1
TABLE OF CONTENTS PAGE
Selected Financial Data 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 3-14
Independent Auditors' Report 15
Consolidated Balance Sheets as of December 27, 1997 and
December 28, 1996 16-17
Consolidated Statements of Earnings for the Years Ended
December 27, 1997, December 28, 1996, and December 30,
1995 18
Consolidated Statements of Shareholders' Equity for the
Years Ended December 27, 1997, December 28, 1996, and
December 30, 1995 19
Consolidated Statements of Cash Flows for the Years Ended
December 27, 1997, December 28, 1996, and December 30,
1995 20-21
Notes to Consolidated Financial Statements 22-34
Price Range of Common Stock and Dividends 34
2
SELECTED FINANCIAL DATA
(in thousands, except per share and statistics data)
................................................................................
1997 1996 1995 1994 1993(2)
CONSOLIDATED STATEMENT OF
EARNINGS DATA (1)
Net sales $1,066,300 $891,230 $754,466 $881,406 $655,516
Gross profit (3) 95,478 89,714 75,502 70,271 59,106
Earnings from continuing operations before
income taxes 25,982 29,803 23,951 18,950 17,592
Net earnings from continuing operations 16,957 17,832 14,388 11,450 10,622
Diluted earnings per share from continuing
operations $ 0.930 $ 0.980 $ 0.800 $ 0.640 $ 0.680
Dividends per share (5) $ 0.065 $ 0.060 $ 0.105 $ 0.050 $ 0.050
Weighted average shares outstanding with
common stock equivalents (4) 18,234 18,121 18,047 18,022 15,680
CONSOLIDATED BALANCE SHEET DATA (1)
Working capital $ 89,783 $ 90,639 $ 83,533 $ 78,878 $ 45,744
Total assets 229,383 198,866 180,791 172,034 188,106
Long-term debt and capital lease obligations 49,541 55,854 59,209 64,037 28,823
Shareholders' equity 115,898 100,815 84,597 72,888 62,850
STATISTICS (1)
Gross profit as a percentage of net sales 9.0% 10.1% 10.0% 7.9% 9.0%
Net earnings from continuing operations as a
percentage of net sales 1.6% 2.0% 1.9% 1.3% 1.6%
Return on shareholders' equity 16.8% 21.0% 19.7% 18.2% 29.9%
Current ratio 2.32 3.30 3.38 3.13 1.46
Debt to equity ratio .43 .55 .70 .88 .46
Book value per common share $ 6.65 $ 5.82 $ 4.89 $ 4.23 $ 3.67
................................................................................
(1) The financial data included herein has been restated for all periods
presented to include the results of Consolidated Building Components, Inc.
("CBC"). CBC merged with a subsidiary of the Company on December 22, 1997, and
has been accounted for as a pooling of interests. (See Note B of Notes to
Consolidated Financial Statements.)
(2) The 1993 financial data for the Company included herein has been restated to
reflect the balances and activities of Universal Restaurants, Inc., a former
subsidiary, as discontinued operations.
(3) In 1995, the Company reclassified delivery expense to include it as a
component of cost of goods sold and gross profit. For comparability, gross
profit for 1994 and 1993 has been restated to include delivery expense.
(4) Includes the effect of common stock to be issued pursuant to the exercise of
outstanding options.
(5) On December 15, 1995, the Company paid a special, one-time cash dividend of
$0.05 per share.
2
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK FACTORS
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. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information currently available to the Company at the
time such statements were made. Actual results could differ materially from
those included in such forward-looking statements as a result of, among other
things, the factors set forth below, the matters included in this report
generally and certain economic and business factors, some of which may be beyond
the control of the Company. Investors are cautioned that all forward-looking
statements involve risks and uncertainty.
LUMBER MARKET VOLATILITY. The Company experiences significant fluctuations in
the cost of lumber products from primary producers. While the Company attempts
to minimize its risk from severe price fluctuations, substantial, prolonged
trends in lumber prices can affect the Company's financial results.
COMPETITION. The Company is subject to competitive selling and pricing pressures
in its major markets. While the Company is generally aware of its existing
competitors' capabilities, it is subject to entry in its markets by new
competitors, which could negatively impact financial results.
MARKET GROWTH. The Company's sales growth is dependent, in part, upon growth
within the markets it serves. If the Company's markets do not maintain
anticipated growth, or if the Company fails to maintain its market share,
financial results could be impaired.
GOVERNMENT REGULATIONS. The Company is subject to a substantial amount of
existing government regulations which create a burden on the Company. Should the
Company become subject to additional laws and regulations enacted in the future,
or changes in interpretation of existing laws, it could have an adverse affect
on the Company's financial results.
FLUCTUATIONS IN LUMBER PRICES
The Company experiences fluctuations in the cost of lumber products from primary
producers. The table below highlights such fluctuations. A variety of factors
over which the Company has no control, including government regulations,
environmental regulations, weather conditions, and natural disasters, impact the
cost of lumber products. The Company anticipates that these fluctuations will
continue in the future.
3
4
The following table presents the Random Lengths framing lumber composite price
for the years ended December 27, 1997, December 28, 1996 and December 30, 1995:
................................................................................
RANDOM LENGTHS AVERAGE $/MBF
1997 1996 1995
January $436 $329 $379
February 444 347 383
March 433 353 358
April 457 374 335
May 444 420 313
June 430 409 292
July 429 402 328
August 413 443 330
September 393 443 346
October 378 421 321
November 379 459 324
December 370 428 332
Annual average $417 $402 $337
Annual percentage change 3.7% 19.3% N/A
................................................................................
The Random Lengths composite price is a weighted average of nine key framing
lumber prices chosen from major producing areas and species. The composite price
is designed as a broad measure of price movement in the commodity lumber market
("Lumber Market"). Although the average Lumber Market increased only 3.7%,
comparing 1997 with 1996, differences in the trend of the Lumber Market resulted
in lower gross margins in 1997 compared to 1996. The effects of the Lumber
Market on the Company's results of operations are discussed below under the
captions "Net Sales" and "Cost of Goods Sold and Gross Profit."
SEASONALITY
The Company's business is seasonal in nature and results of operations vary from
quarter to quarter. The demand for many of the Company's products is highest
during the period of April to August. Accordingly, the Company's sales tend to
be greater during its second and third quarters. To support this sales peak, the
Company builds its inventory of finished goods throughout the winter and spring.
Therefore, quantities of raw materials and finished goods inventories tend to be
at their highest, relative to sales, during the Company's first and fourth
quarters. As a result, the Company's financial performance may be negatively
affected by prolonged declines in the Lumber Market during its primary selling
season. However, the Company maintains supply programs with vendors which are
intended to decrease this potential impact. These programs allow the Company to
carry a lower investment in inventories, and include those materials which are
most susceptible to adverse changes in the Lumber Market.
BUSINESS COMBINATIONS
The Company established strategic objectives which include manufacturing and
distributing engineered building components for commercial and residential
builders, a new market for the Company, and increasing its sales of wood
packaging products to industrial users. Management plans to accomplish these
objectives through internal growth and by acquiring profitable market leaders
with
4
5
strong management. In line with this strategy, the Company has completed the
following acquisitions:
- - On September 29, 1997, a subsidiary of the Company acquired certain assets of
American I-Joist, Inc. ("AIJ"), a manufacturer of engineered I-joists for
commercial and residential builders. AIJ is located in Albuquerque, New
Mexico. The assets were acquired for approximately $200,000 in cash.
- - On December 22, 1997, a subsidiary of the Company completed its merger with
Consolidated Building Components, Inc. ("CBC"), a manufacturer of engineered
trusses, wall panels and I-joist products for commercial and residential
builders and producers of manufactured homes. CBC operates two plants in
Northwest Pennsylvania. The Company issued approximately 398,000 shares of its
common stock in exchange for all of the stock of CBC. This transaction has
been accounted for as a pooling of interests; therefore, prior financial
statements have been restated to reflect this merger for all periods
presented. Annual sales of CBC totaled approximately $24 million in 1997.
- - Subsequent to December 27, 1997, a partnership of the Company acquired
substantially all of the assets of Structural Lumber Products, Inc. ("SLP"), a
manufacturer of engineered trusses and wall panels for residential builders.
SLP operates plants in San Antonio, Austin and Dallas, Texas. The total
purchase price of the transaction was approximately $18.5 million, funded
through the Company's lines of credit. Annual sales of SLP totaled
approximately $25 million in 1997.
In addition, on February 2, 1998, the Company acquired a treating plant and real
estate in Lodi, OH for approximately $1.3 million.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of the
Company's Consolidated Statement of Earnings as a percentage of net sales,
including reorganization and other costs.
................................................................................
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 91.0 89.9 90.0
------------------------------------------
Gross profit 9.0 10.1 10.0
Selling, general, and administrative expenses 6.0 6.4 6.5
Reorganization costs 0.2
------------------------------------------
Earnings from operations 2.8 3.7 3.5
Other expense, net 0.4 0.3 0.3
------------------------------------------
Earnings before income taxes 2.4 3.4 3.2
Income taxes 0.8 1.4 1.3
------------------------------------------
Net earnings 1.6% 2.0% 1.9%
==========================================
................................................................................
5
6
REORGANIZATION AND OTHER COSTS. In the fourth quarter of 1997, the Company
announced a plan of reorganization. In 1998, the Company specifically plans to:
- - Consolidate the management of its operating companies from five regional
companies down to two integrated divisions.
- - Consolidate its regional purchasing operations from five offices down to two.
- - Consolidate its Southern California operations from two plants down to one.
- - Permanently discontinue its treating operations in North East, Maryland.
- - Discontinue manufacturing and/or selling certain products and product lines.
Management believes the reorganization will allow the Company to be more
efficient in its procurement of raw materials, improve the utilization of its
assets, and take advantage of its national presence to create new business
opportunities with national customers and vendors.
These planned activities resulted in a reorganization charge in 1997 which
incorporates the cost of:
- - Employee severance agreements.
- - Writing down fixed assets, which will be abandoned or sold, to their net
realizable value.
- - Future lease payments for facilities which will be abandoned.
- - Writing down inventory of a discontinued product line to its net realizable
value.
- - Future environmental costs at the discontinued treating plant.
At December 27, 1997, the reorganization costs consisted of the following
amounts (in thousands):
................................................................................
Employee benefits $ 448
Fixed assets 306
Leases 216
Inventory 202
Environmental 526
------
$1,698
======
................................................................................
The Company expects to incur additional costs and capital expenditures related
to the reorganization in the future totaling approximately $1.2 million and $3.5
million, respectively.
In addition to reorganization costs, the Company incurred other costs totaling
approximately $1.6 million related to writing down inventory of an unprofitable
product line and certain real estate to net realizable value. The following
table presents, for the periods indicated, the components of the
6
7
Company's Consolidated Statement of Earnings as a percentage of net sales,
excluding reorganization and other costs.
................................................................................
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 91.0 89.9 90.0
------------------------------------------
Gross profit 9.0 10.1 10.0
Selling, general, and administrative expenses 5.9 6.4 6.5
------------------------------------------
Earnings from operations 3.1 3.7 3.5
Other expense, net 0.3 0.3 0.3
------------------------------------------
Earnings before income taxes 2.8 3.4 3.2
Income taxes 1.0 1.4 1.3
------------------------------------------
Net earnings 1.8% 2.0% 1.9%
==========================================
................................................................................
The discussion of the Company's results of operations which follows excludes the
reorganization and other costs discussed above.
NET SALES. The Company manufactures, treats, and distributes lumber and other
products to the do-it-yourself (DIY), manufactured housing, wholesale lumber,
industrial and commercial and residential building markets. Its sales comprise a
single industry segment. The Company's objectives relative to sales, as outlined
in its "Performance 2002" strategic plan, include:
- - Diversifying its end market sales mix by increasing sales to the industrial
market and penetrating the commercial and residential engineered building
components market.
- - Maximizing its sales of "value-added" products. Value-added product sales
consist primarily of items sold to the DIY market under the Company's Fence
Fundamentals(TM), Lattice Basics(TM), Deck Necessities(R), Outdoor
Essentials(R), Storage Solutions(TM), and YardLine(R) trade names, trusses
sold to the manufactured housing market, industrial packaging products sold to
the industrial market, engineered building components sold to the commercial
and residential market, and non-commodity distributed products. Value-added
products generally carry higher net margins than sales of commodity-based
products and are less susceptible to Lumber Market volatility. A long-term
goal of the Company is to achieve a ratio of value-added sales to total sales
of at least 50%.
- - Increasing unit sales to each of the Company's existing markets, except the
wholesale market. The Company is not emphasizing sales to the wholesale market
as a result of its goals to increase its ratio of value-added product sales to
total sales and sell directly to retail customers.
In order to measure its progress in attaining these objectives, management
analyzes the following financial data relative to sales:
- - Sales by market classification.
- - The percentage change in sales attributable to changes in overall selling
prices versus changes in the quantity of units shipped.
7
8
- - The ratio of value-added product sales to total sales.
This information is presented in tables which follow.
The following table presents, for the periods indicated, the Company's net sales
(in thousands) and percentage of total net sales by market classification.
................................................................................
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
MARKET CLASSIFICATION 1997 % 1996 % 1995 %
DIY $ 524,628 49.2% $440,269 49.4% $372,595 9.4%
Manufactured Housing 407,653 38.2 345,418 38.8 281,200 7.3
Wholesale Lumber 63,422 6.0 48,988 5.5 51,456 6.8
Industrial 55,479 5.2 42,168 4.7 39,921 5.3
Commercial and Residential 15,118 1.4 14,387 1.6 9,294 1.2
----------------------------------------------------------------------
Total $1,066,300 100.0% $891,230 100.0% $754,466 100.0%
======================================================================
................................................................................
The following table estimates the Company's percentage change in net sales from
1996 to 1997 and from 1995 to 1996 which were attributable to changes in overall
selling prices versus changes in units shipped.
................................................................................
% CHANGE
IN SALES IN SELLING PRICES IN UNITS
1996 versus 1997 20% 6% 14%
1995 versus 1996 18% 11% 7%
................................................................................
The following table presents, for the periods indicated, the Company's
percentage of value-added and commodity-based sales to total sales.
................................................................................
VALUE-ADDED COMMODITY-BASED
1997 28.6% 71.4%
1996 28.7% 71.3%
................................................................................
The Company implemented a new sales information system in the third quarter of
1997, improving its ability to analyze sales by product and market. As a result
of this new system, and with consideration to the strategic objectives outlined
above, management reclassified certain products between the value-added and
commodity-based categories. Under the prior classifications, value-added sales
to total sales in 1997, 1996 and 1995 were 29.9%, 30.3% and 31.2%, respectively.
In addition, the system does not have the necessary data available to calculate
a restated value-added sales to total sales percentage for 1995.
DIY. Net sales to the DIY market increased approximately $84.4 million, or 19%,
in 1997 compared to 1996, due to an increase in unit sales, combined with an
overall increase in selling prices attributable to the higher level of the
Lumber Market in 1997 compared to 1996. The increase in unit
8
9
sales is primarily attributable to overall growth in the DIY industry, combined
with an increase in sales to certain national retail chains. The Company has
strong relationships with these national customers, centered around its ability
to provide quality products and services at competitive prices. As these
national retail customers continue to capture additional market share in the
industry, management believes it is well positioned to increase its market
share.
Net sales to the DIY market increased approximately $67.7 million, or 18%, in
1996 compared to 1995, primarily due to a 19% increase in the average monthly
Lumber Market comparing 1996 with 1995, which, in turn, increased the overall
selling prices of the Company's commodity-based products.
MANUFACTURED HOUSING. Net sales to the manufactured housing market increased
approximately $62.2 million, or 18%, in 1997 compared to 1996, due to an
increase in unit sales, combined with an overall increase in selling prices
attributable to the higher level of the Lumber Market in 1997 compared to 1996.
The unit sales increase is attributable to the acquisition of three plants from
Hi-Tek Forest Products, Inc. ("Hi-Tek") on October 1, 1996. Hi-Tek was a former
competitor of the Company in the manufactured housing market.
Net sales to the manufactured housing market increased approximately $64.2
million, or 23%, in 1996 compared to 1995, due to an increase in the Lumber
Market which substantially increased the selling prices of the Company's
products, supplemented by an increase in unit sales. Unit shipments improved
further in the fourth quarter of 1996, compared to the same period of 1995, as a
result of the acquisition of Hi-Tek.
WHOLESALE. Net sales to the wholesale market increased approximately $14.4
million, or 29%, in 1997 compared to 1996, primarily due to an increase in unit
sales. Although the Company is not focusing on growing its sales to the
wholesale market, it continues to supply its existing customers and take
advantage of opportunities for new business when these sales provide favorable
net margins. Net sales to the wholesale lumber market decreased $2.5 million, or
5%, in 1996 compared to 1995, as a decrease in unit sales offset the effect of
the higher Lumber Market in 1996.
INDUSTRIAL. Net sales to the industrial market increased approximately $13.3
million, or 32%, in 1997 compared to 1996, due to an increase in unit sales,
combined with an increase in overall selling prices attributable to the higher
level of the Lumber Market in 1997 compared to 1996. In 1997, new sales
positions and sales incentive programs were created to grow sales to this
market. In many cases, products sold to this market are produced from the
byproducts of manufactured products sold to other markets. Therefore, products
produced and distributed to this market provide the Company with opportunities
to improve its raw material yields. In addition, this market is less susceptible
to seasonal and cyclical fluctuations. The Company plans to continue to grow its
sales to this market in the future through internal expansion and strategic
acquisitions. Net sales to the industrial market increased $2.2 million, or 6%,
in 1996 compared to 1995.
COMMERCIAL AND RESIDENTIAL. Sales to this market represent those of CBC, whose
results have been pooled with the Company for prior periods. The increase in
sales from 1995 to 1997 is primarily attributable to a new engineered joist
product which CBC began to manufacture in 1996, and has allowed it to capture
additional market share on its other engineered products.
9
10
COST OF GOODS SOLD AND GROSS PROFIT. Gross profit as a percentage of net sales
decreased to 9.0% in 1997, compared to 10.1% in 1996. This decrease was
primarily due to a combination of the following factors:
- - The Lumber Market was on a prolonged downward trend the final six months of
1997, compared to an upward trend in 1996 that existed the majority of the
year (see Random Lengths chart on page 3). These market conditions caused the
Company to realize a lower gross margin on the sale of commodity-based
products in 1997 compared to 1996.
- - The effect of intense price competition in the manufactured housing market in
certain geographic regions resulted in lower gross margins on the sale of
trusses in 1997 compared to 1996.
Gross profit as a percentage of net sales increased to 10.1% in 1996 from 10.0%
in 1995. The net increase was primarily due to a favorable Lumber Market trend
comparing 1996 with 1995 which caused the Company to realize higher gross
margins in 1996 on the sale of commodity-based products and other products whose
selling prices are indexed to the Lumber Market. The positive gross margin
impact mentioned above was offset by price competition on certain manufactured
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased approximately $6.3 million, or 11.1%,
comparing 1997 to 1996. The net increase was primarily due to:
- - General increases in selling and administrative headcount to support the
growth of the business.
- - Expenses added through the acquisition of Hi-Tek.
- - The creation of new centralized marketing, national sales, and manufacturing
design departments.
- - Increased depreciation expense related to upgraded information systems.
These increases were offset by a decrease in accrued incentive compensation
expenses related to return on investment objectives.
Selling, general and administrative expenses increased $8.3 million, or 17.1%,
comparing 1996 and 1995. This increase is primarily due to an increase in
accrued incentive compensation expenses related to profitability, additional
selling and administrative headcount, higher management training expenses, and
increased depreciation related to upgraded information systems.
OTHER EXPENSE, NET. Other expense, net is primarily comprised of interest
expense and interest income. Net interest costs (interest expense less interest
income) increased approximately $702,000, comparing 1997 to 1996, as average
cash balances decreased and seasonal borrowings on lines of credit increased in
1997. This occurred as a result of greater working capital requirements from a
growth in business and the acquisition of Hi-Tek on October 1, 1996.
Net interest costs (interest expense less interest income) decreased by
approximately $501,000 comparing 1996 and 1995, as the Company continued to
improve its working capital management in 1996 and avoided borrowing on its
lines of credit for the entire year.
INCOME TAXES. The Company's effective tax rate in 1997 was 34.7%, compared to
40.2% in 1996, and 39.9% in 1995. Effective tax rates differ from statutory
federal income tax rates, primarily
10
11
due to provisions for state and local income taxes which can vary from year to
year based on changes in income generated by the Company in each of the states
in which it operates. Due to the reorganization it completed on December 28,
1996 to formalize its existing operating structure, the Company realized a
reduction in its state income taxes for 1997. In addition, the Company
recognized a lower effective tax rate in 1997 due to the extent of pre-tax
earnings it pooled for CBC (a former S-Corporation) in 1997 compared to 1996 and
1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities in 1997 improved to $19.1 million
from $3.7 million in 1996. This improvement was due to an increase in accounts
payable comparing December 27, 1997 and December 28, 1996, resulting from the
timing of payments to vendors at the end of the period. Due to the seasonality
of its business, management believes the Company's cash cycle is a better
indicator of its working capital management. The Company's cash cycle (days
sales outstanding plus days supply of inventory less days payables outstanding)
increased to 45.7 days in 1997 from 43.3 days in 1996 as the Company's average
investment in inventories relative to sales has increased.
Capital expenditures totaled $13.6 million in 1997, primarily to replace
existing machinery and equipment, upgrade information systems, improve
production efficiencies, and expand current production capacity. The Company's
largest capital expenditures were made to construct a new wood preservation
facility and specialty products plant in Moultrie, Georgia and acquire real
estate previously leased from the Company's profit sharing and 401(k) plan.
Capital expenditures totaled $19.8 million in 1996, which includes $10.4 million
spent on the October 1, 1996 acquisition of Hi-Tek.
Cash flows used in financing activities in 1997 consisted primarily of
repayments of long-term debt, payments to repurchase common stock from certain
officers of the Company, and dividends totaling $.065 per share. The Company had
net borrowings of $4.5 million on lines of credit in 1997 and has approximately
$115 million available on revolving credit facilities at December 27, 1997.
In October 1995, the Board of Directors approved a share repurchase program for
up to one million shares. The number of shares which may be repurchased is
limited to the amount of shares which will be issued in connection with employee
benefit and stock option plans. Repurchases of 82,502 shares for $1,119,000 and
100,000 shares for $822,000 were made in 1997 and 1996, respectively.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
The Company is self-insured for environmental impairment liability, and accrues
for the estimated cost of remedial actions when situations requiring such action
arise. The Company owns and operates seventeen 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, the Company 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. Remediation activities are currently being conducted or planned at the
Company's Granger, Indiana; North East, Maryland; Union City, Georgia; and
Elizabeth City, North Carolina treatment facilities.
11
12
The Company has accrued, in other long-term liabilities, amounts totaling $1.5
million (exclusive of the amount discussed under the caption "Reorganization and
Other Charges") and $1.7 million at December 27, 1997 and December 28, 1996,
respectively, representing the estimated costs to complete remediation efforts
currently in process and those expected to occur in the future. The Company
believes that the potential future costs of known remediation efforts will not
have a material adverse effect on its future financial position, results of
operations or liquidity.
"THE YEAR 2000"
The Company has undertaken a complete review of its business and financial
systems, and has concluded it will not have any material "Year 2000" issues with
the computer programs which drive these systems. Accordingly, management does
not expect to incur any significant programming costs in this area. The Company
intends to review its other ancillary systems and the systems of its significant
customers and vendors in 1998 to ensure there are no material issues with
respect to these programs.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for fiscal years beginning after December 15, 1997. This
Statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement further requires that an entity display an
amount representing total comprehensive income for the period in that financial
statement. This Statement also requires that an entity classify items of other
comprehensive income by their nature in a financial statement. For example,
other comprehensive income may include foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments in
debt and equity securities. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. Based on current
accounting standards, this Statement is not expected to have a material impact
on the Company's consolidated financial statements. The Company will adopt this
accounting standard effective January 1, 1998, as required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. This Statement establishes standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets, and other amounts disclosed for segments to corresponding
amounts reported in the consolidated financial statements. Restatement of
comparative information for earlier periods presented is required in the initial
year of application. Interim information is not required until the second year
of application, at which time comparative information is required. The Company
has not determined the impact that the adoption of this new accounting standard
will have on its consolidated financial statement disclosures, but will adopt
this accounting standard effective January 1, 1998, as required.
12
13
FORWARD OUTLOOK
NET SALES. Independent sources forecast continued growth in the Company's two
core markets -- DIY and manufactured housing. The Company has no means of
ascertaining the accuracy of these industry-wide projections, and actual results
could vary significantly. Moreover, irrespective of any growth in industry
sales, the Company's sales could vary materially, due to a variety of factors,
such as increased competition and the Lumber Market, as well as other factors,
some of which are beyond the Company's control.
DIY. DO-IT-YOURSELF RETAILING, in its November 1997 edition, estimated a 10.6%
increase in total retail sales by home improvement retailers comparing 1997 with
1996. The publication also forecasts the following sales for 1998 through 2001
(in billions), which result in a compounded annual growth rate of 4.0%.
................................................................................
1998 $145.1
1999 $152.7
2000 $159.0
2001 $165.3
................................................................................
In addition, the consolidation within the DIY industry continued in 1998 as top
performers obtained additional market share. The Company feels it is in a
position to capitalize on these industry conditions as a result of its national
distribution capabilities, strong relationships with top performing customers,
and diversified product offering. The Company's goal is to continue to grow
sales to this market with an emphasis on new value-added products.
MANUFACTURED HOUSING. MANUFACTURED HOME MERCHANDISER, in its January 1998
edition, estimated a decrease in industry shipments to retailers of 3.3% in 1997
compared to 1996. The publication also forecasted growth in this market of 2.0%
in 1998.
Industry shipments declined in 1997 due to excess inventory at a retail level
during the year. Retailers have currently sold through this excess inventory,
therefore, industry shipments are expected to increase in 1998. The Company
believes this industry will continue to experience long-term growth as
manufactured homes continue to be an attractive alternative to conventional
homes as a result of high product quality and affordability. Due to its national
presence and customer relationships, management believes the Company is
well-positioned to capitalize on industry growth. In addition, the Company is
currently finalizing research and development activities associated with a new
value-added product line for the manufactured housing market.
INDUSTRIAL. A key strategic objective of the Company is to increase its sales of
wood packaging products to industrial users. In 1997, the Company increased its
unit sales to this market by 22% through internal growth attributable to new
sales positions and incentive programs. Management plans to continue to
accomplish its growth objectives for this market through internal expansion and
strategic acquisitions.
COMMERCIAL AND RESIDENTIAL. Another key strategic objective of the Company is to
manufacture engineered building components for commercial and residential
builders. Management believes this market compliments its manufactured housing
business and provides the Company with national
13
14
growth opportunities in a familiar product line. Management plans to continue to
accomplish its growth objectives for this market through internal growth and
strategic acquisitions.
GROSS PROFIT. Management believes the following factors may impact the Company's
gross profits in the future:
- - Current economic conditions in Asia may result in an excess supply of
spruce-pine-fir for Canadian producers. As a result, commodity pricing for
this species may experience a short-term decline. Since the selling prices of
many of the Company's commodity-based and other products are indexed to the
Lumber Market for this species, a prolonged decline may adversely impact gross
margins on these products. In addition, this situation may cause a similar
effect on other species the Company buys and sells. However, management
believes the unique supply programs it maintains with vendors reduce its
exposure. In addition, while a declining Lumber Market generally subjects most
of the products the Company sells to the DIY and manufactured housing market
to risks of lower gross margins, it has the opposite effect for products sold
to the commercial and residential market. Selling prices of these products are
generally quoted based on the current Lumber Market and then fixed for a
specified time period or quantity. Therefore, a falling Lumber Market
generally results in selling prices being set at a higher level than the
subsequent cost of the lumber, which positively impacts gross margins.
- - The Company recently completed two acquisitions of manufacturers which supply
the commercial and residential market.
- - Intense price competition in the manufactured housing market is expected to
continue in the short-term, however, management does not expect any additional
gross margin declines on products sold to this market. In addition, management
continues to pursue manufacturing initiatives which will lower its production
costs per unit.
- - The Company has a key long-term strategic objective of increasing its ratio of
value-added sales to total sales to 50%. Management believes its acquisition
strategy and recent efforts in new product development will help it make
progress toward this objective. Achievement of this goal is dependent upon, in
part, certain factors that are beyond the control of management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. A goal of the Company is to
continue to contain these costs despite a period of expected growth, therefore,
management expects these costs to decline relative to sales in the foreseeable
future. In addition, the recent reorganization to streamline management and
consolidate purchasing operations is expected to result in expense reductions
commencing in 1998.
LIQUIDITY AND CAPITAL RESOURCES. Management expects to spend between $18 million
to $20 million related to capital expenditures in 1998, primarily related to new
business expansion and upgrading machinery and equipment. In addition, the
Company will continue to pursue its acquisition strategy in 1998, and may
finance any future acquisitions by using its lines of credit, borrowing
additional long-term debt, issuing common stock, or by using a combination of
these methods.
In 1998, it is expected that the Company will continue with its current dividend
policy of $.035 per share paid semi-annually. In addition, the Company will pay
amounts due on long-term debt totaling approximately $9.8 million.
14
15
INDEPENDENT AUDITORS' REPORT
Board of Directors
Universal Forest Products, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of Universal Forest
Products, Inc. and subsidiaries as of December 27, 1997 and December 28, 1996,
and the related consolidated statements of earnings, shareholders' equity, and
cash flows for each of the three years in the period ended December 27, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of Universal Forest Products, Inc.
and subsidiaries as of December 27, 1997 and December 28, 1996, and the results
of their consolidated operations and their cash flows for each of the three
years in the period ended December 27, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Grand Rapids, Michigan
January 27, 1998
15
16
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 27, DECEMBER 28,
NOTE 1997 1996
....................................................................................................
ASSETS
CURRENT ASSETS:
Cash and cash equivalents B $ 3,157 $ 1,330
Accounts receivable (net of allowance for doubtful
accounts of $449 and $521) B 35,616 33,642
Inventories:
Raw materials B 38,240 33,446
Finished goods B 72,923 56,950
----------------------------
111,163 90,396
OTHER CURRENT ASSETS B 426 474
PREPAID INCOME TAXES L 3,134
DEFERRED INCOME TAXES L 4,141 4,186
----------------------------
Total Current Assets 157,637 130,028
OTHER ASSETS B, F, J 4,474 4,092
NON-COMPETE AGREEMENTS B, O 2,525 3,052
PROPERTY, PLANT & EQUIPMENT:
Land and improvements B, M 16,113 14,515
Buildings and improvements B, M 37,030 35,240
Machinery, equipment and office furniture B, M 58,214 52,135
Construction in progress 5,358 4,836
----------------------------
116,715 106,726
Less accumulated depreciation and amortization B, M (51,968) (45,032)
----------------------------
64,747 61,694
----------------------------
$ 229,383 $ 198,866
============================
....................................................................................................
16
17
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 27, DECEMBER 28,
NOTE 1997 1996
....................................................................................................
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable D $ 4,500
Accounts payable B 34,053 $ 15,203
Accrued liabilities:
Compensation and benefits B, K 16,345 17,736
Income taxes L 811
Other B, C 3,167 1,986
Current portion of long-term debt and capital lease
obligations B, E, M 9,789 3,653
----------------------------
Total Current Liabilities 67,854 39,389
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
LESS CURRENT PORTION B, E, M 39,752 52,201
DEFERRED INCOME TAXES B, L 1,766 2,389
OTHER LIABILITIES F, O, N 4,113 4,072
COMMITMENTS AND CONTINGENCIES N
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares authorized
1,000,000; issued and outstanding, none
Common stock, no par value; shares authorized 40,000,000;
issued and outstanding, 17,572,262 and 17,438,124 B, G, H 17,572 17,438
Additional paid-in capital B, G 29,855 28,446
Retained earnings B 70,253 56,426
Foreign currency translation adjustment (882) (830)
----------------------------
116,798 101,480
Officers' stock notes receivable I (900) (665)
----------------------------
115,898 100,815
----------------------------
$ 229,383 $ 198,866
============================
....................................................................................................
See notes to consolidated financial statements.
17
18
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
NOTE 1997 1996 1995
.......................................................................................................
Net sales B $ 1,066,300 $ 891,230 $ 754,466
Cost of goods sold B, K, M 970,822 801,516 678,964
--------------------------------------------
Gross profit 95,478 89,714 75,502
Selling, general and administrative expenses B, K, M 63,461 57,122 48,787
Reorganization costs C 1,698
--------------------------------------------
Earnings from operations 30,319 32,592 26,715
Other expense (income):
Interest expense B, D, E 4,305 4,248 4,950
Interest income (368) (1,013) (1,214)
Other, net B 400 (446) (972)
--------------------------------------------
Total other expense 4,337 2,789 2,764
--------------------------------------------
Earnings before income taxes 25,982 29,803 23,951
Income taxes B, L 9,025 11,971 9,563
--------------------------------------------
Net earnings $ 16,957 $ 17,832 $ 14,388
============================================
Earnings per share -- basic $ 0.97 $ 1.02 $ 0.83
Earnings per share -- diluted $ 0.93 $ 0.98 $ 0.80
Weighted average shares outstanding 17,528 17,428 17,439
Weighted average shares outstanding with common
stock equivalents 18,234 18,121 18,047
.......................................................................................................
See notes to consolidated financial statements.
18
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share and per share amounts)
FOREIGN
ADDITIONAL CURRENCY OFFICERS'
PAID-IN RETAINED TRANSLATION STOCK NOTES
COMMON STOCK CAPITAL EARNINGS ADJUSTMENT RECEIVABLE TOTAL
...........................................................................................................
BALANCE AT DECEMBER 31, 1994
As previously reported $ 7,040 $28,605 $27,265 $(533) $(809) $ 71,568
Pooling of interests with
CBC 398 (355) 1,078 1,121
----------------------------------------------------------------------
RESTATED BALANCE AT DECEMBER
31, 1994 $17,438 $28,250 $28,343 $(533) $(809) $ 72,689
Net earnings 14,388 14,388
Cash dividends -- $.105 per
share (1,789) (1,789)
CBC shareholder
distributions (300) (300)
Issuance of 1,381 shares 1 10 11
Foreign currency translation
adjustment (465) (465)
Payments received on
officers' stock notes
receivable 63 63
----------------------------------------------------------------------
BALANCE AT DECEMBER 30, 1995 $17,439 $28,260 $40,642 $(998) $(746) $ 84,597
Net earnings 17,832 17,832
Cash dividends -- $.06 per
share (1,022) (1,022)
CBC shareholder
distributions (304) (304)
Issuance of 98,971 shares 99 186 285
Repurchase of 100,000 shares (100) (722) (822)
Foreign currency translation
adjustment 168 168
Payments received on
officers' stock notes
receivable 81 81
----------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 $17,438 $28,446 $56,426 $(830) $(665) $100,815
Net earnings 16,957 16,957
Cash dividends -- $.065 per
share (1,116) (1,116)
CBC shareholder
distributions (978) (978)
Issuance of 216,640 shares 217 796 1,013
Repurchase of 82,502 shares (83) (1,036) (1,119)
Tax benefits from
non-qualified stock
options exercised 613 613
Foreign currency translation
adjustment (52) (52)
Issuance of officers' stock
notes receivable (400) (400)
Payments received on
officers' stock notes
receivable 165 165
----------------------------------------------------------------------
BALANCE AT DECEMBER 27, 1997 $17,572 $29,855 $70,253 $(882) $(900) $115,898
======================================================================
...........................................................................................................
See notes to consolidated financial statements.
19
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
NOTE 1997 1996 1995
......................................................................................................
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings B $ 16,957 $ 17,832 $ 14,388
Adjustments to reconcile net earnings to net
cash provided by operations:
Depreciation and amortization of capital
leases B 9,515 8,625 7,835
Amortization of non-compete agreements and
goodwill 527 121
Deferred income taxes B, L (578) (635) 1,117
Loss (gain) on sale of property, plant and
equipment 683 15 (272)
Stock Gift Program expense G 5 5 4
Changes in:
Accounts receivable B (1,974) (5,600) 4,574
Inventories B (20,767) (20,502) 13,018
Other B 20 (1,024) 208
Accounts payable B 18,850 (522) (945)
Accrued liabilities B (4,156) 5,388 2,203
------------------------------------------
Net cash provided by operations 19,082 3,703 42,130
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment B (13,631) (9,346) (15,800)
Acquisition of certain net assets of Hi-Tek B (10,413)
Proceeds from sale of property, plant and
equipment B 380 233 1,382
Purchases of notes receivable (164)
Collection of notes receivable I 618 298 347
Purchases of other assets (205) (4) (33)
------------------------------------------
Net cash used in investing activities (12,838) (19,396) (14,104)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable B, D 4,500 (1,600)
Proceeds from issuance of long-term debt B, E 984 1,354
Repayment of long-term debt B, E (6,312) (3,815) (4,287)
Proceeds from issuance of common stock G 608 280 7
Cash dividends paid (1,116) (1,022) (1,789)
CBC shareholder distributions B (978) (96) (300)
Repurchase of common stock G (1,119) (822)
------------------------------------------
Net cash used in financing activities (4,417) (4,491) (6,615)
------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,827 (20,184) 21,411
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,330 21,514 103
------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,157 $ 1,330 $ 21,514
==========================================
......................................................................................................
20
21
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(in thousands)
YEARS ENDED
DECEMBER 27, DECEMBER 28, DECEMBER 30,
NOTE 1997 1996 1995
......................................................................................................
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest B $ 4,347 $ 4,247 $ 4,963
Income taxes B 12,934 10,984 8,174
NON-CASH INVESTING ACTIVITIES:
Officers' stock note receivable I 400
Property, plant and equipment acquired through
capital leases and long-term debt E 59 59
Net book value of assets disposed through
lease termination agreement M 864
Real estate received in lieu of note
receivable 347
Assumption of accounts payable with the
acquisition of certain net assets of Hi-Tek B 495
NON-CASH FINANCING ACTIVITIES:
CBC distribution of real estate, net of
mortgage B 208
......................................................................................................
See notes to consolidated financial statements.
21
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS. Universal Forest Products, Inc. (the "Company") manufactures, treats
and distributes lumber products for the do-it-yourself (DIY), manufactured
housing, industrial, and commercial and residential building markets. The
Company's principal products are preservative-treated wood, dimension lumber,
lattice, fence panels, deck components, engineered roof trusses and wall panels,
and other building products. The Company currently operates manufacturing,
treating and distribution facilities throughout North America and comprises a
single industry segment. In 1997, 1996 and 1995 approximately 18%, 15% and 15%
of net sales, respectively, were to a single customer.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries and partnerships. All
significant intercompany transactions and balances have been eliminated.
FISCAL YEAR. The Company's fiscal year is a 52 or 53 week period, ending on the
Saturday nearest to December 31. Unless otherwise stated, references to 1997,
1996 and 1995 relate to the years ended December 27, 1997, December 28, 1996 and
December 30, 1995, respectively. Each of these fiscal years were comprised of 52
weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value
of Financial Instruments," the estimated fair values of financial instruments
have been determined by the Company; significant differences in fair market
values and recorded values are disclosed in Note E. The estimated fair value
amounts have been determined using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The fair value estimates presented herein are based on pertinent information
available to management as of December 27, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
USE OF ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Management believes its estimates to be
reasonable, however, actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of cash and
highly-liquid investments purchased with an original maturity of three months or
less.
22
23
INVENTORIES. Inventories are stated at the lower of average cost or market. Raw
materials consist primarily of unfinished wood products expected to be
manufactured or treated prior to sale, while finished goods represent various
manufactured and treated wood products ready for sale.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost.
Expenditures for renewals and betterments are capitalized, and maintenance and
repairs are expensed as incurred. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets as follows:
................................................................................
Buildings and improvements 15 to 31.5 years
Land improvements 5 to 15 years
Machinery and equipment 3 to 8 years
Office furniture 5 to 8 years
................................................................................
FOREIGN CURRENCY TRANSLATION. The functional currency for the Company's foreign
operations is the applicable local currency. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date. For revenues,
expenses, gains and losses, the transaction date exchange rate is used. Gains or
losses resulting from the translation are included as a separate component of
shareholders' equity. Gains or losses resulting from foreign currency
transactions were not material in 1997, 1996 or 1995, and are reflected in
earnings from continuing operations.
INCOME TAXES. Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS. Revenue is recognized
at the time the product is shipped to the customer. The Company accrues for bad
debt expense based on its history of accounts receivable write-offs to sales.
Individual accounts receivable balances are evaluated on a monthly basis, and
those balances considered to be uncollectible are recorded to the allowance.
Collections of amounts previously written off are recorded as an increase to the
allowance. Bad debt expense amounted to approximately $728,000, $707,000 and
$143,000, for 1997, 1996 and 1995, respectively.
EARNINGS PER COMMON SHARE. In March 1997, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings Per Share." SFAS 128 requires companies with complex capital
structures that have publicly held common stock or common stock equivalents to
present both basic and diluted earnings per share ("EPS") on the face of the
income statement. The presentation of basic EPS replaces the presentation of
primary EPS previously required by Accounting Principles Board Opinion No. 15
("APB No. 15"), "Earnings Per Share." Basic EPS is calculated as income
available to common shareholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS (previously referred to
as fully diluted EPS) is calculated using an approach similar to the "if
23
24
converted" method for convertible securities and the treasury stock method for
options and warrants as previously prescribed by APB No. 15. This new statement
is effective for financial statements issued for the interim and annual periods
ending after December 15, 1997.
Pursuant to the above-mentioned accounting standard, basic EPS is calculated
based on the weighted average number of common shares outstanding during the
periods presented, while diluted EPS is calculated based on the weighted average
number of common and common equivalent shares outstanding during the periods
presented, giving effect to stock options granted in 1989 and 1993 (see Note H),
utilizing the "treasury stock" method.
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).
.....................................................................................................
FOR THE YEAR-ENDED 12/27/97 FOR THE YEAR-ENDED 12/28/96
PER PER
INCOME SHARES SHARE INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
...............................................................................
NET EARNINGS $16,957 $17,832
======= =======
BASIC EPS
Income available to
common shareholders 16,957 17,528 $0.97 17,832 17,428 $1.02
==== ====
EFFECT OF DILUTIVE
SECURITIES
Options 706 693
----------------------- -----------------------
DILUTED EPS
Income available to
common shareholders
and assumed
conversions $16,957 18,234 $0.93 $17,832 18,121 $0.98
================================ ================================
FOR THE YEAR-ENDED 12/30/95
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
NET EARNINGS $14,388
=======
BASIC EPS
Income available to
common shareholders 14,388 17,439 $0.82
=====
EFFECT OF DILUTIVE
SECURITIES
Options 608
-----------------------
DILUTED EPS
Income available to
common shareholders
and assumed
conversions $14,388 18,047 $0.80
================================
.....................................................................................................
There were no securities excluded from the diluted EPS computation.
STOCK-BASED COMPENSATION. Effective January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation," and as permitted by this
Standard, continues to apply the recognition and measurement principles of
Accounting Principles Board Opinion No. 25 to its stock-based compensation. The
Company has determined that stock-based compensation expense calculated under
SFAS No. 123 is not significant in relation to reported net income and earnings
per share.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1995 and 1996
consolidated financial statements to conform to the classifications used in
1997.
B. BUSINESS COMBINATIONS
Effective October 1, 1996, the Company acquired certain assets of Hi-Tek Forest
Products, Inc. ("Hi-Tek") for approximately $10,908,000 and assumed accounts
payable totaling approximately
24
25
$495,000 (the "Acquisition"). The aggregate purchase price, funded through the
Company's cash balances, consisted of the following amounts (in thousands):
................................................................................
Accounts receivable $ 2,116
Inventories 3,066
Property, plant, and equipment 3,601
Accounts payable (495)
Non-compete agreement 2,125
-------
$10,413
=======
................................................................................
The non-compete agreement spans a five year time period, covers the geographic
regions in which the acquired plants operate, and is being amortized over the
five year term of the agreement on a straight-line basis. The acquired
operations are located in Bend, Oregon; Boise, Idaho; and Corona, California.
The acquisition has been accounted for as a purchase. Accordingly, the aggregate
purchase price has been allocated to assets acquired and accounts payable
assumed, based on their estimated fair market values. Hi-Tek's results of
operations since the date of the acquisition are included in the Company's
earnings from operations.
On September 29, 1997, a subsidiary of the Company acquired certain assets of
American I-Joist, Inc. ("AIJ"). A manufacturer of engineered I-joists for
commercial and residential builders. AIJ is located in Albuquerque, New Mexico.
The assets were acquired for approximately $200,000 in cash.
On December 22, 1997, a subsidiary of the Company completed a merger with
Consolidated Building Components, Inc. ("CBC"), a manufacturer of engineered
trusses, wall panels and I-joist products for commercial and residential
builders and producers of manufactured homes. CBC operates two plants in
Northwest Pennsylvania. The Company issued approximately 398,000 shares of its
common stock in exchange for all of the stock of CBC. This transaction has been
accounted for as a pooling of interests; therefore, prior financial statements
have been restated to reflect this merger for all periods presented. Although
CBC prepared its financial statements on a September 30 fiscal year-end, the
restated financial statements for 1995, 1996 and 1997 include CBC amounts based
on the Company's year-end. In addition, CBC's shareholders elected to be taxed
as an S-Corporation; therefore, no provision for federal or state income taxes
was included in CBC's financial statements for 1995, 1996 and 1997. A provision
for deferred taxes was recorded by the Company on December 27, 1997 for
differences between financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future.
Subsequent to December 27, 1997, a partnership of the Company acquired
substantially all of the assets of Structural Lumber Products, Inc. ("SLP"), a
manufacturer of engineered trusses and wall panels for residential builders. SLP
operates plants in San Antonio, Austin and Dallas, Texas. The total purchase
price of the transaction was approximately $18.5 million, funded through the
Company's lines of credit. This transaction will be accounted for as a purchase,
with the excess of the purchase price over the estimated fair value of the
acquired assets, which approximates $13 million, to be recorded as goodwill.
25
26
C. REORGANIZATION COSTS
In the fourth quarter of 1997, the Company announced a plan of reorganization.
In 1998, the Company specifically plans to:
- - Consolidate the management of its operating companies from five regional
companies down to two integrated divisions.
- - Consolidate its regional purchasing operations from five offices down to two.
- - Consolidate its Southern California operations from two plants down to one.
- - Permanently discontinue its treating operations in North East, Maryland.
- - Discontinue manufacturing and/or selling certain products and product lines.
These planned activities have resulted in a reorganization charge which
incorporates the cost of:
- - Employee severance agreements for 14 middle managers.
- - Writing down fixed assets which will be abandoned or sold to their net
realizable value.
- - Future lease payments for facilities which will be abandoned.
- - Writing down inventory of a discontinued product line to its net realizable
value.
- - Future environmental costs at the discontinued treating plant.
At December 27, 1997, the reorganization charge consisted of the following
amounts (in thousands):
................................................................................
Employee benefits $ 448
Fixed assets 306
Leases 216
Inventory 202
Environmental 526
------
$1,698
======
................................................................................
D. NOTES PAYABLE
At December 27, 1997, the Company had unsecured lines of credit available with
banks totaling $122,000,000, including amounts reserved for letters of credit.
The agreements are subject to annual renewal. The Company had $4,500,000
outstanding on these lines on December 27, 1997, and had no amounts outstanding
on December 28, 1996. Borrowings under the lines are at negotiated rates which
are at or below each respective bank's prime rate. The average rates for 1997
and 1995 were 6.0% and 6.9%, respectively. The Company did not draw on its lines
in 1996. A bank has extended letters of credit on the Company's behalf
aggregating $2,650,000 at December 27, 1997.
26
27
E. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations are summarized as follows at
December 27, 1997 and December 28, 1996 (amounts in thousands):
................................................................................
1997 1996
Senior unsecured notes, $5,714 due annually commencing May
1998 through May 2004, interest due semi-annually at 7.15%
per annum $40,000 $40,000
Bank term loan, $119 due monthly through November 1999,
interest due monthly at 7.75% per annum 2,738 4,286
Bank term loan, $500 due semi-annually through December
2001, interest due monthly at 5.25% per annum 4,000 5,000
Bank term loan, $350 due semi-annually through December
1999, interest due monthly at 9.67% per annum 1,400 2,100
Bank term loan, $350 due semi-annually through April 1997,
interest due monthly at 9.89% per annum 350
Capital lease obligations, interest imputed at rates ranging
from 7.25% to 8.00% per annum 826 823
Other 577 3,295
-----------------
49,541 55,854
Less current portion 9,789 3,653
-----------------
Long-term portion $39,752 $52,201
=================
................................................................................
The terms of the senior unsecured note agreement require, in part, the Company
to maintain a minimum net worth and comply with certain financial ratios. The
agreement also restricts the amount of additional indebtedness the Company may
incur and the amount of assets which may be sold.
The bank term loans and the line of credit agreements require the maintenance of
certain financial ratios and place specified limits on new indebtedness and
stock redemptions.
At December 27, 1997, the principal maturities of long-term debt and capital
lease obligations are as follows (in thousands):
................................................................................
1998 $ 9,789
1999 8,855
2000 6,826
2001 6,784
2002 5,747
Thereafter 11,540
-------
$49,541
=======
................................................................................
At December 27, 1997, the estimated fair value of the Company's long-term debt,
including the current portion, was approximately $49,685,000, which was
approximately $144,000 more than the carrying value. The estimated fair value is
based on rates anticipated to be available to the Company
27
28
for debt with similar terms and maturities. The estimated fair value of notes
payable included in current liabilities approximated the carrying value.
F. DEFERRED COMPENSATION
The Company has established a program whereby certain executives irrevocably
elected to defer receipt of certain compensation in 1985 through 1988. Deferred
compensation payments to these executives will commence upon their retirement
from the Company. The Company has purchased life insurance on such executives,
payable to the Company in amounts which, if assumptions made as to mortality
experience, policy dividends and other factors are realized, will accumulate
cash values adequate to reimburse the Company for all payments for insurance and
deferred compensation obligations. In the event cash values are not sufficient
to fund such obligations, the program allows the Company to reduce benefit
payments to such amounts as may be funded by accumulated cash values.
G. COMMON STOCK
In April 1994, shareholders approved the Employee Stock Purchase Plan ("Stock
Purchase Plan") and Director Retainer Stock Plan ("Stock Retainer Plan"). The
Stock Purchase Plan allows eligible employees to purchase shares of Company
stock at a share price equal to 90% of fair market value on the purchase date.
In 1997, 1996 and 1995, 8,677, 3,471 and 831 shares, respectively, were issued
under this Plan for amounts totaling approximately $113,000, $33,000 and $7,200,
respectively. The Stock Retainer Plan allows eligible members of the Board of
Directors to defer their retainer fees and receive shares of Company stock at
the time of their retirement, disability or death. The number of shares to be
received is equal to the amount of the retainer fee deferred multiplied by 110%
divided by the fair market value of a share of Company stock at the time of
deferral, and is increased for dividends declared. The Company has accrued
approximately $123,000, $83,000 and $50,000 at December 27, 1997, December 28,
1996 and December 30, 1995, respectively, for amounts incurred under this Plan.
The Employee Stock Gift Program was approved by the Board of Directors in
January 1994, and allows management to gift shares of stock to eligible
employees based on length of service. The Company gifted 275, 500 and 550 shares
of stock under this Plan in 1997, 1996 and 1995, respectively, and recognized
the market value of the shares at the date of issuance as expense.
On October 27, 1995, the Board of Directors approved a share repurchase program
for up to 1,000,000 shares of the Company's common stock. Repurchases are to be
made to the extent of share issuances under the Company's employee benefit and
stock option plans. In 1997 and 1996, the Company repurchased 82,502 and 100,000
shares, respectively, of its common stock for approximately $1,119,000 and
$822,000, respectively.
In January 1997, the Company instituted a Directors' Stock Grant Program. In
lieu of a cash increase in the amount of Director fees, each outside Director
receives 100 shares of stock for each Board Meeting attended up to a maximum of
400 shares per year.
On April 22, 1997, the shareholders approved an amendment to the Company's
Articles of Incorporation increasing authorized common stock from 25,000,000
shares to 40,000,000 shares. Apart from the shares of common stock reserved for
issuance under the above-referenced plans and
28
29
plans outlined in Note H, the Company does not have any present plan,
understanding or agreement to issue additional shares of common stock.
On April 22, 1997, the shareholders approved the Long Term Stock Incentive Plan
to succeed the Company's 1994 Employee Stock Option Plan. The Plan reserves a
maximum of 1,100,000 shares, and provides for the granting of incentive stock
options, reload options, stock appreciation rights, restricted stock,
performance shares, and other stock-based awards. The term of the Plan is ten
years. As of December 27, 1997, no awards had been granted under this Plan. On
January 30, 1998, the Company granted incentive stock options under this Plan,
as discussed in Note H.
At December 27, 1997, a total of 2,267,946 shares are reserved for issuance
under the Plans mentioned above and under Note H below.
H. STOCK OPTIONS
On June 8, 1989, the Company granted non-qualified stock options to certain
executive officers. In April 1997, two officers exercised all of their options
and purchased 140,000 shares of stock for $364,400. In February 1996, a former
officer exercised all of his options and purchased 60,000 shares of stock for
$132,600. All of the non-qualified options granted under this plan have been
exercised.
On June 1, 1993, shareholders approved the Incentive Stock Option Plan (the
"Plan") for officers of the Company. Options for the purchase of all 1,200,000
shares of the Company's common stock authorized under the Plan have been
granted. The Plan provides that the options are exercisable only if the officer
is employed by the Company at the time of exercise and holds at least
seventy-five percent of the individuals' shares held on April 1, 1993. The Plan
also requires the option shares to be held for periods of six months to three
years. In April 1997 and April 1996, officers exercised options and purchased
37,500 shares and 35,000 shares, respectively, for $131,250 and $113,750,
respectively. The remaining options (shown below in thousands) are exercisable
within thirty days of the anniversary of the Plan in the years and at the prices
shown below:
................................................................................
PLAN ANNIVERSARY NUMBERS OF SHARES OPTION PRICE PER SHARE
1998 80 $3.75
1999 170 $4.00
2000 80 $4.25
2001 163 $4.50
2002 185 $5.00
2005 190 $5.75
2006 60 $6.00
2007 60 $6.25
2008 40 $6.50
-----
1,028
=====
................................................................................
On November 10, 1993, the Company granted an option to purchase 10,000 shares of
common stock to an officer of the Company at an option price of $7.25 per share.
The option is exercisable for a period of thirty days prior to November 10,
2003, and the officer must be employed by the Company at the time of exercise.
The agreement also requires the purchased shares to be held at least one year.
29
30
In January 1998, the Company granted 346,506 incentive stock options under the
recently approved Long-Term Stock Incentive Plan. Options were granted to 176
employees at option prices equal to or exceeding the market value of the stock
on the date of each grant. The options are exercisable on various dates from
2001 through 2013, and the option recipients must be employed by the Company at
the time of exercise.
I. OFFICERS' STOCK NOTES RECEIVABLE
Officers' stock notes receivable represent notes obtained by the Company from
certain officers for the purchase of the Company's common stock. On January 1,
1997, the Company sold 30,188 shares of common stock to four officers in
exchange for additional notes receivable totaling $399,991. Interest on the
notes ranges from fixed rates of seven to eleven percent per annum and a
variable rate of the prime rate less 10% (minimum 6%, maximum 12%). At December
27, 1997, payments on the notes are due as follows (in thousands):
................................................................................
1998 $ 88
1999 125
2000 85
2001 91
2002 123
Thereafter 388
----
$900
====
................................................................................
J. LIFE INSURANCE
In September 1995, the Company acquired a second-to-die life insurance policy on
its Chairman of the Board and his spouse, the Company's largest shareholders.
The death benefit on the policy totals $8,700,000 and the Company is the
beneficiary. The Company also maintains an officer's life insurance policy on
the Chairman with a death benefit of approximately $1,300,000. The cash
surrender value on these policies at December 27, 1997 is included in "Other
Assets."
K. RETIREMENT PLAN
The Company has a profit sharing and 401(k) plan for the benefit of
substantially all of its employees. Amounts contributed to the plan are made at
the discretion of the Board of Directors. The Company contributed approximately
$1,135,000, $1,528,000 and $1,506,000 in 1997, 1996 and 1995, respectively. In
addition, the Company matched 25% of employee contributions, on a discretionary
basis, totaling approximately $521,000, $440,000 and $393,000 in 1997, 1996 and
1995, respectively. The basis for matching contributions may not exceed the
lesser of 6% of the employee's annual compensation or $10,000.
30
31
L. INCOME TAXES
Income tax provisions for the years ended December 27, 1997, December 28, 1996,
and December 30, 1995 are summarized as follows (in thousands):
....................................................................................................................................
1997 1996 1995
Currently payable:
Federal $9,247 $10,141 $6,830
State and local 356 2,465 1,616
-------------------------
9,603 12,606 8,446
Net Deferred:
Federal (674) (504) 884
State and local 96 (131) 233
-------------------------
(578) (635) 1,117
-------------------------
$9,025 $11,971 $9,563
=========================
....................................................................................................................................
The effective income tax rates are different from the statutory federal income
tax rates for the following reasons:
...................................................................................................................................
1997 1996 1995
Statutory federal income tax rate 35.0 % 35.0% 35.0%
State and local taxes 1.4 4.9 5.4
Effect of pooling CBC (1.5) (0.1) (0.6)
Other (0.2) 0.4 .1
-----------------------------------
Effective income tax rate 34.7 % 40.2% 39.9%
===================================
...................................................................................................................................
The Company has no present intention of remitting undistributed earnings of
foreign subsidiaries aggregating $1.6 million at December 27, 1997 and,
accordingly, no deferred tax liability has been established relative to these
earnings. If these amounts were not considered permanently reinvested, a
deferred tax liability of approximately $200,000 would have been required.
Temporary differences which give rise to deferred tax assets and liabilities at
December 27, 1997 and December 28, 1996 are as follows (in thousands):
....................................................................................................................................
1997 1996
DEFERRED DEFERRED DEFERRED DEFERRED
TAX ASSETS TAX LIABILITIES TAX ASSETS TAX LIABILITIES
Employee benefits $ 2,374 $ (492) $ 2,594 $ (453)
Depreciation 2,937 2,801
Inventory 900 538
Accrued expenses 595 (372) 784 247
All other 272 (307) 270 (206)
---------------------------------------------------------------------
$ 4,141 $ 1,766 $ 4,186 $ 2,389
=====================================================================
....................................................................................................................................
31
32
M. LEASES
Leased property included in the balance sheet at December 27, 1997 and December
28, 1996 is as follows (in thousands):
................................................................................
1997 1996
Land and improvements $ 276 $ 276
Buildings and improvements 319 319
Machinery and equipment 251 251
-----------------
846 846
Less accumulated amortization (186) (175)
-----------------
$ 660 $ 671
=================
................................................................................
The Company leases certain real estate under operating lease agreements with
original terms ranging from one to ten years. The Company is required to pay
real estate taxes and other occupancy costs under these leases. Certain of these
leases carry renewal options of five to fifteen years. The Company also leases
motor vehicles and equipment under operating lease agreements, for periods of
one to seven years. Future minimum payments under noncancellable leases at
December 27, 1997 are as follows (in thousands):
................................................................................
CAPITAL LEASES OPERATING LEASES TOTAL
1998 $866 $2,168 $3,034
1999 4 1,175 1,179
2000 2 553 555
2001 0 365 365
2002 0 43 43
---------------------------------------------
Total minimum lease payments 872 $4,304 $5,716
=====================
Less imputed interest (46)
----
Present value of minimum lease payments $826
====
................................................................................
Rent expense was approximately $4,816,000, $3,718,000 and $3,363,000 in 1997,
1996 and 1995, respectively, including approximately $100,000 paid annually to
the Company's profit-sharing plan for the lease of certain property in 1996 and
1995.
On July 28, 1995, the Company entered into a lease termination agreement with
Chesapeake Corporation covering four of the five facilities the Company acquired
on October 4, 1993. The significant terms of the agreement are outlined as
follows:
- - The lease for the Fredericksburg, Virginia facility was terminated, effective
May 8, 1995. The Company had ceased operations at this facility on December
31, 1994. The Company will continue to be responsible for any environmental
liability which may have resulted from its operating and occupying this
facility from October 4, 1993 to May 8, 1995, the date of lease termination.
32
33
- - Titles to the Elizabeth City, North Carolina; Stockertown, Pennsylvania; and
Holly Hill, South Carolina facilities were transferred to the Company without
any further lease payments by the Company. The Company accepted these sites
"as is." As a result, the Company is responsible for any potential
environmental liability at these sites.
On July 28, 1995, the Company sold all of the assets of the Holly Hill, South
Carolina facility. As a condition of the sale agreement, the buyer is
responsible for any environmental liability existing at the site at the time of
the sale.
Based on the results of the final baseline environmental reports and the
research of its consultants, the Company believed the reduction in its capital
lease obligation substantially offset the estimated environmental liability it
assumed as a result of the agreement with Chesapeake. Accordingly, there was no
effect to the Company's results of operations as a result of the transaction.
N. COMMITMENTS AND CONTINGENCIES
The Company is self-insured for environmental impairment liability and accrues
an expense for the estimated cost of required remedial actions when situations
requiring such action arise. The Company owns and operates 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, the
Company 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. Remediation
activities are currently being conducted or planned at the Company's Granger,
Indiana; North East, Maryland; Union City, Georgia; and Elizabeth City, North
Carolina wood preservation facilities.
The Company has accrued, in other long-term liabilities, amounts totaling
approximately $1,512,000 (exclusive of the amount discussed in Note C) and
$1,738,000 at December 27, 1997 and December 28, 1996, respectively,
representing the estimated costs to complete remediation efforts currently in
process and those expected to occur in the future. The accrued costs include
operating ground water reclamation wells, estimated costs of chemical treatments
and consultant fees.
Various lawsuits and claims, including those involving ordinary routine
litigation incidental to its business, to which the Company is a party, are
pending, or have been asserted, against the Company. Although the outcome of
these matters cannot be predicted with certainty, and some of them may be
disposed of unfavorably to the Company, management has no reason to believe that
their disposition will have a material adverse effect on the consolidated
financial position, operating results or liquidity of the Company.
O. NON-COMPETE AGREEMENT WITH FORMER OFFICER
In February 1996, the Company entered into a consulting and non-compete
agreement with one of its former officers. Included in the agreement are
conditions that the former officer provide certain consulting services and agree
not to compete with the Company for a period of eleven years. In consideration
of these services and agreement not to compete, the Company will make future
payments to the officer totaling $350,000 in 1998 and $100,000 in 1999. The
non-competition asset is being amortized on a straight-line basis over the
eleven year non-compete period.
33
34
P. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected financial information for all of the
quarters during the years ended December 27, 1997 and December 28, 1996 (in
thousands, except per share data):
................................................................................
FIRST SECOND THIRD FOURTH
1997 1996 1997 1996 1997 1996 1997 1996
Net sales $219,450 $163,092 $348,060 $281,633 $292,264 $250,799 $206,526 $195,706
Gross profit 20,509 17,119 33,401 31,816 25,096 22,256 16,472 18,523
Net earnings (loss) 3,627 2,526 9,517 8,631 5,496 4,550 (1,683) 2,125
Diluted earnings (loss)
per share $0.20 $0.14 $0.52 $0.48 $0.30 $0.25 $(0.10) $0.12
................................................................................
Amounts have been restated for all periods presented due to the acquisition of
Consolidated Building Components, Inc. on December 22, 1997, which was accounted
for as a pooling of interests. (See Note B of Notes to Consolidated Financial
Statements.)
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's common stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol UFPI. The following table sets forth the
range of high and low sales prices as reported by Nasdaq.
................................................................................
FISCAL 1997 HIGH LOW
Fourth Quarter 17.750 12.500
Third Quarter 18.000 14.000
Second Quarter 14.750 12.250
First Quarter 14.875 11.875
FISCAL 1996 HIGH LOW
Fourth Quarter 13.500 11.250
Third Quarter 13.375 10.000
Second Quarter 10.875 9.000
First Quarter 10.125 7.625
................................................................................
There were approximately 6,200 shareholders of record as of March 1, 1998.
In 1997, the Company paid dividends on its common stock of $.03 per share in
June, and $.035 per share in December. The Company intends to continue with its
current dividend policy for the foreseeable future, and retain the balance of
its earnings for use in the expansion of its business.
34