordance with the Release No. 33-8216 of the Securities
and Exchange Commission.
In the second quarter of 2003, the Audit Committee approved non-audit services
to be provided by our independent auditors, Ernst & Young LLP, totaling $62,000.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits (listed by number corresponding to the Exhibit
Table as Item 601 in Regulation S-K) are filed with this report:
31(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
99(a) Pension Blackout Notice
28
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: August 8, 2003 By: /s/ William G. Currie
--------------- ----------------------------------------------
William G. Currie
Its: Vice Chairman of the Board and Chief Executive
Officer
Date: August 8, 2003 By: /s/ Michael R. Cole
--------------- ----------------------------------------------
Michael R. Cole
Its: Chief Financial Officer
29
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. 1350).
99(a) Pension Blackout Notice