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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 26, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22684
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
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 26, 2004
-------------------------- -------------------------------
Common stock, no par value 17,886,770
Page 1 of 39
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 26, 2004,
December 27, 2003, and June 28, 2003. 3-4
Consolidated Condensed Statements of Earnings for the Three and
Six Months Ended June 26, 2004 and June 28, 2003. 5
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 26, 2004 and June 28, 2003. 6-7
Notes to Consolidated Condensed Financial Statements. 8-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 18-33
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 34
Item 4. Controls and Procedures. 35
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities. 36
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 37
Item 5. Other Information. 37
Item 6. Exhibits and Reports on Form 8-K. 38
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 26, December 27, June 28,
2004 2003 2003
--------- ------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................... $ 25,080 $ 17,430 $ 20,574
Accounts receivable (net of allowances of $3,119, $1,891
and $3,123) .................................................... 246,850 137,660 200,033
Inventories:
Raw materials .................................................. 123,411 83,064 78,071
Finished goods ................................................. 104,044 86,497 88,671
--------- -------- --------
227,455 169,561 166,742
Insurance receivable ................................................ 3,143
Other current assets ................................................ 8,666 9,836 5,424
--------- -------- --------
TOTAL CURRENT ASSETS ....................................... 511,194 334,487 392,773
OTHER ASSETS ............................................................. 6,974 6,421 6,401
GOODWILL ................................................................. 126,775 125,028 124,395
NON-COMPETE AND LICENSING AGREEMENTS (net of
accumulated amortization of $4,821, $4,003 and $3,331) .............. 5,973 6,791 7,463
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment ....................................... 363,557 361,368 347,685
Accumulated depreciation and amortization ........................... (155,415) (147,164) (136,408)
--------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET ......................... 208,142 214,204 211,277
--------- -------- --------
TOTAL ASSETS ............................................................ $ 859,058 $686,931 $742,309
========= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ..................................................... $ 1,726 $ 1,679
Accounts payable .................................................... $ 134,739 81,687 110,001
Accrued liabilities:
Compensation and benefits ...................................... 45,476 47,150 36,488
Other .......................................................... 25,941 6,723 15,913
Current portion of long-term debt and capital lease obligations ..... 498 6,411 6,271
--------- -------- --------
TOTAL CURRENT LIABILITIES .................................. 206,654 143,697 170,352
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion ................................................ 287,387 205,049 255,975
DEFERRED INCOME TAXES .................................................... 16,423 15,984 12,656
MINORITY INTEREST ........................................................ 7,541 7,780 7,818
OTHER LIABILITIES ........................................................ 9,353 9,317 9,345
--------- -------- --------
TOTAL LIABILITIES .......................................... 527,358 381,827 456,146
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
June 26, December 27, June 28,
2004 2003 2003
--------- ------------ --------
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, 17,886,770, 17,777,631 and 17,702,255\....... $ 17,887 $ 17,778 $ 17,702
Additional paid-in capital...................................... 86,744 84,610 83,358
Deferred stock compensation..................................... 3,253 2,447 2,352
Retained earnings............................................... 225,046 200,745 183,178
Accumulated other comprehensive earnings........................ 406 1,396 1,627
--------- -------- --------
333,336 306,976 288,217
Employee stock notes receivable................................. (1,636) (1,872) (2,054)
--------- -------- --------
TOTAL SHAREHOLDERS' EQUITY................................. 331,700 305,104 286,163
--------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 859,058 $686,931 $742,309
========= ======== ========
See notes to consolidated condensed financial statements.
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
----------- ----------- ----------- -----------
NET SALES .............................................. $ 742,568 $ 552,463 $ 1,208,233 $ 908,082
COST OF GOODS SOLD ..................................... 649,747 473,721 1,059,051 777,536
----------- ----------- ----------- -----------
GROSS PROFIT ........................................... 92,821 78,742 149,182 130,546
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................................... 56,082 46,697 100,011 86,885
----------- ----------- ----------- -----------
EARNINGS FROM OPERATIONS ............................... 36,739 32,045 49,171 43,661
OTHER EXPENSE (INCOME):
Interest expense .................................. 3,869 3,958 7,411 7,745
Interest income ................................... (102) (84) (185) (131)
Net gain on sale of real estate and interest in
subsidiary ...................................... (575) (944)
----------- ----------- ----------- -----------
3,192 3,874 6,282 7,614
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST ................................. 33,547 28,171 42,889 36,047
INCOME TAXES ........................................... 12,645 10,458 16,289 13,249
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST ...................... 20,902 17,713 26,600 22,798
MINORITY INTEREST ...................................... (1,146) (551) (1,277) (1,136)
----------- ----------- ----------- -----------
NET EARNINGS .......................................... $ 19,756 $ 17,162 $ 25,323 $ 21,662
=========== =========== =========== ===========
EARNINGS PER SHARE - BASIC ............................. $ 1.09 $ 0.97 $ 1.41 $ 1.22
EARNINGS PER SHARE - DILUTED ........................... $ 1.06 $ 0.94 $ 1.35 $ 1.19
WEIGHTED AVERAGE SHARES OUTSTANDING .................... 18,050 17,741 17,994 17,735
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS ........................ 18,702 18,193 18,694 18,222
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
----------------------
June 26, June 28,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ................................................................... $ 25,323 $ 21,662
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation .............................................................. 13,408 12,202
Amortization of intangibles ............................................... 940 1,033
Deferred income taxes ..................................................... 366 (1,438)
Minority interest ......................................................... 1,277 1,136
Loss on sale of interest in subsidiary .................................... 193
Net (gain) loss on sale or impairment of property, plant, and equipment.... (730) 640
Changes in:
Accounts receivable ..................................................... (110,873) (94,237)
Inventories ............................................................. (56,963) (736)
Accounts payable ........................................................ 54,711 52,039
Accrued liabilities and other ........................................... 19,535 10,974
--------- ---------
NET CASH FROM OPERATING ACTIVITIES ........................................ (52,813) 3,275
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ...................................... (16,607) (20,689)
Purchase of licensing agreement ................................................ (150)
Acquisitions, net of cash received ............................................. (10,075) (187)
Proceeds from sale of interest in subsidiary ................................... 4,679
Proceeds from sale of property, plant and equipment ............................ 3,287 1,147
Other assets, net .............................................................. 1,678 1,961
--------- ---------
NET CASH FROM INVESTING ACTIVITIES ........................................ (17,038) (17,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt and long-term revolving credit facilities..... 83,062 26,437
Repayment of long-term debt .................................................... (6,117) (6,167)
Proceeds from issuance of common stock ......................................... 1,828 873
Distributions to minority shareholder .......................................... (125) (633)
Dividends paid to shareholders ................................................. (897) (798)
Repurchase of common stock ..................................................... (129) (2,029)
Other .......................................................................... (121)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES ........................................ 77,501 17,683
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................................ 7,650 3,040
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................................... 17,430 17,534
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 25,080 $ 20,574
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................................. $ 7,423 $ 7,610
Income taxes .............................................................. 1,004 1,428
6
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - CONTINUED
Six Months Ended
----------------------
June 26, June 28,
2004 2003
--------- ---------
NON-CASH INVESTING ACTIVITIES:
Note receivable exchanged for management fees to former subsidiary.............. $ 520
Insurance receivable in exchange for property, plant and equipment destroyed
in fire...................................................................... 3,143
Stock exchanged for employee stock notes receivable............................. 6 $ 887
Non-compete agreements with Chairman of the Board in exchange for
future payments............................................................ 856
NON-CASH FINANCING ACTIVITIES:
Common stock issued to trust under deferred compensation plan................... $ 716 $ 647
Common stock issued under stock gift plan....................................... 30 24
Common stock issued under directors' stock grant plan........................... 75 132
See notes to consolidated condensed financial statements.
7
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, as amended, for the fiscal year ended December
27, 2003.
Certain reclassifications have been made to the Financial Statements for
2003 to conform to the classifications used in 2004.
B. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $19.5
million and $18.2 million for the quarter ended June 26, 2004 and June 28,
2003, respectively. During the six months ended June 26, 2004 and June 28,
2003, comprehensive income was approximately $24.3 million and $23.0
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):
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 06/26/04 Three Months Ended 06/28/03
-------------------------------------- -----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS ................ $19,756 $17,162
EPS - BASIC
Income available to
common stockholders ....... 19,756 18,050 $1.09 17,162 17,741 $0.97
===== =====
EFFECT OF DILUTIVE SECURITIES
Options ..................... 652 452
------ ------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised ................. $19,756 18,702 $1.06 $17,162 18,193 $0.94
======= ====== ===== ======= ====== =====
Six Months Ended 06/26/04 Six Months Ended 06/28/03
-------------------------------------- -----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS ................ $25,323 $21,662
EPS - BASIC
Income available to
common stockholders ....... 25,323 17,994 $1.41 21,662 17,735 $1.22
===== =====
EFFECT OF DILUTIVE SECURITIES
Options ..................... 700 487
------ ------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised ................. $25,323 18,694 $1.35 $21,662 18,222 $1.19
======= ====== ===== ======= ====== =====
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Options to purchase 40,000 shares of common stock at exercise prices
ranging from $31.11 to $36.01 were outstanding at June 26, 2004, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 26, 2004. The options' exercise prices were greater than
the average market price of the common stock during the period and,
therefore, would be antidilutive.
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. The options' exercise prices were greater than
the average market price of the common stock during the period and,
therefore, would be antidilutive.
D. SALE OF ACCOUNTS RECEIVABLE
On September 25, 2003, we entered into an accounts receivable sale
agreement with a bank. Under the terms of the agreement:
- We may sell specific receivables to the bank at an agreed-upon price at
terms ranging from one month to one year.
- We will service the receivables sold and outstanding on behalf of the
bank at a rate of .50% per annum.
- We will receive an incentive servicing fee, which we account for as a
retained interest in the receivables sold. Our retained interest is
determined based on the fair market value of anticipated collections in
excess of the Agreed Base Value of the receivables sold. Appropriate
valuation allowances are recorded against the retained interest.
- The maximum amount of receivables which may be sold and outstanding at
any point in time under this arrangement is $33 million.
The master agreement has a one year term, which expires on September 24,
2004. On June 26, 2004, receivables that were sold and outstanding totaled
$32.4 million and our retained interest totaled $2.4 million. A summary of
the transactions we completed for the first six months of 2004 are
presented below (in thousands).
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Six Months Ended
June 26, 2004
----------------
Accounts receivable sold............................... $ 177,288
Retained interest in receivables ...................... (2,432)
Expense from sale ..................................... (490)
Servicing fee received ................................ 106
Discounts and sales allowances ........................ (1,545)
----------------
Net cash received from sale ........................... $ 172,927
================
E. GOODWILL AND OTHER INTANGIBLE ASSETS
On June 26, 2004, non-compete assets totaled $7.9 million with accumulated
amortization totaling $3.5 million, and licensing agreements totaled $2.9
million with accumulated amortization totaling $1.3 million. 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 26, 2004
for each of the five succeeding fiscal years is as follows (in thousands):
2004................................ $ 817
2005 ............................... 1,478
2006 ............................... 1,302
2007 ............................... 788
2008 ............................... 486
Thereafter ......................... 1,102
The changes in the net carrying amount of goodwill for the six months
ended June 26, 2004 and June 28, 2003 are as follows (in thousands):
Balance as of December 27, 2003 $ 125,028
Acquisition ................... 4,381
Sale of interest in subsidiary (2,169)
Other, net .................... (465)
---------
Balance as of June 26, 2004 ... $ 126,775
=========
Balance as of December 28, 2002 $ 126,299
Final purchase price allocation (2,810)
Other, net .................... 906
---------
Balance as of June 28, 2003 ... $ 124,395
=========
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
F. BUSINESS COMBINATIONS AND ASSET PURCHASES
On April 2, 2004, one of our subsidiaries acquired a 50% interest in
Shawnlee Construction, LLC ("Shawnlee"), which provides framing services
for multi-family construction, and is located in Plainville, MA. The
purchase price was approximately $4.8 million. Shawnlee had net sales in
fiscal 2003 totaling approximately $20 million. We have consolidated this
entity, including a respective minority interest, because we exercise
control. The purchase price allocation for this acquisition is preliminary
and will be revised as final estimates of intangible asset values are made
in accordance with SFAS 141, Business Combinations ("SFAS 141").
On March 15, 2004, one of our subsidiaries acquired the assets of
Slaughter Industries, owned by International Paper Company ("Slaughter"),
a facility which supplies the site-built construction market in Dallas,
TX. The purchase price was approximately $3.9 million, which was allocated
to the fair value of tangible net assets. Slaughter had net sales in
fiscal 2003 totaling approximately $48 million.
On January 30, 2004, one of our subsidiaries acquired the assets of
Midwest Building Systems, Inc. ("Midwest"), a facility which serves the
site-built construction market in Indianapolis, IN. The purchase price was
approximately $1.5 million, which was allocated to the fair value of
tangible net assets. Midwest had net sales in fiscal 2003 totaling
approximately $7 million.
On August 28, 2003, one of our subsidiaries acquired 50% of the assets of
D&L Framing, LLC ("D&L"), a framing operation for multi-family
construction located in Las Vegas, NV. The purchase price was
approximately $0.6 million, which was primarily allocated to the fair
value of tangible net assets. D&L had net sales in fiscal 2002 totaling
approximately $8 million. We have consolidated this entity, including a
respective minority interest, because we exercise control.
On August 26, 2003, one of our subsidiaries entered into an agreement with
Quality Wood Treating Co., Inc. ("Quality") to cancel the treating
services agreement completed on November 4, 2002 and purchase plants
located in Lansing, MI and Janesville, WI and the equipment of a plant
located in White Bear Lake, MN. The total purchase price for these assets
was $5.1 million, which was allocated to the fair value of tangible net
assets. In addition, another subsidiary entered into a capital lease for
the real estate of the White Bear Lake, MN plant totaling $2.1 million.
On June 4, 2003, one of our subsidiaries acquired 75% of the assets of
Norpac Construction LLC ("Norpac"), a concrete framer for multi-family
construction located in Las Vegas, NV. The purchase price was
approximately $0.2 million, which was primarily allocated to the fair
value of tangible net assets. Norpac had net sales in fiscal 2002 totaling
approximately $1.5 million. We have consolidated this entity, including a
respective minority interest, because we exercise control.
12
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Acquisitions completed in 2003 and 2004 were not significant to our
operating results individually or in aggregate, and thus pro forma results
are not presented.
G. EMPLOYEE STOCK NOTES RECEIVABLE
Employee stock notes receivable represents notes issued to us by certain
employees and officers 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.
H. 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 2004 and 2003
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 26, June 28, June 26, June 28,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net Earnings:
As reported ................ $ 19,756 $ 17,162 $ 25,323 $ 21,662
Deduct: compensation expense
- fair value method ..... (453) (456) (903) (910)
---------- ---------- ---------- ----------
Pro Forma .................. $ 19,303 $ 16,706 $ 24,420 $ 20,752
========== ========== ========== ==========
EPS - Basic:
As reported ................ $ 1.09 $ 0.97 $ 1.41 $ 1.22
Pro forma .................. $ 1.07 $ 0.94 $ 1.36 $ 1.17
EPS - Diluted:
As reported ................ $ 1.06 $ 0.94 $ 1.35 $ 1.19
Pro forma .................. $ 1.04 $ 0.94 $ 1.32 $ 1.16
I. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are 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 chemically treat lumber products. In connection with the
ownership and operation of these and other real properties, and the
disposal or
13
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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, calculated
primarily with no discount rate, have been established to cover
remediation activities at our Union City, GA; Stockertown, PA; Elizabeth
City, NC; Auburndale, FL; Schertz, TX; and Janesville, WI wood
preservation facilities. In addition, a small reserve was established for
our Thornton, CA property to remove asbestos and certain lead containing
materials which existed on the property at the time of purchase.
Including amounts from the captive insurance company, we have reserved
amounts totaling approximately $1.9 million on June 26, 2004 and June 28,
2003, representing the estimated costs to complete remediation efforts.
The manufacturers of CCA preservative voluntarily discontinued the
registration of CCA for certain residential applications as of December
31, 2003. As a result, all of our wood preservation facilities have been
converted to an alternate preservative, ACQ, or borates.
In November 2003, the EPA published its report on the risks associated
with the use of CCA in children's playsets. While the study observed that
the range of potential exposure to CCA increased by the continuous use of
playsets, the EPA concluded that the risks were not sufficient to require
removal or replacement of any CCA treated structures. The EPA did refer a
question on the use of sealants to a scientific advisory panel. The panel
issued a report which provides guidance to the EPA on the use of various
sealants but does not mandate their use. The EPA is reviewing the report
and is expected to issue further clarification.
The results of the EPA study are consistent with a prior Consumer Products
Safety Commission (CPSC) study which reached a similar conclusion.
In addition, various special interest environmental groups have petitioned
certain states requesting restrictions on the use or disposal of CCA
treated products. 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.
We have been requested by a customer to defend it from purported class
action lawsuits filed against it in Florida, Louisiana, Texas, Illinois
and New Jersey. The Florida claim was denied class action status, and all
appeals have been denied. We had previously been dismissed as a defendant
from the Louisiana litigation, and this case was denied class action
status in March 2004. The remaining complaints do not allege personal
injury or property damage. As previously stated, our vendors believe and
scientific studies support the fact that CCA treated lumber poses no
unreasonable risks, and we intend to vigorously defend this position.
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.
14
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
We believe the remaining claims are unsubstantiated by current facts and
therefore have not accrued for any potential loss related to the
contingencies above. However, potential liabilities of this nature are not
conducive to precise estimates and are subject to change. To the extent we
are required to defend these actions, we intend to do so vigorously.
In addition, on June 26, 2004, 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 contingencies and claims.
On June 26, 2004, we had outstanding purchase commitments on capital
projects of approximately $5.5 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 26,
2004, we had approximately $28.4 million in outstanding performance bonds
which expire during the next six to sixteen 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 will 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 approximately $800,000.
Under our sale of accounts receivable agreement, we guarantee that
Universal Forest Products RMS, LLC, as accounts servicer, will remit
collections on receivables sold to the bank. (See Note D, "Sale of
Accounts Receivable.")
On June 26, 2004, we had outstanding letters of credit totaling $32.1
million, primarily related to certain insurance contracts and industrial
development revenue bonds, as further described below.
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 $13.8 million for these types of insurance
15
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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 2004 which would require us to recognize a liability on our
balance sheet.
J. SALE OF REAL ESTATE AND INTEREST IN SUBSIDIARY
In January 2004, we sold our 60% ownership in Nascor Incorporated, a
Calgary, Alberta-based manufacturer of engineered wood components and
licensor of I-joist manufacturing technology. The total sales price we
collected was $4.7 million and we recorded a pre-tax accounting loss of
approximately $193,000.
In March 2004, we sold a plant in Bend, OR and recognized a pre-tax gain
of approximately $562,000 on the sale in the first quarter and an
additional $207,000 in the second quarter as we collected the note
receivable issued to us on the sale.
In June 2004, we sold a plant in Modesto, CA and recognized a pre-tax gain
of approximately $368,000.
We incurred income taxes associated with these transactions totaling
approximately $722,000.
16
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
K. INSURANCE RECEIVABLE
In April 2004, our plant in Thorndale, Ontario was destroyed by a fire. In
accordance with FIN 30, Accounting for Involuntary Conversions of
Non-Monetary Assets to Monetary Assets, as of June 26, 2004, we have
written off the net book value of the destroyed property to an insurance
receivable. We currently estimate that the insured value of this property
will exceed its net book value, resulting in a gain. We will record this
gain once final insurance amounts are determined.
17
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.
OVERVIEW
We are pleased to report strong results for the second quarter of 2004, which
was highlighted by:
- - Our strong sales growth in the site-built construction, industrial and
manufactured housing markets as we increased our share in each. Our unit
sales to the do-it-yourself/retail (DIY/retail) market declined due, in part,
to poor weather in the Midwest, Texas and portions of the East.
- - Our increase in shipments to the manufactured housing market. While HUD code
industry production reports year-after-year declines, we continue to increase
our shipments to modular producers.
- - Higher lumber prices which elevated our sales dollars and required a greater
investment in working capital. Our sales increased 34% for the quarter, and
we estimate that 23% of this increase was due to higher lumber and chemical
costs.
- - Enhanced profitability in spite of challenges with one of our multi-family
framing operations in the Southwest. The 15% increase in net earnings we
achieved for the quarter surpassed our 11% increase in unit sales. Rising
lumber prices in April and May on products whose selling prices are tied to
the Lumber Market helped us improve our profitability.
- - A fire that destroyed our site-built truss plant in Thorndale, Ontario.
Although we maintained our service to customers by moving the work to other
plants in the United States, transportation costs and operating
inefficiencies resulted in greater costs.
We also made the following accomplishments, as our people remain focused on
executing our growth strategy:
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - We opened several new plants this year which are manufacturing engineered
wood components and distributing other building materials for site-built
construction. While these plants were in a startup phase and were not
profitable in the second quarter of 2004, we currently believe they will
achieve our long-term financial targets.
- - We acquired a 50% interest in Shawnlee Construction LLC ("Shawnlee") on April
2, 2004. Shawnlee is the largest framer for the multi-family construction
market in Massachusetts. This acquisition allows us to capitalize on customer
requests for turnkey construction packages by supplying framing labor through
Shawnlee and engineered wood components from our existing plants in the
Northeast.
In summary, we remain optimistic about the future of our business, markets and
strategies, and our employees remain focused on adding value for our customers,
executing our strategies and meeting our goals.
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 still suffers from difficult market
conditions, including repossessions and tight credit conditions. Significant
lenders who previously provided financing to consumers of these products and
industry participants have either restricted credit or exited the market. While
new lenders have announced intentions to enter this 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.
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
We are witnessing consolidation by our customers in each of the markets we
serve. 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.
A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED WITH ONE CUSTOMER. Our sales
to The Home Depot comprised 28% of our total sales in the first six months of
2004, down from 33% for 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 our financial costs. Several states have
proposed legislation to limit the uses of CCA treated lumber. (See Note I,
"Commitments, Contingencies and Guarantees.")
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, consignment inventory programs are negotiated with certain vendors
that are intended to decrease our exposure to the Lumber Market by correlating
the purchase price of the material with the related sell price to the customer.
These programs include those materials which are most susceptible to adverse
changes in the Lumber Market.
20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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.
WE CONVERTED TO A NEW PRESERVATIVE TO TREAT OUR PRODUCTS. The manufacturers of
CCA preservative voluntarily discontinued the registration of CCA for certain
residential applications as of December 31, 2003. As a result, all of our wood
preservation facilities have been converted to an alternate preservative, ACQ,
or borates. The cost of ACQ is more than four times higher than the cost of CCA.
We coordinated with our chemical suppliers and conducted extensive training with
our plants to achieve the quality and chemical efficiency standards necessary to
maintain profitability and customer satisfaction. In addition, we estimate the
new preservative will increase the cost and sales price of our treated products
by approximately 10% to 15%. While we believe treated products will be
reasonably priced relative to alternative products such as composites or vinyl,
consumer acceptance may be impacted which would in turn affect our future
operating results. (See Note I, "Commitments, Contingencies and Guarantees.")
CURRENTLY, MARKET CONDITIONS FOR THE SUPPLY OF CERTAIN LUMBER PRODUCTS AND
INBOUND TRANSPORTATION ARE TIGHT. These conditions, which occur on occasion,
have resulted in difficulties procuring desired quantities and receiving orders
on a timely basis for all industry participants. We are not certain how these
conditions may impact our short-term sales volumes and profitability. However,
we attempt to mitigate the risks these conditions present by:
- - Our pricing practices (see "Impact of the Lumber Market on Our Operating
Results");
- - Leveraging our size with mill and transportation suppliers to ensure they
achieve supply and service requirements;
- - Increasing our utilization of consigned inventory programs with mills; and
- - Expanding our supply base of dedicated carriers.
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 26, 2004 and June 28, 2003:
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Random Lengths Composite
Average $/MBF
-----------------
2004 2003
---- ----
January ................. $ 341 $278
February ................ 376 295
March ................... 382 277
April ................... 431 283
May ..................... 456 278
June .................... 423 303
Second quarter average .. $ 437 $288
Year-to-date average .... $ 402 $286
Second quarter percentage
increase from 2003 ...... 51.7%
Year-to-date percentage
increase from 2003 ...... 40.6%
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
------------------
2004 2003
---- ----
January.................. $ 410 $387
February................. 436 394
March.................... 487 392
April.................... 532 410
May...................... 535 385
June..................... 498 384
Second quarter average... $ 522 $393
Year-to-date average..... $ 483 $392
Second quarter percentage
increase from 2003....... 32.8%
Year-to-date percentage
increase from 2003....... 23.2%
22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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,
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.
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.
- - Products with fixed selling prices. These products include value-added
products such as decking and fencing sold to DIY/retail customers, as well as
trusses, wall panels and other components sold to the site-built construction
market, and most industrial packaging products. 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
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 costs from our suppliers.
- - Products with selling prices indexed to the reported Lumber Market with a
fixed dollar "adder" to cover conversion costs and profits. These products
primarily 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 the
following products:
- - Products that have significant inventory levels with low turnover rates and
whose selling prices are indexed to the Lumber Market, such as treated
lumber, which comprises almost twenty-five percent of our total sales. In
other words, the longer the period of time these products remain in
inventory, the greater the exposure to changes in the price of lumber. This
exposure is less
23
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
significant with remanufactured lumber, trusses sold to the manufactured
housing market and other similar products, due to the higher rate of
inventory turnover. We attempt to mitigate this risk through certain vendor
supply programs. (See "Risk Factors - Seasonality and weather conditions
could adversely affect us.")
- - Products with fixed selling prices sold under long-term supply arrangements,
particularly those involving multi-family construction projects. We attempt
to mitigate this risk through our purchasing practices.
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.
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 lumber prices; conversely, we
experience margin improvement when lumber prices are relatively low.
BUSINESS COMBINATIONS AND ASSET PURCHASES
We completed the following business combinations and asset acquisitions in
fiscal 2004 and fiscal 2003, which were accounted for using the purchase method.
(See Note F, "Business Combinations and Asset Purchases.")
Company Name Acquisition Date Business Description
------------ ---------------- --------------------
Shawnlee Construction, LLC April 2, 2004 Provides framing services for multi-family
construction in the Northeast.
Slaughter Industries March 15, 2004 Distributes lumber products and manufactures
engineered wood
24
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
components for site-built
construction. Located in Dallas, TX.
Midwest Building Systems, Inc. January 30, 2004 Manufacturer of engineered wood components for
site-built construction. Located in
Indianapolis, IN.
D&L Framing, LLC August 28, 2003 Framing operation for multi-family construction
located in Las Vegas, NV.
Quality Wood Treating Co., Inc. August 26, 2003 Two treating facilities in Lansing, MI and
Janesville, WI and real estate lease of a third
treating facility in White Bear Lake, MN.
Norpac Construction LLC June 4, 2003 Concrete framer for multi-family construction
located in Las Vegas, NV.
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.
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
-------- -------- -------- --------
Net sales ....................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .............. 87.5 85.7 87.7 85.6
----- ----- ----- -----
Gross profit .................... 12.5 14.3 12.3 14.4
Selling, general, and
administrative expenses ....... 7.6 8.5 8.3 9.6
----- ----- ----- -----
Earnings from operations ........ 4.9 5.8 4.0 4.8
Interest, net ................... 0.4 0.7 0.5 0.8
Gain on sale of real estate and
interest in subsidiary ........ (0.1) 0.0 (0.1) 0.0
----- ----- ----- -----
0.3 0.7 0.4 0.8
----- ----- ----- -----
Earnings before income taxes
25
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
and minority interest .............. 4.6 5.1 3.6 4.0
Income taxes ........................ 1.7 1.9 1.4 1.5
----- ----- ----- -----
Earnings before minority interest.... 2.9 3.2 2.2 2.5
Minority interest ................... (0.2) (0.1) (0.1) (0.1)
----- ----- ----- -----
Net earnings ........................ 2.7% 3.1% 2.1% 2.4%
===== ===== ===== =====
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, and industrial markets. Our strategic sales
objectives include:
- - Diversifying our end market sales mix by increasing sales of specialty wood
packaging to industrial users and engineered wood components and framing
services to the site-built construction market. Engineered wood components
include roof trusses, wall panels and floor systems.
- - 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 components, and
"wood alternative" products. Wood alternative products consist primarily of
composite wood and plastics. One of our goals is to achieve a ratio of
value-added sales to total sales of at least 50%. 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.
- - Maximizing profitable top-line sales growth.
The following table presents, for the periods indicated, our net sales (in
thousands) and change in net sales by market classification.
26
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 26, % June 28, June 26, % June 28,
Market Classification 2004 Change 2003 2004 Change 2003
- --------------------- ----------- ------ ---------- ----------- ------ ----------
DIY/Retail................... $ 344,582 14.0 $ 302,224 $ 523,491 14.2 $ 458,510
Site-Built Construction...... 170,325 68.2 101,242 285,163 60.0 178,237
Manufactured Housing......... 103,403 48.9 69,453 180,370 42.6 126,465
Industrial and Other......... 124,258 56.2 79,544 219,209 51.3 144,870
----------- ---------- ----------- ----------
Total........................ $ 742,568 $ 552,463 $ 1,208,233 $ 908,082
=========== ========== =========== ==========
Note: In the first quarter of 2004, we reviewed the classification of our
customers and made certain reclassifications. Prior year information has
been restated to reflect these reclassifications.
Net sales in the second quarter of 2004 increased 34% compared to the second
quarter of 2003 resulting from an estimated increase in units shipped of
approximately 11%, while overall selling prices increased by 23%. Overall
selling prices increased as a result of the Lumber Market (see "Historical
Lumber Prices") and higher preservative prices (ACQ). We estimate that our unit
sales increased by 7% as a result of business acquisitions and new plants, while
our unit sales out of existing facilities increased by 7%. Plant closures and
the sale of Nascor Incorporated caused our unit sales to decrease by 3% in the
second quarter of 2004.
Net sales in the first six months of 2004 increased 33% compared to the first
six months of 2003 resulting from an estimated increase in units shipped of
approximately 12%, while overall selling prices increased by 21%. Overall
selling prices increased as a result of the Lumber Market (see "Historical
Lumber Prices") and higher preservative prices (ACQ). We estimate that our unit
sales increased by 6% as a result of business acquisitions and new plants while
our unit sales out of existing facilities increased by 8%. Plant closures and
the sale of Nascor Incorporated decreased our unit sales by 2% in the first six
months of 2004.
DIY/Retail:
Net sales to the DIY/retail market increased 14% in the second quarter of 2004
compared to 2003, due to the higher Lumber Market and preservative prices. Our
unit sales declined 7% comparing the two periods, which we believe was due to
record precipitation in the Midwest, Texas and portions of the East that caused
homeowners to delay home improvement projects. In addition, higher product costs
for consumers, attributable to higher lumber prices and chemical costs, may have
contributed to the decline in unit sales.
Net sales to the DIY/retail market increased 14% in the first six months of 2004
compared to 2003, due to the higher Lumber Market and preservative prices. Our
unit sales declined 5% comparing the two periods due to poor second quarter
weather and higher product costs for consumers, as discussed above.
27
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Site-Built Construction:
Net sales to the site-built construction market increased 68% in the second
quarter of 2004 compared to 2003, despite the sale of our interest in Nascor
Incorporated. This increase resulted from acquisitions (see "Business
Combinations and Asset Purchases") and new plants since June 28, 2003. Also,
organic unit sales growth out of existing plants contributed approximately 19%
for the quarter. In addition, we estimate the Lumber Market caused our selling
prices to increase 18% this quarter.
Net sales to the site-built construction market increased 60% in the first six
months of 2004 compared to 2003, despite the sale of our interest in Nascor
Incorporated. This increase resulted from acquisitions and new plants since June
28, 2003, and organic unit sales growth out of existing plants totaling
approximately 21% for the period. In addition, we estimate the Lumber Market
caused our selling prices to increase 16% in the first six months of 2004.
Manufactured Housing:
Net sales to the manufactured housing market increased 49% in the second quarter
of 2004 compared to the same period of 2003. This increase resulted primarily
from an estimated 36% increase in selling prices due to the higher Lumber Market
combined with a 13% increase in units shipped. Although industry production for
HUD code homes was down approximately 4% for the quarter, we have increased our
shipments to producers of modular homes.
Net sales to the manufactured housing market increased 43% in the first six
months of 2004 compared to the same period of 2003. This increase resulted
primarily from an estimated 30% increase in selling prices due to the higher
Lumber Market combined with a 13% increase in units shipped. Although industry
production for HUD code homes was down approximately 8% for the first six
months, we have increased our shipments to producers of modular homes.
Industrial and Other:
Net sales to the industrial and other market increased 56% in the second quarter
of 2004 compared to the same period of 2003. This increase resulted from a
combination of unit sales increases out of several existing facilities totaling
approximately 23%, combined with higher selling prices due to the Lumber Market.
We believe our unit sales and market share continue to grow significantly due to
our dedicated local sales teams and national sales support efforts, combined
with our competitive advantages in manufacturing and purchasing.
Net sales to the industrial and other market increased 51% in the first six
months of 2004 compared to the same period of 2003. This increase resulted from
a combination of unit sales increases out of
28
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
several existing facilities totaling approximately 23%, combined with higher
selling prices due to the Lumber Market.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
Three Months Ended Six Months Ended
------------------------- ----------------------
June 26, June 28, June 26, June 28,
2004 2003 2004 2003
--------- -------- -------- --------
Value-Added........................... 47.3% 49.0% 49.3% 51.5%
Commodity-Based....................... 52.7% 51.0% 50.7% 48.5%
Value-added sales increased 30% in the second quarter of 2004 compared to 2003,
primarily due to increased sales of EverX (composite decking), engineered wood
components, industrial packaging products and other specialty products supplied
to the DIY/retail market. Commodity-based sales increased 39% during the second
quarter of 2004 primarily due to the higher Lumber Market, higher preservative
prices and a 2% increase in unit sales. Therefore, our decline in value-added
sales as a percentage of total sales was due to the significant impact of the
Lumber Market on selling prices of commodity-based products.
Value-added sales increased 27% in the first six months of 2004 compared to
2003, primarily due to increased sales of EverX (composite decking), engineered
wood components, industrial packaging products and other specialty products
supplied to the DIY/retail market. Commodity-based sales increased 39% during
the first six months of 2004 primarily due to the higher Lumber Market, higher
preservative prices and a 5% increase in unit sales.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales decreased in the second quarter and
first six months of 2004 compared to the same periods of 2003 due to the Lumber
Market, which was substantially higher than the prior year. Generally, a higher
Lumber Market results in a decrease in our gross margin (see "Impact of the
Lumber Market on our Operating Results") because we attempt to price certain
products to earn a fixed profit per unit. Therefore, in a period of higher
lumber prices, our gross margin will decline. As a result of this factor, we
believe a more meaningful analysis of our profitability is a comparison of the
change in gross profit dollars compared to our change in units shipped. Our
gross profit dollars increased by almost 18% in the second quarter of 2004,
while units shipped increased by 11%. Our gross profit dollars increased by over
14% in the first six months of 2004, while units shipped increased by 12%. Our
improved profitability for each of these periods was primarily due to the effect
of the rising Lumber Market in April and May on products we inventory and whose
selling prices are tied to the Lumber Market. This positive effect more than
offset the operating inefficiencies we experienced from the fire at our plant in
Thorndale, Ontario
29
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
and poor results from one of our multi-family framing operations in the West. We
believe we have taken appropriate actions to improve performance at this framing
operation, including personnel changes. We do not presently believe this venture
will have a material adverse effect on our future operating results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses as a percentage of sales
decreased to 7.6% in the second quarter of 2004 compared to 8.5% in the same
period of 2003 primarily due to the impact of the Lumber Market on our selling
prices. SG&A expenses increased by 20.1% in the second quarter of 2004 compared
to the same period of 2003, which compares unfavorably with our 11% increase in
unit sales, primarily due to higher incentive compensation costs tied to profits
and return on investment and bad debt expense.
Selling, general and administrative ("SG&A") expenses as a percentage of sales
decreased to 8.3% in the first six months of 2004 compared to 9.6% in the same
period of 2003 primarily due to the impact of the Lumber Market on our selling
prices. SG&A expenses increased by 15.1% in the first six months of 2004
compared to the same period of 2003, which compares unfavorably with our 12%
increase in unit sales, primarily due to higher incentive compensation costs and
bad debt expense.
INTEREST, NET
Net interest costs decreased in the second quarter and first six months of 2004
compared to the same periods of 2003. This decrease was due to a slightly lower
average debt balance in 2004.
GAIN ON SALE OF REAL ESTATE AND INTEREST IN SUBSIDIARY
During the first quarter of 2004, we sold our interest in Nascor Incorporated
("Nascor") and recognized a loss of $0.2 million on the sale. Additionally, we
sold a plant in Bend, OR, and recognized a gain of $0.6 million on the sale. We
recorded income tax expense on these transactions totaling approximately
$500,000.
During the second quarter, we recognized an additional gain of $0.2 million on
the sale of the plant in Bend, OR as we collected the note receivable associated
with the original sale. Additionally, we sold a plant in Modesto, CA, and
recognized a gain of $0.4 million on the sale. We recorded income tax on these
transactions totaling approximately $225,000.
INCOME TAXES
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 increased to 37.7% in
30
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
the second quarter of 2004 from 37.1% in the same period of 2003 due to an
estimated increase in certain permanent tax differences.
Our effective tax rate was 38.0% in the first six months of 2004 compared to
36.8% in the same period of 2003. The rate in 2003 was lower due to a permanent
tax difference associated with the effect of minority interest in earnings of a
subsidiary. In addition, we recorded $290,000 of estimated income tax on the
sale of Nascor in January 2004.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions other than operating
leases.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
June 26, June 28,
2004 2003
---------- ----------
Cash from operating activities....................... ($ 52,813) $ 3,275
Cash from investing activities....................... (17,038) (17,918)
Cash from financing activities....................... 77,501 17,683
----------- ----------
Net change in cash and cash equivalents.............. 7,650 3,040
Cash and cash equivalents, beginning of period....... 17,430 17,534
----------- ----------
Cash and cash equivalents, end of period............. $ 25,080 $ 20,574
=========== ==========
In general, we financed our growth in the past through a combination of
operating cash flows, our revolving credit facility ("revolver"), industrial
development bonds (when circumstances permit), and issuance of long-term notes
payable at times when interest rates are favorable. Historically, 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 operating cash flow. We believe this is one of the many
important factors to maintaining a strong credit profile, which in turn helps
ensure timely access to capital when needed.
Seasonality has a significant impact on our working capital from March to August
which generally results in negative or modest cash flows from operations in our
first and second quarters. We experience a substantial decrease in working
capital from September to February which results in significant cash flow from
operations in our third and fourth quarters. For comparative purposes, we have
included the June 28, 2003 balances in the accompanying unaudited consolidated
condensed balance sheets.
31
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 decreased to 46 days in the first six months of 2004
from 49 days in the first six months of 2003, primarily due to a decrease in our
days supply of inventory and an extension on our payables cycle.
Cash flows used for operating activities increased in the first six months of
2004 compared to the same period of 2003 by approximately $56 million. This
increased use of cash was primarily due to the fact that we carried higher than
normal inventory levels at the end of 2002 due to a combination of poor weather
and opportunistic buying by our purchasing offices due to the low Lumber Market
at that time. Since a portion of our seasonal investment in inventory occurred
earlier than normal (at the end of 2002 instead of the first quarter of 2003),
this had the effect of minimizing our seasonal use of cash in 2003.
Cash used for investing activities declined by $0.9 million in the first six
months of 2004 compared to the same period of 2003. Capital expenditures
decreased to $16.6 million in the first six months of 2004 compared to $20.7
million in the same period of 2003. In 2003, we spent a greater amount on
expansionary projects. We expect to spend approximately $46 million on capital
expenditures in 2004, which includes outstanding purchase commitments on capital
projects totaling approximately $5.5 million on June 26, 2004 and $8 million,
which does not include insurance proceeds we expect to collect, to rebuild our
truss plant in Thorndale, Ontario. We intend to fund capital expenditures and
purchase commitments through a combination of operating cash flow and
availability under our revolver.
In addition, we spent approximately $10.1 million on business acquisitions (see
Note F, "Business Combinations and Asset Purchases") during the first six months
of 2004 and collected $4.7 million from the sale of our interest in Nascor
Incorporated.
Cash provided by financing activities increased $59.8 million in the first six
months of 2004 compared to the same period of 2003, due to increased borrowings
under our revolver to support seasonal working capital requirements (see
operating cash flows discussed above).
Additionally, we spent approximately $0.1 million to repurchase 4,050 shares of
our common stock in the first six months of 2004. We have authorization from the
Board of Directors to purchase an additional 1.5 million shares.
On June 26, 2004, we had $109.8 million outstanding on our $200 million
revolver. The revolver also supports letters of credit totaling approximately
$29.7 million on June 26, 2004. Financial covenants on our revolver 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
32
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 26, 2004.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Condensed Financial Statements, Note I, "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 27, 2003.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," as revised in December 2003 (FIN 46(R)). The new
rule requires that companies consolidate a variable interest entity if the
company is subject to a majority of the risk of loss from the variable interest
entity's activities, or is entitled to receive a majority of the entity's
residual returns or both. We do not have any special purpose entities, as
defined, nor have we acquired a variable interest in an entity where we were the
primary beneficiary since January 31, 2003. The implementation of Interpretation
46(R) did not have a material effect on the consolidated financial statements.
33
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 revolver 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.
34
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 26, 2004, 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 26, 2004.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls 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 materially affect, our internal control over
financial reporting.
35
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds and Issuer Purchase of Equity
Securities.
(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 402 Eligible persons None
Employee Stock
Purchase Assistance
Program 03/31/04 Common 195 Eligible persons Notes
Receivable
(d) None.
(e) Issuer purchases of equity securities.
Fiscal Month (a) (b) (c) (d)
- ------------ --- ------ --- ---------
March 28 - May 1, 2004(1)........................ 412 $30.71 412 1,550,587
May 2 - 29, 2004................................. 1,550,587
May 30 - June 26, 2004........................... 1,550,587
(a) Total number of shares purchased.
(b) Average price paid per share.
(c) Total number of shares purchased as part of publicly announced plans or
programs.
(d) Maximum number of shares that may yet be purchased under the plans or
programs.
(1) On October 21, 1998, the Board of Directors approved a share repurchase
program (which succeeded a previous program) allowing us to repurchase up to
1.8 million shares of our common stock. On October 18, 2000 and November 14,
2001, the Board of Directors authorized an additional 1 million shares and
2.5 million shares, respectively, to be repurchased under the program. As of
June 26, 2004, cumulative total authorized shares available for repurchase
is 1.5 million shares.
36
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
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 21, 2004.
(1) Election of the following Director for a one year term expiring in 2005:
For Withheld
---------- --------
Philip M. Novell 14,274,829 925,841
Election of the following Directors for three year terms expiring in 2007:
William G. Currie 15,063,073 137,597
John M. Engler 14,739,203 461,467
Other Directors whose terms of office continued after the meeting are as
follows:
Dan M. Dutton
John W. Garside
Gary F. Goode
Peter F. Secchia
Louis A. Smith
Item 5. Other Information.
In the second quarter of 2004, the Audit Committee approved non-audit services
to be provided by our independent auditors, Ernst & Young LLP, totaling $350 for
2004.
37
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
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).
(b) During the second quarter, we filed a report on Form 8-K dated July 13,
2004, to report the issuance of a press release announcing our financial
results for the second quarter ended June 26, 2004 under Item 7.
38
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: July 23, 2004 By: /s/ William G. Currie
-----------------------------------
William G. Currie
Its: Vice Chairman of the Board and
Chief Executive Officer
Date: July 23, 2004 By: /s/ Michael R. Cole
-----------------------------------
Michael R. Cole
Its: Chief Financial Officer
39
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).