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Universal Forest Products 10-Q 2008 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For
the quarterly period ended September 27, 2008
OR
Commission File Number 0-22684
UNIVERSAL FOREST PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code (616) 364-6161
NONE
(Former name or former address, if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date:
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UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
See notes to unaudited consolidated condensed financial statements.
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UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share data)
See notes to unaudited consolidated condensed financial statements.
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UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share and per share data)
See notes to unaudited consolidated condensed financial statements.
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UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS — (CONTINUED)
See
notes to unaudited consolidated condensed financial statements.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
The accompanying unaudited, interim, consolidated, condensed financial statements (the
“Financial Statements”) include our accounts and those of our wholly-owned and majority-owned
subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, the Financial Statements do not include
all of the information and footnotes normally included in the annual consolidated financial
statements prepared in accordance with accounting principles generally accepted in the United
States. All significant intercompany transactions and balances have been eliminated.
In our opinion, the Financial Statements contain all material adjustments necessary to present
fairly our consolidated financial position, results of operations and cash flows for the
interim periods presented. All such adjustments are of a normal recurring nature. These
Financial Statements should be read in conjunction with the annual consolidated financial
statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K
for the fiscal year ended December 29, 2007.
Effective at the beginning of the fiscal year ending December 27, 2008, we adopted SFAS No.
157, Fair Value Measurements (“SFAS No. 157”). This new standard establishes a framework for
measuring the fair value of assets and liabilities. This framework is intended to provide
increased consistency in how fair value determinations are made under various existing
accounting standards which permit, or in some cases require, estimates of fair market value.
SFAS No. 157 also expands financial statement disclosure requirements about a company’s use of
fair value measurements, including the effect of such measures on earnings. The adoption has
not had a material impact on our consolidated financial statements. SFAS No. 157 requires
fair value measurements be classified and disclosed in one of three categories.
The following table summarizes the valuation of our financial instruments as of September 27,
2008. These instruments are classified as Level 1 which are financial instruments with
unadjusted, quoted prices listed on active market exchanges.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Effective at the beginning of the fiscal year ending December 27, 2008, we adopted SFAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”).
SFAS No. 159 allows companies to choose to measure certain financial instruments and certain
other items at fair value. The statement requires that unrealized gains and losses are
reported in earnings for items measured using the fair value option and establishes
presentation and disclosure requirements. We have elected not to apply the fair value option
to any of our financial instruments except for those expressly required by U.S. GAAP.
Earnings on construction contracts are reflected in operations using either
percentage-of-completion accounting, which includes the cost to cost and units of delivery
methods, or completed contract accounting, depending on the nature of the business at
individual operations. Under percentage-of-completion using the cost to cost method, revenues
and related earnings on construction contracts are measured by the relationships of actual
costs incurred related to the total estimated costs. Under percentage-of-completion using the
units of delivery method, revenues and related earnings on construction contracts are measured
by the relationships of actual units produced related to the total number of units. Revisions
in earnings estimates on the construction contracts are recorded in the accounting period in
which the basis for such revisions becomes known. Projected losses on individual contracts
are charged to operations in their entirety when such losses become apparent. Under the
completed contract method, revenues and related earnings are recorded when the contracted work
is complete and losses are charged to operations in their entirety when such losses becomes
apparent.
The following table presents the balances of percentage-of-completion accounts which are
included in other current assets and accrued liabilities: other, respectively (in thousands):
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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):
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Options to purchase shares and certain other shares of common stock were not included in the
computation of diluted EPS because they were antidilutive given the net loss for the quarter
ended September 27, 2008. Options to purchase 30,000 shares of common stock at exercise
prices ranging from $31.11 to $36.01 were outstanding as of September 27, 2008, but were not
included in the computation of diluted EPS for the nine months ended September 27, 2008
because the options’ exercise price was greater than the average market price of the common
stock during the period and, therefore would be antidilutive.
No outstanding options were excluded from the computation of diluted EPS for the quarter and
nine months ended September 29, 2007.
On March 8, 2006 we entered into an accounts receivable sale arrangement with a bank that was
terminated on September 26, 2008. Under the terms of this arrangement:
No receivables were sold and outstanding as of September 27, 2008. On September 29, 2007,
$54.1 million of receivables were sold and outstanding, and we recorded $4.1 million of
retained interest in other current assets. A summary of the transactions we completed for the
first nine months of 2008 and 2007 are presented below (in thousands).
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Included in assets held for sale is certain property, plant and equipment totaling $11.9
million on September 27, 2008 and $25.4 million on September 29, 2007. These and other idle
assets were evaluated based on the requirements of SFAS No. 144, which resulted in an
impairment charge totaling approximately $6.2 million included in net loss on disposition of
assets and other impairment and exit charges in our Eastern and Western operating segments for
the nine months ended September 27, 2008. The assets held for sale consist of certain vacant
land and several facilities we closed to better align manufacturing capacity with the current
business environment. The fair values were determined based on appraisals or recent offers to
acquire the assets and are included in our Eastern and Western operating segments. The changes in
assets held for sale are as follows (in millions):
We incurred $1.2 million of severance expense associated with idled facilities for the nine
months ended September 27, 2008.
The following amounts were included in other intangible assets, net (in thousands):
The estimated amortization expense for intangible assets as of September 27, 2008 for each of
the five succeeding fiscal years is as follows (in thousands):
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The changes in the net carrying amount of goodwill and indefinite-lived intangible assets for
the nine months ended September 27, 2008 and September 29, 2007 are as follows (in thousands):
We provide compensation benefits to employees and non-employee directors under several
share-based payment arrangements including various employee stock option plans, the Employee
Stock Purchase Plan, the Directors’ Retainer Stock Plan, the Directors’ Stock Grant Plan, and
the 1999 Long Term Stock Incentive Plan.
We account for share-based compensation using the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment, (“SFAS 123(R)”), which we adopted using the
modified-prospective-transition method effective January 1, 2006.
We are self-insured for environmental impairment liability, including certain liabilities
which are insured through a wholly owned subsidiary, UFP Insurance Ltd., a licensed captive
insurance company. We own and operate a number of facilities throughout the United States
that chemically treat lumber products. In connection with the ownership and operation of
these and other real properties, and the disposal or treatment of hazardous or toxic
substances, we may, under various federal, state, and local environmental laws, ordinances,
and regulations, be potentially liable for removal and remediation costs, as well as other
potential costs, damages, and expenses. Environmental reserves, calculated with no discount
rate, have been established to cover remediation activities at our affiliates’ wood
preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Gordon, PA;
Janesville, WI; Medley, FL; and Ponce, PR. In addition, a reserve was established for our
affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed
on the property at the time of purchase.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS On a consolidated basis, we have reserved approximately $4.4 million on September 27, 2008 and
$4.0 million on September 29, 2007, representing the estimated costs to complete future
remediation efforts. These amounts have not been reduced by an insurance receivable.
The manufacturers of CCA preservative voluntarily discontinued the registration of CCA for
certain residential applications as of December 31, 2003. Our wood preservation facilities
have been converted to alternate preservatives, either ACQ, borates or ProWood®
Micro.
In November 2003, the EPA published its report on the risks associated with the use of CCA in
children’s playsets. While the study observed that the range of potential exposure to CCA
increased by the continuous use of playsets, the EPA concluded that the risks were not
sufficient to require removal or replacement of any CCA treated structures. The results of
the EPA study are consistent with a prior Consumer Products Safety Commission (CPSC) study
which reached a similar conclusion. The EPA did refer a question on the use of sealants to a
scientific advisory panel. The panel issued a report which provides guidance to the EPA on
the use of various sealants but does not mandate their use. In its final report issued on
April 30, 2008, the EPA does not require removal or replacement of CCA-treated structures,
including decks and playground equipment, and is not recommending that surrounding soils be
removed or replaced.
From time to time, various special interest environmental groups have petitioned certain
states requesting restrictions on the use or disposal of CCA treated products. The wood
preservation industry trade groups are working with the individual states and their regulatory
agencies to provide an accurate, factual background which demonstrates that the present method
of uses and disposal is scientifically supported.
We have not accrued for any potential loss related to the contingencies above. However,
potential liabilities of this nature are not conducive to precise estimates and are subject to
change.
In addition, on September 27, 2008, we were parties either as plaintiff or a defendant to a
number of lawsuits and claims arising through the normal course of our business. In the
opinion of management, our consolidated financial statements will not be materially affected
by the outcome of these contingencies and claims.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS On September 27, 2008, we had outstanding purchase commitments on capital projects of
approximately $2.0 million.
We provide a variety of warranties for products we manufacture. Historically, warranty claims
have not been material.
In certain cases we jointly bid on contracts with framing companies to supply building
materials to site-built construction projects. In some of these instances we are required to
post payment and performance bonds to insure the owner that the products and installation services
are completed in accordance with our contractual obligations. We have agreed to indemnify the
surety for claims made against the bonds. As of September 27, 2008, we had approximately $39
million in outstanding payment and performance bonds, which expire during the next two years.
In addition, approximately $8 million in payment and performance bonds are outstanding for
completed projects which are still under warranty.
We have entered into operating leases for certain assets that include a guarantee of a portion
of the residual value of the leased assets. If at the expiration of the initial lease term we
do not exercise our option to purchase the leased assets and these assets are sold by the
lessor for a price below a predetermined amount, we will reimburse the lessor for a certain
portion of the shortfall. These operating leases will expire periodically over the next five
years. The estimated maximum aggregate exposure of these guarantees is approximately $2.1
million.
Under our sale of accounts receivable agreement, we guarantee that a subsidiary, as accounts
servicer, will remit collections on receivables sold to the bank. (See Note D, “Sale of
Accounts Receivable.”)
On September 27, 2008, we had outstanding letters of credit totaling $32.2 million, primarily
related to certain insurance contracts and industrial development revenue bonds as further
described below.
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to
guarantee our performance under certain insurance contracts. We currently have irrevocable
letters of credit outstanding totaling approximately $17.4 million for these types of
insurance arrangements. We have reserves recorded on our balance sheet, in accrued
liabilities, that reflect our expected future liabilities under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the bond trustees for all
of the industrial development revenue bonds that we have issued. These letters of credit
guarantee principal and interest payments to the bondholders. We currently have irrevocable
letters of credit outstanding totaling approximately $14.8 million related to our outstanding
industrial development revenue bonds. These letters of credit have varying terms but may be
renewed at the option of the issuing banks.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal
Forest Products, Inc. in certain debt agreements, including the Series 1998-A Senior Notes,
Series 2002-A Senior Notes and our revolving credit facility. The maximum exposure of these
guarantees is limited to the indebtedness outstanding under these debt arrangements and this
exposure will expire concurrent with the expiration of the debt agreements.
Many of our wood treating operations utilize “Subpart W” drip pads, defined as hazardous waste
management units by the EPA. The rules regulating drip pads require that the pad be
“closed” at the point that it is no longer used to manage hazardous waste. Closure involves
identification and disposal of contamination which requires removal from the wood treating
operations. The ultimate cost of closure is dependent upon a number of factors including, but
not limited to, identification and removal of contamination, cleanup standards that vary from
state to state, and the time period over which the cleanup would be completed. Based on our
present knowledge of existing circumstances, it is considered probable that these costs will
approximate $0.4 million. As a result, this amount is recorded in other long-term liabilities
on September 27, 2008.
We did not enter into any new guarantee arrangements during the third quarter of 2008 which
would require us to recognize a liability on our balance sheet.
We completed the following business combinations in fiscal 2008 and fiscal 2007, which were
accounted for using the purchase method.
The business combinations mentioned above were not significant to our operating results
individually or in aggregate, and thus pro forma results are not presented.
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”)
defines operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
Under the definition of a segment, our Eastern, Western and Consumer Products Divisions may be
considered an operating segment of our business. Under SFAS 131, segments may be aggregated
if the segments have similar economic characteristics and if the nature of the products,
distribution methods, customers and regulatory environments are similar. Based on this
criteria, we have aggregated our Eastern and Western Divisions into one reporting segment. Our
Consumer Products Division is included in the “All Other” column in the table below. Our
divisions operate manufacturing and treating facilities throughout North America. A summary of
results for the first nine months of 2008 and 2007 are presented below (in thousands).
Our effective tax rate is almost 44% for the year to date, which resulted in tax expense for
the quarter despite reporting a book loss. This is primarily due to the impact of
non-deductible permanent tax differences and the fact that the federal research and
development tax credit was not granted legislative approval until October of 2008.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Included in this report are certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements are based on the beliefs and assumptions of management,
together with information available to us when the statements were made. Future results could
differ materially from those included in such forward-looking statements as a result of, among
other things, the factors set forth below and certain economic and business factors which may be
beyond our control. Investors are cautioned that all forward-looking statements involve risks and
uncertainty.
OVERVIEW
Our results for the third quarter of 2008 were impacted by the following:
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Outlook
Due to unprecedented and prevailing uncertainties throughout the capital markets, which have a
direct and material impact on the markets Universal serves, we do not believe our previous sales
and net earnings targets for 2008, disclosed in our second quarter 10-Q, are achievable. In
addition, we believe that current economic conditions limit our ability to provide meaningful
guidance for the ranges of likely financial performance; therefore, we will not provide guidance
for the foreseeable future.
Growth & Opportunity 2010 Goals
Since we announced our Growth & Opportunity 2010 Goals in our annual report on form 10-K for the
period ended December 30, 2006, industry and general economic conditions have significantly
deteriorated. We experience significant fluctuations in the cost of commodity lumber products from
primary producers (“Lumber Market”). The Lumber Market has declined from an average of $388/mbf in
2005 to an average of $262/mbf in 2008; a 32% decline from when we first announced our goals, which
has adversely impacted our sales. We are currently reviewing these long-term goals and expect to
modify them when market conditions stabilize so new targets can be set using more current data and
assumptions.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HISTORICAL LUMBER PRICES
The following table presents the Random Lengths framing lumber composite price for the nine months
ended September 27, 2008 and September 29, 2007:
In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented
below. Sales of products produced using this species, which primarily consists of our
preservative-treated products, may comprise up to 50% of our sales volume.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We experience significant fluctuations in the cost of commodity lumber products from primary
producers (“Lumber Market”). We generally price our products to pass lumber costs through to our
customers so that our profitability is based on the
value-added manufacturing, distribution,
engineering, and other services we provide. As a result, our sales levels (and working capital
requirements) are impacted by the lumber costs of our products. Lumber costs are a significant
percentage of our cost of goods sold.
Our gross margins are impacted by both (1) the relative level of the Lumber Market (i.e.
whether prices are higher or lower from comparative periods), and (2) the trend in the
market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a
period or from period to period). Moreover, as explained below, our products are priced
differently. Some of our products have fixed selling prices, while the selling prices of other
products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion
costs and profits. Consequently, the level and trend of the Lumber Market impact
our products differently.
Below is a general description of the primary ways in which our products are priced.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the trend of lumber prices have their greatest impact on the following products:
In addition to the impact of the Lumber Market trends on gross margins, changes in the
level of the market cause fluctuations in gross margins when comparing operating results
from period to period. This is explained in the following example, which assumes the price of
lumber has increased from period one to period two, with no changes in the trend within
each period.
As is apparent from the preceding example, the level of lumber prices does not impact our
overall profits, but does impact our margins. Gross margins are negatively impacted during periods
of high lumber prices; conversely, we experience margin improvement when lumber prices are
relatively low.
BUSINESS COMBINATIONS
See Notes to Consolidated Condensed Financial Statements, Note I, “Business Combinations.”
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our Consolidated
Condensed Statements of Earnings as a percentage of net sales.
GROSS SALES
We engineer, manufacture, treat, distribute and install lumber, composite wood, plastic, and other
building products for the DIY/retail, site-built construction, industrial, and manufactured housing
markets. Our strategic long-term sales objectives include:
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents, for the periods indicated, our gross sales (in thousands) and
percentage change in gross sales by market classification.
Gross sales in the third quarter of 2008 decreased 10% compared to the third quarter of 2007. We
estimate that our unit sales decreased by 8% and overall selling prices decreased by 2% comparing
the two periods. We estimate that our unit sales increased 3% as a result of business
acquisitions, while unit sales from existing and closed facilities decreased 11%. Our overall
selling prices fluctuate as a result of the Lumber Market (see “Historical Lumber Prices”) and were
negatively impacted by pricing pressure primarily in the site-built market.
Gross sales in the first nine months of 2008 decreased 9% compared to the first nine months of 2007
resulting from an estimated decrease in units shipped of approximately 7%, while overall selling
prices decreased by 2%. We estimate that our unit sales increased 3% as a result of business
acquisitions and new plants, while our unit sales from existing and closed facilities decreased by
10%.
Changes in our sales by market are discussed below.
DIY/Retail:
Gross sales to the DIY/retail market decreased 6% in the third quarter of 2008 compared to 2007
primarily due to an estimated 4% decrease in overall unit sales and an estimated 2% decrease in
overall selling prices. We estimate that our unit sales increased 2% as a result of acquisitions,
while unit sales from existing and closed facilities decreased 6%. Unit sales declined due to the
impact of the housing market on our retail customers whose business is closely correlated with
single-family housing starts and a decline in consumer spending as evidenced by a decline in same
store sales of our “big box” customers.
Gross sales to the DIY/retail market decreased 8% in the first nine months of 2008 compared to 2007
primarily due to an estimated 7% decrease in overall units shipped and an estimated 1% decrease in
overall selling prices. We estimate that our unit sales increased 2% as a result of acquisitions,
while unit sales from existing and closed facilities decreased 9%. The decrease in unit sales is
primarily due to the same factors mentioned in the paragraph above.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Site-Built Construction:
Gross sales to the site-built construction market decreased 24% in the third quarter of 2008
compared to 2007 due to an estimated 18% decrease in unit sales out of existing plants and an
estimated 6% decrease in our average selling prices primarily due to intense pricing pressure and a
soft Lumber Market. National single-family housing starts were off a reported 39% from July
through September of 2008 compared to the same period of 2007. We were able to mitigate some of
the decrease in the single-family market by pursuing multi-family and light commercial business and
increasing our turn-key framing activities. However, these markets are currently being impacted by
tight credit conditions.
Gross sales to the site-built construction market decreased 21% in the first nine months of 2008
compared to 2007, due to an estimated 13% decrease in unit sales and an estimated 8% decrease in
selling prices. Single-family housing starts have fallen approximately 40% in 2008 compared to
2007.
Industrial:
Gross sales to the industrial market increased 5% in the third quarter of 2008 compared to the same
period of 2007, due to an estimated 3% increase in unit sales and an estimated 2% increase in
selling prices. Acquisitions and our continued focus on adding new customers, including concrete
forming, helped us mitigate the effect of a decline in sales to certain of our customers that
supply the housing market or have been impacted by the weakening U.S. economy.
Gross sales to the industrial market increased 6% in the first nine months of 2008 compared to the
same period of 2007, due to an estimated 8% increase in units shipped offset by an estimated 2%
decrease in selling prices. Unit sales increased for the reasons mentioned in the paragraph above.
Manufactured Housing:
Gross sales to the manufactured housing market decreased 23% in the third quarter of 2008 compared
to the same period of 2007, primarily due to an estimated 21% decrease in unit sales combined with
an estimated 2% decrease in selling prices due to the Lumber Market. Our decline in unit sales
from existing facilities was the result of an overall decline in industry production. The industry
most recently reported a 17% decrease in HUD code production in July and August, and industry
production of modular homes was down 34% in the second quarter of 2008. We believe these trends
continued through the third quarter of 2008.
Gross sales to the manufactured housing market decreased 19% in the first nine months of 2008
compared to the same period of 2007. This decrease resulted from an estimated 17% decrease in unit
sales combined with an estimated 2% decrease in selling prices. The industry most recently
reported a 10% decrease in HUD code production in the first eight months of 2008 compared to the
same period in 2007.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Value-Added and Commodity-Based Sales:
The following table presents, for the periods indicated, our percentage of value-added and
commodity-based sales to total sales.
Value-added sales decreased 10% in the third quarter of 2008 compared to 2007, primarily due to
decreased sales of trusses, engineered wood products, and wall panels, offset partially by
increases in industrial packaging and related components. Commodity-based sales decreased 11%
comparing the third quarter of 2008 with the same period of 2007, primarily due to decreased sales
of non-manufactured brite and other lumber and non-manufactured treated lumber.
Value-added sales decreased 10% in the first nine months of 2008 compared to 2007, primarily due to
decreased sales of trusses, wall panels, engineered wood products and fencing, offset partially by
increases in industrial packaging and related components and turn-key framing and installed sales
to site-built customers. Commodity-based sales decreased 9% comparing the first nine months of
2008 with the same period of 2007, primarily due to decreased sales of non-manufactured brite and
other lumber and non-manufactured treated lumber.
COST OF GOODS SOLD AND GROSS PROFIT
Our gross profit percentage decreased to 10.7% from 12.1% and gross profit dollars decreased more
than 20% comparing the third quarter of 2008 with the same period of 2007. The decline in our
profitability was primarily due to a combination of:
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our gross profit percentage decreased to 11.3% from 12.9% and gross profit dollars decreased more
than 20% comparing the first nine months of 2008 with the same period of 2007. Our decline in
profitability comparing these two periods was primarily due to the factors mentioned in the
paragraph above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (“SG&A”) expenses decreased by over $0.7 million, or 1.3%, in
the third quarter of 2008 compared to the same period of 2007, while we reported an 8% decrease in
unit sales. Existing operations increased $2.3 million, operations we closed decreased $4.6
million, and business acquisitions added $1.6 million in SG&A expenses. The increase in SG&A
expenses at our existing operations was primarily due to an increase in bad debt expense and bonus
expense, partially offset by a decline in wages and related costs due to a reduction in headcount.
Approximately $1 million of the increase in bad debt expense was due to an adjustment we recorded
in the third quarter of 2007 as a result of a favorable ruling we received on a preference claim.
The increase in bonus expense was due to an adjustment we recorded in the third quarter of 2007 to
reduce our year to date bonus accrual when we felt several of our profit centers would not achieve
our minimum return on investment hurdle to be eligible for bonus.
Selling, general and administrative (“SG&A”) expenses decreased by approximately $14.0 million, or
7.3%, in the first nine months of 2008 compared to the same period of 2007, and we reported a 7%
decrease in unit sales. Existing operations decreased SG&A expenses by approximately $2.3 million,
operations we closed decreased SG&A expenses $14.9 million, and business acquisitions added $3.2
million in SG&A expenses. The decrease in SG&A expenses at existing operations was primarily due
to a decline in wages and related benefits due to a reduction in headcount and a reduction in bonus
and other performance related compensation. These decreases were partially offset by an increase
in bad debt expense.
We believe our cost reduction efforts will continue to drive down our costs and will have a more
significant impact in future reporting periods.
NET LOSS ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENT AND EXIT CHARGES
We incurred $6.2 million and $7.4 million of asset impairments and other costs associated with
idled facilities and down-sizing efforts in the third quarter and first nine months of 2008,
respectively. The
plants we closed had annual sales of approximately $45 million and annual incremental operating
losses of over $6 million.
INTEREST, NET
Net interest costs were lower in the third quarter and first nine months of 2008 compared to the
same period of 2007 due to lower debt balances combined with a decrease in short-term interest
rates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for
state and local income taxes and permanent tax differences. Our effective tax rate increased to
43.6% in the first nine months of 2008, compared to 36.9% in the first nine months of 2007. This
year’s tax rate was negatively impacted by the research & development tax credit for fiscal 2008
which was not granted legislative approval until October 2008, an increase in non-deductible
amortization expense associated with recent acquisitions, and the effect of permanent tax
differences on lower pre-tax income.
We recorded tax expense of $0.5 million in the third quarter of 2008 on a pre-tax loss of $1.2
million due to the factors discussed above.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions other than operating leases.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow statement (in
thousands):
In general, we financed our growth in the past through a combination of operating cash flows, our
revolving credit facility, industrial development bonds (when circumstances permit), and issuance
of long-term notes payable at times when interest rates are favorable. We have not issued equity
to finance growth except in the case of a large acquisition. We manage our capital structure by
attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest,
taxes, depreciation and amortization. We believe this is one of many important factors to
maintaining a strong credit profile, which in turn helps ensure timely access to capital when
needed.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Seasonality has a significant impact on our working capital from March to August which historically
resulted in negative or modest cash flows from operations in our first and second quarters.
Conversely, we experience a substantial decrease in working capital from September to February
which results in significant cash flow from operations in our third and fourth quarters. For
comparative purposes, we have included the September 27, 2007 balances in the accompanying
unaudited consolidated condensed balance sheets.
Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash
cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a
good indicator of our working capital management. Our cash cycle (excluding the impact of our sale
of receivables program) increased to 44 days in the first nine months of 2008 from 43 days in the
first nine months of 2007, due to a one day increase in our days of sales outstanding as a one day
decrease in our days of inventory outstanding was offset by a one day decrease in our days of
payables outstanding. The increase in our days of sales outstanding was primarily due to slower
payments with certain site-built customers and a change in sales mix whereby the industrial market,
which has a comparatively longer receivables cycle, comprises a higher percentage of our sales.
Cash from operating activities was approximately $33 million in the first nine months of 2008. Our
net earnings of $5.1 million included $44.1 million of non-cash expenses, which were offset by a
$15.9 million increase in working capital. Working capital increased primarily due to an increase
in accounts receivable due to the termination of our sales of receivables program at the end of
September 2008. Terminating this program resulted in $27 million more in accounts receivable at
the end of the third quarter 2008 compared to year-end 2007 and $50 million more in accounts
receivable at the end of the third quarter 2008 compared to the same period of the prior year.
Our sale of receivables program was terminated on September 26, 2008, due to the downgrade of the
credit rating of certain customers whose receivables were part of this program. This downgrade
triggered a re-pricing of the program under the terms of the agreement which made this program a
less favorable source of liquidity.
We have curtailed our capital expenditures and currently plan to spend approximately $20 million in
2008, which includes outstanding purchase commitments on existing capital projects totaling
approximately $2 million on September 27, 2008. We intend to fund capital expenditures and
purchase commitments through our operating cash flows.
On September 27, 2008, we had approximately $18 million outstanding on our $300 million revolving
credit facility. The revolving credit facility also supports letters of credit totaling
approximately $30 million on September 27, 2008. Financial covenants on the unsecured revolving
credit facility and unsecured notes include a minimum net worth requirement, minimum interest and
fixed charge coverage tests, and a maximum leverage ratio. The agreements also restrict the amount
of additional indebtedness we may incur and the amount of assets which may be sold. We were within
all of our lending requirements on September 27, 2008. Continued losses may adversely impact our
ability to meet certain of these loan covenants in the future without further action on our part.
Management will evaluate what, if any, action or actions may be available to resolve any future
non-compliance. A possible consequence of non-compliance may include an adjustment to increase our
interest rates to reflect current market conditions.
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UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our Series 1998-A Senior Notes totaling $78.5 million are due on December 21, 2008 and we intend to
re-pay them utilizing available cash flow and our revolving credit facility.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Consolidated Condensed Financial Statements, Note H, “Commitments, Contingencies, and
Guarantees.”
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting principles generally
accepted in the United States. These principles require us to make certain estimates and apply
judgments that affect our financial position and results of operations. We continually review our
accounting policies and financial information disclosures. There have been no material changes in
our policies or estimates since December 29, 2007.
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UNIVERSAL FOREST PRODUCTS, INC.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our variable rate debt,
which consists of a revolving credit facility and industrial development revenue bonds. We do not
currently use interest rate swaps, futures contracts or options on futures, or other types of
derivative financial instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market value, but not
earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do
not influence fair market value, but do affect future earnings and cash flows. We do not have an
obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and
changes in fair market value should not have a significant impact on such debt until we would be
required to refinance it.
Item 4. Controls and Procedures.
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UNIVERSAL FOREST PRODUCTS, INC.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 5. Other Information.
In the third quarter of 2008, the Audit Committee did not approve any non-audit services to be
provided by our independent auditors, Ernst & Young LLP, for 2008.
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PART II. OTHER INFORMATION
Item 6. Exhibits.
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in
Regulation S-K) are filed with this report:
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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