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 June 25, 2005
-------------
OR
__TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-22684
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UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
-------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- ----------
(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 June 25, 2005
----------------------------- -------------------------------
Common stock, no par value 18,286,385
Page 1 of 38
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 25, 2005,
December 25, 2004, and June 26, 2004. 3-4
Consolidated Condensed Statements of Earnings for the Three
and Six Months Ended June 25, 2005 and June 26, 2004. 5
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 25, 2005 and June 26, 2004. 6-7
Notes to Consolidated Condensed Financial Statements. 8-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 18-32
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 33
Item 4. Controls and Procedures. 34
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 35
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 36
Item 5. Other Information 36
Item 6. Exhibits. 37
2
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 25, December 25, June 26,
2005 2004 2004
---------- ------------ --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 27,586 $ 25,274 $ 25,080
Accounts receivable, net........................................ 232,600 151,811 246,850
Inventories:
Raw materials.............................................. 134,699 116,104 123,411
Finished goods............................................. 113,130 96,817 104,044
---------- --------- --------
247,829 212,921 227,455
Other current assets............................................ 13,114 16,477 11,532
---------- --------- --------
TOTAL CURRENT ASSETS................................... 521,129 406,483 510,917
OTHER ASSETS ....................................................... 8,056 7,952 7,251
GOODWILL ....................................................... 127,756 123,845 126,775
OTHER INTANGIBLE ASSETS, net......................................... 6,617 7,807 5,973
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment................................... 398,729 380,632 363,557
Accumulated depreciation and amortization....................... (176,425) (164,359) (155,415)
---------- --------- --------
PROPERTY, PLANT AND EQUIPMENT, NET..................... 222,304 216,273 208,142
---------- --------- --------
TOTAL ASSETS ....................................................... $ 885,862 $762,360 $859,058
========== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................ $ 139,393 $ 87,399 $131,129
Accrued liabilities:
Compensation and benefits.................................. 58,746 58,151 49,086
Other ..................................................... 31,696 16,282 25,941
Current portion of long-term debt and capital lease obligations. 21,937 22,033 498
---------- --------- --------
TOTAL CURRENT LIABILITIES.............................. 251,772 183,865 206,654
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion............................................ 206,000 185,109 287,387
DEFERRED INCOME TAXES................................................ 18,061 18,476 16,423
MINORITY INTEREST.................................................... 8,662 8,265 7,541
OTHER LIABILITIES.................................................... 9,994 9,876 9,353
---------- --------- --------
TOTAL LIABILITIES...................................... 494,489 405,591 527,358
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
June 25, December 25, June 26,
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, 18,286,385, 18,002,255 and 17,945,158........ $ 18,286 $ 18,002 $ 17,945
Additional paid-in capital...................................... 92,190 89,269 88,016
Deferred stock compensation..................................... 4,257 3,423 3,253
Deferred stock compensation in rabbi trust...................... (2,087) (1,331) (1,330)
Retained earnings............................................... 278,536 247,427 225,046
Accumulated other comprehensive earnings........................ 1,622 1,525 406
-------- -------- --------
392,804 358,315 333,336
Employee stock notes receivable................................. (1,431) (1,546) (1,636)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY................................. 391,373 356,769 331,700
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $885,862 $762,360 $859,058
======== ======== ========
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 Six Months Ended
------------------------ ---------------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
--------- --------- ----------- ----------
NET SALES ......................................... $779,552 $742,568 $1,316,712 $1,208,233
COST OF GOODS SOLD................................... 678,310 649,747 1,148,241 1,059,051
-------- -------- ---------- ----------
GROSS PROFIT......................................... 101,242 92,821 168,471 149,182
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................................. 59,505 55,996 109,356 99,836
-------- -------- ---------- ----------
EARNINGS FROM OPERATIONS............................. 41,737 36,825 59,115 49,346
OTHER EXPENSE (INCOME):
Interest expense..................................... 4,266 3,955 8,041 7,586
Interest income...................................... (270) (102) (419) (185)
Net gain on sale of real estate and interest in
subsidiary......................................... 32 (575) (1,240) (944)
-------- -------- ---------- ----------
4,028 3,278 6,382 6,457
-------- -------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST.................................... 37,709 33,547 52,733 42,889
INCOME TAXES......................................... 14,237 12,645 19,996 16,289
-------- -------- ---------- ----------
EARNINGS BEFORE MINORITY INTEREST.................... 23,472 20,902 32,737 26,600
MINORITY INTEREST.................................... (682) (1,146) (718) (1,277)
-------- -------- ---------- ----------
NET EARNINGS......................................... $ 22,790 $ 19,756 $ 32,019 $ 25,323
======== ======== ========== ==========
EARNINGS PER SHARE - BASIC........................... $ 1.24 $ 1.09 $ 1.75 $ 1.41
EARNINGS PER SHARE - DILUTED......................... $ 1.20 $ 1.06 $ 1.69 $ 1.35
WEIGHTED AVERAGE SHARES OUTSTANDING.................. 18,323 18,050 18,255 17,994
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS...................... 18,984 18,702 18,978 18,694
See notes to consolidated condensed financial statements.
5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
-------------------------
June 25, June 26,
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,019 $ 25,323
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................... 15,200 13,408
Amortization of intangibles.................................................... 1,190 817
Deferred income taxes.......................................................... (516) 366
Minority interest.............................................................. 718 1,277
Loss on sale of interest in subsidiary......................................... 193
Net gain on sale or impairment of property, plant, and equipment............... (1,133) (730)
Changes in:
Accounts receivable............................................................ (80,206) (110,873)
Inventories.................................................................... (31,838) (56,963)
Accounts payable............................................................... 50,881 53,135
Accrued liabilities and other.................................................. 17,264 21,234
--------- ---------
NET CASH FROM OPERATING ACTIVITIES........................................... 3,579 (52,813)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment......................................... (21,985) (16,607)
Acquisitions, net of cash received................................................ (7,500) (10,075)
Proceeds from sale of interest in subsidiary...................................... 4,679
Proceeds from sale of property, plant and equipment............................... 2,318 3,287
Insurance proceeds................................................................ 3,013
Other assets, net................................................................. 458 1,678
--------- ---------
NET CASH FROM INVESTING ACTIVITIES........................................... (23,696) (17,038)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities.................................. 21,140 83,062
Repayment of long-term debt....................................................... (454) (6,117)
Proceeds from issuance of common stock............................................ 2,865 1,828
Distributions to minority shareholder............................................. (369) (125)
Dividends paid to shareholders.................................................... (910) (897)
Repurchase of common stock........................................................ (129)
Other............................................................................. 157 (121)
--------- ---------
NET CASH FROM FINANCING ACTIVITIES........................................... 22,429 77,501
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... 2,312 7,650
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 25,274 17,430
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 27,586 $ 25,080
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 7,851 $ 7,598
Income taxes................................................................. 8,438 1,004
6
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS - CONTINUED
Six Months Ended
------------------------
June 25, June 26,
2005 2004
--------- ---------
NON-CASH OPERATING ACTIVITIES:
Accounts receivable exchanged for note receivable................................. $ 765
Deferred purchase price of acquisition exchanged for current payable.............. 994
NON-CASH INVESTING ACTIVITIES:
Insurance receivable exchanged for property, plant and equipment.................. $ 3,143
Property, plant and equipment exchanged for long-term debt........................ $ 63
NON-CASH FINANCING ACTIVITIES:
Common stock issued to trust under deferred compensation plan..................... $ 761 $ 716
Common stock issued under stock gift plan......................................... 26 30
Common stock issued under directors' stock grant plan............................. 107 75
Stock exchanged for the exercise of stock options................................. 2,194
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:
June 25, June 26,
2005 2004
-------- --------
Cost and Earnings in Excess of Billings..... $ 2,386 $ 1,853
Billings in Excess of Cost and Earnings..... 2,539 2,548
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
C. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $22.8
million and $19.5 million for the quarters ended June 25, 2005 and June 26,
2004, respectively. During the six months ended June 25, 2005 and June 26,
2004, comprehensive income was approximately $32.1 million and $24.3
million, 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 06/25/05 Three Months Ended 06/26/04
---------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................. $22,790 $19,756
EPS - BASIC
Income available to
common stockholders......... 22,790 18,323 $1.24 19,756 18,050 $1.09
===== =====
EFFECT OF DILUTIVE SECURITIES
Options...................... 661 652
----- ----
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised................... $22,790 18,984 $1.20 $19,756 18,702 $1.06
======= ====== ===== ======= ====== =====
Six Months Ended 06/25/05 Six Months Ended 06/26/04
---------------------------------- ----------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................. $32,019 $25,323
EPS - BASIC
Income available to
common stockholders......... 32,019 18,255 $1.75 25,323 17,994 $1.41
===== =====
EFFECT OF DILUTIVE SECURITIES
Options...................... 723 700
----- -----
EPS - DILUTED
Income available to
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
common stockholders and
assumed options
exercised................... $32,019 18,978 $1.69 $25,323 18,694 $1.35
======= ======== ====== ======= ====== =====
No outstanding options were excluded from the computation of diluted EPS
for the quarter and six months ended June 25, 2005.
Options to purchase 40,000 shares of common stock at exercise prices
ranging from $31.11 to $36.01 were outstanding at June 26, 2004, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 26, 2004. The options' exercise prices were greater than
the average market price of the common stock during the periods 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.
- 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, net of retained interest, which may
be sold and outstanding at any point in time under this arrangement is
$50 million.
On June 25, 2005, $54.1 million of receivables were sold and outstanding,
and we recorded $4.1 million of net retained interest in other current
assets. On June 26, 2004, $32.4 million of receivables were sold and
outstanding, and we recorded $2.4 million of net retained interest in other
current assets. A summary of the transactions we completed for the first
six months of 2005 and 2004 are presented below (in thousands).
Six Months Ended Six Months Ended
June 25, 2005 June 26, 2004
---------------- ----------------
Accounts receivable sold................................. $230,200 $177,288
Retained interest in receivables......................... (2,595) (2,432)
Expense from sale........................................ (809) (490)
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
Servicing fee received............... 95 106
Discounts and sales allowances....... (1,926) (1,545)
------- -------
Net cash received from sale.......... $224,965 $172,927
======== ========
F. GOODWILL AND OTHER INTANGIBLE ASSETS
The following amounts were included in other intangible assets, net:
June 25, 2005 June 26, 2004
--------------------- ---------------------
Accumulated Accumulated
Assets Amortization Assets Amortization
------ ------------ ------ ------------
Non-compete agreements.... $ 9,806 ($4,997) $ 7,884 ($3,533)
Licensing agreements...... 2,760 (1,936) 2,910 (1,288)
Customer relationships.... 1,285 (301)
Backlog................... 190 (190)
------- ------- ------- --------
Total..................... $14,041 ($7,424) $10,794 $(4,821)
======= ======== ======= ========
Estimated amortization expense for intangible assets as of June 25, 2005
for each of the five succeeding fiscal years is as follows (in thousands):
2005.................... $1,015
2006.................... 1,961
2007.................... 1,446
2008.................... 996
2009.................... 480
Thereafter.............. 719
The changes in the net carrying amount of goodwill for the six months ended
June 25, 2005 and June 26, 2004 are as follows (in thousands):
Balance as of December 25, 2004............... $123,845
Acquisition................................... 3,931
Other, net.................................... (20)
--------
Balance as of June 25, 2005................... $127,756
========
Balance as of December 27, 2003............... $125,028
Acquisition................................... 4,381
Sale of interest in subsidiary................ (2,169)
Other, net.................................... (465)
--------
Balance as of June 26, 2004................... $126,775
========
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
G. BUSINESS COMBINATIONS
On June 2, 2005, one of our subsidiaries acquired the assets of Maine
Ornamental Woodworkers, Inc. ("Maine"), which manufactures, imports and
distributes decorative caps used on decking and fencing posts, and is based
in Winthrop, Maine and Bainbridge Island, Washington. The purchase price
was approximately $8.5 million, consisting of $7.5 million paid on the date
we closed the transaction and $1.0 million to be paid by August 1, 2005,
allocating $4.6 million to tangible assets and $3.9 million to goodwill.
The purchase price allocation for this acquisition is preliminary and will
be revised as final estimates of intangible asset values are made in
accordance with SFAS 141, Business Combinations ("SFAS 141"). Maine had net
sales in fiscal 2004 totaling approximately $12.4 million.
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 noncompete 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 $7.0 million.
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
12
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
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 second quarter and first six months 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 Six Months Ended
------------------- --------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
--------- -------- --------- ---------
Net Earnings:
As reported................... $ 22,790 $ 19,756 $ 32,019 $ 25,323
Deduct: compensation expense
- fair value method.......... (161) (453) (400) (903)
--------- -------- --------- ---------
Pro Forma..................... $ 22,629 $ 19,303 $ 31,619 $ 24,420
========= ======== ========= =========
EPS - Basic:
As reported................... $ 1.24 $ 1.09 $ 1.75 $ 1.41
Pro forma..................... $ 1.24 $ 1.07 $ 1.73 $ 1.36
EPS - Diluted:
As reported................... $ 1.20 $ 1.06 $ 1.69 $ 1.35
Pro forma..................... $ 1.19 $ 1.04 $ 1.68 $ 1.32
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 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 June 25, 2005 and $1.9 million on
June 26, 2004, representing
13
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
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. Such lawsuits are currently pending in Illinois and New
Jersey. The purported class action lawsuits seek unspecified damages from
this customer, 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 was previously dismissed
without prejudice. Based on an alleged violation of the consumer protection
act, the claim has been restated and filed. The 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
14
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
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 June 25, 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 June 25, 2005, we had outstanding purchase commitments on capital
projects of approximately $6.9 million.
We provide a variety of warranties for products we manufacture.
Historically, warranty claims have not been material.
In certain cases, through our partnerships with framing companies, or
through joint bid agreements, we enter into contracts to supply building
materials and installation for 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 June 25, 2005, we had
approximately $11.8 million in outstanding payment and performance bonds
which expire during the next nine to twenty-one months. In addition,
approximately $18.2 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 $1.4 million.
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 June 25, 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.
15
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- CONTINUED
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 second
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 $1.2 million.
In January 2004, we sold our 60% ownership in Nascor Incorporated, a
Calgary, Alberta-based manufacturer of engineered wood components and
licensor of I-joist manufacturing technology. The total sales price we
collected was $4.7 million and we recorded a pre-tax accounting loss of
approximately $193,000.
In March 2004, we sold a plant in Bend, OR and recognized a pre-tax gain of
approximately $562,000 on the sale in the first quarter and an additional
$207,000 in the second quarter as we collected the note receivable issued
to us on the sale.
In June 2004, we sold a plant in Modesto, CA and recognized a pre-tax gain
of approximately $368,000.
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
L. INCOME TAXES
The American Jobs Creation Act of 2004 ("Act") that was signed into law by
the President on October 22, 2004 provides for a special one-time tax
deduction of 85% of certain foreign earnings that are repatriated (as
defined by the Act). In order to qualify for the deduction, the earnings
must be reinvested in the United States pursuant to a domestic reinvestment
plan established by the company's chief executive officer and approved by
its board of directors. Certain other criteria in the Act must be satisfied
as well. Once a decision is reached to remit foreign earnings, the impact
must be recorded in the period in which the decision is made.
On May 10, 2005, the Internal Revenue Service and United States Department
of the Treasury issued guidance concerning the calculation of tax on a
distribution under Section 965 of the Internal Revenue Code. Based on this
guidance, we have decided to repatriate approximately $2.2 million of
undistributed foreign earnings under the Act, which resulted in related
income tax expense of $0.2 million. We have not provided for United States
income taxes on the remaining undistributed earnings of foreign
subsidiaries totaling approximately $7.3 million. Recording deferred income
taxes on these undistributed earnings is not required because these
earnings have been deemed to be permanently reinvested. These amounts would
be subject to possible United States taxation only if remitted as
dividends.
M. SUBSEQUENT EVENT
On June 27, 2005, one of our subsidiaries, which currently owns a 50%
interest in Shawnlee, acquired an additional 25% interest for approximately
$3.5 million, and agreed to purchase the remaining 25% over the next five
years. Shawnlee had net sales in fiscal 2004 totaling approximately $27.0
million.
In addition, Shawnlee acquired the assets of Shepardville Construction,
Inc. ("Shepardville") and AW Construction LLC ("AW"), which install
interior products for commercial and multi-family construction. The
purchase price was approximately $2.0 million. Shepardville had net sales
in fiscal 2004 totaling approximately $4.8 million. AW had net sales in
fiscal 2004 totaling approximately $7.9 million.
17
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 second quarter of 2005, which
was highlighted by:
- - Our significant growth in unit 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.
- - A 15.4% increase in net earnings for the quarter which surpassed our 5%
increase in unit sales. Our enhanced profitability was primarily due to the
down-sizing of one of our Western framing operations and increased sales of
higher margin value-added products.
- - Improved cash flows from operating activities due, in part, to an increase in
our sale of receivables program and improvements in our receivables cycle.
- - We acquired the assets and assumed certain liabilities of Maine Ornamental in
June 2005 for $8.5 million.
- - A decrease in our leverage ratio to 36.8% at the end of June 2005 from 46.5%
last year as a result of strong cash flows and working capital management.
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. Based on anticipated growth in
the business for the balance of 2005 and on current market and economic
conditions, we raised our annual target range for net earnings growth to 15% -
20% for this year (from 10% - 15% originally targeted at the beginning of the
year, excluding the effect of the after-tax insurance gain we recognized in
2004) and re-affirmed our annual target range for units sales growth of 7% -
12%.
In addition, in fiscal July 2005, we acquired an additional 25% membership
interest in Shawnlee Construction LLC ("Shawnlee") for approximately $3.5
million, a company in which we already owned a 50% membership interest, and
agreed to purchase the remaining 25% over the next five years. In addition,
Shawnlee agreed to purchase the assets and assume certain liabilities of
Shepardville Construction, Inc. and AW Construction LLC for $2 million.
18
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 24% of our total sales in the first six months of
2005, down from 28% for the first six 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
19
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 Arsenate ("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 present by:
20
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 six months ended June 25, 2005 and June 26, 2004:
Random Lengths Composite
Average $/MBF
-------------
2005 2004
---- ----
January................. $381 $341
February................ 420 376
March................... 422 382
April................... 407 431
May..................... 386 456
June.................... 405 423
Second quarter average.. $399 $437
Year-to-date average.... $404 $402
Second quarter percentage
decrease from 2004.... (8.7%)
Year-to-date percentage
increase from 2004.... 0.5%
In addition, a Southern Yellow Pine ("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.
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Random Lengths SYP
Average $/MBF
-------------
2005 2004
---- ----
January................. $446 $410
February................ 489 436
March................... 501 487
April................... 511 532
May..................... 500 535
June.................... 538 498
Second quarter average.. $516 $522
Year-to-date average.... $498 $483
Second quarter percentage
decrease from 2004.... (1.2%)
Year-to-date percentage
increase from 2004.... 3.1%
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, 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
22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 in the trend of lumber prices have their greatest impact on the
following products:
- - 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%
23
UNIVERSAL FOREST PRODUCTS, INC.
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
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.")
- --------------------------------------------------------------------------------
Company Name Acquisition Date Business Description
- --------------------------------------------------------------------------------
Shepardville Construction, June 27, 2005 Installs interior products such
Inc. and AW Construction as base boards, crown moldings,
LLC window sills and casing, doors,
and cabinets for commercial and
multi-family construction
projects. Located in Warwick,
RI and Wolcott, CT.
- --------------------------------------------------------------------------------
Maine Ornamental June 2, 2005 Provides decorative post caps
Woodworkers, Inc. for fencing and decking
applications to two-step
distributors and certain "big box"
home improvement retailers. The
company has locations in Winthrop
and Eliot, ME and Bainbridge
Island, WA.
- --------------------------------------------------------------------------------
Shawnlee Construction LLC Provides framing services for
multi-family construction in the
- - Purchased a 50% interest April 2, 2004 Northeast. Located in
Plainville, MA.
- - Purchased an additional June 27, 2005
25% interest and agreed to
purchase the remaining 25%
interest over 5 years
- --------------------------------------------------------------------------------
Slaughter Industries March 15, 2004 Distributes lumber products and
manufactures engineered wood
components for site-built
construction. Located in Dallas,
TX.
- --------------------------------------------------------------------------------
24
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- --------------------------------------------------------------------------------
Midwest Building Systems, January 30, 2004 Manufacturer of engineered wood
Inc. 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 For the Six Months Ended
------------------------------- ----------------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
-------- -------- -------- --------
Net sales ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................. 87.0 87.5 87.2 87.7
----- ----- ----- ------
Gross profit ................................... 13.0 12.5 12.8 12.3
Selling, general, and
administrative expenses ...................... 7.6 7.5 8.3 8.3
----- ----- ----- ------
Earnings from operations ....................... 5.4 5.0 4.5 4.0
Interest, net .................................. 0.5 0.5 0.6 0.6
Net gain on sale of real estate and
interest in subsidiary ....................... (0.0) (0.1) (0.1) (0.2)
----- ----- ----- ------
0.5 0.4 0.5 0.4
----- ----- ----- ------
Earnings before income taxes
and minority interest ........................ 4.9 4.6 4.0 3.6
Income taxes ................................... 1.8 1.7 1.5 1.4
----- ----- ----- ------
Earnings before minority interest .............. 3.1 2.9 2.5 2.2
Minority interest .............................. (0.2) (0.2) (0.1) (0.1)
----- ----- ----- ------
Net earnings ................................... 2.9% 2.7% 2.4% 2.1%
===== ===== ===== ======
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:
25
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - 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 For the Six Months Ended
----------------------------------------- -----------------------------------------
June 25, % June 26, June 25, % June 26,
Market Classification 2005 Change 2004 2005 Change 2004
- --------------------- ---------- ------ ---------- --------- ------ ----------
DIY/Retail ....................... $ 345,977 (0.4) $ 347,381 $ 525,026 (0.5) $ 527,678
Site-Built Construction .......... 187,236 10.3 169,697 338,290 19.0 284,274
Manufactured Housing ............. 107,617 6.3 101,245 202,898 14.7 176,973
Industrial ....................... 138,722 11.7 124,245 250,498 14.2 219,308
---------- ---------- ---------- ----------
Total ............................ $ 779,552 5.0 $ 742,568 $1,316,712 9.0 $1,208,233
========== ========== ========== ==========
Note: In the second quarter of 2005, we reviewed the classification of our
customers and made certain reclassifications. Prior year information has
been restated to reflect these reclassifications.
Net sales in the second quarter of 2005 increased 5% compared to the second
quarter of 2004 resulting from an increase in units shipped out of existing
facilities. While changes in selling prices varied within market
classifications, overall selling prices remained flat comparing the two periods.
Net sales in the first six months of 2005 increased 9% compared to the first six
months of 2004 resulting from an estimated increase in units shipped of
approximately 5%, while overall selling prices increased by 4%. 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. (See "Impact of the Lumber Market on Our Operating Results.") We
estimate that our unit sales increased by 2% as a result of business
acquisitions and new plants, while our unit sales out of existing facilities
increased by 3%.
26
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
DIY/Retail:
Net sales to the DIY/retail market remained flat in the second quarter of 2005
compared to 2004, as a result of a 2% decline in units shipped offset by a
slight increase in overall selling prices. Unit sales declined as a result of
turning down business with our largest customer that did not meet our margin
requirements.
Net sales to the DIY/retail market decreased 1% in the first six months of 2005
compared to 2004, as a result of a 5% decline in units shipped offset by an
increase in overall selling prices due to the Lumber Market for SYP. Unit sales
declined as a result of turning down business with our largest customer that did
not meet our margin requirements and the effects of a delayed spring in the
Northeast and Midwest.
Site-Built Construction:
Net sales to the site-built construction market increased 10% in the second
quarter of 2005 compared to 2004, primarily due to an estimated 13% increase in
unit sales. Unit sales increased as a result of organic growth out of several
existing plants, particularly those in our Texas region. These plants have
executed a strategy to increase sales and profits by selling lumber packages to
customers to whom we currently sell engineered wood components.
Net sales to the site-built construction market increased 19% in the first six
months of 2005 compared to 2004, primarily due to an estimated 15% 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 9%.
Manufactured Housing:
Net sales to the manufactured housing market increased 6% in the second quarter
of 2005 compared to the same period of 2004, primarily due to an estimated 10%
increase in units shipped. Units shipped increased as a result of additional
sales of panel goods to a large national customer and increased shipments to
modular home producers. Industry production for HUD code homes remained flat in
the second quarter of 2005.
Net sales to the manufactured housing market increased 15% in the first six
months 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 in the first quarter of 2005, and an estimated 11% increase in units
shipped for the reasons mentioned in the paragraph above. Industry production
for HUD code homes increased 4% in the first six months of 2005.
27
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Industrial:
Net sales to the industrial market increased 12% in the second quarter of 2005
compared to the same period of 2004, primarily due to an estimated 10% increase
in units shipped. Unit sales increased as a result of organic growth out of
several existing plants, particularly those in our Southeast and West Central
regions. We've added almost 200 new accounts since July of 2004 and we have been
successful at significantly increasing our sales with existing accounts. 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.
Net sales to the industrial market increased 14% in the first six months of 2005
compared to the same period of 2004, primarily due to an estimated 12% increase
in units shipped. Unit sales increased for the reasons mentioned in the
paragraph above.
The following table presents, for the periods indicated, our percentage of
value-added and commodity-based sales to total sales.
Three Months Ended Six Months Ended
------------------- -------------------
June 25, June 26, June 25, June 26,
2005 2004 2005 2004
-------- -------- -------- --------
Value-Added ............. 49.9% 47.3% 51.3% 49.3%
Commodity-Based ......... 50.1% 52.7% 48.7% 50.7%
Value-added sales increased 11% in the second quarter of 2005 compared to 2004,
primarily due to increased sales of engineered wood components and industrial
packaging products. Commodity-based sales remained flat comparing the second
quarter of 2005 with the same period of 2004.
Value-added sales increased 14% in the first six months 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 5% during the first six months of 2005 primarily due to the higher
Lumber Market for SYP and a 1% increase in unit sales.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profits increased approximately 9% comparing the second quarter of 2005
with the same period of 2004, which exceeded our 5% 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;
- - Improving our 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;
28
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - Increasing our sales of higher margin value-added products;
- - And attaining certain cost efficiencies.
Gross profit as a percentage of net sales increased in the first six months 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 13% comparing the first six months of 2005 with the same
period of 2004, which exceeded our 5% increase in unit sales. Our improved
profitability comparing these two periods was primarily due to the factors
mentioned in the paragraph above.
In the third quarter of 2004, one of our multi-family framing subsidiaries in
the West commenced certain new construction projects. Based on the nature of
these projects, calculating precise estimates was difficult except to determine
we would not recognize a loss. Accordingly, we developed and maintained a range
of total estimated gross profit for these projects. The low end of our range
consistently resulted in an estimated breakeven gross profit, which we used
under the percentage of completion method of accounting. These projects were
substantially complete on June 25, 2005 and we recognized approximately $400,000
of gross profit during the quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased by 6% in the
second quarter of 2005 compared to the same period of 2004, which was slightly
higher than our 5% increase in unit sales, primarily due to increases in wages,
health care expenses, and incentive compensation tied to operating profits and
return on investment. Consequently, SG&A expenses as a percentage of sales
increased to 7.6% in the second quarter of 2005 compared to 7.5% in the same
period of 2004.
Selling, general and administrative ("SG&A") expenses increased by 10% in the
first six months of 2005 compared to the same period of 2004, which compared
unfavorably with our 5% increase in unit sales, primarily due to increases in
wages, incentive compensation, and employee benefit costs. SG&A expenses as a
percentage of sales were 8.3% in the first six months of 2005 and 2004,
primarily due to the impact of the higher Lumber Market on our selling prices.
INTEREST, NET
Net interest costs increased in the second quarter and first six months of 2005
compared to the same periods of 2004, primarily due to an increase in short-term
borrowing rates on our variable rate debt.
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 $1.2 million.
29
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 increased to 37.8% in the second quarter of
2005 from 37.7% in the same period of 2004, and decreased to 37.9% in the first
six months of 2005 from 38.0% in the same period of 2004. Anticipated rate
reductions in 2005 associated with the new manufacturing deduction allowed under
the Jobs Creation Act and income taxes accrued on the sale of Nascor
Incorporated in 2004 have been substantially offset by:
- - An anticipated increase in our state and local income tax rate in 2005;
- - Our decision to repatriate income from one of our Canadian subsidiaries in
the second quarter of 2005;
- - Certain new unfavorable permanent tax differences resulting from the Jobs
Creation Act;
- - And a decline in income of certain of our non-wholly owned partnerships.
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):
June 25, June 26,
2005 2004
-------- --------
Cash from operating activities ..................... $ 3,579 ($52,813)
Cash from investing activities ..................... (23,696) (17,038)
Cash from financing activities ..................... 22,429 77,501
-------- --------
Net change in cash and cash equivalents ............ 2,312 7,650
Cash and cash equivalents, beginning of period ..... 25,274 17,430
-------- --------
Cash and cash equivalents, end of period ........... $ 27,586 $ 25,080
======== ========
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.
30
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 June 26, 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 45 days in the first six months of 2005
from 42 days in the first six months of 2004, primarily due to an increase in
our days supply of inventory offset slightly by a faster receivables cycle.
Inventory levels, relative to sales, increased in the first quarter 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 from operating activities improved by approximately $56 million in
the first six months of 2005 compared to the same period of 2004, primarily due
to:
- - An increase in our sale of receivables program;
- - A faster receivables cycle due to additional resources and efforts we have
recently devoted to this area;
- - And a substantial increase in our working capital requirements last year
due to a 32% increase in the lumber market from the beginning of the year
to June 2004.
Cash used for investing activities increased by almost $7 million in the first
six months of 2005 compared to the same period of 2004, primarily due to an
increase in capital expenditures as a result of projects in Thorndale, ON;
Thornton, CA; Berlin, NJ; and Grand Rapids, MI in 2005. We expect to spend
approximately $44 million on capital expenditures in 2005, which includes
outstanding purchase commitments on capital projects totaling approximately $6.9
million on June 25, 2005. We intend to fund capital expenditures and purchase
commitments through a combination of operating cash flows and availability under
our revolving credit facility.
Additionally, in 2005 we:
- - Acquired the assets and assumed certain liabilities of Maine Ornamental in
June 2005 for $8.5 million, consisting of $7.5 million paid on the date of
we closed the transaction and $1.0 million to be paid by August 1, 2005.
- - Sold our plant in Stockton, CA for $2.3M and completed a new facility in
Thornton, CA to which this operation was moved.
31
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - Collected the remaining portion of our insurance receivable totaling $3.0
million associated with the fire in 2004 at our Thorndale, ON plant.
Cash provided by financing activities decreased $55 million in the first six
months of 2005 compared to the same period of 2004, primarily due to decreased
borrowings needed under our revolving credit facility to finance operating and
investing activities discussed above.
On June 25, 2005, we had $50 million outstanding on our $250 million revolving
credit facility, which we believe was entirely comprised of seasonal working
capital requirements. The revolving credit facility also supports letters of
credit totaling approximately $32.2 million on June 25, 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 June 25, 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.
32
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.
33
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 June 25, 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 second quarter ended June 25,
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.
34
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
- ---------------------------------------------------------------------
(a) Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
---------------------------------------------------------------------------------------
Stock Option Exercises Various Common 120,000 Eligible Officers $690,000
(b) None.
(c) Issuer purchases of equity securities.
Fiscal Month (a) (b) (c) (d)
------------ ------- ------- ------- ---------
March 27, 2005 - April 30, 2005(1).. 57,506 $38.36 57,506 1,493,380
May 1 - May 28, 2005................ 1,493,380
May 29 - June 25, 2005.............. 1,493,380
(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 June 25, 2005, cumulative
total authorized shares available for repurchase is 1.5 million
shares.
35
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
The following matters were voted upon at our Annual Meeting of Shareholders on
April 20, 2005:
(1) Election of the following Director for a one year term expiring in 2006:
For Withheld
---------- --------
Louis A. Smith 15,706,230 420,703
Election of the following Directors for three year terms expiring in 2008:
Gary F. Goode 15,499,864 627,069
Mark A. Murray 15,980,041 146,892
Other Directors whose terms of office continued after the meeting are as
follows:
William G. Currie
Dan M. Dutton
John M. Engler
John W. Garside
Peter F. Secchia
Item 5. Other Information.
- ---------------------------
In the second quarter of 2005, the Audit Committee approved non-audit services
to be provided by our independent auditors, Ernst & Young LLP, totaling $17,500
for 2005.
36
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).
37
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: July 27, 2005 By:/s/ William G. Currie
--------------- ----------------------------------
William G. Currie
Its: Vice Chairman of the Board and
Chief Executive Officer
Date: July 27, 2005 By:/s/ Michael R. Cole
--------------- -----------------------------
Michael R. Cole
Its: Chief Financial Officer
38
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).