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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
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EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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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
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(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
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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 July 15, 2002
- ----------------------------------- -------------------------------
Common stock, no par value 17,909,004
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Page 1 of 24
INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 29, 2002
and December 29, 2001. 3
Consolidated Condensed Statements of Earnings for the Three
and Six Months Ended June 29, 2002 and June 30, 2001. 4
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 29, 2002 and June 30, 2001. 5
Notes to Consolidated Condensed Financial Statements. 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities and Use of Proceeds. 22
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 23
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K. 23
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 29, December 29,
2002 2001
--------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 18,020 $ 22,887
Accounts receivable (net of allowance for doubtful accounts of
$2,137 and $1,803)....................................................... 178,017 86,256
Inventories:
Raw materials......................................................... 46,920 41,061
Finished goods........................................................ 91,079 79,708
------------ -----------
137,999 120,769
Other current assets....................................................... 3,425 5,054
------------ -----------
TOTAL CURRENT ASSETS.............................................. 337,461 234,966
OTHER ASSETS.................................................................... 6,334 11,585
GOODWILL........................................................................ 120,569 119,550
NON-COMPETE AND LICENSING AGREEMENTS (net of accumulated
amortization of $1,965 and $3,644)......................................... 5,014 3,446
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment.............................................. 303,622 286,883
Accumulated depreciation and amortization.................................. (114,945) (105,221)
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, NET................................ 188,677 181,662
------------ -----------
TOTAL ASSETS.................................................................... $ 658,055 $ 551,209
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt............................................................ $ 2,001 $ 1,402
Accounts payable........................................................... 90,904 46,862
Accrued liabilities:
Compensation and benefits............................................. 31,063 34,029
Other ................................................................ 18,732 8,187
Current portion of long-term debt and capital lease obligations............ 19,025 20,415
------------ -----------
TOTAL CURRENT LIABILITIES......................................... 161,725 110,895
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less
current portion............................................................ 219,675 154,370
DEFERRED INCOME TAXES........................................................... 10,315 9,580
OTHER LIABILITIES............................................................... 14,865 9,502
------------ -----------
TOTAL LIABILITIES................................................. 406,580 284,347
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, 17,906,447 and 17,787,860............................... 17,906 17,788
Additional paid-in capital................................................. 81,913 80,994
Retained earnings.......................................................... 152,782 132,677
Accumulated other comprehensive earnings................................... 275 558
------------ -----------
252,876 232,017
Officers' stock notes receivable........................................... (1,401) (1,155)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY........................................ 251,475 230,862
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 658,055 $ 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 Six Months Ended
----------------------- --------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------------------ ------------- ------------
NET SALES .............................................. $ 504,944 $ 485,153 $ 846,600 $ 769,222
COST OF GOODS SOLD.......................................... 436,321 418,756 726,700 659,706
---------- ---------- ---------- ----------
GROSS PROFIT................................................ 68,623 66,397 119,900 109,516
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................................. 41,345 38,869 79,143 71,142
---------- ---------- ---------- ----------
EARNINGS FROM OPERATIONS.................................... 27,278 27,528 40,757 38,374
OTHER EXPENSE (INCOME):
Interest expense....................................... 3,047 3,539 5,955 6,738
Interest income........................................ (52) (245) (165) (317)
Gain on sale of assets................................. (1,082) (1,082)
---------- ---------- ---------- ----------
1,913 3,294 4,708 6,421
---------- ---------- ----------- ----------
EARNINGS BEFORE INCOME TAXES, MINORITY
INTEREST AND EQUITY IN EARNINGS
(LOSS) OF INVESTEE....................................... 25,365 24,234 36,049 31,953
INCOME TAXES................................................ 9,400 9,179 13,373 12,035
---------- ---------- ---------- ----------
EARNINGS BEFORE MINORITY INTEREST AND
EQUITY IN EARNINGS (LOSS) OF INVESTEE..................... 15,965 15,055 22,676 19,918
MINORITY INTEREST........................................... (611) (794) (1,240) (861)
EQUITY IN EARNINGS (LOSS) OF INVESTEE....................... (23) 158
---------- ---------- ----------- ----------
REPORTED NET EARNINGS....................................... $ 15,354 $ 14,238 $ 21,436 $ 19,215
ADD: Goodwill amortization, net of tax................. 761 1,457
---------- ---------- ----------- ----------
ADJUSTED NET EARNINGS.................................. $ 15,354 $ 14,999 $ 21,436 $ 20,672
========== ========== =========== ==========
REPORTED EARNINGS PER SHARE - BASIC......................... $ 0.86 $ 0.72 $ 1.19 $ 0.97
ADD: Goodwill amortization, net of tax................. 0.04 0.07
---------- ---------- ----------- ----------
ADJUSTED EARNINGS PER SHARE - BASIC.................... $ 0.86 $ 0.76 $ 1.19 $ 1.05
========== ========== =========== ==========
REPORTED EARNINGS PER SHARE - DILUTED....................... $ 0.82 $ 0.70 $ 1.14 $ 0.95
ADD: Goodwill amortization, net of tax................. 0.04 0.07
---------- ---------- ---------- ----------
ADJUSTED EARNINGS PER SHARE - DILUTED.................. $ 0.82 $ 0.74 $ 1.14 $ 1.02
========== ========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 17,884 19,792 18,047 19,753
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS............................. 18,705 20,388 18,865 20,315
See notes to consolidated condensed financial statements.
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
----------------------------------
June 29, June 30,
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................... $ 21,436 $ 19,215
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................. 11,322 9,498
Amortization of intangibles.................................................. 587 2,180
(Gain) loss on sale or impairment of PP&E.................................... (949) 38
Changes in:
Accounts receivable........................................................ (89,290) (68,218)
Inventories................................................................ (15,194) (21,951)
Accounts payable........................................................... 43,027 36,701
Accrued liabilities and other.............................................. 9,347 9,909
------------ ------------
NET CASH FROM OPERATING ACTIVITIES........................................... (19,714) (12,628)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (13,481) (17,924)
Purchase of licensing agreement................................................... (2,000)
Acquisitions, net of cash received................................................ (359) (21,559)
Proceeds from sale of property, plant and equipment............................... 2,545 399
Other............................................................................. 1,094 512
------------ ------------
NET CASH FROM INVESTING ACTIVITIES........................................... (12,201) (38,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable and revolving credit facilities................... 71,827 67,600
Repayment of long-term debt....................................................... (7,557) (9,038)
Proceeds from issuance of common stock............................................ 716 783
Distributions to minority shareholder............................................. (585)
Dividends paid to shareholders.................................................... (806) (792)
Repurchase of common stock........................................................ (36,547) (1,255)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES........................................... 27,048 57,298
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... (4,867) 6,098
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 22,887 2,392
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 18,020 $ 8,490
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 5,973 $ 6,554
Income taxes................................................................. 2,308 2,434
NON-CASH INVESTING ACTIVITIES:
Note payable issued in exchange for non-compete agreements........................ $ 216
Stock exchanged for officers' notes receivable.................................... 300
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial
statements (the "Financial Statements") include our accounts and those of
our wholly-owned and majority-owned subsidiaries and partnerships, and
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the Financial Statements
do not include all of the information and footnotes normally included in
the annual consolidated financial statements prepared in accordance with
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 $15.0
million and $14.6 million for the quarters ended June 29, 2002 and June
30, 2001, respectively. During the six months ended June 29, 2002 and
June 30, 2001, comprehensive income was approximately $21.2 million and
$19.3 million, respectively.
C. EARNINGS PER COMMON SHARE
A reconciliation of the changes in the numerator and the denominator from
the calculation of basic EPS to the calculation of diluted EPS follows
(in thousands, except per share data):
6
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 06/29/02 Three Months Ended 06/30/01
------------------------------------ -------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- -------- ----------- ------------- ------
NET EARNINGS................... $15,354 $14,238
EPS - BASIC
Income available to
common stockholders.......... 15,354 17,884 $0.86 14,238 19,792 $0.72
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 821 596
-------- --------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $15,354 18,705 $0.82 $14,238 20,388 $0.70
======= ====== ===== ======= ====== =====
Six Months Ended 06/29/02 Six Months Ended 06/30/01
------------------------------------ -------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................... $21,436 $19,215
EPS - BASIC
Income available to
common stockholders.......... 21,436 18,047 $1.19 19,215 19,753 $0.97
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 818 562
-------- --------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $21,436 18,865 $1.14 $19,215 20,315 $0.95
======= ====== ===== ======= ====== =====
Options to purchase 110,000 shares of common stock at exercise prices
ranging from $26.49 to $36.01 were outstanding at June 29, 2002, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 29, 2002 because the options' exercise prices were
greater than the average market price of the common stock during the
period and, therefore, would be antidilutive.
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
D. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective December 30, 2001 (the first day of our fiscal year ending
December 28, 2002), we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142").
This statement changed the accounting and reporting for goodwill and
other intangible assets. Goodwill is no longer amortized, however tests
for impairment are 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. We
tested 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 June 29, 2002
for each of the succeeding fiscal years is as follows:
Remaining 2002..................... $499
2003............................... 997
2004............................... 997
2005............................... 997
2006............................... 928
Thereafter......................... 596
E. LONG-LIVED ASSETS
Effective December 30, 2001, we adopted SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144
superceded 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. 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
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
consolidating the results of Pinelli in the 2002 financial statements. In
2001, we accounted for Pinelli under the equity method.
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.
9
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth below and certain economic
and business factors which may be beyond our control. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
RISK FACTORS
WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICE OF LUMBER. We experience significant
fluctuations in the cost of commodity lumber products from primary producers
(the "Lumber Market"). A variety of factors over which we have no control,
including government regulations, environmental regulations, weather conditions,
economic conditions and natural disasters, impact the cost of lumber products
and our selling prices. While we attempt to minimize our risk from severe price
fluctuations, substantial, prolonged trends in lumber prices can negatively
affect our sales volume, our gross margins and our profitability. We anticipate
that these fluctuations will continue in the future.
OUR GROWTH MAY BE LIMITED BY THE MARKETS WE SERVE. Our sales growth is
dependent, in part, upon the growth of the markets we serve. If our markets do
not achieve anticipated growth, or if we fail to maintain our market share,
financial results could be impaired.
The manufactured housing industry is currently hampered by market conditions,
including tightened credit policies. Significant lenders who previously provided
financing to consumers of these products and industry participants have either
restricted credit or exited the market. A continued shortage of financing to
this industry could adversely affect our operating results. Our ability to
achieve growth in sales and margins to the site-built construction market is
somewhat dependent on housing starts. If housing starts decline significantly,
our financial results could be negatively impacted.
We are witnessing consolidation by our customers. These consolidations will
result in a larger portion of our sales being made to some customers and may
limit the customer base we are able to serve.
10
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
11
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 six months ended June 29, 2002 and June 30, 2001:
Random Lengths Composite
Average $/MBF
-------------------------------
2002 2001
---- ----
January............................ $297 $269
February........................... 317 285
March.............................. 339 306
April.............................. 323 331
May................................ 312 411
June............................... 302 365
Second quarter average............. $312 $369
Year-to-date average............... $315 $328
Second quarter percentage
decrease from 2001................ (15.5%)
Year-to-date percentage
decrease from 2001................ (4.0%)
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
April.............................. 457 427
May................................ 408 509
12
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
June............................... 383 496
Second quarter average............. $416 $477
Year-to-date average............... $426 $434
Second quarter percentage
decrease from 2001............... (12.8%)
Year-to-date percentage
decrease from 2001................ (1.8%)
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
13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 annual sales. In other words, the longer the period of time that
products remain in inventory, the greater the exposure to changes in the price
of lumber. This exposure is less significant with remanufactured lumber, trusses
sold to the manufactured housing market and other similar products, due to the
higher level of inventory turnover.
In addition to the impact of Lumber Market trends on gross margins, changes in
the level of the market causes fluctuations in gross margins when comparing
operating results from period to period. This is explained in the following
example, which assumes the price of lumber has increased from period one to
period two, with no changes in the trend within each period.
Period 1 Period 2
-------- --------
Lumber cost.................................... $300 $400
Conversion cost................................ 50 50
= Product cost................................. 350 450
Adder.......................................... 50 50
= Sell price................................... 400 500
Gross margin................................... 12.5% 10.0%
As is apparent from the preceding example, the level of lumber prices does not
impact our overall profits, but does impact our margins. Gross margins are
negatively impacted during periods of high 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.
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.
14
UNIVERSAL FOREST PRODUCTS, INC.
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 our
Consolidated Condensed Statements of Earnings as a percentage of net sales.
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
------------ ----------- ---------- ----------
Net sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ..................... 86.4 86.3 85.8 85.8
----- ----- ----- -----
Gross profit ........................... 13.6 13.7 14.2 14.2
Selling, general, and
administrative expenses .............. 8.2 8.0 9.3 9.2
----- ----- ----- -----
Earnings from operations ............... 5.4 5.7 4.9 5.0
Interest, net .......................... 0.6 0.7 0.7 0.8
Gain on sale of assets ................. (0.2) 0.0 (0.1) 0.0
----- ----- ----- -----
Earnings before income taxes,
minority interest and equity in
earnings (loss) of investee .......... 5.0 5.0 4.3 4.2
Income taxes ........................... 1.9 1.9 1.6 1.6
----- ----- ----- -----
Earnings before minority interest and
equity in earnings (loss) of investee 3.1 3.1 2.7 2.6
Minority interest .................... (0.1) (0.2) (0.2) (0.1)
Equity in earnings (loss) of investee 0.0 (0.0) 0.0 0.0
----- ----- ----- -----
Reported net earnings .................. 3.0 2.9 2.5 2.5
Add: Goodwill amortization, net of tax 0.0 0.2 0.0 0.2
----- ----- ----- -----
Adjusted net earnings ................ 3.0% 3.1% 2.5% 2.7%
===== ===== ===== =====
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.
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - 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 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 For the Six Months Ended
------------------------------------------- -------------------------------------------
June 29, June 30, June 29, June 30,
Market Classification 2002 % 2001 % 2002 % 2001 %
- --------------------- ------------ ------- ------------ --------- ------------ -------- ---------- ---------
DIY/Retail..................... $265,359 52.5% $271,305 55.9% $412,590 48.7% $398,998 51.9%
Site-Built Construction........ 88,901 17.6 81,773 16.9 157,385 18.6 143,500 18.7
Manufactured Housing........... 80,850 16.0 74,618 15.4 148,047 17.5 124,104 16.1
Industrial..................... 45,737 9.1 34,202 7.0 84,890 10.0 62,679 8.1
Wholesale Lumber............... 24,097 4.8 23,255 4.8 43,688 5.2 39,941 5.2
-------- -------- ---------- ---------- ---------- --------- ---------- ---------
Total.......................... $504,944 100.0% $485,153 100.0% $846,600 100.0% $769,222 100.0%
======== ====== ======== ====== ======== ====== ======== ======
Net sales in the second quarter of 2002 increased 4.1%, compared to the second
quarter of 2001, resulting from an increase in units shipped of approximately
6%. Overall selling prices decreased as a result of the Lumber Market (see
Historical Lumber Prices). Net sales in the first six months of 2002 increased
10.1% compared to last year due to an increase in units shipped. Overall selling
prices remained flat comparing the two periods.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
Three Months Ended Six Months Ended
-------------------------------- ------------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
-------------- ------------- ------------ -----------
Value-Added........................... 47.7% 45.4% 49.7% 47.2%
Commodity-Based....................... 52.3% 54.6% 50.3% 52.8%
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Value-added sales increased 9.2% and 15.6% in the second quarter and first six
months of 2002, respectively, primarily due to increased sales of engineered
wood products. Commodity-based sales remained flat during the second quarter,
and increased 5.3% during the first six months.
DIY/Retail:
Net sales to the DIY/retail market decreased 2.2% in the second quarter of 2002
compared to 2001. This decrease was primarily due to an $11 million decrease in
sales to our largest customer, offset by a $6 million increase in sales from
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.
Net sales to the DIY/retail market increased 3.4% in the first six months of
2002 compared to 2001 primarily due to the acquisition of P&R.
Site-Built Construction:
Net sales to the site-built construction market increased 8.7% and 9.7% in the
second quarter and first six months of 2002, respectively, compared to the same
periods of 2001. These increases were due to increased unit sales as a result of
operations acquired in 2001 combined with organic growth in several regions.
Manufactured Housing:
Net sales to the manufactured housing market increased 8.4% and 19.3% in the
second quarter and first six months of 2002, respectively, compared to the same
periods of 2001. Industry shipments decreased 6% for the second quarter and were
down 2% for the first six months. 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 33.7% and 35.4% in the second
quarter and first six months of 2002, respectively, compared to the same periods
of 2001. Sales in our existing facilities increased approximately 20% in both
periods. The remaining increase in sales was due to the consolidation of Pinelli
in our operating results in 2002. See "Business Combinations."
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales decreased slightly in the second
quarter and first six months of 2002 compared to the same period of 2001. This
decrease was primarily due to a sudden drop in lumber prices which adversely
impacted our sales of commodity-based products not covered under managed
inventory programs. As previously discussed, a decline in the trend of lumber
prices adversely impacts margins on products with selling prices indexed to the
Lumber Market. This was significantly offset by margin gains in our site-built
market and an increase in sales of other value-added products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses as a percentage of sales increased
to 8.2% and 9.3% in the second quarter and first six months of 2002,
respectively, compared to 8.0% and 9.2% in the same periods of 2001,
respectively. On a pro forma basis, excluding amortization of goodwill in 2001,
the second quarter and first six months percentages were 7.8% and 9.0%,
respectively. These increases were primarily due to reduced selling prices
resulting from the decline in the Lumber Market in the second quarter of 2002.
INTEREST, NET
Net interest costs were lower in the second quarter and first six months 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 decrease in short-term
borrowing rates on variable rate debt.
GAIN ON SALE OF ASSETS
During the second quarter, we sold our corporate airplane and recognized a gain
of $1.1 million on the sale.
INCOME TAXES
Our effective tax rate was 37.1% in the second quarter of 2002 compared to 37.9%
in the same period of 2001, and 37.1% in the first six months of 2002 compared
to 37.7% 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. The decreases in our effective tax rate are
a result of no longer amortizing goodwill which resulted in a permanent tax
difference in 2001.
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities increased in the first six months of
2002 compared to the same period of 2001. This was primarily due to an increase
in receivables resulting from longer payment terms with our largest customer.
Due to the seasonality of our business and the effects of the Lumber Market, we
believe our cash cycle (days sales outstanding plus days supply of inventory
less days payables outstanding) is a good indicator of our working capital
management. Our cash cycle increased to 46 days in the first six months of 2002
from 44 days in the first six months of 2001, primarily due to a longer
receivables cycle resulting from extended payment terms with our largest
customer (mentioned above). This was partially offset by a reduction in the days
supply of inventory.
Capital expenditures totaled $13.5 million in the first six months of 2002
compared to $17.9 million in the same period of 2001. Our capital expenditures
during the second quarter of 2002 primarily consisted of several projects to
improve efficiencies and expand manufacturing capacity at existing plants. We
expect to spend approximately $11.5 million on capital expenditures for the
balance of 2002, which includes outstanding purchase commitments on capital
projects totaling approximately $3.8 million on June 29, 2002. We intend to
satisfy these commitments utilizing our revolving credit facilities.
In January 2002, we spent approximately $36 million to purchase 2 million shares
from our largest shareholder. We funded the purchase price using our revolving
credit facilities. On June 29, 2002, we had $98.0 million outstanding on our
$175 million revolving credit facility and $19.4 million Canadian ($12.8 million
U.S.) outstanding on our $25 million Canadian revolving credit facility. We also
have $25 million available on a short-term revolving credit facility obtained in
the first quarter, which expires August 2002. 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 June 29, 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 August 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. Since we have
determined that we will no longer operate the North East, MD facility as a wood
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
preservation location, we have begun the process of closing the conditioning
pad. This process will be completed in accordance with applicable regulations
during the third quarter of 2002.
We have accrued in other long-term liabilities amounts totaling $2.4 million on
June 29, 2002 and December 29, 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. The
review is part of the EPA's re- registration process and is designed, in part,
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
February 2002 press release concluded that there isn't any reason to remove or
replace any CCA treated structures, including decks or playground equipment.
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 formally accepted liability for these costs. We, along with
many others in the industry, 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. While we do not believe the plaintiffs
in this case are entitled to relief, we intend to vigorously defend this
complaint.
In addition, various special interest environmental groups have petitioned
certain states requesting restrictions on the use or disposal of CCA treated
products. The wood preservation industry trade groups are working with the
individual states and their regulatory agencies to provide an accurate, factual
background which demonstrates that the present method of uses and disposal is
scientifically supported. As with all of the above cases, we have placed our
vendors and our insurers on notice that we will seek indemnity and defense costs
from them.
20
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.
21
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Sales of equity securities in the second quarter not registered under the
Securities Act.
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
----------- ---------- --------- ---------- -------------
Stock Gift Program Various Common 144 Eligible persons None
Stock Option Exercises Various Common 120,000 Eligible officers $599,974
22
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were voted upon at our Annual Meeting of Shareholders on
April 17, 2002.
(1) Election of the following Directors for three year terms expiring in 2005:
For Withheld
--------- --------
Louis A. Smith 14,390,936 65,046
John C. Canepa 14,389,562 66,420
However, Mr. Canepa is only allowed to serve until December 31, 2002, the
end of the year in which he reaches age 72.
Other Directors whose terms of office continued after the meeting are as
follows:
William G. Currie
John W. Garside
Philip M. Novell
Peter F. Secchia
(2) Proposal to approve the 2002 Employee Stock Purchase Plan:
For: 13,732,292
Against: 410,478
Abstain: 15,379
Item 6. Exhibits and Reports on Form 8-K.
(a) None.
(b) Reports on Form 8-K.
During the second quarter, we filed three reports on Form 8-K, each
dated May 20, 2002, to report changes in our certifying accountant
under Item 4.
23
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: August 2, 2002 By: /s/ William G. Currie
------------------ ---------------------
William G. Currie
Its: Vice Chairman of the Board and
Chief Executive Officer
Date: August 2, 2002 By: /s/ Michael R. Cole
------------------ ----------------------
Michael R. Cole
Its: Chief Financial Officer
24