SEC Filing - UFP Industries, Inc.

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 June 26, 1999 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 August 1, 1999 -------------------------- -------------------------------- Common stock, no par value 20,777,239 ================================================================================ Page 1 of 26

2 INDEX Page No. -------- PART I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Condensed Balance Sheets at June 26, 1999 and December 26, 1998. 3 Consolidated Condensed Statements of Earnings for the Three and Six Months Ended June 26, 1999 and June 27, 1998. 4 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 26, 1999 and June 27, 1998. 5 Consolidated Condensed Statements of Shareholders' Equity for the Periods Ended June 26, 1999 and June 27, 1998. 6-7 Notes to Consolidated Condensed Financial Statements. 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12-22 PART II. OTHER INFORMATION. Item 1. Legal Proceedings - NONE. Item 2. Changes in Securities. 23 Item 3. Defaults Upon Senior Securities - NONE. Item 4. Submission of Matters to a Vote of Security Holders. 24 Item 5. Other Information - NONE. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit Index. 26 (b) No reports were filed on Form 8-K during the six months ended June 26, 1999. 2

3 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (in thousands, except share data) June 26, December 26, 1999 1998 ---------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents........................................................ $ 1,441 $ 920 Accounts receivable (net of allowance for doubtful accounts of $4,550 and $3,540)............................................................. 112,341 62,846 Inventories: Raw materials................................................................ 46,328 36,856 Finished goods............................................................... 89,931 71,543 ---------- ---------- 136,259 108,399 Other current assets............................................................. 6,966 9,712 ---------- ---------- TOTAL CURRENT ASSETS.................................................... 257,007 181,877 OTHER ASSETS ........................................................................ 10,432 10,978 GOODWILL AND NON-COMPETE AGREEMENTS, NET.............................................. 94,351 95,229 PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, at cost........................................... 211,970 193,375 Accumulated depreciation and amortization........................................ (67,910) (61,389) ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, NET...................................... 144,060 131,986 ---------- ---------- $ 505,850 $ 420,070 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt.................................................................. $ 2,208 $ 1,997 Accounts payable................................................................. 65,214 38,751 Accrued liabilities: Compensation and benefits................................................... 23,880 28,025 Other ...................................................................... 10,429 3,485 Current portion of long-term debt and capital lease obligations.................. 8,566 9,760 ---------- ---------- TOTAL CURRENT LIABILITIES............................................... 110,297 82,018 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion.................................................... 171,804 132,120 DEFERRED INCOME TAXES................................................................. 8,100 8,100 OTHER LIABILITIES..................................................................... 6,948 6,249 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, 20,773,042 and 20,710,263.............................. 20,773 20,710 Additional paid-in capital....................................................... 78,178 77,526 Retained earnings................................................................ 110,644 95,221 Accumulated other comprehensive earnings......................................... (257) (1,072) ---------- ---------- 209,338 192,385 Officers' stock notes receivable................................................. (637) (802) ---------- ---------- 208,701 191,583 ---------- ---------- $ 505,850 $ 420,070 ========== ========== 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 Six Months Ended ------------------------ -------------------------- June 26, June 27, June 26, June 27, 1999 1998 1999 1998 --------- ------------ ----------- ------------ NET SALES........................................ $ 446,751 $ 388,677 $ 746,931 $ 626,874 COST OF GOODS SOLD............................... 391,013 342,362 649,976 556,067 --------- ------------ ----------- ------------ GROSS PROFIT..................................... 55,738 46,315 96,955 70,807 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................ 31,560 25,251 61,433 42,440 --------- ------------ ----------- ------------ EARNINGS FROM OPERATIONS......................... 24,178 21,064 35,522 28,367 OTHER EXPENSE (INCOME): Interest expense............................ 3,318 3,060 6,237 4,732 Interest income............................. (143) (44) (280) (79) Other, net.................................. (224) (97) (378) (141) --------- ------------ ----------- ------------ TOTAL OTHER EXPENSE.................... 2,951 2,919 5,579 4,512 --------- ------------ ----------- ------------ EARNINGS BEFORE INCOME TAXES..................... 21,227 18,145 29,943 23,855 INCOME TAXES ................................... 8,479 7,022 11,834 9,155 --------- ------------ ----------- ------------ NET EARNINGS ................................... $ 12,748 $ 11,123 $ 18,109 $ 14,700 ========= ============ =========== ============ EARNINGS PER SHARE - BASIC....................... $ 0.61 $ 0.54 $ 0.87 $ 0.77 EARNINGS PER SHARE - DILUTED..................... $ 0.60 $ 0.52 $ 0.85 $ 0.74 WEIGHTED AVERAGE SHARES OUTSTANDING ................................... 20,745 20,677 20,727 19,126 WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS.............................. 21,291 21,391 21,353 19,831 See notes to consolidated condensed financial statements. 4

5 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended ------------------------- June 26, June 27, 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings ...................................................................... $ 18,109 $ 14,700 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization.................................................. 7,535 5,363 Amortization of non-compete agreements and goodwill............................ 1,592 924 (Gain) loss on disposal of property, plant and equipment....................... (89) 46 Stock Gift and Stock Grant Program expense..................................... 37 21 Changes in: Accounts receivable.......................................................... (49,494) (37,247) Inventories.................................................................. (27,861) 3,086 Other ...................................................................... 228 (335) Accounts payable............................................................. 26,462 13,820 Accrued liabilities.......................................................... 5,425 6,755 ---------- ---------- NET CASH FROM OPERATING ACTIVITIES........................................ (18,056) 7,133 CASH FLOWS FROM INVESTING ACTIVITIES: Collection of notes receivable...................................................... 1,642 94 Purchase of notes receivable........................................................ (139) Purchases of property, plant and equipment.......................................... (21,153) (10,513) Proceeds from sale of property, plant and equipment................................. 1,633 199 Business acquisitions, net of cash received......................................... (92,931) Purchases of other assets........................................................... (98) (190) ---------- ---------- NET CASH FROM INVESTING ACTIVITIES........................................ (18,115) (103,341) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings of notes payable and revolving credit facilities..................... 26,131 115,900 Proceeds from issuance of common stock.............................................. 785 364 Proceeds from issuance of long-term debt............................................ 20,306 Cash dividends paid................................................................. (728) (725) Repayment of long-term debt......................................................... (7,736) (14,926) Repurchase of common stock.......................................................... (2,066) ---------- ---------- NET OF CASH FROM FINANCING ACTIVITIES..................................... 36,692 100,613 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 521 4,405 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................... 920 3,157 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 1,441 $ 7,562 ========== ========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest ...................................................................... $ 6,111 $ 4,502 Income taxes................................................................... 4,800 4,513 NON-CASH INVESTING ACTIVITIES: Note payable issued in exchange for non-compete agreements.......................... $ 2,373 Note payable issued in business combination......................................... 820 Property, plant and equipment acquired through capital leases....................... 179 Fair market value of common stock issued in business combinations................... 50,511 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) Accumulated Officers' Additional Other Stock Common Paid-In Retained Comprehensive Notes Stock Capital Earnings Earnings Receivable Total ---------- ---------- ---------- ------------- ----------- ---------- BALANCE AS OF 12/26/98................ $ 20,710 $ 77,526 $ 95,221 ($ 1,072) ($ 802) $ 191,583 Comprehensive earnings: Net earnings.................... 5,361 Foreign currency translation adjustment.................... 303 Total comprehensive earnings...... 5,664 Issuance of 5,237 shares.......... 6 92 98 Repurchase of 50,000 shares....... (50) (887) (937) Payments received on officers' stock notes receivable.......... 153 153 -------- -------- --------- -------- ------ --------- BALANCE AS OF 3/27/99................. $ 20,666 $ 77,618 $ 99,695 ($ 769) ($ 649) $ 196,561 Comprehensive earnings: Net earnings.................... 12,748 Foreign currency translation adjustment.................... 512 Total comprehensive earnings...... 13,260 Dividends paid.................... (728) (728) Issuance of 164,743 shares........ 164 560 724 Repurchase of 57,201 shares....... (57) (1,071) (1,128) Payments received on officers' stock notes receivable.......... 12 12 -------- -------- --------- -------- ------ --------- BALANCE AS OF 6/26/99................. $ 20,773 $ 78,178 $ 110,644 ($ 257) ($ 637) $ 208,701 ======== ======== ========= ======== ====== ========= 6

7 UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (in thousands, except share data) Accumulated Officers' Additional Other Stock Common Paid-In Retained Comprehensive Notes Stock Capital Earnings Earnings Receivable Total ---------- ---------- ---------- ------------- ---------- ---------- BALANCE AS OF 12/27/97................ $ 17,572 $ 29,855 $ 70,253 ($ 882) ($ 900) $ 115,898 Comprehensive earnings: Net earnings..................... 3,577 Foreign currency translation adjustment..................... 266 Total comprehensive earnings....... 3,843 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 Comprehensive earnings: Net earnings..................... 11,123 Foreign currency translation adjustment..................... (131) Total comprehensive earnings....... 10,992 Dividend paid...................... (725) (725) Issuance of 3,123,090 shares....... 3,123 47,482 50,605 Payments received on officers' stock notes receivable........... 16 16 ---------- ---------- ---------- ------------ -------- ---------- BALANCE AS OF 6/27/98................... $ 20,700 $ 77,388 $ 84,228 ($ 747) ($ 818) $ 180,751 ========== ========== ========== ============ ======== ========== See notes to consolidated condensed financial statements. 7

8 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 and majority-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. The equity method of accounting has been used for the Company's 50% or less owned affiliates over which the Company has the ability to exercise a significant influence. 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 26, 1998. Certain reclassifications have been made to the consolidated condensed financial statements for 1998 to conform to the classifications used in 1999. B. EARNINGS PER COMMON SHARE A reconciliation of the changes in the numerator and the denominator from the calculation of basic EPS to the calculation of diluted EPS follows (in thousands, except per share data). Three Months Ended 6/26/99 Three Months Ended 6/27/98 --------------------------------- ----------------------------------- Net Per Net Per Earnings Shares Share Earnings Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ EPS - BASIC Net earnings available to common shareholders............ $ 12,748 20,745 $0.61 $11,123 20,677 $0.54 ===== ===== EFFECT OF DILUTIVE SECURITIES Options........................ 546 714 ------ -------- 8

9 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED EPS - DILUTED Net earnings available to common shareholders and options exercised.............. $ 12,748 21,291 $0.60 $11,123 21,391 $0.52 ========= ====== ===== ======= ====== ===== Six Months Ended 6/26/99 Six Months Ended 6/27/98 ----------------------------------- --------------------------------- Net Per Net Per Earnings Shares Share Earnings Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------- ----------- ------------- ------ EPS - BASIC Net earnings available to common shareholders............ $ 18,109 20,727 $0.87 $ 14,700 19,126 $0.77 ===== ===== EFFECT OF DILUTIVE SECURITIES Options........................ 626 705 ------ ------ EPS - DILUTED Net earnings available to common shareholders and options exercised.............. $ 18,109 21,353 $0.85 $ 14,700 19,831 $0.74 ========= ====== ===== ========= ====== ===== Options to purchase 423,135 shares of common stock at exercise prices ranging from $19.75 to $36.01 were outstanding at June 26, 1999, 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 OPTIONS AND STOCK-BASED COMPENSATION In January 1999, the Company granted incentive stock options for 231,161 shares of common stock under its Long Term Stock Incentive Plan. Options were granted to employees and officers of the Company at exercise prices ranging from $19.75 to $36.01, which equaled or exceeded the market value of the stock on the date of each grant. The options are exercisable on various dates from 2002 through 2014, and the option recipients must be employed by the Company at the time of exercise. Options for 105,370 shares related to all plans were canceled during the period. In January 1998, the Company granted incentive stock options for 346,506 shares of common stock under its Long Term Stock Incentive Plan. Options were granted to certain 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. 9

10 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED On April 22, 1998, the Company granted incentive stock options for 125,000 shares of common stock under its Long Term Stock Incentive Plan. Options were granted to certain employees and officers of the Company at exercise prices ranging from $17.4375 to $31.300, 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. The Company continues to apply the provisions of APB Opinion No. 25 which recognizes compensation expense under the intrinsic value method. Had compensation cost for the stock options granted in 1999 and 1998 been determined under the fair value based method defined in 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). Three Months Ended Six Months Ended -------------------------- ------------------------ June 26, June 27, June 26, June 27, 1999 1998 1999 1998 ----------- -------- --------- -------- Net Earnings: As Reported.............. $12,748 $11,123 $18,109 $14,700 Pro Forma................ 12,613 11,042 17,839 14,538 EPS - Basic: As Reported.............. $0.61 $0.54 $0.87 $0.77 Pro Forma................ $0.61 $0.53 $0.86 $0.76 EPS - Diluted: As Reported.............. $0.60 $0.52 $0.85 $0.74 Pro Forma................ $0.59 $0.52 $0.84 $0.73 Because the fair value based method of accounting has not been applied to options granted prior to fiscal year 1996, the resulting pro forma compensation cost may not be indicative of future amounts. The fair value of each option granted in 1999 and 1998 was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions. 1999 1998 ---- ---- Risk Free Interest Rate............. 6.20% 6.20% Expected Life....................... 6.3 years 8.0 years Expected Volatility................. 27.75% 28.35% Expected Dividend Yield............. 0.40% 0.41% 10

11 UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED D. BUSINESS COMBINATIONS In 1998, the Company completed several business combinations which have been accounted for using the purchase method of accounting. Accordingly, in each instance, the purchase price was allocated to the assets acquired and liabilities assumed based on their fair market values at the date of acquisition. Any excess of the purchase price over the fair value of the acquired assets and assumed liabilities was recorded as goodwill in each transaction. The Company has amortized goodwill on a straight-line basis over 40 years. The results of operations of each acquisition is included in the Company's consolidated financial statements since the date it was acquired. The following unaudited pro forma consolidated results of operations for the three and six month periods ended June 27, 1998 assumes the acquisitions of Shoffner Industries, Inc. and Advanced Component Systems, Inc. and its affiliates, occurred on December 27, 1997 (in thousands, except per share data). The pro forma effects of other acquisitions are not included because they are not material individually, or in the aggregate. Three Months Ended Six Months Ended June 27, 1998 June 27, 1998 ------------------ ---------------- Net sales........................... $388,677 $657,094 Net earnings........................ 11,123 15,267 Earnings per share: Basic........................ $0.54 $0.69 Diluted...................... $0.52 $0.67 Weighted average shares outstanding: Basic........................ 20,677 22,126 Diluted...................... 21,391 22,831 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. 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. A variety of factors over which the Company has no control, including government regulations, environmental regulations, weather conditions, economic conditions and natural disasters, impact the cost of lumber products and the Company's selling prices. 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 achieve anticipated growth, or if the Company fails to maintain its market share, financial results could be impaired. Economic Trends: As a result of its recent business combinations in the site-built construction market, management believes the Company's ability to achieve growth in sales and margins has become more dependent on general economic conditions, such as interest rates, housing starts and unemployment levels. To the extent these conditions change significantly in the future, the Company's financial results could be impacted. 12

13 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Business Combinations: The Company has completed several business combinations within the past eighteen months and plans to continue its acquisition activity in the immediate future in order to achieve certain strategic objectives. There are many inherent risks associated with business combinations, including assimilation and successfully managing growth. While the Company conducts extensive due diligence and has taken steps to ensure successful assimilation, factors beyond the Company's control could influence the results of these acquisitions. Consolidation: The Company is witnessing consolidation and a reduction in the number of customers in various markets it serves. These consolidations will result in a larger portion of Company sales being made to some customers. The long term effects of this consolidation are unknown, but could impact the Company's margins on some product lines. 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. Seasonality: The majority of the Company's products are used in outdoor construction activities, therefore its sales volume and profits can be negatively affected by adverse weather conditions in certain geographic markets. In addition, adverse weather conditions in certain regions can negatively impact the Company's operations and consequently its productivity and costs per unit. Please recognize the above risk factors when reviewing the Company's business prospects. FLUCTUATIONS IN LUMBER PRICES The following table presents the Random Lengths framing lumber composite price for the six months ended June 26, 1999 and June 27, 1998: 13

14 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Random Lengths Average $/MBF -------------- 1999 1998 ---- ---- January............................ 370 360 February........................... 386 375 March.............................. 394 369 April.............................. 393 369 May................................ 421 331 June............................... 454 332 Second quarter average............. 423 344 Year-to-date average............... 403 356 Second quarter percentage increase....................... 22.9% Year-to-date percentage increase....................... 13.2% 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"). In the second quarter of 1999, the Lumber Market was 22.9% higher than it was during the same period of 1998. However, Southern Yellow Pine ("SYP"), a species which comprises up to 50% of the Company's volume, increased only 7% in the second quarter of 1999 compared to the same period of 1998. A SYP composite price, prepared and used by the Company in managing the business, is as follows: Random Lengths SYP Average $/MBF --------------- 1999 1998 ---- ---- January............................ 471 499 February........................... 497 525 March.............................. 513 550 April.............................. 498 541 May................................ 517 482 June............................... 563 450 Second quarter average............. 526 491 Year-to-date average............... 510 508 Second quarter percentage increase....................... 7.1% 14

15 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Year-to-date percentage increase....................... 0.4% 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 treated lumber and outdoor specialty products, such as fencing, decking and lattice, experience the greatest seasonal effects. Sales of treated lumber, primarily consisting of SYP, also experience the greatest Lumber Market risk. Sales of treated lumber are generally at their highest levels between the months of April through August. This sales peak, combined with capacity constraints in the wood treatment process, requires the Company to build its inventory of treated lumber throughout the winter and spring. Since sales prices of treated lumber products are generally indexed to the Lumber Market at the time they are shipped, the Company's profits can be negatively affected by prolonged declines in the Lumber Market during its primary selling season. To mitigate this risk, supply programs are maintained with vendors that are intended to decrease the Company's exposure. These programs include those materials which are most susceptible to adverse changes in the Lumber Market, and also allow the Company to carry a lower investment in inventories. 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 For the Six Months Ended -------------------------- ------------------------ June 26, June 27, June 26, June 27, 1999 1998 1999 1998 -------- -------- -------- -------- Net sales................................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold.......................... 87.5 88.1 87.0 88.7 ----- ----- ----- ----- Gross profit................................ 12.5 11.9 13.0 11.3 Selling, general, and administrative expenses................... 7.1 6.5 8.2 6.8 ----- ----- ----- ----- 15

16 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Earnings from operations.................... 5.4 5.4 4.8 4.5 Other expense, net.......................... 0.6 0.7 0.8 0.7 ---- ---- ---- ---- Earnings before income taxes................ 4.8 4.7 4.0 3.8 Income taxes................................ 1.9 1.8 1.6 1.5 ---- ---- ---- ---- Net earnings................................ 2.9% 2.9% 2.4% 2.3% ==== ==== ==== ==== NET SALES The Company manufactures, treats and distributes lumber and other building-related products to the do-it-yourself (DIY), manufactured housing, wholesale lumber, industrial and conventional site-built construction markets. The Company's strategic objectives relative to sales include: - - Continuing to diversify the Company's end market sales mix by increasing its sales of specialty wood packaging to industrial users and "engineered wood products" to the site-built construction market. Engineered wood products consist of trusses, wall panels and I-joists. - - Maximizing its sales of "value-added" products. Value-added product sales consist of fencing, decking, lattice and other outdoor specialty products sold to the DIY market; roof trusses sold to producers of manufactured homes; specialty wood packaging; and engineered wood products. 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 other 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. 16

17 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED 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 For the Six Months Ended -------------------------------------- ------------------------------------- June 26, June 27, June 26, June 27, Market Classification 1999 % 1998 % 1999 % 1998 % - --------------------- -------- ------ -------- ------ --------- ------ -------- ------ DIY................................. $236,912 53.0% $207,922 53.5% $357,068 47.8% $308,742 49.3% Manufactured Housing................ 108,811 24.4 104,500 26.9 205,079 27.5 199,620 31.8 Site-Built Construction............. 53,858 12.1 34,698 8.9 101,374 13.6 43,497 6.9 Wholesale Lumber.................... 22,304 5.0 20,859 5.4 38,406 5.1 38,990 6.2 Industrial.......................... 24,866 5.5 20,698 5.3 45,004 6.0 36,025 5.8 -------- ----- -------- ----- -------- ----- -------- ----- Total............................... $446,751 100.0% $388,677 100.0% $746,931 100.0% $626,874 100.0% ======== ===== ======== ===== ======== ===== ======== ===== Note: In 1998, the Company reviewed the market classifications of each of its customers and made certain reclassifications. Prior year sales have been restated due to these customer reclassifications. Net sales in the second quarter of 1999 increased $58.1 million, or 15%, compared to the second quarter of 1998, reflecting an increase in units shipped combined with an increase in overall selling prices. The increase in units shipped was primarily driven by sales from plants serving the site-built construction market and additional business with the Company's largest DIY customer. Overall selling prices increased due to the Lumber Market (see pages 15 and 16). Net sales in the first six months of 1999 increased $120.1 million, or 19%, compared to the same period of 1998. This sales increase was primarily due to several businesses acquired in the first six months of 1998, combined with increased sales to the Company's largest DIY customer. The following table presents, for the periods and markets indicated, the Company's percentage of value added and commodity-based sales to total sales. Three Months Ended Six Months Ended ------------------ ------------------- June 26, June 27, June 26, June 27, 1999 1998 1999 1998 -------- -------- -------- -------- Value-Added........................... 36.7% 40.1% 38.5% 38.3% Commodity-Based....................... 63.3% 59.9% 61.5% 61.7% DIY: Net sales to the DIY market increased approximately $29.0 million, or 14%, in the second quarter of 1999 compared to the second quarter of 1998. Net sales for the first six months of 1999 increased $48.3 million, or 16%. Approximately $14 million and $23 million of the quarterly and 17

18 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED year-to-date increases, respectively, were due to new treating plants which commenced operations in 1999. Sales from Shoffner Industries, L.L.C. ("Shoffner") acquired on March 30, 1998, also contributed to the year-to-date increase. Existing operations (operations that were part of the Company since the beginning of 1998) primarily increased sales by adding business with the Company's largest customer. The overall increase in DIY sales is offset by a reduction in sales to three other customers due to more restrictive credit terms imposed by the Company and competitive factors. As a result, the percentage of the Company's sales with its largest DIY customer continues to increase. Manufactured Housing: Net sales to the manufactured housing market increased approximately $4.3 million, or 4%, in the second quarter of 1999 compared to the second quarter of 1998. Net sales for the first six months of 1999 increased approximately $5.5 million, or 3%, compared to the same period of 1998. These overall increases were primarily due to an increase in overall selling prices as a result of a higher Lumber Market. Spruce-pine-fir is the species predominantly used for products sold to this market, the costs of which were up considerably during the 1999 periods. In addition, recent data suggests that this industry is showing signs of a slowdown, which will impact the Company's sales to this market. Site-Built Construction Market: Net sales to the site-built construction market increased approximately $19.2 million and $57.9 million in the second quarter and first six months of 1999, respectively, compared to the same periods of 1998, primarily due to increased sales from business acquired in 1998 consisting of Nascor, Shoffner, Advanced Component Systems, Inc. ("ACS") and Structural Lumber Products, Inc. ("SLP"). Sales increases from Shoffner, ACS and SLP are generally due to a combination of strong housing markets and increased market share in their respective regions. Wholesale: Net sales to the wholesale market increased approximately $1.4 million, or 7%, in the second quarter of 1999 compared to the same period of 1998. Net sales decreased $0.5 million, or 1%, for the first six months of 1999 compared to the same period of 1998. The slight increase in sales for the second quarter and decrease for the first six months of 1999 is primarily due to increased selling prices associated with a higher Lumber Market, offset by a decrease in unit sales. The Company is not emphasizing this market in its strategic initiatives because products sold in this market are primarily commodity-based and increasingly put the Company in competition with its vendor mills. 18

19 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Industrial: Net sales to the industrial market increased approximately $4.0 million and $9.0 million in the second quarter and first six months of 1999, respectively, compared to the same periods of 1998. These increases are primarily due to the acquisition of Industrial Lumber Company in June, 1998. COST OF GOODS SOLD AND GROSS PROFIT Gross profit as a percentage of net sales increased to 12.5% in the second quarter of 1999 compared to 11.9% in the second quarter of 1998. Gross profit as a percentage of net sales increased to 13.0% for the first six months of 1999 compared to 11.3% for the same period of 1998. The increases were primarily due to a combination of the following factors: - - Higher margins on the sale of certain commodity-based products, primarily due to an upward trend in the Lumber Market in 1999. - - Increased sales of engineered wood products. - - Increased sales and improved margins on specialty wood packaging products and components sold to the industrial market in the Company's Far West Region. The favorable effects discussed above were partially offset by a decline in sales of fencing, lattice and other outdoor specialty products due to competitive factors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative ("SG&A") expenses increased approximately $6.3 million, or 25%, comparing the second quarter of 1999 to the same period of 1998. SG&A for the first six months of 1999 increased approximately $19 million, or 45%, compared to the same period of 1998. The quarterly increase was primarily due to: - - Expenses added through business acquisitions and other new operations. These expenses totaled $1.2 million in the second quarter of 1999. - - General increases in personnel and travel costs due to additional sales, marketing, engineering and management personnel to support the recent and future growth of the business. - - Increases in accrued incentive compensation expenses tied to profitability and return on investment objectives. 19

20 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED - - Increases in direct selling and marketing expenses tied to sales, such as sales incentives and bad debt expense. Additional factors contributing to the year-to-date increase include the final costs of a research and development project and amortization of goodwill and non-compete agreements as a result of business acquisitions. In addition, the ratio of SG&A to sales during this period increased substantially to 8.2% in 1999 from 6.8% in 1998 due to acquired businesses that supply products to the site-built construction market. These businesses require substantial engineering costs relative 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 $0.2 million and $1.3 million comparing the second quarter and first six months of 1999 and 1998, respectively. The year-to-date increase is primarily due to acquisition-related debt incurred throughout 1998. INCOME TAXES The Company's effective tax rate was 39.9% in the second quarter of 1999 compared to 38.7% in the second quarter of 1998. This increase is primarily due to estimated 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's effective tax rate for the first six months of 1999 was 39.5% compared to 38.4% for the same period of 1998, due to the same factors discussed above plus a permanent tax difference resulting from a business acquisition. LIQUIDITY AND CAPITAL RESOURCES Cash flows USED IN operating activities in the first six months of 1999 totaled approximately $18.1 million compared to cash flows PROVIDED BY operating activities of $7.1 million in the same period of 1998. The decrease in cash from operating activities was primarily due to a greater investment in working capital as a result of business growth, offset by an increase in earnings, depreciation, and amortization expenses as a result of 1998 business acquisitions. Due to the seasonality of its business and the effects of the Lumber Market, management believes the Company's cash cycle (days sales outstanding plus days supply of inventory less days payables outstanding) is the best indicator of its working capital management. The Company's cash cycle decreased to 42 days during the first six months of 1999 from 47 days during the first six months of 1998, primarily due to improved inventory management throughout the first half of 1999. 20

21 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED In the first half of 1998, the Company carried higher levels of inventory in relationship to sales than was necessary. Since that time, plant management improved its control over this area. Capital expenditures totaled $21.2 million in the first six months of 1999 compared to $10.5 million in the same period of 1998. The increase was primarily due to an increase in new facilities purchased during the first six months of 1999 and an investment in a fractional ownership of an airplane. The purchase price for the new facilities totaled almost $10.1 million. The remaining amounts spent in the period were primarily for expanding production capacity and replacing and/or upgrading certain equipment. The Company expects to spend between $14 million and $19 million on capital expenditures for the balance of 1999, primarily to expand its operations into new regions. On June 26, 1999, outstanding purchase commitments on capital projects totaled approximately $7.7 million. The Company intends to satisfy these commitments utilizing its revolving credit facility. The Company has not completed any business acquisitions during the first six months of 1999. It continues to focus on assimilating the acquisitions it completed in 1998, while also investigating other potential targets. Cash flows provided by financing activities totaled approximately $36.7 million in the first six months of 1999 compared to $100.6 million in the same period of 1998. The decrease was due to not having accumulated any acquisition-related debt during 1999, offset by greater working capital requirements and higher capital expenditures in the first six months of 1999. On June 26, 1999, the Company had $42.3 million outstanding on its $175 million revolving credit facility. The Company experiences its greatest working capital requirements during the period from March through July. ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS The Company is self-insured for environmental impairment liability, and accrues for the estimated cost of monitoring or remedial activities. As of August 1, 1999, the Company owns and/or operates twenty facilities throughout the United States that treat lumber products with a chemical preservative. In accordance with applicable federal, state and local environmental laws, ordinances and regulations, the Company may be potentially liable for costs and expenses related to the environmental condition of the Company's real property. The Company has established reserves for remedial activities at its North East, MD; Union City, GA; Stockertown, PA; Elizabeth City, NC; and Schertz, TX facilities. During the second quarter of 1999, the Company completed its remedial activities at its Granger, IN facility. The Company has accrued, in other current and long-term liabilities, amounts totaling $2.3 million and $2.0 million at June 26, 1999 and June 27, 1998 for the activities described above. 21

22 UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED 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 reviewed its primary 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 programming costs in this area. The Company believes its risks associated with the "Year 2000" relate primarily to its customers, suppliers, service providers and possible disruptions in the overall economy. Management is currently reviewing the systems of its significant customers and vendors, as well as its other ancillary systems, and has detected no material issues to date. This review was originally planned for an April completion, but due to priorities in other areas, it is expected to be completed in September 1999. Incremental costs associated with this review are still expected to total $50,000, while no costs have been incurred year-to-date. Although there can be no absolute assurances that there will not be a material adverse effect on the Company if third parties do not resolve their "Year 2000" issues in a timely manner, the Company believes its activities will minimize these risks. The Company will continue to evaluate and develop contingency plans as a result of its "Year 2000" assessment. 22

23 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 Received -------- -------- --------- ---------- ------------- Stock Option Exercises 04/30/99 Common 160,000 Eligible officers $640,000 Employee Stock Gift Program Various Common 50 Eligible employees None 23

24 UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. The following matters were voted upon at the Company's Annual Meeting of Shareholders on April 28, 1999. (1) Election of the following Directors for three year terms expiring in 2001: For Withheld -------- -------- John C. Canepa 15,932,963 110,128 Carroll M. Shoffner 15,932,963 110,128 Louis A. Smith 15,932,963 110,128 Other Directors whose terms of office continued after the meeting are as follows: Peter F. Secchia Richard M. DeVos John W. Garside William G. Currie Phillp M. Novell 24

25 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: August 6, 1999 By: /s/ William G. Currie -------------- -------------------------------------- William G. Currie Its: President and Chief Executive Officer Date: August 6, 1999 By: /s/ Elizabeth A. Nickels -------------- -------------------------------------- Elizabeth A. Nickels Its: Executive Vice President of Finance and Administration and Treasurer (Principal Financial Officer) 25

26 UNIVERSAL FOREST PRODUCTS, INC. EXHIBIT INDEX Exhibit No. Description Page No. - ----------- ----------- -------- 27 Financial Data Schedule 27 26

5 6-MOS DEC-25-1999 DEC-27-1998 JUN-26-1999 1,441 0 116,890 4,549 136,259 257,007 211,970 67,910 505,850 110,297 0 0 0 20,773 0 505,850 446,751 446,751 391,013 391,013 31,560 0 3,318 21,227 8,479 12,748 0 0 0 12,748 0.61 0.60