1
EXHIBIT 13
FINANCIAL SECTION
TABLE OF CONTENTS
PAGE
----
Selected Financial Data..................................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7-18
Independent Auditors' Report................................ 19
Consolidated Balance Sheets as of December 30, 2000 and
December 25, 1999......................................... 20
Consolidated Statements of Earnings for the Years Ended
December 30, 2000, December 25, 1999, and December 26,
1998...................................................... 21
Consolidated Statements of Shareholders' Equity for the
Years Ended December 30, 2000, December 25, 1999, and
December 26, 1998......................................... 22
Consolidated Statements of Cash Flows for the Years Ended
December 30, 2000, December 25, 1999, and December 26,
1998...................................................... 23-24
Notes to Consolidated Financial Statements.................. 25-37
Price Range of Common Stock and Dividends................... 38
5
2
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICS DATA.)
2000 1999 1998 1997 1996
----------------------------------------------------------------
Consolidated Statement of Earnings Data
Net sales.................................. $1,389,443 $1,435,055 $1,238,907 $1,066,300 $891,230
Gross profit(1)............................ 187,013 178,387 145,973 93,372 88,034
Earnings before interest and taxes......... 62,030 63,634 52,540 30,287 34,051
Earnings before interest, taxes,
depreciation and amortization............ 83,492 81,789 67,588 40,329 42,797
Earnings before income taxes, minority
interest and equity in earnings of
investee................................. 50,375 51,537 43,034 25,982 29,803
Net earnings............................... 30,438 31,448 26,419 16,957 17,832
Diluted earnings per share................. $ 1.490 $ 1.480 $ 1.280 $ 0.930 $ 0.980
Dividends per share........................ $ 0.080 $ 0.075 $ 0.070 $ 0.065 $ 0.060
Weighted average shares outstanding with
common stock equivalents................. 20,477 21,186 20,613 18,234 18,121
Consolidated Balance Sheet Data
Working capital............................ $ 120,321 $ 124,324 $ 99,559 $ 89,783 $ 90,639
Total assets............................... 485,320 468,638 419,795 229,383 198,866
Long-term debt and capital lease
obligations.............................. 159,590 154,298 141,880 49,977 55,854
Shareholders' equity....................... 235,769 214,562 191,583 115,898 100,815
Statistics
Gross profit as a percentage of net
sales(1)................................. 13.5% 12.4% 11.8% 8.8% 9.9%
Net earnings as a percentage of net
sales.................................... 2.2% 2.2% 2.1% 1.6% 2.0%
Return on equity........................... 14.4% 16.6% 22.8% 16.8% 21.0%
Current ratio.............................. 2.50 2.36 2.21 2.32 3.30
Debt to equity ratio....................... 0.68 0.72 0.74 0.43 0.55
Book value per common share................ $ 12.02 $ 10.65 $ 9.29 $ 6.65 $ 5.82
- -------------------------
(1) In 2000, the Company reclassified customer rebates and royalties expense to
include it in gross profit. Prior year amounts have been restated.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
In considering whether to buy or sell Universal Forest Products, Inc. (the
"Company") securities, carefully consider all the information included in this
report and the risk factors described below. In addition, read the discussion
under the caption "Forward Outlook," where additional uncertainties associated
with the Company's business and certain forward-looking statements are
described.
LUMBER MARKET VOLATILITY:
The Company experiences significant fluctuations in the cost of commodity lumber
products from primary producers. A variety of factors over which the Company has
no control, including government regulations, environmental regulations, weather
conditions, economic conditions and natural disasters, impact the cost of lumber
products and the Company's selling prices. While the Company attempts to
minimize its risk from severe price fluctuations, substantial, prolonged trends
in lumber prices can affect the Company's financial results. The Company
anticipates that these fluctuations will continue in the future. Management
utilizes the Random Lengths composite price (see "Fluctuations in Lumber
Prices"), which is a weighted average of nine key framing lumber prices chosen
from major producing areas and species, as a broad measure of price movement in
the commodity lumber market ("Lumber Market").
COMPETITION:
The Company is subject to competitive selling and pricing pressures in its major
markets. While the Company is generally aware of its existing competitors'
capabilities, it is subject to entry in its markets by new competitors, which
could negatively impact financial results.
MARKET GROWTH:
The Company's sales growth is dependent, in part, upon growth of the markets it
serves. If the Company's markets do not achieve anticipated growth, or if the
Company fails to maintain its market share, financial results could be impaired.
The manufactured housing industry is currently hampered by market conditions,
including an oversupply of product and tightened credit policies, which have
impacted the Company's ability to achieve short-term growth objectives. A
continued downturn in this market could adversely affect the Company's operating
results.
ECONOMIC TRENDS:
Management believes the Company's 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, the Company's financial results could
be impacted.
BUSINESS COMBINATIONS:
A key component of the Company's growth strategy is to complete business
combinations. Business combinations involve inherent risks, including
assimilation and successfully managing growth. While the Company conducts
extensive due diligence and has taken steps to ensure successful assimilation,
factors beyond the Company's control could influence the results of these
acquisitions.
CONSOLIDATION:
The Company, like most companies, is witnessing consolidation by its customers.
These consolidations will result in a larger portion of the Company's sales
being made to some customers. This consolidation may limit the customer base the
Company is able to serve.
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4
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GOVERNMENT REGULATIONS:
The Company is subject to a variety of government regulations which create a
financial burden on the Company. If additional laws and regulations are enacted
in the future which restrict the ability of the Company to manufacture or market
its products, including its treated lumber products, it could adversely affect
the Company's sales and profits. If existing laws are interpreted differently,
it could also increase the financial cost to the Company.
WEATHER CONDITIONS:
The majority of the Company's products are used in outdoor construction
activities, therefore its short-term sales volume and profits can be negatively
affected by adverse weather conditions. In addition, adverse weather conditions
can negatively impact the Company's productivity and costs per unit.
SEASONALITY:
Some aspects of the Company's business are seasonal in nature and results of
operations vary from quarter to quarter. The Company's 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.
Treated lumber sales are generally at their highest levels between the months of
April through August. This sales peak, combined with capacity constraints in the
wood treatment process, requires the Company to build its inventory of treated
lumber throughout the winter and spring. Since sales prices of treated lumber
products may be indexed to the Lumber Market at the time they are shipped, the
Company's profits can be negatively affected by prolonged declines in the Lumber
Market during its primary selling season. To mitigate this risk, programs are
maintained with certain vendors and customers that are intended to decrease the
Company's exposure. These programs include those materials which are most
susceptible to adverse changes in the Lumber Market. Vendor programs also allow
the Company to carry a lower investment in inventories.
E-BUSINESS/E-COMMERCE:
While the Company has invested heavily in technology and established electronic
business-to-business efficiencies with certain customers and vendors, the
willingness of customers and vendors to modify existing distribution strategies
poses a potential risk. The Company believes the nature of its products,
together with the value-added services the Company provides, ensure that it has
a secure position in the supply chain.
When analyzing this report to assess the future performance of the Company,
please recognize the potential impact of the various risk factors set forth
above.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FLUCTUATIONS IN LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price
for the years ended December 30, 2000, December 25, 1999 and December 26, 1998:
RANDOM LENGTHS COMPOSITE
AVERAGE $/MBF
------------------------------
2000 1999 1998
------------------------------
January................................................... $ 386 $ 370 $ 360
February.................................................. 385 386 375
March..................................................... 382 394 369
April..................................................... 359 393 369
May....................................................... 326 421 331
June...................................................... 331 454 332
July...................................................... 308 480 345
August.................................................... 289 404 355
September................................................. 287 392 328
October................................................... 280 360 329
November.................................................. 281 385 340
December.................................................. 275 384 349
Annual average............................................ $ 324 $ 402 $ 349
Annual percentage change.................................. (19.4)% 15.2% (16.3)%
In addition, a SYP composite price, prepared and used by the Company is
presented below. Sales of products produced using this species comprise up to
fifty percent of the Company's sales volume.
SYP COMPOSITE
AVERAGE $/MBF
------------------------------
2000 1999 1998
------------------------------
January................................................... $ 488 $ 471 $ 499
February.................................................. 490 497 525
March..................................................... 494 513 550
April..................................................... 483 496 536
May....................................................... 439 523 474
June...................................................... 456 563 450
July...................................................... 432 590 471
August.................................................... 403 492 439
September................................................. 395 473 409
October................................................... 384 456 429
November.................................................. 374 456 422
December.................................................. 378 484 443
Annual average............................................ $ 435 $ 501 $ 471
Annual percentage change.................................. (13.2)% 6.4% (11.3)%
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
BUSINESS COMBINATIONS
The Company completed the following business combinations in fiscal 1998 and
2000 (see Note B to the Financial Statements for further details). These
business combinations were accounted for using the purchase method:
COMPANY NAME ACQUISITION DATE BUSINESS DESCRIPTION
- -------------------------------------------------------------------------------------------------------------
Structural Lumber Products, Inc.
("SLP")................................. December 29, 1997 Three facilities in Texas. Manufacturer of
engineered trusses and wall panels for
residential construction.
Shoffner Industries, Inc. ("Shoffner").... March 30, 1998 Fourteen facilities in seven states at the
time of acquisition, with headquarters in
Burlington, North Carolina. Manufacturer
of engineered trusses for commercial and
residential construction.
Atlantic General Packaging, Inc.("AGP")... April 14, 1998 One facility in North Carolina.
Manufacturer of specialty wood packaging
and industrial products.
Advanced Component Systems, Inc.
("ACS")................................. April 20, 1998 One facility in Colorado at the time of
acquisition. Manufacturer of engineered
trusses and distributor of lumber packages
for commercial and residential
construction.
Industrial Lumber Company, Inc. ("ILC")... June 4, 1998 One facility in California at the time of
acquisition. Distributor of lumber
components for packaging and industrial
applications.
Nascor Incorporated ("Nascor")............ November 4, 1998 One facility in Calgary, Alberta, Canada.
-- Purchased 59% ownership interest. Manufacturer of engineered trusses, pre-
insulated wall panels and I-joists for
commercial and residential construction.
Licensor of certain I-joist technology.
Pinelli Universal S. de R.L. de C.V.
("Pinelli")............................. December 18, 1998 One facility in Durango, Durango, Mexico.
-- Purchased 45% ownership interest. Manufacturer of mouldings and millwork
products.
ECJW Holdings, Inc. ("TED")............... April 17, 2000 Two subsidiaries located in London,
-- Purchased 50% ownership interest. Ontario, Canada. Thorndale Roof Systems,
Inc. manufactures engineered roof trusses
and Edcor Floor Systems, Inc. is a
licensed manufacturer of Open Joist
2000(TM).
Gang-Nail Components, Inc.
("Gang-Nail")........................... June 5, 2000 One facility in Fontana, California.
Manufacturer of engineered roof trusses.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of the
Company's Consolidated Statements of Earnings as a percentage of net sales.
YEARS ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
2000 1999 1998
--------------------------------------------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 86.5 87.6 88.2
----- ----- -----
Gross profit................................................ 13.5 12.4 11.8
Selling, general, and administrative expenses............... 9.0 8.0 7.6
----- ----- -----
Earnings from operations.................................... 4.5 4.4 4.2
Interest, net............................................... 0.9 0.8 0.7
----- ----- -----
Earnings before income taxes, minority interest and equity
in earnings of investee................................... 3.6 3.6 3.5
Income taxes................................................ 1.4 1.4 1.4
----- ----- -----
Earnings before minority interest and equity in earnings of
investee.................................................. 2.2 2.2 2.1
Minority interest........................................... 0.0 0.0 0.0
Equity in earnings of investee.............................. 0.0 0.0 0.0
----- ----- -----
Net earnings................................................ 2.2% 2.2% 2.1%
===== ===== =====
NET SALES
The Company engineers, manufactures, treats and distributes lumber and other
building products to the do-it-yourself ("DIY"), manufactured housing, wholesale
lumber, industrial and conventional site-built construction markets. The
Company's strategic sales objectives include:
- - Diversifying the Company's end market sales mix by increasing its 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.
- - Increasing sales of "value-added" products. Value-added product sales consist
of fencing, decking, lattice and other specialty products sold to the DIY
market; specialty wood packaging; and engineered wood products. A long-term
goal of the Company is to achieve a ratio of value-added sales to total sales
of at least 50%. Although the Company considers 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 while increasing DIY market share.
- - Maintaining manufactured housing market share.
In order to measure its progress toward attaining these objectives, management
analyzes the following financial data:
- - Sales by market classification.
- - The percentage change in sales attributable to changes in overall selling
prices versus changes in the quantity of units shipped.
- - The ratio of value-added product sales to total sales.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
This information is presented in the tables and narrative that follow.
The following table presents, for the periods indicated, the Company's net sales
(in thousands) and percentage of total net sales by market classification.
YEARS ENDED
-----------------------------------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
MARKET CLASSIFICATION 2000 % 1999 % 1998 %
- --------------------------------------------------------------------------------------------------------------------
DIY...................................... $ 658,638 47.4 $ 650,859 45.4 $ 562,622 45.4
Manufactured Housing..................... 302,830 21.8 398,237 27.8 401,679 32.4
Site-Built Construction.................. 246,667 17.8 212,479 14.8 127,550 10.3
Industrial............................... 108,795 7.8 95,468 6.6 76,817 6.2
Wholesale Lumber......................... 72,513 5.2 78,012 5.4 70,239 5.7
---------- ----- ---------- ----- ---------- -----
Total.................................... $1,389,443 100.0 $1,435,055 100.0 $1,238,907 100.0
========== ===== ========== ===== ========== =====
The following table estimates, for the periods indicated, the Company's
percentage change in net sales which were attributable to changes in overall
selling prices versus changes in units shipped.
% CHANGE
-----------------------------------------
IN SALES IN SELLING PRICES IN UNITS
-----------------------------------------
2000 versus 1999......................................... -3% -6% +3%
1999 versus 1998......................................... +16% +4% +12%
1998 versus 1997......................................... +16% -8% +24%
A decrease in overall selling prices in 2000 was attributable to the Lumber
Market. The increase in unit sales was well below the Company's goal as
substantial increases in unit sales to the DIY, industrial and site-built
construction markets were offset partially by a decrease in unit sales to the
manufactured housing market of approximately 17%.
The following table presents, for the periods indicated, the Company's
percentage of value-added and commodity-based sales to total sales.
VALUE-ADDED COMMODITY-BASED
------------------------------
2000........................................................ 44.2% 55.8%
1999........................................................ 40.8% 59.2%
1998........................................................ 41.7% 58.3%
The increase in the Company's ratio of value-added sales to total sales in 2000
compared to 1999 is primarily due to a 5% increase in value-added sales while
commodity-based sales decreased 9%. Value-added sales increased primarily due to
increased unit sales of engineered roof trusses, I-joists and Open Joist
2000(TM) products to the site-built construction market and fencing to the DIY
market. These increases were offset partially by a decline in truss sales to the
manufactured housing market.
Commodity-based sales decreased due to a decline in unit sales of structural
lumber to the manufactured housing market and a decline in overall selling
prices resulting from the Lumber Market.
DIY MARKET:
Do-It-Yourself Retailing estimated a 3.8% increase in total retail sales by home
improvement retailers comparing 2000 with 1999. The magazine also estimated a
compounded annual growth rate ("CAGR") from 1998 to 2000 of 6.8%, while the
Company realized an 8.2% CAGR in sales to this market during the period. The
Company has strong relationships with several national retail customers, the
most significant of which is its long standing relationship with The Home Depot.
The Company has developed these relationships due to its ability to provide
quality products and a high level of service at competitive prices. As this
market segment has continued to consolidate, certain national retail customers
have captured additional market share and the Company has in turn increased its
market share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Net sales to the DIY market increased in 2000 compared to 1999, primarily due to
a 17% increase in sales to the Company's largest customer despite a decrease in
overall selling prices caused by the deflated Lumber Market. This increase was
partially offset by a decrease in sales to two customers due to a decline in
their financial positions.
Net sales to the DIY market increased in 1999 compared to 1998, primarily due to
an increase in unit sales of treated lumber combined with an overall increase in
selling prices due to the level of the Lumber Market. The increase in treated
lumber sales was primarily due to additional treating facilities which commenced
operations during the first quarter of 1999. These sales increases were offset
somewhat by a reduction in sales to three national customers. The decrease in
sales to two of these customers was due to a decline in their financial
positions, and the decrease in business with the third customer was due to
competitive factors. Sales to the Company's largest customer increased 55.1% in
1999 compared to 1998.
MANUFACTURED HOUSING MARKET:
Net sales to the manufactured housing market decreased in 2000 compared to 1999
due to a decline in unit sales combined with a decline in selling prices due to
the deflated Lumber Market. The Company's unit sales decreased as customers
continue to struggle with an oversupply of finished homes at the retail level,
tightened credit conditions and an increase in repossessions. The Manufactured
Housing Institute, in its December 2000 "Manufacturing Report" estimated that
the number of finished homes shipped to retailers declined 28.1% from 1999 to
2000. The industry expects this situation to likely continue well into the first
quarter of 2002.
Net sales to the manufactured housing market decreased in 1999 compared to 1998,
primarily due to a decrease in sales to the Company's two largest customers in
this market. These customers had an oversupply of finished homes at the retail
level in the last six months of 1999, and as a result, dramatically curtailed
their production of new homes. The decrease in sales to these accounts was
partially offset by increased sales to several accounts and an increase in
overall selling prices due to the effect of the higher Lumber Market.
SITE-BUILT CONSTRUCTION MARKET:
Net sales to the site-built construction market increased in 2000 compared to
1999 primarily due to the acquisitions of TED and Gang-Nail during the year 2000
(see "Business Combinations").
Net sales to the site-built construction market increased in 1999 compared to
1998, due to the effect of operating businesses acquired in 1998 (see "Business
Combinations") for a complete year in 1999. In addition, these businesses, which
include Nascor, Shoffner, ACS and SLP, experienced an increase in same period
sales due to a combination of strong housing markets, increased market share in
their respective regions, and an increase in selling prices due to the effect of
the higher Lumber Market.
INDUSTRIAL MARKET:
Net sales to the industrial market increased in 2000 compared to 1999 due to
increased market share in several regions. This resulted from a continued focus
on growth, combined with the effects of redirecting sales efforts and
manufacturing capacity at certain plants as a result of the downturn in the
manufactured housing market. The Company continues to pursue market share growth
in this fragmented industry through an internal growth strategy. The Company has
organized a national sales and marketing group, established a sales incentive
program to motivate employees and continues to increase production capacity to
take advantage of market opportunities.
Net sales to the industrial market increased in 1999 compared to 1998, primarily
due to the acquisition of ILC and increased market share by several existing
plants in the Company's Far West Region.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
WHOLESALE MARKET:
Net sales to the wholesale market decreased in 2000 compared to 1999 as a result
of decreased selling prices due to the deflated Lumber Market. Although
increasing sales to the wholesale market is not a strategic objective, the
Company continues to supply its existing customers and take advantage of
opportunities for profitable new business.
Net sales to the wholesale market increased in 1999 compared to 1998, due to
increased unit sales combined with an increase in selling prices due to the
effect of the higher Lumber Market.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased in 2000 compared to 1999,
primarily due to the following factors:
- - An increase in the ratio of value-added product sales to total sales due to
increased sales of engineered wood products to the site-built construction
market, specialty packaging products to the industrial market and fencing
products to the DIY market.
- - An increase in gross margins on certain products due to the low level of the
Lumber Market throughout 2000 compared to 1999. The selling prices of many
products are indexed to the Lumber Market along with a fixed dollar "adder" to
cover conversion costs and profits. Therefore, in periods when the Lumber
Market is low, the fixed adder will result in higher gross margins.
- - The above increases were offset by lower margins on sales to the manufactured
housing market due to the effect of price competition and lower volumes on
manufacturing efficiencies.
Gross profit as a percentage of net sales increased in 1999 compared to 1998,
primarily due to the following factors:
- - An increase in sales of engineered wood products.
- - An increase in sales and improved gross margins on sales of specialty wood
packaging and components to the industrial market.
- - The above increases were offset partially by a decrease in sales of fencing
and lattice products in certain regions of the country due to competitive
factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") increased in 2000 compared
to 1999, primarily due to the following:
- - Expenses added through business acquisitions and other new operations in 2000.
- - An increase in selling and administrative headcount to support the growth of
the business and to pursue strategic initiatives.
SG&A increased in 1999 compared to 1998. This increase was primarily due to:
- - Expenses added through business acquisitions and other new operations in 1999.
- - An increase in selling and administrative headcount and travel costs to
support the growth of the business and to pursue strategic initiatives,
including the formation of its national Sales, Marketing, and Manufacturing
Departments to execute strategic growth and profitability initiatives.
- - A one-time charge to write-off a cumulative translation adjustment related to
the permanent shutdown of a wholly-owned Mexican subsidiary.
- - An increase in incentive compensation expenses tied to profitability and
return on investment objectives.
- - Increases in certain variable selling and marketing expenses tied to sales.
14
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST, NET
Net interest costs increased in 2000 compared to 1999, primarily due to higher
average debt balances associated with share repurchases and acquisitions.
Short-term borrowing rates on variable rate debt were also higher in 2000
compared to 1999.
Net interest costs increased in 1999 compared to 1998, due to higher average
debt balances attributable to having acquisition related debt for a complete
year in 1999 and increased working capital requirements in 1999. In addition,
the Company recognized a higher borrowing rate on debt in 1999 compared to 1998
as a result of extending its maturities on acquisition related debt.
Acquisitions were initially financed using one-year uncommitted credit lines in
1998.
INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily
due to:
- - Provisions for state and local income taxes.
- - Permanent tax differences.
The Company recognized a lower tax rate in 2000 compared to 1999 due to lower
estimated state and local income taxes.
The Company recognized a slightly higher effective tax rate in 1999 compared to
1998 due to an increase in state and local income taxes offset by a reduction in
a valuation allowance related to a deferred tax asset of Nascor.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities increased in 2000 compared to 1999.
This improvement is primarily due to:
- - The impact of a lower Lumber Market on sales and working capital.
- - A change in buying practices on certain products. At the end of 1999, the
Company purchased certain inventory well in advance of the spring DIY selling
season in order to meet expected demand.
- - The positive cash flow effects mentioned above were offset partially by a
reduction in accounts payable due to a change in the timing of cash
disbursements at the end of 2000 versus 1999.
Due to the seasonality of its business and the effects of the Lumber Market,
management believes the Company's cash cycle (days sales outstanding plus days
supply of inventory less days payables outstanding) is a good indicator of its
working capital management. The Company's cash cycle increased to 45 days in
2000 from 42 days in 1999. This increase was primarily due to a longer inventory
cycle resulting from the change in buying practices discussed above and a longer
receivables cycle due to a greater percentage of sales to the site-built market.
The increase in the inventory cycle was partially offset by a longer payment
cycle with certain vendors.
Capital expenditures totaled $29.4 million in 2000 compared to $35.4 million in
1999. These expenditures consisted of several projects to improve efficiencies,
expand manufacturing capacity at existing plants and costs to complete or
acquire several new plants. On December 30, 2000, outstanding purchase
commitments on capital projects totaled $3.3 million. The Company intends to
satisfy these commitments utilizing its revolving credit facility.
The Company spent approximately $32.4 million in 2000 related to business
acquisitions which are discussed earlier under the caption "Business
Combinations." The Company funded the purchase price of these acquisitions using
its revolving credit facility.
Cash flows used in financing activities increased primarily due to an increase
in operating cash flow offset by amounts spent for business acquisitions.
On December 30, 2000, the Company had $10.3 million outstanding on its $175
million primary revolving credit facility and $9.6 million Canadian ($6.4
million U.S.) outstanding on its $20 million Canadian revolving credit facility.
Financial
15
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
covenants on the Company's revolving credit facilities and senior unsecured
notes include a minimum net worth requirement, a minimum interest coverage test
and a maximum leverage ratio. The Company was in compliance with its
requirements at December 30, 2000.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
The Company is self-insured for environmental impairment liability, and accrues
for the estimated cost of monitoring or remediation activities. The Company owns
and/or operates 21 wood preserving facilities throughout the United States that
treat lumber products with a chemical preservative. In accordance with
applicable federal, state and local environmental laws, ordinances and
regulations, the Company may be potentially liable for costs and expenses
related to the environmental condition of the Company's real property. The
Company has established reserves for remediation activities at its North East,
Maryland; Union City, Georgia; Stockertown, Pennsylvania; Elizabeth City, North
Carolina; Auburndale, Florida; and Schertz, Texas facilities.
The Company has accrued, in other long-term liabilities, amounts totaling $2.3
million and $2.4 million on December 30, 2000 and December 25, 1999,
respectively, for the activities described above. Management believes the
potential future costs of known remediation efforts will not have a material
adverse effect on its future financial position, results of operations or
liquidity.
FORWARD OUTLOOK
The following section contains 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 of the Company together with
information available to the Company 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 in the
"Risk Factors" section of this report and certain economic and business factors
which may be beyond the control of the Company. Investors are cautioned that all
forward-looking statements involve risks and uncertainty.
PERFORMANCE 2002
In 1997, the Company announced its goals for growth and diversification entitled
Performance 2002. The goals called for the Company to double its sales by the
fiscal year ending 2002 while maintaining or achieving a leadership position in
the four markets that consume the vast majority of softwood fiber in the United
States. The Company's ability to achieve these goals is dependent upon many
factors, including an increase in the Lumber Market to historical levels and
completion of key acquisitions. The Company's sales goals by market are as
follows (in thousands):
TARGETED ACTUAL TARGETED
SALES IN SALES IN 2-YEAR
2002 2000 CAGR
------------------------------------
DIY.................................................... $1,000,000 $ 658,638 23%
Manufactured Housing................................... 500,000 302,830 28%
Site-Built Construction................................ 250,000 246,667 1%
Industrial and Other................................... 250,000 181,308 18%
---------- ----------
Total.................................................. $2,000,000 $1,389,443 20%
========== ==========
16
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DIY MARKET
Do-It-Yourself Retailing forecasted the following total retail sales for home
improvement retailers for 2001 and 2002 (in billions), which result in a CAGR of
3% from 2000 sales of $165.8 billion. The Company has no means of ascertaining
the accuracy of this industry-wide projection, and actual results could vary
significantly.
2001........................................................ $171.0
2002........................................................ $175.0
The consolidation within the DIY industry continued in 2000 as top performers
obtained additional market share. The Company feels it is in a position to
continue to capitalize on these industry conditions as a result of its national
presence, service capabilities that meet stringent customer requirements and
diversified product offerings. The Company's goal is to continue to increase
market share through acquisitions and internal growth, with a continued emphasis
on value-added products.
MANUFACTURED HOUSING MARKET
Manufactured Home Merchandiser, in its January 2001 edition, forecasted a
decrease of industry shipments to retailers of over 7% in 2001 due to an
oversupply of finished homes at the retail level. The Company has no means of
ascertaining the accuracy of this industry-wide projection, and actual results
could vary significantly. As a result of the prolonged downturn in this market,
the Company has redirected sales efforts and manufacturing capacity at certain
plants to the industrial market.
Management believes the manufactured housing industry's oversupply of inventory
will continue to negatively impact the Company's sales for the next four or five
quarters. However, it also believes this situation is temporary and the industry
will return to its moderate long-term growth as manufactured homes continue to
be an attractive alternative to conventional homes as a result of their
affordability and quality. Management believes the Company may also have an
opportunity to increase its market share as a result of declining financial
positions of certain competitors, which are solely dedicated to the manufactured
housing market.
SITE-BUILT CONSTRUCTION MARKET
The Company entered this market primarily through acquisition and has continued
its growth initiatives in this market by opening several new facilities and by
continuing to acquire regional market leaders. As a result of these actions, the
Company has become one of the largest manufacturers of engineered wood products
in the United States while operating 34 facilities in 15 states and Canada.
Management plans to continue to grow its market share by adding production
capacity to existing facilities, opening new plants and continuing to pursue
business acquisitions in order to enter key geographic markets and add new
products and services.
The National Association of Home Builders published forecasted annual housing
starts of 1,535,000 and 1,540,000 for 2001 and 2002, respectively. The 2001
forecast represents a 3.3% decrease from housing starts totaling 1,592,000 in
2000.
Despite a forecasted decrease in housing starts which were near peak levels,
management believes the sale of engineered wood products will continue to grow.
The Freedonia Group, in its Industry Study 979, forecasted a 7% CAGR in the sale
of engineered wood components through the year 2002 because of the benefits
these products provide builders over traditional carpentry methods employed on
the job site. Some of these benefits include cost advantages through more
efficient labor and better material utilization, faster home construction and
improved product quality. In addition, this market is consolidating as large
production-oriented builders continue to take more market share. Management
believes the Company's geographic presence and national sales efforts will allow
it to continue to increase market share.
17
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INDUSTRIAL MARKET
A key strategic objective of the Company is to increase its sales of wood
packaging products to industrial users. The vast amount of hardwood and softwood
lumber consumed for industrial applications, combined with the highly fragmented
nature of this market provides the Company with significant growth
opportunities.
The Company plans to continue to obtain market share through an internal growth
strategy utilizing its current manufacturing capabilities while continuing to
identify strategic acquisitions which meet its criteria. In addition, the
Company is utilizing its available sales force and production capacity to grow
its business in this market as a result of the temporary downturn in the
manufactured housing market.
GROSS PROFIT
Management believes the following factors may impact the Company's future gross
profits:
- - The Company has a long-term goal of increasing its ratio of value-added sales
to total sales to 50%, which in turn should increase gross margins. Management
believes its acquisition and internal sales growth strategies will help it
continue to make progress toward this objective. Achievement of this goal is
dependent, in part, upon certain factors that are beyond the control of
management.
- - The presently deflated Lumber Market is expected to continue for the majority
of 2001. This may have a positive effect on gross margins as the selling
prices of many products are indexed to the Lumber Market along with a fixed
dollar "adder." In periods when the Lumber Market is low, the fixed adder will
result in higher gross margins. Conversely, in periods when the Lumber Market
is high, gross profit will remain the same, but gross margins may decline.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A costs have increased as a percentage of sales in recent years, in part, due
to acquisitions of engineered wood product manufacturers which have extensive
engineering and design costs, and costs associated with creating new national
sales, marketing and manufacturing departments to execute key strategic
initiatives. SG&A costs as a percentage of sales may continue to increase in the
future as engineered wood products and specialty wood packaging become a greater
percentage of the Company's total business. However, management strives to
achieve economies of scale in other administrative departments as sales growth
objectives are met. In addition, the Company's ratio of SG&A to sales is
influenced by the level of the Lumber Market. In periods of a deflated Lumber
Market, SG&A as a percentage of sales will increase as a result of the negative
impact on sales dollars.
LIQUIDITY AND CAPITAL RESOURCES
Management expects to spend approximately $30 million on capital expenditures in
2001 and incur depreciation and amortization of approximately $24 million.
Besides "maintenance" capital expenditures totaling approximately $15 million,
the Company plans to spend an additional $15 million to expand the business and
complete e-business initiatives. In addition, the Company plans to continue to
execute its acquisition strategy in 2001, and will consider issuing long-term
debt to finance a transaction.
The Company has no present intention to change its current, semi-annual dividend
policy. The Company also has the ability to repurchase approximately 1.5 million
shares of its common stock under a share repurchase program approved by the
Board of Directors. While it is the Company's primary objective to invest in the
profitable growth of the business, it may repurchase substantial shares of its
common stock from time to time. In addition, the Company is obligated to pay
amounts due on long-term debt totaling approximately $8.8 million in 2001.
The Company has a $175 million revolving credit facility and a $20 million
Canadian revolving credit facility used to fund seasonal working capital
requirements and growth. Management believes its peak seasonal working capital
requirements will consume up to $75 million of this availability through June of
2001 and then decrease for the balance of the year in line with historical
trends. The Company plans to finance its capital requirements by using these
revolving credit facilities.
18
15
INDEPENDENT AUDITORS' REPORT
Board of Directors
Universal Forest Products, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Universal Forest
Products, Inc. and subsidiaries as of December 30, 2000 and December 25, 1999,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three fiscal years in the period ended December 30,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Universal Forest Products, Inc. and
subsidiaries as of December 30, 2000 and December 25, 1999, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Grand Rapids, Michigan
January 29, 2001
19
16
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA.)
DECEMBER 30, DECEMBER 25,
NOTE 2000 1999
---------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,392 $ 4,106
Restricted cash equivalents............................... 1,364
Accounts receivable (net of allowance for doubtful
accounts of $1,340 and $1,379).......................... 64,386 70,012
Inventories:
Raw materials........................................... 41,885 44,722
Finished goods.......................................... 81,306 86,813
-------- --------
123,191 131,535
Other current assets...................................... 2,236 1,354
Prepaid income taxes...................................... K 1,394 3,416
Deferred income taxes..................................... K 5,396 5,083
-------- --------
TOTAL CURRENT ASSETS.................................... 200,359 215,506
OTHER ASSETS................................................ E, I 11,392 10,836
GOODWILL AND NON-COMPETE AGREEMENTS, NET.................... B 105,579 93,183
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements..................................... D 35,934 28,320
Buildings and improvements................................ D 93,821 78,926
Machinery, equipment and office furniture................. D 120,834 102,282
Construction in progress.................................. 6,069 13,214
-------- --------
256,658 222,742
Less accumulated depreciation and amortization............ D (88,668) (73,629)
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET...................... 167,990 149,113
-------- --------
TOTAL ASSETS................................................ $485,320 $468,638
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................................... C $ 1,270 $ 1,520
Accounts payable.......................................... 35,589 46,621
Accrued liabilities:
Compensation and benefits............................... J 29,423 32,491
Other................................................... 4,973 3,148
Current portion of long-term debt and capital lease
obligations............................................. C, D 8,783 7,402
-------- --------
TOTAL CURRENT LIABILITIES............................... 80,038 91,182
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion................................................... C, D 150,807 146,896
DEFERRED INCOME TAXES....................................... K 9,092 8,398
OTHER LIABILITIES........................................... E, L 9,614 7,600
COMMITMENTS AND CONTINGENCIES............................... L
-------- --------
TOTAL LIABILITIES....................................... 249,551 254,076
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, 19,719,114 and 20,212,385....... F, G, H 19,719 20,212
Additional paid-in capital................................ F, H 79,800 78,625
Retained earnings......................................... F 136,645 115,327
Accumulated other comprehensive earnings.................. 860 1,033
-------- --------
237,024 215,197
Officers' stock notes receivable.......................... H (1,255) (635)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 235,769 214,562
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $485,320 $468,638
======== ========
See notes to consolidated financial statements.
20
17
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA.)
YEAR ENDED
-------------------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
NOTE 2000 1999 1998
-------------------------------------------------------
NET SALES................................................ $1,389,443 $1,435,055 $1,238,907
COST OF GOODS SOLD....................................... D, J 1,202,430 1,256,668 1,092,934
---------- ---------- ----------
GROSS PROFIT............................................. 187,013 178,387 145,973
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............. D, I, J 124,391 115,589 93,824
---------- ---------- ----------
EARNINGS FROM OPERATIONS................................. 62,622 62,798 52,149
INTEREST, NET:
Interest expense....................................... C 12,804 11,853 9,506
Interest income........................................ H (557) (592) (391)
---------- ---------- ----------
12,247 11,261 9,115
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND
EQUITY IN EARNINGS OF INVESTEE......................... 50,375 51,537 43,034
INCOME TAXES............................................. K 19,218 19,955 16,615
---------- ---------- ----------
EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN EARNINGS
OF INVESTEE............................................ 31,157 31,582 26,419
MINORITY INTEREST........................................ (750) (701)
EQUITY IN EARNINGS OF INVESTEE........................... 31 567
---------- ---------- ----------
NET EARNINGS............................................. $ 30,438 $ 31,448 $ 26,419
========== ========== ==========
EARNINGS PER SHARE -- BASIC.............................. $ 1.52 $ 1.52 $ 1.33
EARNINGS PER SHARE -- DILUTED............................ $ 1.49 $ 1.48 $ 1.28
WEIGHTED AVERAGE SHARES OUTSTANDING...................... 20,086 20,637 19,917
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK
EQUIVALENTS............................................ 20,477 21,186 20,613
See notes to consolidated financial statements.
21
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)
ACCUMULATED
ADDITIONAL OTHER OFFICERS'
COMMON PAID-IN RETAINED COMPREHENSIVE STOCK NOTES
STOCK CAPITAL EARNINGS EARNINGS RECEIVABLE TOTAL
-----------------------------------------------------------------------------
Balance at December 27, 1997....... $17,572 $29,855 $ 70,253 $ (882) $ (900) $115,898
Comprehensive earnings:
Net earnings................... 26,419
Foreign currency translation
adjustment................... (190)
Total comprehensive earnings... 26,229
Cash dividends -- $.070 per
share.......................... (1,451) (1,451)
Final settlement of CBC
acquisition.................... (17) (218) (235)
Issuance of 3,154,866 shares..... 3,155 47,889 51,044
Payments received on officers'
stock notes receivable......... 98 98
------- ------- -------- ------- ------- --------
Balance at December 26, 1998....... $20,710 $77,526 $ 95,221 $(1,072) $ (802) $191,583
Comprehensive earnings:
Net earnings................... 31,448
Foreign currency translation
adjustment................... 2,105
Total comprehensive earnings... 33,553
Cash dividends -- $.075 per
share.......................... (1,539) (1,539)
Issuance of 179,923 shares....... 180 802 982
Repurchase of 677,801 shares..... (678) (9,803) (10,481)
Tax benefits from non-qualified
stock options exercised........ 297 297
Payments received on officers'
stock notes receivable......... 167 167
------- ------- -------- ------- ------- --------
Balance at December 25, 1999....... $20,212 $78,625 $115,327 $ 1,033 $ (635) $214,562
Comprehensive earnings:
Net earnings................... 30,438
Foreign currency translation
adjustment................... (173)
Total comprehensive earnings... 30,265
Cash dividends -- $.080 per
share.......................... (1,605) (1,605)
Issuance of 81,764 shares........ 82 430 512
Repurchase of 635,411 shares..... (635) (7,515) (8,150)
Tax benefits from non-qualified
stock options exercised........ 5 5
Issuance of officers' stock notes
receivable..................... 60 740 (800) 0
Payments received on officers'
stock notes receivable......... 180 180
------- ------- -------- ------- ------- --------
Balance at December 30, 2000....... $19,719 $79,800 $136,645 $ 860 $(1,255) $235,769
======= ======= ======== ======= ======= ========
See notes to consolidated financial statements.
22
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS.)
YEAR ENDED
----------------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
NOTE 2000 1999 1998
----------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................ $ 30,438 $ 31,448 $ 26,419
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation.......................................... D 17,659 14,885 12,584
Amortization of non-compete agreements and goodwill... B 3,803 3,270 2,464
Deferred income taxes................................. K 237 (774) 1,292
Loss on sale of property, plant and equipment......... 422 489 422
Changes in:
Accounts receivable................................. 14,134 (7,300) (5,698)
Inventories......................................... 13,001 (23,136) 20,093
Accounts payable.................................... (12,099) 7,870 (1,504)
Accrued liabilities and other....................... (590) 5,776 10,507
-------- -------- ---------
NET CASH FROM OPERATING ACTIVITIES............... 67,005 32,528 66,579
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment............... (29,436) (35,418) (28,433)
Acquisitions, net of cash received...................... B (32,557) (98,167)
Proceeds from sale of property, plant and equipment..... 1,040 2,247 1,688
Advances on notes receivable............................ (500) (139) (3,200)
Collection of notes receivable.......................... H 432 3,431 377
Restricted cash equivalents............................. (1,364)
Purchases of other assets............................... (306) (87) (370)
-------- -------- ---------
NET CASH FROM INVESTING ACTIVITIES.................. (62,691) (29,966) (128,105)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable and
revolving credit facilities........................... C 4,090 (5,056) 11,880
Proceeds from issuance of long-term debt................ C 7,045 27,502 80,304
Repayment of long-term debt, net........................ C (7,888) (10,744) (31,952)
Proceeds from issuance of common stock.................. F, G 480 942 508
Dividends paid to shareholders.......................... (1,605) (1,539) (1,451)
Repurchase of common stock.............................. F (8,150) (10,481)
-------- -------- ---------
NET CASH FROM FINANCING ACTIVITIES.................. (6,028) 624 59,289
-------- -------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................... (1,714) 3,186 (2,237)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............. 4,106 920 3,157
-------- -------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................... $ 2,392 $ 4,106 $ 920
======== ======== =========
23
20
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS.)
YEAR ENDED
----------------------------------------------------
DECEMBER 30, DECEMBER 25, DECEMBER 26,
NOTE 2000 1999 1998
----------------------------------------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.............................................. C $ 12,721 $ 11,760 $ 9,407
Income taxes.......................................... K 17,369 20,746 14,815
NON-CASH INVESTING ACTIVITIES:
Note payable issued in exchange for non-compete
agreements............................................ B 2,462
Note payable issued in business combination............. B 857
Property, plant and equipment acquired through capital
leases................................................ D 220 255 181
Fair market value of common stock issued in business
combinations.......................................... B 50,509
Officers' stock notes receivable........................ H 800
NON-CASH FINANCING ACTIVITIES:
Inventory exchanged for a note receivable............... 1,040
Accounts receivable exchanged for a note receivable..... 441
See notes to consolidated financial statements.
24
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Universal Forest Products, Inc. (the "Company") engineers, manufactures, treats
and distributes lumber products for the do-it-yourself, manufactured housing,
industrial, wholesale and site-built construction markets. The Company's
principal products include preservative-treated wood, remanufactured lumber,
lattice, fence panels, deck components, specialty packaging, engineered trusses,
wall panels, I-joists and other building products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries and partnerships. All
significant intercompany transactions and balances have been eliminated. The
equity method of accounting is used for the Company's 50% or less owned
affiliates over which the Company has the ability to exercise significant
influence.
FISCAL YEAR
The Company's fiscal year is a 52 or 53 week period, ending on the last Saturday
of December. Unless otherwise stated, references to 2000, 1999 and 1998 relate
to the fiscal years ended December 30, 2000, December 25, 1999 and December 26,
1998, respectively. Fiscal year 2000 was comprised of 53 weeks, and fiscal years
1999 and 1998 were comprised of 52 weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures about Fair Value of Financial Instruments," the estimated fair
values of financial instruments have been determined by the Company; significant
differences in fair market values and recorded values are disclosed in Note C.
The estimated fair value amounts have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information
available to management as of December 30, 2000. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Management believes its estimates to be reasonable, however, actual
results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly-liquid investments
purchased with an original maturity of three months or less.
25
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED CASH EQUIVALENTS
Unexpended proceeds from certain borrowings, that are restricted as to use, have
been excluded from cash and cash equivalents.
INVENTORIES
Inventories are stated at the lower of average cost or market. Raw materials
consist primarily of unfinished wood products expected to be manufactured or
treated prior to sale, while finished goods represent various manufactured and
treated wood products ready for sale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for renewals and
betterments are capitalized, and maintenance and repairs are expensed as
incurred. Depreciation is computed principally by the straight-line method over
the estimated useful lives of the assets as follows:
Buildings and improvements.................................. 15 to 31.5 years
Land improvements........................................... 5 to 15 years
Machinery and equipment..................................... 3 to 8 years
Office furniture............................................ 5 to 8 years
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations are translated into
U.S. dollars at current rates of exchange, with gains or losses included as a
separate component of shareholders' equity.
Prior to January 1999, due to the hyper-inflationary state of the Mexican
economy, the financial statements of the Mexican operations were translated at
either current or historical exchange rates, as appropriate. These adjustments,
along with gains or losses resulting from foreign currency transactions were not
material in 1998, and are reflected in earnings from operations. Effective
January 1999, Mexico was no longer considered a highly inflationary economy, and
the Company began translating the financial statements of its Mexican operations
using current rates of exchange.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future. Such deferred income tax asset
and liability computations are based on enacted tax laws and rates applicable to
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the period
in deferred tax assets and liabilities.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Revenue is recognized at the time the product is shipped to the customer. The
Company accrues for bad debt expense based on its history of accounts receivable
write-offs to sales. Individual accounts receivable balances are evaluated on a
monthly basis, and those balances considered to be uncollectible are charged to
the allowance. Collections of amounts previously written off are recorded as an
increase to the allowance. Bad debt expense amounted to approximately
$1,531,000, $858,000 and $515,000, for 2000, 1999 and 1998, respectively.
26
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER COMMON SHARE
Basic earnings per share ("EPS") is calculated based on the weighted average
number of common shares outstanding during the periods presented. Diluted EPS is
calculated based on the weighted average number of common and common equivalent
shares outstanding during the periods presented, giving effect to stock options
granted in 1993, 1998, 1999 and 2000 (see Note G) utilizing the "treasury stock"
method.
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):
2000 1999 1998
-------------------------- -------------------------- --------------------------
INCOME SHARES PER INCOME SHARES PER INCOME SHARES PER
(NUM- (DENOM- SHARE (NUM- (DENOM- SHARE (NUM- (DENOM- SHARE
ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT
------------------------------------------------------------------------------------
Net Earnings............ $30,438 $31,448 $26,419
EPS -- Basic
Income available to
common stockholders... 30,438 20,086 $1.52 31,448 20,637 $1.52 26,419 19,917 $1.33
===== ===== =====
Effect of Dilutive
Securities
Options................. 391 549 696
------ ------ ------
EPS -- Diluted
Income available to
common stockholders
and assumed options
exercised............. $30,438 20,477 $1.49 $31,448 21,186 $1.48 $26,419 20,613 $1.28
======= ====== ===== ======= ====== ===== ======= ====== =====
Options to purchase 633,160 shares of common stock at exercise prices ranging
from $13.18 to $36.01 were outstanding at December 30, 2000, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common stock during the period
and, therefore, would be antidilutive.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") and as permitted by this Standard, continues to apply the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 to its stock-based compensation (see Note G).
RECLASSIFICATIONS
Certain reclassifications have been made in the 1998 and 1999 consolidated
financial statements to conform to the classifications used in 2000.
27
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
B. BUSINESS COMBINATIONS
Each of the following business combinations have been accounted for as a
purchase. Accordingly, in each instance, the purchase price was allocated to the
assets acquired and liabilities assumed based on their fair market values at the
date of acquisition. Any excess of the purchase price over the fair value of the
acquired assets and assumed liabilities was recorded as goodwill in each
transaction. The Company has amortized goodwill on a straight-line basis over
periods ranging from 20 to 40 years. Non-compete agreements are amortized on a
straight-line basis over the term of the agreements. The results of operations
of each acquisition is included in the Company's consolidated financial
statements since the date it was acquired.
On December 29, 1997, a partnership of the Company acquired substantially all of
the assets of Structural Lumber Products, Inc. ("SLP"), a manufacturer of
engineered trusses and wall panels for residential builders. SLP operated plants
in San Antonio, Austin and Dallas, Texas at the time of acquisition. The total
purchase price of the transaction was $18.5 million. The excess of the purchase
price over the estimated fair value of the acquired assets was $12.7 million.
On March 30, 1998, a subsidiary of the Company acquired all of the outstanding
shares of Shoffner Industries, Inc. ("Shoffner") in exchange for $41.1 million
in cash and 3 million shares of the Company's common stock. The excess of the
purchase price over the estimated fair value of the acquired assets and
liabilities assumed was $66.6 million. Shoffner is a manufacturer of engineered
roof and floor trusses for commercial and residential builders with 14
facilities in 7 states at the time of acquisition.
On April 14, 1998, a subsidiary of the Company acquired substantially all of the
assets and assumed certain liabilities of Atlantic General Packaging, Inc.
("AGP"), a manufacturer of specialty wood packaging products. AGP operates one
facility in Warrenton, North Carolina. The total purchase price for the net
assets of AGP consisted of cash of $1.0 million, a note payable of $857,000, and
57,950 shares of the Company's common stock.
On April 20, 1998, a subsidiary of the Company acquired substantially all of the
assets and assumed certain liabilities of Advanced Component Systems, Inc.
("ACS"), a manufacturer of engineered trusses for commercial and residential
builders. ACS operated one facility in Lafayette, Colorado at the time of
acquisition. The total purchase price for the net assets of ACS was $27.0
million in cash. The excess of the purchase price over the estimated fair value
of the acquired assets and liabilities assumed was $10.6 million.
On June 4, 1998, a subsidiary of the Company acquired substantially all of the
assets of Industrial Lumber Company, Inc. ("ILC"), a distributor of low grade
cut lumber for packaging. The total purchase price for the net assets of ILC
consisted of $3.0 million in cash. The Company also exchanged notes payable
totaling $2.2 million for non-compete agreements.
On November 4, 1998, a subsidiary of the Company acquired 59% of the outstanding
shares of Nascor Incorporated ("Nascor"), a manufacturer of engineered trusses,
pre-insulated wall panels and I-joists, and a licensor of certain I-joist
technology. Nascor operates out of a single facility in Calgary, Alberta,
Canada. The Company exchanged $2.8 million for 5,552,500 shares of Nascor's
outstanding common stock. The excess of the purchase price over the estimated
fair value of the acquired assets, assumed liabilities and minority interest was
$1.4 million.
On December 18, 1998, a subsidiary of the Company acquired a 45% interest in
Pino Exporta, renamed to Pinelli Universal S. de R.L. de C.V. ("Pinelli"), a
manufacturer of mouldings and related products. Pinelli operates out of one
facility in Durango, Durango, Mexico. The Company exchanged $3.0 million for its
share of the outstanding common stock of Pinelli, and accounts for its
investment utilizing the equity method of accounting. Goodwill totaling $0.6
million was recorded on the transaction. The Company retains an option to
acquire an additional 5% interest for $1 million. The option expires after
December 1, 2001. In conjunction with this investment, the Company advanced $3.2
million in cash to Pinelli in exchange for a note receivable. On December 30,
2000, approximately $2.0 million was outstanding on this note.
On April 17, 2000, a subsidiary of the Company acquired 50% of the stock of ECJW
Holdings, Inc. and its two subsidiaries, Thorndale Roof Systems, Inc. and Edcor
Floor Systems, Inc. (collectively "TED"). Thorndale Roof Systems, Inc.
manufactures engineered roof trusses for residential and light commercial
building applications. Edcor Floor Systems, Inc. is a licensed manufacturer of
the patented Open Joist 2000(TM) web floor truss system. Located in London,
Ontario,
28
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Canada, both companies service Ontario, Eastern Michigan and Northern Ohio,
including the major markets of Detroit and Toronto. The total purchase price for
the stock of TED was approximately $3.2 million. The excess of the purchase
price over the estimated fair value of the acquired assets, assumed liabilities
and minority interest was $2.3 million.
On June 5, 2000, Universal Truss, Inc. ("UTI"), a wholly-owned subsidiary of the
Company, acquired substantially all of the assets and assumed certain
liabilities of Gang-Nail Components, Inc. ("Gang-Nail") of Fontana, California,
a manufacturer of engineered roof trusses. The total purchase price for the net
assets was approximately $29.4 million. The excess of the purchase price over
the estimated fair value of the acquired assets and assumed liabilities was
$13.4 million.
The following unaudited pro forma consolidated results of operations for the
years ended December 30, 2000 and December 25, 1999 assumes the acquisitions of
TED and Gang-Nail occurred as of the beginning of the periods presented (in
thousands, except per share data).
YEAR ENDED YEAR ENDED
DECEMBER 30, 2000 DECEMBER 25, 1999
--------------------------------------
NET SALES................................................... $1,408,474 $1,462,492
NET EARNINGS................................................ $ 31,218 $ 33,310
EARNINGS PER SHARE
Basic..................................................... $ 1.55 $ 1.61
Diluted................................................... $ 1.52 $ 1.57
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic..................................................... 20,086 20,637
Diluted................................................... 20,477 21,186
The pro forma results above include certain adjustments to give effect to
amortization of goodwill, interest expense, compensation of management, certain
other adjustments and related income tax effects. The pro forma results are not
necessarily indicative of the operating results that would have occurred had the
acquisitions been completed as of the beginning of the period presented, nor are
they necessarily indicative of future operating results.
C. DEBT
Effective November 13, 1998, the Company completed a five-year, $175 million
revolving credit facility which includes amounts reserved for letters of credit.
Borrowings under the revolver are charged interest at a rate of 50 basis points
over the applicable Eurodollar rate. The average rates on these borrowings in
2000 and 1999 were 7.1% and 5.9%, respectively. The average borrowing rate under
short-term credit lines in 1998 was 5.6%. The amounts outstanding under the
revolving credit facility are included in the long-term debt summary below.
On November 30, 2000, the Company completed a revolving credit facility totaling
$20 million Canadian. The facility expires and is subject to renewal in January
2002. Borrowings under the revolver are charged interest at a rate ranging from
64 to 113 basis points over the bankers acceptance rate depending on the
Company's leverage ratio at the end of each fiscal quarter. The amount
outstanding under the facility is included in the long-term debt summary below.
On December 21, 1998, the Company completed a $100 million private placement of
senior unsecured notes payable. The notes were issued in two installments. The
Company received the first two tranches aggregating $81 million on December 21,
1998, and the remaining tranche of $19 million was received on February 4, 1999.
The notes have an average life of nine years and an average interest rate of
6.9%.
Outstanding letters of credit extended on the Company's behalf aggregated $22.2
million on December 30, 2000, which includes approximately $13.9 million related
to Industrial Development Revenue Bonds.
29
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term debt and capital lease obligations are summarized as follows on
December 30, 2000 and December 25, 1999 (amounts in thousands):
2000 1999
--------------------
Senior unsecured notes, $5,714,000 due annually commencing
May 1998 through May 2004, interest due semi-annually at
7.15%..................................................... $ 22,857 $ 28,571
Series 1998-A Senior Notes Tranche C, due on December 21,
2008, interest payable semi-annually at 6.98%............. 19,000 19,000
Series 1998-A Senior Notes Tranche B, due on December 21,
2008, interest payable semi-annually at 6.98%............. 59,500 59,500
Series 1998-A Senior Notes Tranche A, due on December 21,
2005, interest payable semi-annually at 6.69%............. 21,500 21,500
Revolving credit facility totaling $175 million due on
November 13, 2003, interest due monthly at a floating
rate (7.48% on December 30, 2000)......................... 10,300 11,800
Revolving credit facility totaling $20 million Canadian, due
on January 1, 2002, interest due monthly at a floating
rate (6.48% on December 30, 2000)......................... 6,433
Series 1998 Industrial Development Revenue Bonds, due on
December 1, 2018, interest payable monthly at a floating
rate (4.84% on December 30, 2000)......................... 1,300 1,300
Series 1999 Industrial Development Revenue Bonds, due on
July 1, 2029, interest payable monthly at a floating
rate (4.79% on December 30, 2000)......................... 2,400 2,400
Series 1999 Industrial Development Revenue Bonds, due on
August 1, 2029, interest payable monthly at a floating
rate (4.28% on December 30, 2000)......................... 3,300 3,300
Series 2000 Industrial Development Revenue Bonds, due on
March 1, 2025, interest payable monthly at a floating
rate (4.81% on December 30, 2000)......................... 1,800
Series 2000 Industrial Development Revenue Bonds, due on
October 1, 2020, interest payable monthly at a floating
rate (4.83% on December 30, 2000)......................... 2,700
Series 2000 Industrial Development Revenue Bonds, due on
November 1, 2020, interest payable monthly at a floating
rate (5.12% on December 30, 2000)......................... 2,400
Capital lease obligations, interest imputed at rates ranging
from 7.25% to 8.00%....................................... 3,548 3,080
Notes payable under non-compete agreements, interest imputed
at a rate of 7.0%......................................... 268 1,121
Other....................................................... 2,284 2,726
-------- --------
159,590 154,298
Less current portion........................................ 8,783 7,402
-------- --------
Long-term portion........................................... $150,807 $146,896
======== ========
The terms of the revolving credit facilities and senior unsecured note
agreements (collectively the "agreements") require, in part, the Company to
maintain a minimum net worth and comply with certain financial ratios. The
agreements also restrict the amount of additional indebtedness the Company may
incur and the amount of assets which may be sold.
On December 30, 2000, the principal maturities of long-term debt and capital
lease obligations are as follows (in thousands):
2001........................................................ $ 8,783
2002........................................................ 15,102
2003........................................................ 16,623
2004........................................................ 6,060
2005........................................................ 21,663
Thereafter.................................................. 91,359
--------
$159,590
========
30
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 30, 2000, the estimated fair value of the Company's long-term debt,
including the current portion, was $153,446,000, which was $6,144,000 less than
the carrying value. The estimated fair value is based on rates anticipated to be
available to the Company for debt with similar terms and maturities. The
estimated fair value of notes payable included in current liabilities
approximated the carrying value.
D. LEASES
Leased property included in the balance sheet on December 30, 2000 and December
25, 1999 is as follows (in thousands):
2000 1999
----------------
Land and improvements....................................... $ 295 $ 295
Buildings and improvements.................................. 481 481
Machinery and equipment..................................... 3,539 3,366
------ ------
4,315 4,142
Less accumulated amortization............................... (797) (600)
------ ------
$3,518 $3,542
====== ======
The Company leases certain real estate under operating lease agreements with
original terms ranging from one to ten years. The Company is required to pay
real estate taxes and other occupancy costs under these leases. Certain leases
carry renewal options of five to fifteen years. The Company also leases motor
vehicles and equipment under operating lease agreements, for periods of one to
ten years. Future minimum payments under noncancellable leases on December 30,
2000 are as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES TOTAL
-------------------------------
2001........................................................ $ 590 $ 6,296 $ 6,886
2002........................................................ 2,975 5,241 8,216
2003........................................................ 356 3,775 4,131
2004........................................................ 229 2,761 2,990
2005........................................................ 1,766 1,766
Subsequent.................................................. 1,045 1,045
------ ------- -------
Total minimum lease payments................................ 4,150 $20,884 $25,034
======= =======
Less imputed interest....................................... (602)
------
Present value of minimum lease payments..................... $3,548
======
Rent expense was approximately $9,238,000, $6,939,000 and $5,766,000 in 2000,
1999 and 1998 respectively.
E. DEFERRED COMPENSATION
The Company established a program whereby certain executives irrevocably elected
to defer receipt of certain compensation in 1985 through 1988. Deferred
compensation payments to these executives will commence upon their retirement
from the Company. The Company has purchased life insurance on such executives,
payable to the Company in amounts which, if assumptions made as to mortality
experience, policy dividends and other factors are realized, will accumulate
cash values adequate to reimburse the Company for all payments for insurance and
deferred compensation obligations. In the event cash values are not sufficient
to fund such obligations, the program allows the Company to reduce benefit
payments to such amounts as may be funded by accumulated cash values.
The Company also maintains a non-qualified deferred compensation plan (the
"Plan") for the benefit of senior management employees who may elect to defer a
portion of their annual bonus payments. The Plan provides investment options
similar to the Company's 401(k) plan, including the Company's stock. Investments
in shares of the Company's stock are made on a "phantom stock" basis. Assets
held by the Plan totaled approximately $1,928,000 and $1,665,000 on December 30,
2000 and December 25, 1999, respectively, and are included in "Other Assets."
Related liabilities totaled
31
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$3,039,000 and $2,406,000 on December 30, 2000 and December 25, 1999,
respectively, and are included in "Other Liabilities." The assets and related
liabilities are recorded at fair market value.
F. COMMON STOCK
In January 1994, the Employee Stock Gift Program was approved by the Board of
Directors which allows management to gift shares of stock to eligible employees
based on length of service. The Company gifted 400, 275 and 400 shares of stock
under this Plan in 2000, 1999 and 1998, respectively, and recognized the market
value of the shares at the date of issuance as an expense.
In April 1994, shareholders approved the Employee Stock Purchase Plan ("Stock
Purchase Plan") and Director Retainer Stock Plan ("Stock Retainer Plan"). The
Stock Purchase Plan allows eligible employees to purchase shares of Company
stock at a share price equal to 90% of fair market value on the purchase date.
In 2000, 1999 and 1998, 19,664, 17,789 and 15,016 shares, respectively, were
issued under this Plan for amounts totaling approximately $227,000, $301,000 and
$208,000, respectively. The Stock Retainer Plan allows eligible members of the
Board of Directors to defer their retainer fees and receive shares of Company
stock at the time of their retirement, disability or death. The number of shares
to be received is equal to the amount of the retainer fee deferred multiplied by
110% divided by the fair market value of a share of Company stock at the time of
deferral, and is increased for dividends declared. The Company has accrued, in
"Accrued Liabilities -- Other," approximately $247,000 and $204,000 on December
30, 2000 and December 25, 1999, respectively, for amounts incurred under this
Plan.
In January 1997, the Company instituted a Directors' Stock Grant Program. In
lieu of a cash increase in the amount of Director fees, each outside Director
receives 100 shares of stock for each Board Meeting attended up to a maximum of
400 shares per year. In 2000, 1999 and 1998, the Company issued 1,700, 1,800 and
1,500 shares, respectively, and recognized the market value of the shares on the
date of issuance as an expense.
On April 22, 1997, the shareholders approved the Long Term Stock Incentive Plan
to succeed the Company's 1994 Employee Stock Option Plan. The Plan reserved a
maximum of 1,100,000 shares, and provided for the granting of incentive stock
options, reload options, stock appreciation rights, restricted stock,
performance shares and other stock-based awards. The term of the Plan was ten
years. In 1999 and 1998, the Company granted incentive stock options for 231,161
and 471,002 shares, respectively.
On April 28, 1999, the shareholders approved the Long Term Stock Incentive Plan
to succeed the Company's 1997 Long Term Stock Incentive Plan. The Plan reserves
a maximum of 1,000,000 shares, plus 406,029 shares remaining under the 1997
Plan, plus an annual increase of no more than 200,000 shares which may be added
on the date of the annual meeting of shareholders each year. The Plan provides
for the granting of incentive stock options, reload options, stock appreciation
rights, restricted stock, performance shares and other stock-based awards. The
term of the Plan is ten years. In 2000 and 1999, the Company granted incentive
stock options for 505,934 and 25,000 shares, respectively.
On October 21, 1998, the Board of Directors approved a share repurchase program,
which succeeded a previous program, allowing the Company to repurchase up to
1,800,000 shares of its common stock. On October 18, 2000, the Board of
Directors authorized an additional 1,000,000 shares to be repurchased under the
program. In 2000 and 1999, the Company repurchased 635,411 and 677,801 shares,
respectively, under these programs.
On December 30, 2000, a total of 2,909,402 shares are reserved for issuance
under the plans mentioned above and under Note G below.
G. STOCK OPTIONS AND STOCK-BASED COMPENSATION
Stock options issued under the Long Term Stock Incentive Plan are granted to
employees and officers at exercise prices which equaled or exceeded the market
value of the stock on the date of grant. The options are exercisable from three
to fifteen years from the date of grant and the recipients must be employed by
the Company at the date of exercise.
32
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As permitted under SFAS 123, the Company continues to apply the provisions of
APB Opinion No. 25 which recognizes compensation expense under the intrinsic
value method. Had compensation cost for the stock options granted in 2000, 1999
and 1998 been determined under the fair value based method defined in SFAS 123,
the Company's net earnings and earnings per share would have been reduced to the
following pro forma amounts (in thousands, except per share data):
2000 1999 1998
-----------------------------
Net Earnings:
As Reported............................................... $30,438 $31,448 $26,419
Pro Forma................................................. $29,790 $30,897 $26,098
EPS -- Basic:
As Reported............................................... $ 1.52 $ 1.52 $ 1.33
Pro Forma................................................. $ 1.48 $ 1.50 $ 1.31
EPS -- Diluted:
As Reported............................................... $ 1.49 $ 1.48 $ 1.28
Pro Forma................................................. $ 1.45 $ 1.46 $ 1.27
Options to purchase 40,000, 80,000 and 285,000 shares with a weighted average
exercise price of $21.56, $29.25 and $21.77 per share were granted in 2000, 1999
and 1998, respectively, at exercise prices which exceeded the market prices on
the date of grant.
Because the fair value based method of accounting has not been applied to
options granted prior to fiscal year 1996, the resulting pro forma compensation
cost may not be indicative of future amounts.
The fair value of each option granted in 2000, 1999 and 1998 is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions.
2000 1999 1998
-----------------------------------
Risk Free Interest Rate..................................... 6.2% 6.2% 6.2%
Expected Life............................................... 6.1 years 9.0 years 8.0 years
Expected Volatility......................................... 27.09% 27.75% 28.35%
Expected Dividend Yield..................................... 0.40% 0.40% 0.41%
On June 1, 1993, shareholders approved the Incentive Stock Option Plan (the
"Plan") for officers of the Company. Options for the purchase of all 1,200,000
shares of the Company's common stock authorized under the Plan have been
granted. The Plan provides that the options are exercisable only if the officer
is employed by the Company at the time of exercise and holds at least
seventy-five percent of the individuals' shares held on April 1, 1993. The Plan
also requires the option shares to be held for periods of six months to three
years. The remaining options are exercisable within thirty days of the
anniversary of the Plan in 2001 through 2008.
33
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity since the end of 1997 is summarized as follows:
SHARES OF WEIGHTED
COMMON STOCK AVERAGE
ATTRIBUTABLE TO EXERCISE PRICE
OPTIONS OF OPTIONS
---------------------------------
Outstanding on December 27, 1997............................ 1,037,500 $ 4.95
Granted..................................................... 471,002 $18.60
Exercised................................................... (80,000) $ 3.75
Forfeited................................................... (45,964) $ 7.20
---------
Outstanding on December 26, 1998............................ 1,382,538 $ 9.59
Granted..................................................... 256,161 $22.74
Exercised................................................... (160,000) $ 4.00
Forfeited................................................... (161,184) $10.97
---------
Outstanding on December 25, 1999............................ 1,317,515 $12.66
Granted..................................................... 505,934 $13.22
Exercised................................................... (60,000) $ 4.25
Forfeited................................................... (101,911) $15.96
---------
Outstanding on December 30, 2000............................ 1,661,538 $12.95
=========
The following table summarizes information concerning options on December 30,
2000 (there are no options exercisable on December 30, 2000):
WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES REMAINING
------------------------ NUMBER OUTSTANDING CONTRACTUAL LIFE
--------------------------------------
$4.25 -- $10.00...................................... 592,500 3.64
$10.01 -- $25.00..................................... 959,038 5.34
$25.00 -- $36.01..................................... 110,000 11.27
---------
1,661,538
=========
H. OFFICERS' STOCK NOTES RECEIVABLE
Officers' stock notes receivable represent notes obtained by the Company from
certain officers for the purchase of the Company's common stock. On April 21,
2000, the Company sold 60,376 shares of common stock to eight officers in
exchange for additional notes receivable totaling almost $800,000. Interest on
all of the outstanding notes ranges from fixed rates of seven to eleven percent
per annum and a variable rate of the prime rate less 10% (minimum 6%, maximum
12%). On December 30, 2000, payments on the notes are due as follows (in
thousands):
2001........................................................ $ 98
2002........................................................ 32
2003........................................................ 87
2004........................................................ 56
2005........................................................ 61
Thereafter.................................................. 921
------
$1,255
======
I. LIFE INSURANCE
In September 1995, the Company acquired a second-to-die life insurance policy on
its Chairman of the Board and his spouse, the Company's largest shareholders.
The death benefit on the policy totals $8,700,000 and the Company is the
beneficiary. The Company also maintains an officer's life insurance policy on
the Chairman with a death benefit of $1,300,000. The cash surrender value on
these policies on December 30, 2000 and December 25, 1999 is included in "Other
Assets."
34
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
J. RETIREMENT PLANS
The Company has a profit sharing and 401(k) plan for the benefit of
substantially all of its employees excluding the employees of certain
subsidiaries. Amounts contributed to the plan are made at the discretion of the
Board of Directors. The Company contributed approximately $546,000, $1,548,000
and $1,462,000 in 2000, 1999 and 1998, respectively. In addition, the Company
matched 50% of employee contributions in 2000, and 25% in 1999 and 1998, on a
discretionary basis, totaling $1,706,000, $717,000 and $597,000 in 2000, 1999
and 1998, respectively. The basis for matching contributions may not exceed the
lesser of 6% of the employee's annual compensation or $10,500.
In addition, a wholly-owned subsidiary acquired in 1998 has a 401(k) plan for
the benefit of substantially all of its employees. This subsidiary matched 50%
of employee contributions, on a discretionary basis, totaling $509,000, $522,000
and $328,000 in 2000, 1999 and 1998, respectively.
K. INCOME TAXES
Income tax provisions for the years ended December 30, 2000, December 25, 1999,
and December 26, 1998 are summarized as follows (in thousands):
2000 1999 1998
-----------------------------
Currently payable:
Federal................................................... $16,688 $18,049 $13,049
State and local........................................... 1,781 2,455 1,659
Foreign................................................... 505 225 615
------- ------- -------
18,974 20,729 15,323
Net Deferred:
Federal................................................... (263) 301 1,048
State and local........................................... (189) 115 244
Foreign................................................... 696 (1,190)
------- ------- -------
244 (774) 1,292
------- ------- -------
$19,218 $19,955 $16,615
======= ======= =======
The effective income tax rates are different from the statutory federal income
tax rates for the following reasons:
2000 1999 1998
------------------------
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State and local taxes (net of federal benefits)............. 2.1 3.2 2.9
Foreign subsidiary adjustments.............................. (1.6)
Goodwill.................................................... 1.2 1.1 1.0
Other....................................................... (0.2) 1.0 (0.3)
---- ---- ----
Effective income tax rate................................... 38.1% 38.7% 38.6%
==== ==== ====
The Company has no present intention of remitting undistributed earnings of
certain foreign subsidiaries aggregating $5,870,000 on December 30, 2000 and,
accordingly, no deferred tax liability has been established relative to these
earnings. If these amounts were not considered permanently reinvested, a
deferred tax liability of approximately $846,000 would have been required.
35
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Temporary differences which give rise to deferred tax assets and (liabilities)
on December 30, 2000 and December 25, 1999 are as follows (in thousands):
2000 1999
----------------------
Employee benefits........................................... $ 3,554 $ 2,906
Foreign subsidiary net operating loss....................... 548 2,188
Depreciation................................................ (11,117) (11,126)
Inventory................................................... 389 401
Accrued expenses............................................ 2,814 2,774
All other................................................... 116 350
-------- --------
$ (3,696) $ (2,507)
Valuation allowance......................................... (808)
-------- --------
$ (3,696) $ (3,315)
======== ========
L. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for environmental impairment liability and accrues
an expense for the estimated cost of required remediation actions when
situations requiring such action arise. The Company owns and operates 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 treatment of hazardous or toxic substances, the
Company 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. Remediation
activities are currently being conducted or planned at the Company's North East,
Maryland; Union City, Georgia; Stockertown, Pennsylvania; Elizabeth City, North
Carolina; Auburndale, Florida; and Schertz, Texas wood preservation facilities.
The Company has accrued, in "Other Liabilities," amounts totaling approximately
$2.3 million and $2.4 million on December 30, 2000 and December 25, 1999,
respectively, representing the estimated costs to complete remediation efforts
currently in process and those expected to occur in the future. The accrued
costs include operating ground water reclamation wells, estimated costs of
chemical treatments and consultant fees.
Various lawsuits and claims, including those involving ordinary routine
litigation incidental to its business, to which the Company is a party, are
pending, or have been asserted, against the Company. Although the outcome of
these matters cannot be predicted with certainty, and some of them may be
disposed of unfavorably to the Company, management has no reason to believe that
their disposition will have a material adverse effect on the consolidated
financial position, operating results or liquidity of the Company.
On December 30, 2000, the Company had outstanding purchase commitments on
capital projects totaling $3.3 million.
M. DERIVATIVE AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. In June
1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No. 133.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of SFAS 133. Based on
the revised effective date, the Company intends to adopt SFAS 133, as amended,
effective December 31, 2000 (the first day of its fiscal year ending December
29, 2001). Management does not expect the adoption of SFAS 133 to have a
significant impact on the financial position or results of operations of the
Company because the Company does not have significant derivative activity.
36
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
N. SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in 1998. This statement revised the standards for
reporting information about operating segments in financial statements and for
related disclosures about products and services, geographic areas, and major
customers. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Under the definition of a segment, each of the Company's
manufacturing, treating and distribution facilities may be considered a segment
of its business. Under SFAS No. 131, segments may be aggregated if the segments
have similar economic characteristics and if the nature of the products,
distribution methods, customers and regulatory environments are similar. The
Company has chosen to aggregate its facilities into one reporting segment. The
Company operates manufacturing, treating and distribution facilities throughout
North America.
In 2000, 1999 and 1998, 32%, 26% and 20% of net sales, respectively, were to a
single customer.
Information regarding principal geographic areas was as follows (in thousands):
2000 1999 1998
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
NET SALES ASSETS NET SALES ASSETS NET SALES ASSETS
---------------------------------------------------------------------------
United States.................... $1,350,076 $262,604 $1,394,454 $237,366 $1,205,178 $223,772
Canada........................... 39,367 18,441 39,756 11,461 33,080 10,968
Mexico........................... 3,916 845 4,305 649 3,478
---------- -------- ---------- -------- ---------- --------
Total............................ $1,389,443 $284,961 $1,435,055 $253,132 $1,238,907 $238,218
========== ======== ========== ======== ========== ========
Sales generated in Canada are primarily to customers in the United States of
America.
In the fourth quarter of 1999, the Company closed the operations of its
wholly-owned Mexican subsidiary, Universal Forest Products de Mexico. As a
result of this action, a cumulative foreign currency translation adjustment
totaling $1.0 million was written off and recorded as a loss in 1999.
O. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected financial information for all of the
quarters during the years ended December 30, 2000 and December 25, 1999 (in
thousands, except per share data):
FIRST SECOND THIRD FOURTH
-------------------- -------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------
Net sales............ $304,072 $300,180 $431,578 $446,751 $371,030 $388,402 $282,763 $299,722
Gross profit......... 40,411 39,757 57,298 54,060 48,927 46,083 40,377 38,487
Net earnings......... 6,081 5,361 12,917 12,748 8,148 9,557 3,292 3,782
Diluted earnings per
share.............. 0.30 0.25 0.63 0.60 0.40 0.45 0.16 0.18
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PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol UFPI. The following table sets forth the
range of high and low sales prices as reported by Nasdaq.
FISCAL 2000
----------- HIGH LOW
----------------
Fourth Quarter................... 14.000 10.750
Third Quarter.................... 16.125 11.500
Second Quarter................... 14.000 11.000
First Quarter.................... 14.875 10.625
FISCAL 1999
----------- HIGH LOW
----------------
Fourth Quarter................... 16.875 11.937
Third Quarter.................... 22.125 15.125
Second Quarter................... 21.562 18.000
First Quarter.................... 24.125 17.437
There were approximately 5,500 shareholders of record as of March 1, 2001.
In 2000, the Company paid dividends on its common stock of $.040 per share in
June and $.040 per share in December. In 1999, the Company paid dividends on its
common stock of $.035 per share in June and $.040 per share in December. The
Company intends to continue with its current dividend policy for the foreseeable
future.
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DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
PETER F. SECCHIA
Chairman of the Board
Universal Forest Products, Inc.
WILLIAM G. CURRIE
Vice Chairman of the Board and
Chief Executive Officer
Universal Forest Products, Inc.
JOHN C. CANEPA
Consulting Principal
Crowe Chizek and Company, LLP
JOHN W. GARSIDE
Chairman
Woodruff Coal Company
PHILIP M. NOVELL
Consultant
Compass Group
LOUIS A. SMITH
President
Smith and Johnson, Attorneys, P.C.
CAROLL M. SHOFFNER
Chairman
Shoffner Industries, LLC
OPERATIONS OFFICERS
ROBERT K. HILL
President
Universal Forest Products, Inc.
Western Division, Inc.
GARY A. WRIGHT
Executive Vice President
Site-Built
Universal Forest Products, Inc.
Eastern Division, Inc.
ROBERT D. COLEMAN
Executive Vice President
Manufacturing
Universal Forest Products, Inc.
PHILIP E. ROGERS
Executive Vice President
Sales and Marketing
Universal Forest Products, Inc.
C. SCOTT GREENE
President
Universal Forest Products, Inc.
Eastern Division, Inc.
JEFF A. HIGGS
Executive Vice President
Site-Built
Universal Forest Products, Inc.
Western Division, Inc.
EXECUTIVE COMMITTEE
PETER F. SECCHIA
Chairman of the Board
WILLIAM G. CURRIE
Vice Chairman of the Board and
Chief Executive Officer
MICHAEL B. GLENN
President and Chief Operating Officer
MICHAEL R. COLE
Chief Financial Officer and Treasurer
MATTHEW J. MISSAD
Executive Vice President and Secretary
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SHAREHOLDER INFORMATION
NOTICE OF ANNUAL MEETING
The annual meeting of Universal Forest Products(R), Inc. will be held at 8:00
a.m. on April 18, 2001, at the Amway Grand Plaza Hotel, Pearl and Monroe, Grand
Rapids, Michigan.
SHAREHOLDER INFORMATION
Shares of the Company's stock are traded under the symbol UFPI on the NASDAQ
Stock Market. The Company's 10-K report filed with the Securities and Exchange
Commission will be provided free of charge to any shareholder upon written
request. For more information, contact:
Investor Relations Department
Universal Forest Products(R), Inc.
2801 East Beltline, NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Web: www.ufpi.com
SECURITIES COUNSEL
Varnum, Riddering,
Schmidt & Howlett
Grand Rapids, Michigan
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Grand Rapids, Michigan
TRANSFER AGENT/ SHAREHOLDER'S INQUIRIES
American Stock Transfer & Trust Company serves as the transfer agent for the
Corporation. Inquiries relating to stock transfers, changes of ownership, lost
or stolen stock certificates, changes of address and dividend payments should be
addressed to:
American Stock Transfer & Trust Co.
40 Wall Street
New York, NY 10005
Telephone: (718) 921-8210
UNIVERSAL FOREST PRODUCTS(R), INC. CORPORATE HEADQUARTERS
2801 East Beltline, NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Facsimile: (616) 361-7534
UNIVERSAL FOREST PRODUCTS(R), INC. AND ITS AFFILIATES
Facility Locations
Arlington, TX
Auburndale, FL
Belchertown, MA
Bend, OR (2)
Blanchester, OH
Bunn, NC
Burlington, NC
Calgary, Alberta, Canada
Chandler, AZ
Chesapeake, VA
Conway, SC
Dallas, NC
Denver, CO
Durango, Durango, Mexico
Eastaboga, AL
Eatonton, GA
Elizabeth City, NC
Elkhart, IN
Emlenton, PA
Englewood, CO
Fishersville, VA
Fontana, CA
Georgetown, DE
Gordon, PA
Grandview, TX (2)
Granger, IN
Hamilton, OH
Harrisonville, MO
Hohenwald, TN (2)
Hope, AR
Janesville, WI
Jefferson, GA
Kyle, TX
LaColle, Quebec, Canada
Lafayette, CO (2)
Liberty, NC
Lodi, OH (2)
London, Ontario, Canada
Moultrie, GA
New Waverly, TX
New Windsor, MD
Ooltewah, TN
Parker, PA
Pearisburg, VA
Ranson, WV
Riverside, CA
Rockwood, TN
Saginaw, TX
Salisbury, NC
San Antonio, TX
Sanford, NC
Santee, SC
Schertz, TX
Silsbee, TX
Stockertown, PA
Stockton, CA
Union City, GA
Warrens, WI
Warrenton, NC
Windsor, CO
Westville, IN
Woodburn, OR (2)
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