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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2002
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number 0-22684
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UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
----------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
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NONE
------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of May 1, 2002
----------------------------------- -----------------------------
Common stock, no par value 17,906,382
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Page 1 of 22
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at March 30, 2002
and December 29, 2001. 3
Consolidated Condensed Statements of Earnings for the Three
Months Ended March 30, 2002 and March 31, 2001. 4
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 30, 2002 and March 31, 2001. 5
Notes to Consolidated Condensed Financial Statements. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings. 21
Item 2. Changes in Securities and Use of Proceeds. 21
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders - NONE
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K - NONE.
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
March 30, December 29,
2002 2001
-------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 12,503 $ 22,887
Accounts receivable (net of allowance for doubtful accounts of
$2,394 and $1,803)....................................................... 135,218 86,256
Inventories:
Raw materials......................................................... 57,005 41,061
Finished goods........................................................ 110,656 79,708
------------ -----------
167,661 120,769
Other current assets....................................................... 3,472 5,054
------------ -----------
TOTAL CURRENT ASSETS.............................................. 318,854 234,966
OTHER ASSETS.................................................................... 6,548 11,585
GOODWILL........................................................................ 120,276 119,550
NON-COMPETE AGREEMENTS (net of accumulated amortization
of $1,731 and $3,644)...................................................... 3,247 3,446
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment.............................................. 298,112 286,883
Accumulated depreciation and amortization.................................. (110,581) (105,221)
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, NET................................ 187,531 181,662
------------ -----------
TOTAL ASSETS.................................................................... $ 636,456 $ 551,209
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt............................................................ $ 2,025 $ 1,402
Accounts payable........................................................... 69,988 46,862
Accrued liabilities:
Compensation and benefits............................................. 25,649 34,029
Other ................................................................ 15,930 8,187
Current portion of long-term debt and capital lease obligations............ 20,512 20,415
------------ -----------
TOTAL CURRENT LIABILITIES......................................... 134,104 110,895
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less
current portion............................................................ 240,174 154,370
DEFERRED INCOME TAXES........................................................... 10,413 9,580
OTHER LIABILITIES............................................................... 14,549 9,502
------------ -----------
TOTAL LIABILITIES................................................. 399,240 284,347
TEMPORARY SHAREHOLDERS' EQUITY:
Value of shares subject to redemption agreement; 2,000,000 shares
issued and outstanding................................................... 36,000
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares authorized 1,000,000; issued
and outstanding, none
Common stock, no par value; shares authorized 40,000,000; issued
and outstanding, 17,792,986 and 17,787,860............................... 17,793 17,788
Additional paid-in capital................................................. 81,091 80,994
Retained earnings.......................................................... 138,759 132,677
Accumulated other comprehensive earnings................................... 674 558
------------ -----------
238,317 232,017
Officers' stock notes receivable........................................... (1,101) (1,155)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY........................................ 237,216 230,862
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 636,456 $ 551,209
============ ===========
See notes to consolidated condensed financial statements.
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
-----------------------------
March 30, March 31,
2002 2001
-----------------------------
NET SALES .................................................................... $ 341,656 $ 284,069
COST OF GOODS SOLD................................................................ 290,379 240,950
----------- -----------
GROSS PROFIT...................................................................... 51,277 43,119
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES...................................... 37,798 32,273
----------- -----------
EARNINGS FROM OPERATIONS.......................................................... 13,479 10,846
INTEREST, NET:
Interest expense............................................................. 2,908 3,199
Interest income.............................................................. (113) (72)
----------- -----------
2,795 3,127
----------- -----------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST
AND EQUITY IN EARNINGS OF INVESTEE.............................................. 10,684 7,719
INCOME TAXES...................................................................... 3,973 2,856
----------- -----------
EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN
EARNINGS OF INVESTEE............................................................ 6,711 4,863
MINORITY INTEREST................................................................. (629) (67)
EQUITY IN EARNINGS OF INVESTEE.................................................... 181
----------- -----------
REPORTED NET EARNINGS............................................................. $ 6,082 $ 4,977
ADD: Goodwill amortization, net of tax....................................... 695
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ADJUSTED NET EARNINGS........................................................ $ 6,082 $ 5,672
=========== ===========
REPORTED EARNINGS PER SHARE - BASIC............................................... $ 0.33 $ 0.25
ADD: Goodwill amortization, net of tax....................................... 0.04
----------- -----------
ADJUSTED EARNINGS PER SHARE - BASIC.......................................... $ 0.33 $ 0.29
=========== ===========
REPORTED EARNINGS PER SHARE - DILUTED............................................. $ 0.32 $ 0.25
ADD: Goodwill amortization, net of tax....................................... 0.03
----------- -----------
ADJUSTED EARNINGS PER SHARE - DILUTED........................................ $ 0.32 $ 0.28
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING............................................... 18,210 19,714
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON
STOCK EQUIVALENTS............................................................... 19,024 20,243
See notes to consolidated condensed financial statements.
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
-----------------------------
March 30, March 31,
2002 2001
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................... $ 6,082 $ 4,977
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................. 5,611 4,577
Amortization of non-compete agreements and goodwill.......................... 301 1,045
Changes in:
Accounts receivable........................................................ (46,490) (37,032)
Inventories................................................................ (44,856) (23,587)
Accounts payable........................................................... 22,111 22,600
Accrued liabilities and other.............................................. 981 (7,198)
------------ ------------
NET CASH FROM OPERATING ACTIVITIES........................................... (56,260) (34,618)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (5,255) (7,781)
Acquisitions, net of cash received................................................ (359) (10,498)
Proceeds from sale of property, plant and equipment............................... 161 481
Other............................................................................. 1,222 (391)
------------ ------------
NET CASH FROM INVESTING ACTIVITIES........................................... (4,231) (18,189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable and revolving credit facilities................... 86,453 58,759
Repayment of long-term debt....................................................... (158) (2,864)
Proceeds from issuance of common stock............................................ 62 48
Distributions to minority shareholder............................................. (250)
Repurchase of common stock........................................................ (36,000) (255)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES........................................... 50,107 55,688
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... (10,384) 2,881
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 22,887 2,392
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 12,503 $ 5,273
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest..................................................................... $ 719 $ 731
Income taxes................................................................. (2,097) 289
NON-CASH INVESTING ACTIVITIES:
Note payable issued in exchange for non-compete agreements........................ $ 216
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial
statements (the "Financial Statements") include our accounts and those of
our wholly-owned and majority-owned subsidiaries and partnerships, and
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the Financial Statements
do not include all of the information and footnotes normally included in
the annual consolidated financial statements prepared in accordance with
generally accepted accounting principles. All significant intercompany
transactions and balances have been eliminated. The equity method of
accounting is used for our less than 50% owned affiliates.
In our opinion, the Financial Statements contain all material adjustments
necessary to present fairly our consolidated financial position, results
of operations and cash flows for the interim periods presented. All such
adjustments are of a normal recurring nature. These Financial Statements
should be read in conjunction with the consolidated financial statements,
and footnotes thereto, included in our Annual Report to Shareholders on
Form 10-K for the fiscal year ended December 29, 2001.
Certain reclassifications have been made to the Financial Statements for
2001 to conform to the classifications used in 2002.
B. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $6.2
million and $4.6 million for the quarter ended March 30, 2002 and March
31, 2001, respectively.
C. EARNINGS PER COMMON SHARE
A reconciliation of the changes in the numerator and the denominator from
the calculation of basic EPS to the calculation of diluted EPS follows
(in thousands, except per share data):
6
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 03/30/02 Three Months Ended 03/31/01
------------------------------------ ----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------- ------ ----------- ------------- ------
NET EARNINGS................... $6,082 $4,977
EPS - BASIC
Income available to
common stockholders.......... 6,082 18,210 $0.33 4,977 19,714 $0.25
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 814 529
-------- --------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $6,082 19,024 $0.32 $4,977 20,243 $0.25
====== ======== ===== ====== ======== =====
Options to purchase 195,000 shares of common stock at exercise prices
ranging from $22.88 to $36.01 were outstanding at March 30, 2002, but
were not included in the computation of diluted EPS for the quarter ended
March 30, 2002 because the options' exercise prices were greater than the
average market price of the common stock during the period and,
therefore, would be antidilutive.
D. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"). This statement changes the accounting and
reporting for goodwill and other intangible assets. Goodwill will no
longer be amortized, however tests for impairment will be performed
annually or when a triggering event occurs. Impairment is defined as a
fair market value less than the carrying value of the asset on the
financial statements. SFAS 142 requires that we test all goodwill for
impairment within six months of implementation. Effective December 30,
2001 (the first day of our fiscal year ending December 28, 2002), we
adopted this statement and goodwill is no longer amortized. We performed
the required first step of testing for impairment by utilizing the
discounted cash flow method, as well as comparing the results to other
widely acceptable valuation methods, none of which resulted in impairment
of goodwill.
Estimated amortization expense for intangible assets as of March 30, 2002
for each of the succeeding fiscal years is as follows:
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
2002................ $887
2003................ 998
2004................ 998
2005................ 998
2006................ 928
E. LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Term Assets ("SFAS 144"). SFAS 144
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"), and the
accounting and reporting provisions of the Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. SFAS 144 also amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements.
SFAS 144 retains the provisions of SFAS 121 for recognition and
measurement of impairment of long-lived assets to be held and used, and
measurement of long-lived assets to be disposed of by sale. Discontinued
operations are no longer measured on a net realizable value basis, and
future operating losses are no longer recognized before they occur.
Effective December 30, 2001, we adopted this statement. The impact of
adopting this statement has not been significant to our financial
statements.
F. BUSINESS COMBINATIONS
On January 15, 2002, one of our subsidiaries acquired an additional 5%
interest in Pinelli-Universal S. de R.L. de C.V. ("Pinelli"), increasing
our ownership to 50%. The purchase price for the additional 5% was
approximately $0.9 million. As a result of this transaction, we began
consolidating the results of Pinelli in the 2002 financial statements. In
2001, we accounted for Pinelli under the equity method.
G. SUBSEQUENT EVENTS
On April 10, 2002, one of our subsidiaries acquired certain assets and
entered into an exclusive licensing agreement with Inno-Tech Plastics,
Inc. ("Inno-Tech"), which operates one facility in Springfield, IL. The
total purchase price for these assets was approximately $4.1 million.
Inno-Tech had net sales in fiscal 2001 totaling approximately $1.3
million.
8
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RISK FACTORS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth below and certain economic
and business factors which may be beyond our control. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICE OF LUMBER. We experience significant
fluctuations in the cost of commodity lumber products from primary producers
(the "Lumber Market"). A variety of factors over which we have no control,
including government regulations, environmental regulations, weather conditions,
economic conditions and natural disasters, impact the cost of lumber products
and our selling prices. While we attempt to minimize our risk from severe price
fluctuations, substantial, prolonged trends in lumber prices can negatively
affect our sales volume, our gross margins and our profitability. We anticipate
that these fluctuations will continue in the future.
OUR GROWTH MAY BE LIMITED BY THE MARKETS WE SERVE. Our sales growth is
dependent, in part, upon the growth of the markets we serve. If our markets do
not achieve anticipated growth, or if we fail to maintain our market share,
financial results could be impaired.
The manufactured housing industry is currently hampered by market conditions,
including an oversupply of product and tightened credit policies which have
impacted our ability to achieve short- term performance objectives. Significant
lenders who previously provided financing to consumers of these products and
industry participants have either restricted credit or exited the market. A
continued shortage of financing to this industry could adversely affect our
operating results. Our ability to achieve growth in sales and margins to the
site-built construction market is somewhat dependent on housing starts. If
housing starts decline significantly, our financial results could be negatively
impacted.
We are witnessing consolidation by our customers. These consolidations will
result in a larger portion of our sales being made to some customers and may
limit the customer base we are able to serve.
9
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
OUR GROWTH MAY BE LIMITED BY OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS. A key
component of our growth strategy is to complete business combinations. Business
combinations involve inherent risks, including assimilation and successfully
managing growth. While we conduct extensive due diligence and have taken steps
to ensure successful assimilation, factors beyond our control could influence
the results of these acquisitions. Also, the repurchase of approximately $36
million of our stock from our largest shareholder may reduce the number and
scope of our acquisitions in 2002.
WE MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND SAFETY
REGULATIONS. We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations. There can
be no assurance that we are at all times in complete compliance with all of
these requirements. We have made and will continue to make capital and other
expenditures to comply with environmental regulations. If additional laws and
regulations are enacted in the future, which restrict our ability to manufacture
and market our products, including our treated lumber products, it could
adversely affect our sales and profits. If existing laws are interpreted
differently, it could also increase the financial cost to us. See additional
discussion below under the caption "Environmental Considerations and
Regulations."
SEASONALITY AND WEATHER CONDITIONS COULD ADVERSELY AFFECT US. Some aspects of
our business are seasonal in nature and results of operations vary from quarter
to quarter. Our treated lumber and outdoor specialty products, such as fencing,
decking and lattice, experience the greatest seasonal effects. Sales of treated
lumber, primarily consisting of Southern Yellow Pine ("SYP"), also experience
the greatest Lumber Market risk (see Historical Lumber Prices). Treated lumber
sales are generally at their highest levels between April and August. This sales
peak, combined with capacity constraints in the wood treatment process, requires
us to build our inventory of treated lumber throughout the winter and spring.
This also has an impact on our receivables balances, which tend to be
significantly higher at the end of the second and third quarters. Because sales
prices of treated lumber products may be indexed to the Lumber Market at the
time they are shipped, our profits can be negatively affected by prolonged
declines in the Lumber Market during our primary selling season. To mitigate
this risk, programs are maintained with certain vendors and customers that are
intended to decrease our exposure. These programs include those materials which
are most susceptible to adverse changes in the Lumber Market. Vendor programs
also allow us to carry a lower investment in inventories.
The majority of our products are used or installed in outdoor construction
activities; therefore, short-term sales volume, our gross margins and our
profits can be negatively affected by adverse weather conditions. In addition,
adverse weather conditions can negatively impact our productivity and costs per
unit.
WE MAY BE ADVERSELY AFFECTED IF OUR CUSTOMERS AND VENDORS ARE NOT WILLING TO
MODIFY OUR EXISTING DISTRIBUTION STRATEGIES. While we have invested heavily in
technology and established electronic
10
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
business-to-business efficiencies with certain customers and vendors, the
willingness of customers and vendors to modify existing distribution strategies
poses a potential risk. We believe the nature of our products, together with our
value-added services, ensures that we have a secure position in the supply
chain.
When analyzing this report to assess our future performance, please recognize
the potential impact of the various factors set forth above.
HISTORICAL LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price
for the three months ended March 30, 2002 and March 31, 2001:
Random Lengths Composite
Average $/MBF
---------------------------
2002 2001
---- ----
January............................ $297 $269
February........................... 317 285
March.............................. 339 306
First quarter average.............. $318 $287
First quarter percentage
increase from 2001................ 10.8%
In addition, a SYP composite price, which we prepare and use, is presented
below. Sales of products produced using this species comprise up to 50% of our
sales volume.
Random Lengths SYP
Average $/MBF
---------------------------
2002 2001
---- ----
January............................ $410 $369
February........................... 434 393
March.............................. 464 408
First quarter average.............. $436 $390
First quarter percentage
increase from 2001............... 11.8%
11
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We generally price our products to pass lumber costs through to our customers so
that our profitability is based on the value-added manufacturing, distribution
and services we provide. As a result, our sales levels (and working capital
requirements) are impacted by the lumber costs of our products.
Our gross margins are impacted by both (1) the relative level of the Lumber
Market (i.e. whether prices are higher or lower from comparative periods), and
(2) the trend in the market price of lumber (i.e. whether the price of lumber is
increasing or decreasing within a period or from period to period). Moreover, as
explained below, our products are priced differently. Some of our products have
fixed selling prices, while the selling prices of other products are indexed to
the reported Lumber Market with a fixed dollar adder to cover conversion costs
and profits. Consequently, the level and trends of the Lumber Market impact our
products differently.
Below is a general description of the different ways in which our products are
priced.
- - Products with fixed selling prices. These products include value-added
products such as decking and fencing sold to do-it-yourself/retail
("DIY/retail") customers, as well as trusses, wall panels and other
components sold to the site-built construction market. Prices for these
products are generally fixed at the time of the sales quotation for a
specified period of time or are based upon a specific quantity. In order to
maintain margins and eliminate or reduce any exposure to changes in the price
of component lumber products, we attempt to lock in prices for these sales
commitments with our suppliers. Also, the time periods and quantity
limitations generally allow us to reprice our products for changes in lumber
prices from our suppliers.
- - Products with selling prices indexed to the reported Lumber Market with a
fixed dollar "adder" to cover conversion costs and profits. These products
include treated lumber, remanufactured lumber and trusses sold to the
manufactured housing industry. For these products, we estimate the customers'
needs and carry anticipated levels of inventory. Because lumber costs are set
in advance of final sale prices, subsequent increases or decreases in the
market price of lumber impact our gross margins. For these products, our
margins are exposed to changes in the trend of lumber prices.
Changes in the trend of lumber prices have their greatest impact on those
products that have significant inventory levels with low turnover rates. This
particularly impacts treated lumber, which comprises over twenty five percent of
our total sales. In other words, the longer the period of time that products
remain in inventory, the greater the exposure to changes in the price of lumber.
This exposure is less significant with remanufactured lumber, trusses sold to
the manufactured housing market and other similar products, due to the higher
level of inventory turnover.
12
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
In addition to the impact of Lumber Market trends on gross margins, changes in
the level of the market causes fluctuations in gross margins when comparing
operating results from period to period. This is explained in the following
example, which assumes the price of lumber has increased from period one to
period two, with no changes in the trend within each period.
Period 1 Period 2
-------- --------
Lumber cost.................................... $300 $400
Conversion cost................................ 50 50
= Product cost................................. 350 450
Adder.......................................... 50 50
= Sell price................................... 400 500
Gross margin................................... 12.5% 10.0%
As is apparent from the preceding example, the level of lumber prices does not
impact our overall profits, but does impact our margins. Gross margins are
negatively impacted during periods of high lumber prices; conversely, we
experience margin improvement when lumber prices are relatively low.
BUSINESS COMBINATIONS
On January 15, 2002, one of our subsidiaries acquired an additional 5% interest
in Pinelli-Universal S. de R.L. de C.V. ("Pinelli"), increasing our ownership to
50%. The purchase price for the additional 5% was approximately $0.9 million. As
a result of this transaction, we began consolidating the results of Pinelli in
the 2002 financial statements. In 2001, we accounted for Pinelli under the
equity method.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our
Consolidated Condensed Statements of Earnings as a percentage of net sales.
13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
For the Three Months Ended
-------------------------------
March 30, March 31,
2002 2001
-------------- -------------
Net sales .............................................................. 100.0% 100.0%
Cost of goods sold ..................................................... 85.0 84.8
------- -------
Gross profit ........................................................... 15.0 15.2
Selling, general, and administrative expenses .......................... 11.0 11.4
------- -------
Earnings from operations ............................................... 4.0 3.8
Interest, net .......................................................... 0.8 1.1
------- -------
Earnings before income taxes, minority interest and equity
in earnings of investee ............................................. 3.2 2.7
Income taxes ........................................................... 1.2 1.0
------- -------
Earnings before minority interest and equity in earnings
of investee ......................................................... 2.0 1.7
Minority interest ...................................................... (0.2) (0.0)
Equity in earnings of investee ......................................... 0.0 0.1
------- -------
Reported net earnings .................................................. 1.8 1.8
Add: Goodwill amortization, net of tax ............................... 0.0 0.2
------- -------
Adjusted Net Earnings ................................................ 1.8% 2.0%
======= =======
NET SALES
We engineer, manufacture, treat and distribute lumber and other building
products to the DIY/retail, site-built construction, manufactured housing,
industrial and wholesale lumber markets. Our strategic sales objectives include:
- - Diversifying our end market sales mix by increasing sales of specialty wood
packaging to industrial users and engineered wood 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/retail market, specialty wood packaging, and engineered wood
products. One of our goals is to achieve a ratio of value-added sales to
total sales of at least 50%. Although we consider the treatment of
dimensional lumber with certain chemical
14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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/retail
market share.
- - Maintaining manufactured housing market share.
The following table presents, for the periods indicated, our net sales (in
thousands) and percentage of total net sales by market classification.
For the Three Months Ended
------------------------------------------------------
March 30, March 31,
Market Classification 2002 % 2001 %
- --------------------- ------------ -------- ------------ ---------
DIY/Retail........................................... $147,224 43.1% $127,674 45.0%
Site-Built Construction.............................. 68,485 20.0 61,736 21.7
Manufactured Housing................................. 67,200 19.7 49,489 17.4
Industrial........................................... 36,511 10.7 28,483 10.0
Wholesale Lumber..................................... 22,236 6.5 16,687 5.9
---------- ------- --------- -------
Total................................................ $341,656 100.0% $284,069 100.0%
========== ======= ========= =======
Net sales in the first quarter of 2002 increased 20.3%, compared to the first
quarter of 2001, resulting from an increase in units shipped of approximately
15%. Overall selling prices increased as a result of the Lumber Market (see
Historical Lumber Prices).
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
Three Months Ended
--------------------------------
March 30, March 31,
2002 2001
-------------- -------------
Value-Added........................... 52.6% 50.5%
Commodity-Based....................... 47.4% 49.5%
Value-added sales increased 25.4% in the first quarter of 2002, primarily due to
increased sales of engineered wood products to the site-built construction,
DIY/retail and manufactured housing markets. Commodity-based sales increased
15.3% in the quarter.
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
DIY/Retail:
Net sales to the DIY/retail market increased 15.3% in the first quarter compared
to the same period of 2001. This increase was a result of the following:
- - Acquiring the assets of P&R Truss Company, Inc. ("P&R") on October 15, 2001.
P&R is a manufacturer of engineered wood products used in site-built
construction and sells through retail channels.
- - A 10% increase in sales out of existing facilities.
Site-Built Construction:
Net sales to the site-built construction market increased 10.9% in the first
quarter compared to the same period of 2001. This increase was primarily due to
increased unit sales as a result of operations acquired in 2001.
Manufactured Housing:
Net sales to the manufactured housing market increased 35.8% in the first
quarter of 2002 compared to the same period of 2001, while industry shipments
increased 8%. We increased our market share by acquiring certain assets of the
Sunbelt Wood Components Division of Kevco, Inc. on April 3, 2001.
Industrial:
Net sales to the industrial market increased 28.2% in the first quarter of 2002
compared to the same period of 2001. This increase was primarily due to a 14%
increase in sales at our existing facilities combined with the consolidation of
Pinelli in our operating results in 2002. See "Business Combinations."
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales decreased in the first quarter of 2002
compared to the same period of 2001. This decrease was primarily due to
increased price competition in the site-built construction market as market
activity has slowed in several regions. This decrease offset gains realized from
improving our ratio of value-added product sales. See "Impact of the Lumber
Market on our Operating Results."
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales decreased
to 11.0% in the first quarter of 2002 compared to 11.4% in the same period of
2001. This decrease was primarily due to the requirement to no longer amortize
goodwill beginning in 2002.
INTEREST, NET
Net interest costs were lower in the first quarter of 2002 compared to the same
period of 2001. Although we had a higher average debt balance as a result of
increased working capital and the repurchase of shares from our largest
shareholder, this was offset by a substantial decrease in short- term borrowing
rates on variable rate debt.
INCOME TAXES
Our effective tax rate was 37.2% in the first quarter of 2002 compared to 37.0%
in the same period of 2001. Effective tax rates differ from statutory federal
income tax rates, primarily due to provisions for state and local income taxes
and permanent tax differences.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities increased in the first quarter of 2002
compared to the same period of 2001. This was primarily due to an increase in
inventory to support future sales growth and an increase in accounts receivable
due to record first quarter sales. Longer payment terms with our largest
customer contributed to the increase in receivables.
Due to the seasonality of our business and the effects of the Lumber Market, we
believe our cash cycle (days sales outstanding plus days supply of inventory
less days payables outstanding) is a good indicator of our working capital
management. Our cash cycle decreased to 53 days in the first quarter of 2002
from 55 days in the first quarter of 2001, primarily due to a substantial
reduction in the days supply of inventory which was partially offset by a longer
receivables cycle.
Capital expenditures totaled $5.3 million in the first quarter of 2002 compared
to $7.8 million in the same period of 2001. Our capital expenditures during the
first quarter of 2002 primarily consisted of several projects to improve
efficiencies and expand manufacturing capacity at existing plants. We expect to
spend approximately $21 million on capital expenditures for the balance of 2002,
which includes outstanding purchase commitments on capital projects totaling
approximately $4.0 million on March 30, 2002. We intend to satisfy these
commitments utilizing our revolving credit facilities.
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
We spent approximately $36 million in the first quarter of 2002 to purchase 2
million shares from our largest shareholder. We funded the purchase price using
our revolving credit facilities. On March 30, 2002, we had $112.6 million
outstanding on our $175 million revolving credit facility and $19.3 million
Canadian ($12.1 million U.S.) outstanding on our $25 million Canadian revolving
credit facility. We also have $25 million available on a new short-term
revolving credit facility obtained in the first quarter. Financial covenants on
our revolving credit facilities and senior unsecured notes include a minimum net
worth requirement, a minimum interest coverage test and a maximum leverage
ratio. We were within our requirements at March 30, 2002.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
We are self-insured for environmental impairment liability and accrue for the
estimated cost of monitoring or remediation activities. As of May 1, 2002, we
own or operate 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, we may be potentially liable for costs and expenses related to the
environmental condition of our real property. We have established reserves for
remediation activities at our North East, MD; Union City, GA; Stockertown, PA;
Elizabeth City, NC; Auburndale, FL; and Schertz, TX facilities.
We have accrued in other long-term liabilities amounts totaling $2.4 million on
March 30, 2002 and March 31, 2001 for the activities described above. We believe
the potential future costs of known remediation efforts will not have a material
adverse effect on our future financial position, results of operations or
liquidity.
For the past several years, the EPA has been conducting a scientific review of
CCA, a wood preservative we use to extend the useful life of wood fiber, as part
of its re-registration process and in response to allegations by certain
environmental groups that CCA poses health risks. Recently, the EPA announced
that the manufacturers of CCA preservative agreed to the re-registration of CCA
for certain industrial and commercial uses. The manufacturers agreed to
voluntarily discontinue the registration of CCA for certain residential
applications by December 31, 2003. The manufacturers will continue to produce
CCA for use in various industrial, marine, and non-residential uses. This
agreement will require us to change the preservative we use to one of several
new alternatives prior to December 31, 2003. We estimate that we will incur
capital costs totaling approximately $1.5 million to convert our plants to the
new alternative preservatives.
In addition, an environmental group petitioned the Consumer Products Safety
Commission ("CPSC") to ban the use of CCA treated wood in playsets. We have been
assured by our vendors and by scientific studies that CCA treated lumber poses
no unreasonable risks and its continued use should be permitted. The EPA, in its
recent press release concluded that there isn't any reason to remove or replace
any CCA treated structures, including decks or playground equipment.
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
We have been requested by a major customer to defend it from purported class
action lawsuits filed against it in Florida and Louisiana. The complaints allege
that CCA treated lumber is defective. As previously stated, our vendors believe
and scientific studies support the fact that CCA treated lumber poses no
unreasonable risks, and we intend to vigorously defend our Company. While our
customer has charged us for certain expenses incurred in the defense of these
claims, we have not accepted liability. In addition, we have also been named
as a defendant in a separate purported class action lawsuit in Louisiana,
which contains similar allegations as the complaints against our customer.
Again, we intend to vigorously defend the complaint.
19
UNIVERSAL FOREST PRODUCTS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our
variable rate debt, which consists of a revolving credit facility and industrial
development revenue bonds. We do not currently use interest rate swaps, futures
contracts or options on futures, or other types of derivative financial
instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market
value, but not earnings or cash flows. Conversely, for variable rate debt,
changes in interest rates generally do not influence fair market value, but do
affect future earnings and cash flows. We do not have an obligation to prepay
fixed rate debt prior to maturity, and as a result, interest rate risk and
changes in fair market value should not have a significant impact on such debt
until we would be required to refinance it.
20
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the second quarter of 2001, we received a request for indemnification
from a major customer in two separate lawsuits which seek class action status.
One case, titled Jerry Jacobs et. al. v. Osmose, Inc. et. al., is pending in the
U.S. District Court for the Southern District of Florida. A second case, Albert
Miller et. al. vs. Home Depot, USA Inc., et. al. is pending in the U.S. District
Court for the Western District of Louisiana. During the fourth quarter of 2001,
we were named as a defendant, along with chemical manufacturers and retailers,
in a case titled Ardoin v. Stine Lumber, et. al. which was filed in Louisiana
State Court.
In these cases, the putative plaintiffs allege that CCA treated lumber is
defective and also allege that the marketing of the product is either deceptive
or not sufficiently informative as to the risks of the product. The plaintiffs
seek removal of CCA treated lumber, together with financial remuneration.
We believe the claims are baseless and without merit. To the extent we are
required to defend these actions, we intend to do so vigorously.
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Sales of equity securities in the first quarter not registered under the
Securities Act.
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
----------- ---------- --------- ---------- -------------
Stock Gift Program Various Common 393 Eligible persons None
Directors' Stock Grant Program 01/09/02 Common 1,400 Directors Directors
Services
21
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: May 9, 2002 By: /s/ William G. Currie
----------------------- ---------------------------------------
William G. Currie
Its: Vice Chairman of the Board and Chief
Executive Officer
Date: May 9, 2002 By: /s/ Michael R. Cole
----------------------- ---------------------------------------
Michael R. Cole
Its: Chief Financial Officer
22