<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 26, 1999
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-22684
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-1465835
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2801 East Beltline NE, Grand Rapids, Michigan 49525
--------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (616) 364-6161
--------------
NONE
---------------------------------------------------
(Former name or former address, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of August 1, 1999
-------------------------- --------------------------------
Common stock, no par value 20,777,239
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Page 1 of 26
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION.
<S> <C> <C>
Item 1. Financial Statements.
Consolidated Condensed Balance Sheets at June 26, 1999
and December 26, 1998. 3
Consolidated Condensed Statements of Earnings for the Three and
Six Months Ended June 26, 1999 and June 27, 1998. 4
Consolidated Condensed Statements of Cash Flows for the Six
Months Ended June 26, 1999 and June 27, 1998. 5
Consolidated Condensed Statements of Shareholders' Equity for the
Periods Ended June 26, 1999 and June 27, 1998. 6-7
Notes to Consolidated Condensed Financial Statements. 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-22
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings - NONE.
Item 2. Changes in Securities. 23
Item 3. Defaults Upon Senior Securities - NONE.
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 5. Other Information - NONE.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index. 26
(b) No reports were filed on Form 8-K during the
six months ended June 26, 1999.
</TABLE>
2
<PAGE> 3
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except share data)
June 26, December 26,
1999 1998
---------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents........................................................ $ 1,441 $ 920
Accounts receivable (net of allowance for doubtful accounts of
$4,550 and $3,540)............................................................. 112,341 62,846
Inventories:
Raw materials................................................................ 46,328 36,856
Finished goods............................................................... 89,931 71,543
---------- ----------
136,259 108,399
Other current assets............................................................. 6,966 9,712
---------- ----------
TOTAL CURRENT ASSETS.................................................... 257,007 181,877
OTHER ASSETS ........................................................................ 10,432 10,978
GOODWILL AND NON-COMPETE AGREEMENTS, NET.............................................. 94,351 95,229
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost........................................... 211,970 193,375
Accumulated depreciation and amortization........................................ (67,910) (61,389)
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET...................................... 144,060 131,986
---------- ----------
$ 505,850 $ 420,070
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.................................................................. $ 2,208 $ 1,997
Accounts payable................................................................. 65,214 38,751
Accrued liabilities:
Compensation and benefits................................................... 23,880 28,025
Other ...................................................................... 10,429 3,485
Current portion of long-term debt and capital lease obligations.................. 8,566 9,760
---------- ----------
TOTAL CURRENT LIABILITIES............................................... 110,297 82,018
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, less current portion.................................................... 171,804 132,120
DEFERRED INCOME TAXES................................................................. 8,100 8,100
OTHER LIABILITIES..................................................................... 6,948 6,249
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; shares authorized 1,000,000;
issued and outstanding, none
Common stock, no par value; shares authorized 40,000,000;
issued and outstanding, 20,773,042 and 20,710,263.............................. 20,773 20,710
Additional paid-in capital....................................................... 78,178 77,526
Retained earnings................................................................ 110,644 95,221
Accumulated other comprehensive earnings......................................... (257) (1,072)
---------- ----------
209,338 192,385
Officers' stock notes receivable................................................. (637) (802)
---------- ----------
208,701 191,583
---------- ----------
$ 505,850 $ 420,070
========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ --------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
--------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
NET SALES........................................ $ 446,751 $ 388,677 $ 746,931 $ 626,874
COST OF GOODS SOLD............................... 391,013 342,362 649,976 556,067
--------- ------------ ----------- ------------
GROSS PROFIT..................................... 55,738 46,315 96,955 70,807
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........................ 31,560 25,251 61,433 42,440
--------- ------------ ----------- ------------
EARNINGS FROM OPERATIONS......................... 24,178 21,064 35,522 28,367
OTHER EXPENSE (INCOME):
Interest expense............................ 3,318 3,060 6,237 4,732
Interest income............................. (143) (44) (280) (79)
Other, net.................................. (224) (97) (378) (141)
--------- ------------ ----------- ------------
TOTAL OTHER EXPENSE.................... 2,951 2,919 5,579 4,512
--------- ------------ ----------- ------------
EARNINGS BEFORE INCOME TAXES..................... 21,227 18,145 29,943 23,855
INCOME TAXES ................................... 8,479 7,022 11,834 9,155
--------- ------------ ----------- ------------
NET EARNINGS ................................... $ 12,748 $ 11,123 $ 18,109 $ 14,700
========= ============ =========== ============
EARNINGS PER SHARE - BASIC....................... $ 0.61 $ 0.54 $ 0.87 $ 0.77
EARNINGS PER SHARE - DILUTED..................... $ 0.60 $ 0.52 $ 0.85 $ 0.74
WEIGHTED AVERAGE SHARES
OUTSTANDING ................................... 20,745 20,677 20,727 19,126
WEIGHTED AVERAGE SHARES
OUTSTANDING WITH COMMON
STOCK EQUIVALENTS.............................. 21,291 21,391 21,353 19,831
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 26, June 27,
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings ...................................................................... $ 18,109 $ 14,700
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation and amortization.................................................. 7,535 5,363
Amortization of non-compete agreements and goodwill............................ 1,592 924
(Gain) loss on disposal of property, plant and equipment....................... (89) 46
Stock Gift and Stock Grant Program expense..................................... 37 21
Changes in:
Accounts receivable.......................................................... (49,494) (37,247)
Inventories.................................................................. (27,861) 3,086
Other ...................................................................... 228 (335)
Accounts payable............................................................. 26,462 13,820
Accrued liabilities.......................................................... 5,425 6,755
---------- ----------
NET CASH FROM OPERATING ACTIVITIES........................................ (18,056) 7,133
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection of notes receivable...................................................... 1,642 94
Purchase of notes receivable........................................................ (139)
Purchases of property, plant and equipment.......................................... (21,153) (10,513)
Proceeds from sale of property, plant and equipment................................. 1,633 199
Business acquisitions, net of cash received......................................... (92,931)
Purchases of other assets........................................................... (98) (190)
---------- ----------
NET CASH FROM INVESTING ACTIVITIES........................................ (18,115) (103,341)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of notes payable and revolving credit facilities..................... 26,131 115,900
Proceeds from issuance of common stock.............................................. 785 364
Proceeds from issuance of long-term debt............................................ 20,306
Cash dividends paid................................................................. (728) (725)
Repayment of long-term debt......................................................... (7,736) (14,926)
Repurchase of common stock.......................................................... (2,066)
---------- ----------
NET OF CASH FROM FINANCING ACTIVITIES..................................... 36,692 100,613
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 521 4,405
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................................... 920 3,157
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................ $ 1,441 $ 7,562
========== ==========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ...................................................................... $ 6,111 $ 4,502
Income taxes................................................................... 4,800 4,513
NON-CASH INVESTING ACTIVITIES:
Note payable issued in exchange for non-compete agreements.......................... $ 2,373
Note payable issued in business combination......................................... 820
Property, plant and equipment acquired through capital leases....................... 179
Fair market value of common stock issued in business combinations................... 50,511
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except share data) Accumulated Officers'
Additional Other Stock
Common Paid-In Retained Comprehensive Notes
Stock Capital Earnings Earnings Receivable Total
---------- ---------- ---------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF 12/26/98................ $ 20,710 $ 77,526 $ 95,221 ($ 1,072) ($ 802) $ 191,583
Comprehensive earnings:
Net earnings.................... 5,361
Foreign currency translation
adjustment.................... 303
Total comprehensive earnings...... 5,664
Issuance of 5,237 shares.......... 6 92 98
Repurchase of 50,000 shares....... (50) (887) (937)
Payments received on officers'
stock notes receivable.......... 153 153
-------- -------- --------- -------- ------ ---------
BALANCE AS OF 3/27/99................. $ 20,666 $ 77,618 $ 99,695 ($ 769) ($ 649) $ 196,561
Comprehensive earnings:
Net earnings.................... 12,748
Foreign currency translation
adjustment.................... 512
Total comprehensive earnings...... 13,260
Dividends paid.................... (728) (728)
Issuance of 164,743 shares........ 164 560 724
Repurchase of 57,201 shares....... (57) (1,071) (1,128)
Payments received on officers'
stock notes receivable.......... 12 12
-------- -------- --------- -------- ------ ---------
BALANCE AS OF 6/26/99................. $ 20,773 $ 78,178 $ 110,644 ($ 257) ($ 637) $ 208,701
======== ======== ========= ======== ====== =========
</TABLE>
6
<PAGE> 7
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except share data)
Accumulated Officers'
Additional Other Stock
Common Paid-In Retained Comprehensive Notes
Stock Capital Earnings Earnings Receivable Total
---------- ---------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF 12/27/97................ $ 17,572 $ 29,855 $ 70,253 ($ 882) ($ 900) $ 115,898
Comprehensive earnings:
Net earnings..................... 3,577
Foreign currency translation
adjustment..................... 266
Total comprehensive earnings....... 3,843
Issuance of 4,585 shares........... 5 51 56
Payments received on officers'
stock notes receivable........... 66 66
---------- ---------- ---------- ------------ -------- ----------
BALANCE AS OF 3/28/98................... $ 17,577 $ 29,906 $ 73,830 ($ 616) ($ 834) $ 119,863
Comprehensive earnings:
Net earnings..................... 11,123
Foreign currency translation
adjustment..................... (131)
Total comprehensive earnings....... 10,992
Dividend paid...................... (725) (725)
Issuance of 3,123,090 shares....... 3,123 47,482 50,605
Payments received on officers'
stock notes receivable........... 16 16
---------- ---------- ---------- ------------ -------- ----------
BALANCE AS OF 6/27/98................... $ 20,700 $ 77,388 $ 84,228 ($ 747) ($ 818) $ 180,751
========== ========== ========== ============ ======== ==========
</TABLE>
See notes to consolidated condensed financial statements.
7
<PAGE> 8
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial
statements (the "Financial Statements") of Universal Forest Products,
Inc. and its wholly-owned and majority-owned subsidiaries and
partnerships (together, the "Company"), have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, the Financial Statements do not include all of the
information and footnotes normally included in the annual consolidated
financial statements prepared in accordance with generally accepted
accounting principles. All significant intercompany accounts and
transactions have been eliminated in consolidation. The equity method of
accounting has been used for the Company's 50% or less owned affiliates
over which the Company has the ability to exercise a significant
influence.
In the opinion of management, the Financial Statements contain all
material adjustments necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company
for the interim periods presented. All such adjustments are of a normal
recurring nature. These Financial Statements should be read in
conjunction with the financial statements, and footnotes thereto,
included in the Company's Annual Report to Shareholders on Form 10-K for
the fiscal year ended December 26, 1998.
Certain reclassifications have been made to the consolidated condensed
financial statements for 1998 to conform to the classifications used in
1999.
B. EARNINGS PER COMMON SHARE
A reconciliation of the changes in the numerator and the denominator from
the calculation of basic EPS to the calculation of diluted EPS follows
(in thousands, except per share data).
<TABLE>
<CAPTION>
Three Months Ended 6/26/99 Three Months Ended 6/27/98
--------------------------------- -----------------------------------
Net Per Net Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
EPS - BASIC
Net earnings available to
common shareholders............ $ 12,748 20,745 $0.61 $11,123 20,677 $0.54
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 546 714
------ --------
</TABLE>
8
<PAGE> 9
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EPS - DILUTED
Net earnings available to
common shareholders and
options exercised.............. $ 12,748 21,291 $0.60 $11,123 21,391 $0.52
========= ====== ===== ======= ====== =====
<CAPTION>
Six Months Ended 6/26/99 Six Months Ended 6/27/98
----------------------------------- ---------------------------------
Net Per Net Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------- ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
EPS - BASIC
Net earnings available to
common shareholders............ $ 18,109 20,727 $0.87 $ 14,700 19,126 $0.77
===== =====
EFFECT OF DILUTIVE SECURITIES
Options........................ 626 705
------ ------
EPS - DILUTED
Net earnings available to
common shareholders and
options exercised.............. $ 18,109 21,353 $0.85 $ 14,700 19,831 $0.74
========= ====== ===== ========= ====== =====
</TABLE>
Options to purchase 423,135 shares of common stock at exercise prices
ranging from $19.75 to $36.01 were outstanding at June 26, 1999, but were
not included in the computation of diluted EPS because the options'
exercise prices were greater than the average market price of the common
stock and, therefore, would be antidilutive.
C. STOCK OPTIONS AND STOCK-BASED COMPENSATION
In January 1999, the Company granted incentive stock options for 231,161
shares of common stock under its Long Term Stock Incentive Plan. Options
were granted to employees and officers of the Company at exercise prices
ranging from $19.75 to $36.01, which equaled or exceeded the market value
of the stock on the date of each grant. The options are exercisable on
various dates from 2002 through 2014, and the option recipients must be
employed by the Company at the time of exercise. Options for 105,370
shares related to all plans were canceled during the period.
In January 1998, the Company granted incentive stock options for 346,506
shares of common stock under its Long Term Stock Incentive Plan. Options
were granted to certain employees and officers of the Company at exercise
prices ranging from $13.1875 to $24.4600, which equaled or exceeded the
market value of the stock on the date of each grant. The options are
exercisable on various dates from 2001 through 2013, and the option
recipients must be employed by the Company at the time of exercise.
9
<PAGE> 10
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
On April 22, 1998, the Company granted incentive stock options for
125,000 shares of common stock under its Long Term Stock Incentive Plan.
Options were granted to certain employees and officers of the Company at
exercise prices ranging from $17.4375 to $31.300, which equaled or
exceeded the market value of the stock on the date of each grant. The
options are exercisable on various dates from 2001 through 2013, and the
option recipients must be employed by the Company at the time of
exercise.
The Company continues to apply the provisions of APB Opinion No. 25 which
recognizes compensation expense under the intrinsic value method. Had
compensation cost for the stock options granted in 1999 and 1998 been
determined under the fair value based method defined in SFAS 123, the
Company's net earnings and earnings per share would have been reduced to
the following pro forma amounts (in thousands, except per share amounts).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- ------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
----------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Earnings:
As Reported.............. $12,748 $11,123 $18,109 $14,700
Pro Forma................ 12,613 11,042 17,839 14,538
EPS - Basic:
As Reported.............. $0.61 $0.54 $0.87 $0.77
Pro Forma................ $0.61 $0.53 $0.86 $0.76
EPS - Diluted:
As Reported.............. $0.60 $0.52 $0.85 $0.74
Pro Forma................ $0.59 $0.52 $0.84 $0.73
</TABLE>
Because the fair value based method of accounting has not been applied to
options granted prior to fiscal year 1996, the resulting pro forma
compensation cost may not be indicative of future amounts.
The fair value of each option granted in 1999 and 1998 was estimated on
the date of the grant using the Black-Scholes option pricing model with
the following weighted average assumptions.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk Free Interest Rate............. 6.20% 6.20%
Expected Life....................... 6.3 years 8.0 years
Expected Volatility................. 27.75% 28.35%
Expected Dividend Yield............. 0.40% 0.41%
</TABLE>
10
<PAGE> 11
UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - CONTINUED
D. BUSINESS COMBINATIONS
In 1998, the Company completed several business combinations which have
been accounted for using the purchase method of accounting. Accordingly,
in each instance, the purchase price was allocated to the assets acquired
and liabilities assumed based on their fair market values at the date of
acquisition. Any excess of the purchase price over the fair value of the
acquired assets and assumed liabilities was recorded as goodwill in each
transaction. The Company has amortized goodwill on a straight-line basis
over 40 years. The results of operations of each acquisition is included
in the Company's consolidated financial statements since the date it was
acquired.
The following unaudited pro forma consolidated results of operations for
the three and six month periods ended June 27, 1998 assumes the
acquisitions of Shoffner Industries, Inc. and Advanced Component Systems,
Inc. and its affiliates, occurred on December 27, 1997 (in thousands,
except per share data). The pro forma effects of other acquisitions are
not included because they are not material individually, or in the
aggregate.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 27, 1998 June 27, 1998
------------------ ----------------
<S> <C> <C>
Net sales........................... $388,677 $657,094
Net earnings........................ 11,123 15,267
Earnings per share:
Basic........................ $0.54 $0.69
Diluted...................... $0.52 $0.67
Weighted average
shares outstanding:
Basic........................ 20,677 22,126
Diluted...................... 21,391 22,831
</TABLE>
The pro forma results above include certain adjustments to give effect to
amortization of goodwill, interest expense, compensation of management,
certain other adjustments, and related income tax effects. The pro forma
results are not necessarily indicative of the operating results that
would have occurred had the acquisitions been completed as of the
beginning of the period presented, nor are they necessarily indicative of
future operating results.
11
<PAGE> 12
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RISK FACTORS
Included in this report are certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements are based on the beliefs of the Company's management as well as on
assumptions made by and information currently available to the Company at the
time such statements were made. Actual results could differ materially from
those included in such forward-looking statements as a result of, among other
things, the factors set forth below, the matters included in this report
generally and certain economic and business factors, some of which may be beyond
the control of the Company. Investors are cautioned that all forward-looking
statements involve risks and uncertainty.
Lumber Market Volatility:
The Company experiences significant fluctuations in the cost of lumber
products from primary producers. A variety of factors over which the Company has
no control, including government regulations, environmental regulations, weather
conditions, economic conditions and natural disasters, impact the cost of lumber
products and the Company's selling prices. While the Company attempts to
minimize its risk from severe price fluctuations, substantial, prolonged trends
in lumber prices can affect the Company's financial results.
Competition:
The Company is subject to competitive selling and pricing pressures in its
major markets. While the Company is generally aware of its existing competitors'
capabilities, it is subject to entry in its markets by new competitors, which
could negatively impact financial results.
Market Growth:
The Company's sales growth is dependent, in part, upon growth within the
markets it serves. If the Company's markets do not achieve anticipated growth,
or if the Company fails to maintain its market share, financial results could be
impaired.
Economic Trends:
As a result of its recent business combinations in the site-built
construction market, management believes the Company's ability to achieve growth
in sales and margins has become more dependent on general economic conditions,
such as interest rates, housing starts and unemployment levels. To the extent
these conditions change significantly in the future, the Company's financial
results could be impacted.
12
<PAGE> 13
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Business Combinations:
The Company has completed several business combinations within the past
eighteen months and plans to continue its acquisition activity in the immediate
future in order to achieve certain strategic objectives. There are many inherent
risks associated with business combinations, including assimilation and
successfully managing growth. While the Company conducts extensive due diligence
and has taken steps to ensure successful assimilation, factors beyond the
Company's control could influence the results of these acquisitions.
Consolidation:
The Company is witnessing consolidation and a reduction in the number of
customers in various markets it serves. These consolidations will result in a
larger portion of Company sales being made to some customers. The long term
effects of this consolidation are unknown, but could impact the Company's
margins on some product lines.
Government Regulations:
The Company is subject to a substantial amount of existing government
regulations which create a burden on the Company. Should the Company become
subject to additional laws and regulations enacted in the future, or changes in
interpretation of existing laws, it could have an adverse affect on the
Company's financial results.
Seasonality:
The majority of the Company's products are used in outdoor construction
activities, therefore its sales volume and profits can be negatively affected by
adverse weather conditions in certain geographic markets. In addition, adverse
weather conditions in certain regions can negatively impact the Company's
operations and consequently its productivity and costs per unit.
Please recognize the above risk factors when reviewing the Company's business
prospects.
FLUCTUATIONS IN LUMBER PRICES
The following table presents the Random Lengths framing lumber composite
price for the six months ended June 26, 1999 and June 27, 1998:
13
<PAGE> 14
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
<TABLE>
<CAPTION>
Random Lengths
Average $/MBF
--------------
1999 1998
---- ----
<S> <C> <C>
January............................ 370 360
February........................... 386 375
March.............................. 394 369
April.............................. 393 369
May................................ 421 331
June............................... 454 332
Second quarter average............. 423 344
Year-to-date average............... 403 356
Second quarter percentage
increase....................... 22.9%
Year-to-date percentage
increase....................... 13.2%
</TABLE>
The Random Lengths composite price is a weighted average of nine key
framing lumber prices chosen from major producing areas and species. The
composite price is designed as a broad measure of price movement in the
commodity lumber market ("Lumber Market"). In the second quarter of 1999, the
Lumber Market was 22.9% higher than it was during the same period of 1998.
However, Southern Yellow Pine ("SYP"), a species which comprises up to 50% of
the Company's volume, increased only 7% in the second quarter of 1999 compared
to the same period of 1998. A SYP composite price, prepared and used by the
Company in managing the business, is as follows:
<TABLE>
<CAPTION>
Random Lengths SYP
Average $/MBF
---------------
1999 1998
---- ----
<S> <C> <C>
January............................ 471 499
February........................... 497 525
March.............................. 513 550
April.............................. 498 541
May................................ 517 482
June............................... 563 450
Second quarter average............. 526 491
Year-to-date average............... 510 508
Second quarter percentage
increase....................... 7.1%
</TABLE>
14
<PAGE> 15
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Year-to-date percentage
increase....................... 0.4%
The effects of the Lumber Market on the Company's results of operations are
discussed below under the captions "Net Sales" and "Cost of Goods Sold and Gross
Profit."
SEASONALITY
The Company's business is seasonal in nature and results of operations vary
from quarter to quarter. The demand for many of the Company's treated lumber and
outdoor specialty products, such as fencing, decking and lattice, experience the
greatest seasonal effects. Sales of treated lumber, primarily consisting of SYP,
also experience the greatest Lumber Market risk. Sales of treated lumber are
generally at their highest levels between the months of April through August.
This sales peak, combined with capacity constraints in the wood treatment
process, requires the Company to build its inventory of treated lumber
throughout the winter and spring. Since sales prices of treated lumber products
are generally indexed to the Lumber Market at the time they are shipped, the
Company's profits can be negatively affected by prolonged declines in the Lumber
Market during its primary selling season. To mitigate this risk, supply programs
are maintained with vendors that are intended to decrease the Company's
exposure. These programs include those materials which are most susceptible to
adverse changes in the Lumber Market, and also allow the Company to carry a
lower investment in inventories.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of
the Company's Consolidated Statement of Earnings as a percentage of net sales.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 87.5 88.1 87.0 88.7
----- ----- ----- -----
Gross profit................................ 12.5 11.9 13.0 11.3
Selling, general, and
administrative expenses................... 7.1 6.5 8.2 6.8
----- ----- ----- -----
</TABLE>
15
<PAGE> 16
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
<TABLE>
<S> <C> <C> <C> <C>
Earnings from operations.................... 5.4 5.4 4.8 4.5
Other expense, net.......................... 0.6 0.7 0.8 0.7
---- ---- ---- ----
Earnings before income taxes................ 4.8 4.7 4.0 3.8
Income taxes................................ 1.9 1.8 1.6 1.5
---- ---- ---- ----
Net earnings................................ 2.9% 2.9% 2.4% 2.3%
==== ==== ==== ====
</TABLE>
NET SALES
The Company manufactures, treats and distributes lumber and other
building-related products to the do-it-yourself (DIY), manufactured housing,
wholesale lumber, industrial and conventional site-built construction markets.
The Company's strategic objectives relative to sales include:
- - Continuing to diversify the Company's end market sales mix by increasing
its sales of specialty wood packaging to industrial users and "engineered
wood products" to the site-built construction market. Engineered wood
products consist of trusses, wall panels and I-joists.
- - Maximizing its sales of "value-added" products. Value-added product sales
consist of fencing, decking, lattice and other outdoor specialty products
sold to the DIY market; roof trusses sold to producers of manufactured
homes; specialty wood packaging; and engineered wood products. A long-term
goal of the Company is to achieve a ratio of value-added sales to total
sales of at least 50%.
- - Increasing unit sales to each of the Company's other markets, DIY and
manufactured housing.
In order to measure its progress toward attaining these objectives,
management analyzes the following financial data relative to sales:
- - Sales by market classification.
- - The percentage change in sales attributable to changes in overall selling
prices versus changes in the quantity of units shipped.
- - The ratio of value-added product sales to total sales.
This information is presented in the narrative and tables which follow.
16
<PAGE> 17
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
The following table presents, for the periods indicated, the Company's net sales
(in thousands) and percentage of total net sales by market classification.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------------------- -------------------------------------
June 26, June 27, June 26, June 27,
Market Classification 1999 % 1998 % 1999 % 1998 %
- --------------------- -------- ------ -------- ------ --------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DIY................................. $236,912 53.0% $207,922 53.5% $357,068 47.8% $308,742 49.3%
Manufactured Housing................ 108,811 24.4 104,500 26.9 205,079 27.5 199,620 31.8
Site-Built Construction............. 53,858 12.1 34,698 8.9 101,374 13.6 43,497 6.9
Wholesale Lumber.................... 22,304 5.0 20,859 5.4 38,406 5.1 38,990 6.2
Industrial.......................... 24,866 5.5 20,698 5.3 45,004 6.0 36,025 5.8
-------- ----- -------- ----- -------- ----- -------- -----
Total............................... $446,751 100.0% $388,677 100.0% $746,931 100.0% $626,874 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Note: In 1998, the Company reviewed the market classifications of each of its
customers and made certain reclassifications. Prior year sales have been
restated due to these customer reclassifications.
Net sales in the second quarter of 1999 increased $58.1 million, or 15%,
compared to the second quarter of 1998, reflecting an increase in units shipped
combined with an increase in overall selling prices. The increase in units
shipped was primarily driven by sales from plants serving the site-built
construction market and additional business with the Company's largest DIY
customer. Overall selling prices increased due to the Lumber Market (see pages
15 and 16). Net sales in the first six months of 1999 increased $120.1 million,
or 19%, compared to the same period of 1998. This sales increase was primarily
due to several businesses acquired in the first six months of 1998, combined
with increased sales to the Company's largest DIY customer.
The following table presents, for the periods and markets indicated, the
Company's percentage of value added and commodity-based sales to total sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ -------------------
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Value-Added........................... 36.7% 40.1% 38.5% 38.3%
Commodity-Based....................... 63.3% 59.9% 61.5% 61.7%
</TABLE>
DIY:
Net sales to the DIY market increased approximately $29.0 million, or 14%, in
the second quarter of 1999 compared to the second quarter of 1998. Net sales for
the first six months of 1999 increased $48.3 million, or 16%. Approximately $14
million and $23 million of the quarterly and
17
<PAGE> 18
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
year-to-date increases, respectively, were due to new treating plants which
commenced operations in 1999. Sales from Shoffner Industries, L.L.C.
("Shoffner") acquired on March 30, 1998, also contributed to the year-to-date
increase. Existing operations (operations that were part of the Company since
the beginning of 1998) primarily increased sales by adding business with the
Company's largest customer. The overall increase in DIY sales is offset by a
reduction in sales to three other customers due to more restrictive credit terms
imposed by the Company and competitive factors. As a result, the percentage of
the Company's sales with its largest DIY customer continues to increase.
Manufactured Housing:
Net sales to the manufactured housing market increased approximately $4.3
million, or 4%, in the second quarter of 1999 compared to the second quarter of
1998. Net sales for the first six months of 1999 increased approximately $5.5
million, or 3%, compared to the same period of 1998. These overall increases
were primarily due to an increase in overall selling prices as a result of a
higher Lumber Market. Spruce-pine-fir is the species predominantly used for
products sold to this market, the costs of which were up considerably during the
1999 periods. In addition, recent data suggests that this industry is showing
signs of a slowdown, which will impact the Company's sales to this market.
Site-Built Construction Market:
Net sales to the site-built construction market increased approximately
$19.2 million and $57.9 million in the second quarter and first six months of
1999, respectively, compared to the same periods of 1998, primarily due to
increased sales from business acquired in 1998 consisting of Nascor, Shoffner,
Advanced Component Systems, Inc. ("ACS") and Structural Lumber Products, Inc.
("SLP"). Sales increases from Shoffner, ACS and SLP are generally due to a
combination of strong housing markets and increased market share in their
respective regions.
Wholesale:
Net sales to the wholesale market increased approximately $1.4 million, or
7%, in the second quarter of 1999 compared to the same period of 1998. Net sales
decreased $0.5 million, or 1%, for the first six months of 1999 compared to the
same period of 1998. The slight increase in sales for the second quarter and
decrease for the first six months of 1999 is primarily due to increased selling
prices associated with a higher Lumber Market, offset by a decrease in unit
sales. The Company is not emphasizing this market in its strategic initiatives
because products sold in this market are primarily commodity-based and
increasingly put the Company in competition with its vendor mills.
18
<PAGE> 19
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Industrial:
Net sales to the industrial market increased approximately $4.0 million and
$9.0 million in the second quarter and first six months of 1999, respectively,
compared to the same periods of 1998. These increases are primarily due to the
acquisition of Industrial Lumber Company in June, 1998.
COST OF GOODS SOLD AND GROSS PROFIT
Gross profit as a percentage of net sales increased to 12.5% in the second
quarter of 1999 compared to 11.9% in the second quarter of 1998. Gross profit as
a percentage of net sales increased to 13.0% for the first six months of 1999
compared to 11.3% for the same period of 1998. The increases were primarily due
to a combination of the following factors:
- - Higher margins on the sale of certain commodity-based products, primarily
due to an upward trend in the Lumber Market in 1999.
- - Increased sales of engineered wood products.
- - Increased sales and improved margins on specialty wood packaging products
and components sold to the industrial market in the Company's Far West
Region.
The favorable effects discussed above were partially offset by a decline in
sales of fencing, lattice and other outdoor specialty products due to
competitive factors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased
approximately $6.3 million, or 25%, comparing the second quarter of 1999 to the
same period of 1998. SG&A for the first six months of 1999 increased
approximately $19 million, or 45%, compared to the same period of 1998. The
quarterly increase was primarily due to:
- - Expenses added through business acquisitions and other new operations.
These expenses totaled $1.2 million in the second quarter of 1999.
- - General increases in personnel and travel costs due to additional sales,
marketing, engineering and management personnel to support the recent and
future growth of the business.
- - Increases in accrued incentive compensation expenses tied to profitability
and return on investment objectives.
19
<PAGE> 20
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
- - Increases in direct selling and marketing expenses tied to sales, such as
sales incentives and bad debt expense.
Additional factors contributing to the year-to-date increase include the
final costs of a research and development project and amortization of goodwill
and non-compete agreements as a result of business acquisitions. In addition,
the ratio of SG&A to sales during this period increased substantially to 8.2% in
1999 from 6.8% in 1998 due to acquired businesses that supply products to the
site-built construction market. These businesses require substantial engineering
costs relative to sales.
OTHER EXPENSE, NET
Other expense, net is primarily comprised of interest expense and interest
income. Net interest costs (interest expense less interest income) increased
approximately $0.2 million and $1.3 million comparing the second quarter and
first six months of 1999 and 1998, respectively. The year-to-date increase is
primarily due to acquisition-related debt incurred throughout 1998.
INCOME TAXES
The Company's effective tax rate was 39.9% in the second quarter of 1999
compared to 38.7% in the second quarter of 1998. This increase is primarily due
to estimated state and local income taxes which can vary from year to year based
on changes in income generated by the Company in each of the states in which it
operates. The Company's effective tax rate for the first six months of 1999 was
39.5% compared to 38.4% for the same period of 1998, due to the same factors
discussed above plus a permanent tax difference resulting from a business
acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows USED IN operating activities in the first six months of 1999
totaled approximately $18.1 million compared to cash flows PROVIDED BY operating
activities of $7.1 million in the same period of 1998. The decrease in cash from
operating activities was primarily due to a greater investment in working
capital as a result of business growth, offset by an increase in earnings,
depreciation, and amortization expenses as a result of 1998 business
acquisitions.
Due to the seasonality of its business and the effects of the Lumber
Market, management believes the Company's cash cycle (days sales outstanding
plus days supply of inventory less days payables outstanding) is the best
indicator of its working capital management. The Company's cash cycle decreased
to 42 days during the first six months of 1999 from 47 days during the first six
months of 1998, primarily due to improved inventory management throughout the
first half of 1999.
20
<PAGE> 21
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
In the first half of 1998, the Company carried higher levels of inventory in
relationship to sales than was necessary. Since that time, plant management
improved its control over this area.
Capital expenditures totaled $21.2 million in the first six months of 1999
compared to $10.5 million in the same period of 1998. The increase was primarily
due to an increase in new facilities purchased during the first six months of
1999 and an investment in a fractional ownership of an airplane. The purchase
price for the new facilities totaled almost $10.1 million. The remaining amounts
spent in the period were primarily for expanding production capacity and
replacing and/or upgrading certain equipment. The Company expects to spend
between $14 million and $19 million on capital expenditures for the balance of
1999, primarily to expand its operations into new regions. On June 26, 1999,
outstanding purchase commitments on capital projects totaled approximately $7.7
million. The Company intends to satisfy these commitments utilizing its
revolving credit facility.
The Company has not completed any business acquisitions during the first
six months of 1999. It continues to focus on assimilating the acquisitions it
completed in 1998, while also investigating other potential targets.
Cash flows provided by financing activities totaled approximately $36.7
million in the first six months of 1999 compared to $100.6 million in the same
period of 1998. The decrease was due to not having accumulated any
acquisition-related debt during 1999, offset by greater working capital
requirements and higher capital expenditures in the first six months of 1999.
On June 26, 1999, the Company had $42.3 million outstanding on its $175
million revolving credit facility. The Company experiences its greatest working
capital requirements during the period from March through July.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
The Company is self-insured for environmental impairment liability, and
accrues for the estimated cost of monitoring or remedial activities. As of
August 1, 1999, the Company owns and/or operates twenty facilities throughout
the United States that treat lumber products with a chemical preservative. In
accordance with applicable federal, state and local environmental laws,
ordinances and regulations, the Company may be potentially liable for costs and
expenses related to the environmental condition of the Company's real property.
The Company has established reserves for remedial activities at its North East,
MD; Union City, GA; Stockertown, PA; Elizabeth City, NC; and Schertz, TX
facilities. During the second quarter of 1999, the Company completed its
remedial activities at its Granger, IN facility.
The Company has accrued, in other current and long-term liabilities,
amounts totaling $2.3 million and $2.0 million at June 26, 1999 and June 27,
1998 for the activities described above.
21
<PAGE> 22
UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - CONTINUED
Management believes that the potential future costs of known remediation efforts
will not have a material adverse effect on its future financial position,
results of operations or liquidity.
"THE YEAR 2000"
The Company has reviewed its primary business and financial systems, and
has concluded it will not have any material "Year 2000" issues with the computer
programs which drive these systems. Accordingly, management does not expect to
incur any programming costs in this area. The Company believes its risks
associated with the "Year 2000" relate primarily to its customers, suppliers,
service providers and possible disruptions in the overall economy. Management is
currently reviewing the systems of its significant customers and vendors, as
well as its other ancillary systems, and has detected no material issues to
date. This review was originally planned for an April completion, but due to
priorities in other areas, it is expected to be completed in September 1999.
Incremental costs associated with this review are still expected to total
$50,000, while no costs have been incurred year-to-date. Although there can be
no absolute assurances that there will not be a material adverse effect on the
Company if third parties do not resolve their "Year 2000" issues in a timely
manner, the Company believes its activities will minimize these risks. The
Company will continue to evaluate and develop contingency plans as a result of
its "Year 2000" assessment.
22
<PAGE> 23
UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities.
(a) None.
(b) None.
(c) Sales of equity securities not registered under the Securities Act.
<TABLE>
<CAPTION>
Date of Class of Number Consideration
Sale Stock of Shares Purchasers Received
-------- -------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Stock Option Exercises 04/30/99 Common 160,000 Eligible officers $640,000
Employee Stock Gift Program Various Common 50 Eligible employees None
</TABLE>
23
<PAGE> 24
UNIVERSAL FOREST PRODUCTS, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were voted upon at the Company's Annual Meeting of
Shareholders on April 28, 1999.
(1) Election of the following Directors for three year terms expiring in 2001:
<TABLE>
<CAPTION>
For Withheld
-------- --------
<S> <C> <C>
John C. Canepa 15,932,963 110,128
Carroll M. Shoffner 15,932,963 110,128
Louis A. Smith 15,932,963 110,128
</TABLE>
Other Directors whose terms of office continued after the meeting are
as follows:
Peter F. Secchia
Richard M. DeVos
John W. Garside
William G. Currie
Phillp M. Novell
24
<PAGE> 25
UNIVERSAL FOREST PRODUCTS, INC.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL FOREST PRODUCTS, INC.
Date: August 6, 1999 By: /s/ William G. Currie
-------------- --------------------------------------
William G. Currie
Its: President and Chief Executive
Officer
Date: August 6, 1999 By: /s/ Elizabeth A. Nickels
-------------- --------------------------------------
Elizabeth A. Nickels
Its: Executive Vice President of Finance
and Administration and Treasurer
(Principal Financial Officer)
25
<PAGE> 26
UNIVERSAL FOREST PRODUCTS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule 27
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-START> DEC-27-1998
<PERIOD-END> JUN-26-1999
<CASH> 1,441
<SECURITIES> 0
<RECEIVABLES> 116,890
<ALLOWANCES> 4,549
<INVENTORY> 136,259
<CURRENT-ASSETS> 257,007
<PP&E> 211,970
<DEPRECIATION> 67,910
<TOTAL-ASSETS> 505,850
<CURRENT-LIABILITIES> 110,297
<BONDS> 0
0
0
<COMMON> 20,773
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 505,850
<SALES> 446,751
<TOTAL-REVENUES> 446,751
<CGS> 391,013
<TOTAL-COSTS> 391,013
<OTHER-EXPENSES> 31,560
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,318
<INCOME-PRETAX> 21,227
<INCOME-TAX> 8,479
<INCOME-CONTINUING> 12,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,748
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.60
</TABLE>
