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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 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22684
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
NONE
------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of March 27, 2004
-------------------------- --------------------------------
Common stock, no par value 17,831,276
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Page 1 of 31
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at March 27, 2004,
December 27, 2003, and March 29, 2003. 3
Consolidated Condensed Statements of Earnings for the Three
Months Ended March 27, 2004 and March 29, 2003. 4
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 27, 2004 and March 29, 2003. 5-6
Notes to Consolidated Condensed Financial Statements. 7-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29
Item 4. Controls and Procedures. 30
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities. 31
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders - NONE.
Item 5. Other Information. 32
Item 6. Exhibits and Reports on Form 8-K. 32
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
March 27, December 27, March 29,
2004 2003 2003
--------- --------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 22,052 $ 17,430 $ 11,506
Restricted cash equivalents..................................... 1,383
Accounts receivable (net of allowances of $2,126, $1,891
and $2,580)................................................ 206,508 137,660 149,327
Inventories:
Raw materials.............................................. 106,967 83,064 89,873
Finished goods............................................. 112,237 86,497 106,355
--------- --------- ---------
219,204 169,561 196,228
Other current assets............................................ 4,452 7,662 7,851
--------- --------- ---------
TOTAL CURRENT ASSETS................................... 452,216 332,313 366,295
OTHER ASSETS......................................................... 8,189 6,421 6,608
GOODWILL............................................................. 122,458 125,028 126,620
NON-COMPETE AND LICENSING AGREEMENTS (net of
accumulated amortization of $4,413, $4,003 and $2,713).......... 6,381 6,791 5,122
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment................................... 362,522 361,368 338,185
Accumulated depreciation and amortization....................... (150,989) (147,164) (131,064)
--------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET..................... 211,533 214,204 207,121
--------- --------- ---------
TOTAL ASSETS ....................................................... $ 800,777 $ 684,757 $ 711,766
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt................................................. $ 1,726 $ 1,701
Accounts payable................................................ $ 116,789 81,687 72,012
Accrued liabilities:
Compensation and benefits.................................. 35,774 47,150 29,867
Other ..................................................... 13,415 4,549 8,851
Current portion of long-term debt and capital lease obligations. 6,010 6,411 6,611
--------- --------- ---------
TOTAL CURRENT LIABILITIES.............................. 171,988 141,523 119,042
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion............................................ 285,682 205,049 297,020
DEFERRED INCOME TAXES................................................ 16,076 15,984 12,922
MINORITY INTEREST.................................................... 5,433 7,780 7,263
OTHER LIABILITIES.................................................... 9,649 9,317 6,567
--------- --------- ---------
TOTAL LIABILITIES...................................... 488,828 379,653 442,814
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, 17,831,276, 17,777,631 and 17,658,410........ 17,831 17,778 17,658
Additional paid-in capital...................................... 85,672 84,610 82,379
Deferred stock compensation..................................... 3,188 2,447 2,324
Retained earnings............................................... 206,200 200,745 167,191
Accumulated other comprehensive earnings........................ 701 1,396 617
--------- --------- ---------
313,592 306,976 270,169
Employee stock notes receivable................................. (1,643) (1,872) (1,217)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY................................. 311,949 305,104 268,952
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 800,777 $ 684,757 $ 711,766
========= ========= =========
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 27, March 29,
2004 2003
---------- ------------
NET SALES.............................................. $ 465,665 $ 355,619
COST OF GOODS SOLD..................................... 409,304 303,815
---------- ----------
GROSS PROFIT........................................... 56,361 51,804
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................................... 43,929 40,188
---------- ------------
EARNINGS FROM OPERATIONS............................... 12,432 11,616
OTHER EXPENSE (INCOME):
Interest expense.................................. 3,542 3,787
Interest income................................... (83) (47)
Net gain on sale of operations.................... (369)
---------- ------------
3,090 3,740
---------- ------------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST................................. 9,342 7,876
INCOME TAXES........................................... 3,644 2,791
---------- ------------
EARNINGS BEFORE MINORITY INTEREST...................... 5,698 5,085
MINORITY INTEREST...................................... (131) (585)
---------- ----------
NET EARNINGS........................................... $ 5,567 $ 4,500
========== ============
EARNINGS PER SHARE - BASIC............................. $ 0.31 $ 0.25
EARNINGS PER SHARE - DILUTED........................... $ 0.30 $ 0.25
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 17,961 17,729
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS........................ 18,709 18,252
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 27, March 29,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................... $ 5,567 $ 4,500
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................. 6,672 5,949
Amortization of intangibles.................................................. 471 322
Deferred income taxes........................................................ 20 (405)
Minority interest............................................................ 131 585
Loss on sale of Nascor interest.............................................. 193
Net (gain) loss on sale or impairment of property, plant, and equipment...... (603) 86
Changes in:
Accounts receivable........................................................ (70,883) (44,110)
Accounts receivable under sale and servicing agreement..................... (2,245)
Inventories................................................................ (48,711) (30,222)
Accounts payable........................................................... 37,850 14,497
Accrued liabilities and other.............................................. 1,184 (8,169)
-------- --------
NET CASH FROM OPERATING ACTIVITIES........................................... (70,354) (56,967)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (7,295) (9,809)
Acquisitions, net of cash received................................................ (5,360)
Proceeds from sale of Nascor interest............................................. 4,679
Proceeds from sale of property, plant and equipment............................... 740 144
Other assets, net................................................................. 178 44
-------- --------
NET CASH FROM INVESTING ACTIVITIES........................................... (7,058) (9,621)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of short-term debt and revolving credit facilities................. 81,516 61,752
Repayment of long-term debt....................................................... (58) (22)
Proceeds from issuance of common stock............................................ 857 730
Distributions to minority shareholder............................................. (125) (273)
Repurchase of common stock........................................................ (116) (1,627)
Other............................................................................. (40)
-------- --------
NET CASH FROM FINANCING ACTIVITIES........................................... 82,034 60,560
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... 4,622 (6,028)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 17,430 17,534
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 22,052 $ 11,506
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest..................................................................... $ 774 $ 863
Income taxes................................................................. (2,856) 820
5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - CONTINUED
Three Months Ended
-----------------------
March 27, March 29,
2004 2003
-------- --------
NON-CASH OPERATING ACTIVITIES:
Notes receivable exchanged for property, plant and equipment...................... $ 1,455
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plan.............................. $ 716 $ 614
NON-CASH INVESTING ACTIVITIES:
Non-compete agreements with Chairman of the Board in exchange for
future payments.............................................................. $ 856
See notes to consolidated condensed financial statements.
6
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited, interim, consolidated, condensed financial
statements (the "Financial Statements") include our accounts and those
of our wholly-owned and majority-owned subsidiaries and partnerships,
and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, the Financial
Statements do not include all of the information and footnotes normally
included in the annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United
States. All significant intercompany transactions and balances have
been eliminated.
In our opinion, the Financial Statements contain all material
adjustments necessary to present fairly our consolidated financial
position, results of operations and cash flows for the interim periods
presented. All such adjustments are of a normal recurring nature. These
Financial Statements should be read in conjunction with the annual
consolidated financial statements, and footnotes thereto, included in
our Annual Report to Shareholders on Form 10-K for the fiscal year
ended December 27, 2003.
Certain reclassifications have been made to the Financial Statements
for 2003 to conform to the classifications used in 2004.
B. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $4.9
million and $4.8 million for the quarter ended March 27, 2004 and March
29, 2003, 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):
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 03/27/04 Three Months Ended 03/29/03
--------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS.................. $5,567 $4,500
EPS - BASIC
Income available to
common stockholders......... 5,567 17,961 $0.31 4,500 17,729 $0.25
===== =====
EFFECT OF DILUTIVE SECURITIES
Options....................... 748 523
------ ------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised................... $5,567 18,709 $0.30 $4,500 18,252 $0.25
====== ====== ===== ====== ====== =====
The shares used to calculate EPS - Basic include 180,850 shares issued
to a rabbi trust and phantom stock associated with our deferred
compensation plans.
Options to purchase 20,000 shares of common stock at exercise prices
ranging from $35.75 to $36.01 were outstanding at March 27, 2004, but
were not included in the computation of diluted EPS for the quarter.
The options' exercise prices were greater than the average market price
of the common stock during the period and, therefore, would be
antidilutive.
Options to purchase 918,109 shares of common stock at exercise prices
ranging from $18.25 to $36.01 were outstanding at March 29, 2003, but
were not included in the computation of diluted EPS for the quarter.
The options' exercise prices were greater than the average market price
of the common stock during the period and, therefore, would be
antidilutive.
D. SALE OF ACCOUNTS RECEIVABLE
During the first quarter, we sold specific accounts receivable totaling
$24.5 million with an Agreed Base Value of approximately $22.6 million,
which was received in cash. Approximately $1.8 million was recorded as
a retained interest and approximately $126,000 was recognized as an
expense. During the first quarter, we recognized servicing income
totaling approximately $27,000 related to these transactions. On March
27, 2004, factored receivables and retained interest totaled $7.0
million and $0.5 million, respectively. These transactions terminated
March 31, 2004. The master agreement expires September 25, 2004.
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
E. GOODWILL AND OTHER INTANGIBLE ASSETS
On March 27, 2004, non-compete assets totaled $7.9 million with
accumulated amortization totaling $3.3 million, and licensing
agreements totaled $2.9 million with accumulated amortization totaling
$1.1 million. On March 29, 2003, non-compete assets totaled $5.6
million with accumulated amortization totaling $2.2 million, and
licensing agreements totaled $2.2 million with accumulated amortization
totaling $0.5 million.
Estimated amortization expense for intangible assets as of March 27,
2004 for each of the five succeeding fiscal years is as follows (in
thousands):
2004............................... $1,225
2005............................... 1,478
2006............................... 1,302
2007............................... 788
2008............................... 486
Thereafter......................... 1,102
The changes in the net carrying amount of goodwill for the three months
ended March 27, 2004 and March 29, 2003 are as follows (in thousands):
Balance as of December 27, 2003................................ $125,028
Sale of Nascor interest........................................ (2,169)
Final purchase price allocation and other, net................. (401)
--------
Balance as of March 27, 2004................................... $122,458
========
Balance as of December 28, 2002................................ $126,299
Foreign currency translation effects and other, net............ 321
--------
Balance as of March 29, 2003................................... $126,620
========
F. BUSINESS COMBINATIONS AND ASSET PURCHASES
On March 15, 2004, one of our subsidiaries acquired the assets of
Slaughter Industries, owned by International Paper Company
("Slaughter"), a site-built construction facility located in Dallas,
TX. The purchase price was approximately $3.9 million, allocating $3.9
million to the fair value of tangible net assets. Slaughter had net
sales in fiscal 2003 totaling approximately $48 million.
On January 30, 2004, one of our subsidiaries acquired the assets of
Midwest Building Systems, Inc. ("Midwest"), a site-built construction
facility located in Indianapolis, IN. The
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
purchase price was approximately $1.5 million, allocating $1.5 million
to the fair value of tangible net assets. Midwest had net sales in
fiscal 2003 totaling approximately $7 million.
On August 28, 2003, one of our subsidiaries acquired 50% of the assets
of D&L Framing, LLC ("D&L"), a framing operation for multi-family
construction located in Las Vegas, NV. The purchase price was
approximately $0.6 million which was primarily allocated to goodwill.
D&L had net sales in fiscal 2002 totaling approximately $8 million.
On August 26, 2003, one of our subsidiaries entered into an agreement
with Quality Wood Treating Co., Inc. ("Quality") to cancel the treating
services agreement completed on November 4, 2002 and purchase plants
located in Lansing, MI and Janesville, WI and the equipment of a plant
located in White Bear Lake, MN. The total purchase price for these
assets was $5.1 million. In addition, another subsidiary entered into a
capital lease for the real estate of the White Bear Lake, MN plant
totaling $2.1 million.
On June 4, 2003, one of our subsidiaries acquired 75% of the assets of
Norpac Construction LLC ("Norpac"), a concrete framer for multi-family
construction located in Las Vegas, NV. The purchase price was
approximately $0.2 million, allocating $0.2 million to the fair value
of tangible net assets. Norpac had net sales in fiscal 2002 totaling
approximately $1.5 million.
Acquisitions completed in 2003 and 2004 were not significant to our
operating results individually nor in aggregate, and thus pro forma
results are not presented.
G. EMPLOYEE STOCK NOTES RECEIVABLE
Employee stock notes receivable represents notes issued to us by
certain employees and officers to finance the purchase of our common
stock. Directors and executive officers (including equivalent
positions) do not, and are not allowed to, participate in this program.
H. STOCK-BASED COMPENSATION
As permitted under SFAS No.123, Accounting for Stock-Based
Compensation, ("SFAS 123"), we continue to apply the provisions of APB
Opinion No. 25, Accounting for Stock Issued to Employees, which
recognizes compensation expense under the intrinsic value method. Had
compensation cost for the stock options granted and stock purchased
under the Employee Stock Purchase Plan in the first quarter of 2004 and
2003 been determined under the fair value based method defined in SFAS
123, our net earnings and earnings per share would have been reduced to
the following pro forma amounts (in thousands, except per share data):
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended
-------------------------
March 27, March 29,
2004 2003
---------- ----------
Net Earnings:
As reported................................... $ 5,567 $ 4,500
Deduct: compensation expense
- fair value method........................ (440) (452)
---------- ----------
Pro Forma..................................... $ 5,127 $ 4,048
========== ==========
EPS - Basic:
As reported................................... $ 0.31 $ 0.25
Pro forma..................................... $ 0.29 $ 0.23
EPS - Diluted:
As reported................................... $ 0.30 $ 0.25
Pro forma..................................... $ 0.28 $ 0.23
I. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are insured for environmental impairment liability through a wholly
owned subsidiary, UFP Insurance Ltd., a licensed captive insurance
company. We own and operate a number of facilities throughout the
United States that chemically treat lumber products. In connection with
the ownership and operation of these and other real properties, and the
disposal or treatment of hazardous or toxic substances, we may, under
various federal, state and local environmental laws, ordinances and
regulations, be potentially liable for removal and remediation costs,
as well as other potential costs, damages and expenses. Insurance
reserves, calculated primarily with no discount rate, have been
established to cover remediation activities at our Union City, GA;
Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Schertz, TX; and
Janesville, WI wood preservation facilities. In addition, a small
reserve was established for our Thornton, CA property to remove
asbestos and certain lead containing materials which existed on the
property at the time of purchase.
Including amounts from the captive insurance company, we have reserved
amounts totaling approximately $1.9 million and $2.0 million on March
27, 2004 and March 29, 2003, respectively, representing the estimated
costs to complete remediation efforts.
The manufacturers of CCA preservative agreed to voluntarily discontinue
the registration of CCA for certain residential applications as of
December 31, 2003. As a result, 21 of our 24 wood preservation
facilities were converted to an alternate preservative, ACQ, in the
third and fourth quarters of 2003. The remaining facilities were
converted to either ACQ or borates during January 2004.
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
In November 2003, the EPA published its report on the risks associated
with the use of CCA in children's playsets. While the study observed
that the range of potential exposure to CCA increased by the continuous
use of playsets, the EPA concluded that the risks were not sufficient
to require removal or replacement of any CCA treated structures. The
EPA did refer a question on the use of sealants to a scientific
advisory panel, which has not yet issued its report.
The results of the EPA study are consistent with a prior Consumer
Products Safety Commission (CPSC) study which reached a similar
conclusion.
In addition, various special interest environmental groups have
petitioned certain states requesting restrictions on the use or
disposal of CCA treated products. The wood preservation industry trade
groups are working with the individual states and their regulatory
agencies to provide an accurate, factual background which demonstrates
that the present method of uses and disposal is scientifically
supported.
We have been requested by a customer to defend it from purported class
action lawsuits filed against it in Florida, Louisiana, Texas, Illinois
and New Jersey. The Florida claim was denied class action status, and
is presently under appeal. We had previously been dismissed as a
defendant from the Louisiana litigation, and this case was denied class
action status in March 2004. The remaining complaints do not allege
personal injury or property damage. As previously stated, our vendors
believe and scientific studies support the fact that CCA treated lumber
poses no unreasonable risks, and we intend to vigorously defend this
position. While our customer has charged us for certain expenses
incurred in the defense of these claims, we have not formally accepted
liability of these costs.
We believe the remaining claims are unsubstantiated by current facts
and therefore have not accrued for any potential loss related to the
contingencies above. However, potential liabilities of this nature are
not conducive to precise estimates and are subject to change. To the
extent we are required to defend these actions, we intend to do so
vigorously.
In addition, on March 27, 2004, we were parties either as plaintiff or
a defendant to a number of lawsuits and claims arising through the
normal course of our business. In the opinion of management, our
consolidated financial statements will not be materially affected by
the outcome of these contingencies and claims.
On March 27, 2004, we had outstanding purchase commitments on capital
projects of approximately $5.8 million.
We provide a variety of warranties for products we manufacture.
Historically, warranty claims have not been material.
12
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
In certain cases we jointly bid on contracts with framing companies to
supply building materials to site-built construction projects. In some
of these instances we are required to post payment and performance
bonds to insure the owner that the products and installation services
are completed in accordance with our contractual obligations. We have
agreed to indemnify the surety for claims made against the bonds.
Historically, we have not had any claims for indemnity from our
sureties. As of March 27, 2004, we had approximately $28.4 million in
outstanding performance bonds which expire during the next three to
eighteen months.
We have entered into operating leases for certain assets that include a
guarantee of a portion of the residual value of the leased assets. If
at the expiration of the initial lease term we do not exercise our
option to purchase the leased assets and these assets are sold by the
lessor for a price below a predetermined amount, we will reimburse the
lessor for a certain portion of the shortfall. These operating leases
will expire periodically over the next five years. The estimated
maximum aggregate exposure of these guarantees is less than $800,000.
Under our sale of accounts receivable agreement, we guarantee that
Universal Forest Products RMS, LLC, as servicer, will remit collections
on receivables sold to the bank. (See Note D, "Sale of Accounts
Receivable.")
On March 27, 2004, we had outstanding letters of credit totaling $32.1
million, primarily related to certain insurance contracts and
industrial development revenue bonds, as further described below.
In lieu of cash deposits, we provide irrevocable letters of credit in
favor of our insurers to guarantee our performance under certain
insurance contracts. We currently have irrevocable letters of credit
outstanding totaling approximately $13.8 million for these types of
insurance arrangements. We have reserves recorded on our balance sheet,
in accrued liabilities, that reflect our expected future liabilities
under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of
the bond trustees for all of the industrial development revenue bonds
that we have issued. These letters of credit guarantee principal and
interest payments to the bondholders. We currently have irrevocable
letters of credit outstanding totaling approximately $18.3 million
related to our outstanding industrial development revenue bonds. These
letters of credit have varying terms but may be renewed at the option
of the issuing banks.
Our wholly owned domestic subsidiaries have guaranteed the indebtedness
of Universal Forest Products, Inc. in certain debt agreements,
including the 1994 Senior Notes, Series 1998-A Senior Notes, Series
2002-A Senior Notes and our revolving credit facility. The maximum
exposure of these guarantees is limited to the indebtedness outstanding
under these debt arrangements and this exposure will expire concurrent
with the expiration of the debt agreements.
13
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
We did not enter into any new guarantee arrangements during the first
quarter of 2004 which would require us to recognize a liability on our
balance sheet.
J. SALE OF OPERATIONS
In January 2004, we sold our 60% ownership in Nascor Incorporated, a
Calgary, Alberta-based manufacturer of engineered wood components and
licensor of I-joist manufacturing technology. The total sales price we
collected was $4.7 million and we recorded a pre-tax accounting loss of
approximately $193,000.
In addition, we sold a plant in Bend, OR and recognized a pre-tax gain
of approximately $562,000 on the sale.
We incurred income taxes associated with these transactions totaling
approximately $460,000.
K. SUBSEQUENT EVENT
On April 2, 2004, one of our subsidiaries acquired a 50% interest in
Shawnlee Construction, LLC ("Shawnlee"), a framing operation for
multi-family construction located in Plainville, MA. The purchase price
was approximately $4.8 million. Shawnlee had net sales in fiscal 2003
totaling approximately $20 million. We anticipate consolidating this
entity, including a respective minority interest.
14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth below and certain economic
and business factors which may be beyond our control. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
OVERVIEW
We are pleased to report strong results for the first quarter of 2004, which was
highlighted by:
- - Our strong sales growth in all markets as we increased our share in
each. We also benefitted from a solid housing market.
- - Our increase in shipments to the manufactured housing market. While HUD
code industry production reports year-after-year declines, we continue
to increase our shipments to modular producers.
_ Higher lumber prices which elevated our sales dollars and required a
greater investment in working capital.
- - An improvement in our working capital position throughout the quarter.
We reduced our cash cycle (days sales outstanding plus days supply of
inventory less days payables outstanding) from 62 days last year to 48
days in the first quarter of 2004.
- - Enhanced profitability in spite of the challenges of working with a new
chemical (ACQ) in our wood preservation facilities and the poor
performance of one of our joint venture framing operations in the
Southwest. The 24% increase in net earnings we achieved for the quarter
surpassed our 13% increase in unit sales.
We also made the following accomplishments, as our people remain focused on
executing our growth strategy:
- - We completed the sale of our interest in Nascor Incorporated and one of
our small plants in Bend, OR, as we continue to stay focused on
investing our resources in areas that help us best achieve our goals.
15
- - We acquired plants in Indianapolis, IN and Dallas, TX during the first
quarter. These plants are manufacturing engineered wood components and
distributing other building materials for site-built construction.
- - We acquired a 50% interest in Shawnlee Construction LLC ("Shawnlee") on
April 2, 2004. Shawnlee is the largest framer for the multi-family
construction market in the Massachusetts area. This acquisition allows
us to capitalize on customer requests for turnkey construction packages
by supplying framing labor through Shawnlee and engineered wood
components from our existing plants in the Northeast.
In summary, we remain optimistic about the future of our business, markets and
strategies, and our employees remain focused on adding value for our customers,
executing our strategies and meeting our goals.
RISK FACTORS
WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICE OF LUMBER. We experience significant
fluctuations in the cost of commodity lumber products from primary producers
(the "Lumber Market"). A variety of factors over which we have no control,
including government regulations, environmental regulations, weather conditions,
economic conditions and natural disasters, impact the cost of lumber products
and our selling prices. While we attempt to minimize our risk from severe price
fluctuations, substantial, prolonged trends in lumber prices can negatively
affect our sales volume, our gross margins and our profitability. We anticipate
that these fluctuations will continue in the future.
OUR GROWTH MAY BE LIMITED BY THE MARKETS WE SERVE. Our sales growth is
dependent, in part, upon the growth of the markets we serve. If our markets do
not achieve anticipated growth, or if we fail to maintain our market share,
financial results could be impaired.
The manufactured housing industry still suffers from difficult market
conditions, including repossessions and tight credit conditions. Significant
lenders who previously provided financing to consumers of these products and
industry participants have either restricted credit or exited the market. While
new lenders have announced intentions to enter this market, a continued shortage
of financing to this industry could adversely affect our operating results.
Our ability to achieve growth in sales and margins to the site-built
construction market is somewhat dependent on housing starts. If housing starts
decline significantly, our financial results could be negatively impacted.
We are witnessing consolidation by our customers in each of the markets we
serve. These consolidations will result in a larger portion of our sales being
made to some customers and may limit the customer base we are able to serve.
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED WITH ONE CUSTOMER. Our sales
to The Home Depot comprised 23% of our total sales in the first three months of
2004, down from 27% for the first quarter of 2003.
OUR GROWTH MAY BE LIMITED BY OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS. A key
component of our growth strategy is to complete business combinations. Business
combinations involve inherent risks, including assimilation and successfully
managing growth. While we conduct extensive due diligence and have taken steps
to ensure successful assimilation, factors beyond our control could influence
the results of these acquisitions.
WE MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND SAFETY
REGULATIONS. We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations. There can
be no assurance that we are at all times in complete compliance with all of
these requirements. We have made and will continue to make capital and other
expenditures to comply with environmental regulations. If additional laws and
regulations are enacted in the future, which restrict our ability to manufacture
and market our products, including our treated lumber products, it could
adversely affect our sales and profits. If existing laws are interpreted
differently, it could also increase the financial cost to us. Several states
have proposed legislation to limit the uses of CCA treated lumber. (See Note I,
"Commitments, Contingencies and Guarantees.")
SEASONALITY AND WEATHER CONDITIONS COULD ADVERSELY AFFECT US. Some aspects of
our business are seasonal in nature and results of operations vary from quarter
to quarter. Our treated lumber and outdoor specialty products, such as fencing,
decking and lattice, experience the greatest seasonal effects. Sales of treated
lumber, primarily consisting of Southern Yellow Pine ("SYP"), also experience
the greatest Lumber Market risk (see "Historical Lumber Prices"). Treated lumber
sales are generally at their highest levels between April and August. This sales
peak, combined with capacity constraints in the wood treatment process, requires
us to build our inventory of treated lumber throughout the winter and spring.
(This also has an impact on our receivables balances, which tend to be
significantly higher at the end of the second and third quarters.) Because sales
prices of treated lumber products may be indexed to the Lumber Market at the
time they are shipped, our profits can be negatively affected by prolonged
declines in the Lumber Market during our primary selling season. To mitigate
this risk, consignment inventory programs are negotiated with certain vendors
that are intended to decrease our exposure to the Lumber Market by correlating
the purchase price of the material with the related sell price to the customer.
These programs include those materials which are most susceptible to adverse
changes in the Lumber Market. Vendor programs also allow us to carry a lower
investment in inventories.
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The majority of our products are used or installed in outdoor construction
activities; therefore, short-term sales volume, our gross margins and our
profits can be negatively affected by adverse weather conditions. In addition,
adverse weather conditions can negatively impact our productivity and costs per
unit.
WE CONVERTED TO A NEW PRESERVATIVE TO TREAT OUR PRODUCTS IN THE THIRD AND FOURTH
QUARTERS OF 2003. The manufacturers of CCA preservative voluntarily discontinued
the registration of CCA for certain residential applications as of December 31,
2003. As a result, 21 of our 24 wood preservation facilities were converted to
an alternate preservative, ACQ, in the third and fourth quarters of 2003. The
remaining facilities were converted to either ACQ or borates during January
2004. The cost of ACQ is more than four times higher than the cost of CCA. We
coordinated with our chemical suppliers and conducted extensive training with
our plants to achieve the quality and chemical efficiency standards necessary to
maintain profitability and customer satisfaction. In addition, we estimate the
new preservative will increase the cost and sales price of our treated products
by approximately 10% to 15%. While we believe treated products will be
reasonably priced relative to alternative products such as composites or vinyl,
consumer acceptance may be impacted which would in turn affect our future
operating results. (See Note I, "Commitments, Contingencies and Guarantees.")
CURRENTLY, MARKET CONDITIONS FOR THE SUPPLY OF CERTAIN LUMBER PRODUCTS AND
INBOUND TRANSPORTATION ARE TIGHT. These conditions, which occur on occasion,
have resulted in difficulties procuring desired quantities and receiving orders
on a timely basis for all industry participants. We are not certain how these
conditions may impact our short-term sales volumes and profitability. However,
we attempt to mitigate the risks these conditions present by:
- - Our pricing practices (see "Impact of the Lumber Market on Our
Operating Results");
- - Leveraging our size with mill and transportation suppliers to ensure
they achieve supply and service requirements;
- - Increasing our utilization of consigned inventory programs with mills;
and
- - Expanding our supply base of dedicated carriers.
When analyzing this report to assess our future performance, please recognize
the potential impact of the various factors set forth above.
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
HISTORICAL LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price
for the three months ended March 27, 2004 and March 29, 2003:
Random Lengths Composite
Average $/MBF
------------------------
2004 2003
---------- ----------
January............................ $ 341 $ 278
February........................... 376 295
March.............................. 382 277
First quarter average.............. $ 366 $ 283
First quarter percentage
increase from 2003................ 29.3%
In addition, a SYP composite price, which we prepare and use, is presented
below. Sales of products produced using this species comprise up to 50% of our
sales volume.
Random Lengths SYP
Average $/MBF
------------------
2004 2003
-------- --------
January............................ $ 410 $ 387
February........................... 436 394
March.............................. 487 392
First quarter average.............. $ 444 $ 391
First quarter percentage
increase from 2003................ 13.6%
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We generally price our products to pass lumber costs through to our customers so
that our profitability is based on the value-added manufacturing, distribution,
engineering and other services we provide. As a result, our sales levels (and
working capital requirements) are impacted by the lumber costs of our products.
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Our gross margins are impacted by both (1) the relative level of the Lumber
Market (i.e. whether prices are higher or lower from comparative periods), and
(2) the trend in the market price of lumber (i.e. whether the price of lumber is
increasing or decreasing within a period or from period to period). Moreover, as
explained below, our products are priced differently. Some of our products have
fixed selling prices, while the selling prices of other products are indexed to
the reported Lumber Market with a fixed dollar adder to cover conversion costs
and profits. Consequently, the level and trend of the Lumber Market impact our
products differently.
Below is a general description of the primary ways in which our products are
priced.
- - Products with fixed selling prices. These products include value-added
products such as decking and fencing sold to DIY/retail customers, as
well as trusses, wall panels and other components sold to the
site-built construction market. Prices for these products are generally
fixed at the time of the sales quotation for a specified period of time
or are based upon a specific quantity. In order to maintain margins and
reduce any exposure to adverse trends in the price of component lumber
products, we attempt to lock in costs for these sales commitments with
our suppliers. Also, the time periods and quantity limitations
generally allow us to reprice our products for changes in lumber costs
from our suppliers.
- - Products with selling prices indexed to the reported Lumber Market with
a fixed dollar "adder" to cover conversion costs and profits. These
products include treated lumber, remanufactured lumber and trusses sold
to the manufactured housing industry. For these products, we estimate
the customers' needs and carry anticipated levels of inventory. Because
lumber costs are incurred in advance of final sale prices, subsequent
increases or decreases in the market price of lumber impact our gross
margins. For these products, our margins are exposed to changes in the
trend of lumber prices.
Changes in the trend of lumber prices have their greatest impact on the
following products:
- - Products that have significant inventory levels with low turnover
rates, such as treated lumber, which comprises almost 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 rate of inventory
turnover. We attempt to mitigate this risk through certain vendor
supply programs. (See "Risk Factors - Seasonality and weather
conditions could adversely affect us" section.)
20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
- - Products with fixed selling prices sold under long-term supply
arrangements, particularly those involving multi-family construction
projects. We attempt to mitigate this risk through our purchasing
practices.
In addition to the impact of the Lumber Market trends on gross margins, changes
in the level of the market cause fluctuations in gross margins when comparing
operating results from period to period. This is explained in the following
example, which assumes the price of lumber has increased from period one to
period two, with no changes in the trend within each period.
Period 1 Period 2
-------- --------
Lumber cost.................................... $ 300 $ 400
Conversion cost................................ 50 50
= Product cost................................. 350 450
Adder.......................................... 50 50
= Sell price................................... 400 500
Gross margin................................... 12.5% 10.0%
As is apparent from the preceding example, the level of lumber prices does not
impact our overall profits, but does impact our margins. Gross margins are
negatively impacted during periods of high lumber prices; conversely, we
experience margin improvement when lumber prices are relatively low.
BUSINESS COMBINATIONS AND ASSET PURCHASES
We completed the following business combinations and asset acquisitions in
fiscal 2004 and fiscal 2003, which were accounted for using the purchase method.
(See Note F, "Business Combinations and Asset Purchases.")
Company Name Acquisition Date Business Description
- ------------------- ---------------- --------------------
Slaughter Industries March 15, 2004 Distributes lumber products and manufactures
engineered wood components for site-built
construction. Located in Dallas, TX.
Midwest Building Systems, Inc. January 30, 2004 Manufacturer of engineered wood components for
site-built construction. Located in
Indianapolis, IN.
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
D&L Framing, LLC August 28, 2003 Framing operation for multi-family construction
located in Las Vegas, NV.
Quality Wood Treating Co., Inc. August 26, 2003 Two treating facilities in Lansing, MI and
Janesville, WI and real estate lease of a third
treating facility in White Bear Lake, MN.
Norpac Construction LLC June 3, 2003 Concrete framer for multi-family construction
located in Las Vegas, NV.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our
Consolidated Condensed Statements of Earnings as a percentage of net sales.
For the Three Months Ended
----------------------------
March 27, March 29,
2004 2003
----- -----
Net sales.................................... 100.0% 100.0%
Cost of goods sold........................... 87.9 85.4
----- -----
Gross profit................................. 12.1 14.6
Selling, general, and
administrative expenses.................... 9.4 11.3
----- -----
Earnings from operations..................... 2.7 3.3
Interest, net................................ 0.8 1.1
Gain on sale of operations................... (0.1) 0.0
----- -----
0.7 1.1
----- -----
Earnings before income taxes
and minority interest....................... 2.0 2.2
Income taxes................................. 0.8 0.8
----- -----
Earnings before minority interest............ 1.2 1.4
Minority interest............................ (0.0) (0.1)
----- -----
Net earnings................................. 1.2% 1.3%
===== =====
22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
NET SALES
We engineer, manufacture, treat, distribute and install lumber, composite,
plastic, and other building products for the DIY/retail, site-built
construction, manufactured housing, and industrial markets. Our strategic sales
objectives include:
- - Diversifying our end market sales mix by increasing sales of specialty
wood packaging to industrial users and engineered wood components and
framing services to the site-built construction market. Engineered wood
components include roof trusses, wall panels and floor systems.
- - Increasing sales of "value-added" products. Value-added product sales
consist of fencing, decking, lattice and other specialty products sold
to the DIY/retail market, specialty wood packaging, engineered wood
components, and "wood alternative" products. Wood alternative products
consist primarily of composite wood and plastics. One of our goals is
to achieve a ratio of value-added sales to total sales of at least 50%.
Although we consider the treatment of dimensional lumber with certain
chemical preservatives a value-added process, treated lumber is not
presently included in the value-added sales totals.
- - Maximizing profitable top-line sales growth.
The following table presents, for the periods indicated, our net sales (in
thousands) and change in net sales by market classification.
For the Three Months Ended
-----------------------------
March 27, % March 29,
Market Classification 2004 Change 2003
--------------------- --------- ------ ---------
DIY/Retail................... $178,884 14.5 $156,220
Site-Built Construction...... 114,843 49.1 77,016
Manufactured Housing......... 76,975 35.0 57,033
Industrial and Other......... 94,963 45.3 65,350
-------- --------
Total........................ $465,665 $355,619
======== ========
Note: In the first quarter of 2004, we reviewed the classification of our
customers and made certain reclassifications. Prior year information has
been restated to reflect these reclassifications.
Net sales in the first quarter of 2004 increased 31% compared to the first
quarter of 2003 resulting from an estimated increase in units shipped of
approximately 13%, while overall selling prices increased by 18%. Overall
selling prices increased as a result of the Lumber Market (see "Historical
Lumber Prices") and higher preservative prices (ACQ). We estimate that our unit
sales increased
23
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
by 4% as a result of business acquisitions and new plants and our unit sales out
of existing facilities increased by 9% in the first quarter of 2004.
DIY/Retail:
Net sales to the DIY/retail market increased 15% in the first quarter of 2004
compared to 2003, primarily due to the higher Lumber Market and preservative
prices. Our unit sales were flat comparing the two periods.
Site-Built Construction:
Net sales to the site-built construction market increased 49% in the first
quarter of 2004 compared to 2003, despite the sale of our interest in Nascor
Incorporated. This increase resulted from acquisitions completed after March 29,
2003, and organic sales growth out of existing plants totaling approximately 22%
for the quarter. In addition, we estimate the Lumber Market caused our selling
prices to increase 14% this quarter.
Manufactured Housing:
Net sales to the manufactured housing market increased 35% in the first quarter
of 2004 compared to the same period of 2003. This increase resulted primarily
from an estimated 23% increase in selling prices due to the higher Lumber Market
combined with a 12% increase in units shipped. Although industry production for
HUD code homes was down approximately 13% for the quarter, we have increased our
shipments to producers of modular homes.
Industrial and Other:
Net sales to the industrial and other market increased 45% in the first quarter
of 2004 compared to the same period of 2003. This increase resulted from a
combination of unit sales increases out of several existing facilities and
higher selling prices due to the Lumber Market.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
24
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
Three Months Ended
---------------------------
March 27, March 29,
2004 2003
--------- ---------
Value-Added....................... 52.5% 55.2%
Commodity-Based................... 47.5% 44.8%
Value-added sales increased 25% in the first quarter of 2004 compared to 2003,
primarily due to increased sales of EverX (composite decking), engineered wood
components, industrial packaging products and other specialty products supplied
to the DIY/retail market. Commodity-based sales increased 39% during the first
quarter of 2004 primarily due to the higher Lumber Market, higher preservative
prices and a 10% increase in unit sales.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales decreased in the first quarter of 2004
compared to the same period of 2003. During the first quarter of 2004, the
Lumber Market was substantially higher than the prior year. Generally, a higher
Lumber Market results in a decrease in our gross margin. (See "Impact of the
Lumber Market on our Operating Results.") We attempt to price certain products
to earn a fixed profit per unit, so in a period of higher lumber prices, our
gross margin will decline. Therefore, a more meaningful analysis of
profitability is a comparison of the change in gross profit dollars compared to
our change in units shipped. Our gross profit dollars increased by almost 9%
this quarter, while units shipped increased by 13%. This shortfall was entirely
due to the poor operating results of a joint venture framing operation in the
Southwest, of which we own 50%, which caused a $2.4 million decline in our gross
profit. The framing operation's unfavorable results were primarily attributable
to various management issues, such as bidding practices and lumber market risk
management. We believe we have taken appropriate actions to correct these
issues, including personnel changes. We do not presently believe this venture
will have a material adverse effect on our future operating results.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses as a percentage of sales
decreased to 9.4% in the first quarter of 2004 compared to 11.3% in the same
period of 2003 primarily due to the impact of the Lumber Market on our selling
prices. SG&A expenses increased by 9.3% in the first quarter of 2004 compared to
the same period of 2003, which compares favorably with our 13% increase in unit
sales. The dollar increase in our selling, general, and administrative expenses
was primarily due to acquisitions and new operations, combined with higher
compensation costs resulting from greater headcount to support growth in our
business and an increase in insurance and legal costs.
25
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
INTEREST, NET
Net interest costs decreased in the first quarter of 2004 compared to the same
period of 2003. This decrease was due to a lower average debt balance.
GAIN ON SALE OF OPERATIONS
During the first quarter of 2004, we sold our interest in Nascor Incorporated
and recognized a loss of $0.2 million on the sale. Additionally, we sold a small
plant in Bend, OR, and recognized a gain of $0.6 million on the sale.
INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily
due to provisions for state and local income taxes and permanent tax
differences. Our effective tax rate was 39.0% in the first quarter of 2004
compared to 35.4% in the same period of 2003. This increase was primarily a
result of the tax incurred on the sale of our interest in Nascor Incorporated.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions other than operating
leases.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
March 27, March 29,
2004 2003
-------- --------
Cash from operating activities.............................. ($70,354) ($56,967)
Cash from investing activities.............................. (7,058) (9,621)
Cash from financing activities.............................. 82,034 60,560
------- -------
Net change in cash and cash equivalents..................... 4,622 (6,028)
Cash and cash equivalents, beginning of period.............. 17,430 17,534
------- -------
Cash and cash equivalents, end of period.................... $22,052 $11,506
======= =======
In general, we financed our growth in the past through a combination of
operating cash flows, our revolving credit facility ("revolver"), industrial
development bonds (when circumstances permit), and issuance of long-term notes
payable at times when interest rates are favorable. Historically, we
26
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
have not issued equity to finance growth except in the case of a large
acquisition. We manage our capital structure by attempting to maintain a
targeted ratio of debt to equity and debt to operating cash flow. We believe
this is one of the many important factors to maintaining a strong credit
profile, which in turn helps ensure timely access to capital when needed.
Seasonality has a significant impact on our working capital from March to August
which generally results in negative or modest cash flows from operations in our
first and second quarters. We experience a substantial decrease in working
capital from September to February which results in significant cash flow from
operations in our third and fourth quarters. For comparative purposes, we have
included the March 29, 2003 balances in the accompanying unaudited consolidated
condensed balance sheets.
Due to the seasonality of our business and the effects of the Lumber Market, we
believe our cash cycle (days sales outstanding plus days supply of inventory
less days payables outstanding) is a good indicator of our working capital
management. Our cash cycle decreased to 48 days in the first quarter of 2004
from 62 days in the first quarter of 2003, primarily due to a decrease in our
days supply of inventory and an extension on our payables cycle.
Cash flows used for operating activities increased in the first three months of
2004 compared to the same period of 2003 by approximately $13 million due to a
greater investment in working capital resulting from higher unit sales and the
higher Lumber Market.
Cash used for investing activities declined by $2.6 million in the first three
months of 2004 compared to the same period of 2003. Capital expenditures
decreased to $7.3 million in the first three months of 2004 compared to $9.8
million in the same period of 2003 as a result of several expansionary projects
that were completed earlier in 2003. We expect to spend approximately $38
million on capital expenditures in 2004, which includes outstanding purchase
commitments on capital projects totaling approximately $5.8 million on March 27,
2004. We intend to fund capital expenditures and purchase commitments through a
combination of operating cash flow and availability under our revolver.
In addition, we spent approximately $5.4 million on business acquisitions during
the quarter and collected $4.7 million from the sale of our interest in Nascor
Incorporated.
Cash provided by financing activities increased $21 million in the first three
months of 2004 compared to the same period of 2003, due to increased borrowings
under our revolver resulting from greater working capital requirements (see
operating cash flows discussed above).
27
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Additionally, we spent approximately $0.1 million to repurchase 3,638 shares of
our common stock in the first three months of 2004. We have authorization from
the Board of Directors to purchase an additional 1.5 million shares.
On March 27, 2004, we had $108 million outstanding on our $200 million revolver.
The revolver supports letters of credit totaling approximately $29.7 million on
March 27, 2004. Financial covenants on our revolver and senior unsecured notes
include a minimum net worth requirement, a minimum interest coverage test, a
minimum fixed charge coverage test, and a maximum leverage ratio. The agreements
also restrict the amount of additional indebtedness we may incur and the amount
of assets which may be sold. We were within our requirements at March 27, 2004.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Condensed Financial Statements, Footnote I,
"Commitments, Contingencies, and Guarantees."
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting
principles generally accepted in the United States. These principles require us
to make certain estimates and apply judgments that affect our financial position
and results of operations. We continually review our accounting policies and
financial information disclosures. There have been no material changes in our
policies or estimates since December 27, 2003.
28
UNIVERSAL FOREST PRODUCTS, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our
variable rate debt, which consists of a revolver and industrial development
revenue bonds. We do not currently use interest rate swaps, futures contracts or
options on futures, or other types of derivative financial instruments to
mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market
value, but not earnings or cash flows. Conversely, for variable rate debt,
changes in interest rates generally do not influence fair market value, but do
affect future earnings and cash flows. We do not have an obligation to prepay
fixed rate debt prior to maturity, and as a result, interest rate risk and
changes in fair market value should not have a significant impact on such debt
until we would be required to refinance it.
29
UNIVERSAL FOREST PRODUCTS, INC.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. With the
participation of management, our chief executive officer and chief
financial officer, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a - 15 and
15d - 15) as of March 27, 2004, have concluded that, as of such date,
our disclosure controls and procedures were adequate and effective to
ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those
entities in connection with our filing of this first quarter report on
Form 10-Q for the quarterly period ended March 27, 2004.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls over financial reporting (as such term is defined in
Rules 13a - 15 and 15d - 15 under the Exchange Act) during the fiscal
quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over
financial reporting.
30
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 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 580 Eligible persons None
Directors Stock
Grant Program 01/05/04 Common 2,300 Directors Directors'
Services
(d) None.
(e) Issuer purchases of equity securities.
Fiscal Month (a) (b) (c) (d)
------------ ----- ------ ----- -----------
December 28, 2003 - January 31, 2004...... 3,199 $32.40 3,199 1,551,438
February 1 - 28, 2004..................... 1,551,438
February 29 - March 27, 2004.............. 439 29.77 439 1,550,999
(a) Total number of shares purchased.
(b) Average price paid per share.
(c) Total number of shares purchased as part of publicly announced
plans or programs.
(d) Maximum number of shares that may yet be purchased under the plans
or programs.
31
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 5. Other Information.
In the first quarter of 2004, the Audit Committee approved non-audit services to
be provided by our independent auditors, Ernst & Young LLP, totaling $270,000
for 2004.
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits (listed by number corresponding to the Exhibit
Table as Item 601 in Regulation S-K) are filed with this report:
31(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
(b) During the first quarter, we filed a report on Form 8-K dated April 13,
2004, to report the issuance of a press release announcing our
financial results for the first quarter ended March 27, 2004 under Item
7.
32
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: April 23, 2004 By:/s/ William G. Currie
------------------------------------
William G. Currie
Its: Vice Chairman of the Board and
Chief Executive Officer
Date: April 23, 2004 By:/s/ Michael R. Cole
------------------------------------
Michael R. Cole
Its: Chief Financial Officer
33
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest
Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. 1350).