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

Show all filings for UNIVERSAL FOREST PRODUCTS INC

Form 10-Q for UNIVERSAL FOREST PRODUCTS INC


30-Jul-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 markets: retail, construction, and industrial. Founded in 1955, the Company is headquartered in Grand Rapids, Michigan, 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 second quarter of 2014 were impacted by the following:

Our overall sales increased by 4.6% compared to the second quarter of 2013 as a 6% increase in our unit sales was offset by a small decline in selling prices due to the commodity lumber market (see Historical Lumber Prices). Our 6% increase in unit sales was driven by sales growth to our retail building materials, industrial, and commercial construction markets, offset by a decline in unit sales to our residential construction market. Unit sales to our manufactured housing market were flat.


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UNIVERSAL FOREST PRODUCTS, INC.

National housing starts increased approximately 9.4% in the period from March through May 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 11%, primarily due to being more selective in the business that we take, particularly in our framing operations within our Site-Built segment. We expect our selective pricing policies to continue to impact our sales growth relative to market growth.

Production of HUD code manufactured homes increased 4.0% in the second quarter of 2014, compared to the same period of 2013. Our unit sales to this market were flat due to a vertical integration strategy being employed by one of our primary customers. Our unit sales to all other customers increased approximately 6%, which is in line with the increase in industry production. We expect this trend to continue for the balance of the year.

Our operating profit as a percentage of sales increased to 4.8% from 3.7% comparing 2014 to 2013, primarily due to improved profitability of our framing and other operations that primarily serve residential construction customers, selling a more favorable mix of higher margin products, and relatively steady lumber prices in 2014. In the second quarter of 2013 lumber prices fell for several weeks, which adversely impacted the profitability of certain products.

                            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
  April                                             367                          429
  May                                               377                          367
  June                                              375                          329

  Second quarter average             $              373              $           375
  Year-to-date average                              383                          394

  Second quarter percentage change                 (0.5 %)
  Year-to-date percentage change                   (2.8 %)


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                        UNIVERSAL FOREST PRODUCTS, INC.

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.

                                                   Random Lengths SYP
                                                      Average $/MBF
                                                   2014            2013
              January                            $     375        $  397
              February                                 398           426
              March                                    406           445
              April                                    392           436
              May                                      402           383
              June                                     406           355

              Second quarter average             $     400        $  391
              Year-to-date average                     397           407

              Second quarter percentage change         2.3 %
              Year-to-date percentage change          (2.5 %)

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

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.


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UNIVERSAL FOREST PRODUCTS, INC.

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 deck components 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.

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.


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                        UNIVERSAL FOREST PRODUCTS, INC.

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 margin percentages. Gross margin percentages are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.

BUSINESS COMBINATIONS

We completed one business acquisition during the second quarter of 2014, three acquisitions for the first six months of 2014, and four during all of 2013. Each of the acquisitions was accounted for using the purchase method. The annual revenue of the acquisitions completed in 2014 was approximately $19 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                       Six Months Ended
                                            June 28, 2014        June 29, 2013       June 28, 2014       June 29, 2013

Net sales                                            100.0 %              100.0 %             100.0 %             100.0 %
Cost of goods sold                                    87.5                 89.1                87.7                89.3
Gross profit                                          12.6                 10.9                12.3                10.7
Selling, general, and administrative
expenses                                               7.7                  7.2                 8.5                 7.8
Anti-dumping duty assessments                          0.2                    -                 0.1                 0.1
Net (gain) loss on disposition of
assets, early retirement, and other
impairment and exit charges                              -                    -                (0.1 )                 -
Earnings from operations                               4.8                  3.7                 3.7                 2.8
Other expense (income), net                            0.1                  0.1                 0.1                 0.2
Earnings before income taxes                           4.7                  3.6                 3.6                 2.6
Income taxes                                           1.8                  1.3                 1.4                 0.9
Net earnings                                           2.9                  2.2                 2.3                 1.7
Less net earnings attributable to
noncontrolling interest                               (0.1 )               (0.1 )              (0.1 )              (0.1 )
Net earnings attributable to controlling
interest                                               2.8 %                2.1 %               2.2 %               1.6 %

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


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UNIVERSAL FOREST PRODUCTS, INC.

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:

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 $42.2 million in the second quarter of 2014 compared to $27.6 million during the second quarter of 2013. New product sales year-to-date for 2014 and 2013 were $65.8 and $49.3 million, respectively.

Maximizing unit sales growth while achieving return on investment goals.


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                        UNIVERSAL FOREST PRODUCTS, INC.

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                            Six Months Ended
                            June 28,      June 29,          %           June 28,        June 29,           %
Market Classification         2014          2013          Change          2014            2013           Change
Retail Building Materials   $ 349,134     $ 314,948           10.9     $   551,393     $   521,010            5.8
Industrial                    203,464       193,133            5.3         373,866         352,808            6.0
Housing and Construction
Manufactured Housing          100,028       110,169           (9.2 )       183,640         200,551           (8.4 )
Residential Construction       94,250       102,724           (8.2 )       171,540         181,442           (5.5 )
Commercial Construction        37,336        28,845           29.4          65,970          54,711           20.6
Subtotal                      231,614       241,738           (4.2 )       421,150         436,704           (3.6 )
Total Gross Sales             784,212       749,819            4.6       1,346,409       1,310,522            2.7
Sales Allowances              (11,460 )     (11,383 )                      (19,658 )       (17,592 )
Total Net Sales             $ 772,752     $ 738,436            4.6     $ 1,326,751     $ 1,292,930            2.6

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

Gross sales in the second quarter of 2014 increased 4.6% compared to the same period of 2013, due to a 6% increase in unit sales, offset by a 1% decline in selling prices.

Gross sales in the first six months of 2014 increased 2.7% compared to the same period of 2013, due to a 5% increase in unit sales, offset by a 2% 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 increased almost 11% in the second quarter of 2014 compared to the same period of 2013, all of which was due to an increase in overall unit sales. Within this market, sales to our big box customers increased nearly 13% while our sales to other retailers increased approximately 8%. We believe that these unit sales gains are due, in part, to poor weather in the first quarter which resulted in greater demand in the second quarter when weather became more favorable.

Gross sales to the retail building materials market increased 6% in the first six months of 2014 compared to the same period of 2013, due to a 7% increase in unit sales, offset by a 1% decrease in selling prices due to the Lumber Market. Within this market, sales to our big box customers increased 11% while our sales to other retailers decreased by 1%.


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UNIVERSAL FOREST PRODUCTS, INC.

Industrial:

Gross sales to the industrial market increased over 5% in the second quarter of 2014 compared to the same period of 2013, resulting from a 6% increase in unit sales, offset by a 1% reduction in selling prices due to the Lumber Market. Our growth was primarily due to an increase in orders from our existing customers. Our sales to new customers were approximately $1.5 million for the quarter.

Gross sales to the industrial market increased 6% in the first six months of 2014 compared to the same period of 2013. Our unit sales increased 8% in the first six months of 2014 while our selling prices decreased by 2% due to the Lumber Market.

Manufactured Housing:

Gross sales to the manufactured housing market decreased over 9% in the second quarter of 2014 compared to 2013. The decrease was due to an 8% decrease in selling prices and a 1% decline in unit sales. By comparison, production of HUD-code homes in April and May 2014 were up 4% compared to 2013. Our unit sales growth was adversely impacted by a continuing reduction in sales to one of our key customers in this market. That customer's vertical integration strategy is expected to adversely impact our sales growth in this market for the balance of the year. Our sales to other customers in this market increased by 6%, which is in line with the increase in industry production. The decline in prices was primarily due to OSB prices, which declined approximately 37% year over year in the second quarter.

Gross sales to the manufactured housing market decreased over 8% in the first six months of 2014 compared to 2013, primarily due to the same factors discussed above. Our unit sales remained flat for the first six months of 2014.

Residential Construction:

Gross sales to the residential construction market decreased approximately 8% in the second quarter of 2014 compared to the same period of 2013, due to an 11% decrease in our unit sales, offset by a 3% increase in selling prices. By comparison, national housing starts increased approximately 9.4% in the period from March through May 2014 (our sales trail housing starts by about a month), compared to the same period of 2013. 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. We intend to continue this strategy and expect that it will continue to adversely impact our sales growth in this market.


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UNIVERSAL FOREST PRODUCTS, INC.

Gross sales to the residential construction market decreased over 5% in the first six months of 2014 compared to the same period of 2013, primarily due to the same factors discussed above. Our unit sales decreased 8% for the first six months of 2014.

Commercial Construction:

Gross sales to the commercial construction market increased approximately 29% in the second quarter of 2014 compared to the same period of 2013. This was driven by a 28% increase in unit sales. Our increase in unit sales is a result of an increase in commercial construction activity and our efforts to capture additional market share.

Gross sales to the commercial construction market increased 21% in the first six months of 2014 compared to the same period of 2013, primarily due to the same factors discussed above. Our unit sales increased 18% for the first six months of 2014.

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                         Six Months Ended
                                     June 28, 2014         June 29, 2013       June 28, 2014        June 29, 2013

Value-Added                                    59.3 %                57.8 %              58.6 %               57.5 %
Commodity-Based                                40.7 %                42.2 %              41.4 %               42.5 %

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 12.6% from 10.9% comparing the second quarter of 2014 to the same period of 2013. Additionally, our gross profit dollars increased by $16.8 million, or 20.9%, which compares favorably with our 6% increase in unit sales. The improvement in our profitability in 2014 is due to the following factors:

Over $4 million of our improvement reflects efforts to be more selective in the business that we take on sales to the residential construction market, particularly in our framing operations, as well as operational improvements we have made to those businesses.

Approximately $3.5 million of our improvement was due to growth and a more favorable product mix on sales to the industrial market.


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UNIVERSAL FOREST PRODUCTS, INC.

Nearly $6.5 million of our improvement reflects our growth in sales to the retail market along with experiencing a more favorable Lumber Market in the second quarter of 2014 relative to the Lumber Market in the second quarter of 2013. In the second quarter of 2013 the Lumber Market decreased for several weeks which adversely impact the profits of certain products.

Almost $2 million of our improvement was due to growth and a more favorable product mix on our sales to the commercial and concrete forming market.

Our gross profit percentage increased to 12.3% from 10.7% comparing the first six months of 2014 to the same period of 2013. Additionally, our gross profit dollars increased by 18.1%, which compares favorably to our 5% increase in unit sales. This improvement is primarily due to the same factors discussed above. These improvements were offset to some extent by adverse cost variances resulting from a decline in productivity due to inclement weather during the first quarter of 2014.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $5.9 million, or 11.1%, in the second quarter of 2014 compared to the same period of 2013, while we reported a 6% increase in unit sales. The increase in SG&A was primarily due to:

A $2.2 million, or 9%, increase in compensation and benefit costs tied to . . .

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