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UFPI > SEC Filings for UFPI > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for UNIVERSAL FOREST PRODUCTS INC

Form 10-Q for UNIVERSAL FOREST PRODUCTS INC


30-Apr-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. is a holding company that provides capital, management and administrative resources to subsidiaries that supply wood, wood composite and other products to three robust markets: retail, construction and industrial. Founded in 1955, the Company is headquartered in Grand Rapids, Mich., with affiliates throughout North America. For more about Universal Forest Products, go to www.ufpi.com.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management's beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like "anticipates," "believes," "confident," "estimates," "expects," "forecasts," "likely," "plans," "projects," "should," variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2014.

OVERVIEW

Our results for the first quarter of 2014 were impacted by the following:

Our overall sales were flat compared to the first quarter of 2013 as a 3% increase in our unit sales was offset by a decline in selling prices due to the commodity lumber market (see Historical Lumber Prices). Our 3% increase in unit sales was driven by sales growth to our industrial and commercial construction and concrete forming markets, offset by a decline in unit sales to our residential construction market. Unit sales to our retail and manufactured housing markets were flat. Our ability to grow sales to the retail and construction markets was temporarily hampered by inclement weather in most of the United States in the first quarter of 2014.


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UNIVERSAL FOREST PRODUCTS, INC.

National housing starts increased approximately 1.6% in the period from December 2013 through February 2014 (our sales trail housing starts by about a month), compared to the same period of 2013. Although national housing starts increased, our unit sales to the residential construction market decreased 6%, primarily due to being more selective in the business that we take, particularly in our framing operations within our Site-Built segment.

Production of HUD code manufactured homes increased 3.8% in the first quarter of 2014, compared to the same period of 2013, which helped drive our 1% increase in unit sales to this market. Our unit sales growth trails the market primarily due to a vertical integration strategy being employed by one of our customers. We expect this trend to continue for the balance of the year.

Our operating profit percentage increased to 2.3% from 1.6% comparing 2014 to 2013 primarily due to the improved profitability of our framing and other operations that primarily serve residential construction customers.

                            HISTORICAL LUMBER PRICES

We experience significant fluctuations in the cost of commodity lumber products
from primary producers ("Lumber Market"). The following table presents the
Random Lengths framing lumber composite price:

                                               Random Lengths Composite
                                                     Average $/MBF
                                                2014               2013

           January                           $       395         $     393
           February                                  394               409
           March                                     387               436

           First quarter average             $       392         $     413

           First quarter percentage change          (5.1 %)

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 approximately 50% of our sales volume.


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                        UNIVERSAL FOREST PRODUCTS, INC.

                                                  Random Lengths SYP
                                                     Average $/MBF
                                                  2014            2013

              January                           $     375        $  397
              February                                398           426
              March                                   406           445

              First quarter average             $     393        $  423

              First quarter percentage change        (7.1 %)

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 (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

Products with fixed selling prices. These products include value-added products such as decking and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential 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 with our suppliers for these sales commitments. Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers.


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UNIVERSAL FOREST PRODUCTS, INC.

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 we 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. As a result of the decline in the housing market and our sales to residential and commercial builders, a greater percentage of our sales fall into this general pricing category. Consequently, we believe our profitability may be impacted to a much greater extent to changes in the trend of lumber prices.

Changes in the trend of lumber prices have their greatest impact on the following products:

Products with significant inventory levels 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 15% of our total sales. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to the higher rate of inventory turnover. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs. (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.

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.

                                        Period 1       Period 2

                     Lumber cost       $      300     $      400
                     Conversion cost           50             50
                     = Product cost           350            450
                     Adder                     50             50
                     = Sell price      $      400     $      500
                     Gross margin            12.5 %         10.0 %

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.


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UNIVERSAL FOREST PRODUCTS, INC.

BUSINESS COMBINATIONS

We completed two business acquisitions through March 2014 and four during all of 2013. Each of the acquisitions was accounted for using the purchase method. The annual revenue of these acquisitions is approximately $35 million. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2014 and 2013 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note C, "Business Combinations" for additional information.

                             RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the components of our
Unaudited  Condensed Consolidated Statements of Earnings as a percentage of net
sales.

                                                   Three Months Ended
                                               March 29,        March 30,
                                                  2014            2013

Net sales                                           100.0 %          100.0 %
Cost of goods sold                                   88.1             89.6
Gross profit                                         11.9             10.4
Selling, general, and administrative
expenses                                              9.7              8.7
Anti-dumping duty assessments                           -              0.1
Net gain on disposition of assets                    (0.1 )           (0.0 )
Earnings from operations                              2.3              1.6
Other expense, net                                    0.1              0.2
Earnings before income taxes                          2.2              1.4
Income taxes                                          0.8              0.4
Net earnings                                          1.4              1.0
Less net earnings attributable to
noncontrolling interest                              (0.1 )           (0.1 )
Net earnings attributable to controlling
interest                                              1.3 %            0.9 %

Note: Actual percentages are calculated and may not sum to total due to rounding.

GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries. Our strategic long-term sales objectives include:


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UNIVERSAL FOREST PRODUCTS, INC.

Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, increasing our penetration of the concrete forming market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, and increasing our market share with independent retailers.

Expanding geographically in our core businesses, domestically and internationally.

Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail building materials 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.

Developing new products and expanding our product offering for existing customers. New product sales were $21.2 million in the first quarter of 2014 compared to $18.8 million during the first quarter of 2013.

Maximizing unit sales growth while achieving return on investment goals.

The following table presents, for the periods indicated, our gross sales and percentage change in gross sales by market classification.

(in thousands)                                   Three Months Ended

                                      March 29,      March 30,
Market Classification                    2014           2013         % Change
Retail Building Materials             $  202,259     $  206,062           (1.8 )
Industrial                               170,402        159,676            6.7
Manufactured Housing                      83,611         90,380           (7.5 )
Residential Construction                  77,290         78,719           (1.8 )
Commercial Construction and
Concrete Forming                          28,635         25,865           10.7
Total Gross Sales                        562,197        560,702            0.3
Sales Allowances                          (8,199 )       (6,208 )
Total Net Sales                       $  553,998     $  554,494           (0.1 )

During 2014, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.


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UNIVERSAL FOREST PRODUCTS, INC.

Gross sales in the first quarter of 2014 increased 0.3% compared to the same period of 2013, due to a 3% increase in unit sales, offset by a 3% decline in selling prices due to the lower level of the Lumber Market.

Changes in our gross sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market decreased almost 2% in the first quarter of 2014 compared to the same period of 2013, due to a reduction in selling prices due to the Lumber Market. Overall unit sales remained flat. Within this market, sales to our big box customers increased 7% while our sales to other retailers decreased 11%. The decline in sales to our independent retail customers was due to inclement weather in the first quarter of 2014 as these customers are more apt to order product on a just-in-time basis.

Industrial:

Gross sales to the industrial market increased nearly 7% in the first quarter of 2014 compared to the same period of 2013, resulting from a 10% increase in unit sales, offset by a 3% reduction in selling prices due to the Lumber Market. Our growth was due to a combination of new customers and an increase in sales to existing customers.

Manufactured Housing:

Gross sales to the manufactured housing market decreased over 7% in the first quarter of 2014 compared to 2013. The decrease was due to an 8% decrease in selling prices, offset by a 1% increase in unit sales. By comparison, production of HUD-code homes in January and February 2014 were up 4% compared to 2013. Our unit sales increase generally trailed industry production primarily due to a vertical integration strategy being employed by one of our customers. We expect this trend to continue for the balance of the year.

Residential Construction:

Gross sales to the residential construction market decreased approximately 2% in the first quarter of 2014 compared to the same period of 2013, due to a 6% decrease in our unit sales, offset by a 4% increase in selling prices. By comparison, national housing starts increased approximately 1.6% in the period from December 2013 through February 2014 (our sales trail housing starts by about a month), compared to the same period of 2013, and were impacted by inclement weather in the first quarter of 2014. The decrease in our unit sales and increase in our selling prices reflects efforts to be more selective in the business that we take, particularly in our framing operations within our Site-Built segment.


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UNIVERSAL FOREST PRODUCTS, INC.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased nearly 11% in the first quarter of 2014 compared to the same period of 2013. A shift in sales mix towards higher margin products generated a 3% increase in selling prices, despite a decrease in lumber prices. Additionally, unit sales increased 8%.

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 products
generally carry higher gross margins than our commodity-based products.

                      Three Months Ended
                  March 29,        March 30,
                     2014             2013

Value-Added             57.7 %           57.1 %
Commodity-Based         42.3 %           42.9 %

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 11.9% from 10.4% comparing the first quarter of 2014 to the same period of 2013. Our gross profit dollars increased by 14.2%, which compares favorably with our 3% increase in unit sales. The improvement in our profitability in 2014 reflects efforts to be more selective in the business that we take on sales to the residential construction market, particularly in our framing entities, as well as operational improvements we made to those entities. Our growth in sales to the industrial market also contributed to our gross margin and gross profit increases. These improvements were offset to some extent by adverse cost variances resulting from a decline in productivity due to inclement weather. We experienced many lost production days at our plants during the first quarter in 2014.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $5.7 million, or 11.8%, in the first quarter of 2014 compared to the same period of 2013, while we reported a 3% increase in unit sales. The increase in SG&A was primarily due to increases in compensation and benefit costs tied to an increased headcount, incentive compensation resulting from an increase in our profitability, and an increase in bad debt expense.

INTEREST, NET

Net interest costs were lower in the first quarter of 2014 compared to the same period of 2013, due to lower interest expense resulting from lower debt levels in 2014, and an increase in interest income resulting from certain notes receivables.


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UNIVERSAL FOREST PRODUCTS, INC.

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 was 35.6% in the first quarter of 2014 compared to 28.1% for the same period of 2013. The increase is primarily due to recognizing a tax benefit for research and development and certain other tax credits totaling approximately $700,000 in the first quarter of 2013 related to 2012. These tax credits were enacted in the first quarter of 2013, retroactive to the beginning of 2012.

SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and
earnings from operations by reportable segment.

                                     Net Sales                              Earnings from Operations
  (in thousands)                 Three Months Ended                            Three Months Ended
                      March 29,      March 30,                      March 29,       March 30,
                         2014           2013         % Change         2014             2013          % Change
Eastern and Western   $  456,396     $  445,524            2.4     $    14,906     $     14,074            5.9
         Site-Built       52,121         58,150          (10.4 )         1,598           (4,055 )        139.4
          All Other       45,481         50,820          (10.5 )        (1,253 )           (346 )       (261.3 )
         Corporate1                                                     (2,623 )           (616 )       (325.8 )
              Total   $  553,998     $  554,494           (0.1 )   $    12,628     $      9,057           39.5

1 Corporate earnings from operations represents unallocated administrative costs and certain incentive compensation expense.

Eastern and Western

Net sales to the Eastern and Western reportable segment increased in the first quarter of 2014 compared to 2013 due to an increase in sales to industrial and concrete forming customers, offset by a decline in sales to retail and manufactured housing customers due to the Lumber Market.

Earnings from operations for the Eastern and Western reportable segment increased in the first quarter of 2014 compared to 2013, primarily due to an increase in overall unit sales and improvement in product mix, offset by unfavorable cost variances due to lost production days resulting from inclement weather.

Site-Built

Net sales to the Site-Built reportable segment decreased in the first quarter of 2014 compared to 2013 primarily due to a decrease in sales to the commercial construction market and due to a decline in sales of our framing operations as we were more selective in the business that we pursued.


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UNIVERSAL FOREST PRODUCTS, INC.

Earnings from operations for the Site-Built reportable segment increased in the first quarter of 2014 compared to 2013 primarily due to improvements in our framing operations, as well as improved profitability of our component plants. These results were offset somewhat by unfavorable cost variances resulting from lost production days due to inclement weather.

All Other

Net sales to all other segments decreased in the first quarter of 2014 compared to 2013, primarily due to a decline in commodity lumber sales executed by our centralized purchasing department.

Earnings from operations for all other segments decreased in the first quarter of 2014 compared to 2013, primarily due to our Universal Consumer Products operations.

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):

                                                                        Three Months Ended
                                                                March 29, 2014       March 30, 2013
Cash from operating activities                                 $        (54,732 )   $        (64,574 )
Cash from investing activities                                          (14,425 )            (10,090 )
Cash from financing activities                                           58,161               59,135
Effect of exchange rate changes on cash                                     (76 )                217
Net change in cash and cash equivalents                                 (11,072 )            (15,312 )
. . .
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