<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1997
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission File Number 0-22684
-------
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
----------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
--------------
NONE
-----------------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of November 1, 1997
-------------------------- ----------------------------------
Common stock, no par value 17,174,605
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Page 1 of 19
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements:
Consolidated Condensed Balance Sheets at September 27, 1997
and December 28, 1996. 3
Consolidated Condensed Statements of Earnings for the Three and
Nine Months Ended September 27, 1997 and September 28, 1996. 4
Consolidated Condensed Statements of Cash Flows for the Nine
Months Ended September 27, 1997 and September 28, 1996. 5
Notes to Consolidated Condensed Financial Statements. 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8-15
Forward-Looking Statements and Risk Factors. 16
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities. 17
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders - NONE.
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index. 19
(b) No reports were filed on Form 8-K during the
nine months ended September 27, 1997.
</TABLE>
2
<PAGE> 3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 11,268,855 $ 1,275,636
Accounts receivable ............................ 57,844,520 32,102,276
Inventories:
Raw materials ............................... 33,939,507 32,752,316
Finished goods .............................. 57,788,891 55,767,455
------------ ------------
91,728,398 88,519,771
Other current assets ........................... 5,074,874 4,659,749
------------ ------------
TOTAL CURRENT ASSETS ...................... 165,916,647 126,557,432
OTHER ASSETS ..................................... 4,437,612 4,092,038
NON-COMPETE AGREEMENTS ........................... 2,669,739 3,051,727
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost. ........ 111,472,185 103,643,146
Accumulated depreciation and amortization ...... (49,332,059) (43,967,364)
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, NET ........ 62,140,126 59,675,782
------------ ------------
$235,164,124 $193,376,979
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................... $ 42,988,499 $ 14,100,269
Accrued liabilities:
Compensation and benefits ................... 15,806,323 17,736,451
Income taxes ................................ 563,058 810,927
Other ....................................... 2,709,298 1,761,486
Current portion of long-term debt
and capital lease obligations ................ 3,149,994 3,652,900
------------ ------------
TOTAL CURRENT LIABILITIES ................. 65,217,172 38,062,033
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current portion .............. 47,040,349 48,975,502
OTHER LIABILITIES ................................ 6,358,719 6,461,643
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 & outstanding, 17,172,558
and 17,040,467 ............................... 17,172,558 17,040,467
Additional paid-in capital ..................... 29,567,664 28,801,707
Retained earnings .............................. 71,476,773 55,530,786
Foreign currency translation adjustment ........ (764,538) (830,459)
------------ ------------
117,452,457 100,542,501
Officers' stock notes receivable ............... (904,573) (664,700)
------------ ------------
116,547,884 99,877,801
------------ ------------
$235,164,124 $193,376,979
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES ..................... $ 284,991,209 $243,886,515 $840,971,709 $679,194,681
COST OF GOODS SOLD ............ 260,866,755 221,956,342 764,669,437 609,472,165
------------- ------------ ------------ ------------
GROSS PROFIT .................. 24,124,454 21,930,173 76,302,272 69,722,516
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ..... 15,206,232 13,685,303 45,777,565 41,546,331
------------- ------------ ------------ ------------
EARNINGS FROM OPERATIONS ...... 8,918,222 8,244,870 30,524,707 28,176,185
OTHER EXPENSE (INCOME):
Interest expense ............ 954,457 996,151 3,188,226 3,041,842
Interest income ............. (77,219) (334,763) (238,141) (624,442)
Other, net .................. (69,954) (442,704) (134,295) (442,601)
------------- ------------ ------------ ------------
TOTAL OTHER EXPENSE ...... 807,284 218,684 2,815,790 1,974,799
------------- ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES .. 8,110,938 8,026,186 27,708,917 26,201,386
INCOME TAXES .................. 2,889,362 3,234,000 10,212,000 10,595,000
------------- ------------ ------------ ------------
NET EARNINGS .................. $ 5,221,576 $ 4,792,186 $ 17,496,917 $ 15,606,386
============= ============ ============ ============
PRIMARY AND FULLY-DILUTED
EARNINGS PER SHARE ............ $ 0.29 $ 0.27 $ 0.98 $ 0.88
WEIGHTED AVERAGE SHARES
OUTSTANDING ................. 17,913,000 17,776,000 17,851,000 17,701,000
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
September 27, September 28,
1997 1996
------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................... $ 17,496,917 $ 15,606,386
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization ....................... 6,780,048 6,176,595
Stock Gift Program expense .......................... 3,444 2,656
Gain on disposal of property, plant and equipment ... (38,292) (41,005)
Changes in:
Accounts receivable ................................ (25,742,244) (22,187,464)
Inventories ........................................ (3,208,627) (8,745,319)
Other .............................................. (314,768) (144,491)
Accounts payable ................................... 28,888,230 12,734,147
Accrued liabilities ................................ (1,230,186) 5,015,981
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....... 22,634,522 8,417,486
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable ....................... 230,937 210,276
Purchase of notes receivable .......................... (164,085)
Purchase of property, plant and equipment ............. (9,454,545) (6,864,318)
Proceeds from sale of property, plant and equipment ... 248,446 223,193
Other ................................................. (171,767) (8,859)
------------ -------------
NET CASH USED IN INVESTING ACTIVITIES ........... (9,146,929) (6,603,793)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................ 577,115 266,089
Cash dividends paid to shareholders ................... (515,108) (511,146)
Repayment of long-term debt ........................... (2,438,059) (2,230,492)
Repurchase of common stock ............................ (1,118,324) (821,882)
------------ -------------
NET CASH USED IN FINANCING ACTIVITIES ............... (3,494,376) (3,297,431)
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. 9,993,217 (1,483,738)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........ 1,275,636 21,471,821
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .............. $ 11,268,855 $ 19,988,083
============ =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................ $ 2,451,073 $ 2,236,575
Income taxes ........................................ 10,459,866 8,438,879
NONCASH INVESTING ACTIVITIES:
Equipment acquired with long term debt ................ $ 59,000
Real estate received in lieu of note receivable ....... 347,000
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial
statements (the "Financial Statements") of Universal Forest Products, Inc.
and its wholly-owned subsidiaries and partnerships (together, the "Company"),
have been prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, the Financial Statements do not
include all of the information and footnotes normally included in the annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In the opinion of management, the Financial Statements contain all material
adjustments necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company for the interim periods
presented. All such adjustments are of a normal recurring nature. These
Financial Statements should be read in conjunction with the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996.
Certain reclassifications have been made to the 1996 consolidated condensed
statements of earnings to conform to the classifications in 1997.
B. EARNINGS PER COMMON SHARE
Earnings per common share have been computed based on the weighted average
number of common and common equivalent shares outstanding during the periods
presented, giving effect to options granted in 1989 and 1993, utilizing the
"treasury stock" method as if the options were granted and outstanding as of
the earliest period presented. Primary and fully-diluted earnings per common
share were not materially different during the periods presented. Weighted
average shares outstanding are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Issued and outstanding ............... 17,171,000 17,039,000 17,116,000 17,027,000
Effect of stock options .............. 742,000 737,000 735,000 674,000
---------- ---------- ---------- ----------
Weighted average shares outstanding... 17,913,000 17,776,000 17,851,000 17,701,000
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997 - CONTINUED
C. NEW ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share."
SFAS 128 requires companies with complex capital structures that have
publicly held common stock or common stock equivalents to present both
basic and diluted earnings per share ("EPS") on the face of the income
statement. The presentation of basic EPS replaces the presentation of
primary EPS currently required by Accounting Principles Board Opinion No.
15 ("APB No. 15"), "Earnings Per Share." Basic EPS is calculated as income
available to common stockholders divided by the weighted average number of
common shares outstanding during the period. Diluted EPS (previously
referred to as fully diluted EPS) is calculated using the "if converted"
method for convertible securities and the treasury stock method for options
and warrants as prescribed by APB No. 15. This new statement is effective
for financial statements issued for interim and annual periods ending after
December 15, 1997. The Company does not believe the adoption of SFAS 128
in fiscal 1997 will have a significant impact on the Company's
reported EPS.
7
<PAGE> 8
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL IMPACT OF FLUCTUATIONS IN LUMBER PRICES AND SEASONALITY
The Company experiences significant fluctuations in the cost of lumber products
from primary producers. The table below highlights such fluctuations for the
nine months ended September 27, 1997 and September 28, 1996. A variety of
factors over which the Company has no control, including government
regulations, environmental regulations, weather conditions, and natural
disasters, impact the cost of lumber products. The Company anticipates that
these fluctuations will continue in the future.
The following table presents the Random Lengths framing lumber composite price.
<TABLE>
<CAPTION>
Random Lengths
Average $/MBF
----------------
1997 1996
------- -------
<S> <C> <C>
January ......... $436 $329
February ........ 444 347
March ........... 433 353
April ........... 457 374
May ............. 444 420
June ............ 430 409
July ............ 429 402
August .......... 413 443
September ....... 393 443
---- ----
Period Average .. $431 $391
</TABLE>
The composite price is a weighted average of nine key framing lumber prices
chosen from major producing areas and species. The composite price is designed
as a broad measure of price movement in the commodity lumber market ("Lumber
Market"). The effects of the Lumber Market on the Company's results of
operations are discussed below under the captions "Net Sales" and "Cost of
Goods Sold and Gross Profit."
The Company's business is seasonal in nature and results of operations vary
from quarter to quarter. The demand for many of the Company's products is
highest during the period of April to August. Accordingly, the Company's sales
tend to be greater during its second and third quarters. To support this sales
peak, the Company builds its inventory of finished goods throughout the winter
and spring. Therefore, quantities of raw materials and finished goods
inventories tend to be at their highest, relative to sales, during the
Company's first and fourth quarters. As a result, the Company has some
exposure related to sharp declines in the Lumber Market during its primary
selling season. However, the Company maintains supply programs with vendors
which are intended to decrease its exposure. These programs have substantially
reduced the Company's investment in inventories, and include those materials
which are most susceptible to adverse changes in the Lumber Market.
8
<PAGE> 9
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of the
Company's Consolidated Condensed Statements of Earnings as a percentage of net
sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales ........................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................. 91.5 91.0 90.9 89.7
------ ------ ------ ------
Gross profit ........................ 8.5 9.0 9.1 10.3
Selling, general and administrative
expenses ........................... 5.3 5.6 5.5 6.1
------ ------ ------ ------
Earnings from operations ............ 3.2 3.4 3.6 4.2
Other expense, net .................. 0.4 0.1 0.3 0.3
------ ------ ------ ------
Earnings before income taxes ...... 2.8 3.3 3.3 3.9
Income taxes ...................... 1.0 1.3 1.2 1.6
------ ------ ------ ------
Net earnings ...................... 1.8% 2.0% 2.1% 2.3%
====== ====== ====== ======
</TABLE>
NET SALES
The Company manufactures, treats, and distributes lumber and other products to
the do-it-yourself (DIY), manufactured housing, wholesale lumber, and
industrial markets. Its sales comprise a single industry segment. The
Company's key strategic objectives relative to sales include:
- - Diversifying its end market sales mix by increasing sales to the
industrial market and penetrating the commercial and residential engineered
building components market.
- - Maximizing its sales of "value-added" products. Value-added product sales
consist primarily of items sold to the DIY market under the Company's Fence
Fundamentals(TM), Lattice Basics(TM), Deck Necessities(R), Outdoor
Essentials(R), Storage Solutions(TM), and YardLine(R) trade names, trusses
sold to the manufactured housing market, industrial packaging products
sold to the industrial market, and non-
9
<PAGE> 10
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
commodity distributed products. Distributed products include vinyl
fencing and decking, engineered wood products, and other building
materials. Value-added products generally carry higher net margins than
sales of commodity-based products and are less susceptible to Lumber
Market volatility. A long-term goal of the Company is to achieve a ratio
of value-added sales to total sales of at least 50%.
- - Growing unit sales to each of the Company's existing markets, except the
wholesale market. The Company is not emphasizing sales to the wholesale
market as a result of its goals to increase its ratio of value-added
product sales to total sales and sell directly to retail customers.
- - Utilizing its distribution network to the DIY and manufactured housing
markets to increase distribution sales of non-commodity products
manufactured by other companies.
In order to measure its progress in attaining these objectives, management
analyzes the following financial data relative to sales:
- - Sales by market classification.
- - The percentage change in sales attributable to changes in overall selling
prices versus changes in the quantity of units shipped.
- - The ratio of value-added product sales to total sales.
This information is presented in tables which follow.
The following table presents, for the periods indicated, the Company's net
sales (in thousands) and percentage of total net sales by market
classification.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- ------------------------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
Market Classification 1997 % 1996 % 1997 % 1996 %
- --------------------- --------- ----- --------- ----- --------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DIY ............... $148,623 52.2% $127,778 52.4% $446,712 53.1% $370,603 54.6%
MH ................ 105,902 37.2 92,560 38.0 307,728 36.6 242,951 35.8
Wholesale Lumber .. 15,518 5.4 12,007 4.9 45,025 5.4 33,281 4.9
Industrial ........ 14,948 5.2 11,542 4.7 41,507 4.9 32,360 4.8
-------- ------ -------- ------ -------- ----- -------- -------
Total ............. $284,991 100.0% $243,887 100.0% $840,972 100.0% $679,195 100.0%
======== ====== ======== ====== ======== ===== ======== =======
</TABLE>
10
<PAGE> 11
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table estimates the Company's percentage change in net sales from
1996 to 1997 which are attributable to changes in overall selling prices and
changes in units shipped.
<TABLE>
<Caption
Three Months Ended Nine Months Ended
September 27, 1997 September 27, 1997
------------------------------------------------ --------------------------------
% Change % Change in % Change % Change % Change in % Change
Market Classification in Sales Selling Prices in Units in Sales Selling Prices in Units
- --------------------- -------- -------------- -------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
DIY ................. 16.0% 3.0% 13.0% 20.0% 10.0% 10.0%
MH .................. 14.0 3.0 11.0 26.0 13.0 13.0
Wholesale Lumber .... 29.0 (3.0) 32.0 35.0 3.0 32.0
Industrial .......... 29.0 5.0 24.0 28.0 14.0 14.0
Weighted Total ...... 17.0 3.0 14.0 24.0 10.0 14.0
</TABLE>
The following table presents, for the periods and markets indicated, the
Company's percentage of value-added and commodity-based sales to total sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -------------------------------------------
Sept. 27, 1997 Sept. 28, 1996 Sept. 27, 1997 Sept. 28, 1996
---------------- ----------------- ------------------ -----------------------
% & % % % % % %
Value- Commodity- Value- Commodity- Value Commodity- Value Commodity
Market Classification Added Based Added Based Added Based Added Based
- --------------------- ------ ----- ----- ---------- ----- ----- ----- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DIY ................. 25.4% 74.6% 24.7% 75.3% 29.4% 70.6% 29.2% 70.8%
MH .................. 29.0 71.0 27.4 72.6 28.7 71.3 28.5 71.5
Wholesale Lumber .... 14.7 85.3 20.0 80.0 18.7 81.3 27.7 72.3
Industrial .......... 21.0 79.0 17.5 82.5 21.2 78.8 19.3 80.7
Weighted Total ...... 25.9 74.1 25.1 74.9 28.2 71.8 28.4 7.16
</TABLE>
The Company implemented a new sales information system in the third quarter of
1997, improving its ability to analyze sales by product. As a result of this
new system, and with consideration to the strategic objectives outlined above,
management reclassified certain products between the value-added and
commodity-based categories. Under the prior classifications, value-added sales
to total sales for the third quarter and first nine months of 1996 were 28.8%
and 31.6%, respectively.
Do-It-Yourself (DIY):
Net sales to the DIY market increased in the third quarter of 1997 compared to
the third quarter of 1996. This increase is primarily attributable to growth
in the DIY industry, combined with an increase in market share of the national
retail chains. The Company has strong relationships with these national
customers, centered around its ability to provide quality products and services
at competitive prices. As these national
11
<PAGE> 12
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
retail customers continue to capture additional market share in the industry,
management believes it is well positioned to increase its market share.
An increase in net sales for the first nine months of 1997 is due to an
increase in unit sales (due to the same factors mentioned above), combined with
an increase in overall selling prices attributable to the relatively high level
of the Lumber Market in 1997 compared to 1996. (See the Random Lengths table
presented on page 8.)
Manufactured Housing (MH):
Net sales to the manufactured housing market increased in the third quarter of
1997 compared to the third quarter of 1996, primarily due to an increase in
unit sales attributable to the acquisition of three plants from Hi-Tek Forest
Products, Inc. ("Hi-Tek") on October 1, 1996. An increase in net sales for the
first nine months of 1997, compared to the first nine months of 1996, is
attributable to an increase in units shipped (due to the additional Hi-Tek
plants), combined with an increase in overall selling prices due to the
relatively high level of the Lumber Market in 1997 compared to 1996.
Wholesale:
Net sales to the wholesale market increased in the third quarter and first nine
months of 1997, compared to the same period of 1996, primarily due to an
increase in unit sales. Although the Company is not focusing on growing its
sales to the wholesale market, it continues to supply its existing customers
and take advantage of opportunities for new business when these sales provide
favorable net margins.
Industrial:
Net sales to the industrial market increased in the third quarter of 1997,
compared to the third quarter of 1996, primarily due to an increase in unit
sales. In 1997, new sales positions and sales incentive programs were created
to grow sales to this market. An increase in net sales for the first nine
months of 1997 is due to an increase in units shipped, combined with an
increase in overall selling prices due to the relatively high level of the
Lumber Market in 1997 compared to 1996. In many cases, products sold to this
market are produced from the byproducts of manufactured products sold to other
markets. Therefore, products produced and distributed to this market provide
the Company with opportunities to improve its raw material yields. In
addition, this market is less susceptible to seasonal and cyclical
fluctuations. The Company plans to continue to grow its sales to this market
in the future through internal expansion and strategic acquisitions.
12
<PAGE> 13
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
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 decreased to 8.5% in the third
quarter of 1997 compared to 9.0% in the same period of 1996. This decrease was
primarily due to a combination of the following factors:
- - The Lumber Market was on a downward trend in the third quarter of 1997,
compared to an upward trend in the third quarter of 1996. This resulted in
a comparatively lower gross profit percentage on the sale of
commodity-based products in the third quarter of 1997.
- - The effect of predatory price competition in the manufactured housing
market in certain geographic regions.
Gross profit as a percentage of net sales decreased to 9.1% in the first nine
months of 1997, compared to 10.3% in the same period of 1996, primarily due to
the factors discussed above, plus:
- - The effect of the higher level of the Lumber Market that existed
throughout the first six months of 1997 on the gross profit percentage of
the Company's commodity-based products. Selling prices of these products
are generally indexed to the Lumber Market, along with a fixed dollar
"adder" to cover production costs plus profit. Therefore, in a stable but
high Lumber Market, the Company's gross profit percentage will be lower
than the gross profit percentage it would realize with a stable but low
Lumber Market.
- - The effect of the higher level of the Lumber Market on the gross profit
percentage of the Company's value-added products in the first six months of
1997. Selling prices of these products tend to be fixed for a specific
time period or quantity. Therefore, in periods of high or increasing
lumber costs, the Company's gross profit percentage will decrease.
- - The Lumber Market was on an upward trend in the second quarter of 1996,
compared to a stable to downward trending Lumber Market in the second
quarter of 1997. This resulted in a comparatively lower gross profit
percentage on the sale of commodity-based products in the second quarter
of 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased approximately $1.5
million, or 11.1%, comparing the third quarter of 1997 to the same period of
1996. This net increase was primarily due to:
- - General increases in selling and administrative headcount to support the
growth of the business.
13
<PAGE> 14
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-CONTINUED
- - Expenses added through the acquisition of Hi-Tek.
- - The creation of new centralized marketing, national sales, and
manufacturing design departments.
- - Increased depreciation expense related to upgraded information systems.
These increases were offset by a decrease in accrued incentive compensation
expenses related to return on investment objectives. Selling, general and
administrative expenses for the first nine months of 1997 increased
approximately $4.2 million, or 10.2%, compared to the same period of 1996,
primarily due to the same factors discussed above.
OTHER EXPENSE, NET
Other expense, net is primarily comprised of interest expense and interest
income. Net interest costs (interest expense less interest income) increased
approximately $215,000, comparing the third quarter of 1997 to the same period
of 1996. Average cash balances have decreased in 1997 due to increased working
capital requirements resulting from a growth in business. Net interest costs
for the first nine months of 1997 increased approximately $530,000, compared to
the same period of 1996, due to the same factors.
INCOME TAXES
The Company's effective tax rate in the third quarter of 1997 was 35.6%,
compared to 40.3% in the third quarter of 1996, and 36.9% for the first nine
months of 1997, compared to 40.4% for the same period of 1996. Effective tax
rates differ from statutory federal income tax rates primarily due to
provisions for state and local income taxes, which can vary from year to year
based on changes in income generated by the Company in each of the states in
which it operates. Due to the reorganization it completed on December 28, 1996
to formalize its existing operating structure, the Company anticipates
realizing a reduction in its state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities for the first nine months of 1997
improved to $22.6 million from $8.4 million in the same period of 1996. This
improvement in cash flow provided by operations was due to an increase in the
Company's net earnings, combined with a net decrease in its working capital
investment comparing September 27, 1997 and September 28, 1996. A decrease in
net working capital investment at September 27, 1997 is primarily due to the
timing of payments to vendors at the end of the period. The Company's cash
cycle (days
14
<PAGE> 15
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
sales outstanding plus days supply of inventory less days payable outstanding)
increased to 42.7 days for the first nine months of 1997 from 40.7 days compared
to the same period of 1996.
Capital expenditures totaled $9.5 million in the first nine months of 1997, as
the Company remains on pace to spend approximately $13 to $15 million for the
year to replace existing machinery and equipment, upgrade information systems,
improve production efficiencies, and expand current production capacity. The
Company's largest capital expenditures were made to construct a new wood
preservation facility and specialty products plant in Moultrie, Georgia and
acquire real estate previously leased from the Company's profit sharing and
401(k) plan.
Cash flows used in financing activities consisted primarily of repayments of
long-term debt and payments to repurchase common stock from certain officers of
the Company. On September 27, 1997, approximately $119 million remained
available on revolving credit facilities.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
The Company is self-insured for environmental impairment liability, and accrues
for the estimated cost of remedial actions when situations requiring such
action arise. The Company owns and operates seventeen facilities throughout
the United States that chemically treat lumber products. In connection with
the ownership and operation of these and other real properties, and the
disposal or treatment of hazardous or toxic substances, the Company may, under
various federal, state and local environmental laws, ordinances and
regulations, be potentially liable for removal and remediation costs, as well
as other potential costs, damages and expenses. Remediation activities are
currently being conducted at the Company's Granger, Indiana; Union City,
Georgia; and Elizabeth City, North Carolina wood preservation facilities.
The Company has accrued, in other long-term liabilities, amounts totaling $1.5
million and $1.7 million at September 27, 1997 and December 28, 1996,
respectively, representing the estimated costs to complete remediation efforts
currently in process and those expected to occur in the future. The Company
believes that the potential future costs of known remediation efforts will not
have a material adverse effect on its future financial position, results of
operations, or liquidity.
15
<PAGE> 16
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Included in this report, and from time to time, certain forward-looking
statements may be made by the Company within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Such forward-looking statements are based on the
beliefs of the Company's management as well as on assumptions made by and
information currently available to the Company at the time such statements are
made. Actual results could differ materially from those included in such
forward-looking statements as a result of, among other things, the factors set
forth below, the matters included in this report generally and certain economic
and business factors, some of which may be beyond the control of the Company.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty.
Lumber Market Volatility:
The Company experiences significant fluctuations in the cost of lumber products
from primary producers. While the Company attempts to minimize its risk from
severe price fluctuations, substantial, rapid changes in lumber prices can
affect the Company's financial results.
Competition:
The Company is subject to competitive selling and pricing pressures in its
major markets. While the Company is generally aware of its existing
competitors' capabilities, it is subject to entry in its markets by new
competitors, which could negatively impact financial results.
Market Growth:
The Company's sales growth is dependent, in part, upon growth within the
markets it serves. If the Company's markets do not maintain anticipated
growth, or if the Company fails to maintain its market share, financial results
could be impaired.
Government Regulations:
The Company is subject to a substantial amount of existing government
regulations which create a burden on the Company. Should the Company become
subject to additional laws and regulations enacted in the future, or changes in
interpretation of existing laws, it could have an adverse affect on the
Company's financial results.
16
<PAGE> 17
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(a) None.
(b) None.
(c) Sales of equity securities not registered under the Securities Act.
<TABLE>
<CAPTION>
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Exchanged
------- -------- --------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
Employee Stock Gift Program Various Common 75 Eligible officers None
and employees
</TABLE>
17
<PAGE> 18
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: November 12, 1997 By: /s/ William G. Currie
--------------------------
William G. Currie
Its: President and Chief Executive Officer
Date: November 12, 1997 By: /s/ Elizabeth A. Bowman
---------------------------------------
Elizabeth A. Bowman
Its: Executive Vice President of Finance
and Administration and Treasurer
(Principal Financial Officer)
18
<PAGE> 19
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
27 Financial Data Schedule 20
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 11,268,855
<SECURITIES> 0
<RECEIVABLES> 58,427,599
<ALLOWANCES> 583,079
<INVENTORY> 91,728,398
<CURRENT-ASSETS> 165,916,647
<PP&E> 111,472,185
<DEPRECIATION> 49,332,059
<TOTAL-ASSETS> 235,164,124
<CURRENT-LIABILITIES> 65,217,172
<BONDS> 0
0
0
<COMMON> 17,172,558
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 235,164,124
<SALES> 840,971,709
<TOTAL-REVENUES> 840,971,709
<CGS> 764,669,437
<TOTAL-COSTS> 764,669,437
<OTHER-EXPENSES> 45,777,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,188,226
<INCOME-PRETAX> 27,708,917
<INCOME-TAX> 10,212,000
<INCOME-CONTINUING> 17,496,917
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,496,917
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
