þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
Class | Outstanding as of March 31, 2007 | |
Common stock, no par value | 18,968,009 |
Page No. | ||||||||
PART I. | FINANCIAL INFORMATION. |
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Item 1. | Financial Statements. |
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3-4 | ||||||||
5 | ||||||||
6 | ||||||||
7-8 | ||||||||
9-17 | ||||||||
Item 2. | 18-29 | |||||||
Item 3. | 30 | |||||||
Item 4. | 31 | |||||||
PART II. | ||||||||
Item 1. | Legal Proceedings NONE. |
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Item 1A. | Risk Factors NONE. |
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Item 2. | 32 | |||||||
Item 3. | Defaults Upon Senior Securities NONE. |
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Item 4. | Submission of Matters to a Vote of Security Holders NONE. |
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Item 5. | 33 | |||||||
Item 6. | 34 | |||||||
Section 302 Certification of Chief Executive Officer | ||||||||
Section 302 Certification of Chief Financial Officer | ||||||||
Section 906 Certification of Chief Executive Officer | ||||||||
Section 906 Certification of Chief Financial Officer |
2
March 31, | December 30, | April 1, | ||||||||||
2007 | 2006 | 2006 | ||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 44,024 | $ | 51,108 | $ | 39,608 | ||||||
Accounts receivable, net |
195,617 | 148,242 | 199,508 | |||||||||
Inventories: |
||||||||||||
Raw materials |
152,645 | 128,621 | 145,945 | |||||||||
Finished goods |
133,108 | 116,497 | 133,632 | |||||||||
285,753 | 245,118 | 279,577 | ||||||||||
Other current assets |
22,192 | 30,667 | 21,448 | |||||||||
TOTAL CURRENT ASSETS |
547,586 | 475,135 | 540,141 | |||||||||
OTHER ASSETS |
7,881 | 7,404 | 8,083 | |||||||||
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS |
147,514 | 155,177 | 131,560 | |||||||||
OTHER INTANGIBLE ASSETS, net |
38,844 | 25,390 | 10,006 | |||||||||
PROPERTY, PLANT AND EQUIPMENT: |
||||||||||||
Property, plant and equipment |
511,396 | 466,021 | 420,888 | |||||||||
Land held for sale |
17,115 | |||||||||||
Accumulated depreciation and amortization |
(223,906 | ) | (215,686 | ) | (195,709 | ) | ||||||
PROPERTY, PLANT AND EQUIPMENT, NET |
304,605 | 250,335 | 225,179 | |||||||||
TOTAL ASSETS |
$ | 1,046,430 | $ | 913,441 | $ | 914,969 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable |
$ | 119,006 | $ | 94,441 | $ | 130,584 | ||||||
Accrued liabilities: |
||||||||||||
Compensation and benefits |
46,427 | 71,990 | 51,622 | |||||||||
Other |
26,035 | 25,111 | 41,542 | |||||||||
Current portion of long-term debt and capital lease obligations |
1,223 | 680 | 461 | |||||||||
TOTAL CURRENT LIABILITIES |
192,691 | 192,222 | 224,209 | |||||||||
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS,
less current portion |
278,198 | 169,417 | 204,010 | |||||||||
DEFERRED INCOME TAXES |
24,202 | 12,697 | 12,800 | |||||||||
MINORITY INTEREST |
10,743 | 10,819 | 8,805 | |||||||||
OTHER LIABILITIES |
16,254 | 13,544 | 10,698 | |||||||||
TOTAL LIABILITIES |
522,088 | 398,699 | 460,522 |
3
March 31, | December 30, | April 1, | ||||||||||
2007 | 2006 | 2006 | ||||||||||
SHAREHOLDERS EQUITY: |
||||||||||||
Preferred stock, no par value; shares authorized 1,000,000; issued
and outstanding, none |
||||||||||||
Common stock, no par value; shares authorized 40,000,000; issued
and outstanding, 18,968,009, 18,858,892 and 18,626,455 |
$ | 18,968 | $ | 18,859 | $ | 18,626 | ||||||
Additional paid-in capital |
119,311 | 113,754 | 106,045 | |||||||||
Retained earnings |
384,817 | 380,931 | 328,744 | |||||||||
Accumulated other comprehensive earnings |
2,395 | 2,451 | 2,151 | |||||||||
525,491 | 515,995 | 455,566 | ||||||||||
Employee stock notes receivable |
(1,149 | ) | (1,253 | ) | (1,119 | ) | ||||||
TOTAL SHAREHOLDERS EQUITY |
524,342 | 514,742 | 454,447 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 1,046,430 | $ | 913,441 | $ | 914,969 | ||||||
4
Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
NET SALES |
$ | 549,038 | $ | 665,609 | ||||
COST OF GOODS SOLD |
475,518 | 571,298 | ||||||
GROSS PROFIT |
73,520 | 94,311 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES |
63,458 | 64,529 | ||||||
EARNINGS FROM OPERATIONS |
10,062 | 29,782 | ||||||
OTHER EXPENSE (INCOME): |
||||||||
Interest expense |
4,324 | 3,799 | ||||||
Interest income |
(582 | ) | (429 | ) | ||||
3,742 | 3,370 | |||||||
EARNINGS BEFORE INCOME TAXES AND
MINORITY INTEREST |
6,320 | 26,412 | ||||||
INCOME TAXES |
2,068 | 9,756 | ||||||
EARNINGS BEFORE MINORITY INTEREST |
4,252 | 16,656 | ||||||
MINORITY INTEREST |
(366 | ) | (790 | ) | ||||
NET EARNINGS |
$ | 3,886 | $ | 15,866 | ||||
EARNINGS PER SHARE BASIC |
$ | 0.20 | $ | 0.85 | ||||
EARNINGS PER SHARE DILUTED |
$ | 0.20 | $ | 0.82 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
18,985 | 18,606 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING
WITH COMMON STOCK EQUIVALENTS |
19,409 | 19,278 |
5
Deferred | ||||||||||||||||||||||||||||||||
Deferred | Compen- | Accumulated | ||||||||||||||||||||||||||||||
Additional | Stock | sation | Other | Employees | ||||||||||||||||||||||||||||
Common | Paid-In | Compen- | Rabbi | Retained | Comprehensive | Stock Notes | ||||||||||||||||||||||||||
Stock | Capital | sation | Trust | Earnings | Earnings | Receivable | Total | |||||||||||||||||||||||||
Balance at December 31, 2005 |
$ | 18,403 | $ | 97,372 | $ | 4,212 | ($2,117 | ) | $ | 312,878 | $ | 2,408 | ($1,304 | ) | $ | 431,852 | ||||||||||||||||
Comprehensive earnings: |
||||||||||||||||||||||||||||||||
Net earnings |
15,866 | |||||||||||||||||||||||||||||||
Foreign currency translation
adjustment |
(257 | ) | ||||||||||||||||||||||||||||||
Total comprehensive earnings |
15,609 | |||||||||||||||||||||||||||||||
Reversal of deferred compensation
upon adoption of SFAS 123(R) |
2,095 | (4,212 | ) | 2,117 | 0 | |||||||||||||||||||||||||||
Issuance of 119,726 shares under
employee stock plans |
120 | 1,825 | 1,945 | |||||||||||||||||||||||||||||
Issuance of 2,803 shares under
stock grant programs |
2 | 158 | 160 | |||||||||||||||||||||||||||||
Issuance of 101,278 shares under
deferred compensation plans |
101 | (101 | ) | 0 | ||||||||||||||||||||||||||||
Tax benefits from non-qualified
stock options exercised |
1,419 | 1,419 | ||||||||||||||||||||||||||||||
Expense associated with share-based
compensation arrangements |
215 | 215 | ||||||||||||||||||||||||||||||
Accrued expense under deferred
compensation plans |
3,062 | 3,062 | ||||||||||||||||||||||||||||||
Payments received on employee
stock notes receivable |
185 | 185 | ||||||||||||||||||||||||||||||
Balance at April 1, 2006 |
$ | 18,626 | $ | 106,045 | $ | 0 | $ | 0 | $ | 328,744 | $ | 2,151 | ($1,119 | ) | $ | 454,447 | ||||||||||||||||
Balance at December 30, 2006 |
$ | 18,859 | $ | 113,754 | $ | 0 | $ | 0 | $ | 380,931 | $ | 2,451 | ($1,253 | ) | $ | 514,742 | ||||||||||||||||
Comprehensive earnings: |
||||||||||||||||||||||||||||||||
Net earnings |
3,886 | |||||||||||||||||||||||||||||||
Foreign currency translation
adjustment |
(56 | ) | ||||||||||||||||||||||||||||||
Total comprehensive earnings |
3,830 | |||||||||||||||||||||||||||||||
Issuance of 84,477 shares under
employee stock plans |
84 | 1,650 | 1,734 | |||||||||||||||||||||||||||||
Issuance of 2,622 shares under
stock grant programs |
3 | 119 | 122 | |||||||||||||||||||||||||||||
Issuance of 23,755 shares under
deferred compensation plans |
24 | (24 | ) | 0 | ||||||||||||||||||||||||||||
Received 1,737 shares for the exercise of
Stock options |
(2 | ) | (83 | ) | (85 | ) | ||||||||||||||||||||||||||
Tax benefits from non-qualified
stock options exercised |
484 | 484 | ||||||||||||||||||||||||||||||
Expense associated with share-based
compensation arrangements |
127 | 127 | ||||||||||||||||||||||||||||||
Accrued expense under deferred
compensation plans |
3,284 | 3,284 | ||||||||||||||||||||||||||||||
Payments received on employee
stock notes receivable |
104 | 104 | ||||||||||||||||||||||||||||||
Balance at March 31, 2007 |
$ | 18,968 | $ | 119,311 | $ | 0 | $ | 0 | $ | 384,817 | $ | 2,395 | ($1,149 | ) | $ | 524,342 |
6
Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net earnings |
$ | 3,886 | $ | 15,866 | ||||
Adjustments to reconcile net earnings to net cash from operating activities: |
||||||||
Depreciation |
9,146 | 8,279 | ||||||
Amortization of intangibles |
2,367 | 1,311 | ||||||
Expense associated with share-based compensation arrangements |
127 | 215 | ||||||
Expense associated with stock grant plans |
122 | 160 | ||||||
Deferred income taxes |
(50 | ) | (88 | ) | ||||
Minority interest |
366 | 790 | ||||||
Net loss (gain) on sale or impairment of property, plant, and equipment |
23 | (1 | ) | |||||
Changes in: |
||||||||
Accounts receivable |
(33,439 | ) | (14,276 | ) | ||||
Inventories |
(23,321 | ) | (25,800 | ) | ||||
Accounts payable |
24,891 | 23,927 | ||||||
Accrued liabilities and other |
(11,249 | ) | (4,860 | ) | ||||
Excess tax benefits from share-based compensation arrangements |
(437 | ) | (1,278 | ) | ||||
NET CASH FROM OPERATING ACTIVITIES |
(27,568 | ) | 4,245 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property, plant and equipment |
(8,638 | ) | (8,186 | ) | ||||
Acquisitions, net of cash received |
(54,770 | ) | (2,052 | ) | ||||
Proceeds from sale of property, plant and equipment |
267 | 225 | ||||||
Collections of notes receivable |
109 | 1,542 | ||||||
Other, net |
103 | (55 | ) | |||||
NET CASH FROM INVESTING ACTIVITIES |
(62,929 | ) | (8,526 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Net borrowings (repayments) under revolving credit facilities |
106,488 | (5,020 | ) | |||||
Repayment of long-term debt |
(24,525 | ) | (15 | ) | ||||
Proceeds from issuance of common stock |
1,649 | 1,945 | ||||||
Distributions to minority shareholder |
(371 | ) | (509 | ) | ||||
Excess tax benefits from share-based compensation arrangements |
437 | 1,278 | ||||||
Other, net |
(265 | ) | (5 | ) | ||||
NET CASH FROM FINANCING ACTIVITIES |
83,413 | (2,326 | ) | |||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
(7,084 | ) | (6,607 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
51,108 | 46,215 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 44,024 | $ | 39,608 | ||||
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,779 | $ | 2,325 | ||||
Income taxes |
(9,952 | ) | 4,427 |
7
Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
NON-CASH OPERATING ACTIVITIES: |
||||||||
Deferred purchase price of acquisition exchanged for current payable |
$ | $ | 690 | |||||
NON-CASH FINANCING ACTIVITIES: |
||||||||
Common stock issued under deferred compensation plans |
$ | 1,283 | $ | 2,225 |
8
A. | BASIS OF PRESENTATION | |
The accompanying unaudited, interim, consolidated, condensed financial statements (the Financial Statements) include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany transactions and balances have been eliminated. | ||
In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 30, 2006. | ||
Certain reclassifications have been made to the Financial Statements for 2006 to conform to the classifications used in 2007. | ||
B. | REVENUE RECOGNITION | |
Earnings on construction contracts are reflected in operations using either percentage-of-completion accounting, which includes the cost to cost and units of delivery methods, or completed contract accounting, depending on the nature of the business at individual operations. Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent. Under the completed contract method, revenues and related earnings are recorded when the contracted work is complete and losses are charged to operations in their entirety when such losses become apparent. |
9
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): |
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
Cost and Earnings in Excess of Billings |
$ | 3,490 | $ | 10,020 | ||||
Billings in Excess of Cost and Earnings |
4,489 | 9,314 |
C. | EARNINGS PER 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): |
Three Months Ended 03/31/07 | Three Months Ended 04/01/06 | |||||||||||||||||||||||
Per | Per | |||||||||||||||||||||||
Income | Shares | Share | Income | Shares | Share | |||||||||||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | |||||||||||||||||||
Net Earnings |
$ | 3,886 | $ | 15,866 | ||||||||||||||||||||
EPS Basic |
||||||||||||||||||||||||
Income available to common stockholders |
3,886 | 18,985 | $ | 0.20 | 15,866 | 18,606 | $ | 0.85 | ||||||||||||||||
Effect of dilutive
securities |
||||||||||||||||||||||||
Options |
424 | 672 | ||||||||||||||||||||||
EPS Diluted |
||||||||||||||||||||||||
Income available to common stockholders and assumed options exercised |
$ | 3,886 | 19,409 | $ | 0.20 | $ | 15,866 | 19,278 | $ | 0.82 | ||||||||||||||
No outstanding options were excluded from the computation of diluted EPS for the quarters ended March 31, 2007 or April 1, 2006. | ||
D. | SALE OF ACCOUNTS RECEIVABLE | |
On March 8, 2006 we entered into a new accounts receivable sale agreement with a bank. Under the terms of this agreement: |
| We sell specific receivables to the bank at an agreed-upon price at terms ranging from one month to one year. |
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| We service the receivables sold and outstanding on behalf of the bank at a rate of 0.50% per annum. | ||
| We receive an incentive servicing fee, which we account for as a retained interest in the receivables sold. Our retained interest is determined based on the fair market value of anticipated collections in excess of the Agreed Base Value of the receivables sold. Appropriate valuation allowances are recorded against the retained interest. | ||
| The maximum amount of receivables, net of retained interest, which may be sold and outstanding at any point in time under this arrangement is $50 million. |
On March 31, 2007 $52.8 million of receivables were sold and outstanding, and we recorded $4.0 million of retained interest in other current assets. On April 1, 2006, $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 three months of 2007 and 2006 are presented below (in thousands). |
Three Months Ended | Three Months Ended | |||||||
March 31, 2007 | April 1, 2006 | |||||||
Accounts receivable sold |
$ | 119,538 | $ | 82,355 | ||||
Retained interest in receivables |
(1,887 | ) | (4,054 | ) | ||||
Expense from sale |
(596 | ) | (415 | ) | ||||
Servicing fee received |
47 | 36 | ||||||
Net cash received from sale |
$ | 117,102 | $ | 77,922 | ||||
E. | GOODWILL AND OTHER INTANGIBLE ASSETS | |
The following amounts were included in other intangible assets, net (in thousands): |
March 31, 2007 | April 1, 2006 | |||||||||||||||
Accumulated | Accumulated | |||||||||||||||
Assets | Amortization | Assets | Amortization | |||||||||||||
Non-compete agreements |
$ | 38,641 | ($11,288 | ) | $ | 12,750 | ($ | 7,031 | ) | |||||||
Licensing agreements |
2,510 | (2,495 | ) | 2,510 | (2,095 | ) | ||||||||||
Customer relationships |
14,587 | (3,123 | ) | 4,882 | (1,124 | ) | ||||||||||
Backlog |
693 | (681 | ) | 644 | (530 | ) | ||||||||||
Total |
$ | 56,431 | ($17,587 | ) | $ | 20,786 | ($ | 10,780 | ) | |||||||
The estimated amortization expense for intangible assets as of March 31, 2007 for each of the five succeeding fiscal years is as follows (in thousands): |
11
2007 |
$ | 7,862 | ||
2008 |
9,439 | |||
2009 |
7,903 | |||
2010 |
6,991 | |||
2011 |
5,506 | |||
Thereafter |
1,143 |
The changes in the net carrying amount of goodwill and indefinite-lived intangible assets for the three months ended March 31, 2007 and April 1, 2006 are as follows (in thousands): |
Indefinite- | ||||||||
Lived Intangible | ||||||||
Goodwill | Assets | |||||||
Balance as of December 30, 2006 |
$ | 152,837 | $ | 2,340 | ||||
Acquisitions |
1,327 | |||||||
Preliminary purchase price allocations |
(9,000 | ) | ||||||
Other, net |
10 | |||||||
Balance as of March 31, 2007 |
$ | 145,174 | $ | 2,340 | ||||
Balance as of December 31, 2005 |
$ | 131,556 | $ | 0 | ||||
Acquisition |
||||||||
Other, net |
4 | |||||||
Balance as of April 1, 2006 |
$ | 131,560 | $ | 0 | ||||
F. | EMPLOYEE STOCK NOTES RECEIVABLE | |
Employee stock notes receivable represents notes issued to us by certain employees and officers to finance the purchase of our common stock. Directors and executive officers do not, and are not allowed to, participate in this program. | ||
G. | STOCK-BASED COMPENSATION | |
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. |
12
H. | COMMITMENTS, CONTINGENCIES, AND GUARANTEES | |
We are self-insured for environmental impairment liability through a wholly owned subsidiary, UFP Insurance Ltd., a licensed captive insurance company. We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Insurance reserves, calculated with no discount rate, have been established to cover remediation activities at our Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Janesville, WI; Medley, FL; and Ponce, PR wood preservation facilities. In addition, a small reserve was established for our Thornton, CA property to remove asbestos and certain lead containing materials which existed on the property at the time of purchase. | ||
Including amounts from our wholly owned captive insurance company, we have reserved approximately $4.1 million on March 31, 2007 and $1.7 million on April 1, 2006, 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 March 2005, one facility began using CCA to treat certain marine products and panel goods for which ACQ is not a suitable preservative. | ||
In November 2003, the EPA published its report on the risks associated with the use of CCA in childrens 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. The EPA is expected to issue a final report at the end of 2007. | ||
In addition, various special interest environmental groups have petitioned certain states requesting restrictions on the use or disposal of CCA treated products. The wood preservation industry trade groups are working with the individual states and their regulatory agencies to provide an accurate, factual background which demonstrates that the present method of uses and disposal is scientifically supported. |
13
We have been requested by a customer to defend it from purported class action lawsuits. To date, none of these cases have been certified as class action. One such purported class action lawsuit pending in Illinois seeks unspecified damages from this customer, based on generalized claims under a purported theory of violation of individual state Consumer Protection Act statutes. The Illinois case was previously dismissed without prejudice. The claim was then restated and filed with no allegations of personal injury or property damage. The judge in the case denied class certification for this case in December 2005. As previously stated, our vendors believe and scientific studies support the fact that CCA treated lumber poses no unreasonable risks, and we intend to vigorously defend this position. While our customer has charged us for certain costs incurred in the defense of these claims and we have expensed them accordingly, we have not formally accepted liability of these costs. | ||
We believe that based on current facts, laws, and existing scientific evidence, as well as the favorable disposition of the above referenced lawsuits, that the likelihood of a material adverse financial impact from the remaining claims is remote. Therefore, we have not accrued for any potential loss related to the contingencies above. However, potential liabilities of this nature are not conducive to precise estimates and are subject to change. To the extent we are required to defend these actions, we intend to do so vigorously and will monitor these facts on an ongoing basis. | ||
In addition, on March 31, 2007, we were parties either as plaintiff or a defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims. | ||
On March 31, 2007, we had outstanding purchase commitments on capital projects of approximately $10.5 million. | ||
We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. | ||
In certain cases we jointly bid on contracts with framing companies to supply building materials to site-built construction projects. In some of these instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. Historically, we have not had any claims for indemnity from our sureties. As of March 31, 2007, we had approximately $27.7 million in outstanding payment and performance bonds, which expire during the next two years. In addition, approximately $15.4 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 |
14
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 $2.4 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 March 31, 2007, we had outstanding letters of credit totaling $44.8 million, primarily related to certain insurance contracts, industrial development revenue bonds and commercial trade, 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 $20.4 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 $18.5 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. | ||
We are required to provide irrevocable commercial letters of credit in favor of certain import vendors to guarantee our payment upon their performance under certain import purchase orders. We currently have irrevocable commercial letters of credit outstanding totaling approximately $5.6 million related to pending import purchase orders. | ||
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. | ||
Our 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 $465,000. As a result, this amount is recorded in other long-term liabilities on March 31, 2007. |
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We did not enter into any new guarantee arrangements during the first quarter of 2007 which would require us to recognize a liability on our balance sheet. | ||
I. | ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES | |
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, and disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted FIN 48 beginning December 31, 2006. The implementation of FIN 48 did not have a significant impact on our financial position or results of operations. | ||
As of the beginning of fiscal year 2007, we had unrecognized tax benefits of $6.5 million including accrued interest and penalties. There has been no significant change in the unrecognized tax benefits during the first quarter ending March 31, 2007. If recognized, the effective tax rate would be affected by the unrecognized tax benefits. | ||
We recognize interest and penalties related to unrecognized tax benefits, which are included in Income Taxes. Interest and penalties accrued as of March 31, 2007 are insignificant. Interest and penalties recorded during the quarter ended March 31, 2007 were not considered significant. | ||
We are subject to periodic audits by domestic and foreign tax authorities. Currently, we are undergoing routine periodic audits in domestic jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits. Based on the current audits in process, the payment of taxes as a result of audit settlements could be from $0.1 to $2.8 million. | ||
For the majority of tax jurisdictions, we are no longer subject to income tax examinations by tax authorities for years before 2003. | ||
J. | SEGMENT REPORTING | |
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131) defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. |
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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, which was formed in 2006, 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 three months of 2007 and 2006 are presented below (in thousands). |
2007 | 2006 | |||||||||||||||||||||||
Eastern | Eastern | |||||||||||||||||||||||
and | and | |||||||||||||||||||||||
Western | All | Western | All | |||||||||||||||||||||
Divisions | Other | Total | Divisions | Other | Total | |||||||||||||||||||
Net sales to outside customers |
$ | 529,188 | $ | 19,850 | $ | 549,038 | $ | 654,153 | $ | 11,456 | $ | 665,609 | ||||||||||||
Intersegment net sales |
0 | 4,376 | 4,376 | 0 | 2,645 | 2,645 | ||||||||||||||||||
Segment operating profit |
9,227 | 835 | 10,062 | 28,517 | 1,265 | 29,782 |
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| Our overall unit sales declined 8%, as sales out of existing facilities decreased by 16% this quarter and we experienced an 8% increase in unit sales as a result of acquisitions and new operations. | |
| Lumber prices were significantly lower compared to the same period of 2006, impacting our overall selling prices (see Impact of the Lumber Market on Our Operating Results below). | |
| We faced challenging industry conditions in our D-I-Y/retail, site-built construction and manufactured housing markets and adverse weather, which impacted our unit sales. We were able to mitigate the impact of these adverse conditions by the market share we believe we gained in each one of our four markets. | |
| Our gross profits decreased almost 22% compared to the same period of 2006 due to a combination of lower unit sales out of existing facilities, fixed manufacturing costs and greater pricing pressure in the site-built market. | |
| Our cash flows from operating activities decreased $32 million due to a 40% decrease in our quarterly earnings and non-cash expenses and the timing of sales under our sale of receivables program (see Liquidity and Capital Resources below). | |
| An increase in interest-bearing debt to $279.4 million from $204.5 million primarily due to business acquisitions. | |
| Our purchase of Aljoma Lumber Company in February 2007 and Perfection Trusses, Inc. in March 2007. |
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Random Lengths Composite | ||||||||
Average $/MBF | ||||||||
2007 | 2006 | |||||||
January |
$ | 292 | $ | 382 | ||||
February |
289 | 377 | ||||||
March |
280 | 368 | ||||||
First quarter average |
$ | 287 | $ | 376 | ||||
First quarter percentage
change from 2006 |
(24 | %) |
Random Lengths SYP | ||||||||
Average $/MBF | ||||||||
2007 | 2006 | |||||||
January |
$ | 414 | $ | 496 | ||||
February |
405 | 503 | ||||||
March |
396 | 514 | ||||||
First quarter average |
$ | 405 | $ | 504 | ||||
First quarter percentage
change from 2006 |
(20 | %) |
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| Products with fixed selling prices. These products include value-added products such as decking and fencing sold to DIY/retail customers, as well as trusses, wall panels and other components sold to the site-built construction market, and most industrial packaging products. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs for these sales commitments with our suppliers. Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers. | |
| Products with selling prices indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry. For these products, we estimate the customers needs and carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins. For these products, our margins are exposed to changes in the trend of lumber prices. |
| Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 12% of our total sales. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar |
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products, due to the higher rate of inventory turnover. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs. (Please refer to the Risk Factors section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.) | ||
| Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs. |
Period 1 | Period 2 | |||||||
Lumber cost |
$ | 300 | $ | 400 | ||||
Conversion cost |
50 | 50 | ||||||
= Product cost |
350 | 450 | ||||||
Adder |
50 | 50 | ||||||
= Sell price |
$ | 400 | $ | 500 | ||||
Gross margin |
12.5 | % | 10.0 | % |
Company Name | Acquisition Date | Business Description | ||
Perfection Trusses, Inc.
(Perfection) Purchase price: $1.3 million 2006 sales: $3.9 million |
March 5, 2007 | Manufacture and distribute roof and floor trusses to the Eastern Florida market. |
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Company Name | Acquisition Date | Business Description | ||
Aljoma Lumber Company
(Aljoma)
Purchase price: $53.5 million 2006 sales: $225 million |
February 12, 2007 | Manufacture, treat and distribute various wood products, building materials and specialty hardwoods. They serve Florida, the Eastern United States and the Caribbean islands. Aljoma has one of the largest treating facilities in the country. | ||
Banks Lumber (Banks)
Purchase price: $46.7 million 2005 sales: $147.0 million |
November 17, 2006 | Manufactures roof trusses and cut-to-size structural lumber for manufactured housing and recreational vehicle (RV) manufacturers nationwide. The company currently has continuing operations in Elkhart, IN, Edwardsburg, MI, Morristown, TN, Auburndale, FL and Hillsboro, TX. | ||
GeoMatrix, Inc.
(GeoMatrix)
Purchase price: $11.5 million 2005 sales: $19.0 million |
August 18, 2006 | A developer and distributor of plastic lattice products and other proprietary plastic products located in Troy, MI. | ||
United Lumber & Reman, LLC
(United)
Purchase price: $4.9 million 2005 sales: $26.0 million |
July 10, 2006 | An industrial wood manufacturing plant located in Muscle Shoals, AL. Acquired a 50% membership interest. | ||
Dura-Bilt Mfg. Co.
(Dura-Bilt)
Purchase price: $9.2 million 2005 sales: $16.0 million |
June 5, 2006 | Designs and manufactures roof and floor trusses for site-built construction. The company is located in Riverbank, CA. | ||
Shawnlee Construction, LLC
(Shawnlee)
2006 Purchase price: $0.8 million |
April 3, 2006 | Provides framing services for multi-family construction in the northeast. Located in Plainville, MA. Purchased an additional 5% membership interest. |
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Company Name | Acquisition Date | Business Description | ||
Classic Truss Company, Inc.
(Classic)
Purchase price: $2.1 million 2005 sales: $6.0 million |
January 9, 2006 | Manufactures and distributes engineered wood components for site-built construction. The company is located in Fort Pierce, FL. |
For the Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of goods sold |
86.6 | 85.8 | ||||||
Gross profit |
13.4 | 14.2 | ||||||
Selling, general, and
administrative expenses |
11.6 | 9.7 | ||||||
Earnings from operations |
1.8 | 4.5 | ||||||
Interest, net |
0.7 | 0.5 | ||||||
Earnings before income taxes
and minority interest |
1.1 | 4.0 | ||||||
Income taxes |
0.3 | 1.5 | ||||||
Earnings before minority interest |
0.8 | 2.5 | ||||||
Minority interest |
(0.1 | ) | (0.1 | ) | ||||
Net earnings |
0.7 | % | 2.4 | % | ||||
| Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial. |
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| Expanding geographically in our core businesses. | |
| Increasing sales of value-added products and framing services. Value-added product sales primarily consist of fencing, decking, lattice, and other specialty products sold to the DIY/retail market, specialty wood packaging, engineered wood components, and wood alternative products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals. | |
| Maximizing unit sales growth while achieving return on investment goals. |
For the Three Months Ended | ||||||||||||
March 31, | % | April 1, | ||||||||||
Market Classification | 2007 | Change | 2006 | |||||||||
DIY/Retail |
$ | 196,136 | (9.4 | %) | $ | 216,466 | ||||||
Site-Built Construction |
138,842 | (34.9 | ) | 213,132 | ||||||||
Industrial |
133,452 | (4.7 | ) | 139,955 | ||||||||
Manufactured Housing |
88,278 | (17.3 | ) | 106,803 | ||||||||
Total Gross Sales |
556,708 | (17.7 | ) | 676,356 | ||||||||
Sales allowances |
(7,670 | ) | (10,747 | ) | ||||||||
Total Net Sales |
$ | 549,038 | (17.5 | %) | $ | 665,609 | ||||||
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Three Months Ended | ||||||||
March 31, | April 1, | |||||||
2007 | 2006 | |||||||
Value-Added |
62.4 | % | 62.8 | % | ||||
Commodity-Based |
37.6 | % | 37.2 | % |
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Note: | In the first quarter of 2007, we reviewed the classification of our product codes and made certain reclassifications. Prior year information has been restated to reflect these reclassifications. |
| A change in sales mix whereby engineered wood components sold to site-built customers comprised a lower percentage of our sales this quarter. | ||
| Cost inefficiencies as a result of the impact of decreased unit sales out of existing facilities and fixed manufacturing costs. | ||
| Increased pricing pressure on sales to the site-built construction market due to the overall decline in market demand. |
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March 31, | April 1, | |||||||
2007 | 2006 | |||||||
Cash from operating activities |
$ | (27,568 | ) | $ | 4,245 | |||
Cash from investing activities |
(62,929 | ) | (8,526 | ) | ||||
Cash from financing activities |
83,413 | (2,326 | ) | |||||
Net change in cash and cash equivalents |
(7,084 | ) | (6,607 | ) | ||||
Cash and cash equivalents, beginning of period |
51,108 | 46,215 | ||||||
Cash and cash equivalents, end of period |
$ | 44,024 | $ | 39,608 | ||||
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| A decline in net earnings of approximately $12 million. | |
| The impact of our sale of receivables program in the first quarter of 2007 compared to the prior period. Specifically, during the first quarter of 2006 we entered into a new sale of receivables program and had approximately $50 million of net receivables sold and outstanding at the end of the first quarter of 2006. At the end of fiscal 2006, we had approximately $27 million sold and outstanding, which was increased to approximately $49 million of net receivables sold and outstanding at the end of the first quarter of 2007. Therefore, in the first quarter of 2007 we generated approximately $22 million of positive cash flow from our sale of receivables program compared to $50 million of positive cash flow in the prior year period. |
28
29
30
(a) | Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a 15e and 15d 15e) as of the quarter ended March 31, 2007 (the Evaluation Date), have concluded that, as of such date, our disclosure controls and procedures were effective. | |
(b) | Changes in Internal Controls. During the first quarter ended March 31, 2007, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. |
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(a) | None. | |
(b) | None. | |
(c) | Issuer purchases of equity securities. |
Fiscal Month | (a) | (b) | (c) | (d) | ||||||||||||
December 31, 2006 February 3, 2007(1) |
1,499,976 | |||||||||||||||
February 4, 2007 March 3, 2007 |
1,499,976 | |||||||||||||||
March 4, 2007 March 31, 2007 |
1,737 | $ | 49.14 | 1,737 | 1,498,239 |
(a) | Total number of shares purchased. | |
(b) | Average price paid per share. | |
(c) | Total number of shares purchased as part of publicly announced plans or programs. | |
(d) | Maximum number of shares that may yet be purchased under the plans or programs. | |
(1) | On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. As of March 31, 2007, cumulative total authorized shares available for repurchase is 1.5 million shares. |
32
33
31(a)
|
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
31(b)
|
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
32(a)
|
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
32(b)
|
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
34
UNIVERSAL FOREST PRODUCTS, INC. |
||||
Date: April 26, 2007 | By: | /s/ Michael B. Glenn | ||
Michael B. Glenn | ||||
Its: Chief Executive Officer | ||||
Date: April 26, 2007 | By: | /s/ Michael R. Cole | ||
Michael R. Cole | ||||
Its: Chief Financial Officer | ||||
35
Exhibit No. | Description | |
31(a)
|
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
31(b)
|
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
32(a)
|
Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). | |
32(b)
|
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |