1
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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 30, 2001
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number 0-22684
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UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
- ----------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
--------------
NONE
------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by 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, 2001
----------------------------------- --------------------------------
Common stock, no par value 19,805,055
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Page 1 of 23
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INDEX
PAGE NO.
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 30, 2001
and December 30, 2000. 3
Consolidated Condensed Statements of Earnings for the Three and
Six Months Ended June 30, 2001 and June 24, 2000. 4
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 30, 2001 and June 24, 2000. 5
Notes to Consolidated Condensed Financial Statements. 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings. 21
Item 2. Changes in Securities. 21
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 22
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K. 22
2
3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 30, December 30,
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 8,490 $ 2,392
Restricted cash equivalents................................................ 723 1,364
Accounts receivable (net of allowance for doubtful accounts of
$2,018 and $1,340)....................................................... 140,698 64,386
Inventories:
Raw materials......................................................... 50,343 41,885
Finished goods........................................................ 97,726 81,306
------------ -----------
148,069 123,191
Other current assets....................................................... 8,210 9,026
------------ -----------
TOTAL CURRENT ASSETS.............................................. 306,190 200,359
OTHER ASSETS.................................................................... 11,698 11,392
GOODWILL AND NON-COMPETE AGREEMENTS, NET........................................ 114,903 105,579
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment.............................................. 276,936 256,658
Accumulated depreciation and amortization.................................. (97,355) (88,668)
------------ -----------
PROPERTY, PLANT AND EQUIPMENT, NET................................ 179,581 167,990
------------ -----------
TOTAL ASSETS.................................................................... $ 612,372 $ 485,320
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt............................................................ $ 1,020 $ 1,270
Accounts payable........................................................... 73,673 35,589
Accrued liabilities:
Compensation and benefits............................................. 25,852 29,423
Other ................................................................ 20,350 4,973
Current portion of long-term debt and capital lease obligations............ 21,360 8,783
------------ -----------
TOTAL CURRENT LIABILITIES......................................... 142,255 80,038
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current portion.............................................. 197,197 150,807
DEFERRED INCOME TAXES........................................................... 9,128 9,092
OTHER LIABILITIES............................................................... 9,734 9,614
------------ -----------
TOTAL LIABILITIES................................................. 358,314 249,551
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, 19,802,633 and 19,719,114............................... 19,803 19,719
Additional paid-in capital................................................. 80,585 79,800
Retained earnings.......................................................... 153,902 136,645
Accumulated other comprehensive earnings................................... 923 860
------------ -----------
255,213 237,024
Officers' stock notes receivable........................................... (1,155) (1,255)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY........................................ 254,058 235,769
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................................... $ 612,372 $ 485,320
============ ===========
See notes to consolidated condensed financial statements.
3
4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
----------------------------- ----------------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
--------------- -------------- ------------- --------------
NET SALES........................................ $ 486,348 $ 431,578 $ 770,986 $ 735,650
COST OF GOODS SOLD............................... 419,951 374,280 661,470 637,941
---------- ---------- ---------- ----------
GROSS PROFIT..................................... 66,397 57,298 109,516 97,709
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........................ 38,869 32,045 71,142 59,363
---------- ---------- ---------- ----------
EARNINGS FROM OPERATIONS......................... 27,528 25,253 38,374 38,346
INTEREST, NET:
Interest expense............................ 3,539 3,607 6,738 6,775
Interest income............................. (245) (160) (317) (246)
---------- ---------- ---------- ----------
3,294 3,447 6,421 6,529
---------- ---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES,
MINORITY INTEREST AND EQUITY IN
EARNINGS (LOSS) OF INVESTEE.................... 24,234 21,806 31,953 31,817
INCOME TAXES..................................... 9,179 8,563 12,035 12,516
---------- ---------- ---------- ----------
EARNINGS BEFORE MINORITY
INTEREST AND EQUITY IN EARNINGS
(LOSS) OF INVESTEE............................. 15,055 13,243 19,918 19,301
MINORITY INTEREST................................ (794) (307) (861) (330)
EQUITY IN EARNINGS (LOSS)
OF INVESTEE.................................... (23) (19) 158 27
---------- ---------- ---------- ----------
NET EARNINGS..................................... $ 14,238 $ 12,917 $ 19,215 $ 18,998
========== ========== ========== ==========
EARNINGS PER SHARE - BASIC....................... $ 0.72 $ 0.64 $ 0.97 $ 0.94
EARNINGS PER SHARE - DILUTED..................... $ 0.70 $ 0.63 $ 0.95 $ 0.93
WEIGHTED AVERAGE SHARES
OUTSTANDING.................................... 19,792 20,144 19,753 20,140
WEIGHTED AVERAGE SHARES
OUTSTANDING WITH COMMON
STOCK EQUIVALENTS.............................. 20,388 20,501 20,315 20,513
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 30, June 24,
2001 2000
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................... $ 19,215 $ 18,998
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation................................................................. 9,498 7,862
Amortization of non-compete agreements and goodwill.......................... 2,180 1,639
Loss on sale of property, plant and equipment................................ 38 5
Changes in:
Accounts receivable........................................................ (68,218) (40,083)
Inventories................................................................ (21,951) (9,577)
Accounts payable........................................................... 36,701 23,647
Accrued liabilities and other.............................................. 9,909 3,209
------------ ------------
NET CASH FROM OPERATING ACTIVITIES........................................... (12,628) 5,700
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................................ (17,924) (15,623)
Acquisitions, net of cash received................................................ (21,559) (32,386)
Proceeds from sale of property, plant and equipment............................... 399 440
Other............................................................................. 512 (520)
------------ ------------
NET CASH FROM INVESTING ACTIVITIES........................................... (38,572) (48,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable and revolving credit facilities................... 67,600 48,774
Proceeds from issuance of long-term debt.......................................... 1,937
Repayment of long-term debt, net.................................................. (9,038) (7,181)
Proceeds from issuance of common stock............................................ 783 379
Dividends paid to shareholders.................................................... (792) (808)
Repurchase of common stock........................................................ (1,255) (2,070)
------------ ------------
NET CASH FROM FINANCING ACTIVITIES........................................... 57,298 41,031
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... 6,098 (1,358)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 2,392 4,106
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 8,490 $ 2,748
============ ============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest..................................................................... $ 6,554 $ 6,117
Income taxes paid ........................................................... 2,434 3,359
NON-CASH FINANCING ACTIVITIES:
Stock exchanged for note receivable............................................... $ 801
See notes to consolidated condensed financial statements.
5
6
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 transactions and
balances have been eliminated.
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, and changes in
shareholders' equity 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 consolidated financial
statements, and footnotes thereto, included in the Company's Annual
Report to Shareholders on Form 10-K for the fiscal year ended December
30, 2000.
Certain reclassifications have been made to the Financial Statements for
2000 to conform to the classifications used in 2001.
B. COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency
translation adjustments. Comprehensive income was approximately $14.6
million and $12.9 million for the quarters ending June 30, 2001 and June
24, 2000, respectively. During the six months ended June 30, 2001 and
June 24, 2000, comprehensive income was approximately $19.3 million and
$19.1 million, respectively.
C. 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):
6
7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
Three Months Ended 6/30/01 Three Months Ended 6/24/00
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................... $ 14,238 $ 12,917
EPS - BASIC
Income available to
common stockholders.......... 14,238 19,792 $0.72 12,917 20,144 $0.64
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 596 357
--------- --------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $ 14,238 20,388 $0.70 $ 12,917 20,501 $0.63
========= ========= ===== ========= ======== =====
Six Months Ended 6/30/01 Six Months Ended 6/24/00
------------------------------------- -------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
NET EARNINGS................... $ 19,215 $ 18,998
EPS - BASIC
Income available to
common stockholders.......... 19,215 19,753 $0.97 18,998 20,140 $0.94
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 562 373
--------- --------
EPS - DILUTED
Income available to
common stockholders and
assumed options
exercised.................... $ 19,215 20,315 $0.95 $ 18,998 20,513 $0.93
========= ========= ===== ========= ======== =====
Options to purchase 434,547 shares of common stock at exercise prices
ranging from $18.25 to $36.01 were outstanding at June 30, 2001, but were
not included in the computation of diluted EPS for the quarter and six
months ended June 30, 2001 because the options' exercise prices were
greater than the average market price of the common stock and, therefore,
would be antidilutive.
D. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). This statement changes the accounting and reporting for
goodwill and other intangible assets. Upon adoption of this statement,
goodwill will no longer be amortized, however tests for impairment will
be
7
8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
performed annually or when a triggering event occurs. This statement will
apply to assets acquired after June 30, 2001, and existing goodwill and
other intangible assets upon the adoption of SFAS 142, in fiscal 2002.
Pre-tax amortization of goodwill for the six months ended June 30, 2001,
was $1.7 million. The Company is evaluating the effect of SFAS 142 on the
consolidated financial statements.
E. BUSINESS COMBINATIONS
On February 28, 2001, a subsidiary of the Company acquired 50% of the
assets of D&R Framing Contractors ("D&R") of Englewood, Colorado. The
total purchase price to the Company was approximately $7.6 million. The
excess of the purchase price over the estimated fair value of the
acquired assets, assumed liabilities and minority interest was $7.0
million, and has been recorded as goodwill. D&R's results of operations
are included in the Company's consolidated condensed financial statements
since the date of acquisition.
On March 2, 2001, a subsidiary of the Company acquired the remaining 50%
of ECJW Holdings, Inc. and its two subsidiaries, Thorndale Roof Systems,
Inc. and Edcor Floor Systems, Inc. (collectively "TED"). The purchase
price for the remaining stock of TED was approximately $3.5 million. The
excess of the purchase price over the previously recorded minority
interest was $2.3 million, and has been recorded as goodwill. TED's
results of operations are included in the Company's consolidated
condensed financial statements since the date of the initial acquisition.
On June 1, 2001, subsidiaries of the Company acquired certain assets of
the Superior Truss Division of Banks Corporation ("Superior"). The assets
include operations in Syracuse, Indiana and Minneota, Minnesota which
serve the site-built construction market. The total purchase price for
the assets was approximately $11.0 million. The excess of the purchase
price over the estimated fair value of the acquired assets was $2.1
million and has been recorded as goodwill. Superior's results of
operations are included in the Company's consolidated condensed financial
statements since the date of acquisition.
8
9
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. The forward-looking
statements are based on the beliefs and assumptions of management of the Company
together with information available to the Company when the statements were
made. Future results could differ materially from those included in such
forward-looking statements as a result of, among other things, the factors set
forth below and certain economic and business factors which may be beyond 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 commodity
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. The Company anticipates that these fluctuations will continue
in the future. Management utilizes the Random Lengths composite price (see
"Fluctuations in Lumber Prices"), which is a weighted average of nine key
framing lumber prices chosen from major producing areas and species, as a broad
measure of price movement in the commodity lumber market ("Lumber Market").
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 of 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. The manufactured housing industry is currently hampered by market
conditions, including an oversupply of product, increased repossessions and
tightened credit policies, which have impacted the Company's ability to achieve
short-term growth objectives. A continued downturn in this market could
adversely affect the Company's operating results.
9
10
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Economic Trends:
Management believes the Company's ability to achieve growth in sales and
margins to the site-built construction market is somewhat dependent on housing
starts. If housing starts decline significantly, the Company's financial results
could be impacted.
Business Combinations:
A key component of the Company's growth strategy is to complete business
combinations. Business combinations involve inherent risks, 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 by its customers. These
consolidations will result in a larger portion of the Company's sales being made
to some customers and may limit the customer base the Company is able to serve.
Government Regulations:
The Company is subject to a variety of government regulations which
create a financial burden on the Company. If additional laws and regulations are
enacted in the future which restrict the ability of the Company to manufacture
or market its products, including its preservative-treated products, it could
adversely affect the Company's sales and profits. If existing laws are
interpreted differently, it could increase the financial cost to the Company.
The Company's wood preservation process involves the use of a chromated
copper arsenate (CCA) solution that is applied to wood products under pressure.
The Company understands, based on published industry reports, that CCA is a safe
and effective product to prolong the use of many of the Company's wood products.
The Company is aware of certain allegations that the existence of arsenic in
such products presents a threat to public health. To date, the Company has no
evidence supporting the validity of any of these allegations. Nevertheless, and
presumably due to these allegations, the State of Florida has imposed a
moratorium on the use of CCA treated wood in Florida state parks. The expansion
of limits on the use of CCA treated lumber within Florida or by other states
could have a negative impact on the Company's results of operations.
The United States government recently suspended the implementation of
proposed changes in the arsenic drinking water standards adopted in the last
days of the Clinton administration. If the proposed changes are adopted, which
reduce the current standard for arsenic of 50 parts per billion,
10
11
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
the Company anticipates that other threshold levels, such as storm water and
soil limitations, will be reduced. These requirements, if adopted, could have a
significant adverse impact on the Company's cost of operations.
Weather Conditions:
The majority of the Company's products are used or installed in outdoor
construction activities, therefore its short-term sales volume and profits can
be negatively affected by adverse weather conditions. In addition, adverse
weather conditions can negatively impact the Company's productivity and costs
per unit.
Seasonality:
Some aspects of the Company's business are seasonal in nature and results
of operations vary from quarter to quarter. 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
Southern Yellow Pine ("SYP"), also experience the greatest Lumber Market risk.
Treated lumber sales 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 may be 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, programs are
maintained with certain vendors and customers 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. Vendor programs also allow
the Company to carry a lower investment in inventories.
E-Business/E-Commerce:
While the Company has invested heavily in technology and established
electronic business-to-business efficiencies with certain customers and
vendors, the willingness of customers and vendors to modify existing
distribution strategies poses a potential risk. The Company believes the nature
of its products, together with its value-added services, ensures that it has a
secure position in the supply chain.
When analyzing this report to assess the future performance of the Company,
please recognize the potential impact of the various factors set forth above.
11
12
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 six months ended June 30, 2001 and June 24, 2000:
Random Lengths Composite
Average $/MBF
------------------------
2001 2000
---- ----
January............................ $269 $386
February........................... 285 385
March.............................. 306 382
April.............................. 331 359
May................................ 411 326
June............................... 365 331
Second quarter average............. $369 $339
Year-to-date average............... $328 $362
Second quarter percentage
increase from 2000............... 8.9%
Year-to-date percentage
decrease from 2000............... (9.4%)
In addition, a SYP composite price, prepared and used by the Company, is
presented below. Sales of products produced using this species comprise up to
50% of the Company's sales volume.
Average $/MBF
-----------------
2001 2000
---- ----
January............................ $369 $488
February........................... 393 490
March.............................. 408 494
April ............................. 427 483
May................................ 509 439
June............................... 496 456
Second quarter average............. $477 $459
Year-to-date average............... $434 $475
Second quarter percentage
increase from 2000............... 3.9%
Year-to-date percentage
decrease from 2000 .............. (8.6%)
12
13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The effects of the Lumber Market on the Company's results of operations
are discussed below under the caption "Net Sales."
BUSINESS COMBINATIONS
On February 28, 2001, a subsidiary of the Company acquired 50% of the
assets of D&R Framing Contractors ("D&R") of Englewood, Colorado for
approximately $7.6 million. D&R had net sales in fiscal 2000 totaling
approximately $44 million.
On March 2, 2001, a subsidiary of the Company acquired the remaining 50%
of ECJW Holdings, Inc. and its two subsidiaries, Thorndale Roof Systems, Inc.
and Edcor Floor Systems, Inc. (collectively "TED"). The purchase price for the
remaining stock of TED was approximately $3.5 million.
On June 1, 2001, subsidiaries of the Company acquired certain assets of
the Superior Truss Division of Banks Corporation ("Superior"). The assets
include operations in Syracuse, Indiana and Minneota, Minnesota which serve the
site-built construction market. The total purchase price for the assets was
approximately $11.0 million. Superior had net sales in fiscal 2000 totaling
approximately $20 million.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components
of the Company's Consolidated Condensed Statement of Earnings as a percentage of
net sales.
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
------------- ------------- ---------- ----------
Net sales.................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 86.3 86.7 85.8 86.7
--------- --------- --------- ---------
Gross profit................................. 13.7 13.3 14.2 13.3
Selling, general, and
administrative expenses.................... 8.0 7.4 9.2 8.1
---------- ---------- --------- --------
Earnings from operations..................... 5.7 5.9 5.0 5.2
Interest, net................................ 0.7 0.8 0.8 0.9
--------- --------- -------- --------
13
14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Earnings before income taxes,
minority interest and equity in
earnings (loss) of investee................ 5.0 5.1 4.2 4.3
Income taxes................................. 1.9 2.0 1.6 1.7
------ ------ ------- ------
Earnings before minority interest and
equity in earnings (loss) of investee...... 3.1 3.1 2.6 2.6
Minority interest............................ (0.2) (0.1) (0.1) (0.0)
Equity in earnings (loss) of investee........ (0.0) (0.0) 0.0 0.0
------ ------ ------- ------
Net earnings................................. 2.9% 3.0% 2.5% 2.6%
====== ====== ======= ======
NET SALES
The Company engineers, manufactures, installs, treats and distributes
lumber and other building products to the do-it-yourself ("DIY"), site-built
construction, manufactured housing, wholesale lumber and industrial markets. The
Company's strategic sales objectives include:
- - Diversifying 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 include roof
trusses, wall panels and floor systems.
- - Increasing sales of "value-added" products. Value-added product sales
consist of fencing, decking, lattice and other specialty products sold to
the DIY market; 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%. Although the Company considers the treatment of
dimensional lumber with certain chemical preservatives a value-added
process, treated lumber is not presently included in the value-added sales
totals.
- - Maximizing profitable top-line sales growth while increasing DIY market
share.
- - Maintaining manufactured housing market share.
In order to measure its progress toward attaining these objectives,
management analyzes the following financial data:
- - Sales by market classification.
- - The percentage change in sales attributable to changes in overall selling
prices versus changes in the quantity of units shipped.
14
15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - The ratio of value-added product sales to total sales.
This information is included in the tables and narrative that 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 For the Six Months Ended
------------------------------------------ -----------------------------------------
June 30, June 24, June 30, June 24,
Market Classification 2001 % 2000 % 2001 % 2000 %
- --------------------- ---------- -------- ---------- ------- ---------- ------- --------- -------
DIY............................ $ 272,407 56.0% $230,899 53.5% $ 400,483 51.9% $ 365,612 49.7%
Site-Built Construction........ 81,963 16.9 62,987 14.6 143,817 18.7 111,890 15.2
Manufactured Housing........... 74,907 15.4 84,413 19.6 124,568 16.2 160,510 21.8
Industrial..................... 34,086 7.0 32,450 7.5 62,515 8.1 59,577 8.1
Wholesale Lumber............... 22,985 4.7 20,829 4.8 39,603 5.1 38,061 5.2
---------- ------ -------- ------ ---------- ------ ---------- ------
Total.......................... $ 486,348 100.0% $431,578 100.0% $ 770,986 100.0% $ 735,650 100.0%
========== ====== ======== ====== ========== ====== ========== ======
Note: In the second quarter of 2001, the Company reviewed the classification
of its customers and made certain reclassifications. Prior year
information has been restated to reflect these reclassifications.
Net sales in the second quarter of 2001 increased 12.7% compared to the
second quarter of 2000, resulting from an increase in units shipped. Overall
selling prices were minimally impacted by the Lumber Market (see "Fluctuations
in Lumber Prices"). The increase in units shipped was primarily driven by sales
from newly acquired plants serving the site-built construction market, increased
unit sales to the industrial market and additional business with the Company's
largest DIY customer.
Net sales increased in the first six months of 2001 compared to the same
period of 2000, primarily due to an increase in units shipped, partially offset
by a decrease in overall selling prices. The increase in units shipped was due
to the same factors stated above. Overall selling prices decreased due to the
Lumber Market (see "Fluctuations in Lumber Prices").
The following table presents, for the periods indicated, the Company's
percentage of value-added and commodity-based sales to total sales.
Three Months Ended Six Months Ended
------------------------ --------------------------
June 30, June 24, June 30, June 24,
2001 2000 2001 2000
--------- --------- ---------- ----------
Value-Added........................... 45.4% 41.4% 47.2% 42.5%
Commodity-Based....................... 54.6% 58.6% 52.8% 57.5%
15
16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Value-added sales increased 23.6% in the second quarter and 16.5% for the
first six months of 2001, primarily due to increased sales of engineered roof
trusses, I-joists and Open Joist 2000 products to the site-built construction
market and fencing and decking to the DIY market. The increase in sales of these
products was partially offset by a decline in truss sales to the manufactured
housing market. In addition, commodity-based sales decreased due to a decline in
units shipped to the manufactured housing market.
DIY/Retail:
Net sales to the DIY/retail market increased in the second quarter and
first six months of 2001 compared to the same periods of 2000. These increases
were due primarily to an increase in sales to the Company's largest customer as
a result of new store openings, additional business the Company was able to
capture and improved weather conditions.
Site-Built Construction:
Net sales to the site-built construction market increased in the second
quarter and first six months of 2001 compared to the same periods of 2000. These
increases were primarily due to increased unit sales as a result of newly
acquired facilities. In addition, sales increased 6.5% and 6.1% from existing
facilities in the second quarter and first six months of 2001, respectively.
Manufactured Housing:
Net sales to the manufactured housing market decreased in the second
quarter and first six months of 2001 compared to the same periods of 2000,
primarily due to a decline in units shipped. The industry continues to struggle
with an oversupply of finished homes at the retail level, tight credit
conditions and an increase in repossessions. On April 3, 2001, the Company
increased its market share by acquiring certain assets of the Sunbelt Wood
Components division of Kevco, Inc.
Industrial:
Net sales to the industrial market increased in the second quarter and
first six months of 2001 compared to the same periods of 2000. These increases
were primarily due to increased market share in several regions from redirecting
sales efforts and manufacturing capacity at certain plants as a result of the
downturn in the manufactured housing market.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased in the second quarter
of 2001 compared to the same period of 2000. This increase was primarily due to
an increase in the ratio of value-added
16
17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
product sales to the Company's total sales due to increased sales of engineered
wood products to the site-built construction market and fencing and decking to
the DIY market.
Gross profit as a percentage of net sales increased in the first six
months of 2001 compared to the same period of 2000. In addition to the above
factor, the increase was due to the lower overall level of the Lumber Market in
the first six months of 2001 compared to 2000. The selling prices of several
products are indexed to the Lumber Market along with a fixed dollar "adder" to
cover conversion costs and profits. Therefore, in periods when the Lumber Market
is down, the fixed adder will result in higher gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased in the second
quarter and first six months of 2001 compared to the same periods of 2000. These
increases were primarily due to expenses added through business acquisitions and
other new operations, and an increase in selling and administrative headcount to
support the growth of the business and to pursue strategic initiatives.
INTEREST, NET
Net interest costs remained relatively flat in the second quarter and
first six months of 2001 compared to the same periods of 2000. Although the
Company had a higher average debt balance as a result of business acquisitions
in 2001, this was offset by a decrease in short-term borrowing rates on variable
rate debt.
INCOME TAXES
The Company's effective tax rate was 37.9% in the second quarter of 2001
compared to 39.3% in the same period of 2000. The effective tax rate was 37.7%
in the first six months of 2001 compared to 39.3% in the same period of 2000.
Effective tax rates differ from statutory federal income tax rates, primarily
due to provisions for state and local income taxes and permanent tax
differences. The investment in D&R on February 28, 2001 resulted in an
additional permanent tax difference.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities decreased in the first six months of
2001 compared to the same period of 2000. This was primarily due to an increase
in accounts receivable due to increased sales levels in June 2001 compared to
June 2000, combined with a slightly longer receivables cycle in 2001.
17
18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
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 44 days in the first six months of 2001 from 45 days in the first six months
of 2000 primarily due to a reduction in the days supply of inventory, which was
partially offset by a longer receivables cycle.
Capital expenditures totaled $17.9 million in the first six months of
2001. Approximately $9.2 million of this amount was spent to acquire four plants
from Kevco, Inc. and two new site-built plants in Georgia and Florida. The
Company expects to spend approximately $17.0 million on capital expenditures for
the balance of 2001, which includes outstanding purchase commitments on capital
projects totaling approximately $5.1 million on June 30, 2001. The Company
intends to satisfy these commitments utilizing its revolving credit facilities.
The Company spent approximately $21.6 million in the first six months of
2001 related to business acquisitions which are discussed earlier under the
caption "Business Combinations." The Company funded the purchase price of these
acquisitions using its revolving credit facilities.
Cash flows provided by financing activities increased in the first six
months of 2001 compared to the same period of 2000, primarily due to borrowings
to fund business acquisitions, seasonal working capital requirements and
maturities of long-term debt. On June 30, 2001, the Company had $72 million
outstanding on its $175 million primary revolving credit facility and $18.7
million Canadian ($12.7 million U.S.) outstanding on its $20 million Canadian
revolving credit facility. Financial covenants on the Company's revolving credit
facilities and senior unsecured notes include a minimum net worth requirement, a
minimum interest coverage test and a maximum leverage ratio. The Company was
within its requirements at June 30, 2001.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
The Company is self-insured for environmental impairment liability and
accrues for the estimated cost of monitoring or remediation activities. As of
June 30, 2001, the Company owns or operates 21 wood preserving 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 remediation
activities at its North East, MD; Union City, GA; Stockertown, PA; Elizabeth
City, NC; Auburndale, FL; and Schertz, TX facilities.
18
19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The Company has accrued in other long-term liabilities amounts totaling
$2.3 million on June 30, 2001 and June 24, 2000, for the activities described
above. 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 Federal Environmental Protection Agency ("EPA") is currently
performing its review of chromated copper arsenate ("CCA"), a wood preservative
used by the Company to extend the useful life of the wood fiber. As part of this
review process, the wood preservation industry and the EPA have agreed on a
revised consumer information program to advise consumers of safe handling
information for CCA treated wood. This new program will increase the Company's
costs of marketing the product, but is not expected to materially impact sales
of CCA treated wood.
In addition, an environmental group has petitioned the Consumer Products
Safety Commission ("CPSC") to ban the use of CCA treated wood in playsets. The
Company has been assured by its vendors and by scientific studies that CCA
treated lumber poses no unreasonable risks and its continued use should be
permitted.
Any action by EPA or the CPSC to limit the use of CCA treated lumber will
likely have a material adverse impact on the Company's results of operation in
the short term.
19
20
UNIVERSAL FOREST PRODUCTS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to fluctuations in
interest rates on its variable rate debt, which consists of revolving credit
facilities and industrial development revenue bonds. The Company does not
currently use interest rate swaps, futures contracts or options on futures, or
other types of derivative financial instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market value,
but do affect future earnings and cash flows. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to refinance
it.
20
21
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the quarter, the Company received a request for indemnification from a
major customer in two separate lawsuits which seek class action status. One
case, titled Jerry Jacobs et. al. v. Osmose, Inc. et. al., is pending in the
U.S. District Court for the Southern District of Florida. A second case, Albert
Miller et. al. vs. Home Depot, USA Inc., et. al. is pending in the U.S. District
Court for the Western District of Louisiana.
In both cases, the putative plaintiffs allege that CCA treated lumber is
defective and also allege that the marketing of the product is either deceptive
or not sufficiently informative as to the risks of the product. The plaintiffs
seek removal of CCA treated lumber, together with financial remuneration.
The Company believes the claims are baseless and without merit. To the extent
the Company is required to defend these actions, it intends to do so vigorously.
Item 2. Changes in Securities.
(a) None.
(b) None.
(c) Sales of equity securities in the second quarter not registered under the
Securities Act.
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
----------- ---------- ----------- ---------- -------------
Stock Gift Program Various Common 527 Eligible persons None
Stock Option Exercises Various Common 152,500 Eligible officers $686,260
21
22
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were voted upon at the Company's Annual Meeting of
Shareholders on April 18, 2001.
(1) Election of the following Directors for three year terms expiring in
2004:
For Withheld
---------- --------
William G. Currie 16,193,041 85,943
Philip M. Novell 16,192,943 86,040
Other Directors whose terms of office continued after the meeting are as
follows:
John C. Canepa
John W. Garside
Peter F. Secchia
Carroll M. Shoffner
Louis A. Smith
Item 6. Exhibits and Reports on Form 8-K.
(a) None.
(b) Reports on Form 8-K.
During the second quarter, the Company filed a report of Form 8-K dated
June 14, 2001: Item 4. Changes in Registrant's Certifying Accountant.
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: August 9, 2001 By: /s/ William G. Currie
----------------------- -----------------------------------
William G. Currie
Its: Vice Chairman of the Board and
Chief Executive Officer
Date: August 9, 2001 By: /s/ Michael R. Cole
----------------------- ----------------------------------
Michael R. Cole
Its: Chief Financial Officer
23
