UFP Industries - 10-Q quarterly report FY2011 Q3

UNIVERSAL FOREST PRODUCTS, INC.

 

For the quarterly period ended September 24, 2011

OR

Commission File Number 0-22684

(Exact name of registrant as specified in its charter)

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TABLE OF CONTENTS

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(Unaudited)

(in thousands, except per share data)

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

(Unaudited)

(in thousands, except share and per share data)

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

See notes to unaudited consolidated condensed financial statements

UNIVERSAL FOREST PRODUCTS, INC.

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 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 25, 2010.

Certain prior year information has been reclassified to conform to the current year presentation.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a continuous statement of comprehensive income or in two separate consecutive statements.  The amended guidance is effective for financial periods beginning after December 15, 2011.  ASU 2011-05 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value.  Assets measured at fair value are as follows:

 

UNIVERSAL FOREST PRODUCTS, INC.

Mutual funds are valued at prices quoted in an active exchange market and are included in “Other Assets”.  Property, plant and equipment are valued based on active market prices and other relevant information for sales of similar assets.  We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

We do not maintain any Level 3 assets or liabilities that would be based on significant unobservable inputs.

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.

UNIVERSAL FOREST PRODUCTS, INC.

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):

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):

UNIVERSAL FOREST PRODUCTS, INC.

Options to purchase 110,000 and 10,000 shares were not included in the computation of diluted EPS for the quarter and nine months ended September 24, 2011 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

Options to purchase 130,000 and 10,000 shares were not included in the computation of diluted EPS for the quarter and nine months ended September 25, 2010 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

Included in “Assets held for sale” on our Consolidated Condensed Balance Sheets are certain property, plant and equipment totaling $5.1 million on September 24, 2011. The assets held for sale consist of certain vacant land and facilities we previously closed to better align manufacturing capacity with the current business environment.  The fair values were determined based on appraisals or recent offers to acquire assets.  These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in impairment and other exit charges included in “Net loss on disposition of assets, early retirement and other impairment and exit charges” for the periods presented below. These amounts include the following, separated by reporting segment (in thousands):

UNIVERSAL FOREST PRODUCTS, INC.

Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of June 2011. This amount is included in “severances and early retirement” expenses under Corporate in the table above.

UNIVERSAL FOREST PRODUCTS, INC.

The changes in assets held for sale are as follows (in thousands):

We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, Ardellis Insurance Ltd., (f/k/a UFP Insurance Ltd.), a licensed captive insurance company.

We own and operate a number of facilities throughout the United States that chemically treat lumber products.  In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses.  Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Janesville, WI; and Medley, FL. In addition, a reserve was established for our affiliate’s facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.  During 2009, a subsidiary entered into a consent order with the State of Florida to conduct additional testing at the Auburndale, FL facility. We admitted no liability and the costs are not expected to be material.
 

On a consolidated basis, we have reserved approximately $3.2 million on September 24, 2011 and $4.2 million on September 25, 2010, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

From time to time, various special interest environmental groups have petitioned certain states requesting restrictions on the use or disposal of CCA treated products.  The wood preservation industry trade groups are working with the individual states and their regulatory agencies to provide an accurate, factual background which demonstrates that the present method of uses and disposal is scientifically supported.  Our affiliates market a modest amount of CCA treated products for permitted, non-residential applications.

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.

UNIVERSAL FOREST PRODUCTS, INC.

In addition, on September 24, 2011, we were parties either as plaintiff or 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 September 24, 2011, we had outstanding purchase commitments on capital projects of approximately $11.9 million.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material.  We distribute products manufactured by other companies, some of which are no longer in business.  While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay.  Historically, these costs have not had a material affect on our consolidated financial statements.

In certain cases we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances we are required to post payment and performance bonds to insure the owner that the products and installation services are completed in accordance with our contractual obligations.  We have agreed to indemnify the surety for claims made against the bonds.  As of September 24, 2011, we had approximately $14.6 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $29.0 million in payment and performance bonds are outstanding for completed projects which are still under warranty.

We have entered into operating leases for certain assets that include a guarantee of a portion of the residual value of the leased assets.  If, at the expiration of the initial lease term we do not exercise our option to purchase the leased assets and these assets are sold by the lessor for a price below a predetermined amount, we will reimburse the lessor for a certain portion of the shortfall.  These operating leases will expire periodically over the next three years.  The estimated maximum aggregate exposure of these guarantees is approximately $0.5 million.

On September 24, 2011, we had outstanding letters of credit totaling $31.3 million, primarily related to certain insurance contracts and industrial development revenue bonds described further 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 $18.9 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.

UNIVERSAL FOREST PRODUCTS, INC.

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 $12.4 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.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2002-A Senior Notes and our revolving credit facility.  The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.

Many of our wood treating operations utilize "Subpart W" drip pads, defined as hazardous waste management units by the EPA.  The rules regulating drip pads require that the pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste.  Closure involves identification and disposal of contaminants which are required to be removed from the facility.  The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed.  Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.7 million.  As a result, this amount is recorded in other long-term liabilities on September 24, 2011.

We did not enter into any new guarantee arrangements during the third quarter of 2011 which would require us to recognize a liability on our balance sheet.

No business combinations were completed in fiscal 2011.  We completed the following business combinations in fiscal 2010 which were accounted for using the purchase method (in millions):

The business combinations mentioned above were not significant to our operating results individually or in aggregate, and thus pro forma results are not presented.

UNIVERSAL FOREST PRODUCTS, INC.

ASC 280, Segment Reporting (“ASC 280”), 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.

Our operating segments consist of Eastern, Western, Atlantic, Consumer Products and Distribution divisions.  In accordance with ASC 280, due to similar economic characteristics, nature of products, distribution methods, and customers, we have aggregated our Eastern and Western operating segments into one reportable segment.  The Atlantic division is considered a separate reportable segment.  Our other divisions do not collectively form a reportable segment because their respective operations are dissimilar and they do not meet the applicable quantitative requirements.  These operations have been included in the “All Other” column of the table below. As a result of returning to two geographical divisions, we are in the process of evaluating changes to our operating segments that will be effective in the fourth quarter.

UNIVERSAL FOREST PRODUCTS, INC.

 

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. ("the Company") is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for DIY/retail home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the site-built construction market, and specialty wood packaging and components and packing materials for various industries. The Company’s subsidiaries also provide framing services for the site-built market and forming products for concrete construction. The Company's consumer products subsidiary offers a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide. The Company is headquartered in Grand Rapids, Michigan, and its subsidiaries operate facilities throughout North America. For more about Universal Forest Products, Inc., go to www.ufpi.com.

Please be aware that: Any statements included in this report that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by, and information currently available to, the Company at the time such statements were made. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events 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: adverse lumber market trends, competitive activity, negative economic trends, government regulations and weather. Certain of these 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 2011.

OVERVIEW

Our results for the third quarter of 2011 were impacted by the following:

HISTORICAL LUMBER PRICES

The following table presents the Random Lengths framing lumber composite price:

In addition, a Southern Yellow Pine ("SYP") composite price, which we prepare and use, is presented below.  Sales of products produced using this species, which primarily consists of our preservative-treated products, may comprise up to 50% of our sales volume.

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 try to price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide.  As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products.  Lumber costs are a significant percentage of our cost of goods sold.

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

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

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

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

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

BUSINESS COMBINATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note G, "Business Combinations."

RESULTS OF OPERATIONS

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

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:

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

Gross sales in the third quarter of 2011 decreased 2% compared to the same period of 2010, primarily due to an estimated 2% decrease in overall selling prices.

Gross sales in the first nine months of 2011 decreased 7% compared to the same period of 2010, primarily due to an estimated 2% decrease in overall unit sales and an estimated 5% decrease in overall selling prices due to the Lumber Market.

Changes in our sales by market are discussed below.

Retail Building Materials:

Gross sales to the retail building materials market decreased 5% in the third quarter of 2011 compared to the same period of 2010, primarily due to an estimated 2% decrease in our overall unit sales and an estimated 3% decrease in our overall selling prices.  Unit sales declined primarily due to a decrease in consumer spending for “big ticket” building materials products such as decking and fencing.  As unemployment remains high and housing prices have decreased, we believe many homeowners have delayed plans for these projects.  In the long-term, we believe this business will rebound as the economy improves and housing prices stabilize.  In addition, our sales of composite decking have decreased as we are preparing to launch a new product in 2012. Selling prices have been impacted by lower prices for SYP and competitive factors.

Gross sales to the retail building materials market decreased 12% in the first nine months of 2011 compared to the same period of 2010, primarily due to an estimated 5% decrease in our overall unit sales and an estimated 7% decrease in our overall selling prices.  Unit sales declined due to the same factors mentioned in the paragraph above.

 

Residential Construction:

Gross sales to the residential construction market decreased 17% in the third quarter of 2011 compared to the same period of 2010 due to a 16% decrease in unit sales as a result of operations we have recently closed and an estimated 1% decrease in selling prices.  Unit sales of plants that were operating in both comparative periods were flat.  By comparison, national housing starts increased approximately 5% in the period from June through August of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Gross sales to the residential construction market decreased 15% in the first nine months of 2011 compared to the same period of 2010 due to a combination of a 15% decrease in unit sales as a result of operations we have recently closed and an estimated 4% decrease in selling prices, offset by an estimated 4% increase in unit sales out of plants that were operating in both periods.  By comparison, national housing starts decreased approximately 4% in the period from December through August of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 12% in the third quarter of 2011 compared to the same period of 2010.  Volume has increased as a result of adding a few large commercial accounts this quarter and continuing to gain share of the concrete forming market.

Gross sales to the commercial construction and concrete forming market increased 12% in the first nine months of 2011 compared to the same period of 2010, primarily due to continuing to gain share of the concrete forming market.

Industrial:

Gross sales to the industrial market increased 6% in the third quarter of 2011 compared to the same period of 2010, primarily due to an estimated 6% increase in unit sales.  Our rate of growth slowed this quarter primarily due to a decline in demand of existing customers, which we believe is a reflection of a slowdown in manufacturing output in the U.S. In addition, we had a decline in sales of our Mexican partnership as changes in exchange rates have made their pricing in the U.S. less competitive resulting in a loss of volume.  We added almost 150 new customers again this quarter which allowed us to continue to add market share and grow unit sales this quarter.

Gross sales to the industrial market increased 6% in the first nine months of 2011 compared to the same period of 2010, primarily due to an estimated 9% increase in unit sales, offset by an estimated 3% decrease in overall selling prices.  Unit sales increased due to the same factors mentioned in the paragraph above.

 
 

Manufactured Housing and Recreation Vehicles:

Gross sales to the manufactured housing market increased 2% in the third quarter of 2011 compared to 2010, primarily due to a combination of a 3% increase in unit sales and an estimated 1% decrease in overall selling prices.  By comparison, shipments of HUD code manufactured homes were down 3% in July and August of 2011, compared to the same period of 2010.

Gross sales to the manufactured housing market decreased 9% in the first nine months of 2011 compared to 2010, primarily due to a combination of a 7% decrease in unit sales out of existing operations and an estimated 5% decrease in overall selling prices, offset by a 3% increase in unit sales of new operations we acquired in 2010.  By comparison, shipments of HUD code manufactured homes were down 10% in January through August of 2011, compared to the same period of 2010.

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.

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased to 11.6% from 11.3% comparing the third quarter of 2011 with the same period of 2010.  Additionally, our gross profit dollars and overall unit sales were flat comparing the two periods.  Our gross profit percentage was impacted by several factors.

Our gross profit percentage decreased to 10.9% from 12.2% comparing the first nine months of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 17% comparing the first nine months of 2011 with the same period of 2010, which compares unfavorably to our 2% decrease in unit sales.  The decline in our gross margin and profitability for the first nine months of 2011 was due to several factors.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses decreased by approximately $3.3 million, or 6.9%, in the third quarter of 2011 compared to the same period of 2010, while we reported flat unit sales.  The decline in SG&A was primarily due to a decrease in compensation and related expenses, executive retirement plan expenses, advertising, merchandising and promotional costs, and depreciation and amortization expense as a result of our continuing cost-cutting initiatives.  These decreases were offset by increases in accrued bonus and bad debt expense.

Selling, general and administrative ("SG&A") expenses decreased by approximately $14.0 million, or 9.3%, in the first nine of 2011 compared to the same period of 2010, while we reported a 2% decrease in unit sales.  The decline in SG&A was primarily due to a decrease in accrued bonus expense and compensation and related expenses.

NET LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES

We incurred approximately $1.3 million of charges in the first nine months of 2011 and $1.5 million in the first nine months of 2010 relating to asset impairments and other costs associated with idled facilities and down-sizing efforts combined with early retirement expenses. These costs were offset by gains on disposition of property, plant and equipment totaling approximately $0.2 million in the first nine months of 2011.

Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of June 2011.

 

We regularly review the performance of each our operations and make decisions to permanently or temporarily close operations based on a variety of factors including:

We currently have 14 operations which are experiencing operating losses and negative cash flow for the first nine months of 2011.  The net book value of the long-lived assets of these operations, which could be subject to an impairment charge in the future, was $13.1 million at the end of September of 2011.  In addition, these operations had future fixed operating lease payments totaling $0.3 million at the end of September of 2011.

INTEREST, NET

Net interest costs were comparable in the third quarter and first nine months of 2011 compared to the same period of 2010 as there have been no significant changes in our debt structure or borrowing rates.

 

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 35.5% in the third quarter of 2011 and 38.7% for same period of 2010. Our effective tax rate was 33.3% in the first nine months of 2011 and 35.9% for the same period of 2010. These differences were primarily due to the profits of our non-U.S. subsidiaries, which have a lower tax rate, and our non-wholly owned partnerships that we consolidate, which comprised a greater percentage of our year to date profits.

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.

LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):

In general, we financed our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable.  We have not issued equity to finance growth except in the case of a large acquisition.  We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization.  We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.  We are currently below our internal targets but plan to manage our capital structure conservatively in light of current economic conditions.

Seasonality has a significant impact on our working capital from March to August which historically resulted in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the September 25, 2010 balances in the accompanying unaudited consolidated condensed balance sheets.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management.  Our cash cycle increased to 51 days in the first nine months of 2011 from 43 days in the first nine months of 2010, due to a 1 day increase in our receivables cycle combined with a 7 day increase in our days supply of inventory, due to much higher inventory levels this year.  In preparation for the 2011 selling season, we changed our purchasing strategy to buy inventory earlier at opportune times in an attempt to protect margins and avoid buying as much inventory during the peak of the season when lumber prices tend to rise.

Cash provided by operating activities was $2.1 million in the first nine months of 2011, which was comprised of net earnings of $6.2 million and $28.1 million of non-cash expenses, offset by a $32.2 million increase in working capital since the end of 2010.  Working capital increased primarily due to the usual seasonality of our business combined with higher inventory levels than we expected at the end of September primarily due to weaker sales to the retail building materials market than we planned.  Based on the seasonality of our operations, we currently anticipate achieving strong cash flows from operations for the balance of the year as we move beyond our seasonal peak for working capital requirements and manage our inventories down to a level necessary to support current demand.

Capital expenditures were $21.8 million in the first nine months of 2011.  We currently plan to spend up to $35 million in 2011, which includes outstanding purchase commitments on existing capital projects totaling approximately $11.9 million on September 24, 2011.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.

On September 24, 2011, we had no outstanding balance on our $300 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $31.3 million on September 24, 2011.  Financial covenants on the unsecured revolving credit facility and unsecured notes include a minimum net worth requirement, minimum interest and fixed charge coverage tests, and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold.  We were within all of our lending requirements on September 24, 2011.  

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note F, "Commitments, Contingencies, and Guarantees."

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures.  There have been no material changes in our policies or estimates since December 25, 2010.