UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22684
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
NONE
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Exchange Act). Yes [X] No[ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of March 26, 2005
-------------------------- --------------------------------
Common stock, no par value 18,121,589
Page 1 of 34
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at March 26, 2005,
December 25, 2004, and March 27, 2004. 3-4
Consolidated Condensed Statements of Earnings for the Three
Months Ended March 26, 2005 and March 27, 2004. 5
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 26, 2005 and March 27, 2004. 6-7
Notes to Consolidated Condensed Financial Statements. 8-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16-28
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 29
Item 4. Controls and Procedures. 30
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 31
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders - NONE.
Item 5. Other Information. 32
Item 6. Exhibits. 33
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
March 26, December 25, March 27,
2005 2004 2004
--------- ------------ ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $ 28,396 $ 25,274 $ 22,052
Accounts receivable, net.......................................... 179,954 151,811 206,508
Inventories:
Raw materials................................................ 146,936 116,104 106,967
Finished goods............................................... 139,899 96,817 112,237
--------- ------------ ---------
286,835 212,921 219,204
Other current assets.............................................. 15,429 16,477 6,009
--------- ------------ ---------
TOTAL CURRENT ASSETS..................................... 510,614 406,483 453,773
OTHER ASSETS........................................................... 8,303 7,952 8,523
GOODWILL............................................................... 123,901 123,845 122,458
OTHER INTANGIBLE ASSETS, net........................................... 7,207 7,807 6,381
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment..................................... 388,231 380,632 362,522
Accumulated depreciation and amortization......................... (169,862) (164,359) (150,989)
--------- ------------ ---------
PROPERTY, PLANT AND EQUIPMENT, NET....................... 218,369 216,273 211,533
--------- ------------ ---------
TOTAL ASSETS ......................................................... $ 868,394 $ 762,360 $ 802,668
========= ============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................. $ 123,508 $ 87,399 $ 116,789
Accrued liabilities:
Compensation and benefits.................................... 43,343 58,151 35,774
Other ....................................................... 21,935 16,282 15,306
Current portion of long-term debt and capital lease obligations... 21,910 22,033 6,010
--------- ------------ ---------
TOTAL CURRENT LIABILITIES................................ 210,696 183,865 173,879
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion.............................................. 251,806 185,109 285,682
DEFERRED INCOME TAXES.................................................. 18,597 18,476 16,076
MINORITY INTEREST...................................................... 7,765 8,265 5,433
OTHER LIABILITIES...................................................... 10,153 9,876 9,649
--------- ------------ ---------
TOTAL LIABILITIES........................................ 499,017 405,591 490,719
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
March 26, December 25, March 27,
2005 2004 2004
--------- ------------ ---------
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, 18,121,589, 18,002,255 and 17,889,664............. $ 18,122 $ 18,002 $ 17,890
Additional paid-in capital........................................... 92,223 89,269 86,944
Deferred stock compensation.......................................... 4,197 3,423 3,187
Deferred stock compensation rabbi trust.............................. (2,087) (1,331) (1,330)
Retained earnings.................................................... 256,656 247,427 206,200
Accumulated other comprehensive earnings............................. 1,635 1,525 701
--------- --------- ---------
370,746 358,315 313,592
Employee stock notes receivable...................................... (1,369) (1,546) (1,643)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY...................................... 369,377 356,769 311,949
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $ 868,394 $ 762,360 $ 802,668
========= ========= =========
See notes to consolidated condensed financial statements.
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
Three Months Ended
------------------------
March 26, March 27,
2005 2004
--------- ---------
NET SALES ................................................................. $ 537,160 $ 465,665
COST OF GOODS SOLD......................................................... 469,931 409,304
--------- ---------
GROSS PROFIT............................................................... 67,229 56,361
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............................... 49,851 43,840
--------- ---------
EARNINGS FROM OPERATIONS................................................... 17,378 12,521
OTHER EXPENSE (INCOME):
Interest expense...................................................... 3,775 3,631
Interest income....................................................... (149) (83)
Net gain on sale of real estate and interest in subsidiary............ (1,272) (369)
--------- ---------
2,354 3,179
--------- ---------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST......................... 15,024 9,342
INCOME TAXES............................................................... 5,759 3,644
--------- ---------
EARNINGS BEFORE MINORITY INTEREST.......................................... 9,265 5,698
MINORITY INTEREST.......................................................... (36) (131)
--------- ---------
NET EARNINGS ............................................................. $ 9,229 $ 5,567
========= =========
EARNINGS PER SHARE - BASIC................................................. $ 0.51 $ 0.31
EARNINGS PER SHARE - DILUTED............................................... $ 0.49 $ 0.30
WEIGHTED AVERAGE SHARES OUTSTANDING........................................ 18,187 17,961
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS.......... 18,972 18,709
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
------------------------
March 26, March 27,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 9,229 $ 5,567
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation............................................................. 7,345 6,672
Amortization of intangibles.............................................. 601 410
Deferred income taxes.................................................... 19 20
Minority interest........................................................ 36 131
Loss on sale of interest in subsidiary................................... 193
Net gain on sale or impairment of property, plant, and equipment......... (1,131) (603)
Changes in:
Accounts receivable.................................................... (28,643) (73,128)
Inventories............................................................ (73,913) (48,711)
Accounts payable....................................................... 36,108 37,850
Accrued liabilities and other.......................................... (6,160) 1,245
--------- ---------
NET CASH FROM OPERATING ACTIVITIES....................................... (56,509) (70,354)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment..................................... (10,604) (7,295)
Acquisitions, net of cash received............................................ (5,360)
Proceeds from sale of interest in subsidiary.................................. 4,679
Proceeds from sale of property, plant and equipment........................... 2,295 740
Other assets, net............................................................. 366 178
--------- ---------
NET CASH FROM INVESTING ACTIVITIES....................................... (7,943) (7,058)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities.............................. 66,713 81,516
Repayment of long-term debt................................................... (138) (58)
Proceeds from issuance of common stock........................................ 1,462 857
Distributions to minority shareholder......................................... (536) (125)
Repurchase of common stock.................................................... (116)
Other......................................................................... 73 (40)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES....................................... 67,574 82,034
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS....................................... 3,122 4,622
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................. 25,274 17,430
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD...................................... $ 28,396 $ 22,052
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest................................................................. $ 877 $ 863
Income taxes............................................................. 1,489 (1,913)
6
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - CONTINUED
Three Months Ended
------------------------
March 26, March 27,
2005 2004
--------- ---------
NON-CASH OPERATING ACTIVITIES:
Accounts receivable exchanged for note receivable............................... $ 500
NON-CASH INVESTING ACTIVITIES:
Note receivable exchanged for property, plant and equipment..................... $ 1,455
NON-CASH FINANCING ACTIVITIES:
Common stock issued to trust under deferred compensation plan................... $ 761 $ 716
Common stock issued under stock gift plan....................................... 13 19
Common stock issued under directors' stock grant plan........................... 107 75
See notes to consolidated condensed financial statements.
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited, interim, consolidated, condensed financial
statements (the "Financial Statements") include our accounts and those of
our wholly-owned and majority-owned subsidiaries and partnerships, and
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, the Financial Statements do not
include all of the information and footnotes normally included in the
annual consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States. All
significant intercompany transactions and balances have been eliminated.
In our opinion, the Financial Statements contain all material adjustments
necessary to present fairly our consolidated financial position, results
of operations and cash flows for the interim periods presented. All such
adjustments are of a normal recurring nature. These Financial Statements
should be read in conjunction with the annual consolidated financial
statements, and footnotes thereto, included in our Annual Report to
Shareholders on Form 10-K for the fiscal year ended December 25, 2004.
Certain reclassifications have been made to the Financial Statements for
2004 to conform to the classifications used in 2005.
B. REVENUE RECOGNITION
Earnings on construction contracts are reflected in operations either by
the percentage-of-completion method or completed contract method depending
on the nature of the business at individual operations. Under the
percentage-of-completion method, revenues and related earnings on
construction contracts are measured by the relationships of actual costs
incurred related to the total estimated costs. Revisions in earnings
estimates on the construction contracts are recorded in the accounting
period in which the basis for the revisions become known. Projected losses
on individual contracts are charged to operations in their entirety when
such losses become apparent. Under the completed contract method, revenues
and related earnings are recorded when the contracted work is complete and
losses are charged to operations in their entirety when such losses become
apparent.
The following table presents the balances of percentage-of-completion
accounts:
March 26, March 27,
2005 2004
--------- ---------
Cost and Earnings in Excess of Billings...... $ 2,568 $ 1,891
Billings in Excess of Cost and Earnings...... 2,294 2,142
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
C. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $9.3
million and $4.9 million for the quarter ended March 26, 2005 and March
27, 2004, respectively.
D. EARNINGS PER COMMON SHARE
A reconciliation of the changes in the numerator and the denominator from
the calculation of basic EPS to the calculation of diluted EPS follows (in
thousands, except per share data):
Three Months Ended 03/26/05 Three Months Ended 03/27/04
---------------------------------- ------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................................... $ 9,229 $ 5,567
EPS - BASIC
Income available to common stockholders........ 9,229 18,187 $ 0.51 5,567 17,961 $ 0.31
====== ======
EFFECT OF DILUTIVE SECURITIES
Options........................................ 785 748
------ ------
EPS - DILUTED
Income available to common stockholders and
assumed options exercised.................... $ 9,229 18,972 $ 0.49 $ 5,567 18,709 $ 0.30
=========== ====== ====== =========== ====== ======
No outstanding options were excluded from the computation of diluted EPS
for the quarter ended March 26, 2005.
Options to purchase 20,000 shares of common stock at exercise prices
ranging from $35.75 to $36.01 were outstanding at March 27, 2004, but were
not included in the computation of diluted EPS for the quarter. The
options' exercise prices were greater than the average market price of the
common stock during the period and, therefore, would be antidilutive.
E. SALE OF ACCOUNTS RECEIVABLE
We have entered into an accounts receivable sale agreement with a bank.
Under the terms of the agreement:
- We sell specific receivables to the bank at an agreed-upon price at
terms ranging from one month to one year.
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
- We service the receivables sold and outstanding on behalf of the
bank at a rate of 0.50% per annum.
- We receive an incentive servicing fee, which we account for as a
retained interest in the receivables sold. 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.
Appropriate valuation allowances are recorded against the retained
interest.
- The maximum amount of receivables which may be sold and outstanding
at any point in time under this arrangement is $50 million.
On March 26, 2005, $34.9 million of receivables were sold and outstanding,
and we recorded $2.3 million of net retained interest in other current
assets. On March 27, 2004, $7.0 million of receivables were sold and
outstanding, and we recorded $0.1 million of net retained interest in
other current assets. A summary of the transactions we completed for the
first three months of 2005 and 2004 are presented below (in thousands).
Three Months Ended Three Months Ended
March 26, 2005 March 27, 2004
------------------ ------------------
Accounts receivable sold....................... $ 79,466 $ 56,460
Retained interest in receivables............... (1,156) (1,451)
Expense from sale.............................. (255) (111)
Servicing fee received......................... 32 24
Discounts and sales allowances................. (606) (579)
--------- ---------
Net cash received from sale.................... $ 77,481 $ 54,343
========= =========
F. GOODWILL AND OTHER INTANGIBLE ASSETS
The following amounts were included in other intangible assets, net:
March 26, 2005 March 27,2004
----------------------- ----------------------
Accumulated Accumulated
Assets Amortization Assets Amortization
-------- ------------ ------- ------------
Non-compete agreements $ 9,806 $(4,657) $ 7,884 $(3,301)
Licensing agreements 2,760 (1,759) 2,910 (1,112)
Customer relationships 1,285 (257)
Backlog 190 (161)
-------- ------- ------- -------
Total $ 14,041 $(6,834) $10,794 $(4,413)
======== ======= ======= =======
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Estimated amortization expense for intangible assets as of March 26, 2005
for each of the five succeeding fiscal years is as follows (in thousands):
2005............................... $1,604
2006............................... 1,961
2007............................... 1,446
2008............................... 996
2009............................... 480
Thereafter......................... 720
The changes in the net carrying amount of goodwill for the three months
ended March 26, 2005 and March 27, 2004 are as follows (in thousands):
Balance as of December 25, 2004....... $123,845
Other, net............................ 56
--------
Balance as of March 27, 2005.......... $123,901
========
Balance as of December 27, 2003....... $125,028
Final purchase price allocation....... (2,169)
Other, net............................ (401)
--------
Balance as of March 27, 2004.......... $122,458
========
G. BUSINESS COMBINATIONS
On April 2, 2004, one of our subsidiaries acquired a 50% interest in
Shawnlee Construction, LLC ("Shawnlee"), which provides framing services
for multi-family construction, and is located in Plainville, MA. The
purchase price was approximately $4.8 million, allocating $1.2 million to
tangible assets and purchased intangibles, $1.1 million to a non-compete
agreement, $1.3 million to customer relationship related intangibles, $0.2
million to a backlog, and $1.0 million to goodwill. Shawnlee had net sales
in fiscal 2003 totaling approximately $20 million. We have consolidated
this entity, including a respective minority interest, because we exercise
control.
On March 15, 2004, one of our subsidiaries acquired the assets of
Slaughter Industries, owned by International Paper Company ("Slaughter"),
a facility which supplies the site-built construction market in Dallas,
TX. The purchase price was approximately $3.9 million, which was allocated
to the fair value of tangible net assets. Slaughter had net sales in
fiscal 2003 totaling approximately $48 million.
On January 30, 2004, one of our subsidiaries acquired the assets of
Midwest Building Systems, Inc. ("Midwest"), a facility which serves the
site-built construction market in Indianapolis, IN. The purchase price was
approximately $1.5 million, which was allocated to the fair value of
tangible net assets. Midwest had net sales in fiscal 2003 totaling
approximately $7 million.
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
The business combinations mentioned above were not significant to our
operating results individually or in aggregate, and thus pro forma results
are not presented.
H. EMPLOYEE STOCK NOTES RECEIVABLE
Employee stock notes receivable represents notes issued to us by certain
employees and officers to finance the purchase of our common stock.
Directors and executive officers do not, and are not allowed to,
participate in this program.
I. STOCK-BASED COMPENSATION
As permitted under SFAS No.123, Accounting for Stock-Based Compensation,
("SFAS 123"), we continue to apply the provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, which recognizes compensation
expense under the intrinsic value method. Had compensation cost for the
stock options granted and stock purchased under the Employee Stock
Purchase Plan in the first quarter of 2005 and 2004 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):
Three Months Ended
--------------------------
March 26, March 27,
2005 2004
------------ ----------
Net Earnings:
As reported................................... $ 9,229 $ 5,567
Deduct: compensation expense
- fair value method........................ (237) (440)
----------- ----------
Pro Forma..................................... $ 8,992 $ 5,127
=========== ==========
EPS - Basic:
As reported................................... $ 0.51 $ 0.31
Pro forma..................................... $ 0.49 $ 0.29
EPS - Diluted:
As reported................................... $ 0.49 $ 0.30
Pro forma..................................... $ 0.48 $ 0.28
J. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are self-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
12
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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 with no discount rate, have
been established to cover remediation activities at our Union City, GA;
Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Schertz, TX; and
Janesville, WI wood preservation facilities. In addition, a small reserve
was established for our Thornton, CA property to remove asbestos and
certain lead containing materials which existed on the property at the
time of purchase.
Including amounts from our wholly owned captive insurance company, we have
reserved approximately $1.8 million on March 26, 2005 and $1.9 million on
March 27, 2004, representing the estimated costs to complete future
remediation efforts and has not been reduced by an insurance receivable.
The manufacturers of CCA preservative voluntarily discontinued the
registration of CCA for certain residential applications as of December
31, 2003. Our wood preservation facilities have been converted to
alternate preservatives, either ACQ or borates. In March 2005, one
facility began using CCA to treat certain marine products and panel goods
for which ACQ is not a suitable preservative.
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. The panel
issued a report which provides guidance to the EPA on the use of various
sealants but does not mandate their use. The EPA is reviewing the report
and is expected to issue further clarifications. 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 Texas, Illinois, and New Jersey. The
purported class action lawsuits seek unspecified damages from one of our
customers, based on generalized claims under a purported theory of
inherent defect, failure to properly warn, or violation of individual
state Consumer Protection Act statutes. To date, none of these cases have
been certified as a class action. The Illinois case and the Texas case
were recently dismissed without prejudice, although the plaintiff may
choose to appeal or refile. The Texas case was again dismissed in March
2005 without prejudice. The Texas case has been continued as an individual
plantiffs
13
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
case, rather than a class action. As such, the case is not material. The
Illinois case, based on an alleged violation of the consumer protection
act, has been restated and filed. The remaining case does 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 costs incurred in
the defense of these claims and we have expensed them accordingly, we have
not formally accepted liability of these costs.
We believe that based on current facts, laws, and existing scientific
evidence, as well as the favorable disposition of the above referenced
lawsuits, that the likelihood of a material adverse financial impact from
the remaining claims is remote. Therefore, we 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 and will monitor these facts on an ongoing
basis.
In addition, on March 26, 2005, we were parties either as plaintiff or a
defendant to a number of lawsuits and claims arising through the normal
course of our business. In the opinion of management, our consolidated
financial statements will not be materially affected by the outcome of
these contingencies and claims.
On March 26, 2005, we had outstanding purchase commitments on capital
projects of approximately $7.5 million.
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 March 26,
2005, we had approximately $25.1 million in outstanding payment and
performance bonds which expire during the next one to twenty-three months.
In addition, approximately $3.5 million in payment and performance bonds
are outstanding for completed projects which are still under warranty.
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 approximately $1.2 million.
14
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Under our sale of accounts receivable agreement, we guarantee that
Universal Forest Products RMS, LLC, as accounts servicer, will remit
collections on receivables sold to the bank. (See Note E, "Sale of
Accounts Receivable.")
On March 26, 2005, we had outstanding letters of credit totaling $34.6
million, primarily related to certain insurance contracts and industrial
development revenue bonds, as further described below.
In lieu of cash deposits, we provide irrevocable letters of credit in
favor of our insurers to guarantee our performance under certain insurance
contracts. We currently have irrevocable letters of credit outstanding
totaling approximately $16.3 million for these types of insurance
arrangements. We have reserves recorded on our balance sheet, in accrued
liabilities, that reflect our expected future liabilities under these
insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the
bond trustees for all of the industrial development revenue bonds that we
have issued. These letters of credit guarantee principal and interest
payments to the bondholders. We currently have irrevocable letters of
credit outstanding totaling approximately $18.3 million related to our
outstanding industrial development revenue bonds. These letters of credit
have varying terms but may be renewed at the option of the issuing banks.
Our wholly owned domestic subsidiaries have guaranteed the indebtedness of
Universal Forest Products, Inc. in certain debt agreements, including the
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.
We did not enter into any new guarantee arrangements during the first
quarter of 2005 which would require us to recognize a liability on our
balance sheet.
K. SALE OF REAL ESTATE
On January 3, 2005, we sold real estate located in Stockton, CA for $2.3
million and recorded a pre-tax gain totaling approximately $1.3 million.
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The forward-looking
statements are based on the beliefs and assumptions of management, together with
information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a
result of, among other things, the factors set forth below and certain economic
and business factors which may be beyond our control. Investors are cautioned
that all forward-looking statements involve risks and uncertainty.
OVERVIEW
We are pleased to report strong results for the first quarter of 2005, which was
highlighted by:
- - Our growth in sales to the site-built construction, industrial, and
manufactured housing markets. Our unit sales to the do-it-yourself/retail
(DIY/retail) market declined due to our sales strategy with our largest
customer and efforts to diversify our customer base, combined with a
delayed spring in the Northeast and Midwest.
- - Higher lumber prices which elevated our sales dollars and required a
greater investment in working capital. Our sales increased 15% for the
quarter, and we estimate that 6% of this increase was due to higher lumber
prices.
- - A 66% increase in net earnings for the quarter which surpassed our 9%
increase in unit sales. Our enhanced profitability was primarily due to
the down-sizing of one of our Western framing operations, improved gross
margins on certain product lines due to cost reductions, and a gain on the
sale of our Stockton, CA, plant.
- - Improved cash flows from operating activities and a decrease in our
leverage ratio due, in part, to an increase in our sale of receivables
program.
In summary, we remain optimistic about the future of our business, markets and
strategies, and our employees remain focused on adding value for our customers,
executing our strategies and meeting our goals.
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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.
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 19% of our total sales in the first three months of
2005, down from 23% for the first three months of 2004.
OUR GROWTH MAY BE LIMITED BY OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS. A key
component of our growth strategy is to complete business combinations. Business
combinations involve inherent risks, including assimilation and successfully
managing growth. While we conduct extensive due diligence and have taken steps
to ensure successful assimilation, factors beyond our control could influence
the results of these acquisitions.
WE MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND SAFETY
REGULATIONS. We are subject to the requirements of federal, state and local
environmental and occupational health and safety laws and regulations. There can
be no assurance that we are at all times in complete compliance with all of
these requirements. We have made and will continue to make capital and other
expenditures to comply with environmental regulations. If additional laws and
regulations are enacted in the future, which restrict our ability to manufacture
and market our products, including our treated lumber products, it could
adversely affect our sales and profits. If existing laws are interpreted
differently, it could also increase our financial costs. Several states have
proposed
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
legislation to limit the uses and disposal of Chromated Copper Arsenic
("CCA") treated lumber. (See Note J, "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.
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, particularly
in our first and fourth quarters. In addition, adverse weather conditions can
negatively impact our productivity and costs per unit.
WE CONVERTED TO A NEW PRESERVATIVE TO TREAT OUR PRODUCTS. The manufacturers of
CCA preservative voluntarily discontinued the registration of CCA for certain
residential applications as of December 31, 2003. As a result, all of our wood
preservation facilities, except the one described below, have been converted to
an alternate preservative, either Amine Copper Quaternary ("ACQ"), or borates.
The cost of ACQ is more than four times higher than the cost of CCA. We estimate
the new preservative has increased the cost and sales price of our treated
products by approximately 10% to 15%. In March 2005, one facility began using
CCA to treat certain marine products and panel goods for which ACQ is not a
suitable preservative. While we believe treated products are 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 J, "Commitments, Contingencies and Guarantees.")
MARKET CONDITIONS FOR THE SUPPLY OF CERTAIN LUMBER PRODUCTS AND INBOUND
TRANSPORTATION MAY BE LIMITED. These conditions, which occur on occasion, have
resulted in difficulties procuring desired quantities and receiving orders on a
timely basis for all industry participants. We are not certain how these
conditions may impact our short-term sales volumes and profitability. However,
we attempt to mitigate the risks these conditions by:
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - Our pricing practices (see "Impact of the Lumber Market on Our Operating
Results");
- - Leveraging our size with mill and transportation suppliers to ensure they
achieve supply and service requirements;
- - Increasing our utilization of consigned inventory programs with mills; and
- - Expanding our supply base of dedicated carriers.
When analyzing this report to assess our future performance, please recognize
the potential impact of the various factors set forth above.
HISTORICAL LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price
for the three months ended March 26, 2005 and March 27, 2004:
Random Lengths Composite
Average $/MBF
------------------------
2005 2004
---- ----
January............................ $381 $341
February........................... 420 376
March.............................. 422 382
First quarter average.............. $408 $366
First quarter percentage
increase from 2004............ 11.5%
In addition, a SYP composite price, which we prepare and use, is presented
below. Sales of products produced using this species comprise up to 50% of our
sales volume.
Random Lengths SYP
Average $/MBF
------------------
2005 2004
---- ----
January............................ $446 $410
February........................... 489 436
March.............................. 501 487
First quarter average.............. $479 $444
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
<Table>
First quarter percentage
increase from 2004............ 7.9%
</Table>
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, and most industrial packaging products. 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 period and quantity
limitations generally allow us to re-price 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
primarily 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 the trend of lumber prices have their greatest impact on the following
products:
20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - Products that have significant inventory levels with low turnover rates,
whose selling prices are indexed to the Lumber Market. This would include
treated lumber, which comprises almost twenty-five percent of our total
sales. In other words, the longer the period of time these 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 the risk
associated with treated lumber through vendor consignment inventory
programs. (See "Risk Factors - Seasonality and weather conditions could
adversely affect us.")
- - 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 by locking in costs.
In addition to the impact of the Lumber Market trends on gross margins, changes
in the level of the market cause fluctuations in gross margins when comparing
operating results from period to period. This is explained in the following
example, which assumes the price of lumber has increased from period one to
period two, with no changes in the trend within each period.
Period 1 Period 2
-------- --------
Lumber cost...................................................... $300 $400
Conversion cost.................................................. 50 50
= Product cost................................................... 350 450
Adder............................................................ 50 50
= Sell price..................................................... 400 500
Gross margin..................................................... 12.5% 10.0%
As is apparent from the preceding example, the level of lumber prices does not
impact our overall profits, but does impact our margins. Gross margins are
negatively impacted during periods of high lumber prices; conversely, we
experience margin improvement when lumber prices are relatively low.
BUSINESS COMBINATIONS
We completed the following business combinations in fiscal 2005 and fiscal 2004,
which were accounted for using the purchase method. (See Note G, "Business
Combinations.")
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Company Name Acquisition Date Business Description
- ------------------------------ ---------------- ---------------------------------------------------------------
Shawnlee Construction, LLC April 2, 2004 Provides framing services for multi-family construction in the
Northeast. Located in Plainville, MA.
Slaughter Industries March 15, 2004 Distributes lumber products and manufactures engineered wood
components for site-built construction. Located in Dallas, TX.
Midwest Building Systems, Inc. January 30, 2004 Manufacturer of engineered wood components for site-built
construction. Located in Indianapolis, IN.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our
Consolidated Condensed Statements of Earnings as a percentage of net sales.
For the Three Months Ended
--------------------------
March 26, March 27,
2005 2004
--------- ---------
Net sales..................................................... 100.0% 100.0%
Cost of goods sold............................................ 87.5 87.9
------- -------
Gross profit.................................................. 12.5 12.1
Selling, general, and
administrative expenses..................................... 9.3 9.4
------- -------
Earnings from operations...................................... 3.2 2.7
Interest, net................................................. 0.6 0.8
Net gain on sale of real estate and
interest in subsidiary...................................... ( 0.2) (0.1)
------- -------
0.4 0.7
------- -------
Earnings before income taxes
and minority interest....................................... 2.8 2.0
Income taxes.................................................. 1.1 0.8
------- -------
22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
<Table>
Earnings before minority interest............................. 1.7 1.2
Minority interest............................................. (0.0) (0.0)
------- -------
Net earnings.................................................. 1.7% 1.2%
======= =======
</Table>
NET SALES
We engineer, manufacture, treat, distribute and install lumber, composite wood,
plastic, and other building products for the DIY/retail, site-built
construction, manufactured housing, and industrial markets. Our strategic sales
objectives include:
- - Diversifying our end market sales mix by increasing sales of specialty
wood packaging to industrial users and engineered wood components and
framing services to the site-built construction market. Engineered wood
components include roof trusses, wall panels, and floor systems.
- - Increasing sales of "value-added" products and framing services.
Value-added product sales consist of fencing, decking, lattice, and other
specialty products sold to the DIY/retail market, specialty wood
packaging, engineered wood components, and "wood alternative" products.
Wood alternative products consist primarily of composite wood and
plastics. 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 unit sales growth while achieving return on investment goals.
The following table presents, for the periods indicated, our net sales (in
thousands) and change in net sales by market classification.
For the Three Months Ended
--------------------------------------------------
March 26, % March 27,
Market Classification 2005 Change 2004
- --------------------- --------------- ------ ----------------
DIY/Retail............................. $ 177,622 (0.7) $ 178,884
Site-Built Construction................ 151,901 32.3 114,843
Manufactured Housing................... 96,344 25.2 76,975
Industrial............................. 111,293 17.2 94,963
--------------- ---------------
Total.................................. $ 537,160 $ 465,665
=============== ===============
Net sales in the first quarter of 2005 increased 15% compared to the first
quarter of 2004 resulting from an estimated increase in units shipped of
approximately 9%, while overall selling prices increased by 6%. Overall selling
prices increased as a result of the Lumber Market (see "Historical Lumber
Prices"), since our pricing practices are designed to pass these costs along to
our customers.
23
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
(See "Impact of the Lumber Market on Our Operating Results.") We estimate that
our unit sales increased by 4% as a result of business acquisitions and new
plants, while our unit sales out of existing facilities increased by 6%. Plant
closures caused our unit sales to decrease by 1%.
DIY/Retail:
Net sales to the DIY/retail market decreased 1% in the first quarter of 2005
compared to 2004, as a result of a 6% decline in units shipped. Unit sales
declined as a result of declining business with our largest customer that did
not meet our margin requirements, combined with a delayed spring in the
Northeast and Midwest.
Site-Built Construction:
Net sales to the site-built construction market increased 32% in the first
quarter of 2005 compared to 2004, primarily due to an estimated 25% increase in
unit sales. Unit sales increased as a result of acquisitions and new plants,
combined with organic growth out of several existing plants, particularly those
in our Carolina, Florida, and Texas regions, totaling approximately 10%.
Manufactured Housing:
Net sales to the manufactured housing market increased 25% in the first quarter
of 2005 compared to the same period of 2004. This increase resulted primarily
from an increase in selling prices due to the higher Lumber Market and a change
in sales mix toward more complex trusses that require more engineering costs,
and an estimated 12% increase in units shipped. A 13% increase in industry
production for HUD code homes contributed to our increase in unit sales.
Industrial:
Net sales to the industrial market increased 17% in the first quarter of 2005
compared to the same period of 2004, primarily due to an estimated 14% increase
in units shipped. We believe our unit sales and market share continue to grow
significantly due to our dedicated local sales teams and national sales support
efforts, combined with our competitive advantages in manufacturing, purchasing,
and material utilization.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
24
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Three Months Ended
---------------------------------------------
March 26, March 27,
2005 2004
------------------- -------------------
Value-Added........................................ 53.2% 52.5%
Commodity-Based.................................... 46.8% 47.5%
Value-added sales increased 17% in the first quarter of 2005 compared to 2004,
primarily due to increased sales of engineered wood components, turn-key framing
services, and industrial packaging products. Commodity-based sales increased 14%
during the first quarter of 2005 primarily due to the higher Lumber Market and a
7% increase in unit sales.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased in the first quarter of 2005
compared to the same period of 2004, in spite of a higher Lumber Market. See
"Impact of the Lumber Market on our Operating Results." Gross profits increased
approximately 19% comparing the first quarter of 2005 with the same period of
2004, which exceeded our 9% increase in unit sales. Our improved profitability
this quarter was due to a combination of:
- - The down-sizing of one of our Western framing operations;
- - Improved margins on sales of engineered wood components as a result of
anticipating an increase in lumber prices and improving our ability to
lock in costs with vendors;
- - And attainment of certain cost efficiencies.
In the third quarter of 2004, one of our multi-family framing subsidiaries in
the West commenced certain new construction projects which are expected to be
completed in three to six months. Based on the nature of these projects,
calculating precise estimates is difficult except to determine we will not
recognize a loss. Accordingly, total estimated gross profit on these projects
range from breakeven to a gross profit of approximately $920,000. We have used
the low end of the range while utilizing the percentage of completion method of
accounting. If we had used the high end of the range, our gross profits for the
first quarter of 2005 would have been approximately $147,000 higher. As
mentioned above, this operation is being down-sized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses as a percentage of sales
decreased to 9.3% in the first quarter of 2005 compared to 9.4% in the same
period of 2004 primarily due to the impact of the Lumber Market on our selling
prices. SG&A expenses increased by 14% in the first quarter of 2005 compared to
the same period of 2004, which compares unfavorably with our 9% increase in
25
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
unit sales, primarily due to higher incentive compensation costs tied to profits
and return on investment and higher employee benefit costs.
INTEREST, NET
Net interest costs increased in the first quarter of 2005 compared to the same
period of 2004 due to slightly higher interest rates in 2005.
NET GAIN ON SALE OF REAL ESTATE
On January 3, 2005, we sold real estate located in Stockton, CA for $2.3 million
and recorded a pre-tax gain totaling approximately $1.3 million.
INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily
due to provisions for state and local income taxes and permanent tax
differences. Our effective tax rate decreased to 38.3% in the first quarter of
2005 from 39.0% in the same period of 2004 primarily due to:
- - Income taxes accrued on the sale of Nascor Incorporated in 2004.
- - Anticipated benefits in 2005 associated with the new manufacturing
deduction allowed under the Jobs Creation Act.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions other than operating
leases.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
March 26, March 27,
2005 2004
---------- ---------
Cash from operating activities................................................... ($ 56,509) ($70,354)
Cash from investing activities................................................... (7,943) (7,058)
Cash from financing activities................................................... 67,574 82,034
--------- --------
Net change in cash and cash equivalents.......................................... 3,122 4,622
Cash and cash equivalents, beginning of period................................... 25,274 17,430
--------- --------
Cash and cash equivalents, end of period......................................... $ 28,396 $22,052
========= ========
26
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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. 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 many important factors to
maintaining a strong credit profile, which in turn helps ensure timely access to
capital when needed.
Seasonality has a significant impact on our working capital from March to August
which generally results in negative or modest cash flows from operations in our
first and second quarters. Conversely, we experience a substantial decrease in
working capital from September to February which results in significant cash
flow from operations in our third and fourth quarters. For comparative purposes,
we have included the March 27, 2004 balances in the accompanying unaudited
consolidated condensed balance sheets.
Due to the seasonality of our business and the effects of the Lumber Market, we
believe our cash cycle (days sales outstanding plus days supply of inventory
less days payables outstanding) is a good indicator of our working capital
management. Our cash cycle increased to 53 days in the first three months of
2005 from 48 days in the first three months of 2004, primarily due to an
increase in our days supply of inventory. Inventory levels have increased as a
result of opportunistic buying by our purchasing offices, which anticipated
rising lumber prices and attempted to lock in margins on products with fixed
selling prices.
Cash flows used in operating activities improved by almost $14 million in the
first three months of 2005 compared to the same period of 2004, primarily due to
an increase in our sale of receivables program combined with a significant
decline in sales to our DIY/retail market comparing March of 2005 with March of
2004, which resulted in a decline in our receivables. These positive factors
were offset by a substantial increase in inventory primarily due to opportunity
buying by our purchasing offices.
Cash used for investing activities increased by $0.9 million in the first three
months of 2005 compared to the same period of 2004, primarily due to an increase
in capital expenditures associated with opening our new plants in Thorndale, ON
and Thornton, CA and expanding our plant in Woodburn, OR. We expect to spend
approximately $41 million on capital expenditures in 2005, which includes
outstanding purchase commitments on capital projects totaling approximately $7.5
million on March 26, 2005. We intend to fund capital expenditures and purchase
commitments through a combination of operating cash flows and availability under
our revolving credit facility.
Cash provided by financing activities decreased $14 million in the first three
months of 2005 compared to the same period of 2004, primarily due to decreased
borrowings under our revolving credit facility to support the capital
requirements discussed above.
27
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
On March 26, 2005, we had $95.8 million outstanding on our $250 million
revolving credit facility, including approximately $75 million related to
seasonal working capital requirements. The revolving credit facility also
supports letters of credit totaling approximately $32.2 million on March 26,
2005. 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 March 26, 2005.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Condensed Financial Statements, Note J, "Commitments,
Contingencies, and Guarantees."
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting
principles generally accepted in the United States. These principles require us
to make certain estimates and apply judgments that affect our financial position
and results of operations. We continually review our accounting policies and
financial information disclosures. There have been no material changes in our
policies or estimates since December 25, 2004.
28
UNIVERSAL FOREST PRODUCTS, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our
variable rate debt, which consists of a revolving credit facility and industrial
development revenue bonds. We do not currently use interest rate swaps, futures
contracts or options on futures, or other types of derivative financial
instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market
value, but not earnings or cash flows. Conversely, for variable rate debt,
changes in interest rates generally do not influence fair market value, but do
affect future earnings and cash flows. We do not have an obligation to prepay
fixed rate debt prior to maturity, and as a result, interest rate risk and
changes in fair market value should not have a significant impact on such debt
until we would be required to refinance it.
29
UNIVERSAL FOREST PRODUCTS, INC.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. With the participation
of management, our chief executive officer and chief financial officer,
after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a - 15e and 15d - 15e) as
of the quarter ended March 26, 2005 (the "Evaluation Date"), have
concluded that, as of such date, our disclosure controls and procedures
were effective.
(b) Changes in Internal Controls. During the first quarter ended March 26,
2005, there were no changes in our internal control over financial
reporting that materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
30
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) None.
(b) None.
(c) Issuer purchases of equity securities.
Fiscal Month (a) (b) (c) (d)
------------ ------ ------ ------ ------
December 25, 2004 - January 29, 2005(1)...... (none)
January 30 - February 26, 2005............... (none)
February 27 - March 26, 2005................. (none)
(a) Total number of shares purchased.
(b) Average price paid per share.
(c) Total number of shares purchased as part of publicly announced plans
or programs.
(d) Maximum number of shares that may yet be purchased under the plans
or programs.
(1) On October 21, 1998, the Board of Directors approved a share
repurchase program (which succeeded a previous program) allowing us
to repurchase up to 1.8 million shares of our common stock. On
October 18, 2000 and November 14, 2001, the Board of Directors
authorized an additional 1 million shares and 2.5 million shares,
respectively, to be repurchased under the program. As of March 26,
2005, cumulative total authorized shares available for repurchase is
1.5 million shares.
31
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 5. Other Information.
In the first quarter of 2005, the Audit Committee approved non-audit services to
be provided by our independent auditors, Ernst & Young LLP, totaling $100,000
for 2005.
32
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits.
The following exhibits (listed by number corresponding to the Exhibit Table as
Item 601 in Regulation S-K) are filed with this report:
31(a) Certificate of the Chief Executive Officer of Universal Forest Products,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest Products,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest Products,
Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest Products,
Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
33
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: May 2, 2005 By: /s/ William G. Currie
-----------------------------------------------
William G. Currie
Its: Vice Chairman of the Board and Chief Executive
Officer
Date: May 2, 2005 By: /s/ Michael R. Cole
-----------------------------------------------
Michael R. Cole
Its: Chief Financial Officer
34
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31(a) Certificate of the Chief Executive Officer of Universal Forest Products,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
31(b) Certificate of the Chief Financial Officer of Universal Forest Products,
Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
32(a) Certificate of the Chief Executive Officer of Universal Forest Products,
Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).
32(b) Certificate of the Chief Financial Officer of Universal Forest Products,
Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
1350).