================================================================================ 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 28, 2003 ------------- 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 checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No --- ---- Indicate the number of shares of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of June 28, 2003 - ----------------------------------- ------------------------------- Common stock, no par value 17,738,188 ================================================================================ Page 1 of 29
INDEX PAGE NO. PART I. FINANCIAL INFORMATION. Item 1. Financial Statements. Consolidated Condensed Balance Sheets at June 28, 2003, December 28, 2002, and June 29, 2002. 3 Consolidated Condensed Statements of Earnings for the Three and Six Months Ended June 28, 2003 and June 29, 2002. 4 Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 28, 2003 and June 29, 2002. 5 Notes to Consolidated Condensed Financial Statements. 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13-24 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 25 Item 4. Controls and Procedures. 26 PART II. OTHER INFORMATION. Item 1. Legal Proceedings - NONE. Item 2. Changes in Securities and Use of Proceeds. 27 Item 3. Defaults Upon Senior Securities - NONE. Item 4. Submission of Matters to a Vote of Security Holders. 27 Item 5. Other Information. 28 Item 6. Exhibits and Reports on Form 8-K. 28 2
UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited) (in thousands, except share data) June 28, December 28, June 29, 2003 2002 2002 --------- ------------ ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents....................................... $ 16,139 $ 13,454 $ 18,020 Restricted cash equivalents..................................... 1,383 Accounts receivable (net of allowances of $3,123, $2,427 and $2,137)................................................ 200,033 105,217 178,017 Inventories: Raw materials.............................................. 78,071 83,557 46,920 Finished goods............................................. 88,671 82,449 91,079 --------- --------- --------- 166,742 166,006 137,999 Other current assets............................................ 4,944 8,037 3,425 --------- --------- --------- TOTAL CURRENT ASSETS................................... 387,858 294,097 337,461 OTHER ASSETS......................................................... 6,401 6,738 6,334 GOODWILL............................................................. 124,395 126,299 120,569 NON-COMPETE AND LICENSING AGREEMENTS (net of accumulated amortization of $3,331, $2,463 and $1,965).......... 7,463 4,516 5,014 PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment................................... 347,685 328,499 303,622 Accumulated depreciation and amortization....................... (136,408) (125,355) (114,945) --------- --------- --------- PROPERTY, PLANT AND EQUIPMENT, NET..................... 211,277 203,144 188,677 --------- --------- --------- TOTAL ASSETS......................................................... $ 737,394 $ 634,794 $658,055 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt................................................. $ 1,679 $ 1,758 $ 2,001 Accounts payable................................................ 110,001 57,515 90,904 Accrued liabilities: Compensation and benefits.................................. 32,053 36,610 31,368 Other ..................................................... 15,747 6,463 18,427 Current portion of long-term debt and capital lease obligations. 6,271 6,495 19,025 --------- --------- --------- TOTAL CURRENT LIABILITIES.............................. 165,751 108,841 161,725 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion............................................ 255,975 235,319 219,675 DEFERRED INCOME TAXES................................................ 12,656 13,328 10,315 MINORITY INTEREST.................................................... 7,818 7,040 7,020 OTHER LIABILITIES.................................................... 9,345 5,832 6,344 --------- --------- --------- TOTAL LIABILITIES...................................... 451,545 370,360 405,079 SHAREHOLDERS' EQUITY: Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none Common stock, no par value; shares authorized 40,000,000; issued and outstanding, 17,738,188, 17,741,982 and 17,906,447........ 17,738 17,742 17,906 Additional paid-in capital...................................... 83,936 82,139 81,913 Deferred stock compensation..................................... 1,424 1,434 1,501 Retained earnings............................................... 183,178 164,221 152,782 Accumulated other comprehensive earnings........................ 1,627 299 275 --------- --------- --------- 287,903 265,835 254,377 Employee stock notes receivable................................. (2,054) (1,401) (1,401) TOTAL SHAREHOLDERS' EQUITY................................. 285,849 264,434 252,976 --------- --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 737,394 $ 634,794 $ 658,055 ========= ========= ========= See notes to consolidated condensed financial statements. 3
UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited) (in thousands, except per share data) Three Months Ended Six Months Ended ------------------------- -------------------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 -------- -------- -------- -------- NET SALES.............................................. $ 552,463 $ 504,944 $ 908,082 $ 846,600 COST OF GOODS SOLD..................................... 473,721 436,321 777,536 726,700 ---------- ---------- ---------- ---------- GROSS PROFIT........................................... 78,742 68,623 130,546 119,900 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................................... 46,697 41,345 86,885 79,143 ---------- ---------- ---------- ---------- EARNINGS FROM OPERATIONS............................... 32,045 27,278 43,661 40,757 OTHER EXPENSE (INCOME): Interest expense.................................. 3,958 3,047 7,745 5,955 Interest income................................... (84) (52) (131) (165) Gain on sale of assets............................ (1,082) (1,082) ---------- ---------- ---------- ---------- 3,874 1,913 7,614 4,708 ---------- ---------- ---------- ---------- EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST................................. 28,171 25,365 36,047 36,049 INCOME TAXES........................................... 10,458 9,400 13,249 13,373 ---------- ---------- ---------- ---------- EARNINGS BEFORE MINORITY INTEREST...................... 17,713 15,965 22,798 22,676 MINORITY INTEREST...................................... (551) (611) (1,136) (1,240) ---------- ---------- ---------- ---------- NET EARNINGS........................................... $ 17,162 $ 15,354 $ 21,662 $ 21,436 ========== ========== ========== ========== EARNINGS PER SHARE - BASIC............................. $ 0.97 $ 0.86 $ 1.22 $ 1.19 EARNINGS PER SHARE - DILUTED........................... $ 0.94 $ 0.82 $ 1.19 $ 1.14 WEIGHTED AVERAGE SHARES OUTSTANDING.................... 17,741 17,884 17,735 18,047 WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS........................ 18,193 18,705 18,222 18,865 See notes to consolidated condensed financial statements. 4
UNIVERSAL FOREST PRODUCTS, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended -------------------------- June 28, June 29, 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings .................................................................... $ 21,662 $ 21,436 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation................................................................. 12,202 11,322 Amortization of intangible assets............................................ 1,033 587 Deferred income taxes........................................................ (1,438) (251) Loss (gain) on sale or impairment of property, plant, and equipment.......... 640 (949) Changes in: Accounts receivable........................................................ (94,237) (89,290) Inventories................................................................ (736) (15,194) Accounts payable........................................................... 52,039 43,027 Accrued liabilities and other.............................................. 11,755 9,598 ---------- ---------- NET CASH FROM OPERATING ACTIVITIES........................................... 2,920 (19,714) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment......................................... (20,689) (13,481) Purchase of licensing agreements.................................................. (150) (2,000) Acquisitions, net of cash received................................................ (187) (359) Proceeds from sale of property, plant and equipment............................... 1,147 2,545 Other............................................................................. 1,961 1,094 -------- -------- NET CASH FROM INVESTING ACTIVITIES........................................... (17,918) (12,201) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings of notes payable and revolving credit facilities................... 26,437 71,827 Repayment of long-term debt....................................................... (6,167) (7,557) Proceeds from issuance of common stock............................................ 873 716 Distributions to minority shareholder............................................. (633) (585) Dividends paid to shareholders.................................................... (798) (806) Repurchase of common stock........................................................ (2,029) (36,547) -------- -------- NET CASH FROM FINANCING ACTIVITIES........................................... 17,683 27,048 -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS........................................... 2,685 (4,867) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 13,454 22,887 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD.......................................... $ 16,139 $ 18,020 ======== ======== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest..................................................................... $ 7,610 $ 5,973 Income taxes................................................................. 1,472 2,308 NON-CASH INVESTING ACTIVITIES: Non-compete agreements in exchange for future payments............................ $ 216 Non-compete agreements with Chairman of the Board in exchange for future payments.............................................................. $ 856 Stock exchanged for employee stock notes receivable............................... 887 300 See notes to consolidated condensed financial statements. 5
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS A. BASIS OF PRESENTATION The accompanying unaudited, interim, consolidated, condensed financial statements (the "Financial Statements") include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany transactions and balances have been eliminated. In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 28, 2002. Certain reclassifications have been made to the Financial Statements for 2002 to conform to the classifications used in 2003. B. COMPREHENSIVE INCOME Comprehensive income consists of net income and foreign currency translation adjustments. Comprehensive income was approximately $18.2 million and $15.0 million for the quarter ended June 28, 2003 and June 29, 2002, respectively. During the six months ended June 28, 2003 and June 29, 2002, comprehensive income was approximately $23.0 million and $21.2 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
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED Three Months Ended 06/28/03 Three Months Ended 06/29/02 --------------------------------------- -------------------------------------- Per Per Income Shares Share Income Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ NET EARNINGS................... $17,162 $15,354 EPS - BASIC Income available to common stockholders.......... 17,162 17,741 $0.97 15,354 17,884 $0.86 ===== ===== EFFECT OF DILUTIVE SECURITIES Options........................ 452 821 ------ ------ EPS - DILUTED Income available to common stockholders and assumed options exercised.................... $17,162 18,193 $0.94 $15,354 18,705 $0.82 ======= ====== ===== ======= ====== ===== Six Months Ended 06/28/03 Six Months Ended 06/29/02 --------------------------------------- -------------------------------------- Per Per Income Shares Share Income Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ NET EARNINGS................... $21,662 $21,436 EPS - BASIC Income available to common stockholders.......... 21,662 17,735 $1.22 21,436 18,047 $1.19 ===== ===== EFFECT OF DILUTIVE SECURITIES Options........................ 487 818 ------ ------ EPS - DILUTED Income available to common stockholders and assumed options exercised.................... $21,662 18,222 $1.19 $21,436 18,865 $1.14 ======= ====== ===== ======= ====== ===== Options to purchase 863,073 shares of common stock at exercise prices ranging from $19.75 to $36.01 were outstanding at June 28, 2003, but were not included in the computation of diluted EPS for the quarter and six months ended June 28, 2003 because the options' exercise prices were greater than the average market price of the common stock during the period and, therefore, would be antidilutive. 7
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED Options to purchase 110,000 shares of common stock at exercise prices ranging from $26.49 to $36.01 were outstanding at June 29, 2002, but were not included in the computation of diluted EPS for the quarter and six months ended June 29, 2002 because the options' exercise prices were greater than the average market price of the common stock during the period and, therefore, would be antidilutive. D. GOODWILL AND OTHER INTANGIBLE ASSETS On June 28, 2003, non-compete assets totaled $7.9 million with accumulated amortization totaling $2.7 million, and licensing agreements totaled $2.9 million with accumulated amortization totaling $0.6 million. Estimated amortization expense for intangible assets as of June 28, 2003 for each of the five succeeding fiscal years is as follows (in thousands): 2003............................... $ 674 2004............................... 1,633 2005............................... 1,477 2006............................... 1,302 2007............................... 781 Thereafter......................... 1,596 The changes in the net carrying amount of goodwill for the quarter ended June 28, 2003 are as follows (in thousands): Balance as of December 28, 2002............................... $126,299 Final purchase price allocation............................... (2,810) Foreign currency translation effects and other, net........... 906 -------- Balance as of June 28, 2003................................... $124,395 ======== E. BUSINESS COMBINATIONS Acquisitions completed in 2002 and 2003 were not significant to the operating results individually nor in aggregate, and thus pro forma results are not presented. The purchase price allocations for the composite manufacturing plant of Quality Wood Treating Co., Inc. ("Quality") and J.S. Building Products, Inc., both acquired in the fourth quarter of 2002, were completed during the second quarter in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. The total purchase price for the real estate, equipment, inventory and intangible assets of the composite plant was approximately $14.7 million, allocating $10.1 million to net assets, 8
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED $2.3 million to non-compete agreements, $0.5 million to a licensing agreement, and $1.8 million to goodwill. The total purchase price for J.S. Building Products, Inc. was $4.1 million, allocating $2.9 million to net assets and $1.2 million to goodwill. F. EMPLOYEE STOCK NOTES RECEIVABLE Employee stock notes receivable represents notes issued to us by certain employees to finance the purchase of our common stock. Directors and executive officers (including equivalent positions) do not, and are not allowed to, participate in this program. G. STOCK-BASED COMPENSATION As permitted under SFAS No.123, Accounting for Stock-Based Compensation, ("SFAS 123"), we continue to apply the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, which recognizes compensation expense under the intrinsic value method. Had compensation cost for the stock options granted and stock purchased under the Employee Stock Purchase Plan in the first quarter and first six months of 2003 and 2002 been determined under the fair value based method defined in SFAS 123, our net earnings and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data): Three Months Ended Six Months Ended --------------------- ---------------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 -------- -------- -------- -------- Net Earnings: As reported................................... $ 17,162 $ 15,354 $ 21,662 $ 21,436 Deduct: compensation expense - fair value method........................ (379) (346) (758) (665) -------- -------- -------- -------- Pro Forma..................................... $ 16,783 $ 15,008 $ 20,904 $ 20,771 ======== ======== ======== ======== EPS - Basic: As reported................................... $0.97 $0.86 $1.22 $1.19 Pro forma..................................... $0.95 $0.84 $1.18 $1.15 EPS - Diluted: As reported................................... $0.94 $0.82 $1.19 $1.14 Pro forma..................................... $0.94 $0.82 $1.17 $1.13 9
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED H. COMMITMENTS, CONTINGENCIES, AND GUARANTEES We are self-insured for environmental impairment liability through a wholly owned subsidiary, UFP Insurance Ltd., a licensed captive insurance company. We own and operate a number of facilities throughout the United States that treat lumber products with chemical preservatives. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state and local environmental laws, ordinances and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages and expenses. Insurance reserves have been established to cover remediation activities at our Union City, GA; Stockertown, PA; Elizabeth City, NC; and Schertz, TX wood preservation facilities. Additionally, a reserve is in place to cover the removal of lead and asbestos containing material from property we purchased in Thornton, CA. Including amounts recorded in our captive insurance company, we reserved amounts totaling approximately $1.9 million and $2.4 million on June 28, 2003 and June 29, 2002, respectively, representing the estimated costs to complete remediation efforts. As part of its re-registration process and in response to allegations by certain environmental groups that CCA poses health risks, the EPA has been conducting a scientific review of CCA, a wood preservative we use to extend the useful life of wood fiber. In April of 2003, the EPA announced the re-registration of CCA preservative for certain industrial and commercial uses. The manufacturers of CCA preservative agreed to voluntarily discontinue the registration of CCA for certain residential applications by December 31, 2003. All of our facilities are presently capable of using a new preservative to treat wood products. We expect that all of our treating facilities will be using this new preservative on or before January 1, 2004, except those facilities which may treat with CCA for allowed industrial and commercial applications. In addition to the EPA review, an environmental group petitioned the Consumer Products Safety Commission ("CPSC") to ban the use of CCA treated wood in playsets. On February 7, 2003, the CPSC issued a staff report on its study of the risks of children playing on treated playsets. The study does not recommend removal of product, and proposes the CPSC take no further action until the EPA concludes its assessment. The EPA has previously stated that CCA treated lumber does not pose an unreasonable risk to human health. We have been requested by a customer to defend it from purported class action lawsuits filed against it in Florida and Louisiana. The complaints allege that CCA treated lumber is defective. While our customer has charged us for certain expenses incurred in the defense of these claims, we have not formally accepted liability of these costs. In February 2003, the judge in the Florida case denied the plaintiff's motion for certification of the class. In June 2003, the judge allowed the plaintiffs to amend their complaint and again reiterated that he would not certify a class in this case. 10
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED We, along with others in the industry, were previously named as a defendant in the purported class action lawsuit in Louisiana. We have been dismissed from this litigation. Subsequent to quarter end, we were advised of another purported class action filing in Texas, where a customer of ours is named as the sole defendant. To date, no classes have been certified in any of the pending actions. In addition, various special interest environmental groups have petitioned certain states requesting restrictions on the use or disposal of CCA treated products. The State of Maine has prohibited the manufacture and sale of CCA products after October 15, 2003. The Company does not presently sell product in Maine. The wood preservation industry trade groups are working with the individual states and their regulatory agencies to provide an accurate, factual background which demonstrates that the present method of uses and disposal is scientifically supported. On June 28, 2003, we were parties either as plaintiff or a defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these legal proceedings. On June 28, 2003, we had outstanding purchase commitments on capital projects of approximately $9.4 million. We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. In certain cases we jointly bid on contracts with framing companies to supply building materials to site-built construction projects. In some of these instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. Historically, we have not had any claims for indemnity from our sureties. As of June 28, 2003, we had approximately $22.0 million in outstanding performance bonds which expire during the next three to eighteen months. We have entered into operating leases for certain assets that include a guarantee of a portion of the residual value of the leased assets. If at the expiration of the initial lease term we do not exercise our option to purchase the leased assets and these assets are sold by the lessor for a price below a predetermined amount, we are required to reimburse the lessor for a certain portion of the shortfall. These operating leases will expire periodically over the next five years. The estimated maximum aggregate exposure of these guarantees is less than $350,000. On June 28, 2003, we had outstanding letters of credit totaling $29.5 million, primarily related to certain insurance contracts and industrial development revenue bonds. 11
UNIVERSAL FOREST PRODUCTS, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $11.2 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements. We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $18.3 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks. Our wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the 1994 Senior Notes, Series 1998-A Senior Notes, Series 2002-A Senior Notes and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements. We did not enter into any new guarantee arrangements during the second quarter of 2003 which would require us to recognize a liability on our balance sheet. 12
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Included in this report are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on the beliefs and assumptions of management, together with information available to us when the statements were made. Future results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors set forth below and certain economic and business factors which may be beyond our control. Investors are cautioned that all forward-looking statements involve risks and uncertainty. RISK FACTORS WE ARE SUBJECT TO FLUCTUATIONS IN THE PRICE OF LUMBER. We experience significant fluctuations in the cost of commodity lumber products from primary producers (the "Lumber Market"). A variety of factors over which we have no control, including government regulations, environmental regulations, weather conditions, economic conditions and natural disasters, impact the cost of lumber products and our selling prices. While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can negatively affect our sales volume, our gross margins and our profitability. We anticipate that these fluctuations will continue in the future. OUR GROWTH MAY BE LIMITED BY THE MARKETS WE SERVE. Our sales growth is dependent, in part, upon the growth of the markets we serve. If our markets do not achieve anticipated growth, or if we fail to maintain our market share, financial results could be impaired. The manufactured housing industry is currently hampered by market conditions, including a high rate of repossessions and tightened credit policies. Significant lenders who previously provided financing to consumers of these products and industry participants have either restricted credit or exited the market. A continued shortage of financing to this industry could adversely affect our operating results. Our ability to achieve growth in sales and margins to the site-built construction market is somewhat dependent on housing starts. If housing starts decline significantly, our financial results could be negatively impacted. We are witnessing consolidation by our customers. These consolidations will result in a larger portion of our sales being made to some customers and may limit the customer base we are able to serve. 13
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED WITH ONE CUSTOMER. Our sales to The Home Depot comprised 33% of our total sales in the first six months of 2003. OUR GROWTH MAY BE LIMITED BY OUR ABILITY TO MAKE SUCCESSFUL ACQUISITIONS. A key component of our growth strategy is to complete business combinations. Business combinations involve inherent risks, including assimilation and successfully managing growth. While we conduct extensive due diligence and have taken steps to ensure successful assimilation, factors beyond our control could influence the results of these acquisitions. WE MAY BE ADVERSELY AFFECTED BY THE IMPACT OF ENVIRONMENTAL AND SAFETY REGULATIONS. We are subject to the requirements of federal, state and local environmental and occupational health and safety laws and regulations. There can be no assurance that we are at all times in complete compliance with all of these requirements. We have made and will continue to make capital and other expenditures to comply with environmental regulations. If additional laws and regulations are enacted in the future, which restrict our ability to manufacture and market our products, including our treated lumber products, it could adversely affect our sales and profits. If existing laws are interpreted differently, it could also increase the financial cost to us. Several states have proposed legislation to limit the uses of CCA treated lumber. (See "Environmental Considerations and Regulations.") SEASONALITY AND WEATHER CONDITIONS COULD ADVERSELY AFFECT US. Some aspects of our business are seasonal in nature and results of operations vary from quarter to quarter. Our treated lumber and outdoor specialty products, such as fencing, decking and lattice, experience the greatest seasonal effects. Sales of treated lumber, primarily consisting of Southern Yellow Pine ("SYP"), also experience the greatest Lumber Market risk (see "Historical Lumber Prices"). Treated lumber sales are generally at their highest levels between April and August. This sales peak, combined with capacity constraints in the wood treatment process, requires us to build our inventory of treated lumber throughout the winter and spring. This also has an impact on our receivables balances, which tend to be significantly higher at the end of the second and third quarters. Because sales prices of treated lumber products may be indexed to the Lumber Market at the time they are shipped, our profits can be negatively affected by prolonged declines in the Lumber Market during our primary selling season. To mitigate this risk, programs are maintained with certain vendors and customers that are intended to decrease our exposure. These programs include those materials which are most susceptible to adverse changes in the Lumber Market. Vendor programs also allow us to carry a lower investment in inventories. The majority of our products are used or installed in outdoor construction activities; therefore, short-term sales volume, our gross margins and our profits can be negatively affected by adverse weather conditions. In addition, adverse weather conditions can negatively impact our productivity and costs per unit. 14
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED WE WILL BE CONVERTING TO A NEW PRESERVATIVE TO TREAT OUR PRODUCTS IN THE THIRD AND FOURTH QUARTERS OF 2003. In February 2002, the manufacturers of CCA preservative agreed with the EPA to voluntarily discontinue the registration of CCA for certain residential applications by December 31, 2003. As a result, 19 of our 21 wood preservation facilities will convert to an alternate preservative in the third and fourth quarters of 2003. The necessary capital investments for this conversion were made in 2002. We are coordinating with our chemical suppliers and customers to insure an orderly transition and minimize risks associated with chemical efficiencies and inventory levels of products treated with CCA preservative. In addition, we estimate the new preservative will increase the cost and sales price of our treated products by up to 20%. While we expect that this transition will not have a material impact on our operations, certain factors, such as consumer acceptance, may adversely affect our planned transition to this new preservative. When analyzing this report to assess our future performance, please recognize the potential impact of the various factors set forth above. HISTORICAL LUMBER PRICES The following table presents the Random Lengths framing lumber composite price for the six months ended June 28, 2003 and June 29, 2002: Random Lengths Composite Average $/MBF ------------------------ 2003 2002 ---- ---- January............................ $278 $297 February........................... 295 317 March.............................. 277 339 April.............................. 283 323 May ............................... 278 312 June............................... 303 302 Second quarter average............. $288 $312 Year-to-date average............... $286 $315 Second quarter percentage decrease from 2002................ (7.7%) Year-to-date percentage decrease from 2002............... (9.2%) 15
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED In addition, a SYP composite price, which we prepare and use, is presented below. Sales of products produced using this species comprise up to 50% of our sales volume. Random Lengths SYP Average $/MBF ------------------ 2003 2002 ---- ---- January............................ $387 $410 February........................... 394 434 March.............................. 392 464 April.............................. 410 457 May................................ 385 408 June............................... 384 383 Second quarter average............. $393 $416 Year-to-date average............... $392 $426 Second quarter percentage decrease from 2002................ (5.5%) Year-to-date percentage decrease from 2002................ (8.0%) IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution and services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Our gross margins are impacted by both (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently. Below is a general description of the primary ways in which our products are priced. 16
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED o Products with fixed selling prices. These products include value-added products such as decking and fencing sold to do-it-yourself/retail ("DIY/retail") customers, as well as trusses, wall panels and other components sold to the site-built construction market. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and eliminate or reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs for these sales commitments with our suppliers. Also, the time periods and quantity limitations generally allow us to reprice our products for changes in lumber prices from our suppliers. o Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profits. These products include treated lumber, remanufactured lumber and trusses sold to the manufactured housing industry. For these products, we estimate the customers' needs and carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins. For these products, our margins are exposed to changes in the trend of lumber prices. Changes in the trend of lumber prices have their greatest impact on those products that have significant inventory levels with low turnover rates. This particularly impacts treated lumber, which comprises almost twenty-five percent of our total annual sales. In other words, the longer the period of time that products remain in inventory, the greater the exposure to changes in the price of lumber. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market and other similar products, due to the higher rate of inventory turnover. In addition to the impact of Lumber Market trends on gross margins, changes in the level of the market causes fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period. Period 1 Period 2 -------- -------- Lumber cost.................................... $300 $400 Conversion cost................................ 50 50 = Product cost................................. 350 450 Adder.......................................... 50 50 = Sell price................................... 400 500 Gross margin................................... 12.5% 10.0% As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high 17
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. BUSINESS COMBINATIONS We completed the following business combinations and asset acquisitions in fiscal 2002, which were accounted for using the purchase method. Seller`s Name Acquisition Date Business Description Quality Wood Treating Co., Inc. November 4, 2002 One facility in Prairie du Chien, WI which ("Quality") produces EverX composite decking. We also entered into an exclusive treating services agreement with Quality. J.S. Building Products, Inc. September 9, 2002 One facility in Modesto, CA which manufactures engineered roof trusses for the site-built construction market. Inno-Tech Plastics, Inc. ("Inno- April 10, 2002 One facility in Springfield, IL which Tech") - Entered into exclusive manufactures "wood alternative" products. licensing agreement and acquired certain assets. Pinelli-Universal S. de R.L. de January 15, 2002 One facility in Durango, Durango, Mexico C.V. ("Pinelli") - Purchased which manufactures molding and millwork additional 5% interest. products. RESULTS OF OPERATIONS The following table presents, for the periods indicated, the components of our Consolidated Condensed Statements of Earnings as a percentage of net sales. 18
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED For the Three Months Ended For the Six Months Ended -------------------------------- ------------------------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 -------------- -------------- -------------- -------------- Net sales.................................... 100.0% 100.0% 100.0% 100.0% Cost of goods sold........................... 85.7 86.4 85.6 85.8 -------- -------- -------- -------- Gross profit................................. 14.3 13.6 14.4 14.2 Selling, general, and administrative expenses.................... 8.5 8.2 9.6 9.3 ------- -------- -------- -------- Earnings from operations..................... 5.8 5.4 4.8 4.9 Interest, net................................ 0.7 0.6 0.8 0.7 Gain on sale of assets....................... 0.0 (0.2) 0.0 (0.1) ------- ------- -------- ------- 0.7 0.4 0.8 0.6 ------- ------- -------- -------- Earnings before income taxes and minority interest....................... 5.1 5.0 4.0 4.3 Income taxes................................. 1.9 1.9 1.5 1.6 -------- -------- -------- ------- Earnings before minority interest............ 3.2 3.1 2.5 2.7 Minority interest............................ (0.1) (0.1) (0.1) (0.2) -------- -------- -------- ------- Net earnings................................. 3.1% 3.0% 2.4% 2.5% ======== ======== ======== ======= NET SALES We engineer, manufacture, treat, distribute and install lumber, composite, plastic, and other building products for the DIY/retail, site-built construction, manufactured housing, industrial and other markets. Our strategic sales objectives include: o Diversifying our end market sales mix by increasing 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. o Increasing sales of "value-added" products. Value-added product sales consist of fencing, decking, lattice and other specialty products sold to the DIY/retail market, specialty wood packaging, engineered wood products, and "wood alternative" products. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals. Wood alternative products consist primarily of composite wood and plastics. 19
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED o Maximizing profitable top-line sales growth while increasing DIY/retail market share. o Maintaining manufactured housing market share. The following table presents, for the periods indicated, our net sales (in thousands) and percentage of total net sales by market classification. For the Three Months Ended For the Six Months Ended -------------------------------------- --------------------------------------- June 28, June 29, June 28, June 29, Market Classification 2003 % 2002 % 2003 % 2002 % - --------------------- -------- ----- -------- ----- -------- ----- -------- ----- DIY/Retail................... $302,613 54.7 $264,656 52.4% $459,646 50.7 $411,420 48.4% Site-Built Construction...... 101,433 18.4 88,398 17.5 178,137 19.6 156,987 18.6 Manufactured Housing......... 70,208 12.7 81,040 16.0 127,569 14.0 148,401 17.6 Industrial and Other......... 78,209 14.2 70,850 14.1 142,730 15.7 129,792 15.4 -------- ----- -------- ----- -------- ----- -------- ----- Total........................ $552,463 100.0% $504,944 100.0% $908,082 100.0% $846,600 100.0% ======== ====== ======== ====== ======== ====== ======== ====== Note: In the first quarter of 2003, we reviewed the classification of our customers and made certain reclassifications. Prior year information has been restated to reflect these classifications. Net sales in the second quarter of 2003 increased 9.4% compared to the second quarter of 2002 resulting from an increase in units shipped of approximately 14%. Overall selling prices decreased as a result of the Lumber Market (see "Historical Lumber Prices"). We estimate that our unit sales increased by 7% as a result of business acquisitions and an exclusive treating services agreement completed after June 29, 2002. Our unit sales out of existing facilities increased by 7% in the second quarter of 2003. Net sales in the first six months of 2003 increased 7.3% compared to the first six months of 2002 resulting from an increase in units shipped of approximately 11%. Overall selling prices decreased as a result of the Lumber Market (see "Historical Lumber Prices"). We estimate that our unit sales increased by 7% as a result of business acquisitions and an exclusive treating services agreement completed after June 29, 2002. Our unit sales out of existing facilities increased by 4% in the first six months of 2003. The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales. 20
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Three Months Ended Six Months Ended ----------------------------- ---------------------------- June 28, June 29, June 28, June 29, 2003 2002 2003 2002 -------- -------- -------- -------- Value-Added........................... 49.0% 47.7% 51.5% 49.7% Commodity-Based....................... 51.0% 52.3% 48.5% 50.3% Value-added sales increased 12.6% and 11.1%, respectively, in the second quarter and first six months of 2003, primarily due to increased sales of EverX, engineered wood products, industrial products and other specialty products supplied to the DIY/retail market. Commodity-based sales increased 7.4% and 4.1%, respectively, during the second quarter and first six months of 2003 primarily due to the exclusive treating services agreement we completed in November 2002. DIY/Retail: Net sales to the DIY/retail market increased $38.0 million, or 14.3%, in the second quarter of 2003 compared to 2002, primarily due to acquiring a composite manufacturing plant and entering into an exclusive treating services agreement with Quality. Net sales to the DIY/retail market increased $48.2 million, or 11.7%, in the first six months of 2003 compared to 2002, primarily due to the composite plant acquisition and treating services agreement mentioned above, combined with an increase in unit sales to our largest customer out of existing facilities. The increase in sales out of existing facilities primarily consisted of fencing products. Site-Built Construction: Net sales to the site-built construction market increased 14.7% and 13.5% in the second quarter and first six months of 2003, respectively, compared to the same periods of 2002. These increases resulted from acquisitions completed in 2002, a new framing joint venture, and increased sales out of several existing plants. Manufactured Housing: Net sales to the manufactured housing market decreased 13.4% and 14.0% in the second quarter and first six months of 2003, respectively, compared to the same periods of 2002. These decreases primarily resulted from a 27% decrease in quarterly and year-to-date industry production. 21
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Industrial and Other: Net sales to the industrial and other market increased 10.4% and 10.0% in the second quarter and first six months of 2003, respectively, compared to the same period of 2002. These increases resulted from unit sales increases out of several existing facilities, offset partially by a decline in selling prices due to the Lumber Market. COST OF GOODS SOLD AND GROSS PROFIT Gross profit as a percentage of net sales increased in the second quarter of 2003 compared to the same period of 2002. Generally, a lower Lumber Market results in an increase in our gross margins. (See "Impact of the Lumber Market on our Operating Results.") Gross profit as a percentage of net sales increased in the first six months of 2003 compared to the same period of 2002 primarily due to lower overall selling prices and material costs due to the Lumber Market. (See "Impact of the Lumber Market on our Operating Results.") The effect of the lower Lumber Market was partially offset by the effect of inclement winter weather in several regions of the country in February 2003. During this period, we lost 154 production days while missing sales and related profits. Production inefficiencies resulted in unfavorable cost variances totaling $2.5 million which were recorded in cost of goods sold in the first quarter. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses as a percentage of sales increased to 8.5% and 9.6% in the second quarter and first six months of 2003, respectively, compared to 8.2% and 9.3% in the same periods of 2002, respectively. These increases were primarily due to the impact of the lower Lumber Market on our selling prices. The dollar increase in our selling, general, and administrative expenses was primarily due to acquisitions and new operations, combined with higher compensation costs resulting from greater headcount related to growth in our business. INTEREST, NET Net interest costs increased in the second quarter and first six months of 2003 compared to the same periods of 2002. These increases were due to a higher average debt balance combined with an increase in our average borrowing rates as a result of issuing $55 million of long-term unsecured notes payable in December 2002. The proceeds from the note issuance were used to reduce amounts outstanding under our revolving credit facility, which bears interest at a lower rate. 22
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED GAIN ON SALE OF ASSETS During the second quarter of 2002, we sold our corporate airplane and recognized a gain of $1.1 million on the sale, and entered into an operating lease for a replacement airplane. INCOME TAXES Our effective tax rate was 37.1% in the second quarter of 2003 and 2002, and 36.8% in the first six months of 2003 compared to 37.1% in the same period of 2002. 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 decrease in our year-to-date effective tax rate was primarily due to a permanent tax difference associated with the effect of minority interest in earnings of a subsidiary. OFF-BALANCE SHEET TRANSACTIONS We have no significant off-balance sheet transactions other than operating leases. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities increased in the first six months of 2003 compared to the same period of 2002 by almost $23 million as a result of selling the extra inventory we carried at the end of 2002 and throughout the first quarter from opportunistic buying and poor weather. Seasonality has a significant impact on our working capital during the first six months of the year which generally results in negative or modest cash flows from operations. We expect to experience a substantial decrease in working capital and corresponding increase in cash flows from operations in the third and fourth quarters of 2003. For comparative purposes, we have included the June 29, 2002 balances in the accompanying unaudited consolidated condensed balance sheets. Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. Our cash cycle increased to 49 days in the first six months of 2003 from 46 days in the first six months of 2002, primarily due to an increase in our days supply of inventory. During the first quarter of 2003, this increase was primarily due to a combination of "opportunity buying" by our purchasing managers at the end of 2002 due to the low level of the Lumber Market and the effect of winter weather on sales. During the second quarter we carried slightly higher levels of inventory primarily due to preparations to convert to a new preservative, slower inventory turnover of our composite manufacturing plant, and the 23
UNIVERSAL FOREST PRODUCTS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED impact of poor weather on our site-built operations. This increase in our days supply of inventory was partially offset by an increase in our payables cycle. Capital expenditures increased to $20.7 million in the first six months of 2003 compared to $13.5 million in the same period of 2002 as a result of greater spending on expansionary projects. For example, we completed a project to expand the manufacturing capacity of the composite manufacturing plant we purchased in November 2002 and completed construction of three new plants. We expect to spend approximately $19 million on capital expenditures for the balance of 2003, which includes outstanding purchase commitments on capital projects totaling approximately $9.4 million on June 28, 2003. We intend to fund capital expenditures and purchase commitments through a combination of operating cash flow and availability under our revolving credit facility. We spent approximately $2.0 million to repurchase 123,234 shares of our common stock in the first six months of 2003. We have authorization from the Board of Directors to purchase an additional 1.5 million shares. On June 28, 2003, we had $80.0 million outstanding on our $200 million revolving credit facility. The revolving credit facility supports letters of credit totaling approximately $27.1 million on June 28, 2003. Financial covenants on our revolving credit facilities and senior unsecured notes include a minimum net worth requirement, a minimum interest coverage test, a minimum fixed charge coverage test, and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were within our requirements at June 28, 2003. ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS See Notes to Consolidated Condensed Financial Statements, Note G "Commitments, Contingencies, and Guarantees." CRITICAL ACCOUNTING POLICIES In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. There have been no material changes in our policies or estimates since December 28, 2002. 24
UNIVERSAL FOREST PRODUCTS, INC. Item 3. Quantitative and Qualitative Disclosures about Market Risk. We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk. For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it. 25
UNIVERSAL FOREST PRODUCTS, INC. Item 4. Controls and Procedures. (a) Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15 and 15d - 15) as of June 28, 2003, have concluded that, as of such date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities in connection with our filing of this second quarter report on Form 10-Q for the quarterly period ended June 28, 2003. (b) Changes in Internal Controls. There were no significant changes in our internal control over financial reporting (as such term is defined in Rules 13a - 15 and 15d - 15 under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to affect our internal control over financial reporting. 26
UNIVERSAL FOREST PRODUCTS, INC. PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. (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 1,001 Eligible persons None Item 4. Submission of Matters to a Vote of Security Holders. The following matters were voted upon at our Annual Meeting of Shareholders on April 16, 2003. (1) Election of the following Director for a one year term expiring in 2004: For Withheld ---------------- ----------- John M. Engler 13,774,217 434,047 Election of the following Director for a two year term expiring in 2005: Gary F. Goode 14,112,648 95,616 Election of the following Directors for three year terms expiring in 2006: Dan M. Dutton 14,113,713 94,551 John W. Garside 13,776,042 432,222 Peter F. Secchia 14,080,025 128,239 Other Directors whose terms of office continued after the meeting are as follows: William G. Currie Philip M. Novell Louis A. Smith 27
UNIVERSAL FOREST PRODUCTS, INC. PART II. OTHER INFORMATION Item 5. Other Information. On May 7, 2003, management sent a notice to our directors and officers informing them that between the dates of May 19, 2003 and July 1, 2003, inclusive, they would be proscribed from trading in our common stock, due to trading limitations in our 401(k) plan, consistent with the restrictions set forth in Section 306(a) of the Sarbanes-Oxley Act of 2002. A copy of this notice is attached as Exhibit 99(e) to this report. The information contained in the preceding paragraph is being furnished pursuant to "Item 11, Temporary Suspension of Trading Under Registrant's Employee Benefit Plans" of Form 8-K in accordance with the Release No. 33-8216 of the Securities and Exchange Commission. In the second quarter of 2003, the Audit Committee approved non-audit services to be provided by our independent auditors, Ernst & Young LLP, totaling $62,000. Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report: 31(a) Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 31(b) Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32(a) Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32(b) Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 99(a) Pension Blackout Notice 28
UNIVERSAL FOREST PRODUCTS, INC. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNIVERSAL FOREST PRODUCTS, INC. Date: August 8, 2003 By: /s/ William G. Currie --------------- ---------------------------------------------- William G. Currie Its: Vice Chairman of the Board and Chief Executive Officer Date: August 8, 2003 By: /s/ Michael R. Cole --------------- ---------------------------------------------- Michael R. Cole Its: Chief Financial Officer 29
EXHIBIT INDEX EXHIBIT NO. DESCRIPTION 31(a) Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 31(b) Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32(a) Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 32(b) Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). 99(a) Pension Blackout Notice
EXHIBIT 31(a) UNIVERSAL FOREST PRODUCTS, INC. CERTIFICATION I, William G. Currie, certify that: 1. I have reviewed this report on Form 10-Q of Universal Forest Products, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ William G. Currie ----------------------- --------------------------- William G. Currie Chief Executive Officer
EXHIBIT 31(b) UNIVERSAL FOREST PRODUCTS, INC. CERTIFICATION I, Michael R. Cole, certify that: 1. I have reviewed this report on Form 10-Q of Universal Forest Products, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of registrant's Board of Directors (or persons performing the equivalent function):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2003 /s/ Michael R. Cole ----------------------- --------------------------- Michael R. Cole Chief Financial Officer
EXHIBIT 32(a) CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER OF UNIVERSAL FOREST PRODUCTS, INC. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350): I, William G. Currie, Chief Executive Officer of Universal Forest Products, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that: (1) The quarterly report on Form 10-Q for the quarterly period ended June 28, 2003, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in this quarterly report on Form 10-Q for the quarterly period ended June 28, 2003 fairly presents, in all material respects, the financial condition and results of operations of Universal Forest Products, Inc. UNIVERSAL FOREST PRODUCTS, INC. Date: August 8, 2003 By: /s/ William G. Currie ------------------------ ---------------------------- William G. Currie Its: Chief Executive Officer
EXHIBIT 32(b) CERTIFICATE OF THE CHIEF FINANCIAL OFFICER OF UNIVERSAL FOREST PRODUCTS, INC. Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350): I, Michael R. Cole, Chief Financial Officer of Universal Forest Products, Inc., certify, to the best of my knowledge and belief, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) that: (1) The quarterly report on Form 10-Q for the quarterly period ended June 28, 2003, which this statement accompanies, fully complies with requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in this quarterly report on Form 10-Q for the quarterly period ended June 28, 2003 fairly presents, in all material respects, the financial condition and results of operations of Universal Forest Products, Inc. UNIVERSAL FOREST PRODUCTS, INC. Date: August 8, 2003 By: /s/ Michael R. Cole -------------------------- ------------------------ Michael R. Cole Its: Chief Financial Officer
EXHIBIT 99(a) Gentlemen, Due to the change in our profit sharing plan from CIGNA to Wachovia, there will be a short "blackout" period when NO TRADING OF UFP STOCK BY DIRECTORS AND EXECUTIVE OFFICERS WILL BE PERMITTED. This is a result of the new Sarbanes-Oxley law. The dates for this blackout are May 19 to July 1, 2003. Thank you for your understanding in this regard. If you have any transactions planned for the second quarter, I recommend you try to complete them prior to the blackout period. Please call with any questions you may have. /s/ Matthew J. Missad Matthew J. Missad Executive Vice President MJM:cah