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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
FOR
FISCAL YEAR ENDED DECEMBER 31, 2005.
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period of to .
Commission File No.: 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 No.) | |
| 2801 East Beltline, N.E., Grand Rapids, Michigan | 49525 | |
| (Address of principal executive offices) | (Zip Code) |
(616) 364-6161
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
|
Name of Each Exchange on Which Registered | |||
None
|
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
(Title of Class)
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 in the past 90 days.
Yes þ No o
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes
o
No
þ
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
o
No
þ
Indicate by checkmark if disclosure of delinquent filers pursuant to Items 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or
a non-accelerated filer (as defined in Rule 12b-2). (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-2 of the Act.)
Yes o No þ
As of June 25, 2005, 18,286,385 shares of the registrant’s common stock, no par value, were
outstanding. The aggregate market value of the common stock held by non-affiliates of the
registrant (i.e. excluding shares held by executive officers, directors, and control persons as
defined in Rule 405, 17 CFR 230.405) on that date was $593,012,928 computed at the closing price of
$40.43 on that date.
As of February 4, 2006, 18,528,673 shares of the registrant’s common stock, no par value, were
outstanding.
Documents incorporated by reference:
| (1) | Certain portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2005 are incorporated by reference into Part I and II of this Report. |
| (2) | Certain portions of the registrant’s Proxy Statement for its 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report. |
Exhibit Index located on page E-1.
Page 1 of 17
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Table of Contents
ANNUAL REPORT ON FORM 10-K
December 31, 2005
TABLE OF CONTENTS
December 31, 2005
TABLE OF CONTENTS
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PART I
Item 1. Business.
General Development of the Business.
Universal Forest Products, Inc. was organized as a Michigan corporation in 1955. We engineer,
manufacture, treat, distribute and install lumber, composite wood, plastic and other building
products to the do-it-yourself/retail (“DIY/retail”), site-built construction, manufactured
housing, and industrial markets. We currently operate facilities throughout the United States,
Canada, and Mexico.
Information relating to current developments in our business is incorporated by reference from our
Annual Report to Shareholders for the fiscal year ended December 31, 2005 (“2005 Annual Report”)
under the caption “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Selected portions of the 2005 Annual Report are filed as Exhibit 13 with this Form
10-K Report.
Financial Information About Industry Segments.
Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an
Enterprise and Related Information (“SFAS 131”) defines operating segments as components of an
enterprise about which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in assessing
performance. Under the definition of a segment, our Eastern and Western Divisions may be
considered an operating segment of our business. Under SFAS 131, segments may be aggregated if the
segments have similar economic characteristics and if the nature of the products, distribution
methods, customers and regulatory environments are similar. We have aggregated our divisions into
one reporting segment, consistent with SFAS 131. Accordingly, separate industry segment
information is not presented.
Narrative Description of Business.
We presently engineer, manufacture, treat, distribute and install lumber, composite wood, plastic
and other building products for the DIY/retail, site-built construction, manufactured housing, and
industrial markets. Each of these markets is discussed in the paragraphs which follow.
DIY/Retail Market. The customers comprising this market are primarily national home center
retailers, retail-oriented regional lumberyards and contractor-oriented lumberyards. Generally,
terms of sale are established for annual periods, and orders are placed with our regional
facilities in accordance with established terms. One customer, The Home Depot, accounted for
approximately 22% of our total net sales for fiscal 2005, 25% for 2004, and 30% for 2003.
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From time to time we enter into certain sales contracts with The Home Depot. The contracts are
limited to the establishment of general sales terms and conditions, such as delivery, invoicing,
warranties and other standard, commercial matters. Sales are made by the release of purchase
orders to us for particular quantities of certain products. We also enter into marketing
agreements and rebate agreements with The Home Depot. The marketing agreements provide a certain
percentage of our sales revenue or a minimum dollar amount will be committed to generate sales for
us and The Home Depot.
We currently supply customers in this market from many of our locations. These regional facilities
are able to supply mixed truckloads of products which can be delivered to customers with rapid
turnaround from receipt of an order. Freight costs are a factor in the ability to competitively
service this market, especially with treated wood products because of their heavier weight. The
close proximity of our regional facilities to the various outlets of these customers is a
significant advantage when negotiating annual sales programs.
The products offered to customers in this market include dimensional lumber (both preserved and
unpreserved) and various “value-added products,” some of which are sold under our trademarks. In
addition to our conventional lumber products, we offer composite wood and plastic products. We
also sell engineered wood products to this market, which include roof trusses, wall panels and
engineered floor systems (see “Site-Built Construction Market” below).
We are not aware of any competitor that currently manufactures, treats and distributes a full line
of both value-added and commodity products on a national basis. We face competition on individual
products from several different producers, but the majority of these competitors tend to be
regional in their efforts and/or do not offer a full line of outdoor lumber products. We believe
the breadth of our product offering, geographic dispersion, close proximity of our plants to core
customers, purchasing expertise and service capabilities provide significant competitive
advantages in this market.
Site-Built Construction Market. We entered the site-built construction market through
strategic business acquisitions beginning in 1997. The residential housing customers comprising
this market are primarily large-volume, multi-tract builders and smaller volume custom builders.
We also supply builders engaged in multi-family and commercial construction. Generally, terms of
sale and pricing are determined based on quotes for each order.
We currently supply customers in this market from many manufacturing facilities located in many
different states and Canada. These facilities manufacture various engineered wood components used
to frame residential or commercial projects, including roof and floor trusses, wall panels, Open
Joist 2000®, I-joists and lumber packages. Freight costs are a factor in the ability to
competitively service this market due to the space requirements of these products on each
truckload.
We also provide framing services for customers in certain regional markets, in which we erect the
wood structure. We believe that providing a comprehensive framing package, including
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installation, provides a competitive advantage. Terms of sale are based on a construction
contract.
Competitors in this market include national and regional retail contractor yards who also
manufacture components and provide framing services, as well as regional manufacturers of
components. Our objective is to continue to increase our manufacturing capacity and framing
capabilities for this market while developing a national presence. We believe our primary
competitive advantages relate to the engineering and design capabilities of our regional staff,
customer relationships, product quality and timeliness of delivery.
Manufactured Housing Market. The customers comprising the manufactured housing market are
producers of mobile, modular and prefabricated homes and recreational vehicles. Products sold to
customers in this market consist primarily of roof trusses, lumber cut and shaped to the customer’s
specification, plywood, particle board and dimensional lumber, all intended for use in the
construction of manufactured housing. Sales are made by personnel located at each regional
facility based on customer orders.
While no competitor operates in as widely-dispersed geographic areas as we do, we face competition
from suppliers in many geographic regions. Our principal competitive advantages include our
product knowledge, the capacity to supply all of the customer’s lumber requirements, the ability to
deliver engineering support services, the close proximity of our regional facilities to our
customers and our ability to provide national sales programs to certain customers.
Industrial Market. We define our industrial market as industrial manufacturers and
agricultural customers who use pallets, specialty crates and wooden boxes for packaging, shipping
and material handling purposes. Many of the products sold to this market may be produced from the
by-product of other manufactured products, thereby allowing us to increase our raw material yields
while expanding our business. Competition is fragmented and includes virtually every supplier of
lumber convenient to the customer. We service this market with our regional sales personnel
supported by a centralized national sales and marketing department.
Suppliers. We are one of the largest domestic buyers of solid sawn lumber from primary
producers (lumber mills). We use primarily Southern Yellow Pine in our pressure-treating
operations and site-built component plants in the Southeastern United States, which we obtain from
mills located throughout the states comprising the Sunbelt. Other species we use include
“spruce-pine-fir” from various provinces in Canada; hemlock, Douglas fir and cedar from the Pacific
Northwest; inland species of pine, plantation grown radiata and southern yellow pines from South
America; and European spruce. There are numerous primary producers for all varieties we use, and
we are not dependent on any particular source of supply. Our financial resources, in combination
with our strong sales network and ability to remanufacture lumber, enable us to purchase a large
percentage of a primary producer’s output, (as opposed to only those dimensions or grades in
immediate need), thereby lowering our average cost of raw materials. We believe this represents a
competitive advantage.
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Intellectual Property. We own several patents and have several patents pending on
technologies related to our business. In addition, we own numerous registered trademarks and claim
common law trademark rights to several others. As we develop proprietary brands, we may pursue
registration or other formal protection. While we believe our patent and trademark rights are
valuable, the loss of a patent or any trademark would not be likely to have a material adverse
impact on our competitive position.
Backlog. Due to the nature of our DIY/retail, manufactured housing and industrial
businesses, backlog information is not meaningful. The maximum time between receipt of a firm
order and shipment does not usually exceed a few days. Therefore, we would not normally have a
backlog of unfilled orders in a material amount. The relationships with our major customers are
such that we are either the exclusive supplier of certain products and/or certain geographic areas,
or the designated source for a specified portion of the customer’s requirements. In such cases,
either we are able to forecast the customer’s requirements or the customer may provide an estimate
of its future needs. In neither case, however, will we receive firm orders until just prior to the
anticipated delivery dates for the products in question.
On December 31, 2005 and December 25, 2004, we estimate that backlog orders associated with the
site-built construction business approximated $92.4 million and $69.2 million, respectively. With
respect to the former, we expect that these orders will be primarily filled within the current
fiscal year.
Environmental. Information required for environmental disclosures is incorporated by
reference from Note M of the Consolidated Financial Statements presented under Item 8 herein.
Employees. At February 4, 2006, we had approximately 9,400 employees.
Financial Information About Geographic Areas.
The dominant portion of our operations and sales occur in the United States. Separate financial
information about foreign and domestic operations and export sales is incorporated by reference
from Note P of the Consolidated Financial Statements presented under Item 8 herein.
Available Information.
Our Internet address is www.ufpi.com. Through our Internet web site under “Financial” in the
Investor Relations section, we make available free of charge, as soon as reasonably practical after
such information has been filed with the SEC, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section
13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet web site under
“Corporate Governance” in the Investor Relations section is our Code of Ethics for Senior Financial
Officers.
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Reports to Security Holders.
Not applicable.
Enforceability of Civil Liabilities Against Foreign Persons.
Not applicable.
Item 1A. 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.
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 in each of the markets we serve. 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.
A significant portion of our sales are concentrated with one customer. Our sales to The Home Depot
comprised 22% of our total sales in 2005, down from 25% for 2004.
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
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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 our financial costs. Several states have
proposed legislation to limit the uses and disposal of Chromated Copper Arsenate (“CCA”) treated
lumber. (See Note M to the Consolidated Financial Statements.)
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, 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, consignment inventory programs are negotiated with
certain vendors that are intended to decrease our exposure to the Lumber Market by correlating the
purchase price of the material with the related sell price to the customer. These programs include
those materials which are most susceptible to adverse changes in the Lumber Market.
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, particularly in our first and fourth quarters. In addition, adverse weather
conditions can negatively impact our productivity and costs per unit.
We converted to a new preservative to treat our products. The manufacturers of CCA preservative
voluntarily discontinued the registration of CCA for certain residential applications as of
December 31, 2003. As a result, all of our wood preservation facilities, except the one described
below, have been converted to an alternate preservative, either Amine Copper Quaternary (“ACQ”) or
borates. The cost of ACQ is more than four times higher than the cost of CCA. We estimate the new
preservative has increased the cost and sales price of our treated products by approximately 10% to
15%. In March 2005, one facility began using CCA to treat certain marine products and panel goods
for which ACQ is not a suitable preservative. While we believe treated products are reasonably
priced relative to alternative products such as composites or vinyl, consumer acceptance may be
impacted which would in turn affect our future operating results.
Market conditions for the supply of certain lumber products and inbound transportation may be
limited. These conditions, which occur on occasion, have resulted in difficulties procuring
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desired quantities and receiving orders on a timely basis for all industry participants. We are not
certain how these conditions may impact our short-term sales volumes and profitability. However,
we attempt to mitigate the risks of these conditions by:
| • | Our pricing practices (see “Impact of the Lumber Market on Our Operating Results” in Management’s Discussion and Analysis of Financial Condition and Results of Operations which is presented under Item 7 of this Form 10-K and is incorporated herein by reference); | |
| • | Leveraging our size with mill and transportation suppliers to ensure they achieve supply and service requirements; | |
| • | Increasing our utilization of consigned inventory programs with mills; and | |
| • | Expanding our supply base of dedicated carriers. |
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
Our corporate headquarters building is located in suburban Grand Rapids, Michigan. We
currently have approximately 105 facilities located throughout the United States, Canada, and
Mexico. Depending upon function and location, these facilities typically utilize office space,
manufacturing space, treating space and covered storage.
We own all of our properties, free from any significant mortgage or other encumbrance, except for
approximately 7 regional facilities which are leased. We believe all of these operating facilities
are adequate in capacity and condition to service existing customer locations.
Item 3. Legal Proceedings.
Information regarding our legal proceedings is set forth in Note M of our Consolidated
Financial Statements which are presented under Item 8 of this Form 10-K and are incorporated herein
by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Additional Item: Executive Officers of the Registrant.
The following table lists the names, ages, and positions of our executive officers as of
February 1, 2006. Executive officers are elected annually by the Board of Directors at the first
meeting of the Board following the annual meeting of shareholders.
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| Name | Age | Position | ||||
William G. Currie
|
58 | Vice Chair. of the Board and Chief Exec. Officer, Universal Forest Products, Inc. | ||||
Michael B. Glenn
|
54 | President and Chief Operating Officer, Universal Forest Products, Inc. | ||||
C. Scott Greene
|
50 | President, Universal Forest Products Eastern Division, Inc. | ||||
Robert K. Hill
|
58 | President, Universal Forest Products Western Division, Inc. | ||||
Robert D. Coleman
|
51 | Executive Vice President Manufacturing, Universal Forest Products, Inc. | ||||
Matthew J. Missad
|
45 | Executive Vice President and Secretary, Universal Forest Products, Inc. | ||||
Michael R. Cole
|
39 | Chief Financial Officer and Treasurer, Universal Forest Products, Inc. | ||||
Ronald G. Klyn
|
48 | Chief Information Officer, Universal Forest Products, Inc. | ||||
William G. Currie joined us in 1971. From 1983 to 1990, Mr. Currie was President of
Universal Forest Products, Inc., and he was the President and Chief Executive Officer of The
Universal Companies, Inc. from 1989 until the merger to form Universal Forest Products, Inc. in
1993. On January 1, 2000, Mr. Currie also became Vice Chairman of the Board.
Michael B. Glenn has been employed by us since 1974. In June of 1989, Mr. Glenn was elected
Senior Vice President of our Southwest Operations, and on December 1, 1997, became President of
Universal Forest Products Western Division, Inc. Effective January 1, 2000, Mr. Glenn was
promoted to President and Chief Operating Officer.
C. Scott Greene joined us in February of 1991. In November of 1996 he became General Manager of
Operations for our Florida Region, and in January of 1999 became Vice President of Marketing for
Universal Forest Products, Inc. During early 2000, Mr. Greene became President of Universal
Forest Products Eastern Division, Inc.
Robert K. Hill has been with us since 1986. In March of 1993, Mr. Hill was elected Senior Vice
President of our Far West Operations. On December 1, 1997, Mr. Hill became the Executive Vice
President of Operations of Universal Forest Products Western Division, Inc., and on January 1,
2000, became President of that Division.
Robert D. Coleman, has been an employee since 1979. Mr. Coleman was promoted to Senior Vice
President of our Midwest Operations in September 1993. On December 1, 1997, Mr. Coleman became
the Executive Vice President of Manufacturing of the Universal Forest Products Eastern Division,
Inc. On January 1, 1999, Mr. Coleman was named the Executive Vice President of Manufacturing.
Matthew J. Missad has been employed since 1985. Mr. Missad has served as General Counsel and
Secretary since December 1, 1987, and Vice President Corporate Compliance since August 1989. In
February 1996, Mr. Missad was promoted to Executive Vice President.
Michael R. Cole, CPA, CMA, joined us in November of 1993. In January of 1997, Mr. Cole was
promoted to Director of Finance, and on January 1, 2000 was made Vice President of Finance. On
July 19, 2000, Mr. Cole became Chief Financial Officer.
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Ronald G. Klyn joined us in May of 1993 as Information Services Manager. In October of 1999, Mr.
Klyn was promoted to Chief Information Officer.
PART II
The following information items in this Part II, which are contained in the 2005 Annual
Report, are specifically incorporated by reference into this Form 10-K Report. These portions of
the 2005 Annual Report that are specifically incorporated by reference are filed as Exhibit 13 with
this Form 10-K Report.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters, and Issuer
Purchases of Equity Securities.
| (a) | Not applicable. | |
| (b) | Not applicable. | |
| (c) | There were no issuer purchases of equity securities during the fourth quarter. |
| Fiscal Month | (a) | (b) | (c) | (d) | ||||||||||||
September 25 — October 29, 2005(1) |
1,501,343 | |||||||||||||||
October 30 — November 26, 2005 |
1,501,343 | |||||||||||||||
November 27 — December 31, 2005 |
1,501,343 | |||||||||||||||
| (a) | Total number of shares purchased. | |
| (b) | Average price paid per share. | |
| (c) | Total number of shares purchased as part of publicly announced plans or programs. | |
| (d) | Maximum number of shares that may yet be purchased under the plans or programs. |
| (1) | On November 14, 2001 the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. As of December 31, 2005, cumulative total authorized shares available for repurchase is 1.5 million shares. |
Item 6. Selected Financial Data.
The information required by this Item is incorporated by reference from the 2005 Annual Report
under the caption “Selected Financial Data.”
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
The information required by this item is incorporated by reference from the 2005 Annual Report
under the caption “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Item 7A. 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.
On December 31, 2005, the estimated fair value of our long-term debt, including the current
portion, was $214.2 million, which was $4.7 million greater than the carrying value. The estimated
fair value is based on rates anticipated to be available to us for debt with similar terms and
maturities. The estimated fair value of notes payable included in current liabilities and the
revolving credit facility approximated the carrying values.
Expected cash flows over the next five years related to debt instruments are as follows:
| ($US equivalents, in thousands) | 2006 | 2007 | 2008 | 2009 | 2010 | Thereafter | Total | |||||||||||||||||||||
Long-term Debt: |
||||||||||||||||||||||||||||
Fixed Rate ($US) |
$ | 78,500 | $ | 15,000 | $ | 40,000 | $ | 133,500 | ||||||||||||||||||||
Average interest rate |
6.98 | % | 5.63 | % | 6.16 | % | ||||||||||||||||||||||
Variable Rate ($US) |
$ | 458 | $ | 351 | $ | 2,349 | $ | 53,767 | $ | 250 | $ | 18,822 | $ | 75,997 | ||||||||||||||
Average interest rate(1) |
5.32 | % | ||||||||||||||||||||||||||
| (1) | Average of rates at December 31, 2005. |
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is incorporated by reference from the 2005 Annual Report
under the following captions:
“Management’s Annual Report on Internal Control Over Financial Reporting”
“Report
of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting”
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“Report of Independent Registered Public Accounting Firm”
“Consolidated Balance Sheets”
“Consolidated Statements of Earnings”
“Consolidated Statements of Shareholders’ Equity”
“Consolidated Statements of Cash Flows”
“Notes to Consolidated Financial Statements”
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
| (1) | 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 — 15e and 15d — 15e) as of the year ended December 31, 2005 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective. | |
| (2) | Management’s Annual Report on Internal Control Over Financial Reporting. Management’s Annual Report on Internal Control Over Financial Reporting is included in the 2005 Annual Report under the caption “Management’s Annual Report on Internal Control Over Financial Reporting” and is incorporated herein by reference. Our accounting firm’s attestation on that Report is also included in the 2005 Annual Report in the caption “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” and is incorporated herein by reference. | |
| (3) | Changes in Internal Controls. During the fourth quarter ended December 31, 2005, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to executive officers is included in this report in the last Section of
Part I under the caption “Additional Item: Executive Officers of the Registrant.” Information
relating to directors and compliance with Section 16(a) of the Securities and Exchange Act of 1934
is
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incorporated by reference from our definitive Proxy Statement for the year ended December 31, 2005
for the 2006 Annual Meeting of Shareholders, as filed with the Commission (“2006 Proxy Statement”),
under the captions “Election of Directors,” “Corporate Governance and Board Matters,” and “Section
16(a) Beneficial Ownership Reporting Compliance.” Information relating to our code of ethics is
included in this report in Part I, Item 1 under the caption “Available Information”.
Item 11. Executive Compensation.
Information relating to executive compensation is incorporated by reference from the 2006
Proxy Statement under the caption “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters.
Information relating to security ownership of certain beneficial owners and management is
incorporated by reference from our 2006 Proxy Statement under the captions “Ownership of Common
Stock” and “Securities Ownership of Management.”
Information relating to securities authorized for issuance under equity compensation plans as of
December 31, 2005, is as follows:
| Number of shares | ||||||
| remaining | ||||||
| available for future | ||||||
| Number of | Weighted | issuance under | ||||
| shares to be | average | equity | ||||
| issued upon | exercise | compensation | ||||
| exercise of | price of | plans [excluding | ||||
| outstanding | outstanding | shares reflected in | ||||
| options | options | column (a)] | ||||
| (a) | (b) | (c) | ||||
Equity compensation plans approved by security holders |
1,384,879 | $19.08 | 932,348 | |||
Equity compensation plans not approved by security holders |
none | |||||
Item 13. Certain Relationships and Related Transactions.
Information relating to certain relationships and related transactions is incorporated by
reference from the 2006 Proxy Statement under the captions “Election of Directors” and “Related
Party Transactions.”
14
Table of Contents
Item 14. Principal Accountant Fees and Services.
Information relating to the types of services rendered by our Independent Auditors and the
fees paid for these services is incorporated by reference from our 2006 Proxy Statement under the
caption “Independent Public Accountants.”
PART IV
Item 15. Exhibits, Financial Statement Schedules.
| (a) | 1. Financial Statements. The following Management’s Annual Report, Reports of Independent Registered Public Accounting Firm and Consolidated Financial Statements are incorporated by reference, under Item 8 of this report, from the 2005 Annual Report: | |
| Management’s Annual Report on Internal Control Over Financial Reporting | ||
| Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | ||
| Report of Independent Registered Public Accounting Firm | ||
| Consolidated Balance Sheets as of December 31, 2005 and December 25, 2004 | ||
| Consolidated Statements of Earnings for the Years Ended December 31, 2005, December 25, 2004 and December 27, 2003 | ||
| Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2005, December 25, 2004 and December 27, 2003 | ||
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, December 25, 2004 and December 27, 2003 | ||
| Notes to Consolidated Financial Statements | ||
| 2. Financial Statement Schedules. All schedules required by this Form 10-K Report have been omitted because they were inapplicable, included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements, or otherwise not required under instructions contained in Regulation S-X. | ||
| 3. Exhibits. Reference is made to the Exhibit Index which is included in this Form 10-K Report. | ||
| (b) | Reference is made to the Exhibit Index which is included in this Form 10-K Report. | |
| (c) | Not applicable. |
15
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Dated: March 8, 2006 | UNIVERSAL FOREST PRODUCTS, INC. | |||
| By: | /s/ William G. Currie | |||
| William G. Currie, Vice Chairman of the | ||||
| Board and Chief Executive Officer | ||||
| and | ||||
| /s/ Michael R. Cole | ||||
| Michael R. Cole, Chief Financial Officer | ||||
| and Treasurer | ||||
16
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below on this 8th day of March, 2006, by the following persons on behalf of us and in the
capacities indicated.
Each Director whose signature appears below hereby appoints Matthew J. Missad and Michael R.
Cole, and each of them individually, as his attorney-in-fact to sign in his name and on his behalf
as a Director, and to file with the Commission any and all amendments to this report on Form 10-K
to the same extent and with the same effect as if done personally.
/s/ Peter F. Secchia
|
/s/ William G. Currie | |
Peter F. Secchia, Director
|
William G. Currie, Director | |
/s/ Dan M. Dutton
|
/s/ John M. Engler | |
Dan M. Dutton, Director
|
John M. Engler, Director | |
/s/ John W. Garside
|
/s/ Gary F. Goode | |
John W. Garside, Director
|
Gary F. Goode, Director | |
/s/ Mark A. Murray
|
/s/ Louis A. Smith | |
Mark A. Murray, Director
|
Louis A. Smith, Director |
17
Table of Contents
EXHIBIT INDEX
| Exhibit # | Description | |||
| 3 | Articles of Incorporation and Bylaws. | |||
| (a) | Registrant’s Articles of Incorporation were filed as Exhibit 3(a) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| (b) | Registrant’s Bylaws were filed as Exhibit 3(b) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| 4 | Instruments Defining the Rights of Security Holders. | |||
| (a) | Specimen form of Stock Certificate for Common Stock was filed as Exhibit 4(a) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| (b)(3) | Series A, Senior Unsecured Note Agreement dated May 5, 1994, was filed as Exhibit 4(b)(3) to a Form 10-Q Quarterly Report for the quarter period ended March 26, 1994, and the same is incorporated herein by reference. | |||
| (b)(4) | First Amendment to Note Agreement dated November 13, 1998, relating to Series A, Senior Unsecured Note Agreement dated May 5, 1994, was filed as Exhibit 4(b)(4) to a Form 10-K Annual Report for the fiscal year ended December 26, 1998. | |||
| 10 | Material Contracts. | |||
| (a) | Form of Conditional Share Grant Agreement utilized under the Company’s Long Term Stock Incentive Plan, was filed as Exhibit 10(a) to a Form 10-Q Quarterly Report for the quarter ended September 25, 2004. | |||
| *(a)(3) | Consulting Agreement with Peter F. Secchia, dated December 31, 2002, and Assignment dated January 1, 2003 was filed as Exhibit 10(a)(3) to a Form 10-K, Annual Report for the year ended December 28, 2002 and the same is incorporated herein by reference. | |||
| *(a)(4) | Nondisclosure and Non-Compete Agreement with Peter F. Secchia, dated December 31, 2002 was filed as Exhibit 10(a)(4) to a Form 10-K, Annual Report for the year ended December 28, 2002 and the same is incorporated herein by reference. | |||
E-1
Table of Contents
| Exhibit # | Description | |||
| *(a)(5) | Conditional Share Grant Agreement with William G. Currie dated April 17, 2002 was filed as Exhibit 10(a)(5) to a Form 10-K, Annual Report for the year ended December 28, 2002 and the same is incorporated herein by reference. | |||
| (a)(6) | Form of Conditional Share Grant Agreement utilized under the Company’s Long Term Stock Incentive Plan, was filed as Exhibit 10(a) to a Form 10-Q Quarterly Report for the quarter ended September 25, 2004. | |||
| (b) | Form of Indemnity Agreement entered into between the Registrant and each of its directors was filed as Exhibit 10(b) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| *(e)(1) | Form of Executive Stock Option Agreement was filed as Exhibit 10(e)(1) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| *(e)(2) | Form of Officers’ Stock Option Agreement was filed as Exhibit 10(e)(2) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| *(f) | Salaried Employee Bonus Plan was filed as Exhibit 10(f) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference. | |||
| (i)(2) | Series 2002-A, Revolving Credit Agreement dated November 25, 2002 was filed as Exhibit 10(i)(2) to a Form 10-K Annual Report for the year ended December 28, 2002. | |||
| (i)(3) | First Amendment dated September 18, 2003 relating to Series 2002-A, Revolving Credit Agreement dated November 25, 2002 was filed as Exhibit 10(i)(3) to a Form 10-Q Quarterly Report for the quarter ended September 27, 2003. | |||
| (i)(4) | Series 2004-A, Credit Agreement dated December 20, 2004 was filed as Exhibit 10(i) to a Form 8-K Current Report dated December 21, 2004. | |||
| (j)(1) | Series 1998-A, Senior Note Agreement dated December 21, 1998 was filed as Exhibit 10(j)(1) to a Form 10-K Annual Report for the year ended December 26, 1998, and the same is incorporated herein by reference. | |||
| (j)(2) | Series 2002-A, Senior Note Agreement dated December 18, 2002 was filed as Exhibit 10(j)(2) to a Form 10-K Annual Report for the year ended December 28, 2002. | |||
E-2
Table of Contents
| Exhibit # | Description | |||
| (k)(1) | Program for Accounts Receivable Transfer (“PARTS”) Agreement dated September 22, 2003 was filed as Exhibit 10(k)(1) to a Form 10-Q Quarterly Report for the quarter ended September 27, 2003. | |||
| (k)(2) | Deposit Account Control Agreement dated September 22, 2003, completed pursuant to the PARTS Agreement, was filed as Exhibit 10(k)(2) to a Form 10-Q, Quarterly Report for the quarter ended September 27, 2003. | |||
| (k)(3) | Program for Accounts Receivable Transfer (“PARTS”) Agreement dated November 12, 2004 was filed as Exhibit 10(k) to a Form 8-K Current Report dated November 15, 2004. | |||
| 13 | Selected portions of the Company’s Annual Report to Shareholders for the fiscal year ended December 31, 2005. | |||
| 14 | Code of Ethics for Senior Financial Officers | |||
| (a) | Code of Ethics for Chief Financial Officer was filed as Exhibit 14(a) to a Form 10-K, Annual Report for the year ended December 25, 2004 and the same is incorporated herein by reference. | |||
| (b) | Code of Ethics for Vice President of Accounting and Administration was filed as Exhibit 14(a) to a Form 10-K, Annual Report for the year ended December 25, 2004 and the same is incorporated herein by reference. | |||
| (c) | Code of Ethics for Vice President of Accounting. | |||
| 21 | Subsidiaries of the Registrant. | |||
| 23 | Consent of Ernst & Young LLP. | |||
| 31 | Certifications. | |||
| (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). | |||
| (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 | Certifications. | |||
E-3
Table of Contents
| Exhibit # | Description | |||
| (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). | |||
| (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). | |||
| * | Indicates a compensatory arrangement. |
E-4
Universal Forest Products, Inc.
Financial Information
Table of Contents
13
Table of Contents
Selected Financial Data
(In thousands, except per share and statistics data)
| 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||
|
Consolidated Statement of Earnings Data
|
||||||||||||||||||||
|
Net sales
|
$ | 2,691,522 | $ | 2,453,281 | $ | 1,898,830 | $ | 1,639,899 | $ | 1,530,353 | ||||||||||
|
Gross profit
|
359,256 | 296,253 | 257,986 | 230,410 | 211,479 | |||||||||||||||
|
Earnings before income taxes, minority interest and equity in
earnings of investee
|
110,772 | 83,059 | 65,792 | 62,115 | 54,300 | |||||||||||||||
|
Net
earnings(2)
|
67,373 | 48,603 | 40,119 | 36,637 | 33,142 | |||||||||||||||
|
Diluted earnings per
share(2)
|
$ | 3.53 | $ | 2.59 | $ | 2.18 | $ | 1.97 | $ | 1.63 | ||||||||||
|
Dividends per share
|
$ | 0.105 | $ | 0.100 | $ | 0.095 | $ | 0.090 | $ | 0.085 | ||||||||||
|
Weighted average shares outstanding with common stock equivalents
|
19,106 | 18,771 | 18,379 | 18,619 | 20,377 | |||||||||||||||
|
Consolidated Balance Sheet Data
|
||||||||||||||||||||
|
Working
capital(3)
|
$ | 298,027 | $ | 222,618 | $ | 190,400 | $ | 185,256 | $ | 124,071 | ||||||||||
|
Total assets
|
876,920 | 762,360 | 686,931 | 638,874 | 551,209 | |||||||||||||||
|
Total debt and capital lease
obligations(1)
|
209,497 | 207,142 | 213,186 | 243,572 | 212,187 | |||||||||||||||
|
Shareholders’ equity
|
431,852 | 356,769 | 305,104 | 264,804 | 232,416 | |||||||||||||||
|
Statistics
|
||||||||||||||||||||
|
Gross profit as a percentage of net sales
|
13.3 | % | 12.1 | % | 13.6 | % | 14.1 | % | 13.8 | % | ||||||||||
|
Net earnings as a percentage of net
sales(2)
|
2.5 | % | 2.0 | % | 2.1 | % | 2.2 | % | 2.2 | % | ||||||||||
|
Return on beginning
equity(4)
|
18.9 | % | 15.9 | % | 15.2 | % | 13.6 | % | 14.0 | % | ||||||||||
|
Current ratio
|
2.46 | 2.21 | 2.33 | 2.64 | 2.12 | |||||||||||||||
|
Debt to equity
ratio(1)
|
0.49 | 0.58 | 0.70 | 0.92 | 0.91 | |||||||||||||||
|
Book value per common
share(5)
|
$ | 23.47 | $ | 19.82 | $ | 17.13 | $ | 14.93 | $ | 13.07 | ||||||||||
| (1) | Includes $36 million classified as temporary shareholders’ equity in 2001 associated with a share redemption we completed in January 2002. |
| (2) | In 2002, we adopted SFAS 142 and as a result we no longer recognize amortization expense associated with goodwill. |
| (3) | Current assets less current liabilities. |
| (4) | Net earnings divided by beginning shareholders’ equity (including temporary shareholders’ equity). |
| (5) | Shareholders’ equity divided by common stock outstanding. |
14
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
We advise you to read the issues discussed in Management’s
Discussion and Analysis of Financial Condition and Results of
Operations in conjunction with our Consolidated Financial
Statements and the Notes to the Consolidated Financial
Statements included in this Annual Report for the year ended
December 31, 2005. We also encourage you to read our Annual
Report on
Form 10-K, filed
with the United States Securities and Exchange Commission. That
report includes “Risk Factors” that you should
consider in connection with any decision to buy or sell our
securities. We are pleased to present this overview of 2005.
Overview
We are pleased to report strong results for 2005, which was
highlighted by:
| • | Our sales growth in the site-built construction, industrial, and manufactured housing markets as we increased our market share in each. |
| • | Our unit sales to the do-it-yourself/retail (“DIY/retail”) market declined due to our sales strategy with our largest customer and efforts to diversify our customer base. |
| • | Hurricanes Katrina and Rita provided us with sales opportunities to the manufactured housing and DIY/retail markets in the fourth quarter. |
| • | Improved cash flows from operating activities due to a combination of strong earnings growth and effective working capital management. |
| • | A decrease in our leverage ratio (interest-bearing debt divided by the sum of interest-bearing debt and shareholders’ equity) to 32.6% at the end of December from 36.7% last year as a result of strong earnings and cash flow. |
| • | The 38.6% increase in net earnings we achieved surpassed our 8% increase in unit sales. Our enhanced profitability was primarily due to: |
| • | Improved results from certain under-performing operations, including the down-sizing of one of our western framing operations. | |
| • | Improved profitability on sales of engineered wood components. | |
| • | Increased sales of higher margin products, such as engineered wood components used in site-built and modular housing and industrial packaging. Our sales of higher margin value-added products increased to 52.7% of total sales in 2005 compared to 50.7% last year. | |
| • | Walking away from certain business with our largest customer that did not meet profitability expectations. | |
| • | Cost efficiencies we achieved through our company-wide innovation program and organic sales growth. |
We also made the following accomplishments as our people remain
focused on executing our strategy:
| • | We acquired the assets and assumed certain liabilities of Maine Ornamental Woodworkers, Inc. in June 2005, which imports and distributes ornamental post caps used on fences and decks. |
| • | In June 2005, we acquired an additional 25% membership interest in Shawnlee Construction, LLC (“Shawnlee”), a company in which we already owned a 50% membership interest, and agreed to purchase the remaining 25% over the next five years. In addition, Shawnlee agreed to purchase the assets and assume certain liabilities of Shepardville Construction, Inc. and AW Construction, LLC for $2 million. |
| • | We acquired the assets and assumed certain liabilities of DecKorators, Inc. in November 2005, which imports and distributes decorative balusters used on decks and porches. |
In summary, we remain optimistic about the future of our
business, markets, and strategies, and our employees remain
focused on adding value for our customers, executing our
strategies, and meeting our goals.
15
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Historical Lumber Prices
The following table presents the Random Lengths framing lumber
composite price for the years ended December 31, 2005,
December 25, 2004, and December 27, 2003.
| Random Lengths Composite | ||||||||||||
| Average $/MBF | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
January
|
$ | 381 | $ | 341 | $ | 278 | ||||||
|
February
|
420 | 376 | 295 | |||||||||
|
March
|
422 | 382 | 277 | |||||||||
|
April
|
407 | 431 | 283 | |||||||||
|
May
|
386 | 456 | 278 | |||||||||
|
June
|
405 | 423 | 303 | |||||||||
|
July
|
381 | 426 | 302 | |||||||||
|
August
|
360 | 473 | 336 | |||||||||
|
September
|
395 | 441 | 375 | |||||||||
|
October
|
373 | 378 | 325 | |||||||||
|
November
|
359 | 355 | 338 | |||||||||
|
December
|
365 | 376 | 327 | |||||||||
|
Annual average
|
$ | 388 | $ | 405 | $ | 310 | ||||||
|
Annual percentage change
|
(4.2 | %) | 30.6 | % | 4.0 | % | ||||||
In addition, a Southern Yellow Pine (“SYP”) composite
price, which we prepare and use, is presented below. Sales of
products produced using this species may comprise up to 50% of
our sales volume.
| Random Lengths SYP | ||||||||||||
| Average $/MBF | ||||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
January
|
$ | 446 | $ | 410 | $ | 387 | ||||||
|
February
|
489 | 436 | 394 | |||||||||
|
March
|
501 | 487 | 392 | |||||||||
|
April
|
511 | 532 | 410 | |||||||||
|
May
|
500 | 535 | 385 | |||||||||
|
June
|
538 | 498 | 384 | |||||||||
|
July
|
536 | 479 | 374 | |||||||||
|
August
|
503 | 503 | 398 | |||||||||
|
September
|
501 | 473 | 437 | |||||||||
|
October
|
463 | 429 | 390 | |||||||||
|
November
|
436 | 394 | 410 | |||||||||
|
December
|
462 | 408 | 401 | |||||||||
|
Annual average
|
$ | 491 | $ | 465 | $ | 397 | ||||||
|
Annual percentage change
|
5.6 | % | 17.1 | % | (0.5 | %) | ||||||
Impact of the Lumber Market on Our Operating
Profits
We experience significant fluctuations in the cost of commodity
lumber products from primary producers (“Lumber
Market”). We generally price our products to pass lumber
costs through to our customers so our profitability is based on
the value-added
16
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
manufacturing, distribution, engineering, and other services we
provide. As a result, our sales levels (and working capital
requirements) are impacted by the lumber costs of our products.
Lumber costs generally comprise up to 80% of our cost of goods
sold.
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.
| • | Products with fixed selling prices. These products include value-added products such as decking and fencing sold to DIY/retail customers, as well as trusses, wall panels, and other components sold to the site-built construction market, and most industrial packaging products. 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 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 period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers. |
| • | Products with selling prices indexed to the reported Lumber Market with a fixed dollar “adder” to cover conversion costs and profits. These products primarily 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 the following products:
| • | Products with significant inventory levels and low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises almost 18% of our total sales. 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. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs. |
| • | Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs. |
In addition to the impact of Lumber Market trends on
gross margins, changes in the level of the market cause
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 lumber prices; conversely, we experience margin
improvement when lumber prices are relatively low.
17
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Business Combinations and Asset Purchases
All of the transactions mentioned below are considered business
combinations, except for the purchase of the treating plants
from Quality Wood Treating Co., Inc. (“Quality”) on
August 26, 2003. See Note B to the Consolidated
Financial Statements for further details. Each business
combination has been accounted for using the purchase method.
| Company Name | Acquisition Date | Business Description | ||
|
DecKorators, Inc. (“DecKorators”)
|
November 14, 2005 | Provides decorative balusters and accessories for residential decks and porches to independent dealers and certain “big box” home improvement retailers. The company has locations in Crestwood and St. Louis, MO. | ||
|
Shawnlee Construction, LLC (“Shawnlee”)
|
June 27, 2005 and April 2, 2004 | Provides framing services for multi-family construction in the Northeast. Located in Plainville, MA. Purchased 50% interest on April 2, 2004, and an additional 25% interest on June 27, 2005. | ||
|
Shepardville Construction, Inc. and AW Construction, LLC
(“Shepardville and AW”)
|
June 27, 2005 | Installs interior products such as base boards, crown moldings, window sills and casings, doors, and cabinets for commercial and multi-family construction projects. Located in Warwick, RI and Wolcott, CT. | ||
|
Maine Ornamental Woodworkers, Inc. (“Maine Ornamental”)
|
June 2, 2005 | Provides decorative post caps for fencing and decking applications to two-step distributors and certain “big box” home improvement retailers. The company has locations in Winthrop and Eliot, ME and Bainbridge Island, WA. | ||
|
Slaughter Industries (“Slaughter”)
|
March 15, 2004 | Distributes lumber products and manufactures engineered wood components for site-built construction. Located in Dallas, TX. | ||
|
Midwest Building Systems, Inc. (“Midwest”)
|
January 30, 2004 | One facility in Indianapolis, IN which manufactures engineered wood components for site-built construction. | ||
|
D&L Framing, LLC (“D&L”)
|
August 28, 2003 | Framing operation for multi-family construction located in Las Vegas, NV. | ||
|
Norpac Construction, L. L. C. (“Norpac”)
|
June 4, 2003 | Concrete framer for multi-family construction located in Las Vegas, NV. | ||
|
Quality Wood Treating Co., Inc. (“Quality”)
|
November 4, 2002 August 26, 2003 | One facility in Prairie du Chien, WI which produced EverX®composite decking, currently branded as Lattitudes®. We also entered into an exclusive treating services agreement with Quality. On August 26, 2003, we canceled the treating services agreement and purchased two treating facilities in Lansing, MI and Janesville, WI and one of our subsidiaries agreed to lease the real estate of a third treating facility in White Bear Lake, MN. | ||
18
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations
The following table presents, for the periods indicated, the
components of our Consolidated Statements of Earnings as a
percentage of net sales.
| Years Ended | ||||||||||||
| December 31, | December 25, | December 27, | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
Net sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost of goods sold
|
86.7 | 87.9 | 86.4 | |||||||||
|
Gross profit
|
13.3 | 12.1 | 13.6 | |||||||||
|
Selling, general and administrative expenses
|
8.8 | 8.2 | 9.4 | |||||||||
|
Gain on insurance settlement
|
(0.0 | ) | ||||||||||
|
Earnings from operations
|
4.5 | 3.9 | 4.2 | |||||||||
|
Interest, net
|
(0.5 | ) | (0.6 | ) | (0.7 | ) | ||||||
|
Net gain on sale of real estate and interest in subsidiary
|
0.1 | 0.1 | 0.0 | |||||||||
|
Earnings before income taxes and minority interest
|
4.1 | 3.4 | 3.5 | |||||||||
|
Income taxes
|
1.5 | 1.3 | 1.3 | |||||||||
|
Earnings before minority interest
|
2.6 | 2.1 | 2.2 | |||||||||
|
Minority interest
|
(0.1 | ) | (0.1 | ) | (0.1 | ) | ||||||
|
Net earnings
|
2.5 | % | 2.0 | % | 2.1 | % | ||||||
NET SALES
We engineer, manufacture, treat, distribute and install lumber,
composite wood, plastic, and other building products for the
DIY/retail, site-built construction, manufactured housing, and
industrial markets. Our strategic sales objectives include:
| • | Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users and engineered wood components and framing services to the site-built construction market. Engineered wood components include roof trusses, wall panels, and floor systems. |
| • | Increasing sales of “value-added” products and framing services. Value-added product sales consist of fencing, decking, lattice, and other specialty products sold to the DIY/retail market, specialty wood packaging, engineered wood components used in site-built construction, and “wood alternative” products. Wood alternative products consist primarily of composite wood and plastics. 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. |
| • | Maximizing unit sales growth while achieving return on investment goals. |
19
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
The following table presents, for the periods indicated, our net
sales (in thousands) and change in net sales by market
classification.
| Years Ended | ||||||||||||||||||||
| December 31, | % | December 25, | % | December 27, | ||||||||||||||||
| Market Classification | 2005 | Change | 2004 | Change | 2003 | |||||||||||||||
|
DIY/retail
|
$ | 1,001,620 | 1.3 | $ | 988,463 | 9.8 | $ | 900,150 | ||||||||||||
|
Site-Built Construction
|
744,113 | 17.9 | 631,136 | 56.5 | 403,201 | |||||||||||||||
|
Manufactured Housing
|
431,382 | 13.6 | 379,572 | 34.5 | 282,139 | |||||||||||||||
|
Industrial
|
514,407 | 13.3 | 454,110 | 44.9 | 313,340 | |||||||||||||||
|
Total
|
$ | 2,691,522 | 9.7 | $ | 2,453,281 | 29.2 | $ | 1,898,830 | ||||||||||||
| Note: | During 2005, we reviewed our customer lists and made certain reclassifications. Historical information has been restated to reflect these reclassifications. |
The following table presents estimates, for the periods
indicated, of our percentage change in net sales which were
attributable to changes in overall selling prices versus changes
in units shipped.
| % Change | ||||||||||||
| in Sales | in Selling Prices | in Units | ||||||||||
|
2005 versus 2004
|
+10 | % | +2 | % | +8 | % | ||||||
|
2004 versus 2003
|
+29 | % | +18 | % | +11 | % | ||||||
|
2003 versus 2002
|
+16 | % | +3 | % | +13 | % | ||||||
We estimate that our 2005 unit sales increased by 8%
compared to 2004, while overall selling prices increased by 2%.
We estimate that our unit sales increased by 1% as a result of
business combinations and new plants, while our unit sales out
of existing facilities increased by 7% in 2005. Overall selling
prices increased as a result of the Lumber Market for Southern
Yellow Pine.
We estimate that our 2004 unit sales increased by 11%,
while overall selling prices increased by 18%. Overall selling
prices primarily increased as a result of the Lumber Market and
higher preservative prices (ACQ) because our pricing
practices are designed to pass these costs along to our
customers. We estimate that our unit sales increased by 6% as a
result of business combinations and new plants, while our unit
sales out of existing facilities increased by 7% in 2004. Plant
closures and the sale of our interest in Nascor Incorporated
caused our unit sales to decrease by 2% in 2004.
Changes in our sales by market are discussed below.
DIY/ RETAIL:
Net sales to the DIY/retail market increased 1% in 2005 compared
to 2004, due to the higher Lumber Market for SYP. Our unit sales
declined 3% comparing the two periods, due, in part, to our
strategy to walk away from certain business that did not meet
profitability expectations and to better balance our business by
growing our other markets faster than the DIY/retail market.
This unit sales decline was offset slightly by our acquisition
of Maine Ornamental.
Net sales to the DIY/retail market increased 10% in 2004
compared to 2003, primarily due to the higher Lumber Market and
preservative prices. Our unit sales declined 7% comparing the
two periods, which we believe was due to a decline in demand as
a result of higher product costs for consumers. An increase in
consumer costs can be traced primarily to higher lumber and
preservative prices, combined with higher gross margin
requirements of some of our customers.
SITE-BUILT CONSTRUCTION:
Net sales to the site-built construction market increased 18% in
2005 compared to 2004, primarily due to an estimated 17%
increase in unit sales. Unit sales increased as a result of
acquisitions and new plants combined with 13% organic growth out
of several existing plants, particularly those in our Carolina,
Southern California and Texas regions. Organic growth was
primarily due to strong housing and multi-family construction
activities and greater market penetration by offering turn-key
framing and lumber packages, in addition to engineered wood
components in some regions.
20
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Net sales to the site-built construction market increased 57% in
2004 compared to 2003, despite the sale of our interest in
Nascor Incorporated. This increase primarily resulted from
acquisitions (see “Business Combinations and Asset
Purchases”) and new plants opened since 2003 and unit sales
growth out of existing plants totaling approximately 26%.
Factors contributing to increased unit sales out of existing
plants include strong housing and multi-family construction
activities, particularly in southern California and
Las Vegas, and greater market penetration by offering
turn-key framing and lumber packages, in addition to engineered
wood components, in some regions. In addition, we estimate the
Lumber Market caused our selling prices to increase 13% in 2004.
MANUFACTURED HOUSING:
Net sales to the manufactured housing market increased 14% in
2005 compared to 2004, due to organic sales growth. An increase
in units shipped primarily resulted from achieving increased
market share with modular home producers and an increase in
manufactured housing production in the fourth quarter due to
hurricanes Katrina and Rita. Industry production for HUD code
homes increased 12% in 2005 and 43% in the fourth quarter of
2005.
Net sales to the manufactured housing market increased 35% in
2004 compared to 2003. This increase resulted primarily from an
estimated 24% increase in selling prices combined with an 11%
increase in units shipped. Our increase in selling prices was
primarily due to the higher Lumber Market and a change in sales
mix toward more complex trusses that require greater engineering
and manufacturing costs. Although industry production for HUD
code homes remained flat for 2004, we continued to increase our
shipments to modular home producers.
INDUSTRIAL:
Net sales to industrial customers increased 13% in 2005 compared
to 2004, due to an estimated 14% increase in units shipped.
Units shipped increased as a result of organic growth out of
several existing plants, particularly those in our Southeast,
West Central, and Southwest regions. We’ve added almost
1,000 new accounts since December 2004 and we have been
successful at significantly increasing our sales with existing
accounts. We believe our unit sales and market share continue to
grow significantly due to our dedicated local sales teams and
national sales support efforts, combined with our competitive
advantages in manufacturing, purchasing, and material
utilization.
Net sales to industrial customers increased 45% in 2004 compared
to 2003. This increase resulted from a combination of unit sales
increases out of several existing facilities totaling
approximately 25%, combined with higher selling prices due to
the Lumber Market.
VALUE-ADDED AND COMMODITY-BASED SALES:
The following table presents, for the periods indicated, our
percentage of value-added and commodity-based sales to total
sales.
| Value-Added | Commodity-Based | |||||||
|
2005
|
52.7 | % | 47.3 | % | ||||
|
2004
|
50.7 | % | 49.3 | % | ||||
|
2003
|
51.1 | % | 48.9 | % | ||||
Value-added sales increased 14% in 2005 compared to 2004,
primarily due to increased sales of engineered wood components
and industrial packaging products. Commodity-based sales
increased 5% primarily due to increased sales of lumber packages
to site-built construction customers.
Value-added sales increased 28% in 2004 compared to 2003,
primarily due to increased sales of engineered wood components,
turn-key framing, industrial packaging products and other
specialty products supplied to the DIY/retail market.
Commodity-based sales increased 30% primarily due to the higher
Lumber Market, higher preservative prices and an increase in
unit sales. Therefore, our decline in value-added sales as a
percentage of total sales was primarily due to the significant
impact of the Lumber Market on selling prices of commodity-based
products.
21
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased in 2005
compared to 2004 and our gross profit dollars increased by
almost 21% in 2005, while our units shipped increased by 8%. Our
improved profitability was primarily due to a combination of:
| • | Improved results from certain under-performing operations, including the down-sizing of one of our western framing operations. |
| • | Improved profitability on sales of engineered wood components. |
| • | Increased sales of higher margin products, such as engineered wood components used in site-built and modular housing and industrial packaging. Our sales of higher margin value-added products increased to 52.7% of total sales in 2005 from 50.7% last year. |
| • | Walking away from certain business with our largest customer that did not meet profitability expectations. |
| • | Cost efficiencies we achieved through our company-wide innovation program and organic sales growth. |
Gross profit as a percentage of net sales decreased in 2004
compared to 2003. Generally, a higher Lumber Market results in a
decrease in our gross margin because we attempt to price our
products to earn a fixed profit per unit. (See “Impact of
the Lumber Market on our Operating Results.”) Therefore, a
more meaningful analysis of profitability is a comparison of our
change in gross profit dollars compared to our change in units
shipped. Our gross profit dollars increased by almost 15% in
2004, while units shipped increased by 11%. Our improved
profitability was primarily due to the effect of rising lumber
prices in the second and third quarters on products we inventory
and whose selling prices are tied to the Lumber Market and
improved profitability on sales to the industrial market. In
addition, many of our treating facilities began converting to a
new preservative in the third quarter of 2003 and experienced
inefficiencies in that year. These positive effects more than
offset the operating inefficiencies we experienced from the fire
at our plant in Thorndale, Ontario and poor results from one of
our multi-family framing subsidiaries in the western United
States.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses
(“SG&A”) as a percentage of net sales increased to
8.8% in 2005 compared to 8.2% in 2004. SG&A expenses
increased 17.0% in 2005, which compares unfavorably with our 8%
increase in unit sales. This increase was primarily due to
increased headcount to support our site-built and industrial
businesses, greater health care costs, certain taxes,
amortization of intangible assets associated with recent
acquisitions, and incentive compensation tied to operating
profits and return on investment.
Selling, general, and administrative expenses as a percentage of
net sales decreased to 8.2% in 2004 compared to 9.4% in 2003,
primarily due to the impact of the Lumber Market on our selling
prices. SG&A expenses increased 13.2% in 2004, which
compares unfavorably with our 11% increase in unit sales. This
increase was primarily due to an increase in bad debt expense,
greater incentive compensation resulting from growth in
operating profits and a higher return on investment, greater
health care costs, and new compliance costs associated with
certain regulatory changes. The dollar increase in SG&A was
also impacted by business combinations and an increase in
personnel to support growth in our business.
GAIN ON INSURANCE SETTLEMENT
In April 2004, our plant in Thorndale, Ontario was destroyed by
a fire. In accordance with Financial Interpretation No.
(“FIN”) 30, Accounting for Involuntary
Conversions of Non-Monetary Assets to Monetary Assets, we
have written off the net book value of the destroyed inventory
and property totaling $3.6 million. The insured value of
the property exceeded its net book value by approximately
$1.4 million, which was recorded as a gain on insurance
settlement. As of December 25, 2004, we collected
$2.0 million of insurance proceeds and the remaining
insurance receivable totaled approximately $3.0 million and
was recorded in other current assets. This receivable was
collected in 2005.
INTEREST, NET
Net interest costs were slightly lower in 2005 compared to 2004
due to increased investment income on investments held by our
wholly-owned insurance captive. Interest expense increased
slightly as a decline in our average debt level was offset by
higher borrowing rates on our variable rate debt.
22
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Net interest costs were slightly higher in 2004 compared to
2003. The increase was due to a slight increase in our average
debt balance and an increase in interest rates on our variable
rate debt in 2004.
NET GAIN ON SALE OF REAL ESTATE AND INTEREST IN SUBSIDIARY
On January 3, 2005, we sold real estate located in
Stockton, CA for $2.3 million and recorded a pre-tax gain
totaling approximately $1.2 million.
We entered into the following transactions in 2004:
| • | In January 2004, we sold our 60% ownership in Nascor Incorporated, a Calgary, Alberta-based manufacturer of engineered wood components and licensor of I-joist manufacturing technology. The total sales price we collected was $4.7 million and we recorded a pre-tax accounting loss of approximately $193,000. |
| • | In March 2004, we sold a plant in Bend, OR and recognized a pre-tax gain of approximately $562,000 on the sale in the first quarter and an additional $207,000 in the second quarter as we collected the note receivable issued to us on the sale. |
| • | In June 2004, we sold a plant in Modesto, CA and recognized a pre-tax gain of approximately $368,000. |
| • | In December 2004, we sold real estate in Elkhart, IN and Thornton, CA and recognized a net pre-tax gain of $426,000. |
INCOME TAXES
Effective tax rates differ from statutory federal income tax
rates, primarily due to provisions for state and local income
taxes and permanent tax differences. Our effective tax rate
decreased to 37.1% in 2005 compared 37.9% in 2004 as a result of
the new manufacturing deduction allowed in 2005 under the Jobs
Creation Act and income taxes accrued on the sale of Nascor
Incorporated in 2004.
Our effective tax rate increased to 37.9% in 2004 compared 37.0%
in 2003 primarily due to income taxes totaling approximately
$0.3 million associated with the sale of our interest in
Nascor and an increase in state income taxes as a result of
certain tax credits received in 2003.
OFF-BALANCE SHEET TRANSACTIONS AND CONTRACTUAL OBLIGATIONS
We have no significant off-balance sheet transactions other than
operating leases. The following table summarizes our contractual
obligations as of December 31, 2005 (in thousands).
| Payments Due by Period | ||||||||||||||||||||
| Less than | 1-3 | 3-5 | After 5 | |||||||||||||||||
| Contractual Obligation | 1 Year | Years | Years | Years | Total | |||||||||||||||
|
Long-term debt
|
$ | 458 | $ | 81,199 | $ | 69,017 | $ | 58,823 | $ | 209,497 | ||||||||||
|
Estimated interest on long-term debt
|
11,912 | 23,825 | 9,580 | 12,859 | 58,176 | |||||||||||||||
|
Operating leases
|
13,198 | 17,754 | 7,785 | 702 | 39,439 | |||||||||||||||
|
Capital project purchase obligations
|
2,856 | 2,856 | ||||||||||||||||||
|
Total
|
$ | 28,424 | $ | 122,778 | $ | 86,382 | $ | 72,384 | $ | 309,968 | ||||||||||
As of December 31, 2005, we also had $38.1 million in
outstanding letters of credit issued during the normal course of
business, as required by some vendor contracts.
23
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Capital Resources
The table below presents, for the periods indicated, a summary
of our cash flow statement (in thousands):
| 2005 | 2004 | 2003 | ||||||||||
|
Cash from operating activities
|
$ | 74,132 | $ | 50,234 | $ | 70,375 | ||||||
|
Cash from investing activities
|
(55,409 | ) | (37,256 | ) | (33,999 | ) | ||||||
|
Cash from financing activities
|
2,218 | (5,134 | ) | (36,480 | ) | |||||||
|
Net change in cash and cash equivalents
|
20,941 | 7,844 | (104 | ) | ||||||||
|
Cash and cash equivalents, beginning of year
|
25,274 | 17,430 | 17,534 | |||||||||
|
Cash and cash equivalents, end of year
|
$ | 46,215 | $ | 25,274 | $ | 17,430 | ||||||
In general, we financed our growth in the past through a
combination of operating cash flows, our revolving credit
facility, industrial development bonds (when circumstances
permit), and issuances of long-term notes payable at times when
interest rates are favorable. We have not issued equity to
finance growth except in the case of a large acquisition. We
manage our capital structure by attempting to maintain a
targeted ratio of debt to equity and debt to operating cash
flow. We believe this is one of many important factors to
maintaining a strong credit profile, which in turn helps ensure
timely access to capital when needed.
Seasonality has a significant impact on our working capital from
March to August which generally results in negative or modest
cash flows from operations in our first and second quarters.
Conversely, we experience a substantial decrease in working
capital from September to February which results in significant
cash flow from operations in our third and fourth quarters.
Due to the seasonality of our business and the effects of the
Lumber Market, we believe our cash cycle (days sales
outstanding, including the effect of our sale of receivables
program, plus days supply of inventory less days payables
outstanding) is a good indicator of our working capital
management. Our cash cycle was 44 days in 2005 and 2004 as
an increase in ours days supply of inventory was offset by a
faster receivables cycle.
Cash flows from operating activities increased by approximately
$24 million in 2005 compared to 2004 in spite of strong
fourth quarter sales growth (which generally increases working
capital requirements) and not having a sale of receivables
program in place at the end of 2005. At the end of 2004, we had
approximately $18 million of receivables sold and
outstanding. Our operating cash flow increase was primarily
accomplished through improved profitability and better working
capital management in the fourth quarter of 2005 compared to
2004. Specifically, we reduced our receivables cycle by almost
4 days and reduced our days supply of inventory by nearly
3 days.
Cash used for investing activities increased by approximately
$18 million in 2005 compared to 2004 primarily due to an
increase in amounts spent on acquisitions in 2005 and proceeds
received from the sale of our 60% interest in Nascor
Incorporated in 2004. In 2005 we entered into the following
significant transactions:
| • | Acquired the assets and assumed certain liabilities of Maine Ornamental in June 2005 for $8.4 million; |
| • | Acquired an additional 25% interest in Shawnlee in June 2005 for $3.5 million; additionally, Shawnlee acquired the assets and assumed certain liabilities of Shepardville and AW in June 2005 for $2.0 million; |
| • | Acquired the assets and assumed certain liabilities of DecKorators in November 2005 for $7.7 million ($0.7 million of this amount was paid in January 2006); |
| • | Sold our plant in Stockton, CA for $2.3 million and completed a new facility in Thornton, CA to which this operation was moved; and |
| • | Collected the remaining portion of our insurance receivable totaling $3.0 million associated with the fire in 2004 at our Thorndale, ON plant. |
Capital expenditures were $40 million in 2005 compared to
almost $41 million in 2004. Significant investments made in
2005 include amounts spent for the rebuilding of our plant in
Thorndale, ON; expansionary projects in Thornton, CA; Berlin,
NJ; Prairie du Chien, WI; and Woodburn, OR and the renovation of
our corporate headquarters in Grand Rapids, MI in 2005.
24
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
On December 31, 2005, we had $53.4 million outstanding
on our $250 million revolving credit facility. The
revolving credit facility supports letters of credit totaling
approximately $35.7 million on December 31, 2005.
Financial covenants on the unsecured revolving credit facility
and unsecured notes include a minimum net worth requirement,
minimum interest coverage tests, 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 all of our lending requirements on
December 31, 2005.
Environmental Considerations and Regulations
See Note M to the Consolidated Financial Statements.
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. Following is a summary of our
more significant accounting policies that require the use of
estimates and judgments in preparing the financial statements.
ACCOUNTS RECEIVABLE ALLOWANCES
We record provisions against gross revenues for estimated
returns and cash discounts in the period when the related
revenue is recorded. These estimates are based on factors that
include, but are not limited to, historical discounts taken,
analysis of credit memorandum activity, and customer demand. We
also evaluate the allowance for uncollectible accounts
receivable and discounts based on historical collection
experience and specific identification of other potential
problems, including the economic climate. Actual collections can
differ, requiring adjustments to the allowances.
SELF-INSURANCE RESERVES
We are primarily self-insured for general liability, automobile,
workers’ compensation, and certain employee health
benefits. We are fully self-insured for environmental
liabilities. The general liability, automobile, workers’
compensation, and environmental liabilities are managed through
a wholly-owned insurance captive; the related assets and
liabilities are included in the consolidated financial
statements as of December 31, 2005. Our accounting policies
with respect to the reserves are as follows:
| • | General liability, automobile, property and workers’ compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities. |
| • | Health benefits are self-insured by us up to our pre-determined stop loss limits. These reserves, including incurred but not reported claims, are based on internal computations. These computations consider our historical claims experience, independent statistics, and trends. |
| • | The environmental reserve is based on known remediation activities at certain wood preservation facilities and the potential for undetected environmental matters at other sites. The reserve for known activities is based on expected future costs and is computed by in-house experts responsible for managing our monitoring and remediation activities. (See “Environmental Considerations and Regulations.”) |
REVENUE RECOGNITION ON CONSTRUCTION CONTRACTS
Earnings on construction contracts are reflected in operations
using either
percentage-of-completion
accounting, which includes the cost to cost and units of
delivery methods, or completed contract accounting, depending on
the nature of the business at individual operations. Under
percentage-of-completion
using the cost to cost method, revenues and related earnings on
construction contracts are measured by the relationships of
actual costs incurred related to the total estimated costs.
Under
percentage-of-completion
using the units of delivery method, revenues and related
earnings on construction contracts are measured by the
relationships of actual units produced related to the total
number of units. Revisions in earnings estimates on the
construction contracts are recorded in the accounting period in
which the basis for such revisions becomes known. Projected
losses on individual contracts are charged to operations in
their entirety when such losses become apparent. Under the
completed contract method, revenues and related earnings are
recorded when the contracted work is complete and losses are
charged to operations in their entirety when such losses become
apparent.
25
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
LONG-LIVED ASSETS AND GOODWILL
We evaluate long-lived assets for indicators of impairment when
events or circumstances indicate that this risk may be present.
Our judgments regarding the existence of impairment are based on
market conditions, operational performance and estimated future
cash flows. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded to adjust
the asset to its fair value. In addition, we test goodwill for
impairment by utilizing the discounted cash flow method.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note A to the Consolidated Financial Statements.
Forward Outlook
The following section contains 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 in the “Risk Factors”
section of our Annual Report on
Form 10-K, filed
with the United States Securities and Exchange Commission and
certain economic and business factors which may be beyond our
control. Investors are cautioned that all forward-looking
statements involve risks and uncertainties.
“BUILDING IT FORWARD 2007”
In 2002, we announced our goals for growth and diversification
entitled “Building it Forward 2007.” The goals call
for us to:
| • | Grow our sales by $1 billion while continuing to diversify our markets, primarily by growing our market share of products we manufacture for the industrial and site-built construction markets. |
| • | Improve our cash cycle by 10%. |
| • | Improve our return on invested capital from approximately 10% to over 13%. |
Based on our 2005 results, we have achieved our sales growth and
return on invested capital goals and have made progress toward
our cash cycle goal.
We anticipate continued growth in our business in 2006. Key
assumptions with respect to our 2006 outlook include:
| • | Modest increases in interest rates are mitigated by favorable demographic trends and economic conditions resulting in a continued strong site-built construction market, although not as strong as 2005. |
| • | The continued need for manufactured and modular housing as the South recovers from 2005’s hurricanes and the growing trend among manufactured housing producers to switch to modular housing. |
| • | A stable DIY/retail market with opportunities for growth with existing customers and increased opportunities for new products, customers and market share through our new Consumer Products Division, which was announced in October 2005. |
| • | Continued opportunities for market share gains in both site-built construction and industrial business. |
| • | The completion of strategic business acquisitions. |
| • | A stable Lumber Market. |
With these factors in mind, we have targeted unit sales growth
and net earnings growth of 10% to 15% each in 2006. Our net
earnings growth target includes the impact of adopting FASB
Statement No. 123(R), which we are required to do beginning
in the first quarter of 2006. We currently estimate that
this statement will result in an annual pre-tax expense totaling
approximately $875,000.
26
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
DIY/ RETAIL MARKET
The Home Improvement Research Institute forecasts an increase in
home improvement product sales of 4.6% to $305 billion in
2006. A slower pace of growth is forecasted due to softening of
the housing market and consumer spending.
In 2006, we currently believe our unit sales will increase
primarily due to additional business awarded from certain
“big box” home improvement retailers and our
acquisitions of Maine Ornamental and DecKorators. On a long-term
basis, it is our goal to achieve sales growth by:
| • | Maintaining our market share on sales of value-added wood products and preservative-treated products as a result of our national presence, service capabilities that meet stringent customer requirements, diversified product offering, and purchasing leverage. |
| • | Increasing our sales of wood alternative products such as composite wood decking, which continues to take market share from preservative-treated products. Although we expect this trend to continue to some extent, we believe wood products will continue to maintain a dominant market share for the foreseeable future as a result of its cost advantages over wood alternative products. |
| • | Developing new value-added products and services for this market through our newly formed Consumers Products Division. |
| • | Adding capacity through strategic business acquisitions. |
SITE-BUILT CONSTRUCTION MARKET
The National Association of Home Builders forecasts a
6.3% decline in housing starts resulting from an anticipated
increase in long-term interest rates. The effect of rising
interest rates may be mitigated somewhat by favorable
demographic trends leading to a larger number of households and
construction activity resulting from hurricanes Katrina and Rita.
In 2006 and on a long-term basis, we anticipate growth in our
sales to the site-built construction market primarily as a
result of market share gains achieved through:
| • | Acquisitions of component manufacturers and framing services providers. We believe the trend whereby customers prefer to purchase a combination of components and framing services will continue. Therefore, our acquisition strategy includes targeted markets for framing operations. |
| • | Greater customer acceptance of engineered wood components because of the benefits these products provide builders over traditional carpentry methods employed on the job site. |
| • | Industry consolidation toward large production-oriented builders, which tend to prefer the use of engineered products and who desire suppliers with a national presence. |
We expect that business acquisitions will play a major role in
our future growth in this market.
MANUFACTURED HOUSING MARKET
The Manufactured Housing Institute forecasts a 3% increase in
shipments of HUD code homes in 2006 as a result of continued
demand from both rebuilding along the gulf coast and pent up
demand for manufactured housing due to the shift of shipments to
the gulf coast at the end of 2005. It is our goal to maintain
our current market share of trusses produced for this market,
which is currently estimated at 65%.
Sales of modular homes are expected to increase in 2006 as a
result of more developers adopting the controlled building
environment of modular construction as a method of cost control.
This trend is expected to be particularly prevalent along the
gulf coast as the challenge of rebuilding over 300,000 homes
destroyed by the hurricanes will shift builders toward the speed
of modular construction. In addition, these consumers are
expected to experience more favorable lending rates compared to
HUD code homes. It is our goal to maintain our current market
share of over 80% of trusses produced for the modular market as
a result of our strong relationships with modular builders,
design services and proprietary products.
INDUSTRIAL MARKET
One of our key strategic objectives is to increase our sales of
wood packaging products to industrial users. We believe the vast
amount of hardwood and softwood lumber consumed for industrial
applications, combined with the highly fragmented nature of this
market provides us with significant growth opportunities as a
result of our competitive cost advantages in manufacturing,
purchasing, and material utilization. To take advantage of these
opportunities, we plan to continue to obtain market share
through an internal
27
Table of Contents
Universal Forest Products, Inc.
Management’s Discussion and Analysis of
Financial Condition and Results of Operations (continued)
growth strategy utilizing our current manufacturing capabilities
and dedicated industrial sales force. On a long-term basis, we
also plan to evaluate strategic acquisition opportunities.
GROSS PROFIT
We believe the following factors may impact our gross profits in
the future:
| • | We have a long-term goal of continuing to increase our ratio of value-added sales to total sales, which in turn should increase gross margins. Our acquisition and internal sales growth strategies will help us continue to make progress toward this objective, including our goal of increasing our market share of products we manufacture for the industrial and site-built construction markets. However, achievement of this goal is dependent, in part, upon certain factors that are beyond our control. |
| • | Our ability to increase sales and maintain gross margins on products sold to our largest customers. We believe our level of service, geographic diversity, and quality of products provide an added value to our customers. If our customers are unwilling to pay for the additional services, our sales and gross margins may be reduced. |
| • | Fluctuations in the relative level of the Lumber Market and the trend in the market price of lumber impact our gross margins. (See “Impact of the Lumber Market on our Operating Results.”) |
| • | The relative strength of our end markets may impact our sales prices, capacity utilization, and profitability. |
| • | Our ability to continue to achieve cost reductions through our company-wide innovation program. |
In addition, we do not anticipate achieving the same magnitude
of improvements in under-performing operations in 2006 that we
did in 2005.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
SG&A costs have increased at a rate greater than our unit
sales in recent years due, in part, to acquisitions of
engineered wood component manufacturers, which have extensive
engineering and design costs, our growth in sales to the
industrial market, and certain investments in technology.
SG&A costs as a percentage of sales may continue to increase
in the future as sales of engineered wood components and
specialty wood packaging become a greater percentage of our
total business. However, we strive to achieve economies of scale
in other administrative departments as sales growth objectives
are met.
LIQUIDITY AND CAPITAL RESOURCES
Our cash cycle will continue to be impacted in the future by our
growth in sales to the site-built construction and industrial
markets. Sales to these markets require a greater investment in
working capital (inventory and accounts receivable) than our
sales to the DIY/retail and manufactured housing markets.
Management expects to spend $45 million to $50 million
on capital expenditures in 2006 and incur depreciation and
amortization of approximately $39 million. Besides
“maintenance” capital expenditures totaling
approximately $35 million, we plan to spend an additional
$10 million to $15 million to expand the business. On
December 31, 2005, we had outstanding purchase commitments
on capital projects of approximately $2.9 million.
We have no present intention to change our dividend policy,
which is currently $0.055 per share paid semi-annually.
Our Board of Directors has approved a share repurchase program
under which we have authorization to buy back approximately
1.5 million shares as of December 31, 2005. In the
past, we have repurchased shares in order to offset the effect
of issuances resulting from our employee benefit plans and at
times when our stock price falls to a pre-determined level.
We are obligated to pay amounts due on long-term debt totaling
approximately $0.5 million in 2006.
We have a $250 million unsecured revolving credit facility
used to support certain outstanding letters of credit and fund
seasonal working capital requirements and growth. We believe our
peak seasonal working capital requirements may consume up to
$125 million of this availability through June of 2006 and
then decrease for the balance of the year in line with
historical trends. We plan to finance our capital requirements
for the year through operating cash flows, the use of a new sale
of receivables program, and use of our revolving credit facility.
28
Table of Contents
Management’s Annual Report on Internal Control Over
Financial Reporting
The management of Universal Forest Products, Inc. is responsible
for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to
provide reasonable assurance to us and the board of directors
regarding the preparation and fair presentation of published
financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
We assessed the effectiveness of our internal control over
financial reporting as of December 31, 2005. In making this
assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control — Integrated
Framework. Based on our assessment, management has concluded
that as of December 31, 2005, our internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
Our independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on
management’s assessment of our internal control over
financial reporting. Their report immediately follows our report.
Universal Forest Products, Inc.
February 20, 2006
29
Table of Contents
Report of Independent Registered Public Accounting Firm
on Internal Control Over Financial Reporting
The Board of Directors and Shareholders of Universal Forest
Products, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal Control
over Financial Reporting, that Universal Forest Products, Inc.
and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Universal Forest
Products, Inc. and subsidiaries’ management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Universal
Forest Products, Inc. and subsidiaries maintained effective
internal control over financial reporting as of
December 31, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
Universal Forest Products, Inc. and subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Universal Forest Products, Inc.
and subsidiaries as of December 31, 2005 and
December 25, 2004, and the related consolidated statements
of earnings, shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2005 of
Universal Forest Products, Inc. and subsidiaries and our report
dated February 20, 2006 expressed an unqualified opinion
thereon.
Grand Rapids, Michigan
February 20, 2006
30
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Universal Forest
Products, Inc.
We have audited the accompanying consolidated balance sheets of
Universal Forest Products, Inc. and subsidiaries as of
December 31, 2005 and December 25, 2004, and the
related consolidated statements of earnings, shareholders’
equity, and cash flows for each of the three years in the period
ended December 31, 2005. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Universal Forest Products, Inc. and
subsidiaries at December 31, 2005 and December 25,
2004, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Universal Forest Products, Inc. and
subsidiaries’ internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 20, 2006 expressed an
unqualified opinion thereon.
Grand Rapids, Michigan
February 20, 2006
31
Table of Contents
Consolidated Balance Sheets
(In thousands, except share data)
| December 31, | December 25, | |||||||||
| 2005 | 2004 | |||||||||
|
Assets
|
||||||||||
|
CURRENT ASSETS:
|
||||||||||
|
Cash and cash equivalents
|
$ | 46,215 | $ | 25,274 | ||||||
|
Accounts receivable, net
|
185,080 | 151,811 | ||||||||
|
Inventories:
|
||||||||||
|
Raw materials
|
144,361 | 116,104 | ||||||||
|
Finished goods
|
109,408 | 96,817 | ||||||||
| 253,769 | 212,921 | |||||||||
|
Other current assets
|
11,956 | 9,515 | ||||||||
|
Prepaid income taxes
|
3,501 | |||||||||
|
Deferred income taxes
|
5,158 | 3,461 | ||||||||
|
TOTAL CURRENT ASSETS
|
502,178 | 406,483 | ||||||||
|
OTHER ASSETS
|
7,887 | 7,952 | ||||||||
|
GOODWILL
|
131,556 | 123,845 | ||||||||
|
OTHER INTANGIBLE ASSETS, NET
|
10,966 | 7,807 | ||||||||
|
PROPERTY, PLANT AND EQUIPMENT:
|
||||||||||
|
Land and improvements
|
64,534 | 52,648 | ||||||||
|
Building and improvements
|
139,200 | 123,004 | ||||||||
|
Machinery, equipment and office furniture
|
204,924 | 183,055 | ||||||||
|
Construction in progress
|
3,817 | 21,925 | ||||||||
| 412,475 | 380,632 | |||||||||
|
Less accumulated depreciation and amortization
|
(188,142 | ) | (164,359 | ) | ||||||
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
224,333 | 216,273 | ||||||||
|
TOTAL ASSETS
|
$ | 876,920 | $ | 762,360 | ||||||
|
Liabilities and Shareholders’ Equity
|
||||||||||
|
CURRENT LIABILITIES:
|
||||||||||
|
Accounts payable
|
$ | 106,716 | $ | 87,399 | ||||||
|
Accrued liabilities:
|
||||||||||
|
Compensation and benefits
|
69,528 | 58,151 | ||||||||
|
Income taxes
|
1,604 | |||||||||
|
Other
|
25,845 | 16,282 | ||||||||
|
Current portion of long-term debt and capital lease obligations
|
458 | 22,033 | ||||||||
|
TOTAL CURRENT LIABILITIES
|
204,151 | 183,865 | ||||||||
|
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current
portion
|
209,039 | 185,109 | ||||||||
|
DEFERRED INCOME TAXES
|
12,914 | 18,476 | ||||||||
|
MINORITY INTEREST
|
8,577 | 8,265 | ||||||||
|
OTHER LIABILITIES
|
10,387 | 9,876 | ||||||||
|
TOTAL LIABILITIES
|
445,068 | 405,591 | ||||||||
|
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 18,402,648 and 18,002,255
|
18,403 | 18,002 | ||||||||
|
Additional paid-in capital
|
97,372 | 89,269 | ||||||||
|
Deferred stock compensation
|
4,212 | 3,423 | ||||||||
|
Deferred stock compensation rabbi trust
|
(2,117 | ) | (1,331 | ) | ||||||
|
Retained earnings
|
312,878 | 247,427 | ||||||||
|
Accumulated other comprehensive earnings
|
2,408 | 1,525 | ||||||||
| 433,156 | 358,315 | |||||||||
|
Employee stock notes receivable
|
(1,304 | ) | (1,546 | ) | ||||||
|
TOTAL SHAREHOLDERS’ EQUITY
|
431,852 | 356,769 | ||||||||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 876,920 | $ | 762,360 | ||||||
See notes to consolidated financial statements.
32
Table of Contents
Consolidated Statements of Earnings
(In thousands, except per share data)
| Year Ended | |||||||||||||
| December 31, | December 25, | December 27, | |||||||||||
| 2005 | 2004 | 2003 | |||||||||||
|
NET SALES
|
$ | 2,691,522 | $ | 2,453,281 | $ | 1,898,830 | |||||||
|
COST OF GOODS SOLD
|
2,332,266 | 2,157,028 | 1,640,844 | ||||||||||
|
GROSS PROFIT
|
359,256 | 296,253 | 257,986 | ||||||||||
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
235,651 | 201,335 | 177,824 | ||||||||||
|
GAIN ON INSURANCE SETTLEMENT
|
(1,391 | ) | |||||||||||
|
EARNINGS FROM OPERATIONS
|
123,605 | 96,309 | 80,162 | ||||||||||
|
OTHER EXPENSE (INCOME):
|
|||||||||||||
|
Interest expense
|
15,171 | 14,904 | 14,589 | ||||||||||
|
Interest income
|
(1,098 | ) | (284 | ) | (219 | ) | |||||||
|
Net gain on sale of real estate and interest in subsidiary
|
(1,240 | ) | (1,370 | ) | |||||||||
| 12,833 | 13,250 | 14,370 | |||||||||||
|
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST
|
110,772 | 83,059 | 65,792 | ||||||||||
|
INCOME TAXES
|
41,050 | 31,462 | 24,325 | ||||||||||
|
EARNINGS BEFORE MINORITY INTEREST
|
69,722 | 51,597 | 41,467 | ||||||||||
|
MINORITY INTEREST
|
(2,349 | ) | (2,994 | ) | (1,348 | ) | |||||||
|
NET EARNINGS
|
$ | 67,373 | $ | 48,603 | $ | 40,119 | |||||||
|
EARNINGS PER SHARE — BASIC
|
$ | 3.67 | $ | 2.70 | $ | 2.26 | |||||||
|
EARNINGS PER SHARE — DILUTED
|
$ | 3.53 | $ | 2.59 | $ | 2.18 | |||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
18,374 | 18,032 | 17,761 | ||||||||||
|
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS
|
19,106 | 18,771 | 18,379 | ||||||||||
See notes to consolidated financial statements.
33
Table of Contents
Consolidated Statements of Shareholders’ Equity
(In thousands, except share and per share data)
| Deferred | Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Deferred | Compensation | Other | Employees | |||||||||||||||||||||||||||||
| Common | Paid-In | Stock | Rabbi | Retained | Comprehensive | Stock Notes | |||||||||||||||||||||||||||
| Stock | Capital | Compensation | Trust | Earnings | Earnings | Receivable | Total | ||||||||||||||||||||||||||
|
Balance at December 28, 2002
|
$ | 17,742 | $ | 82,139 | $ | 1,804 | $ | 0 | $ | 164,221 | $ | 299 | $ | (1,401 | ) | $ | 264,804 | ||||||||||||||||
|
Comprehensive earnings:
|
|||||||||||||||||||||||||||||||||
|
Net earnings
|
40,119 | ||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
1,097 | ||||||||||||||||||||||||||||||||
|
Total comprehensive earnings
|
41,216 | ||||||||||||||||||||||||||||||||
|
Cash dividends — $.095 per share
|
(1,689 | ) | (1,689 | ) | |||||||||||||||||||||||||||||
|
Issuance of 89,753 shares under employee stock plans
|
90 | 1,191 | 1,281 | ||||||||||||||||||||||||||||||
|
Issuance of 3,997 shares under stock grant programs
|
4 | 83 | 87 | ||||||||||||||||||||||||||||||
|
Issuance of 43,834 shares under deferred compensation plans
|
44 | 700 | (129 | ) | (615 | ) | 0 | ||||||||||||||||||||||||||
|
Repurchase of 123,234 shares
|
(123 | ) | (1,906 | ) | (2,029 | ) | |||||||||||||||||||||||||||
|
Tax benefits from non-qualified stock options exercised
|
246 | 246 | |||||||||||||||||||||||||||||||
|
Accrued expense under deferred compensation plans
|
772 | 772 | |||||||||||||||||||||||||||||||
|
Issuance of 57,232 shares in exchange for employee stock
notes receivable
|
57 | 830 | (887 | ) | 0 | ||||||||||||||||||||||||||||
|
Payments received on employee stock notes receivable
|
416 | 416 | |||||||||||||||||||||||||||||||
|
Balance at December 27, 2003
|
$ | 17,814 | $ | 85,189 | $ | 2,447 | $ | (615 | ) | $ | 200,745 | $ | 1,396 | $ | (1,872 | ) | $ | 305,104 | |||||||||||||||
|
Comprehensive earnings:
|
|||||||||||||||||||||||||||||||||
|
Net earnings
|
48,603 | ||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
129 | ||||||||||||||||||||||||||||||||
|
Total comprehensive earnings
|
48,732 | ||||||||||||||||||||||||||||||||
|
Cash dividends — $.100 per share
|
(1,796 | ) | (1,796 | ) | |||||||||||||||||||||||||||||
|
Issuance of 170,677 shares under employee stock plans
|
170 | 2,845 | 3,015 | ||||||||||||||||||||||||||||||
|
Issuance of 4,036 shares under stock grant programs
|
4 | 127 | 131 | ||||||||||||||||||||||||||||||
|
Issuance of 22,528 shares under deferred compensation plans
|
23 | 693 | (716 | ) | 0 | ||||||||||||||||||||||||||||
|
Received 4,695 shares for the exercise of stock options
|
(5 | ) | (150 | ) | (155 | ) | |||||||||||||||||||||||||||
|
Received 4,050 shares to payoff notes receivable
|
(4 | ) | (125 | ) | (129 | ) | |||||||||||||||||||||||||||
|
Tax benefits from non-qualified stock options exercised
|
559 | 559 | |||||||||||||||||||||||||||||||
|
Accrued expense under deferred compensation plans
|
976 | 976 | |||||||||||||||||||||||||||||||
|
Issuance of 195 shares in exchange for employee stock notes
receivable
|
6 | (6 | ) | 0 | |||||||||||||||||||||||||||||
|
Payments received on employee stock notes receivable
|
332 | 332 | |||||||||||||||||||||||||||||||
|
Balance at December 25, 2004
|
$ | 18,002 | $ | 89,269 | $ | 3,423 | $ | (1,331 | ) | $ | 247,427 | $ | 1,525 | $ | (1,546 | ) | $ | 356,769 | |||||||||||||||
|
Comprehensive earnings:
|
|||||||||||||||||||||||||||||||||
|
Net earnings
|
67,373 | ||||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment
|
883 | ||||||||||||||||||||||||||||||||
|
Total comprehensive earnings
|
68,256 | ||||||||||||||||||||||||||||||||
|
Cash dividends — $.105 per share
|
(1,922 | ) | (1,922 | ) | |||||||||||||||||||||||||||||
|
Issuance of 411,245 shares under employee stock plans
|
411 | 4,781 | 5,192 | ||||||||||||||||||||||||||||||
|
Issuance of 3,713 shares under stock grant programs
|
4 | 158 | 162 | ||||||||||||||||||||||||||||||
|
Issuance of 33,074 shares under deferred compensation plans
|
33 | 939 | (216 | ) | (756 | ) | 0 | ||||||||||||||||||||||||||
|
Received 49,244 shares for the exercise of stock options
|
(49 | ) | (1,856 | ) | (1,905 | ) | |||||||||||||||||||||||||||
|
Tax benefits from non-qualified stock options exercised
|
4,021 | 4,021 | |||||||||||||||||||||||||||||||
|
Accrued expense under deferred compensation plans
|
1,005 | (30 | ) | 975 | |||||||||||||||||||||||||||||
|
Issuance of 1,605 shares in exchange for employee stock
notes receivable
|
2 | 60 | (62 | ) | 0 | ||||||||||||||||||||||||||||
|
Payments received on employee stock notes receivable
|
304 | 304 | |||||||||||||||||||||||||||||||
|
Balance at December 31, 2005
|
$ | 18,403 | $ | 97,372 | $ | 4,212 | $ | (2,117 | ) | $ | 312,878 | $ | 2,408 | $ | (1,304 | ) | $ | 431,852 | |||||||||||||||
See notes to consolidated financial statements.
34
Table of Contents
Consolidated Statements of Cash Flows
(In thousands)
| Year Ended | |||||||||||||||
| December 31, | December 25, | December 27, | |||||||||||||
| 2005 | 2004 | 2003 | |||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|||||||||||||||
|
Net earnings
|
$ | 67,373 | $ | 48,603 | $ | 40,119 | |||||||||
|
Adjustments to reconcile net earnings to net cash from operating
activities:
|
|||||||||||||||
|
Depreciation
|
31,311 | 28,453 | 25,638 | ||||||||||||
|
Amortization of intangibles
|
3,485 | 2,383 | 1,588 | ||||||||||||
|
Notes receivable written off to expense
|
816 | ||||||||||||||
|
Expense associated with stock grant plans
|
162 | 131 | 87 | ||||||||||||
|
Deferred income taxes
|
(7,377 | ) | 790 | 1,746 | |||||||||||
|
Tax benefits from non-qualified stock options exercised
|
4,021 | 559 | 246 | ||||||||||||
|
Minority interest
|
2,349 | 2,994 | 1,348 | ||||||||||||
|
Loss on sale of interest in subsidiary
|
193 | ||||||||||||||
|
Gain on insurance settlement
|
(1,391 | ) | |||||||||||||
|
Net (gain) loss on sale or impairment of property, plant
and equipment
|
(553 | ) | (710 | ) | 1,050 | ||||||||||
|
Changes in:
|
|||||||||||||||
|
Accounts receivable
|
(28,742 | ) | (16,107 | ) | (32,074 | ) | |||||||||
|
Inventories
|
(36,501 | ) | (42,817 | ) | (3,555 | ) | |||||||||
|
Accounts payable
|
16,998 | 7,371 | 23,476 | ||||||||||||
|
Accrued liabilities and other
|
20,790 | 19,782 | 10,706 | ||||||||||||
|
NET CASH FROM OPERATING ACTIVITIES
|
74,132 | 50,234 | 70,375 | ||||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|||||||||||||||
|
Purchase of property, plant and equipment
|
(40,233 | ) | (40,722 | ) | (40,578 | ) | |||||||||
|
Purchase of licensing agreements
|
(150 | ) | |||||||||||||
|
Acquisitions, net of cash received
|
(20,747 | ) | (10,075 | ) | (787 | ) | |||||||||
|
Proceeds from sale of interest in subsidiary
|
4,679 | ||||||||||||||
|
Proceeds from sale of property, plant, and equipment
|
2,712 | 5,226 | 6,221 | ||||||||||||
|
Advances on notes receivable
|
(887 | ) | (308 | ) | |||||||||||
|
Collection of notes receivable
|
820 | 2,560 | 461 | ||||||||||||
|
Restricted cash equivalents
|
1,383 | ||||||||||||||
|
Insurance proceeds
|
3,057 | 2,000 | |||||||||||||
|
Other assets, net
|
(131 | ) | (616 | ) | (549 | ) | |||||||||
|
NET CASH FROM INVESTING ACTIVITIES
|
(55,409 | ) | (37,256 | ) | (33,999 | ) | |||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|||||||||||||||
|
Net borrowings (repayments) of revolving credit facilities
|
23,827 | 1,223 | (27,070 | ) | |||||||||||
|
Repayment of long-term debt
|
(23,407 | ) | (6,392 | ) | (6,140 | ) | |||||||||
|
Proceeds from issuance of common stock
|
4,487 | 2,860 | 1,281 | ||||||||||||
|
Distributions to minority shareholder
|
(1,217 | ) | (1,123 | ) | (833 | ) | |||||||||
|
Investment received from minority shareholder
|
500 | ||||||||||||||
|
Dividends paid to shareholders
|
(1,922 | ) | (1,796 | ) | (1,689 | ) | |||||||||
|
Repurchase of common stock
|
(129 | ) | (2,029 | ) | |||||||||||
|
Other, net
|
(50 | ) | 223 | ||||||||||||
|
NET CASH FROM FINANCING ACTIVITIES
|
2,218 | (5,134 | ) | (36,480 | ) | ||||||||||
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
20,941 | 7,844 | (104 | ) | |||||||||||
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
25,274 | 17,430 | 17,534 | ||||||||||||
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
$ | 46,215 | $ | 25,274 | $ | 17,430 | |||||||||
|
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
|
|||||||||||||||
|
Cash paid during the year for:
|
|||||||||||||||
|
Interest
|
$ | 14,179 | $ | 15,087 | $ | 14,651 | |||||||||
|
Income taxes
|
43,303 | 29,181 | 19,884 | ||||||||||||
|
NON-CASH OPERATING ACTIVITIES:
|
|||||||||||||||
|
Accounts receivable exchanged for note receivable
|
765 | ||||||||||||||
|
Non-compete agreements with Chairman of the Board in exchange
for future payments
|
856 | ||||||||||||||
|
NON-CASH INVESTING ACTIVITIES:
|
|||||||||||||||
|
Property, plant and equipment exchanged for long-term debt
|
63 | ||||||||||||||
|
Insurance receivable in exchange for property, plant and
equipment
|
1,455 | ||||||||||||||
|
Note receivable exchanged for management fees to former
subsidiary
|
520 | ||||||||||||||
|
Property, plant and equipment acquired through capital leases
|
2,110 | ||||||||||||||
|
Stock acquired through employees’ stock notes receivable
|
62 | 6 | 887 | ||||||||||||
|
NON-CASH FINANCING ACTIVITIES:
|
|||||||||||||||
|
Common stock issued under deferred compensation plans
|
972 | 716 | 744 | ||||||||||||
|
Stock received for the exercise of stock options, net
|
1,200 | 4 | |||||||||||||
See notes to consolidated financial statements.
35
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements
A. Summary of Significant Accounting Policies
OPERATIONS
We engineer, manufacture, treat, distribute and install lumber,
composite wood, plastic, and other building products for the
do-it-yourself/retail (“DIY/retail”), site-built
construction, manufactured housing, and industrial markets. Our
principal products include preservative-treated wood,
remanufactured lumber, lattice, fence panels, deck components,
specialty packaging, engineered trusses, wall panels, and other
building products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and
those of our wholly-owned and majority-owned subsidiaries and
partnerships. In addition, we consolidate 50% owned entities
over which we exercise control. Intercompany transactions and
balances have been eliminated.
MINORITY INTEREST IN SUBSIDIARIES
Minority interest in results of operations of consolidated
subsidiaries represents the minority shareholders’ share of
the income or loss of various consolidated subsidiaries. The
minority interest reflects the original investment by these
minority shareholders combined with their proportional share of
the earnings or losses of these subsidiaries, net of
distributions paid.
FISCAL YEAR
Our fiscal year is a 52 or 53 week period, ending on the
last Saturday of December. Unless otherwise stated, references
to 2005, 2004, and 2003 relate to the fiscal years ended
December 31, 2005, December 25, 2004, and
December 27, 2003, respectively. Fiscal year 2005 was
comprised of 53 weeks, and fiscal years 2004 and 2003 were
comprised of 52 weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments have been
determined in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 107, Disclosures about
Fair Value of Financial Instruments. Significant differences
in fair market values and recorded values are disclosed in
Note D. The estimated fair value amounts have been
determined using available market information and appropriate
valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that we could realize in a
current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31,
2005. Although we are not aware of any factors that would
significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current
estimates of fair value may differ significantly from the
amounts presented herein.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly-liquid
investments purchased with an original maturity of three months
or less. Cash equivalents totaled approximately
$32.7 million and $15.4 million as of
December 31, 2005 and December 25, 2004, respectively.
As a result of our cash management system, checks issued but not
presented to our bank for payment create negative cash balances.
These negative balances are included in accounts payable and
accrued liabilities and totaled $25.1 million and
$19.0 million as of December 31, 2005 and
December 25, 2004, respectively.
ACCOUNTS RECEIVABLE
We perform periodic credit evaluations of our customers and
generally do not require collateral. Accounts receivable are due
under a range of terms we offer to our customers. Discounts are
offered, in most instances, as an incentive for early payment.
36
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
ACCOUNTS RECEIVABLE ALLOWANCES
We base our allowances related to receivables on historical
credit and collections experience, and the specific
identification of other potential problems, including the
economic climate. Actual collections can differ, requiring
adjustments to the allowances. Individual accounts receivable
balances are evaluated on a monthly basis, and those balances
considered to be uncollectible are charged to the allowance.
Collections of amounts previously written off are recorded as an
increase to the allowance.
The following table presents the activity in our accounts
receivable allowances (in thousands):
| Additions | Recovery of | ||||||||||||||||||||
| Balance at | Charged to | Uncollectible | Amounts | Balance | |||||||||||||||||
| Beginning | Costs and | Accounts | Previously | at End of | |||||||||||||||||
| of Period | Expenses | Written Off | Written Off | Period | |||||||||||||||||
|
Year Ended December 31, 2005:
|
|||||||||||||||||||||
|
Allowance for possible losses on accounts receivable
|
$ | 2,943 | $ | 29,173 | ($ | 29,531 | ) | $ | 811 | $ | 3,396 | ||||||||||
|
Year Ended December 25, 2004:
|
|||||||||||||||||||||
|
Allowance for possible losses on accounts receivable
|
$ | 1,891 | $ | 24,126 | ($ | 23,796 | ) | $ | 722 | $ | 2,943 | ||||||||||
|
Year Ended December 27, 2003:
|
|||||||||||||||||||||
|
Allowance for possible losses on accounts receivable
|
$ | 2,427 | $ | 17,817 | ($ | 18,694 | ) | $ | 341 | $ | 1,891 | ||||||||||
We record estimated sales returns, discounts, and other
applicable adjustments as a reduction of net sales in the same
period revenue is recognized.
INVENTORIES
Inventories are stated at the lower of average cost or market.
The cost of inventories includes raw materials, direct labor,
and manufacturing overhead. Cost is determined on a
first-in, first-out
(FIFO) basis. Raw materials consist primarily of unfinished
wood products expected to be manufactured or treated prior to
sale, while finished goods represent various manufactured and
treated wood products ready for sale.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Expenditures
for renewals and betterments are capitalized, and maintenance
and repairs are expensed as incurred. Amortization of assets
held under capital leases is included in depreciation and
amortized over the shorter of the estimated useful life of the
asset or the lease term. Depreciation is computed principally by
the straight-line method over the estimated useful lives of the
assets as follows:
|
Buildings and improvements
|
15 to 31.5 years | |||
|
Land improvements
|
5 to 15 years | |||
|
Machinery, equipment and office furniture
|
3 to 10 years |
FOREIGN CURRENCY TRANSLATION
Our foreign operations use the local currency as their
functional currency. Accordingly, assets and liabilities are
translated at exchange rates as of the balance sheet date and
revenues and expenses are translated using weighted average
rates, with translation adjustments included as a separate
component of shareholders’ equity. The net realized gain or
loss on foreign currency transactions were not material in any
year presented.
SELF-INSURANCE RESERVES
We are primarily self-insured for certain employee health
benefits, and have self-funded retentions for general liability,
automobile liability, property and workers’ compensation.
We are fully self-insured for environmental liabilities. The
general liability, automobile liability, property, workers’
compensation, and environmental liabilities are managed through
a wholly-owned insurance captive; the related assets and
liabilities of which are included in the consolidated financial
statements as of December 31, 2005. Through the captive we
are responsible for general liability claims up to
$2 million per occurrence and $4 million in aggregate;
for automobile claims up to $1.5 million per occurrence;
for property claims up to $0.4 million; and for
workers’ compensation claims up to $1.5 million per
37
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
accident or disease. We have purchased excess liability coverage
over our general liability, automobile liability, and
employer’s liability up to $100 million per occurrence
and in aggregate. Our policy is to accrue amounts equal to
actuarially determined or internally computed liabilities. The
actuarial and internal valuations are based on historical
information along with certain assumptions about future events.
Changes in assumptions for such matters as legal actions,
medical cost trends, and changes in claims experience could
cause these estimates to change in the future.
INCOME TAXES
Deferred income tax assets and liabilities are computed for
differences between the financial statement and tax basis of
assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax asset and
liability computations are based on enacted tax laws and rates.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred
tax assets and liabilities.
REVENUE RECOGNITION
Revenue is recognized at the time the product is shipped to the
customer. Generally, title passes at the time of shipment. In
certain circumstances, the customer takes title when the
shipment arrives at the destination. However, our shipping
process is typically completed the same day.
Earnings on construction contracts are reflected in operations
using either
percentage-of-completion
accounting, which includes the cost to cost and units of
delivery methods, or completed contract accounting, depending on
the nature of the business at individual operations. Under
percentage-of-completion
using the cost to cost method, revenues and related earnings on
construction contracts are measured by the relationships of
actual costs incurred related to the total estimated costs.
Under
percentage-of-completion
using the units of delivery method, revenues and related
earnings on construction contracts are measured by the
relationships of actual units produced related to the total
number of units. Revisions in earnings estimates on the
construction contracts are recorded in the accounting period in
which the basis for such revisions becomes known. Projected
losses on individual contracts are charged to operations in
their entirety when such losses become apparent. Under the
completed contract method, revenues and related earnings are
recorded when the contracted work is complete and losses are
charged to operations in their entirety when such losses become
apparent.
The following table presents the balances of
percentage-of-completion
accounts on December 31, 2005 and December 25, 2004
which are included in other current assets and other current
liabilities, respectively (in thousands):
| 2005 | 2004 | |||||||
|
Cost and Earnings in Excess of Billings
|
$ | 9,052 | $ | 2,803 | ||||
|
Billings in Excess of Cost and Earnings
|
7,495 | 2,517 | ||||||
SHIPPING AND HANDLING OF PRODUCT
Shipping and handling costs that are charged to and reimbursed
by the customer are recognized as revenue. Costs incurred
related to the shipment and handling of products are classified
in cost of goods sold.
EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated based
on the weighted average number of common shares outstanding
during the periods presented. Diluted EPS is calculated based on
the weighted average number of common and common equivalent
shares outstanding during the periods presented, giving effect
to stock options granted (see Note I) utilizing the
“treasury stock” method.
38
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
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):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| Per | Per | Per | ||||||||||||||||||||||||||||||||||
| Income | Shares | Share | Income | Shares | Share | Income | Shares | Share | ||||||||||||||||||||||||||||
| (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||||||||||||||||||||
|
Net Earnings
|
$ | 67,373 | $ | 48,603 | $ | 40,119 | ||||||||||||||||||||||||||||||
|
EPS — Basic
|
||||||||||||||||||||||||||||||||||||
|
Income available to common stockholders
|
67,373 | 18,374 | $ | 3.67 | 48,603 | 18,032 | $ | 2.70 | 40,119 | 17,761 | $ | 2.26 | ||||||||||||||||||||||||
|
Effect of Dilutive Securities
|
||||||||||||||||||||||||||||||||||||
|
Options
|
732 | 739 | 618 | |||||||||||||||||||||||||||||||||
|
EPS — Diluted
|
||||||||||||||||||||||||||||||||||||
|
Income available to common stockholders and assumed options
exercised
|
$ | 67,373 | 19,106 | $ | 3.53 | $ | 48,603 | 18,771 | $ | 2.59 | $ | 40,119 | 18,379 | $ | 2.18 | |||||||||||||||||||||
No outstanding options were excluded from the computation of
diluted EPS as of December 31, 2005.
Options to purchase 15,000 shares of common stock at
an exercise price of $36.01 were outstanding as of
December 25, 2004, but were not included in the computation
of diluted EPS because the options’ exercise prices were
greater than the average market price of the common stock during
the period and, therefore, would be antidilutive.
Options to purchase 295,000 shares of common stock at
exercise prices ranging from $22.88 to $36.01 were outstanding
as of December 27, 2003, but were not included in the
computation of diluted EPS because the options’ exercise
prices were greater than the average market price of the common
stock during the period and, therefore, would be antidilutive.
LONG-LIVED ASSETS
In accordance with SFAS No. 144, Accounting for the
Impairment and Disposal of Long-Lived Assets, we evaluate
the recoverability of our long-lived assets by determining
whether unamortized balances could be recovered through
undiscounted future operating cash flows over the remaining
lives of the assets. If the sum of the expected future cash
flows was less than the carrying value of the assets, an
impairment loss would be recognized for the excess of the
carrying value over the fair value. The estimated fair value is
determined by discounting the expected future cash flows at a
rate that is required for a similar investment with like risks.
STOCK-BASED COMPENSATION
As permitted under SFAS No. 123, Accounting for
Stock-Based Compensation, (“SFAS 123”), we
continue to apply the provisions of Accounting Principles Board
(“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 in 2005, 2004,
39
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
and 2003 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):
| 2005 | 2004 | 2003 | |||||||||||
|
Net Earnings:
|
|||||||||||||
|
As Reported
|
$ | 67,373 | $ | 48,603 | $ | 40,119 | |||||||
|
Deduct: Compensation expense — fair value method
|
(734 | ) | (1,866 | ) | (1,743 | ) | |||||||
|
Pro Forma
|
$ | 66,639 | $ | 46,737 | $ | 38,376 | |||||||
|
EPS — Basic:
|
|||||||||||||
|
As Reported
|
$ | 3.67 | $ | 2.70 | $ | 2.26 | |||||||
|
Pro Forma
|
$ | 3.63 | $ | 2.59 | $ | 2.16 | |||||||
|
EPS — Diluted:
|
|||||||||||||
|
As Reported
|
$ | 3.53 | $ | 2.59 | $ | 2.18 | |||||||
|
Pro Forma
|
$ | 3.50 | $ | 2.51 | $ | 2.13 | |||||||
No options were granted in 2005. The fair value of each option
granted in 2004 and 2003 is estimated on the date of the grant
using the Black-Scholes option pricing model with the following
weighted average assumptions.
| 2004 | 2003 | |||||||
|
Risk Free Interest Rate
|
4.6% | 4.6% | ||||||
|
Expected Life
|
6.0 years | 6.5 years | ||||||
|
Expected Volatility
|
27.42% | 28.25% | ||||||
|
Expected Dividend Yield
|
0.40% | 0.40% | ||||||
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and
expenses during the reporting period. We believe our estimates
to be reasonable; however, actual results could differ from
these estimates.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform
to the current year presentation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued a revision of SFAS No. 123,
Share-Based Payment (“SFAS 123(R)”), which
supercedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. This statement focuses primarily on
transactions in which an entity obtains employee services in
exchange for share-based payments. Under SFAS 123(R), a
public entity generally is required to measure the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award,
with such cost recognized over the applicable vesting period. In
addition, SFAS 123(R) requires an entity to provide certain
disclosures in order to assist in understanding the nature of
share-based payment transactions and the effects of those
transactions on the financial statements. The provisions of
SFAS 123(R) are required to be applied as of the beginning
of the first interim or annual reporting period that began after
December 15, 2005. As such, we were required to adopt the
provisions of SFAS 123(R) at the beginning of the first
quarter of fiscal 2006. While we currently disclose the
pro-forma earnings effects of our stock-based awards, we
currently estimate that this statement will result in an annual
pre-tax expense totaling approximately $875,000.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs (“SFAS 151”), which amends
Accounting Research Bulletin (“ARB”) No. 43,
chapter 4, Inventory Pricing. This statement
clarifies that abnormal amounts of idle facility expense,
freight, handling costs and wasted materials
(spoilage) should be recognized as current-period charges
and requires the allocation of fixed production
40
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
overhead to inventory based on the normal capacity of the
production facilities. The provisions of SFAS 151 are
required to be applied for fiscal years beginning after
June 15, 2005. As such, we are required to adopt the
provisions of SFAS 151 at the beginning of our fiscal year
beginning January 1, 2006. We do not expect that the
implementation of SFAS 151 will have a material effect on
our consolidated financial statements.
In March 2005, the FASB issued Financial Interpretation
No. 47, Accounting for Conditional Asset Retirement
Obligations (“FIN 47”). This new rule
requires that companies must recognize a liability for the fair
value of a legal obligation to perform asset-retirement
activities that are conditional on a future event if the amount
can be reasonably estimated. Companies must adopt FIN 47 no
later than the end of the fiscal year ending after
December 15, 2005. Accordingly, as discussed in
Note M, we recorded a liability as of December 31,
2005 of approximately $465,000.
B. Business Combinations and Asset Purchases
All of the transactions mentioned below are considered business
combinations under the provision of SFAS No. 141,
Business Combinations and Emerging Issues Task Force
Issue 98-3, Determining Whether a Nonmonetary Transaction
Involves Receipt of Productive Assets or of a Business
(“EITF 98-3”), except for the purchase of the
treating plants from Quality Wood Treating Co., Inc.
(“Quality”) on August 26, 2003. Each business
combination has been accounted for as a purchase. Accordingly,
in each instance, the purchase price was allocated to the assets
acquired, liabilities assumed, and identifiable intangible
assets as applicable based on their fair market values at the
date of acquisition. Any excess of the purchase price over the
fair value of the acquired assets, including identifiable
intangible assets, and assumed liabilities was recorded as
goodwill in each transaction. The results of operations of each
business combination are included in our consolidated financial
statements since the date it was acquired.
On November 14, 2005, one of our subsidiaries acquired the
assets of DecKorators, Inc. (“DecKorators”) which
designs, imports, markets and distributes decorative balusters
and accessories for residential decks and porches, and is
located in Crestwood and St. Louis, MO. The purchase price
was approximately $7.7 million, consisting of
$7.0 million paid on the date we closed the transaction and
$0.7 million paid in January 2006, allocating
$0.8 million to tangible net assets, $0.2 million to
non-compete agreements and $6.7 million to goodwill. The
purchase price allocation for this acquisition is preliminary
and will be revised as final estimates of intangible asset
values are made in accordance with SFAS 141, Business
Combinations. DecKorators had net sales in fiscal 2004
totaling approximately $9.1 million.
On June 27, 2005, one of our subsidiaries which at the time
owned a 50% interest in Shawnlee Construction, LLC
(“Shawnlee”), which provides framing services for
multi-family construction, and is located in Plainville, MA,
acquired an additional 25% interest for approximately
$3.5 million, allocating $1.2 million to tangible
assets, $0.8 million to customer relationship related
intangibles, $0.7 million to a non-compete agreement,
$0.2 million to a backlog and $0.6 million to
goodwill. In addition, we agreed to purchase the remaining 25%
over the next five years. In addition, Shawnlee acquired the
assets of Shepardville Construction, Inc.
(“Shepardville”) and AW Construction, LLC
(“AW”), which install interior products for commercial
and multi-family construction. The purchase price was
approximately $2.0 million, allocating $0.9 million to
tangible assets, $0.8 million to customer relationship
related intangibles, and $0.3 million to a backlog.
Shepardville had net sales in fiscal 2004 totaling approximately
$4.8 million. AW had net sales in 2004 totaling
approximately $7.9 million.
On June 2, 2005, one of our subsidiaries acquired the
assets of Maine Ornamental Woodworkers, Inc. (“Maine
Ornamental”), which manufactures, imports and distributes
decorative caps used on decking and fence posts, and is based in
Winthrop, ME and Bainbridge Island, WA. The purchase price was
approximately $8.4 million, consisting of $7.5 million
paid on the date we closed the transaction and $0.9 million
paid in August 2005, allocating $4.4 million to tangible
net assets, $1.7 million to non-compete agreements,
$2.1 million to customer relationship related intangibles
and $0.2 million to goodwill. Maine Ornamental had net
sales in fiscal 2004 totaling approximately $12.4 million.
On April 2, 2004, one of our subsidiaries acquired a 50%
interest in Shawnlee. The purchase price was approximately
$4.8 million, allocating $1.2 million to tangible
assets and purchased intangibles, $1.1 million to a
non-compete agreement, $1.3 million to customer
relationship related intangibles, $0.2 million to a
backlog, and $1.0 million to goodwill. Shawnlee had net
sales in fiscal 2003 totaling approximately $20 million. We
have consolidated this entity, including a respective minority
interest, because we exercise control.
On March 15, 2004, one of our subsidiaries acquired the
assets of Slaughter Industries, owned by International Paper
Company (“Slaughter”), a facility which supplies the
site-built construction market in Dallas, TX. The purchase price
was approximately
41
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
$3.9 million, which was allocated to the fair value of
tangible net assets. Slaughter had net sales in fiscal 2003
totaling approximately $48 million.
On January 30, 2004, one of our subsidiaries acquired the
assets of Midwest Building Systems, Inc. (“Midwest”),
a facility which serves the site-built construction market in
Indianapolis, IN. The purchase price was approximately
$1.5 million, which was allocated to the fair value of
tangible net assets. Midwest had net sales in fiscal 2003
totaling approximately $7 million.
On August 28, 2003, one of our subsidiaries acquired 50% of
the assets of D&L Framing LLC (“D&L”), a
framing operation for multi-family construction located in Las
Vegas, NV. The purchase price was approximately
$0.6 million, which was primarily allocated to the fair
value of tangible net assets. D&L had net sales in fiscal
2002 totaling approximately $8 million. We have
consolidated this entity, including a respective minority
interest, because we exercise control.
On August 26, 2003, one of our subsidiaries entered into an
agreement with Quality to cancel the treating services agreement
completed on November 4, 2002 and purchase plants located
in Lansing, MI and Janesville, WI and the equipment of a plant
located in White Bear Lake, MN. The total purchase price for
these assets was $5.1 million, which was allocated to the
fair value of tangible net assets. In addition, another
subsidiary entered into a capital lease for the real estate of
the White Bear Lake, MN plant totaling $2.1 million.
On June 4, 2003, one of our subsidiaries acquired 75% of
the assets of Norpac Construction, L. L. C.
(“Norpac”), a concrete framer for multi-family
construction located in Las Vegas, NV. The purchase price was
approximately $0.2 million, which was primarily allocated
to the fair value of tangible net assets. Norpac had net sales
in fiscal 2002 totaling approximately $1.5 million. We have
consolidated this entity, including a respective minority
interest, because we exercise control.
The acquisitions in 2005, 2004 and 2003 were not significant to
our operating results individually nor in the aggregate, and
thus pro forma results are not presented.
C. Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets in
accordance with the provisions of SFAS No. 142
Goodwill and Other Intangible Assets. Goodwill and
intangible assets acquired in a purchase business combination
and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually
or when a triggering event occurs. We tested for impairment in
the fourth quarter by utilizing the discounted cash flow method,
which resulted in no impairment.
On December 31, 2002, the Chairman of the Board retired as
an employee of Universal Forest Products, Inc., and we entered
into a non-compete agreement with him which provides for monthly
payments of $12,500 for a term of seven years. The present value
of these payments has been recorded in Other liabilities.
The following amounts were included in other intangible assets,
net as of December 31, 2005 and December 25, 2004 (in
thousands):
| 2005 | 2004 | |||||||||||||||
| Accumulated | Accumulated | |||||||||||||||
| Assets | Amortization | Assets | Amortization | |||||||||||||
|
Non-compete agreements
|
$ | 12,399 | $ | (6,190 | ) | $ | 9,805 | $ | (4,318 | ) | ||||||
|
Licensing agreements
|
2,510 | (1,995 | ) | 2,760 | (1,601 | ) | ||||||||||
|
Customer relationships
|
4,882 | (867 | ) | 1,285 | (193 | ) | ||||||||||
|
Backlog
|
644 | (417 | ) | 190 | (121 | ) | ||||||||||
|
Total
|
$ | 20,435 | $ | (9,469 | ) | $ | 14,040 | $ | (6,233 | ) | ||||||
Amortization is computed principally by the straight-line method
over the estimated useful lives of the intangible assets as
follows:
|
Non-compete agreements
|
5 to 11 years | |||
|
Licensing agreements
|
5 to 20 years | |||
|
Customer relationship
|
5 years | |||
|
Backlog
|
1 year |
42
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
Amortization expense for intangibles totaled $3.5 million,
$2.4 million and $1.6 million in 2005, 2004, and 2003,
respectively. The estimated amortization expense for intangibles
for each of the five succeeding fiscal years is as follows (in
thousands):
|
2006
|
$ | 3,539 | ||
|
2007
|
2,800 | |||
|
2008
|
2,350 | |||
|
2009
|
1,346 | |||
|
2010
|
506 | |||
|
Thereafter
|
425 | |||
|
Total
|
$ | 10,966 | ||
The changes in the net carrying amount of goodwill for the years
ended December 31, 2005 and December 25, 2004, are as
follows (in thousands):
|
Balance as of December 27, 2003
|
$ | 125,028 | ||
|
Acquisitions
|
4,345 | |||
|
Final purchase price allocation of Shawnlee
|
(3,397 | ) | ||
|
Sale of interest in subsidiary
|
(2,169 | ) | ||
|
Other, net
|
38 | |||
|
Balance as of December 25, 2004
|
$ | 123,845 | ||
|
Acquisitions
|
7,461 | |||
|
Other, net
|
250 | |||
|
Balance as of December 31, 2005
|
$ | 131,556 | ||
D. Debt
On December 20, 2004, we completed a five-year,
$250 million unsecured revolving credit facility, which
includes amounts reserved for letters of credit. This facility
replaced our $200 million facility. Cash borrowings are
charged interest based upon an index equal to the Eurodollar
rate (in the case of borrowings in US Dollars) or the
bankers’ acceptance rate quoted (in the case of borrowings
in Canadian Dollars), plus a margin (ranging from 42.5 to
107.5 basis points, based upon our financial performance).
We are also charged an annual facility fee on the entire amount
of the lending commitment (ranging from 12.5 to 30 basis
points, based upon our performance), and a usage premium
(ranging from 7.5 to 12.5 basis points, based upon our
performance) at times when borrowings exceed $125 million.
The average borrowing rate on this facility was 3.4% and 2.8% in
2005 and 2004, respectively. The amount outstanding on the
revolving credit facility is included in the long-term debt
summary below.
On November 25, 2002, we completed a three-year,
$200 million unsecured revolving credit facility, which
includes amounts reserved for letters of credit. This facility
replaced our $175 million and $20 million Canadian
facilities. Borrowings under the revolver were charged interest
based upon an index equal to the Eurodollar rate (in the case of
borrowings in US Dollars) or the bankers’ acceptance
rate quoted (in the case of borrowings in Canadian Dollars),
plus a margin (ranging from 70 to 140 basis points, based
upon our financial performance). We were also charged an annual
facility fee on the entire amount of the lending commitment
(ranging from 17.5 to 35 basis points, based upon our
performance). The average borrowing rate on this facility was
3.3% and 3.7% in 2004 and 2003, respectively. This facility was
replaced on December 20, 2004 by the $250 million
facility noted above.
Outstanding letters of credit extended on our behalf aggregated
$38.1 million on December 31, 2005, which includes
approximately $18.3 million related to industrial
development revenue bonds. Letters of credit have terms ranging
from one to five years, and include an automatic renewal clause.
The letters of credit are charged an annual interest rate
ranging from 42.5 to 107.5 basis points, based upon our
financial performance, under the $250 million facility and
previously, 70.0 to 140.0 basis points under the
$200 million facility.
43
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
Long-term debt and capital lease obligations are summarized as
follows on December 31, 2005 and December 25, 2004
(amounts in thousands):
| 2005 | 2004 | |||||||
|
Series 1998-A Senior Notes Tranche A, due on
December 21, 2005, interest payable semi-annually at 6.69%
|
$ | 21,500 | ||||||
|
Series 1998-A Senior Notes Tranche B, due on
December 21, 2008, interest payable semi-annually at 6.98%
|
$ | 59,500 | 59,500 | |||||
|
Series 1998-A Senior Notes Tranche C, due on
December 21, 2008, interest payable semi-annually at 6.98%
|
19,000 | 19,000 | ||||||
|
Series 2002-A Senior Notes Tranche A, due on
December 18, 2009, interest payable semi-annually at 5.63%
|
15,000 | 15,000 | ||||||
|
Series 2002-A Senior Notes Tranche B, due on
December 18, 2012, interest payable semi-annually at 6.16%
|
40,000 | 40,000 | ||||||
|
Revolving credit facility totaling $250 million due on
December 18, 2009, interest due monthly at a floating rate
(4.57% on December 31, 2005)
|
53,434 | 29,108 | ||||||
|
Series 1998 Industrial Development Revenue Bonds, due on
December 1, 2018, interest payable monthly at a floating
rate (3.14% on December 31, 2005)
|
1,300 | 1,300 | ||||||
|
Series 1999 Industrial Development Revenue Bonds, due on
July 1, 2029, interest payable monthly at a floating rate
(3.05% on December 31, 2005)
|
2,400 | 2,400 | ||||||
|
Series 1999 Industrial Development Revenue Bonds, due on
August 1, 2029, interest payable monthly at a floating rate
(2.93% on December 31, 2005)
|
3,300 | 3,300 | ||||||
|
Series 2000 Industrial Development Revenue Bonds, due on
October 1, 2020, interest payable monthly at a floating
rate (3.04% on December 31, 2005)
|
2,700 | 2,700 | ||||||
|
Series 2000 Industrial Development Revenue Bonds, due on
November 1, 2020, interest payable monthly at a floating
rate (3.05% on December 31, 2005)
|
2,400 | 2,400 | ||||||
|
Series 2001 Industrial Development Revenue Bonds, due on
November 1, 2021, interest payable monthly at a floating
rate (3.04% on December 31, 2005)
|
2,500 | 2,500 | ||||||
|
Series 2002 Industrial Development Revenue Bonds, due on
December 1, 2022, interest payable monthly at a floating
rate (3.03% on December 31, 2005)
|
3,700 | 3,700 | ||||||
|
Capital lease obligations, interest imputed at 6.1%
|
2,106 | 2,084 | ||||||
|
Other
|
2,157 | 2,650 | ||||||
| 209,497 | 207,142 | |||||||
|
Less current portion
|
458 | 22,033 | ||||||
|
Long-term portion
|
$ | 209,039 | $ | 185,109 | ||||
Financial covenants on the unsecured revolving credit facility
and unsecured notes include a minimum net worth requirement,
minimum interest coverage tests, 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 all of our lending requirements on
December 31, 2005.
On December 31, 2005, the principal maturities of long-term
debt and capital lease obligations are as follows (in thousands):
|
2006
|
$ | 458 | ||
|
2007
|
351 | |||
|
2008
|
80,848 | |||
|
2009
|
68,767 | |||
|
2010
|
250 | |||
|
Thereafter
|
58,823 | |||
| $ | 209,497 | |||
44
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
On December 31, 2005, the estimated fair value of our
long-term debt, including the current portion, was
$214.2 million, which was $4.7 million greater than
the carrying value. The estimated fair value is based on rates
anticipated to be available to us for debt with similar terms
and maturities.
E. Leases
Leased property included in the balance sheet on
December 31, 2005 and December 25, 2004 is as follows
(in thousands):
| 2005 | 2004 | |||||||
|
Land and improvements
|
$ | 211 | $ | 211 | ||||
|
Buildings and improvements
|
1,909 | 1,899 | ||||||
|
Machinery and equipment
|
51 | |||||||
| 2,171 | 2,110 | |||||||
|
Less accumulated amortization
|
(214 | ) | (135 | ) | ||||
| $ | 1,957 | $ | 1,975 | |||||
We lease certain real estate under operating and capital lease
agreements with original terms ranging from one to ten years. We
are required to pay real estate taxes and other occupancy costs
under these leases. Certain leases carry renewal options of five
to fifteen years. We also lease motor vehicles, equipment, and
an airplane under operating lease agreements for periods of one
to ten years. Future minimum payments under non-cancelable
leases on December 31, 2005 are as follows (in thousands):
| Capital | Operating | |||||||||||
| Leases | Leases | Total | ||||||||||
|
2006
|
$ | 55 | $ | 13,198 | $ | 13,253 | ||||||
|
2007
|
41 | 10,161 | 10,202 | |||||||||
|
2008
|
2,402 | 7,593 | 9,995 | |||||||||
|
2009
|
4,998 | 4,998 | ||||||||||
|
2010
|
2,787 | 2,787 | ||||||||||
|
Thereafter
|
702 | 702 | ||||||||||
|
Total minimum lease payments
|
$ | 2,498 | $ | 39,439 | $ | 41,937 | ||||||
|
Less imputed interest
|
(392 | ) | ||||||||||
|
Present value of minimum lease payments
|
$ | 2,106 | ||||||||||
Rent expense was approximately $21.9 million,
$19.3 million, and $15.4 million in 2005, 2004, and
2003, respectively.
F. Deferred Compensation
We have a program whereby certain executives irrevocably elected
to defer receipt of certain compensation in 1985 through 1988.
Deferred compensation payments to these executives will commence
upon their retirement. We purchased life insurance on such
executives, payable to us in amounts which, if assumptions made
as to mortality experience, policy dividends, and other factors
are realized, will accumulate cash values adequate to reimburse
us for all payments for insurance and deferred compensation
obligations. In the event cash values are not sufficient to fund
such obligations, the program allows us to reduce benefit
payments to such amounts as may be funded by accumulated cash
values. The deferred compensation liabilities and related cash
surrender value of life insurance policies are included in
“Other Liabilities” and “Other Assets,”
respectively.
We also maintain a non-qualified deferred compensation plan (the
“Plan”) for the benefit of senior management employees
who may elect to defer a portion of their annual bonus payments.
The Plan provides investment options similar to our 401(k) plan,
including our stock. The investment in our stock is funded by
the issuance of shares to a Rabbi trust, and may only be
distributed in kind. Assets held by the Plan totaled
approximately $3.2 million and $2.7 million on
December 31, 2005 and December 25, 2004, respectively,
and are included in “Other Assets.” Related
liabilities totaled $6.6 million and $5.4 million on
December 31, 2005 and December 25,
45
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
2004, respectively, and are included in “Other
Liabilities” and “Shareholders’ Equity.”
Assets of the Plan are recorded at fair market value. The
related liabilities are recorded at fair market value, with the
exception of obligations associated with investments in our
stock which are recorded at the market value on the date of
deferral. Under this Plan we issued 21,144 shares,
22,528 shares, and 37,678 shares in 2005, 2004, and
2003, respectively, which included distributions to participants
and shares held in the Rabbi trust.
G. Sale of Accounts Receivable
On September 25, 2003, we entered into an accounts
receivable sale arrangement with a bank. On November 12,
2004 we amended and extended this agreement. Under the terms of
the agreement:
| • | We sold specific receivables to the bank at an agreed-upon price at terms ranging from one month to one year. |
| • | We serviced the receivables sold and outstanding on behalf of the bank at a rate of 0.50% per annum. |
| • | We received an incentive servicing fee, which we accounted for as a retained interest in the receivables sold. Our retained interest is determined based on the fair market value of anticipated collections in excess of the Agreed Base Value of the receivables sold. Appropriate valuation allowances were included in the retained interest. |
| • | The maximum amount of receivables which could be sold and outstanding at any point in time under this arrangement was $50 million. |
This program was terminated on October 28, 2005; therefore,
no receivables were sold and outstanding on December 31,
2005. On December 25, 2004, $19.5 million of
receivables were sold and outstanding, and we recorded
$1.3 million of retained interest in other current assets.
A summary of the transactions we completed in 2005, 2004, and
2003 is presented below (in thousands).
| 2005 | 2004 | 2003 | ||||||||||
|
Accounts receivable sold
|
$ | 351,181 | $ | 301,325 | $ | 101,930 | ||||||
|
Retained interest in receivables
|
1,459 | (3,892 | ) | (2,039 | ) | |||||||
|
Expense from sale
|
(1,214 | ) | (631 | ) | (168 | ) | ||||||
|
Servicing fee received
|
137 | 126 | 37 | |||||||||
|
Discounts and sales allowances
|
(3,594 | ) | (2,873 | ) | (840 | ) | ||||||
|
Net cash received from sale
|
$ | 347,969 | $ | 294,055 | $ | 98,920 | ||||||
H. Common Stock
On June 1, 1993, our shareholders approved the Incentive
Stock Option Plan (the “Plan”) for our officers.
Options for the purchase of all 1,200,000 shares of our
common stock authorized under the Plan have been granted. The
Plan provides that the options are exercisable only if the
officer is employed by us at the time of exercise and holds at
least seventy-five percent of the individuals’ shares held
on April 1, 1993. The Plan also requires the option shares
to be held for periods of six months to three years. The
remaining options are exercisable within thirty days of the
anniversary of the Plan in 2006 through 2008.
In January 1994, the Employee Stock Gift Program was approved by
the Board of Directors which allows us to gift shares of stock
to eligible employees based on length of service. We gifted
shares of stock under this Plan in 2005, 2004, and 2003,
respectively, and recognized the market value of the shares at
the date of issuance as an expense totaling approximately
$55,000, $56,000, and $51,000, respectively.
In April 1994, our shareholders approved the Employee Stock
Purchase Plan (“Stock Purchase Plan”) and
Directors’ Retainer Stock Plan (“Stock Retainer
Plan”). In April 2002, our shareholders approved the 2002
Employee Stock Purchase Plan (“2002 Stock Purchase
Plan”) to succeed the Stock Purchase Plan. The plans allow
eligible employees to purchase shares of our stock at a share
price equal to 85% of fair market value on the purchase date. In
2005, 2004, and 2003, shares were issued under this Plan for
amounts totaling approximately $511,000, $411,000, and $417,000,
respectively. The weighted-average discounted fair value of
these shares was $36.92, $26.34, and $17.04, respectively.
The Stock Retainer Plan allows eligible members of the Board of
Directors to defer their retainer fees and receive shares of our
stock at the time of their retirement, disability or death. The
number of shares to be received is equal to the amount of the
retainer fee deferred multiplied by 110% divided by the fair
market value of a share of our stock at the time of deferral, is
increased for dividends
46
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
declared and may only be distributed in kind. We have accrued,
in shareholders’ equity approximately $559,000 and $533,000
on December 31, 2005 and December 25, 2004,
respectively, for obligations incurred under this Plan. In 2005
and 2003, shares were issued as part of a distribution from the
Plan for amounts totaling approximately $184,000 in 2005 and
$98,000 in 2003.
In January 1997, we instituted a Directors’ Stock Grant
Program. In lieu of a cash increase in the amount of Director
fees, each outside Director receives 100 shares of stock
for each board meeting attended up to a maximum of
400 shares per year. In 2005, 2004, and 2003, we issued
shares and recognized the market value of the shares on the date
of issuance as an expense totaling approximately $107,000,
$75,000, and $35,000, respectively.
On April 28, 1999, our shareholders approved the Long Term
Stock Incentive Plan (the “1999 Plan”) to succeed the
1997 Long Term Stock Incentive Plan (the “1997 Plan”).
The 1999 Plan reserves a maximum of 1,000,000 shares, plus
406,029 shares remaining under the 1997 Plan, plus an
annual increase of no more than 200,000 shares which may be
added on the date of the annual meeting of shareholders each
year. The 1999 Plan provides for the granting of stock options,
reload options, stock appreciation rights, restricted stock,
performance shares and other stock-based awards. The term of the
1999 Plan is ten years. In 2004 and 2003, we granted stock
options for 100,000 and 140,000 shares, respectively.
On April 17, 2002, under the 1999 Plan, a Conditional Share
Grant Agreement was executed which will grant our Chief
Executive Officer 10,000 shares of common stock immediately
upon the satisfaction of the terms and conditions set forth in
the Agreement. We have accrued in shareholders’ equity
approximately $221,000 and $129,000 on December 31, 2005
and December 25, 2004 respectively, for this grant.
As of December 31, 2005, a total of 2,408,757 shares
are reserved for issuance under the plans mentioned above and
under Note I below.
On November 14, 2001, the Board of Directors approved a
share repurchase program (which succeeded a previous program)
allowing us to repurchase up to 2,500,000 shares of our
common stock. In 2004 and 2003, we repurchased
4,050 shares, and 123,234 shares, respectively, under these
programs. As of December 31, 2005, cumulative total
authorized shares available for repurchase is approximately
1.5 million shares.
Common stock activity for 2005, 2004 and 2003 was as follows:
| Note | ||||||||||||||||||
| 2005 | 2004 | 2003 | ||||||||||||||||
|
Shares issued under plan:
|
||||||||||||||||||
|
Employee Stock Purchase
|
H | 13,839 | 15,594 | 24,469 | ||||||||||||||
|
Stock option
|
I | 397,406 | 155,083 | 65,284 | ||||||||||||||
|
Employee stock plans
|
411,245 | 170,677 | 89,753 | |||||||||||||||
|
Stock gift
|
H | 1,213 | 1,736 | 2,397 | ||||||||||||||
|
Directors’ Stock Grant
|
H | 2,500 | 2,300 | 1,600 | ||||||||||||||
|
Stock grant plans
|
3,713 | 4,036 | 3,997 | |||||||||||||||
|
Deferred compensation
|
F | 21,144 | 22,528 | 37,678 | ||||||||||||||
|
Directors’ Stock Retainer
|
H | 11,930 | 6,156 | |||||||||||||||
|
Deferred compensation plans
|
33,074 | 22,528 | 43,834 | |||||||||||||||
|
Stock notes receivable
|
J | 1,605 | 195 | 57,232 | ||||||||||||||
|
Shares received for exercise of stock options
|
(49,244 | ) | (4,695 | ) | ||||||||||||||
|
Stock repurchase
|
H | (4,050 | ) | (123,234 | ) | |||||||||||||
| 400,393 | 188,691 | 71,582 | ||||||||||||||||
|
Beginning common stock
|
18,002,255 | 17,813,564 | 17,741,982 | |||||||||||||||
|
Ending common stock
|
18,402,648 | 18,002,255 | 17,813,564 | |||||||||||||||
47
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
I. Stock Options and Stock-Based Compensation
Stock options issued under the 1999 Plan are granted to
employees and officers at exercise prices which equaled or
exceeded the market value of the stock on the date of grant. The
options are exercisable from three to fifteen years from the
date of grant and the recipients must be employed by us on the
date of exercise.
No options were granted in 2005. Options were granted in 2004
and 2003 with exercise prices which were equal to the market
prices on the date of grant.
Stock option activity since the end of 2002 is summarized as
follows:
| Shares of | Weighted | Weighted | ||||||||||
| Common Stock | Average | Average | ||||||||||
| Attributable to | Exercise Price | Fair Value of | ||||||||||
| Options | Options | Options Granted | ||||||||||
|
Outstanding on December 28, 2002
|
2,105,874 | $ | 16.86 | |||||||||
|
Granted
|
140,000 | $ | 17.10 | $ | 6.18 | |||||||
|
Exercised
|
(65,284 | ) | $ | 13.24 | ||||||||
|
Forfeited
|
(185,074 | ) | $ | 18.73 | ||||||||
|
Outstanding on December 27, 2003
|
1,995,516 | $ | 16.83 | |||||||||
|
Granted
|
100,000 | $ | 30.64 | $ | 10.34 | |||||||
|
Exercised
|
(155,083 | ) | $ | 16.86 | ||||||||
|
Forfeited
|
(63,174 | ) | $ | 21.01 | ||||||||
|
Outstanding on December 25, 2004
|
1,877,259 | $ | 17.42 | |||||||||
|
Exercised
|
(397,406 | ) | $ | 11.78 | ||||||||
|
Forfeited
|
(94,974 | ) | $ | 16.81 | ||||||||
|
Outstanding on December 31, 2005
|
1,384,879 | $ | 19.08 | |||||||||
Options to purchase 237,529 shares were exercisable on
December 31, 2005 with a weighted average price of $18.22.
Options to purchase 121,073 shares were exercisable on
December 25, 2004 with a weighted average price of $16.26.
Options to purchase 55,003 shares were exercisable on
December 27, 2003 with a weighted average price of $13.01.
The following table summarizes information concerning options on
December 31, 2005:
| Weighted-Average | ||||||||
| Number | Remaining | |||||||
| Range of Exercise Prices | Outstanding | Contractual Life | ||||||
|
$6.00 — $10.00
|
115,000 | 2.09 | ||||||
|
$10.01 — $14.00
|
133,741 | 2.17 | ||||||
|
$14.01 — $18.00
|
390,950 | 2.16 | ||||||
|
$18.01 — $21.00
|
59,706 | 1.51 | ||||||
|
$21.01 — $23.00
|
330,482 | 2.03 | ||||||
|
$23.01 — $25.00
|
180,000 | 3.97 | ||||||
|
$25.01 — $36.01
|
175,000 | 5.71 | ||||||
| 1,384,879 | ||||||||
J. Employees’ Stock Notes Receivable
Notes were obtained by us from certain officers for the purchase
of our common stock. Interest on all of the outstanding notes
range from fixed rates of five to eleven percent per annum and a
variable rate of the prime rate less 10% (minimum 6%, maximum
12%).
48
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
Each loan is evidenced by a promissory note from the
participating officer, and is secured by all of the shares
purchased with the loan proceeds. As of August 1, 2002, we
no longer issue notes to executive officers under this program.
On March 31, 2005, we sold 1,605 shares of common
stock to various employees in exchange for notes receivable
totaling approximately $62,000. Interest on the note is fixed at
4.5% per annum. The loan is evidenced by a promissory note
from the participating employee, and is secured by all of the
shares purchased with the loan proceeds.
On March 31, 2004, we sold 195 shares of common stock
to an employee in exchange for a note receivable totaling
approximately $6,000. Interest on the note is fixed at
4.8% per annum. The loan is evidenced by a promissory note
from the participating employee, and is secured by all of the
shares purchased with the loan proceeds.
On April 30, 2003, we sold 57,232 shares of common
stock to employees in exchange for notes receivable totaling
approximately $887,000. Interest on these notes is fixed at
4.8% per annum. Each loan is evidenced by a promissory note
from the participating employee, and is secured by all of the
shares purchased with the loan proceeds.
All loans are recourse loans. On December 31, 2005,
payments on the notes are due as follows (in thousands):
|
2006
|
$ | 71 | ||
|
2007
|
79 | |||
|
2008
|
97 | |||
|
2009
|
234 | |||
|
2010
|
252 | |||
|
Thereafter
|
571 | |||
| $ | 1,304 | |||
K. Retirement Plans
We have a profit sharing and 401(k) plan for the benefit of
substantially all of our employees, excluding the employees of
certain non-wholly
owned subsidiaries. Amounts contributed to the plan are made at
the discretion of the Board of Directors. We matched 50% of
employee contributions in 2005, 2004, and 2003, on a
discretionary basis, totaling $3.7 million,
$3.3 million, and $2.9 million, respectively. In
addition, we made an additional discretionary match of
approximately $311,000 in 2003. The basis for matching
contributions may not exceed the lesser of 6% of the
employee’s annual compensation or $14,000.
L. Income Taxes
Income tax provisions for the years ended December 31,
2005, December 25, 2004, and December 27, 2003 are
summarized as follows (in thousands):
| 2005 | 2004 | 2003 | |||||||||||
|
Currently Payable:
|
|||||||||||||
|
Federal
|
$ | 38,250 | $ | 26,385 | $ | 19,331 | |||||||
|
State and local
|
5,717 | 3,728 | 2,296 | ||||||||||
|
Foreign
|
4,342 | 486 | 952 | ||||||||||
| 48,309 | 30,599 | 22,579 | |||||||||||
|
Net Deferred:
|
|||||||||||||
|
Federal
|
(3,947 | ) | (712 | ) | 2,422 | ||||||||
|
State and local
|
(344 | ) | 8 | (443 | ) | ||||||||
|
Foreign
|
(2,968 | ) | 1,567 | (233 | ) | ||||||||
| (7,259 | ) | 863 | 1,746 | ||||||||||
| $ | 41,050 | $ | 31,462 | $ | 24,325 | ||||||||
49
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
The effective income tax rates are different from the statutory
federal income tax rates for the following reasons:
| 2005 | 2004 | 2003 | ||||||||||
|
Statutory federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
State and local taxes (net of federal benefits)
|
3.2 | 2.9 | 1.8 | |||||||||
|
Effect of minority owned interest in earnings of partnerships
|
(0.3 | ) | (0.9 | ) | (0.1 | ) | ||||||
|
Manufacturing deduction
|
(0.8 | ) | ||||||||||
|
Other, net
|
0.9 | 0.3 | ||||||||||
|
Effective income tax rate
|
37.1 | % | 37.9 | % | 37.0 | % | ||||||
The American Jobs Creation Act of 2004 (“Act”) that
was signed into law by the President on October 22, 2004
provides for a special one-time tax deduction of 85% of certain
foreign earnings that are repatriated (as defined by the Act).
In order to qualify for the deduction, the earnings must be
reinvested in the United States pursuant to a domestic
reinvestment plan established by the company’s chief
executive officer and approved by its board of directors.
Certain other criteria in the Act must be satisfied as well.
Once a decision is reached to remit foreign earnings, the impact
must be recorded in the period in which the decision is made.
On May 10, 2005, the Internal Revenue Service and United
States Department of the Treasury issued guidance concerning the
calculation of tax on a distribution under Section 965 of
the Internal Revenue Code. Based on this guidance, we have
repatriated approximately $2.3 million of undistributed
foreign earnings under the Act, which resulted in related income
tax expense of $0.1 million. We have not provided for
United States income taxes on the remaining undistributed
earnings of foreign subsidiaries totaling approximately
$3.7 million. Recording deferred income taxes on these
undistributed earnings is not required because these earnings
have been deemed to be permanently reinvested. These amounts
would be subject to possible United States taxation only if
remitted as dividends. If the amounts were not considered
permanently reinvested, we would have recorded a deferred tax
liability of approximately $215,000.
Temporary differences which give rise to deferred tax assets and
(liabilities) on December 31, 2005 and
December 25, 2004 are as follows (in thousands):
| 2005 | 2004 | |||||||
|
Employee benefits
|
$ | 6,337 | $ | 4,907 | ||||
|
Foreign subsidiary net operating loss
|
702 | 216 | ||||||
|
Depreciation
|
(11,555 | ) | (15,575 | ) | ||||
|
Inventory
|
(18 | ) | (658 | ) | ||||
|
Accrued expenses
|
487 | 207 | ||||||
|
All other, net
|
(3,709 | ) | (3,639 | ) | ||||
| $ | (7,756 | ) | $ | (14,542 | ) | |||
|
Valuation allowance
|
(473 | ) | ||||||
| $ | (7,756 | ) | $ | (15,015 | ) | |||
The 2004 valuation allowance consists of a capital loss
carryforward we had related to a prior investment in a
wholly-owned subsidiary, UFP de Mexico and Canada. We did not
anticipate realizing a future benefit from this loss
carryforward, therefore, we had established an allowance for the
entire amount of the future benefit. This carryforward expired
at the end of 2005.
M. 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 chemically treat
lumber products. In connection with the ownership and operation
of these and other real properties, and the disposal or
treatment of hazardous or toxic substances, 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, calculated with no
discount rate, have been established to cover remediation
activities at our Union City, GA; Stockertown, PA; Elizabeth
City,
50
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
NC; Auburndale, FL; Schertz, TX; and Janesville, WI wood
preservation facilities. In addition, a small reserve was
established for our Thornton, CA property to remove asbestos and
certain lead containing materials which existed on the property
at the time of purchase.
Including amounts from our wholly owned captive insurance
company, we have reserved approximately $1.7 million and
$1.9 million on December 31, 2005 and
December 25, 2004, respectively, representing the estimated
costs to complete future remediation efforts and has not been
reduced by an insurance receivable.
The manufacturers of CCA preservative voluntarily discontinued
the registration of CCA for certain residential applications as
of December 31, 2003. Our wood preservation facilities have
been converted to alternate preservatives, either ACQ or
borates. In March 2005, one facility began using CCA to treat
certain marine products and panel goods for which ACQ is not a
suitable preservative.
In November 2003, the EPA published its report on the risks
associated with the use of CCA in children’s playsets.
While the study observed that the range of potential exposure to
CCA increased by the continuous use of playsets, the EPA
concluded that the risks were not sufficient to require removal
or replacement of any CCA treated structures. The EPA did refer
a question on the use of sealants to a scientific advisory
panel. The panel issued a report which provides guidance to the
EPA on the use of various sealants but does not mandate their
use. The EPA is reviewing the report and is expected to issue
further clarifications.
The results of the EPA study are consistent with a prior
Consumer Products Safety Commission (CPSC) study which
reached a similar conclusion.
In addition, various special interest environmental groups have
petitioned certain states requesting restrictions on the use or
disposal of CCA treated products. 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.
We have been requested by a customer to defend it from purported
class action lawsuits. One such lawsuit is currently pending in
Illinois. The purported class action lawsuit seeks unspecified
damages from this customer, based on generalized claims under a
purported theory of violation of individual state Consumer
Protection Act statutes. To date, none of these cases have been
certified as a class action. The Illinois case was previously
dismissed without prejudice. Based on an alleged violation of
the Consumer Protection Act, the claim has been restated and
filed. The case does not allege personal injury or property
damage. The judge in this case denied class certification for
this case in December 2005. As previously stated, our vendors
believe and scientific studies support the fact that CCA treated
lumber poses no unreasonable risks, and we intend to vigorously
defend this position. While our customer has charged us for
certain costs incurred in the defense of these claims and we
have expensed them accordingly, we have not formally accepted
liability of these costs.
We believe that based on current facts, laws, and existing
scientific evidence, as well as the favorable disposition of the
above referenced lawsuits, that the likelihood of a material
adverse financial impact from the remaining claims is remote.
Therefore, we have not accrued for any potential loss related to
the contingencies above. However, potential liabilities of this
nature are not conducive to precise estimates and are subject to
change. To the extent we are required to defend these actions,
we intend to do so vigorously and will monitor these facts on an
ongoing basis.
In addition, on December 31, 2005, 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
contingencies and claims.
On December 31, 2005, we had outstanding purchase
commitments on capital projects of approximately
$2.9 million included in other liabilities.
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 December 31, 2005, we had approximately
$26.9 million in outstanding performance bonds which expire
during the next two to twenty-five months. In addition,
approximately $8.8 million in payment and performance bonds
are outstanding for completed projects which are still under
warranty.
51
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
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 will 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 approximately
$1.7 million.
Under our sale of accounts receivable agreement, we guarantee
that Universal Forest Products RMS, LLC, as accounts servicer,
will remit collections on receivables sold to the bank. (See
Note G.)
On December 31, 2005, we had outstanding letters of credit
totaling $38.1 million, primarily related to certain
insurance contracts and industrial development revenue bonds, as
further described below.
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
$19.8 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 (see Note D). 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.
Certain wholly owned domestic subsidiaries have guaranteed the
indebtedness of Universal Forest Products, Inc. in certain debt
agreements, including the 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 (see Note D).
Our treating operations currently include 30 “Subpart
W” drip pads, defined as hazardous waste management units
by the EPA. The rules regulating drip pads require that the pad
be “closed” at the point that it is no longer used to
manage hazardous waste. Closure involves identification and
disposal of all contamination from the wood treating operations.
The ultimate cost of closure is dependent upon a number of
factors including, but not limited to, identification and
removal of contamination, cleanup standards that vary from state
to state, and the time period over which the cleanup would be
completed. Based on our knowledge of existing circumstances, it
is considered probable that these costs will approximate
$465,000. As a result, this amount has been recorded as a
liability and recorded in other long-term liabilities on
December 31, 2005 in accordance with FIN 47.
N. Sale of Real Estate and Interest in
Subsidiary
In January 2005, we sold real estate in Stockton, CA for
$2.3 million and recorded a pre-tax gain of approximately
$1.2 million.
In December 2004, we sold real estate in Elkhart, IN and
Thornton, CA and recognized a net pre-tax gain of $426,000.
In June 2004, we sold a plant in Modesto, CA and recognized a
pre-tax gain of approximately $368,000.
In March 2004, we sold a plant in Bend, OR and recognized a
pre-tax gain of approximately $562,000 on the sale in the first
quarter and an additional $207,000 in the second quarter as we
collected the note receivable issued to us on the sale.
In January 2004, we sold our 60% ownership in Nascor
Incorporated, a Calgary, Alberta-based manufacturer of
engineered wood components and licensor of I-joist manufacturing
technology. The total sales price we collected was
$4.7 million and we recorded a pre-tax accounting loss of
approximately $193,000.
O. Gain on Insurance Settlement
In April 2004, our plant in Thorndale, Ontario was destroyed by
a fire. In accordance with FIN 30, Accounting for
Involuntary Conversions of Non-Monetary Assets to Monetary
Assets, we wrote off the net book value of the destroyed
inventory and property totaling $3.6 million. The insured
value of the property exceeded its net book value by
approximately $1.4 million, which was recorded as a gain on
insurance settlement. As of December 25, 2004, we have
collected $2.0 million of insurance proceeds. In 2005, we
collected the remaining insurance proceeds of $3.0 million.
52
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
P. Segment Reporting
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information
(“SFAS 131”) defines operating segments as
components of an enterprise about which separate financial
information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate
resources and in assessing performance. Under the definition of
a segment, our Eastern and Western Divisions may be considered
an operating segment of our business. Under SFAS 131,
segments may be aggregated if the segments have similar economic
characteristics and if the nature of the products, distribution
methods, customers and regulatory environments are similar. We
have chosen to aggregate our divisions into one reporting
segment. Our divisions operate manufacturing and treating
facilities throughout North America.
In 2005, 2004, and 2003, 22%, 25%, and 30% of net sales,
respectively, were to a single customer.
Information regarding principal geographic areas was as follows
(in thousands):
| 2005 | 2004 | 2003 | ||||||||||||||||||||||
| Long-Lived | Long-Lived | Long-Lived | ||||||||||||||||||||||
| Tangible | Tangible | Tangible | ||||||||||||||||||||||
| Net Sales | Assets | Net Sales | Assets | Net Sales | Assets | |||||||||||||||||||
|
United States
|
$ | 2,621,443 | $ | 207,334 | $ | 2,373,289 | $ | 194,480 | $ | 1,813,257 | $ | 182,904 | ||||||||||||
|
Foreign
|
70,079 | 24,886 | 79,992 | 29,745 | 85,573 | 38,111 | ||||||||||||||||||
|
Total
|
$ | 2,691,522 | $ | 232,220 | $ | 2,453,281 | $ | 224,225 | $ | 1,898,830 | $ | 221,015 | ||||||||||||
Sales generated in Canada and Mexico are primarily to customers
in the United States of America.
The following table presents, for the periods indicated, our
percentage of value-added and commodity-based sales to total
sales.
| Value-Added | Commodity-Based | |||||||
|
2005
|
52.7% | 47.3% | ||||||
|
2004
|
50.7% | 49.3% | ||||||
|
2003
|
51.1% | 48.9% | ||||||
Value-added product sales consist of fencing, decking, lattice,
and other specialty products sold to the DIY/retail market,
industrial packaging, engineered wood components used in
site-built construction, and “wood alternative”
products. Wood alternative products consist primarily of
composite wood and plastics. 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. Commodity-based product sales
consist primarily of remanufactured lumber and preservative
treated lumber.
53
Table of Contents
Universal Forest Products, Inc.
Notes to Consolidated Financial Statements (continued)
The following table presents, for the periods indicated, our net
sales (in thousands) by major product classification.
| Years Ended | ||||||||||||
| December 31, | December 25, | December 27, | ||||||||||
| 2005 | 2004 | 2003 | ||||||||||
|
Value-Added Sales
|
||||||||||||
|
Fencing
|
$ | 152,867 | $ | 139,473 | $ | 127,899 | ||||||
|
Decking
|
45,864 | 37,908 | 37,816 | |||||||||
|
Lattice
|
17,485 | 20,755 | 20,705 | |||||||||
|
Outdoor preservative treated products
|
18,667 | 14,469 | 11,820 | |||||||||
|
Wood alternative products
|
42,516 | 33,348 | 19,357 | |||||||||
|
Engineered wood components and other building materials
|
756,968 | 656,338 | 523,508 | |||||||||
|
Turn-key framing and installed sales
|
126,243 | 120,741 | 58,576 | |||||||||
|
Packaging
|
82,987 | 57,581 | 42,138 | |||||||||
|
Specialty lumber products
|
93,443 | 84,919 | 73,650 | |||||||||
|
Other
|
81,410 | 78,155 | 55,782 | |||||||||
|
Total Value-Added Sales
|
1,418,450 | 1,243,687 | 971,251 | |||||||||
|
Commodity-Based Sales
|
||||||||||||
|
Dimensional lumber
|
510,954 | 451,041 | 296,512 | |||||||||
|
Preservative treated lumber
|
480,294 | 489,682 | 450,891 | |||||||||
|
Plywood and OSB
|
271,487 | 254,499 | 165,545 | |||||||||
|
Other
|
10,337 | 14,372 | 14,631 | |||||||||
|
Total Commodity-Based Sales
|
1,273,072 | 1,209,594 | 927,579 | |||||||||
|
Total Net Sales
|
$ | 2,691,522 | $ | 2,453,281 | $ | 1,898,830 | ||||||
Q. Quarterly Financial Information (Unaudited)
The following table sets forth selected financial information
for all of the quarters, each consisting of 13 weeks
(except fourth quarter of 2005 which consisted of 14 weeks)
during the years ended December 31, 2005 and
December 25, 2004 (in thousands, except per share data):
| First | Second | Third | Fourth | |||||||||||||||||||||||||||||
| 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
|
Net sales
|
$ | 537,160 | $ | 465,665 | $ | 779,552 | $ | 742,568 | $ | 721,497 | $ | 709,294 | $ | 653,313 | $ | 535,754 | ||||||||||||||||
|
Gross profit
|
67,229 | 56,361 | 101,242 | 92,821 | 99,062 | 83,792 | 91,723 | 63,279 | ||||||||||||||||||||||||
|
Net earnings
|
9,229 | 5,567 | 22,790 | 19,756 | 19,171 | 14,626 | 16,183 | 8,654 | ||||||||||||||||||||||||
|
Basic earnings per share
|
0.51 | 0.31 | 1.24 | 1.09 | 1.04 | 0.81 | 0.87 | 0.48 | ||||||||||||||||||||||||
|
Diluted earnings per share
|
0.49 | 0.30 | 1.20 | 1.06 | 1.00 | 0.78 | 0.84 | 0.46 | ||||||||||||||||||||||||
R. Subsequent Events
On January 9, 2006, one of our subsidiaries acquired
certain assets of Classic Truss Company, Inc.
(“Classic”), which designs and manufactures trusses
for the site-built construction market in the region surrounding
Ft. Pierce, FL. The purchase price was approximately
$2.1 million. Classic had net sales totaling approximately
$6.0 million in 2005.
54
Table of Contents
Price Range of Common Stock and Dividends
Our common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol UFPI. The following
table sets forth the range of high and low sales prices as
reported by Nasdaq.
| Fiscal 2005 | High | Low | Fiscal 2004 | High | Low | |||||||||||||
|
Fourth Quarter
|
61.69 | 50.34 | Fourth Quarter | 44.34 | 31.50 | |||||||||||||
|
Third Quarter
|
58.97 | 39.78 | Third Quarter | 34.19 | 28.54 | |||||||||||||
|
Second Quarter
|
42.86 | 37.10 | Second Quarter | 33.03 | 26.36 | |||||||||||||
|
First Quarter
|
44.55 | 37.03 | First Quarter | 34.48 | 28.08 | |||||||||||||
There were approximately 1,000 shareholders of record as of
January 31, 2006.
In 2005, we paid dividends on our common stock of $.055 per
share in December and $.050 per share in June. In 2004, we
paid dividends on our common stock of $.050 per share in
June and December. We intend to continue with our current
semi-annual dividend policy for the foreseeable future.
Directors and Executive Officers
BOARD OF DIRECTORS
Peter F. Secchia
Chairman of the Board
Universal Forest Products, Inc.
William G. Currie
Vice Chairman of the Board and
Chief Executive Officer
Universal Forest Products, Inc.
Dan M. Dutton
Chairman of the Board
Stimson Lumber Co.
John M. Engler
President and Chief Executive Officer
National Association of Manufacturers
John W. Garside
President and Treasurer
Woodruff Coal Company
Gary F. Goode, CPA
Chairman
Titan Sales & Consulting, LLC
Mark A. Murray
President
Grand Valley State University
Louis A. Smith
President
Smith and Johnson, Attorneys, P.C.
EXECUTIVE OFFICERS
William G. Currie
Vice Chairman of the Board and
Chief Executive Officer
Michael B. Glenn
President and Chief Operating Officer
Michael R. Cole
Chief Financial Officer and Treasurer
Robert D. Coleman
Executive Vice President Manufacturing
C. Scott Greene
President
Universal Forest Products
Eastern Division, Inc.
Robert K. Hill
President
Universal Forest Products
Western Division, Inc.
Ronald G. Klyn
Chief Information Officer
Matthew J. Missad
Executive Vice President and Secretary
55
Table of Contents
Shareholder Information
ANNUAL MEETING
The annual meeting of Universal Forest Products, Inc., will be
held at 8:30 a.m. on April 19, 2006, at the
Company’s corporate headquarters, 2801 East Beltline NE,
Grand Rapids, MI 49525.
SHAREHOLDER INFORMATION
Shares of the Company’s stock are traded under the symbol
UFPI on the NASDAQ Stock Market. The
Company’s 10-K
report, filed with the Securities and Exchange Commission, will
be provided free of charge to any shareholder upon written
request. For more information contact:
Investor Relations Department
Universal Forest Products, Inc.
2801 East Beltline NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Web: www.ufpi.com
SECURITIES COUNSEL
Varnum, Riddering, Schmidt & Howlett
Grand Rapids, MI
INDEPENDENT ACCOUNTANTS
Ernst & Young LLP
Grand Rapids, MI
TRANSFER AGENT/
SHAREHOLDER INQUIRIES
American Stock Transfer & Trust Company serves as the
transfer agent for the Corporation. Inquiries relating to stock
transfers, changes of ownership, lost or stolen stock
certificates, changes of address, and dividend payments should
be addressed to:
American Stock Transfer & Trust Co.
59 Maiden Lane
New York, NY 10005
Telephone: (718) 921-8210
UNIVERSAL FOREST
PRODUCTS, INC.,
CORPORATE HEADQUARTERS
2801 East Beltline NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Facsimile: (616) 364-5558
UNIVERSAL FOREST
PRODUCTS, INC.,
AND ITS AFFILIATES
Locations:
Arlington, TX
Ashburn, GA
Auburn, NY
Auburndale, FL
Belchertown, MA
Berlin, NJ
Blanchester, OH
Bunn, NC
Burlington, NC
Chaffee, NY
Chandler, AZ
Chesapeake, VA
Clinton, NY
Conway, SC
Crestwood, MO
Dallas, NC
Dallas, TX
Denver, CO
Durango, Durango, Mexico
Earlysville, VA
Eatonton, GA
Eliot, ME
Elizabeth City, NC
Emlenton, PA
Englewood, CO
Fishersville, VA
Folkston, GA
Fontana, CA
Ft. Pierce, FL
Georgetown, DE
Gordon, PA
Grandview, TX
Grand Rapids, MI
Granger, IN
Haleyville, AL
Hamilton, OH
Harrisonville, MO
Hope, AR
Houston, TX
Hudson, NY
Indianapolis, IN
Jacksonville, FL
Janesville, WI
Jefferson, GA
Kyle, TX
Lacolle, Quebec, Canada
Lafayette, CO
Lancaster, PA
Lansing, MI
Las Vegas, NV (2)
Liberty, NC
Lodi, OH
London, Ontario, Canada
Minneota, MN
Moultrie, GA
New London, NC
New Waverly, TX
New Windsor, MD
Ocala, FL
Ooltewah, TN
Parker, PA
Pearisburg, VA
Plainville, MA
Prairie du Chien, WI
Ranson, WV
Riverside, CA
Saginaw, TX
Salisbury, NC
San Antonio, TX
San Diego, CA
Sanford, NC
Santee, SC
Schertz, TX
Sidney, NY
Silsbee, TX
Springfield, IL
Stockertown, PA
Tampa, FL
Tecate, Baja California, Mexico
Thornton, CA
Union City, GA
Warrens, WI
Westville, IN
White Bear Lake, MN
White Pigeon, MI
Windsor, CO
Woodburn, OR
56
EXHIBIT 14(c)
UNIVERSAL FOREST PRODUCTS, INC.
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
Each person who has been designated by the Board of Directors of Universal Forest
Products, Inc. (the “Company”) as a senior financial officer of the Company shall, as a condition
of employment by the Company, be required to sign and deliver to the Company the following
statement:
In my role as a senior financial officer of Universal Forest Products, Inc. (the
“Company”), I certify to the Company and the Audit Committee of the Board of
Directors of the Company, that I adhere to and advocate the following principles and
responsibilities governing my professional and ethical conduct, and to the best of
my knowledge and ability:
| 1. | I act with honesty and integrity, avoiding actual or apparent conflicts of interest in personal and professional relationships. | ||
| 2. | I provide constituents with information that is accurate, complete, objective, relevant, timely, and understandable. | ||
| 3. | I comply with rules and regulations of federal, state, and local governments, and other appropriate private and public regulatory agencies. | ||
| 4. | I act in good faith, responsibly, with due care, competence, and diligence, without misrepresenting material facts or allowing my independent judgment to be subordinated or otherwise compromised. | ||
| 5. | I respect the confidentiality of information acquired in the course of my work except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of my work is not used for my personal advantage. | ||
| 6. | I share knowledge and maintain skills important and relevant to my constituents’ needs. | ||
| 7. | I proactively promote ethical behavior among my professional peers. | ||
| 8. | I comply with and adhere to each and all of the Company’s policies and practices, including those policies governing accounting and financial reporting practices and procedures. |
/s/ Scott T. Bravata
|
February 27, 2006 | |||
(signature)
|
Dated |
EXHIBIT 21
LIST OF REGISTRANT’S SUBSIDIARIES AND AFFILIATES
| 1. | Advanced Component Systems LLC, a Michigan Limited Liability Company. | |
| 2. | Atlantic Building Professionals, LLC, a Michigan Limited Liability Company. | |
| 3. | AW Construction, LLC, a Connecticut Limited Liability Company. | |
| 4. | D&L Framing, LLC, a Nevada Limited Liability Company (50% owned). | |
| 5. | D&R Framing Contractors, L.L.C., a Michigan Limited Liability Company (50% owned). | |
| 6. | Euro-Pacific Building Materials, Inc., an Oregon Corporation. | |
| 7. | Euro-Pacific International Corp., an Oregon Corporation. | |
| 8. | Indianapolis Real Estate, LLC., a Michigan Limited Liability Company. | |
| 9. | Maine Ornamental, LLC, a Michigan Limited Liability Company. | |
| 10. | Midwest Framing, LLC (d/b/a Professional Framers of Minnesota), a Michigan Limited Liability Company. | |
| 11. | Norpac Construction, L.L.C., a Nevada Limited Liability Company (75% owned). | |
| 12. | Pinelli Universal, S. de R.L. de C.V., a Mexican Corporation (50% owned). | |
| 13. | Pinelli Universal Tecate, S. de R.L. de C.V., a Mexican Corporation. | |
| 14. | Shawnlee Construction, LLC, a Michigan Limited Liability Company (75% owned). | |
| 15. | Shepardville Construction, LLC, a Michigan Limited Liability Company. | |
| 16. | Texas Framing, LLC (d/b/a Professional Framers of Texas), a Michigan Limited Liability Company. | |
| 17. | Tecate Real Estate, S. de R.L. de C.V., a Mexican Corporation (50% owned). | |
| 18. | Treating Services of Minnesota, LLC, a Michigan Limited Liability Company. | |
| 19. | Tresstar, LLC, a Michigan Limited Liability Company. | |
| 20. | UFP Framing LLC, a Michigan Limited Liability Company. | |
| 21. | UFP Framing of Florida, LLC, a Michigan Limited Liability Company. | |
| 22. | UFP Insurance Ltd., an exempted company organized under the laws of Bermuda. | |
| 23. | UFP Real Estate, Inc., a Michigan Corporation. | |
| 24. | UFP Transportation, Inc., a Michigan Corporation. | |
| 25. | UFP Ventures, Inc., a Michigan Corporation. | |
| 26. | UFP Ventures II, Inc., a Michigan Corporation. | |
| 27. | Universal Consumer Products, Inc., a Michigan Corporation. | |
| 28. | Universal Forest Products 401K/Profit Sharing Trust Fund. | |
| 29. | Universal Forest Products Eastern Division, Inc., a Michigan Corporation. | |
| 30. | Universal Forest Products Education Foundation. | |
| 31. | Universal Forest Products Foundation, a Michigan Nonprofit Corporation. | |
| 32. | Universal Forest Products — FSC, Inc., a Barbados company. | |
| 33. | Universal Forest Products Holding Company, Inc., a Michigan Corporation. | |
| 34. | U. F. P. Mexico Holdings, S. de R.L. de C.V., a Mexican Corporation. |
| 35. | Universal Forest Products of Canada, Inc., a Canadian Corporation. | |
| 36. | Universal Forest Products of Modesto L.L.C., a Michigan Limited Liability Company. | |
| 37. | Universal Forest Products Reclamation Center, Inc., a Michigan Corporation. | |
| 38. | Universal Forest Products RMS, LLC, a Michigan Limited Liability Company. | |
| 39. | Universal Forest Products Texas Limited Partnership, a Michigan Limited Partnership. | |
| 40. | Universal Forest Products Western Division, Inc., a Michigan Corporation. | |
| 41. | Universal Truss, Inc., a Michigan Corporation. | |
| 42. | Western Building Professionals, LLC, a Michigan Limited Liability Company. | |
| 43. | Western Building Professionals of California, Inc., a Michigan Corporation. | |
| 44. | Western Building Professionals of California II Limited Partnership, a Michigan Limited Partnership. |
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Form 10-K of Universal Forest Products,
Inc. and subsidiaries of our reports dated February 20, 2006, with respect to the consolidated
financial statements of Universal Forest Products, Inc. and subsidiaries, Universal Forest
Products, Inc. and subsidiaries management’s assessment of the effectiveness of internal control
over financial reporting, and the effectiveness of internal control over financial reporting of
Universal Forest Products, Inc. and subsidiaries, included in the 2005 Annual Report to
Shareholders of Universal Forest Products, Inc. and subsidiaries.
We also consent to the incorporation by reference in the Registration Statement File Numbers
33-81128, 33-81116, 33-81450, 333-60630 and 333-88056 on Form S-8 and Registration File Number
333-75278 on form S-3 of our reports dated February 20, 2006, with respect to the consolidated
financial statements of Universal Forest Products, Inc. and subsidiaries, Universal Forest
Products, Inc. and subsidiaries management’s assessment of the effectiveness of internal control
over financial reporting, and the effectiveness of internal control over financial reporting of
Universal Forest Products, Inc. and subsidiaries, incorporated by reference in the Form 10-K of
Universal Forest Products, Inc. and subsidiaries for the year ended December 31, 2005.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
ERNST & YOUNG LLP
Grand Rapids, Michigan
March 8, 2006
March 8, 2006
EXHIBIT 31(a)
Universal Forest Products, Inc.
Certification
I, William G. Currie, certify that:
| 1. | I have reviewed this report on Form 10-K of Universal Forest Products, Inc.; | |
| 2. | Based on my knowledge, this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to de designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c. | 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 |
| d. | 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 functions): |
| 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:
|
March 8, 2006 | /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-K of Universal Forest Products, Inc.; | |
| 2. | Based on my knowledge, this 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 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to de designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c. | 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 |
| d. | 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 functions): |
| 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:
|
March 8, 2006 | /s/ Michael R. Cole | ||
| Michael R. Cole |
||||
| Chief Financial Officer |
EXHIBIT 32(a)
CERTIFICATE OF THE
CHIEF EXECUTIVE OFFICER OF
UNIVERSAL FOREST PRODUCTS, INC.
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 report on Form 10-K for the year ended December 31, 2005, 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 report on Form 10-K for the period ended December 31,
2005 fairly presents, in all material respects, the financial condition and results of operations
of Universal Forest Products, Inc.
| UNIVERSAL FOREST PRODUCTS, INC. | ||||||
Date:
|
March 8, 2006 | 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.
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 report on Form 10-K for the period ended December 31, 2005, 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 report on Form 10-Q for the period ended December 31,
2005 fairly presents, in all material respects, the financial condition and results of operations
of Universal Forest Products, Inc.
| UNIVERSAL FOREST PRODUCTS, INC. | ||||||
Date:
|
March 8, 2006 | By: | /s/ Michael R. Cole | |||
| Michael R. Cole | ||||||
| Its: | Chief Financial Officer | |||||