.
.
.
EXHIBIT 13
UNIVERSAL FOREST PRODUCTS, INC.
FINANCIAL INFORMATION
TABLE OF CONTENTS
<Table>
Selected Financial Data.............................. 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 7-21
Report of Independent Auditors -- Ernst & Young LLP.. 22
Report of Independent Public Accountants -- Arthur
Andersen LLP......................................... 23
Consolidated Balance Sheets as of December 27, 2003
and December 28, 2002................................ 24
Consolidated Statements of Earnings for the Years
Ended December 27, 2003, December 28, 2002 and
December 29, 2001.................................... 25
Consolidated Statements of Shareholders' Equity for
the Years Ended December 27, 2003, December 28, 2002
and December 29, 2001................................ 26
Consolidated Statements of Cash Flows for the Years
Ended December 27, 2003, December 28, 2002 and
December 29, 2001.................................... 27
Notes to Consolidated Financial Statements........... 28-45
Price Range of Common Stock and Dividends............ 46
</Table>
UNIVERSAL FOREST PRODUCTS(R) 5
SELECTED FINANCIAL DATA
(In thousands, except per share and statistics data.)
<Table>
<Caption>
2003 2002 2001 2000 1999
--------------------------------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS DATA
Net sales(1)........................... $1,898,830 $1,639,899 $1,530,353 $1,387,130 $1,432,601
Gross profit(1)........................ 257,986 230,410 211,479 187,013 178,387
Earnings before income taxes, minority
interest and equity in earnings of
investee............................. 65,792 62,115 54,300 50,375 51,537
Net earnings(3)........................ 40,119 36,637 33,142 30,438 31,448
Diluted earnings per share(3).......... $ 2.18 $ 1.97 $ 1.63 $ 1.49 $ 1.48
Dividends per share.................... $ 0.095 $ 0.090 $ 0.085 $ 0.080 $ 0.075
Weighted average shares outstanding
with common stock equivalents........ 18,379 18,619 20,377 20,477 21,186
CONSOLIDATED BALANCE SHEET DATA
Working capital(4)..................... $ 190,435 $ 185,256 $ 124,071 $ 120,321 $ 124,324
Total assets........................... 684,757 638,874 551,209 485,320 468,638
Total debt and capital lease
obligations(2)....................... 213,186 243,572 212,187 160,860 155,818
Shareholders' equity................... 304,749 264,434 230,862 235,769 214,562
STATISTICS
Gross profit as a percentage of net
sales(1)............................. 13.6% 14.1% 13.8% 13.5% 12.5%
Net earnings as a percentage of net
sales(3)............................. 2.1% 2.2% 2.2% 2.2% 2.2%
Return on beginning equity(5).......... 15.2% 13.7% 14.1% 14.2% 16.4%
Current ratio.......................... 2.34 2.64 2.10 2.50 2.36
Debt to equity ratio(2)................ 0.70 0.92 0.92 0.68 0.73
Book value per common share............ $ 17.11 $ 14.90 $ 13.04 $ 12.02 $ 10.65
</Table>
- -------------------------
(1) In 2001, we reclassified customer rebate expense from cost of goods sold to
include it in net sales. Prior year amounts have been reclassified.
(2) Includes $36 million classified as temporary shareholders' equity in 2001
associated with a share redemption we completed in January 2002.
(3) In 2002, we adopted SFAS 142 and as a result we no longer recognize
amortization expense associated with goodwill.
(4) Current assets less current liabilities.
(5) Net earnings divided by beginning shareholders' equity (including temporary
shareholder's equity).
6 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
We advise you to read the issues discussed in Management's Discussion and
Analysis in conjunction with our Consolidated Financial Statements and the Notes
to the Consolidated Financial Statements included in this Annual Report for the
year ended December 27, 2003. We are pleased to present this overview of 2003,
which is discussed in three sections: the challenges we faced, the
accomplishments we made, and our view of the future.
OVERVIEW
In 2003, we faced several challenges:
- - The manufactured housing industry experienced a 23% decline in production as a
result of the tight credit conditions and repossessions which hampered the
industry since the end of 1999.
- - Inclement weather across the United States in the first quarter adversely
impacted our operating efficiencies during that period.
- - Difficult economic conditions, such as rising unemployment and declining
consumer sentiment and manufacturing activity, impacted all of our markets for
the first half of the year. The one bright spot, low interest rates,
specifically attractive mortgage rates, helped housing starts and multi-family
construction remain at historically high levels.
- - Our wood preservation plants, along with the rest of the industry, converted
from CCA to a new preservative in the third and fourth quarters of 2003, which
brought several unique challenges. For example, each of our plants experienced
production downtime in order to clean its cylinders and remove CCA; we had to
work closely with our chemical suppliers to ensure we were able to achieve
desired quality and efficiency standards; and we had to coordinate with our
customers to ensure supply requirements were achieved. Each of these
challenges required extensive management time, focus and cost.
We are pleased to say that our people managed through these challenges and
achieved another year of strong results. We remained focused on our goals and
delivered the following accomplishments:
- - Our sales to the industrial market increased 20% for the year as we continue
to obtain new accounts and develop packaging products that meet our customers'
needs.
- - We continue to increase our shipments to modular home producers, and developed
several new products for manufacturing housing producers which will help them
reduce costs.
- - We acquired interests in two framing operations and began a joint venture with
another. Some of our site-built construction customers prefer supply
arrangements which allow them to purchase a complete package of components and
framing services. Therefore, we expect to continue to investigate
opportunities which enable us to supply complete packages of components and
services to them.
- - We expanded the production capacity of the EverX(R) (composite decking)
manufacturing plant we acquired in November 2002. While we believe wood
decking will continue to hold a dominant share of the market in the future, we
also believe that composites will continue to be an important component of
this market. The EverX(R) plant provides us with the opportunity to realize a
portion of that growth.
- - Following a year in which we completed several strategic acquisitions and
large repurchases of our stock, we focused on our balance sheet, assimilating
new operations and reducing debt levels.
- - We sold several idle plants and non-operating subsidiaries in 2003, and in
January 2004 we sold the shares we had invested in Nascor Inc., one of our
subsidiaries, as we continue to stay focused on investing our resources in
areas that help us best achieve our strategic goals.
As we look ahead, we see a variety of opportunities and trends that could
benefit our position in each of our markets. We also see some familiar
challenges that, historically, we have used as springboards for growth.
- - The supply network of the industrial and site-built construction markets we
serve are very fragmented, and customers continue to consolidate, particularly
in the site-built construction market. Our history includes successfully
serving consolidating markets such as the manufactured housing and
do-it-yourself/retail ("DIY/retail") industries. As we grow our sales to the
site-built construction and industrial markets this will help us achieve more
balance and diversification which is the foundation upon which our strategy is
built.
UNIVERSAL FOREST PRODUCTS(R) 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- - In the short term, our wood preservation facilities will stay focused on
achieving the high quality and efficiency standards we must hit to maintain
our profitability and customer satisfaction. Historically, we have held a
leadership position in these areas.
- - In the long-term, there is some uncertainty whether demand for wood treated
with the new preservative, ACQ, which is expected to increase consumer costs
by 10% to 15%, will be less than it was for wood treated with CCA. We continue
to believe that demand will not be materially changed.
- - Providing framing services is a new business for us and as a result we expect
to experience a learning curve. However, this area also presents exciting
opportunities to create a competitive advantage and add value to our customer
relationships.
- - Recent signs suggest that the manufactured housing industry may have reached a
bottom and that a slight recovery is possible. For example, in early 2003,
Berkshire Hathaway acquired one of the industry's largest producers -- Clayton
Homes, Inc. -- which in turn recently agreed to purchase Oakwood Homes, Inc.
Oakwood is presently operating under Chapter 11 of the U.S. Bankruptcy Code.
In addition, several lenders recently announced that they will begin providing
financing to the industry.
In summary, we remain optimistic about the future of our business, markets and
strategies, and our employee-owners 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.
A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED WITH ONE CUSTOMER. Our
sales to The Home Depot comprised 30% of our total sales in 2003 and 2002.
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
8 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Notes to Consolidated Financial Statements, Footnote N
"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.
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. On December 27, 2003, we had approximately $5.6 million of
CCA-treated product in inventory, which we expect to sell at reasonable margins
during the first quarter of 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 N, "Commitments,
Contingencies and Guarantees.")
When analyzing this report to assess our future performance, please recognize
the potential impact of the various factors set forth above.
UNIVERSAL FOREST PRODUCTS(R) 9
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 years ended December 27, 2003, December 28, 2002 and December 29, 2001.
<Table>
<Caption>
RANDOM LENGTHS COMPOSITE
AVERAGE $/MBF
--------------------------
2003 2002 2001
--------------------------
January..................................................... $278 $297 $269
February.................................................... 295 317 285
March....................................................... 277 339 306
April....................................................... 283 323 331
May......................................................... 278 312 411
June........................................................ 303 302 365
July........................................................ 302 306 325
August...................................................... 336 291 336
September................................................... 375 279 309
October..................................................... 325 274 278
November.................................................... 338 265 283
December.................................................... 327 271 277
Annual average.............................................. $310 $298 $314
Annual percentage change.................................... 4.0% (5.1%) (2.8%)
</Table>
In addition, a SYP composite price, which we prepare and use, is presented
below. Sales of products produced using this species comprise up to fifty
percent of our sales volume.
<Table>
<Caption>
SYP COMPOSITE
AVERAGE $/MBF
---------------------
2003 2002 2001
---------------------
January..................................................... $387 $410 $369
February.................................................... 394 434 393
March....................................................... 392 464 408
April....................................................... 410 457 427
May......................................................... 385 408 509
June........................................................ 384 383 496
July........................................................ 374 409 426
August...................................................... 398 375 419
September................................................... 437 361 406
October..................................................... 390 357 365
November.................................................... 410 354 371
December.................................................... 401 375 371
Annual average.............................................. $397 $399 $413
Annual percentage change.................................... (0.5%) (3.4%) (5.1%)
</Table>
10 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We generally price our products to pass lumber costs through to our customers so
that our profitability is based on the value-added manufacturing, distribution,
engineering and other services we provide. As a result, our sales levels (and
working capital requirements) are impacted by the lumber costs of our products.
Our gross margins are impacted by both (1) the relative level of the Lumber
Market (i.e. whether prices are higher or lower from comparative periods), and
(2) the trend in the market price of lumber (i.e. whether the price of lumber is
increasing or decreasing within a period or from period to period). Moreover, as
explained below, our products are priced differently. Some of our products have
fixed selling prices, while the selling prices of other products are indexed to
the reported Lumber Market with a fixed dollar adder to cover conversion costs
and profits. Consequently, the level and trend of the Lumber Market impact our
products differently.
Below is a general description of the primary ways in which our products are
priced.
- - Products with fixed selling prices. These products include value-added
products such as decking and fencing sold to DIY/retail customers, as well as
trusses, wall panels and other components sold to the site-built construction
market. 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.)
- - 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.
<Table>
<Caption>
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%
</Table>
UNIVERSAL FOREST PRODUCTS(R) 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 in fiscal 2003, 2002 and 2001
(see Note B to the consolidated financial statements for further details). These
business combinations were accounted for using the purchase method.
<Table>
<Caption>
COMPANY NAME ACQUISITION DATE BUSINESS DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------
D&L Framing LLC...................................... August 28, 2003 Framing operation for multi-family
construction located in Las Vegas, NV.
Norpac Construction LLC.............................. June 3, 2003 Concrete framer for residential
construction located in Las Vegas, NV.
Quality Wood Treating Co., Inc. ("Quality").......... November 4, 2002 One facility in Prairie du Chien, WI
August 26, 2003 which produces EverX(R) composite
decking. We also entered into an
exclusive treating services agreement
with Quality. On August 26, 2003, we
canceled the treating services
agreement and purchased two treating
facilities in Lansing, MI and
Janesville, WI and our subsidiary
agreed to lease the real estate of a
third treating facility in White Bear
Lake, MN.
J.S. Building Products, Inc.......................... September 9, 2002 One facility in Modesto, CA, which
manufactures engineered roof trusses
for the site-built construction
market.
Inno-Tech Plastics, Inc. ("Inno-Tech")............... April 10, 2002 One facility in Springfield, IL which
-- Entered into exclusive licensing agreement and manufactures "wood alternative"
acquired certain assets. products.
Pinelli-Universal S. de R.L. de C.V. ("Pinelli")..... January 15, 2002 One facility in Durango, Durango,
-- Purchased additional 5% interest. Mexico which manufactures molding and
millwork products.
P&R Truss Company, Inc. and P&R Truss-Sidney, Inc.
(collectively "P&R"). ............................. October 15, 2001 Facilities in Auburn, Chaffee, Hudson
and Sidney, New York, which serve the
site-built construction market.
Superior Truss Division of Banks Corporation
("Superior"). ..................................... June 1, 2001 One facility in Syracuse, Indiana and
one in Minneota, Minnesota which serve
the site-built construction market.
Sunbelt Wood Components ("Sunbelt"). ................ April 3, 2001 Facilities in New London, North
Carolina; Haleyville, Alabama;
Ashburn, Georgia; and Glendale,
Arizona which serve the manufactured
housing industry.
D&R Framing Contractors ("D&R")...................... February 28, 2001 One facility in Englewood, Colorado.
-- Purchased 50% of the assets. Framer serving the site-built
construction market.
</Table>
12 UNIVERSAL FOREST PRODUCTS(R)
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 Statements of Earnings as a percentage of net sales.
<Table>
<Caption>
YEARS ENDED
------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 29,
2003 2002 2001
------------------------------------------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 86.4 86.0 86.2
----- ----- -----
Gross profit................................................ 13.6 14.1 13.8
Selling, general and administrative expenses................ 9.4 9.7 9.5
----- ----- -----
Earnings from operations.................................... 4.2 4.4 4.3
Interest, net............................................... (0.7) (0.7) (0.8)
Gain on sale of assets...................................... 0.0 0.1 0.0
----- ----- -----
Earnings before income taxes, minority interest and equity
in earnings of investee................................... 3.5 3.8 3.5
Income taxes................................................ 1.3 1.4 1.3
----- ----- -----
Earnings before minority interest and equity in earnings of
investee.................................................. 2.2 2.4 2.3
Minority interest........................................... (0.1) (0.2) (0.1)
Equity in earnings of investee.............................. 0.0 0.0 0.0
----- ----- -----
Reported net earnings....................................... 2.1% 2.2% 2.2%
Add: Goodwill amortization, net of tax.................... 0.0 0.0 0.2
----- ----- -----
Adjusted net earnings..................................... 2.1% 2.2% 2.4%
===== ===== =====
</Table>
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 products and framing
services to the site-built construction market. Engineered wood products
include roof trusses, wall panels and floor systems.
- - Increasing sales of "value-added" products. Value-added product sales consist
of fencing, decking, lattice and other specialty products sold to the
DIY/retail market, specialty wood packaging, engineered wood products 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.
UNIVERSAL FOREST PRODUCTS(R) 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table presents, for the periods indicated, our net sales (in
thousands) and percentage change in net sales by market classification.
<Table>
<Caption>
YEARS ENDED
------------------------------------------------------------
DECEMBER 27, % DECEMBER 28, % DECEMBER 29,
MARKET CLASSIFICATION 2003 CHANGE 2002 CHANGE 2001
- --------------------------------------------------------------------------------------------------
DIY/retail......................................... $ 900,188 18.5 $ 759,439 2.9 $ 738,218
Site-Built Construction............................ 400,055 22.4 326,962 5.9 308,826
Manufactured Housing............................... 285,040 (2.7) 293,070 4.6 280,208
Industrial and Other............................... 313,547 20.4 260,428 28.2 203,101
---------- ---------- ----------
Total.............................................. $1,898,830 $1,639,899 $1,530,353
========== ========== ==========
</Table>
- -------------------------
Note: During 2003, we reviewed our customer lists and made certain
reclassifications. Historical information has been restated to reflect
these reclassifications.
The following table estimates, for the periods indicated, our percentage change
in net sales which were attributable to changes in overall selling prices versus
changes in units shipped.
<Table>
<Caption>
% CHANGE
---------------------------------------
IN SALES IN SELLING PRICES IN UNITS
---------------------------------------
2003 versus 2002............................................ +16% +3% +13%
2002 versus 2001............................................ +7% -2% +9%
2001 versus 2000............................................ +10% -3% +13%
</Table>
We estimate that our 2003 unit sales increased by 7% as a result of business
combinations, a new joint venture framing operation, and an exclusive treating
services agreement completed in the third quarter of 2002. We estimate that our
unit sales out of existing facilities increased by 6% in 2003. The increase in
selling prices was attributable to a slight increase in the Lumber Market.
The increase in unit sales in 2002 was due to the consolidation of Pinelli,
business combinations we completed, and organic growth achieved by our existing
plants totaling approximately 3%. The decrease in overall selling prices was
attributable to the Lumber Market.
Changes in sales by market are discussed below.
DIY/RETAIL:
We have developed strong relationships with national retail customers due to our
ability to provide quality products and a high level of service at competitive
prices. The most significant is our longstanding relationship with The Home
Depot, which comprised 30% of our total sales and 63% of our DIY/retail sales in
2003.
Net sales to the DIY/retail market increased 19% in 2003 compared to 2002,
primarily due to acquiring a plant that manufactures composite decking
(EverX(R)) and entering into an exclusive treating services agreement with
Quality. Our organic sales growth out of existing facilities was approximately
11% due to new opportunities with an existing customer and an increase in the
number of our customers' stores. In addition, we began providing installation
service for some of our products.
Net sales to the DIY/retail market increased 3% in 2002 compared to 2001,
primarily due to the acquisitions of P&R, Quality and Inno-Tech (see Business
Combinations). Organic growth out of our existing operations was offset by lower
overall selling prices due to the Lumber Market.
SITE-BUILT CONSTRUCTION:
Net sales to the site-built construction market increased 22% in 2003 compared
to 2002 primarily due to acquisitions completed after the third quarter of 2002,
a new joint venture framing operation, and organic sales growth spread over
14 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
several existing plants totaling approximately 14%. The ability of some of our
plants to offer framing services in addition to engineered component sales
allowed these plants to capture additional market share from existing customers,
which contributed to our organic sales growth.
Net sales to the site-built construction market increased 6% in 2002 compared to
2001 primarily due to the acquisition of Superior (see Business Combinations).
Organic growth achieved out of existing operations was substantially offset by
lower selling prices due to the Lumber Market.
MANUFACTURED HOUSING:
Net sales to the manufactured housing market decreased 3% in 2003 compared to
2002 primarily due to a 23% decline in industry shipments. We improved our
market share this year as a result of new product initiatives and continuing to
increase our sales to modular home producers.
Net sales to the manufactured housing market increased 5% in 2002 compared to
2001 despite a 13% decline in industry shipments. We improved our market share
by utilizing certain assets acquired from Sunbelt (see Business Combinations)
for the full year and increasing our sales to modular home producers.
INDUSTRIAL AND OTHER:
Net sales to industrial and other increased 20% in 2003 compared to 2002 due to
unit increases out of several existing facilities as a result of executing our
internal growth strategy. Additional sales personnel, training and equipment has
been dedicated to this market.
Net sales to industrial and other increased 28% in 2002 compared to 2001 due to
the consolidation of Pinelli, combined with 15% unit sales growth out of our
existing plants. In January 2002, we acquired an additional 5% ownership
interest in Pinelli. As a result of this transaction, we obtained additional
rights of control and began consolidating Pinelli in the 2002 consolidated
financial statements.
VALUE-ADDED AND COMMODITY-BASED SALES:
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
<Table>
<Caption>
VALUE-ADDED COMMODITY-BASED
-----------------------------
2003........................................................ 51.1% 48.9%
2002........................................................ 50.8% 49.2%
2001........................................................ 48.4% 51.6%
</Table>
The increase in our ratio of value-added sales to total sales in 2003 compared
to 2002 was primarily due to a 17% increase in value-added sales while
commodity-based sales increased by 15%. Value-added sales increased primarily
due to increased unit sales of trusses sold to the site-built market, new
framing operations, EverX(R) composite decking and specialty products supplied
to the DIY/retail market. Commodity-based sales increased due to increased unit
sales of plywood and the exclusive treating services agreement completed in the
third quarter of 2002.
The increase in our ratio of value-added sales to total sales in 2002 compared
to 2001 was primarily due to a 12% increase in value-added sales while
commodity-based sales remained relatively flat. Value-added sales increased
primarily due to increased unit sales of engineered wood products, the
consolidation of Pinelli which manufactures molding, millwork, industrial
products and other specialty products supplied to the DIY/retail market.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales decreased in 2003 compared to 2002.
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 12%, while units shipped increased by 13%. We
UNIVERSAL FOREST PRODUCTS(R) 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
believe this slight shortfall in gross profit dollars was due in part to
operating inefficiencies resulting from inclement first quarter weather and the
conversion to ACQ.
Gross profit as a percentage of net sales increased in 2002 compared to 2001.
This increase was primarily due to an increase in sales of value-added products,
offset in part by a dramatic decline in lumber prices during our peak selling
season which adversely impacted our gross margins on products not covered under
managed inventory programs, inventory programs maintained with certain vendors.
As previously discussed, a declining trend in lumber prices adversely impacts
margins on products whose selling prices are indexed to the Lumber Market.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") as a percentage of net
sales decreased to 9.4% in 2003 compared to 9.7% in 2002, primarily due to the
impact of the Lumber Market on our selling prices. Our 12.4% increase in SG&A
for the year was slightly lower than our 13% increase in units shipped. The
dollar increase in SG&A was primarily due to acquisitions and new operations,
combined with higher compensation costs resulting from greater head count to
support growth in our business, an increase in health care and legal costs, and
higher incentive compensation tied to growth in profits and return on
investment. These increases were offset somewhat by a decline in bad debt
expense as our trend of accounts receivable write-offs improved.
SG&A as a percentage of net sales increased to 9.7% in 2002 compared to 9.5% in
2001. On a pro forma basis, excluding amortization of goodwill in 2001, the
percentage was 9.3%. This increase was primarily due to new acquisitions that
have comparatively higher selling and design costs, combined with increases in
insurance costs and incentive compensation.
Effective December 30, 2001 (the first day of our fiscal year ending December
28, 2002), we adopted SFAS 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 and if a triggering event occurs.
INTEREST, NET
Net interest costs were higher in 2003 compared to 2002. The increase was due to
an average debt balance that was $13.6 million higher in 2003, combined with an
increase in our average borrowing rates as a result of issuing $55 million of
long-term unsecured notes payable in December 2002. The proceeds from the note
issuance were used to reduce amounts outstanding under our revolving credit
facility which bears interest at a lower rate.
Net interest costs were lower in 2002 compared to 2001. Although we had a higher
average debt balance as a result of increased working capital, acquisitions and
the repurchase of shares from our largest shareholder, this was offset by a
decrease in short-term borrowing rates on variable rate debt. The average
interest rate on our primary revolving credit facility was 2.3% and 4.7% for
2002 and 2001, respectively.
GAIN ON SALE OF ASSETS
During the second quarter of 2002, we sold our corporate airplane and recognized
a gain of $1.1 million on the sale, and entered into an operating lease for a
replacement airplane.
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.
While our effective tax rate was 37.0% in 2003 and 2002 we experienced the
following fluctuations between the periods:
- - Our state and local effective tax rate decreased in 2003 as a result of state
income tax credits received.
- - A reduction in the earnings of certain minority owned entities we consolidate.
16 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our effective tax rate increased to 37.0% in 2002 from 36.1% in 2001. This
increase primarily resulted from an increase in our state income tax rate in
2002 and certain tax credits recognized in the third and fourth quarters of
2001. These increases were offset somewhat by the effect of no longer amortizing
goodwill, which resulted in a permanent tax difference in 2001.
OFF-BALANCE SHEET TRANSACTIONS AND CONTRACTUAL OBLIGATIONS
We have no significant off-balance sheet transactions other than operating
leases. The following table summarizes our contractual obligations as of
December 27, 2003 (in thousands).
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------
LESS THAN 1 - 3 3 - 5 AFTER 5
CONTRACTUAL OBLIGATION 1 YEAR YEARS YEARS YEARS TOTAL
- -----------------------------------------------------------------------------------------------------------
Long-term debt......................................... $ 6,411 $49,642 $81,478 $73,929 $211,460
Operating leases....................................... 9,931 11,885 3,097 267 25,180
Capital project purchase obligations................... 2,755 2,755
------- ------- ------- ------- --------
Total.................................................. $19,097 $61,527 $84,575 $74,196 $239,395
======= ======= ======= ======= ========
</Table>
As of December 27, 2003, we also had $31.4 million in outstanding letters of
credit issued during the normal course of business, as required by some vendor
contracts.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
<Table>
<Caption>
2003 2002 2001
------------------------------
Cash from operating activities.............................. $ 70,375 $ 20,796 $ 78,056
Cash from investing activities.............................. (31,412) (48,435) (68,494)
Cash from financing activities.............................. (39,067) 22,286 10,933
-------- -------- --------
Net change in cash and cash equivalents..................... (104) (5,353) 20,495
Cash and cash equivalents, beginning of year................ 17,534 22,887 2,392
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 17,430 $ 17,534 $ 22,887
======== ======== ========
</Table>
In general, we financed our growth in the past through a combination of
operating cash flows, our revolving credit facility, industrial development
bonds (when circumstances permit), and issuance of long-term notes payable at
times when interest rates are favorable. In the past we have not issued equity
to finance growth except in the case of a large acquisition. We manage our
capital structure by attempting to maintain a targeted ratio of debt to equity
and debt to operating cash flow. We believe this is one of the many important
factors to maintaining a strong credit profile, which in turn helps ensure
timely access to capital when needed.
Our business is highly seasonal in nature and our investment in working capital
is at its highest levels from March until August of each year in preparation for
and during our primary selling season. As a result, we generally report negative
or modest cash flows from operations in our first and second quarters. During
these periods, we use our revolving credit facility to finance working capital
requirements. In fact, at our seasonal peak we may consume up to $100 million of
our availability under the credit facility. Conversely, from September through
February, our slower sales periods, our working capital levels decline resulting
in substantial operating cash flows, a portion of which is used to prepay
outstanding amounts under the credit facility. Our business is highly working
capital-intensive, therefore, one of the keys to reporting strong returns and
operating cash flows lies in careful management of receivables, inventory and
accounts payable. As a result of the seasonality of our business and the
temporary effects changes in the Lumber Market can have on our operating cash
flows, we believe our cash cycle (days sales outstanding plus days supply of
inventory less days payables outstanding) is a good indicator of how well we are
managing our working capital.
UNIVERSAL FOREST PRODUCTS(R) 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Our cash cycle was 47 days (without the sale of receivables program) in 2003 and
47 days in 2002. Our days supply of inventory and accounts receivable cycle
increased slightly in 2003, but was offset by an extension in our payables
cycle.
Cash flows from operating activities increased by almost $50 million in 2003
compared to 2002 for the following reasons:
- - We sold the extra inventory we carried at the end of 2002 and throughout the
first quarter of 2003 resulting from opportunistic buying and poor weather.
- - We extended our payables cycle by negotiating better terms with our vendors.
- - Our accrued liabilities increased due to accrued compensation costs tied to
headcount and incentives.
- - During the third quarter of 2003, we implemented a new program whereby we sold
certain accounts receivable for cash. The proceeds from this sale were used to
reduce borrowings on our revolving credit facility. Benefits of this program
include a lower net cost than our revolving credit facility, an increase in
our available debt capacity, and further diversification of our funding
sources. (See Notes to Consolidated Financial Statements, Footnote G, "Sale of
Accounts Receivable.")
The positive factors listed above were offset somewhat by an increase in our
accounts receivable as a result of strong December sales in 2003.
Cash used for investing activities declined by $17 million in 2003 compared to
2002, as we curtailed acquisition activities in order to focus on assimilating
businesses acquired in 2002 and to reduce our debt levels. Our capital
expenditures totaled almost $41 million in 2003, compared to $31 million in
2002. In 2003, we increased our spending on expansionary projects and purchased
two treating facilities and the equipment of a third facility from Quality. In
addition, we were able to sell several idle facilities and an airplane in 2003
for proceeds totaling approximately $6.2 million.
Our cash flows used in financing activities was over $39 million in 2003
primarily as a result of repaying obligations on our revolving credit facility
and notes payable. In addition, our financing activities included approximately
$2 million spent to repurchase our common stock. We have authorization from the
Board of Directors to purchase an additional 1.5 million shares.
On December 27, 2003, we had $27 million outstanding on our $200 million
revolving credit facility. The revolving credit facility supports letters of
credit totaling approximately $29 million on December 27, 2003. Financial
covenants on our revolving credit facilities 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 all our requirements at December 27,
2003.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Financial Statements Footnote N, "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. Following is a summary of our more
significant accounting policies that require the use of estimates and judgments
in preparing the financial statements.
ACCOUNTS RECEIVABLE ALLOWANCES
We record provisions against gross revenues for estimated returns and cash
discounts in the period when the related revenue is recorded. These estimates
are based on factors that include, but are not limited to, historical discounts
taken, analysis of credit memorandum activity and customer demand. We also
evaluate the allowance for uncollectible accounts receivable and discounts based
on historical collection experience and specific identification of other
potential problems, including the economic climate. Actual collections can
differ, requiring adjustments to the allowances.
18 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELF-INSURANCE RESERVES
We are significantly self-insured for general liability, automobile, workers'
compensation and certain employee health benefits. We are fully self-insured for
environmental liabilities. The general liability, automobile, workers'
compensation and environmental liabilities are managed through a wholly-owned
insurance captive; the related assets and liabilities are included in the
consolidated financial statements as of December 27, 2003. Our accounting
policies with respect to the reserves are as follows:
- - General liability, automobile and workers' compensation reserves are accrued
based on third party actuarial valuations of the expected future liabilities.
- - Health benefits are self-insured by us up to our pre-determined stop loss
limits. These reserves, including incurred but not reported claims, are based
on internal computations. These computations consider our historical claims
experience, independent statistics and trends.
- - The environmental reserve is based on known remediation activities at certain
wood preservation facilities and the potential for undetected environmental
matters at other sites. The reserve for known activities is based on expected
future costs and is computed by in-house experts responsible for managing our
monitoring and remediation activities. (See "Environmental Considerations and
Regulations.")
PERCENTAGE OF COMPLETION
Earnings on construction contracts are reflected in operations by the
percentage-of-completion method, measured by the relationships of actual costs
incurred related to the total estimated costs. Revisions in earnings estimates
on construction contracts are recorded in the accounting period in which the
basis for such revisions becomes known. Projected losses on individual contracts
are charged to operations in their entirety when such losses become apparent.
LONG-LIVED ASSETS AND GOODWILL
We evaluate long-lived assets for indicators of impairment when events or
circumstances indicate that this risk may be present. Our judgments regarding
the existence of impairment are based on market conditions, operational
performance and estimated future cash flows. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is recorded to
adjust the asset to its fair value. In addition, we test goodwill for impairment
by utilizing the discounted cash flow method, as well as comparing the results
to other widely acceptable valuation methods.
FORWARD OUTLOOK
The following section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements are
based on the beliefs and assumptions of management, 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 in the "Risk Factors" section of
this report and certain economic and business factors which may be beyond our
control. Investors are cautioned that all forward-looking statements involve
risks and uncertainty.
"BUILDING IT FORWARD 2007"
In 2002, we announced our goals for growth and diversification entitled
"Building it Forward 2007." The goals call for us to:
- - Grow our sales by $1 billion while continuing to diversify our markets,
particularly by growing our industrial and site-built markets.
- - Improve our cash cycle by 10%.
- - Earn a return on capital exceeding our cost of capital.
We believe that we must complete several business acquisitions in order to
achieve these goals and expect that acquisitions may comprise up to 50% of our
targeted growth.
In line with the goals for growth stated above, we have targeted sales and net
earnings growth of 10% to 14% for 2004.
UNIVERSAL FOREST PRODUCTS(R) 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DIY/RETAIL MARKET
The Home Improvement Research Institute forecasts an increase in retail sales
from home centers and building supply outlets totaling 4% in 2004. In addition,
the consolidation within the DIY/retail industry is expected to continue as top
performers continue to obtain additional market share. We feel we are in a
position to continue to capitalize on these industry conditions as a result of
our national presence, service capabilities that meet stringent customer
requirements and diversified product offering.
Notwithstanding the information above, our long-term growth objectives may be
impacted by the industry's recent conversion to a new chemical used to preserve
wood products. The registered manufacturers of CCA agreed to voluntarily limit
the future residential uses of CCA treated wood products as of December 31,
2003. CCA treated products are still permitted for a variety of industrial and
non-residential applications.
The cost of ACQ is more than four times higher than 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 N, "Commitments, Contingencies and Guarantees.")
SITE-BUILT CONSTRUCTION MARKET
As a result of improving economic factors, and the current low interest rate
environment, we expect the site-built construction market to be stable in 2004.
However, we believe we will obtain additional market share in 2004 as a result
of planned expansion into new geographic markets, including new plants in
Tecate, Mexico; Berlin, NJ; Houston and Dallas, TX; and Indianapolis, IN.
On a long-term basis, we believe the sale of engineered wood products will
continue to grow because of the benefits these products provide builders over
traditional carpentry methods employed on the job site, including cost
advantages through more efficient labor, and consolidation toward large
production-oriented builders, which tend to prefer the use of engineered
products and who desire suppliers with a national presence.
We expect that business acquisitions will play a major role in our future growth
in this market. In addition, we believe the trend whereby customers prefer to
purchase a combination of components and framing services will continue.
Therefore, our acquisition strategy includes targeted markets for framing
operations.
MANUFACTURED HOUSING MARKET
As a result of a continuation of tight credit conditions and repossessions, but
improving economic factors, we expect a small increase in industry shipments to
retailers. We believe we will maintain our current market share of trusses
produced for Housing and Urban Development ("HUD") code homes and plan to
continue efforts to gain share from new products and sales to the modular
market.
INDUSTRIAL AND OTHER
One of our key strategic objectives is to increase our sales of wood packaging
products to industrial users. We believe the vast amount of hardwood and
softwood lumber consumed for industrial applications, combined with the highly
fragmented nature of this market provides us with significant growth
opportunities. To take advantage of these opportunities, we plan to continue to
obtain market share through an internal growth strategy utilizing our current
manufacturing capabilities and dedicated industrial sales force. On a long-term
basis, we plan to evaluate strategic acquisition opportunities.
GROSS PROFIT
We believe the following factors may impact our gross profits in the future:
- - We have a long-term goal of continuing to increase our ratio of value-added
sales to total sales, which in turn should increase gross margins. Our
acquisition and internal sales growth strategies will help us continue to make
progress
20 UNIVERSAL FOREST PRODUCTS(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
toward this objective. However, achievement of this goal is dependent, in
part, upon certain factors that are beyond our control. (See "Impact of the
Lumber Market on Our Operating Results.")
- - Our ability to increase sales and gross margins on products sold to our
largest customers is intended to improve margins. We believe our level of
service, geographic diversity and quality of products provide an added value
to our customers. If our customers are unwilling to pay for the additional
services, our sales and gross margins may be reduced.
- - The conversion to a new chemical to preserve wood products may impact our
margins in the event consumer demand for the new preservatives is not as
strong as the demand for CCA treated products. The new chemical is expected to
increase the cost of our products by approximately 10% to 15%. (See Note N,
"Commitments, Contingencies and Guarantees.") On a short-term basis, margins
may be impacted by our ability to achieve desired chemical efficiencies. The
cost of the new chemical is more than four times higher than CCA.
- - Fluctuations in the relative level of the Lumber Market and the trend in the
market price of lumber impact our gross margins. (See "Impact of the Lumber
Market on Our Operating Results.")
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A costs have increased as a percentage of sales in recent years, in part, due
to acquisitions of engineered wood product manufacturers which have extensive
engineering and design costs. SG&A costs as a percentage of sales may continue
to increase in the future as sales of engineered wood products and specialty
wood packaging become a greater percentage of our total business. However, we
strive to achieve economies of scale in other administrative departments as
sales growth objectives are met.
LIQUIDITY AND CAPITAL RESOURCES
Management expects to spend approximately $38 million on capital expenditures in
2004 and incur depreciation and amortization of approximately $29 million.
Besides "maintenance" capital expenditures totaling approximately $27 million,
we plan to spend an additional $11 million to expand the business and create
operating efficiencies. On December 27, 2003, we had outstanding purchase
commitments on capital projects of approximately $2.8 million.
We have no present intention to change our dividend policy, which is currently
$0.050 per share paid semi-annually.
Our Board of Directors has approved a share repurchase program under which we
have authorization to buy back approximately 1.5 million shares as of December
27, 2003. In the past, we have repurchased shares in order to offset the effect
of issuances resulting from our employee benefit plans and at times when our
stock price falls to a pre-determined level.
We are obligated to pay amounts due on long-term debt totaling approximately
$6.4 million in 2004. In addition, we expect to refinance our revolving credit
facility by the end of 2004.
We have a $200 million unsecured revolving credit facility used to support
certain outstanding letters of credit and fund seasonal working capital
requirements and growth. We believe our peak seasonal working capital
requirements will consume an additional $100 million of this availability
through June of 2004 and then decrease for the balance of the year in line with
historical trends. We plan to finance our capital requirements by using this
revolving credit facility.
SALE OF NASCOR
In January 2004, we sold our 60% ownership in Nascor, a Calgary, Alberta-based
manufacturer of engineered building products and licensor of I-joist
manufacturing technology. The total sales price was $6 million (Canadian) and we
expect to record an after-tax accounting loss from the sale of our Nascor shares
of approximately $443,000 in the first quarter of 2004.
UNIVERSAL FOREST PRODUCTS(R) 21
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of Universal Forest Products, Inc.
We have audited the accompanying consolidated balance sheets of Universal Forest
Products, Inc. and subsidiaries as of December 27, 2003 and December 28, 2002,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the two years in the period ended December 27, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated financial statements
of Universal Forest Products, Inc. for the year ended December 29, 2001 were
audited by other auditors who have ceased operations and whose report dated
January 25, 2002 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Universal Forest
Products, Inc. and subsidiaries at December 27, 2003 and December 28, 2002, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 27, 2003, in conformity with
accounting principles generally accepted in the United States.
As discussed above, the financial statements of Universal Forest Products, Inc.
as of December 29, 2001, and for the year then ended were audited by other
auditors who have ceased operations. As described in Note C, these consolidated
financial statements have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards (Statement) No. 142,
Goodwill and Other Intangible Assets, which was adopted by the Company as of
December 30, 2001. Our audit procedures with respect to the adjusted net
earnings and adjusted earnings-per-share as shown on the consolidated statement
of earnings and as described in Note C with respect to 2001 included (a)
agreeing the previously reported net income to the previously issued financial
statements and the adjustments to reported net income representing amortization
expense (including any related tax effects) recognized in 2001 related to
goodwill as a result of initially applying Statement No. 142 to the Company's
underlying records obtained from management, and (b) testing the mathematical
accuracy of the reconciliation of adjusted net income to reported net income,
and the related earnings-per-share amounts. In our opinion, the disclosures for
2001 as shown on the consolidated statement of earnings and described in Note C
are appropriate. However, we were not engaged to audit, review, or apply any
procedures to the 2001 consolidated financial statements of the Company other
than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 consolidated financial
statements taken as a whole.
As discussed in Note C to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill and other intangible
assets.
/s/ ERNST & YOUNG
Grand Rapids, Michigan
January 27, 2004
22 UNIVERSAL FOREST PRODUCTS(R)
The following report is a copy of a report previously issued by Arthur Andersen
LLP in connection with the Company's Annual Report on Form 10-K for the year
ended December 29, 2001. This opinion has not been reissued by Arthur Andersen
LLP.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Universal Forest Products, Inc.:
We have audited the accompanying consolidated balance sheet of Universal Forest
Products, Inc. (a Michigan Corporation) and subsidiaries as of December 29,
2001, and the related consolidated statements of earnings, shareholders' equity
and cash flows for the year ended December 29, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Universal Forest Products, Inc.
and subsidiaries as of December 29, 2001 and the results of their operations and
their cash flows for the year ended December 29, 2001, in conformity with
accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Grand Rapids, Michigan
January 25, 2002
UNIVERSAL FOREST PRODUCTS(R) 23
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<Table>
<Caption>
DECEMBER 27, DECEMBER 28,
NOTE 2003 2002
-------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 17,430 $ 17,534
Restricted cash equivalents............................... 1,383
Accounts receivable (net of allowances of $1,891 and
$2,427)................................................. G 137,660 105,217
Inventories:
Raw materials........................................... 83,064 83,557
Finished goods.......................................... 86,497 82,449
--------- ---------
169,561 166,006
Other current assets...................................... G 2,540 2,041
Prepaid income taxes...................................... M 3,290 5,075
Deferred income taxes..................................... M 1,832 921
--------- ---------
TOTAL CURRENT ASSETS.................................... 332,313 298,177
OTHER ASSETS................................................ F, K 6,421 6,738
GOODWILL.................................................... B, C 125,028 126,299
NON-COMPETE AND LICENSING AGREEMENTS
(net of accumulated amortization of $4,003 and $2,463).... B, C 6,791 4,516
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements..................................... E 51,942 47,102
Buildings and improvements................................ E 120,001 113,316
Machinery, equipment and office furniture................. E 177,525 157,004
Construction in progress.................................. 11,900 11,077
--------- ---------
361,368 328,499
Less accumulated depreciation and amortization............ E (147,164) (125,355)
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET...................... 214,204 203,144
--------- ---------
TOTAL ASSETS................................................ $ 684,757 $ 638,874
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt........................................... D $ 1,726 $ 1,758
Accounts payable.......................................... 81,687 57,515
Accrued liabilities:
Compensation and benefits............................... L 47,150 40,690
Other................................................... H 4,904 6,463
Current portion of long-term debt and capital lease
obligations............................................. D, E 6,411 6,495
--------- ---------
TOTAL CURRENT LIABILITIES............................... 141,878 112,921
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion................................................... D, E 205,049 235,319
DEFERRED INCOME TAXES....................................... M 15,984 13,328
MINORITY INTEREST........................................... 7,780 7,040
OTHER LIABILITIES........................................... C, F, N 9,317 5,832
--------- ---------
TOTAL LIABILITIES....................................... 380,008 374,440
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, 17,813,564 and 17,741,982....... H, I, J 17,814 17,742
Additional paid-in capital................................ H, J 85,189 82,139
Deferred stock compensation............................... F, H 1,477 1,434
Retained earnings......................................... 200,745 164,221
Accumulated other comprehensive earnings.................. 1,396 299
--------- ---------
306,621 265,835
Employee stock notes receivable........................... J (1,872) (1,401)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY.............................. 304,749 264,434
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 684,757 $ 638,874
========= =========
</Table>
See notes to consolidated financial statements.
24 UNIVERSAL FOREST PRODUCTS(R)
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
<Table>
<Caption>
YEAR ENDED
------------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 29,
NOTE 2003 2002 2001
------------------------------------------------------
NET SALES.............................................. $1,898,830 $1,639,899 $1,530,353
COST OF GOODS SOLD..................................... E, L 1,640,844 1,409,489 1,318,874
---------- ---------- ----------
GROSS PROFIT........................................... 257,986 230,410 211,479
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... C,E,H,K,L 177,970 158,299 145,722
---------- ---------- ----------
EARNINGS FROM OPERATIONS............................... 80,016 72,111 65,757
OTHER EXPENSE (INCOME):
Interest expense..................................... D 14,443 11,375 12,043
Interest income...................................... J (219) (297) (586)
Gain on sale of assets............................... (1,082)
---------- ---------- ----------
14,224 9,996 11,457
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES, MINORITY INTEREST AND
EQUITY IN EARNINGS OF INVESTEE....................... 65,792 62,115 54,300
INCOME TAXES........................................... M 24,325 22,983 19,612
---------- ---------- ----------
EARNINGS BEFORE MINORITY INTEREST AND EQUITY IN
EARNINGS OF INVESTEE................................. 41,467 39,132 34,688
MINORITY INTEREST...................................... (1,348) (2,495) (1,792)
EQUITY IN EARNINGS OF INVESTEE......................... 246
---------- ---------- ----------
REPORTED NET EARNINGS.................................. 40,119 36,637 33,142
ADD: Goodwill amortization, net of tax............... 2,997
---------- ---------- ----------
ADJUSTED NET EARNINGS................................ $ 40,119 $ 36,637 $ 36,139
========== ========== ==========
REPORTED EARNINGS PER SHARE -- BASIC................... $ 2.26 $ 2.04 $ 1.68
ADD: Goodwill amortization, net of tax............... 0.15
---------- ---------- ----------
ADJUSTED EARNINGS PER SHARE -- BASIC................. $ 2.26 $ 2.04 $ 1.83
========== ========== ==========
REPORTED EARNINGS PER SHARE -- DILUTED................. $ 2.18 $ 1.97 $ 1.63
ADD: Goodwill amortization, net of tax............... 0.15
---------- ---------- ----------
ADJUSTED EARNINGS PER SHARE -- DILUTED............... $ 2.18 $ 1.97 $ 1.77
========== ========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING.................... 17,761 17,922 19,774
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK
EQUIVALENTS.......................................... 18,379 18,619 20,377
</Table>
See notes to consolidated financial statements.
UNIVERSAL FOREST PRODUCTS(R) 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share and per share data)
<Table>
<Caption>
ACCUMULATED
ADDITIONAL DEFERRED OTHER EMPLOYEES'
COMMON PAID-IN STOCK RETAINED COMPREHENSIVE STOCK NOTES
STOCK CAPITAL COMPENSATION EARNINGS EARNINGS RECEIVABLE TOTAL
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 2000....... $19,719 $79,800 $1,134 $136,645 $ 860 $(1,255) $236,903
Comprehensive earnings:
Net earnings..................... 33,142
Foreign currency translation
adjustment..................... (302)
Total comprehensive earnings..... 32,840
Cash dividends -- $.085 per
share............................ (1,683) (1,683)
Issuance of 164,764 shares under
employee stock plans............. 165 705 870
Issuance of 13,464 shares under
stock grant programs............. 13 173 186
Repurchase of 109,482 shares....... (109) (1,427) (1,536)
Tax benefits from non-qualified
stock options exercised.......... 316 316
Deferred stock compensation........ 120 120
Transfer to temporary equity....... (2,000) (34,000) (36,000)
Payments received on officers'
stock notes receivable........... 100 100
------- ------- ------ -------- ------ ------- --------
BALANCE AT DECEMBER 29, 2001....... $17,788 $80,994 $1,254 $132,677 $ 558 $(1,155) $232,116
Comprehensive earnings:
Net earnings..................... 36,637
Foreign currency translation
adjustment..................... (259)
Total comprehensive earnings..... 36,378
Cash dividends -- $.090 per
share............................ (1,605) (1,605)
Issuance of 133,125 shares under
employee stock plans............. 133 710 843
Issuance of 7,877 shares under
stock grant programs............. 8 125 133
Repurchase of 199,435 shares....... (199) (3,488) (3,687)
Tax benefits from non-qualified
stock options exercised.......... 22 22
Deferred stock compensation........ 180 180
Issuance of officers' stock notes
receivable....................... 12 288 (300) 0
Payments received on officers'
stock notes receivable........... 54 54
------- ------- ------ -------- ------ ------- --------
BALANCE AT DECEMBER 28, 2002....... $17,742 $82,139 $1,434 $164,221 $ 299 $(1,401) $264,434
Comprehensive earnings:
Net earnings..................... 40,119
Foreign currency translation
adjustment..................... 1,097
Total comprehensive earnings..... 41,216
Cash dividends -- $.095 per
share............................ (1,689) (1,689)
Issuance of 89,753 shares under
employee stock plans............. 90 1,191 1,281
Issuance of 10,153 shares under
stock grant programs............. 10 174 184
Issuance of 37,678 shares under
Deferred Compensation plan....... 38 609 647
Repurchase of 123,234 shares....... (123) (1,906) (2,029)
Tax benefits from non-qualified
stock options exercised.......... 246 246
Deferred stock compensation........ 43 43
Issuance of employees' stock notes
receivable....................... 57 830 (887) 0
Payments received on stock notes
receivable....................... 416 416
------- ------- ------ -------- ------ ------- --------
BALANCE AT DECEMBER 27, 2003....... $17,814 $85,189 $1,477 $200,745 $1,396 $(1,872) $304,749
======= ======= ====== ======== ====== ======= ========
</Table>
See notes to consolidated financial statements.
26 UNIVERSAL FOREST PRODUCTS(R)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
YEAR ENDED
-------------------------------------------------
DECEMBER 27, DECEMBER 28, DECEMBER 29,
NOTE 2003 2002 2001
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.............................................. $ 40,119 $ 36,637 $ 33,142
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation............................................ E 25,638 23,371 20,101
Amortization of intangibles............................. B, C 1,909 1,152 4,375
Deferred income taxes................................... M 1,746 3,102 4,587
Minority interest....................................... 1,348 2,495 1,792
Net loss on sale or impairment of property, plant and
equipment............................................. 1,050 702 1,445
Changes in:
Accounts receivable................................... (41,233) (16,489) (11,753)
Accounts receivable under sale and servicing
agreement........................................... G 9,159
Inventories........................................... (3,555) (40,780) 10,051
Accounts payable...................................... 23,476 9,638 9,891
Accrued liabilities and other......................... 10,718 968 4,425
-------- -------- --------
NET CASH FROM OPERATING ACTIVITIES.................. 70,375 20,796 78,056
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (40,578) (31,295) (22,748)
Purchase of licensing agreements.......................... (150) (2,000)
Acquisitions, net of cash received........................ B (787) (17,540) (49,534)
Proceeds from sale of property, plant and equipment....... 6,221 2,862 2,497
Advances on notes receivable.............................. (886)
Collection of notes receivable............................ 461 965 945
Restricted cash equivalents............................... 1,383 (1,383) 1,364
Other assets, net......................................... 2,038 (44) (132)
-------- -------- --------
NET CASH FROM INVESTING ACTIVITIES.................. (31,412) (48,435) (68,494)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments)/borrowings of short-term debt and
revolving credit facilities............................. D (29,657) 13,862 23,129
Proceeds from issuance of long-term debt.................. D 58,700 2,500
Repayment of long-term debt............................... D (6,140) (8,482) (10,697)
Proceeds from issuance of common stock.................... H, I 1,281 843 870
Distributions to minority shareholder..................... (833) (1,345) (1,650)
Dividends paid to shareholders............................ (1,689) (1,605) (1,683)
Repurchase of common stock................................ H (2,029) (39,687) (1,536)
-------- -------- --------
NET CASH FROM FINANCING ACTIVITIES.................. (39,067) 22,286 10,933
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS..................... (104) (5,353) 20,495
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 17,534 22,887 2,392
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 17,430 $ 17,534 $ 22,887
======== ======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ D $ 14,505 $ 11,388 $ 12,303
Income taxes............................................ M 19,829 22,827 14,911
NON-CASH OPERATING ACTIVITIES:
Non-compete agreements with Chairman of the Board in
exchange for future payments............................ C 856
NON-CASH INVESTING ACTIVITIES:
Property, plant and equipment acquired through capital
leases.................................................. E 2,110 247
Stock acquired through employees' stock notes
receivable.............................................. J 887 300
NON-CASH FINANCING ACTIVITIES:
Note payable exchanged for non-compete.................... B 2,069
Common stock issued under deferred compensation plan...... F 647
</Table>
See notes to consolidated financial statements.
UNIVERSAL FOREST PRODUCTS(R) 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
We engineer, manufacture, treat, distribute and install lumber, composite,
plastic and other building products for the do-it-yourself/retail
("DIY/retail"), site-built construction, manufactured housing and industrial and
other markets. Our principal products include preservative-treated wood,
remanufactured lumber, lattice, fence panels, deck components, specialty
packaging, engineered trusses, wall panels and other building products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and those of our
wholly-owned and majority-owned subsidiaries and partnerships. Intercompany
transactions and balances have been eliminated. The equity method of accounting
is used for less than 50% owned affiliates.
INVESTMENT IN AFFILIATE
On December 18, 1998, one of our subsidiaries acquired a 45% interest in Pino
Exporta, renamed to Pinelli Universal S. de R.L. de C.V. ("Pinelli"), a
manufacturer of moldings and millwork products. Pinelli operates out of one
facility in Durango, Durango, Mexico. We exchanged $3.0 million for our initial
ownership interest in Pinelli, and accounted for our investment utilizing the
equity method of accounting. In addition, we retained an option to acquire an
additional 5% interest in Pinelli for $1 million. This option was extended and
exercised on January 15, 2002. As a result of this transaction, we obtained
additional rights of control and thus began consolidating the results of Pinelli
in the 2002 consolidated financial statements. (See Note B.)
MINORITY INTEREST IN SUBSIDIARIES
Minority interest in results of operations of consolidated subsidiaries
represents the minority shareholders' share of the income or loss of various
consolidated subsidiaries. The minority interest reflects the original
investment by these minority shareholders combined with their proportional share
of the earnings or losses of these subsidiaries, net of dividends paid.
FISCAL YEAR
Our fiscal year is a 52 or 53 week period, ending on the last Saturday of
December. Unless otherwise stated, references to 2003, 2002 and 2001 relate to
the fiscal years ended December 27, 2003, December 28, 2002 and December 29,
2001, respectively. Fiscal years 2003, 2002 and 2001 were comprised of 52 weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 107,
Disclosures about Fair Value of Financial Instruments. Significant differences
in fair market values and recorded values are disclosed in Note D. The estimated
fair value amounts have been determined using available market information and
appropriate valuation methodologies. However, considerable judgment is required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that we could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information
available to management as of December 27, 2003. Although we are not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair value may
differ significantly from the amounts presented herein.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly-liquid investments
purchased with an original maturity of three months or less. Cash equivalents
totaled approximately $9.6 million and $3.9 million as of December 27, 2003 and
December 28, 2002, respectively.
28 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of our cash management system, checks issued but not presented to
our bank for payment creates negative cash balances. These negative balances are
included in trade accounts payable and totaled $30.5 million and $23.9 million
as of December 27, 2003 and December 28, 2002, respectively.
RESTRICTED CASH EQUIVALENTS
Unexpended proceeds from certain borrowings, that are restricted as to use, have
been excluded from cash and cash equivalents. This cash was restricted for
future capital projects financed with industrial development revenue bonds.
ACCOUNTS RECEIVABLE
We perform periodic credit evaluations of our customers and generally do not
require collateral. Accounts receivable are generally due within 30 days.
Discounts are offered as an incentive for early payment.
INVENTORIES
Inventories are stated at the lower of average cost or market. The cost of
inventories includes raw materials, direct labor and manufacturing overhead.
Cost is determined on a first-in, first-out (FIFO) basis. Raw materials consist
primarily of unfinished wood products expected to be manufactured or treated
prior to sale, while finished goods represent various manufactured and treated
wood products ready for sale.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for renewals and
betterments are capitalized, and maintenance and repairs are expensed as
incurred. Amortization of assets held under capital leases is included in
depreciation and amortized over the shorter of the estimated useful life of the
asset or the lease term. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets as follows:
<Table>
Buildings and improvements.................................. 15 to 31.5 years
Land improvements........................................... 5 to 15 years
Machinery, equipment and office furniture................... 3 to 10 years
</Table>
FOREIGN CURRENCY TRANSLATION
Our foreign operations use the local currency as their functional currency.
Accordingly, assets and liabilities are translated at exchange rates as of the
balance sheet date and revenues and expenses are translated using weighted
average rates, with translation adjustments included as a separate component of
shareholders' equity. The net gain in translation adjustments was $1.1 million
for the year ended December 27, 2003. The net loss in translation adjustments
was $0.3 million for the years ended December 28, 2002 and December 29, 2001.
SELF-INSURANCE RESERVES
We are significantly self-insured for certain employee health benefits, and have
self-funded retentions for general liability, automobile liability and workers'
compensation. We are fully self-insured for environmental liabilities. The
general liability, automobile liability, workers' compensation and environmental
liabilities are managed through a wholly-owned insurance captive; the related
assets and liabilities are included in the consolidated financial statements as
of December 27, 2003. Through the captive we are responsible for general
liability up to $2 million per occurrence and $4 million in aggregate; for
automobile liability up to $1 million per occurrence; and for workers'
compensation up to $1 million per accident or disease. We have purchased excess
liability over our general liability, automobile liability and workers'
compensation employer's liability up to $100 million per occurrence and in
aggregate. Our policy is to accrue amounts equal to actuarially determined or
internally computed liabilities. The actuarial and internal valuations are based
on historical information along with certain assumptions about future events.
Changes in assumptions for such matters as legal actions, medical cost trends
and changes in claims experience could cause these estimates to change in the
future.
UNIVERSAL FOREST PRODUCTS(R) 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax basis of assets and liabilities that will result
in taxable or deductible amounts in the future. Such deferred income tax asset
and liability computations are based on enacted tax laws and rates. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE ALLOWANCES
Revenue is recognized at the time the product is shipped to the customer.
Generally, title passes at the time of shipment. In certain circumstances, the
customer takes title when the shipment arrives at the destination. However, our
shipping process is typically completed the same day.
Earnings on construction contracts are reflected in operations by the
percentage-of-completion method, measured by the relationships of actual costs
incurred related to the total estimated costs. Revisions in earnings estimates
on construction contracts are recorded in the accounting period in which the
basis for such revisions becomes known. Projected losses on individual contracts
are charged to operations in their entirety when such losses become apparent.
We base our allowances related to receivables on historical credit and
collections experience, and the specific identification of other potential
problems, including the economic climate. Actual collections can differ,
requiring adjustments to the allowances. Individual accounts receivable balances
are evaluated on a monthly basis, and those balances considered to be
uncollectible are charged to the allowance. Collections of amounts previously
written off are recorded as an increase to the allowance.
The following table presents the activity in our accounts receivable allowances
(in thousands):
<Table>
<Caption>
ADDITIONS UNCOLLECTIBLE RECOVERY OF
BALANCE AT CHARGED TO ACCOUNTS AMOUNTS BALANCE
BEGINNING COSTS AND WRITTEN OFF PREVIOUSLY AT END OF
OF PERIOD EXPENSES (NET)(1) WRITTEN OFF PERIOD
-----------------------------------------------------------------
Year ended December 27, 2003:
Allowance for possible losses on accounts receivable... $2,427 $17,817 $(18,694) $341 $1,891
Year ended December 28, 2002:
Allowance for possible losses on accounts receivable... 1,803 17,500 (16,981) 105 2,427
Year ended December 29, 2001:
Allowance for possible losses on accounts receivable... 1,340 15,298 (15,286) 451 1,803
</Table>
- -------------------------
(1) Includes effects of foreign currency translation.
We record estimated sales returns, discounts and other applicable adjustments as
a reduction of net sales in the same period revenue is recognized.
SHIPPING AND HANDLING OF PRODUCT
Shipping and handling costs that are charged to and reimbursed by the customer
are recognized as revenue. Costs incurred related to the shipment and handling
of products are classified in cost of goods sold.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated based on the weighted average
number of common shares outstanding during the periods presented. Diluted EPS is
calculated based on the weighted average number of common and common equivalent
shares outstanding during the periods presented, giving effect to stock options
granted (see Note I) utilizing the "treasury stock" method.
30 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
<Table>
<Caption>
2003 2002 2001
-------------------------- -------------------------- --------------------------
INCOME SHARES PER INCOME SHARES PER INCOME SHARES PER
(NUM- (DENOM- SHARE (NUM- (DENOM- SHARE (NUM- (DENOM- SHARE
ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT ERATOR) INATOR) AMOUNT
------------------------------------------------------------------------------------
NET EARNINGS................ $40,119 $36,637 $33,142
EPS -- BASIC
Income available to common
stockholders.............. 40,119 17,761 $2.26 36,637 17,922 $2.04 33,142 19,774 $1.68
===== ===== =====
EFFECT OF DILUTIVE
SECURITIES
Options..................... 618 697 603
------ ------ ------
EPS -- DILUTED
Income available to common
stockholders and assumed
options exercised......... $40,119 18,379 $2.18 $36,637 18,619 $1.97 $33,142 20,377 $1.63
======= ====== ===== ======= ====== ===== ======= ====== =====
</Table>
Options to purchase 295,000 shares of common stock at exercise prices ranging
from $22.88 to $36.01 were outstanding as of December 27, 2003, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common stock during the period
and, therefore, would be antidilutive.
Options to purchase 749,771 shares of common stock at exercise prices ranging
from $21.84 to $36.01 were outstanding as of December 28, 2002, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common stock during the period
and, therefore, would be antidilutive.
Options to purchase 399,548 shares of common stock at exercise prices ranging
from $19.75 to $36.01 were outstanding as of December 29, 2001, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of the common stock during the period
and, therefore, would be antidilutive.
LONG-LIVED ASSETS
Prior to December 30, 2001, we evaluated the recoverability of our long-lived
assets by determining whether unamortized balances could be recovered through
undiscounted future operating cash flows over the remaining lives of the assets
in accordance with the provisions of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121").
If the sum of the expected future cash flows was less than the carrying value of
the assets, an impairment loss was recognized for the excess of the carrying
value over the fair value. The estimated fair value was determined by
discounting the expected future cash flows at a rate that would have been
required for a similar investment with like risks.
Effective December 30, 2001 (the first day of our fiscal year ending December
28, 2002), we adopted SFAS No. 144, Accounting for the Impairment and Disposal
of Long-Lived Assets ("SFAS 144"). SFAS 144 supercedes SFAS 121, and the
accounting and reporting provisions of the Accounting Principles Board ("APB")
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 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 standard has not been significant to our consolidated
financial statements.
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 in 2003,
UNIVERSAL FOREST PRODUCTS(R) 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2002 and 2001 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):
<Table>
<Caption>
2003 2002 2001
---------------------------
Net Earnings:
As Reported............................................... $40,119 $36,637 $33,142
Deduct: Compensation expense -fair value method........... (1,743) (1,571) (1,371)
------- ------- -------
Pro Forma................................................. $38,376 $35,066 $31,771
======= ======= =======
EPS -- Basic:
As Reported............................................... $ 2.26 $ 2.04 $ 1.68
Pro Forma................................................. $ 2.16 $ 1.96 $ 1.61
EPS -- Diluted:
As Reported............................................... $ 2.18 $ 1.97 $ 1.63
Pro Forma................................................. $ 2.13 $ 1.93 $ 1.56
</Table>
The fair value of each option granted in 2003, 2002 and 2001 is estimated on the
date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions.
<Table>
<Caption>
2003 2002 2001
---------------------------------
Risk Free Interest Rate..................................... 4.6% 4.6% 4.6%
Expected Life............................................... 6.5 years 5.0 years 4.5 years
Expected Volatility......................................... 28.25% 27.52% 26.62%
Expected Dividend Yield..................................... 0.40% 0.40% 0.40%
</Table>
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. We believe our estimates to be reasonable; however, actual
results could differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 and 2001 consolidated
financial statements to conform to the classifications used in 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
modifies the definition of "liabilities" in SFAS No. 6, "Elements of Financial
Statements," to encompass certain obligations that a reporting entity can or
must settle by issuing its own common shares. The Statement affects accounting
for three types of freestanding financial instruments, (i) mandatorily
redeemable shares which an issuing company is obligated to buy back in exchange
for cash or other assets, (ii) put options or forward purchase contracts that do
or may require the issuer to buy back some of its shares in exchange for cash or
other assets, and (iii) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuee's
shares. The Statement considers each of these types of instruments as a
liability, as opposed to recent practice that may have classified the instrument
as mezzanine financing or equity, and increases disclosures for alternate
settlement methods. This Statement was effective beginning in our fiscal third
quarter, and adoption of this statement had no effect on our consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, as revised December 2003 (FIN 46(R)). This new rule
requires that companies consolidate a variable interest entity if the company is
entitled to receive a majority of the risk of loss from the variable interest
entity's activities, or is entitled to receive a majority of the entity's
residual returns, or both. We do not have any special purpose entities, as
defined, nor have we acquired a variable interest in an entity where we are the
primary beneficiary since January 31, 2003. The provisions of FIN 46(R)
currently
32 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are required to be applied as of the end of the first reporting period that ends
after March 15, 2004 for the variable interest entities in which we hold a
variable interest that we acquired on or before January 31, 2003. We do not
expect that the implementation of Interpretation 46(R) will have a material
effect on our consolidated financial statements.
B. BUSINESS COMBINATIONS AND ASSET PURCHASES
Each of the following business combinations have been accounted for as a
purchase. Accordingly, in each instance, the purchase price was allocated to the
assets acquired, liabilities assumed and identifiable intangible assets as
applicable based on their fair market values at the date of acquisition. Any
excess of the purchase price over the fair value of the acquired assets,
including identifiable intangible assets, and assumed liabilities was recorded
as goodwill in each transaction. For business combinations prior to June 30,
2001, we amortized goodwill on a straight-line basis over periods ranging from
20 to 40 years. Non-compete and licensing agreements are amortized on a
straight-line basis over the term of the agreements. In July 2001, the FASB
issued SFAS No. 141, Business Combinations ("SFAS 141"). SFAS 141 supercedes APB
No. 16, Business Combinations, and requires that all business combinations be
accounted for using the purchase method and further clarifies the criteria to
recognize intangible assets separately from goodwill. The results of operations
of each acquisition is included in our consolidated financial statements since
the date it was acquired.
On August 28, 2003, one of our subsidiaries acquired 50% of the assets of D&L
Framing LLC, 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.
On August 26, 2003, one of our subsidiaries entered into an agreement with
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 and is included in purchases of PP&E in the consolidated
statement of cash flows. 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, a concrete framer for multi-family construction located in Las
Vegas, NV. The purchase price was approximately $0.2 million.
On November 4, 2002, one of our subsidiaries acquired a facility from Quality
Wood Treating Co., Inc. ("Quality") in Prairie du Chien, WI, which produces
EverX(R) composite decking. The total purchase price for the real estate,
equipment, inventory and intangible assets was approximately $14.7 million,
allocating $10.1 million to net assets, $2.3 million to non-compete agreements,
$0.5 million to a licensing agreement and $1.8 million to goodwill. Quality had
composite decking net sales in fiscal 2001 totaling approximately $2 million. In
addition, we entered into a treating services agreement with Quality. Under the
terms of this agreement, we purchased substantially all of the inventory of
Quality for approximately $7.5 million, Quality agreed to provide exclusive
treating services to us for a five year term, and we agreed to monthly and
annual minimum volumes.
On September 9, 2002, one of our subsidiaries acquired certain assets of J.S.
Building Products, Inc., ("JS") a site-built component manufacturer in Modesto,
CA. The total purchase price for the assets was approximately $2.2 million. On
October 22, 2002, we purchased the real property from JS where the operation is
located. The total purchase price was $1.9 million. The purchase price allocates
$2.9 million to net assets and $1.2 million to goodwill. JS had net sales of
approximately $5 million in 2001.
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, allocating $2.1
million to net assets acquired and $2.0 million to a licensing agreement.
Inno-Tech had net sales in fiscal 2001 totaling approximately $1.3 million.
On January 15, 2002, one of our subsidiaries acquired an additional 5% interest
in Pinelli, increasing our ownership to 50%. The purchase price for the
additional 5% was approximately $0.9 million, allocating $0.3 million to net
assets acquired and $0.6 million to goodwill. As a result of this transaction,
we obtained additional rights of control and thus began consolidating the
results of Pinelli in the 2002 consolidated financial statements. In 2001,
Pinelli had net sales of $31 million and net earnings of $0.6 million. In 2001
and 2000, we accounted for Pinelli under the equity method.
On October 15, 2001, one of our subsidiaries acquired the assets of P&R Truss
Company, Inc. and the stock of P&R Truss-Sidney, Inc. (collectively "P&R"). P&R
has plants in Auburn, Chaffee, Hudson and Sidney, New York. The total purchase
price was approximately $21.0 million, allocating $10.4 million to net assets
acquired, $0.7 million to identifiable intangibles
UNIVERSAL FOREST PRODUCTS(R) 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(non-compete agreements), and the remaining $9.9 million to goodwill. P&R had
net sales in fiscal 2000 totaling approximately $23 million.
On June 1, 2001, three of our subsidiaries acquired certain assets of the
Superior Truss Division of Banks Corporation ("Superior"). The assets include
operations in Syracuse, Indiana and Minneota, Minnesota which serve the
site-built construction market. The total purchase price for the assets was
approximately $11.0 million, allocating $8.9 million to net assets and $2.1
million to goodwill. Superior had net sales in fiscal 2000 totaling
approximately $20 million.
On April 3, 2001, several of our subsidiaries acquired certain assets of the
Sunbelt Wood Component Division ("Sunbelt") of Kevco, Inc. The assets include
operations in New London, North Carolina; Haleyville, Alabama; Ashburn, Georgia;
and Glendale, Arizona which serve the manufactured housing market. The total
purchase price for the assets was approximately $7.8 million. Sunbelt had net
sales in fiscal 2000 totaling approximately $63 million.
On February 28, 2001, one of our subsidiaries acquired 50% of the assets of D&R
Framing Contractors ("D&R") of Englewood, Colorado for approximately $7.6
million, allocating $0.7 million to net assets and $6.9 million to goodwill. D&R
had net sales in fiscal 2000 totaling approximately $44 million.
The acquisitions in 2003 and 2002 were not significant to our operating results
individually nor in the aggregate, and thus pro forma results are not presented.
The following unaudited pro forma consolidated results of operations for the
year ended December 29, 2001 assumes the acquisitions of P&R, Superior and D&R
occurred as of the beginning of the periods presented (in thousands, except per
share data).
<Table>
<Caption>
YEAR ENDED
DECEMBER 29, 2001
-----------------
Net sales................................................... $1,559,756
Net earnings................................................ $ 34,739
Earnings per share:
Basic..................................................... $ 1.76
Diluted................................................... $ 1.70
Weighted average shares outstanding:
Basic..................................................... 19,774
Diluted................................................... 20,377
</Table>
The pro forma results above include certain adjustments to give effect to
amortization of goodwill, interest expense, compensation of management, certain
other adjustments and related income tax effects. The pro forma results are not
necessarily indicative of the operating results that would have occurred had the
acquisitions been completed as of the beginning of the period presented, nor are
they necessarily indicative of future operating results. Pro forma results are
not presented for Sunbelt. In 2001, we purchased certain assets of this
operation out of Chapter 11 bankruptcy. As a result of substantial changes in
the operations and customer base, pro forma results are not meaningful.
C. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective December 30, 2001, we adopted SFAS 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 and if a
triggering event occurs. The effect of applying the non-amortization provisions
of SFAS 142 in 2001 are shown separately in the accompanying consolidated
statement of earnings. We tested for transition as well as annual 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.
On December 31, 2002, the Chairman of the Board retired as an employee of
Universal Forest Products, Inc., and we entered into a non-compete agreement
with him which provides for monthly payments of $12,500 for a term of seven
years. The present value of these payments has been recorded in Other
Liabilities.
On December 27, 2003, non-compete assets totaled $7.9 million with accumulated
amortization totaling $3.1 million, and licensing agreements totaled $2.9
million with accumulated amortization of $0.9 million.
34 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 28, 2002, non-compete assets totaled $4.7 million with accumulated
amortization totaling $2.1 million, and licensing agreements totaled $2.3
million with accumulated amortization of $0.4 million.
Amortization is computed principally by the straight-line method over the
estimated useful lives of the intangible assets as follows:
<Table>
Non-compete agreements...................................... 5 to 11 years
Licensing agreements........................................ 5 to 20 years
</Table>
Amortization expense for intangibles totaled $1.9 million and $1.2 in 2003 and
2002, respectively. The estimated amortization expense for intangibles for each
of the five succeeding fiscal years is as follows (in thousands):
<Table>
2004........................................................ $1,634
2005........................................................ 1,478
2006........................................................ 1,302
2007........................................................ 788
2008........................................................ 486
Thereafter.................................................. 1,103
</Table>
The changes in the net carrying amount of goodwill for the years ended December
27, 2003 and December 28, 2002 are as follows (in thousands):
<Table>
Balance as of December 29, 2001............................. $119,550
Goodwill acquired........................................... 6,386
Foreign currency translation effects, and other, net........ 363
--------
Balance as of December 28, 2002............................. 126,299
Final purchase price allocation of Quality and JS........... (2,810)
Goodwill acquired........................................... 550
Foreign currency translation effects and other, net......... 989
--------
Balances as of December 27, 2003............................ $125,028
========
</Table>
D. DEBT
On December 18, 2002, we completed a $55 million private placement of senior
unsecured notes payable. The notes have an average life of over nine years and
an average interest rate of 6.0%.
On November 25, 2002, we completed a three-year, $200 million unsecured
revolving credit facility, which includes amounts reserved for letters of
credit. This facility replaced our $175 million and $20 million Canadian
facilities. Borrowings under the revolver are charged interest at a rate of 125
basis points over the applicable Eurodollar rate. The average borrowing rate on
these facilities was 3.7% and 2.3% in 2003 and 2002, respectively. The amount
outstanding on the revolving credit facility is included in the long-term debt
summary below.
Outstanding letters of credit extended on our behalf aggregated $31.4 million on
December 27, 2003, which includes approximately $18.3 million related to
industrial development revenue bonds. Letters of credit have terms ranging from
one to five years, and include an automatic renewal clause. The letters of
credit are charged an annual interest rate of 1.25%.
UNIVERSAL FOREST PRODUCTS(R) 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Long-term debt and capital lease obligations are summarized as follows on
December 27, 2003 and December 28, 2002 (amounts in thousands):
<Table>
<Caption>
2003 2002
-------------------
1994 Senior unsecured notes, $5,714,000 due annually
commencing May 1998 through May 2004, interest due
semi-annually at 7.15%.................................... $ 5,714 $ 11,429
Series 1998-A Senior Notes Tranche A, due on December 21,
2005, interest payable semi-annually at 6.69%............. 21,500 21,500
Series 1998-A Senior Notes Tranche B, due on December 21,
2008, interest payable semi-annually at 6.98%............. 59,500 59,500
Series 1998-A Senior Notes Tranche C, due on December 21,
2008, interest payable semi-annually at 6.98%............. 19,000 19,000
Series 2002-A Senior Notes Tranche A, due on December 18,
2009, interest payable semi-annually at 5.63%............. 15,000 15,000
Series 2002-A Senior Notes Tranche B, due on December 18,
2012, interest payable semi-annually at 6.16%............. 40,000 40,000
Revolving credit facility totaling $200 million due on
November 25, 2005, interest due monthly at a floating rate
(1.86% on December 27, 2003).............................. 27,058 53,383
Series 1998 Industrial Development Revenue Bonds, due on
December 1, 2018, interest payable monthly at a floating
rate (1.33% on December 27, 2003)......................... 1,300 1,300
Series 1999 Industrial Development Revenue Bonds, due on
July 1, 2029, interest payable monthly at a floating rate
(1.24% on December 27, 2003).............................. 2,400 2,400
Series 1999 Industrial Development Revenue Bonds, due on
August 1, 2029, interest payable monthly at a floating
rate (1.12% on December 27, 2003)......................... 3,300 3,300
Series 2000 Industrial Development Revenue Bonds, due on
October 1, 2020, interest payable monthly at a floating
rate (1.23% on December 27, 2003)......................... 2,700 2,700
Series 2000 Industrial Development Revenue Bonds, due on
November 1, 2020, interest payable monthly at a floating
rate (1.24% on December 27, 2003)......................... 2,400 2,400
Series 2001 Industrial Development Revenue Bonds, due on
November 1, 2021, interest payable monthly at a floating
rate (1.24% on December 27, 2003)......................... 2,500 2,500
Series 2002 Industrial Development Revenue Bonds, due on
December 1, 2022, interest payable monthly at a floating
rate (1.22% on December 27, 2003)......................... 3,700 3,700
Capital lease obligations, interest imputed at rates ranging
from 7.25% to 8.00%....................................... 2,320 226
Other....................................................... 3,068 3,476
-------- --------
211,460 241,814
Less current portion........................................ 6,411 6,495
-------- --------
Long-term portion........................................... $205,049 $235,319
======== ========
</Table>
Financial covenants on the unsecured revolving credit facility and unsecured
notes include a minimum net worth requirement, minimum interest coverage tests
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 all of our lending requirements on December 27, 2003.
36 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 27, 2003, the principal maturities of long-term debt and capital
lease obligations are as follows (in thousands):
<Table>
2004........................................................ $ 6,411
2005........................................................ 49,100
2006........................................................ 542
2007........................................................ 499
2008........................................................ 80,979
Thereafter.................................................. 73,929
--------
$211,460
========
</Table>
On December 27, 2003, the estimated fair value of our long-term debt, including
the current portion, was $215.2 million, which was $3.7 million greater than the
carrying value. The estimated fair value is based on rates anticipated to be
available to us for debt with similar terms and maturities. The estimated fair
value of short-term debt included in current liabilities approximated the
carrying value. The weighted-average rate on this short-term debt was 6.99% at
December 27, 2003.
E. LEASES
Leased property included in the balance sheet on December 27, 2003 and December
28, 2002 is as follows (in thousands):
<Table>
<Caption>
2003 2002
-------------
Land and improvements....................................... $ 230 $ 19
Buildings and improvements.................................. 2,061 161
Machinery and equipment..................................... 431 392
------ ----
2,722 572
Less accumulated amortization............................... (278) (168)
------ ----
$2,444 $404
====== ====
</Table>
We lease certain real estate under operating lease agreements with original
terms ranging from one to ten years. We are required to pay real estate taxes
and other occupancy costs under these leases. Certain leases carry renewal
options of five to fifteen years. We also lease motor vehicles and equipment
under operating lease agreements for periods of one to ten years. Future minimum
payments under non-cancellable leases on December 27, 2003 are as follows (in
thousands):
<Table>
<Caption>
CAPITAL OPERATING
LEASES LEASES TOTAL
-----------------------------
2004........................................................ $ 84 $ 9,931 $10,015
2005........................................................ 97 7,138 7,235
2006........................................................ 103 4,747 4,850
2007........................................................ 55 2,304 2,359
2008........................................................ 2,709 793 3,502
Subsequent.................................................. 267 267
------ ------- -------
Total minimum lease payments................................ 3,048 $25,180 $28,228
======= =======
Less imputed interest....................................... (728)
------
Present value of minimum lease payments..................... $2,320
======
</Table>
Rent expense was approximately $15.4 million, $12.7 million and $11.2 million in
2003, 2002 and 2001 respectively.
UNIVERSAL FOREST PRODUCTS(R) 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. DEFERRED COMPENSATION
We have a program whereby certain executives irrevocably elected to defer
receipt of certain compensation in 1985 through 1988. Deferred compensation
payments to these executives will commence upon their retirement. We purchased
life insurance on such executives, payable to us in amounts which, if
assumptions made as to mortality experience, policy dividends and other factors
are realized, will accumulate cash values adequate to reimburse us for all
payments for insurance and deferred compensation obligations. In the event cash
values are not sufficient to fund such obligations, the program allows us to
reduce benefit payments to such amounts as may be funded by accumulated cash
values. The deferred compensation liabilities and related cash surrender value
of life insurance policies are included in "Other Liabilities" and "Other
Assets," respectively.
We also maintain a non-qualified deferred compensation plan (the "Plan") for the
benefit of senior management employees who may elect to defer a portion of their
annual bonus payments. The Plan provides investment options similar to our
401(k) plan, including our stock. Investments in shares of our stock are made on
a "phantom stock" basis, and may only be distributed in kind. Assets held by the
Plan totaled approximately $2.1 million and $1.9 million on December 27, 2003
and December 28, 2002, respectively, and are included in "Other Assets." Related
liabilities totaled $4.1 million and $3.4 million on December 27, 2003 and
December 28, 2002, respectively, and are included in "Other Liabilities" and
"Shareholders' Equity." The assets are recorded at fair market value. The
related liabilities are recorded at fair market value, with the exception of the
phantom stock which is recorded at the market value on the date of deferral. In
2003, 37,678 shares were issued under this Plan, which included a distribution
to a participant and shares held in the Rabbi trust.
G. SALE OF ACCOUNTS RECEIVABLE
On September 25, 2003, we entered into an arrangement with a bank to sell
specific accounts receivable totaling $27.2 million with an Agreed Base Value of
approximately $25 million, which was received in cash. Approximately $2.0
million was recorded as a retained interest and approximately $168,000 was
recognized as an expense. The maximum amount of receivables which may be sold
and outstanding at any point in time under this arrangement is $33 million. The
agreement with the bank has a one year term. Each new sale may have a term
ranging from one month to a year. The September 25, 2003 transaction terminated
on December 31, 2003. We will service the sold receivables as part of the
arrangement with the bank and will receive servicing fees in the amount of .50%
per annum. Our retained interest is determined based on the fair market value of
anticipated collections in excess of the Agreed Base Value of the receivables
sold. The fair market value of anticipated collections is determined using
management's best estimate based on historical collections experience.
Appropriate valuation allowances are recorded against the retained interest. The
retained interest is reduced for subsequent collections. On December 27, 2003,
Factored Receivables and Retained Interest totaled $9.7 million and $0.5
million, respectively.
On January 2, 2004, we sold specific accounts receivable totaling $19.4 million
with an Agreed Base Value of approximately $18 million, which was received in
cash. Approximately $1.5 million was recorded as a retained interest and
approximately $110,000 was recognized as an expense. The January 2, 2004
transaction terminates on March 31, 2004.
H. COMMON STOCK
On June 1, 1993, shareholders approved the Incentive Stock Option Plan (the
"Plan") for our officers. Options for the purchase of all 1,200,000 shares of
our common stock authorized under the Plan have been granted. The Plan provides
that the options are exercisable only if the officer is employed by us at the
time of exercise and holds at least seventy-five percent of the individuals'
shares held on April 1, 1993. The Plan also requires the option shares to be
held for periods of six months to three years. The remaining options are
exercisable within thirty days of the anniversary of the Plan in 2005 through
2008.
In January 1994, the Employee Stock Gift Program was approved by the Board of
Directors which allows us to gift shares of stock to eligible employees based on
length of service. We gifted 2,397 shares, 798 shares and 1,552 shares of stock
under this Plan in 2003, 2002 and 2001, respectively, and recognized the market
value of the shares at the date of issuance as an expense totaling approximately
$51,000, $23,000 and $26,000 respectively.
In April 1994, shareholders approved the Employee Stock Purchase Plan ("Stock
Purchase Plan") and Director Retainer Stock Plan ("Stock Retainer Plan"). In
April 2002, shareholders approved the 2002 Employee Stock Purchase Plan ("2002
38 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Purchase Plan") to succeed the Stock Purchase Plan. The plans allow
eligible employees to purchase shares of our stock at a share price equal to 85%
of fair market value on the purchase date. In 2003, 2002 and 2001, 24,469
shares, 13,125 shares and 12,264 shares, respectively, were issued under this
Plan for amounts totaling approximately $417,000, $243,000 and $183,000,
respectively. The weighted-average fair value of these shares was $17.04, $18.54
and $14.95, respectively.
The Stock Retainer Plan allows eligible members of the Board of Directors to
defer their retainer fees and receive shares of our stock at the time of their
retirement, disability or death. The number of shares to be received is equal to
the amount of the retainer fee deferred multiplied by 110% divided by the fair
market value of a share of our stock at the time of deferral, is increased for
dividends declared and may only be distributed in kind. We have accrued, in
"Accrued Liabilities -- Other," approximately $355,000 and $370,000 on December
27, 2003 and December 28, 2002, respectively, for amounts incurred under this
Plan. In 2003, 6,156 shares were issued as part of a distribution from the Plan
for an amount totaling approximately $98,000.
In January 1997, we instituted a Directors' Stock Grant Program. In lieu of a
cash increase in the amount of Director fees, each outside Director receives 100
shares of stock for each board meeting attended up to a maximum of 400 shares
per year. In 2003, 2002 and 2001, we issued 1,600 shares, 1,400 shares and 1,500
shares, respectively, and recognized the market value of the shares on the date
of issuance as an expense totaling approximately $35,000, $31,000 and $32,000,
respectively.
On April 28, 1999, the shareholders approved the Long Term Stock Incentive Plan
(the "1999 Plan") to succeed the 1997 Long Term Stock Incentive Plan (the "1997
Plan"). The 1999 Plan reserves a maximum of 1,000,000 shares, plus 406,029
shares remaining under the 1997 Plan, plus an annual increase of no more than
200,000 shares which may be added on the date of the annual meeting of
shareholders each year. The 1999 Plan provides for the granting of stock
options, reload options, stock appreciation rights, restricted stock,
performance shares and other stock-based awards. The term of the 1999 Plan is
ten years. In 2003, 2002 and 2001, we granted stock options for 140,000 shares,
576,769 shares and 390,597 shares, respectively.
On April 17, 2002, under the 1999 Plan, a Conditional Share Grant Agreement was
executed which will grant the Chief Executive Officer 10,000 shares of common
stock immediately upon the satisfaction of the terms and conditions set forth in
the Agreement. We have accrued in shareholders equity approximately $41,000 and
$21,000 on December 27, 2003 and December 28, 2002, respectively, for this
grant.
As of December 27, 2003, a total of 3,000,558 shares are reserved for issuance
under the plans mentioned above and under Note I below.
On October 21, 1998, the Board of Directors approved a share repurchase program
(which succeeded a previous program) allowing us to repurchase up to 1,800,000
shares of our common stock. On October 18, 2000 and November 14, 2001, the Board
of Directors authorized an additional 1,000,000 shares and 2,500,000 shares,
respectively, to be repurchased under the program. In 2003, 2002 and 2001, we
repurchased 123,234 shares, 2,199,435 shares and 109,482 shares, respectively,
under these programs. As of December 27, 2003, cumulative total authorized
shares available for repurchase is 1.5 million shares.
I. STOCK OPTIONS AND STOCK-BASED COMPENSATION
Stock options issued under the Long Term Stock Incentive Plan are granted to
employees and officers at exercise prices which equaled or exceeded the market
value of the stock on the date of grant. The options are exercisable from three
to fifteen years from the date of grant and the recipients must be employed by
us at the date of exercise.
Options were granted in 2003, 2002 and 2001 with exercise prices which were
equal to the market prices on the date of grant.
UNIVERSAL FOREST PRODUCTS(R) 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity since the end of 2000 is summarized as follows:
<Table>
<Caption>
SHARES OF WEIGHTED WEIGHTED
COMMON STOCK AVERAGE AVERAGE FAIR
ATTRIBUTABLE TO EXERCISE PRICE VALUE OF OPTIONS
OPTIONS OF OPTIONS GRANTED
-----------------------------------------------------
Outstanding on December 30, 2000..................... 1,661,538 $12.95
Granted.............................................. 390,597 $14.13 $4.15
Exercised............................................ (152,500) $ 4.50
Forfeited............................................ (187,901) $11.20
---------
Outstanding on December 29, 2001..................... 1,711,734 $14.15
Granted.............................................. 576,769 $22.48 $7.09
Exercised............................................ (120,000) $ 5.00
Forfeited............................................ (62,629) $17.02
---------
Outstanding on December 28, 2002..................... 2,105,874 $16.86
Granted.............................................. 140,000 $17.10 $6.18
Exercised............................................ (65,284) $13.24
Forfeited............................................ (185,074) $18.73
---------
Outstanding on December 27, 2003..................... 1,995,516 $16.83
=========
</Table>
Options to purchase 55,003 shares were exercisable at December 27, 2003 with a
weighted average price of $13.01. Options to purchase 20,000 shares were
exercisable at December 28, 2002 with a weighted average price of $20.03. No
options were exercisable on December 29, 2001. The following table summarizes
information concerning options on December 27, 2003:
<Table>
<Caption>
WEIGHTED-AVERAGE
NUMBER REMAINING
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- -----------------------------------------------------------------------------------------------
$4.25 -- $10.00............................................. 235,000 3.02
$10.01 -- $14.00............................................ 413,530 2.70
$14.01 -- $18.00............................................ 490,245 3.58
$18.01 -- $21.00............................................ 157,827 1.79
$21.01 -- $23.00............................................ 413,914 3.88
$23.01 -- $25.00............................................ 195,000 5.67
$25.01 -- $36.01............................................ 90,000 8.56
---------
1,995,516
=========
</Table>
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure -- an amendment of FASB Statement No.
123 ("SFAS 148"). SFAS 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair-value based method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. We do not intend to adopt a fair-value based method of
accounting for stock-based employee compensation until a final standard is
issued by the FASB that addresses industry concerns related to applicability of
current option pricing models to non-exchange traded employee option plans.
J. EMPLOYEES' STOCK NOTES RECEIVABLE
Notes were obtained by us from certain officers for the purchase of our common
stock. On April 30, 2002, we sold 12,555 shares of common stock to three
officers in exchange for additional notes receivable totaling approximately
$300,000. Interest on all of the outstanding notes range from fixed rates of
five to eleven percent per annum and a variable rate of the prime rate less 10%
(minimum 6%, maximum 12%). Each loan is evidenced by a promissory note from
40 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the participating officer and is secured by all of the shares purchased with the
loan proceeds. As of August 1, 2002, we no longer issue notes to executive
officers under this program.
On April 30, 2003, we sold 57,232 shares of common stock to employees in
exchange for notes receivable totaling almost $900,000. Interest on these notes
is fixed at 4.8% per annum. Each loan is evidenced by a promissory note from the
participating employee and is secured by all of the shares purchased with the
loan proceeds.
All loans are recourse loans. On December 27, 2003, payments on the notes are
due as follows (in thousands):
<Table>
2004........................................................ $ 193
2005........................................................ 62
2006........................................................ 124
2007........................................................ 113
2008........................................................ 82
Thereafter.................................................. 1,298
------
$1,872
======
</Table>
K. LIFE INSURANCE
We maintain an officer's life insurance policy on the Chairman with a death
benefit of $1.3 million. The cash surrender value on this policy on December 28,
2002 and December 29, 2001 is included in "Other Assets." During 2003, this
policy was purchased by the Chairman of the Board for approximately $190,000,
which was equal to its cash value.
L. RETIREMENT PLANS
We have a profit sharing and 401(k) plan for the benefit of substantially all of
our employees excluding the employees of certain subsidiaries. Amounts
contributed to the plan are made at the discretion of the Board of Directors. On
July 1, 2003, the plan of a wholly-owned subsidiary merged with our plan. We
made a profit sharing contribution of approximately $384,000 and $682,000 in
2002 and 2001, respectively. In addition, we matched 50% of employee
contributions in 2003, 2002 and 2001, on a discretionary basis, totaling $2.9
million, $2.1 million and $1.8 million in 2003, 2002 and 2001, respectively. We
made an additional discretionary match of approximately $311,000 in 2003. The
basis for matching contributions may not exceed the lesser of 6% of the
employee's annual compensation or $11,500.
In addition, a wholly-owned subsidiary acquired in 1998 has a 401(k) plan for
the benefit of substantially all of its employees. This subsidiary matched 50%
of employee contributions, on a discretionary basis, totaling $583,000 and
$586,000 in 2002 and 2001, respectively.
UNIVERSAL FOREST PRODUCTS(R) 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
M. INCOME TAXES
Income tax provisions for the years ended December 27, 2003, December 28, 2002,
and December 29, 2001 are summarized as follows (in thousands):
<Table>
<Caption>
2003 2002 2001
-----------------------------
Currently payable:
Federal................................................... $19,331 $17,196 $12,801
State and local........................................... 2,296 2,590 1,385
Foreign................................................... 952 (509) 421
------- ------- -------
22,579 19,277 14,607
Net Deferred:
Federal................................................... 2,422 1,753 4,430
State and local........................................... (443) 462 447
Foreign................................................... (233) 1,491 128
------- ------- -------
1,746 3,706 5,005
------- ------- -------
$24,325 $22,983 $19,612
======= ======= =======
</Table>
The effective income tax rates are different from the statutory federal income
tax rates for the following reasons:
<Table>
<Caption>
2003 2002 2001
--------------------------------
Statutory federal income tax rate........................... 35.0% 35.0% 35.0%
State and local taxes (net of federal benefits)............. 1.8 3.2 2.2
Goodwill.................................................... 1.1
Effect of minority owned interest in earnings of
partnerships.............................................. (0.1) (1.0) (0.9)
Other, net.................................................. 0.3 (0.2) (1.3)
---- ---- ----
Effective income tax rate................................... 37.0% 37.0% 36.1%
==== ==== ====
</Table>
We have no present intention of remitting undistributed earnings of certain
foreign subsidiaries aggregating $6.4 million on December 27, 2003 and,
accordingly, no deferred tax liability has been established relative to these
earnings. If these amounts were not considered permanently reinvested, a
deferred tax liability of approximately $898,000 would have been required.
Temporary differences which give rise to deferred tax assets and (liabilities)
on December 27, 2003 and December 28, 2002 are as follows (in thousands):
<Table>
<Caption>
2003 2002
--------------------
Employee benefits........................................... $ 4,322 $ 4,369
Foreign subsidiary net operating loss....................... 9 64
Depreciation................................................ (14,919) (13,002)
Inventory................................................... (382) (480)
Accrued expenses............................................ 279 548
All other, net.............................................. (2,811) (3,234)
-------- --------
(13,502) (11,735)
Valuation allowance......................................... (651) (672)
-------- --------
$(14,153) $(12,407)
======== ========
</Table>
42 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The valuation allowance consists of a capital loss carryforward we have related
to a prior investment in a wholly-owned subsidiary, UFP de Mexico. We do not
anticipate realizing a future benefit from this loss carryforward, therefore, we
have established an allowance for the entire amount of the future benefit. This
carryforward will expire at the end of 2005. The foreign subsidiary net
operating loss carryforward also expires in 2005.
N. 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 August of 2002, we purchased property in Thornton, CA on which
several old buildings existed. The environmental assessment indicated that these
buildings contained small amounts of asbestos. A reserve has been established to
cover the removal of the asbestos. Since we determined we will no longer operate
the North East, MD facility as a wood preservation location, during the third
quarter of 2002 we completed the process of closing the conditioning pad, in
accordance with applicable regulations and the reserve was reduced accordingly.
Including amounts from the captive insurance company, we have reserved amounts
totaling approximately $1.9 million on December 27, 2003 and December 28, 2002,
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.
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 and Illinois. The
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. The Florida claim was denied class action status, and is presently under
appeal. We, along with others in the industry, were previously named as a
defendant in the purported class action lawsuit in Louisiana. We have been
dismissed from this litigation.
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 December 27, 2003, 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 December 27, 2003, we had outstanding purchase commitments on capital
projects of approximately $2.8 million.
UNIVERSAL FOREST PRODUCTS(R) 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We provide a variety of warranties for products we manufacture. Historically,
warranty claims have not been material.
In certain cases we jointly bid on contracts with framing companies to supply
building materials to site-built construction projects. In some of these
instances we are required to post payment and performance bonds to insure the
owner that the products and installation services are completed in accordance
with our contractual obligations. We have agreed to indemnify the surety for
claims made against the bonds. Historically, we have not had any claims for
indemnity from our sureties. As of December 27, 2003, we had approximately $26.6
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 G.)
On December 27, 2003, we had outstanding letters of credit totaling $31.4
million, primarily related to certain insurance contracts and industrial
development revenue bonds.
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
$13.1 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
(see Note D). 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 (see Note D).
O. SEGMENT REPORTING
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS 131") defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Under the definition of a
segment, our Eastern and Western Divisions may be considered an operating
segment of our business. Under SFAS 131, segments may be aggregated if the
segments have similar economic characteristics and if the nature of the
products, distribution methods, customers and regulatory environments are
similar. We have chosen to aggregate our divisions into one reporting segment.
Our divisions operate manufacturing and treating facilities throughout North
America.
In 2003, 2002 and 2001, 30%, 30% and 33% of net sales, respectively, were to a
single customer.
Information regarding principal geographic areas was as follows (in thousands):
<Table>
<Caption>
2003 2002 2001
------------------------ ------------------------ ------------------------
LONG-LIVED LONG-LIVED LONG-LIVED
TANGIBLE TANGIBLE TANGIBLE
NET SALES ASSETS NET SALES ASSETS NET SALES ASSETS
--------------------------------------------------------------------------------
United States................. $1,813,257 $182,514 $1,559,530 $181,761 $1,483,110 $172,407
Foreign....................... 85,573 38,111 80,369 28,121 47,243 20,840
---------- -------- ---------- -------- ---------- --------
Total......................... $1,898,830 $220,625 $1,639,899 $209,882 $1,530,353 $193,247
========== ======== ========== ======== ========== ========
</Table>
44 UNIVERSAL FOREST PRODUCTS(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Sales generated in Canada and Mexico are primarily to customers in the United
States of America.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
<Table>
<Caption>
VALUE-ADDED COMMODITY-BASED
-----------------------------
2003........................................................ 51.1% 48.9%
2002........................................................ 50.8% 49.2%
2001........................................................ 48.4% 51.6%
</Table>
Value added product sales consist of fencing, decking, lattice and other
specialty products sold to the DIY/retail market, specialty wood packaging,
engineered wood products and "wood alternative" products. Wood alternative
products consist primarily of composite wood and plastic. 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. Commodity-based product sales consist primarily of remanufactured
lumber and preservative treated lumber.
P. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected financial information for all of the
quarters, each consisting of 13 weeks, during the years ended December 27, 2003
and December 28, 2002 (in thousands, except per share data):
<Table>
<Caption>
FIRST SECOND THIRD FOURTH
------------------- ------------------- ------------------- -------------------
2003 2002 2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------------------------
Net sales............ $355,619 $341,656 $552,463 $504,944 $536,278 $452,959 $454,470 $340,340
Gross profit......... 51,804 51,277 78,742 68,623 72,563 61,665 54,877 48,845
Net earnings......... 4,500 6,082 17,162 15,354 12,204 10,644 6,252 4,557
Basic earnings per
share.............. 0.25 0.33 0.97 0.86 0.69 0.60 0.35 0.26
Diluted earnings per
share.............. 0.25 0.32 0.94 0.82 0.66 0.58 0.34 0.25
</Table>
Q. SUBSEQUENT EVENTS
In January 2004, we sold our 60% ownership in Nascor, a Calgary, Alberta-based
manufacturer of engineered building products and licensor of I-joist
manufacturing technology. The total sales price was $6 million (Canadian) and we
expect to record an after-tax accounting loss from the sale of our Nascor shares
of approximately $443,000 in the first quarter of 2004.
UNIVERSAL FOREST PRODUCTS(R) 45
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Our common stock trades on the Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol UFPI. The following table sets forth the range of high
and low sales prices as reported by Nasdaq.
<Table>
<Caption>
FISCAL 2003 HIGH LOW FISCAL 2002 HIGH LOW
- ---------------------------------------------------- ----------------------------------------------------
Fourth Quarter....................... 31.74 24.25 Fourth Quarter....................... 22.00 16.04
Third Quarter........................ 26.10 19.98 Third Quarter........................ 24.14 17.47
Second Quarter....................... 21.50 15.41 Second Quarter....................... 26.75 21.67
First Quarter........................ 21.99 15.01 First Quarter........................ 26.18 20.28
</Table>
There were approximately 5,500 shareholders of record as of March 1, 2004.
In 2003, we paid dividends on our common stock of $.045 per share in June and
$.050 per share in December. In 2002, we paid dividends on our common stock of
$.045 per share in June and $.045 per share in December. We intend to continue
with our current dividend policy for the foreseeable future.
46 UNIVERSAL FOREST PRODUCTS(R)
DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
Peter F. Secchia
Chairman of the Board
Universal Forest Products, Inc.
William G. Currie
Vice Chairman of the Board and
Chief Executive Officer
Universal Forest Products, Inc.
Dan M. Dutton
Chairman
Stimson Lumber Co.
John M. Engler
President of State and Local
Government Business
EDS
John W. Garside
Chairman
Woodruff Coal Company
Gary F. Goode, CPA
Independent Consultant
Philip M. Novell
Consultant
Compass Group
Louis A. Smith
President
Smith and Johnson, Attorneys, P.C.
OPERATIONS OFFICERS
Robert K. Hill
President
Universal Forest Products, Inc.
Western Division, Inc.
C. Scott Greene
President
Universal Forest Products, Inc.
Eastern Division, Inc.
Donald A. James
Executive Vice President
Site-Built
Universal Forest Products, Inc.
Eastern Division, Inc.
Robert D. Coleman
Executive Vice President
Manufacturing
Universal Forest Products, Inc.
EXECUTIVE COMMITTEE
Peter F. Secchia
Chairman of the Board
William G. Currie
Vice Chairman of the Board and
Chief Executive Officer
Michael B. Glenn
President and Chief Operating Officer
Michael R. Cole
Chief Financial Officer and Treasurer
Matthew J. Missad
Executive Vice President and Secretary
UNIVERSAL FOREST PRODUCTS(R) 47
SHAREHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of Universal Forest Products(R), Inc. will be held at 8:30
a.m. on April 21, 2004, at the Company's corporate headquarters, 2801 East
Beltline, NE. Grand Rapids, Michigan.
SHAREHOLDER INFORMATION
Shares of the Company's stock are traded under the symbol UFPI on the NASDAQ
Stock Market. The Company's 10-K report filed with the Securities and Exchange
Commission will be provided free of charge to any shareholder upon written
request. For more information, contact:
Investor Relations Department
Universal Forest Products(R), Inc.
2801 East Beltline, NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Web: www.ufpi.com
SECURITIES COUNSEL
Varnum, Riddering, Schmidt & Howlett
Grand Rapids, MI
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
Grand Rapids, MI
TRANSFER AGENT/
SHAREHOLDER'S INQUIRIES
American Stock Transfer & Trust Company serves as the transfer agent for the
Corporation. Inquiries relating to stock transfers, changes of ownership, lost
or stolen stock certificates, changes of address and dividend payments should be
addressed to:
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10005
Telephone: (718) 921-8210
UNIVERSAL FOREST
PRODUCTS(R), INC.
CORPORATE HEADQUARTERS
2801 East Beltline, NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Facsimile: (616) 361-7534
UNIVERSAL FOREST
PRODUCTS(R), INC.
AND ITS AFFILIATES
LOCATIONS:
Arlington,TX
Ashburn, GA
Auburn, NY
Auburndale, FL
Belchertown, MA
Bend, OR
Berlin, NJ
Blanchester, OH
Bunn, NC
Burlington, NC
Chaffee, NY
Chandler, AZ
Chesapeake, VA
Clinton, NY
Conway, SC
Dallas, NC
Denver, CO
Durango, Durango, Mexico
Eatonton, GA
Elizabeth City, NC
Emlenton, PA
Englewood, CO
Fishersville, VA
Folkston, GA
Fontana, CA
Georgetown, DE
Gordon, PA
Grandview, TX
Granger, IN
Haleyville, AL
Hamilton, OH
Harrisonville, MO
Hope, AR
Houston, TX
Hudson, NY
Hutchinson, MN
Indianapolis, IN
Janesville, WI
Jefferson, GA
Kyle, TX
LaColle, Quebec, Canada
Lafayette, CO
Lansing, MI
Las Vegas, NV
Liberty, NC
Lodi, OH
Minneota, MN
Moultrie, GA
New London, NC
New Waverly, TX
New Windsor, MD
Ocala, FL
Ooltewah,TN
Parker, PA
Pearisburg, VA
Phoenix, AZ
Praire du Chien, WI
Ranson, WV
Riverside, CA
Saginaw, TX
Salisbury, NC
San Antonio, TX
Sanford, NC
Santee, SC
Schertz, TX
Sidney, NY
Silsbee, TX
Springfield, IL
Stockertown, PA
Stockton, CA
Tecate, MX
Thorndale, Ontario, Canada
Thornton, CA
Union City, GA
Warrens, WI
White Bear Lake, MN
Windsor, CO
Westville, IN
White Pigeon, MI
Woodburn, OR
48 UNIVERSAL FOREST PRODUCTS(R)