1
===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22684
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
NONE
--------------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark 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 the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of May 1, 1998
----------------------------- ------------------------------
Common stock, no par value 20,716,777
===============================================================================
Page 1 of 24
2
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at March 28, 1998
and December 27, 1997. 3
Consolidated Condensed Statements of Earnings for the Three
Months Ended March 28, 1998 and March 29, 1997. 4
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 28, 1998 and March 29, 1997. 5
Consolidated Condensed Statements of Shareholders' Equity for the
Three Months Ended March 28, 1998 and March 29, 1997. 6
Notes to Consolidated Condensed Financial Statements. 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-21
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities. 22
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders - NONE.
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index. 24
(b) No reports were filed on Form 8-K during the three
months ended March 28, 1998.
2
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) March 28, December 27,
1998 1997
--------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 8,200 $ 3,157
Accounts receivable (net of allowance for doubtful
accounts of $910 and $449) ..................................................... 61,608 35,616
Inventories:
Raw materials .............................................................. 46,366 38,240
Finished goods ............................................................. 88,812 72,923
--------- ---------
135,178 111,163
Other current assets ............................................................ 6,270 7,701
--------- ---------
TOTAL CURRENT ASSETS ................................................... 211,256 157,637
OTHER ASSETS ......................................................................... 4,486 4,474
GOODWILL AND NON-COMPETE AGREEMENTS, NET ............................................. 15,625 2,525
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost .......................................... 124,332 116,715
Accumulated depreciation and amortization ....................................... (54,083) (51,968)
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET ..................................... 70,249 64,747
--------- ---------
$ 301,616 $ 229,383
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ................................................................... $ 73,400 $ 4,500
Accounts payable ................................................................ 38,261 34,053
Accrued liabilities:
Compensation and benefits .................................................... 11,127 16,345
Other ........................................................................ 4,193 3,167
Current portion of long-term debt and capital
lease obligations .............................................................. 12,786 9,789
--------- ---------
TOTAL CURRENT LIABILITIES .............................................. 139,767 67,854
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current portion ................................................... 36,368 39,752
DEFERRED INCOME TAXES ................................................................ 1,766
OTHER LIABILITIES .................................................................... 5,618 4,113
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, 17,576,847
and 17,572,262 ................................................................... 17,577 17,572
Additional paid-in capital ......................................................... 29,906 29,855
Retained earnings .................................................................. 73,830 70,253
Foreign currency translation adjustment ............................................ (616) (882)
--------- ---------
120,697 116,798
Officers' stock notes receivable ................................................... (834) (900)
--------- ---------
119,863 115,898
--------- ---------
$ 301,616 $ 229,383
========= =========
See notes to consolidated condensed financial statements.
3
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts) Three Months Ended
---------------------------
March 28, March 29,
1998 1997
---- ----
NET SALES ...................................................................... $ 238,197 $ 219,450
COST OF GOODS SOLD ............................................................. 213,624 198,930
--------- ---------
GROSS PROFIT ................................................................... 24,573 20,520
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................................... 17,270 13,961
--------- ---------
EARNINGS FROM OPERATIONS ....................................................... 7,303 6,559
OTHER EXPENSE (INCOME):
Interest expense .......................................................... 1,672 1,066
Interest income ........................................................... (35) (113)
Other, net ................................................................ (44) 31
--------- ---------
TOTAL OTHER EXPENSE .................................................. 1,593 984
--------- ---------
EARNINGS BEFORE INCOME TAXES ................................................... 5,710 5,575
INCOME TAXES ................................................................... 2,133 1,948
--------- ---------
NET EARNINGS ................................................................... $ 3,577 $ 3,627
========= =========
EARNINGS PER SHARE - BASIC ..................................................... $ 0.20 $ 0.21
EARNINGS PER SHARE - DILUTED ................................................... $ 0.20 $ 0.20
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC .................................... 17,575 17,454
WEIGHTED AVERAGE SHARES OUTSTANDING - DILUTED .................................. 18,271 18,228
See notes to consolidated condensed financial statements.
4
5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands) Three Months Ended
------------------
March 28, March 29,
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings ......................................................................... $ 3,577 $ 3,627
Adjustments to reconcile net earnings to net cash used
in operating activities:
Depreciation and amortization of capital leases ................................. 2,270 2,062
Amortization of non-compete agreements
and goodwill ................................................................... 177 78
(Gain) loss on disposal of property, plant
and equipment .................................................................. (24) 47
Stock Gift Program and Directors' Stock Grant
Program expense ................................................................ 22 1
Changes in:
Accounts receivable ........................................................... (23,501) (28,005)
Inventories ................................................................... (22,725) (12,052)
Other ......................................................................... (122) (228)
Accounts payable .............................................................. 4,207 26,233
Accrued liabilities ........................................................... (2,578) (6,271)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES ...................................... (38,697) (14,508)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of notes receivable ......................................................... (156) (100)
Collection of notes receivable ....................................................... 67 171
Purchases of property, plant and equipment ........................................... (6,140) (3,275)
Proceeds from sale of property, plant and equipment .................................. 81 15
Cash used in business combinations ................................................... (18,644)
Other ................................................................................ (15)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ...................................... (24,807) (3,189)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable ...................................................... 68,900 17,500
Proceeds from issuance of common stock ............................................... 35 23
Repayment of long-term debt .......................................................... (388) (915)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................................. 68,547 16,608
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. 5,043 (1,089)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ....................................... 3,157 1,330
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................. $ 8,200 $ 241
======== ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ........................................................................ $ 482 $ 204
Income taxes .................................................................... 520 160
NON-CASH INVESTING ACTIVITIES:
Officer's stock note receivable ...................................................... $ 400
Note payable - non-compete ........................................................... $ 146
See notes to consolidated condensed financial statements.
5
6
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(in thousands, except share data) Foreign
Additional Currency Officers'
Common Paid-In Retained Translation Stock Notes
Stock Capital Earnings Adjustment Receivable Total
----- ------- -------- ---------- ---------- -----
BALANCE AS OF 12/27/97 .......... $ 17,572 $ 29,855 $70,253 ($ 882) ($ 900) $ 115,898
Net earnings ................ 3,577 3,577
Other comprehensive
income .................... 266 266
Issuance of
4,585 shares .............. 5 51 56
Payments received
on officers'
stock notes
receivable ................ 66 66
--------- --------- --------- --------- --------- ---------
BALANCE AS OF 3/28/98 ........... $ 17,577 $ 29,906 $ 73,830 ($ 616) ($ 834) $ 119,863
========= ========= ========= ========= ========= =========
BALANCE AS OF 12/28/96 .......... $ 17,438 $ 28,446 $ 56,426 ($ 830) ($ 665) $ 100,815
Net earnings ................ 3,627 3,627
Other comprehensive
income .................... 64 64
Issuance of
32,253 shares ............. 32 392 424
Issuance of
officers' stock
notes receivable .......... (400) (400)
Payments received
on officers'
stock notes
receivable ................ 128 128
--------- --------- --------- --------- --------- ---------
BALANCE AS OF 3/29/97 ........... $ 17,470 $ 28,838 $ 60,053 ($ 766) ($ 937) $ 104,658
========= ========= ========= ========= ========= =========
See notes to consolidated condensed financial statements.
6
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial
statements (the "Financial Statements") of Universal Forest Products,
Inc. and its wholly-owned subsidiaries and partnerships (together, the
"Company"), 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 generally accepted accounting principles. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the Financial Statements contain all
material adjustments necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company
for the interim periods presented. All such adjustments are of a normal
recurring nature. These Financial Statements should be read in
conjunction with the financial statements, and footnotes thereto,
included in the Company's Annual Report to Shareholders on Form 10-K for
the fiscal year ended December 27, 1997.
Certain reclassifications have been made to the consolidated condensed
statement of earnings for the first quarter of 1997 to conform to the
classifications used in the first quarter of 1998.
B. EARNINGS PER COMMON SHARE
In February 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 net earnings 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
converted" method for convertible securities and the treasury stock
method for options and warrants as previously prescribed by APB No. 15.
This new statement was effective for financial statements issued for the
interim and annual periods ending after December 15, 1997.
7
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
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 1993 and 1998, 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 date).
For the Three Months Ended 3/28/98 For the Three Months Ended 3/29/97
------------------------------------------- ---------------------------------------
Net Per Net Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
EPS - BASIC
Net earnings available to
common shareholders ...................... $3,577 17,575 $ 0.20 $3,627 17,454 $ 0.21
====== ======
EFFECT OF DILUTIVE SECURITIES
Options .................................. 696 774
------ ------ ------ ------
EPS - DILUTED
Net earnings available to
common shareholders and
assumed conversions ...................... $3,577 18,271 $ 0.20 $3,627 18,228 $ 0.20
====== ====== ====== ====== ====== ======
Options to purchase 180,000 shares of common stock at exercise prices
ranging from $15.77 to $24.46 were outstanding at March 28, 1998, but
were not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
stock and, therefore, would be antidilutive.
C. STOCK BASED COMPENSATION
In January 1998, the Company granted 346,506 incentive stock options
under the recently approved Long Term Stock Incentive Plan. Options were
granted to employees and officers of the Company at exercise prices
ranging from $13.1875 to $24.4600, which equaled or exceeded 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.
8
9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits entities to continue to apply the provisions
of APB Opinion No. 25, providing pro forma net earnings and pro forma
earnings per share disclosures. Had compensation cost for these plans
been determined consistent with SFAS 123, the Company's net earnings and
earnings per share would have been reduced to the following pro forma
amounts (in thousands, except per share amounts) for the three months
ended March 28, 1998.
Net Earnings:
As Reported.............. $3,577
Pro Forma................ 1,829
EPS - Basic:
As Reported.............. .20
Pro Forma................ .10
EPS - Diluted:
As Reported.............. .20
Pro Forma................ .10
Because the SFAS 123 method of accounting has not been applied to options
granted prior to fiscal year 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The fair value of each option granted in 1998 is estimated on the date of
the grant using the Black-Scholes option pricing model with the following
weighted average assumptions.
Risk Free Interest Rate............. 6.20%
Expected Life....................... 7.6 years
Expected Volatility................. 28.35%
Expected Dividend Yield............. 0.41%
D. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement established standards for reporting
and display of comprehensive income and its components. Comprehensive
income reflects the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
non-owner sources. The Company's comprehensive income includes net
earnings adjusted for foreign currency translation adjustments.
Comprehensive income was
9
10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
approximately $3.8 million and $3.7 million for the quarters ended March
28, 1998 and March 29, 1997, respectively.
E. BUSINESS COMBINATIONS
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. 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 financials statements for 1997.
On December 29, 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
has been accounted for as a purchase and, accordingly, the purchase price
has been allocated to the assets acquired based on their estimated fair
market values at the date of the acquisition. The excess of the purchase
price over the estimated fair value of the acquired assets, was
approximately $13.0 million and has been recorded as goodwill, to be
amortized on a straight-line basis over 40 years. SLP's results of
operations are included in the Company's consolidated condensed financial
statements since the date of the acquisition.
The following unaudited pro forma consolidated results of operations for
the three months ended March 29, 1997 assumes the acquisition of SLP
occurred on December 29, 1996 (in thousands, except per share data):
10
11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Net sales........................ $ 224,546
Net earnings..................... 3,859
Earnings per share:
Basic..................... $ 0.22
Diluted................... $ 0.21
Weighted average shares outstanding:
Basic..................... 17,454
Diluted................... 18,228
The pro forma results above include certain adjustments to give effect to
amortization of goodwill, interest expense, compensation of management,
certain other adjustments, and related income tax effects. The pro forma
results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been completed as of the
beginning of the period presented, nor are they necessarily indicative of
future operating results.
F. SUBSEQUENT EVENTS
On March 30, 1998, a subsidiary of the Company acquired 100% of the
outstanding shares of privately held Shoffner Industries, Inc.
("Shoffner") in exchange for $41.1 million in cash and 3 million shares
of the Company's common stock. Shoffner is a manufacturer of roof and
floor trusses for commercial and residential builders with 14 facilities
in 7 states. This transaction will be accounted for as a purchase and,
accordingly, the purchase price will be allocated to the assets acquired
based on their estimated fair market values at the date of the
acquisition.
On April 14, 1998, a subsidiary of the Company acquired substantially all
of the assets and assumed certain liabilities of Atlantic General
Packaging, Inc. ("AGP"), a manufacturer of specialty wood packaging
products. AGP operates one facility in Warrenton, North Carolina. The
total purchase price for the net assets of AGP comprised, cash of $1.0
million, a note payable of $820,000, and 57,950 shares of the Company's
common stock. This transaction will be accounted for as a purchase.
On April 20, 1998, a subsidiary of the Company acquired substantially all
of the assets and assumed certain liabilities of Advanced Component
Systems, Inc. ("ACS"), a manufacturer of roof trusses and engineered
building components for commercial and residential builders. ACS operates
one facility in Lafayette, Colorado. The total purchase price for the net
assets of ACS was approximately $27.0 million, funded through the
Company's lines of credit.
11
12
UNIVERSAL FOREST PRODUCTS, INC.
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.
12
13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
FLUCTUATIONS IN LUMBER PRICES
The following table presents the Random Lengths framing lumber composite
price for the three months ended March 28, 1998 and March 29, 1997:
Random Lengths
Average $/MBF
-------------
1998 1997
---- ----
January............................ $360 $436
February........................... 375 444
March.............................. 369 433
Period average..................... $368 $438
Percentage decrease................ 16.0%
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"). 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." Depending on the extent of the
fluctuation, the type of product and other factors, it could take up to a month
for a fluctuation in the Lumber Market to be reflected in the Company's selling
prices.
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. The Company attempts to mitigate this risk through
certain supply programs with vendors. 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.
13
14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
BUSINESS COMBINATIONS
The Company has strategic objectives which include manufacturing and
distributing engineered building components for conventional site-built housing
and commercial structures, a new market for the Company, and increasing its
sales of specialty wood packaging products to industrial users. Management plans
to accomplish these objectives through internal growth and by acquiring
profitable market leaders with strong management. In line with this strategy,
the Company completed the following acquisitions in fiscal year 1998:
- - On December 29, 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. SLP had net sales in fiscal 1997
totaling approximately $22.0 million.
- - On March 30, 1998, a subsidiary of the Company acquired 100% of the
outstanding shares of privately held Shoffner Industries, Inc. ("Shoffner")
in exchange for $41.1 million in cash and 3 million shares of the Company's
common stock. Shoffner is a manufacturer of roof and floor trusses for
commercial and residential builders with 14 facilities in 7 states. Shoffner
had net sales in fiscal 1997 totaling approximately $90.0 million.
- - On April 14, 1998, a subsidiary of the Company acquired substantially all of
the assets and assumed certain liabilities of Atlantic General Packaging,
Inc. ("AGP"), a manufacturer of specialty wood packaging products. AGP
operates one facility in Warrenton, North Carolina. The total purchase price
for the net assets of AGP comprised cash of $1.0 million, a note payable of
$820,000, and 57,950 shares of the Company's common stock. AGP had net sales
in fiscal 1997 totaling approximately $4.0 million.
- - On April 20, 1998, a subsidiary of the Company acquired substantially all of
the assets and assumed certain liabilities of Advanced Component Systems,
Inc. ("ACS"), a manufacturer of roof trusses and engineered building
components for commercial and residential builders. ACS operates one
facility in Lafayette, Colorado. The total purchase price of ACS was
approximately $27.0 million, funded through the Company's lines of credit.
ACS had net sales in fiscal 1997 totaling approximately $39.0 million.
The Company regularly evaluates the acquisition of, and holds discussions
with, various potential acquisition candidates. As a general rule, the Company
publicly announces such acquisitions only after a letter of intent is signed or
a definitive purchase agreement is reached.
14
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components
of the Company's Consolidated Statement of Earnings as a percentage of net
sales.
For the Three Months Ended
--------------------------
March 28, March 29,
1998 1997
--------- ---------
Net sales................................................... 100.0% 100.0%
Cost of goods sold.......................................... 89.7 90.6
--------- ------
Gross profit................................................ 10.3 9.4
Selling, general, and administrative expenses............... 7.2 6.4
---------- ------
Earnings from operations.................................... 3.1 3.0
Other expense, net.......................................... 0.7 0.5
---------- ------
Earnings before income taxes................................ 2.4 2.5
Income taxes................................................ 0.9 0.9
---------- ------
Net earnings................................................ 1.5% 1.6%
======= =======
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 strategic objectives relative to sales
include:
- - Diversifying the Company's end market sales mix by increasing its sales
to industrial users of specialty wood packaging and builders of
conventional site-built housing and commercial structures.
- - 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, specialty wood packaging sold to
industrial users, and engineered building components (e.g. roof and floor
trusses, wall panels, joists and I-beams). Value-added products generally
carry higher net margins than sales of commodity-based products
15
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 core markets, DIY and
manufactured housing.
In order to measure its progress toward 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.
- - The ratio of value-added product sales to total sales.
This information is presented in the narrative and 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.
For the Three Months Ended
----------------------------------------------
March 28, March 29,
Market Classification 1998 % 1997 %
- --------------------- ------------- ------- ------------- ----
DIY................................... $107,201 45.0% $ 96,136 43.8%
Manufactured Housing.................. 95,114 39.9 93,835 42.8
Wholesale Lumber...................... 13,369 5.6 14,410 6.6
Industrial............................ 14,226 6.0 12,158 5.5
Commercial and Residential............ 8,287 3.5 2,911 1.3
-------- ------ -------- ------
Total $238,197 100.0% $219,450 100.0%
======== ====== ======== ======
1997 sales by market include CBC, whose financial results have been
pooled with the Company's.
Net sales in the first quarter of 1998 increased $18.7 million or 8.5%
compared to the first quarter of 1997, reflecting an estimated 14.0% increase in
units shipped combined with an estimated 5.5% decrease in overall selling
prices. The increase in units shipped was primarily driven by sales from the
plants acquired from SLP, coupled with increased unit sales to the DIY market.
The trend in the Lumber Market was relatively flat in the first quarter of 1998,
consistent with the trend in the
16
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Lumber Market in the first quarter of 1997. However, the level of the average
Lumber Market in 1998 was 16.0% lower than the level of the first quarter of
1997. The lower level of the Lumber Market caused the Company's overall selling
prices to decrease (see graph, Page 13).
The following table presents, for the periods and markets indicated, the
Company's percentage of value-added and commodity-based sales to total sales.
For the Three Months Ended
--------------------------------------
March 28, 1998 March 29, 1997
-------------- ---------------
Value-Added........................... 35.1% 31.6%
Commodity Based....................... 64.9% 68.4%
The ratios above include the effect of pooling CBC.
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 for the first quarter of 1998 and 1997 were
39.1% and 34.2%, respectively.
DIY:
Net sales to the DIY market increased approximately $11.1 million, or 11%
in the first quarter of 1998, compared to the first quarter of 1997, due
primarily to an increase in unit sales, as overall selling prices remained flat
compared to the prior period. The increase in unit sales was 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.
Manufactured Housing:
Net sales to the manufactured housing market increased approximately $1.3
million, or 1%, in the first quarter of 1998, compared to the first quarter of
1997, primarily due to an increase in unit sales, offset by a decrease in
overall selling prices. Overall selling prices to this market decreased as a
result of the lower level of the Lumber Market during the first quarter of 1998
compared to the first quarter of 1997.
17
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Wholesale:
Net sales to the wholesale market decreased approximately $1.0 million,
or 7%, in the first quarter of 1998, compared to the first quarter of 1997,
primarily due to an overall decrease in selling prices attributable to the
comparatively lower level of the Lumber Market during these periods.
Industrial:
Net sales to the industrial market increased approximately $2.1 million,
or 17%, in the first quarter of 1998, compared to the first quarter of 1997,
primarily due to an increase in unit sales as the Company continues to obtain
additional market share. In addition, the recent acquisition of AGP (subsequent
to March 28, 1998) provides the Company with new opportunities in this market.
Commercial and Residential:
Net sales to the commercial and residential market increased
approximately $5.4 million primarily due to an increase in unit sales,
attributable to the acquisition of SLP. Sales in the first quarter of 1997
represent the commercial and residential sales of CBC. The acquisitions of
Shoffner and ACS (subsequent to March 28, 1998) are expected to increase sales
to this market by over $100 million for the balance of the year.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased to 10.3% in the first
quarter of 1998 compared to 9.4% in the first quarter of 1997. This increase was
primarily due to a combination of the following factors:
- - The effect of sales to the commercial and residential market as a result of
the acquisitions of CBC and SLP.
- - Increased fence sales in the Company's Eastern Division.
- - The increases above were offset by decreased margins on trusses sold to the
manufactured housing market.
18
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately $3.3
million, or 23.7%, comparing the first quarter of 1998 to the first quarter of
1997. The net increase was primarily due to:
- - Expenses added through the business acquisition of SLP, and new operations in
Albuquerque, New Mexico (I-joist plant) and Lodi, Ohio (treating plant).
- - General increases in selling and administrative headcount to support the
growth of the business.
- - Increases in accrued incentive compensation expenses related to
profitability.
- - Increases in customer rebates, travel and certain other variable expenses
tied to sales.
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 $684,000, comparing the first quarter of 1998 to the
first quarter of 1997, due to an increase in short-term debt. The Company funded
the cash portion of the purchase price for recent acquisitions utilizing its
lines of credit, and its investment in inventories at its existing plants has
increased due to anticipation of a strong sales increase in the second quarter
of 1998.
INCOME TAXES
The Company's effective tax rate is 37.4% for the first quarter of 1998
compared to 34.9% for the first quarter of 1997. Effective tax rates differ from
statutory federal income tax rates, primarily 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. The Company
recognized a lower effective tax rate in the first quarter of 1997 due primarily
to the extent of pre-tax earnings it pooled for CBC (a former S-Corporation) for
that period.
REORGANIZATION AND OTHER COSTS
In the fourth quarter of 1997, the Company announced a plan of
reorganization, which was discussed in the Company's Annual Report to
Shareholders on Form 10-K for the fiscal year ended December 27, 1997.
Management believes the reorganization will allow the Company to be more
19
20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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.
The Company did not incur any material charges associated with the
reorganization during the first quarter of 1998. The Company expects to incur
additional costs and capital expenditures related to the reorganization for the
balance of 1998 totaling about $1.2 million and $3.5 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows used in operating activities in the first quarter of 1998
increased to approximately $38.7 million from approximately $14.5 million in the
first quarter of 1997. The increase in cash used in operating activities is
primarily due to higher inventory levels to support forecasted second quarter
sales growth and lower accounts payable due to the timing of payments to
vendors.
Due to the seasonality of its business, management believes the
Company's cash cycle (days outstanding plus days supply of inventory less days
payables outstanding) is a better indicator of its working capital management.
The Company's cash cycle increased to 62.2 days in the first quarter of 1998
from 53.3 days in the first quarter of 1997 as the Company's average investment
in inventories relative to sales has increased.
Cash flow used in investing activities increased to approximately $24.8
million in the first quarter of 1998 compared to approximately $3.2 million in
the first quarter of 1997. The Company used approximately $18.5 million in cash
to acquire SLP. Capital expenditures totaled $6.2 million for the first quarter
of 1998, primarily to replace existing machinery and equipment, expand current
operating capacity, improve production efficiencies, and set up commercial and
residential truss manufacturing lines at two existing facilities. The Company
plans to spend approximately $19 million for the year on capital expenditures.
Cash flows provided by financing activities for the first quarter of
1998 consisted primarily of net borrowings on notes payable to fund recent
acquisitions and working capital requirements. The Company had amounts
outstanding on lines of credit totaling $73.4 million on March 28, 1998, and had
approximately $120 million which remained available.
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
20
21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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.
The Company has accrued, in other current and long-term liabilities,
amounts totaling $2.2 million and $1.7 million at March 28, 1998 and March 29,
1997. These represent estimated costs to complete remediation efforts currently
in process and those expected to occur in the future. Management 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 continues to review its other ancillary systems and the
systems of its significant customers and vendors to ensure there are no material
issues with respect to these programs. The Company does not believe that adverse
findings in the review of its significant customers' and vendors' systems would
have a material effect on its operating results.
21
22
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(a) None.
(b) None.
(c) Sales of equity securities not registered under the Securities Act.
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
---- ----- --------- ---------- ---------
Employee Stock Gift Program Various Common 100 Eligible officers None
and employees
Directors' Stock Grant Program 01/14/98 Common 1,500 Directors Director
services
22
23
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: May 12, 1998 By: /s/ William G. Currie
----------------------------- -------------------------------
William G. Currie
Its: President and Chief Executive
Officer
Date: May 12, 1998 By: /s/ Elizabeth A. Bowman
----------------------------- -------------------------------
Elizabeth A. Bowman
Its: Executive Vice President of
Finance and Administration and
Treasurer (Principal Financial
Officer)
23
24
UNIVERSAL FOREST PRODUCTS, INC.
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule 25
27.1QTR97 Financial Data Schedule 29
24
5
1,000
3-MOS
DEC-26-1998
DEC-28-1997
MAR-28-1998
8,200
0
62,518
910
135,178
211,256
124,332
54,083
301,616
139,767
0
0
0
17,577
0
301,616
238,197
238,197
213,624
213,624
17,270
0
1,672
5,710
2,133
3,577
0
0
0
3,577
.20
.20
5
1,000
3-MOS
DEC-27-1997
DEC-29-1996
MAR-29-1997
241
0
62,076
429
102,461
169,182
109,545
46,779
239,357
76,854
0
0
0
17,470
0
239,357
219,450
219,450
198,930
198,930
13,961
0
1,066
5,575
1,948
3,627
0
0
0
3,627
0.21
0.20
