EX-13 2 ufpi-20151226xexhibit13.htm EXHIBIT 13 Exhibit
 
 

Exhibit 13
 
UNIVERSAL FOREST PRODUCTS, INC.
FINANCIAL INFORMATION

Table of Contents

Selected Financial Data
2
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
3-17
 
 
Management's Annual Report on Internal Control Over Financial Reporting
18
 
 
Report of Independent Registered Public Accounting Firm
19
 
 
Report of Independent Registered Public Accounting Firm
20
 
 
Consolidated Balance Sheets as of December 26, 2015 and December 27, 2014
22-23
 
 
Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 26, 2015, December 27, 2014, and December 28, 2013
24
 
 
Consolidated Statements of Shareholders' Equity for the Years Ended December 26, 2015, December 27, 2014, and December 28, 2013
25-27
 
 
Consolidated Statements of Cash Flows for the Years Ended December 26, 2015, December 27, 2014, and December 28, 2013
28-29
 
 
Notes to Consolidated Financial Statements
30-49
 
 
Price Range of Common Stock and Dividends
50
 
 
Stock Performance Graph
51
 
 
Directors and Executive Officers
52
 
 
Shareholder Information
53



SELECTED FINANCIAL DATA
(In thousands, except per share and statistics data)
 
 
2015
 
2014
 
2013
 
2012
 
2011
Consolidated Statement of Earnings Data
 
 
 
 
 
 
 
 
 
Net sales
$
2,887,071

 
$
2,660,329

 
$
2,470,448

 
$
2,054,933

 
$
1,822,336

Gross profit
399,904

 
325,342

 
280,552

 
225,109

 
199,727

Earnings before income taxes
131,002

 
95,713

 
70,258

 
41,064

 
8,787

Net earnings attributable to controlling interest
$
80,595

 
$
57,551

 
$
43,082

 
23,934

 
4,549

Diluted earnings per share
$
3.99

 
$
2.86

 
$
2.15

 
$
1.21

 
$
0.23

Dividends per share
$
0.820

 
$
0.610

 
$
0.410

 
$
0.400

 
$
0.400

Consolidated Balance Sheet Data
 

 
 

 
 

 
 

 
 

Working capital(1)
$
444,057

 
$
397,546

 
$
357,299

 
$
338,389

 
$
225,399

Total assets
1,107,679

 
1,023,800

 
916,987

 
860,540

 
764,007

Total debt
85,895

 
98,645

 
84,700

 
95,790

 
52,470

Shareholders' equity
766,409

 
699,560

 
649,734

 
607,525

 
582,599

Statistics
 

 
 

 
 

 
 

 
 

Gross profit as a percentage of
 

 
 

 
 

 
 

 
 

net sales
13.9
%
 
12.2
%
 
11.4
%
 
11.0
%
 
11.0
%
Net earnings attributable to controlling interest as a percentage of net sales
2.8
%
 
2.2
%
 
1.7
%
 
1.2
%
 
0.2
%
Return on beginning equity(2)
11.5
%
 
8.8
%
 
7.1
%
 
4.1
%
 
0.8
%
Current ratio(4)
3.17

 
3.27

 
3.59

 
3.95

 
2.70

Debt to equity ratio(5)
0.11

 
0.14

 
0.13

 
0.16

 
0.09

Book value per common share(3)
$
38.05

 
$
35.01

 
$
32.57

 
$
30.68

 
$
29.69


(1)
Current assets less current liabilities.
(2)
Net earnings attributable to controlling interest divided by beginning shareholders’ equity.
(3)
Shareholders’ equity divided by common stock outstanding.
(4)
Current assets divided by current liabilities.
(5)
Total debt divided by shareholders' equity.

2

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America and in Australia that supply wood, wood composite and other products to three robust markets: retail,construction and industrial. The Company is headquartered in Grand Rapids, Mich., and is celebrating its 60th year in business. For more information about Universal Forest Products, Inc., or its affiliated operations, 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 2015.

OVERVIEW
 
Our results for 2015 were impacted by the following:

Our sales increased 8.5% in 2015 due to an 11.5% increase in our unit sales, offset by a 3% decrease in overall selling prices.  See “Historical Lumber Prices”.  Our unit sales increased to all three of our markets - retail, industrial, and construction - and were driven by a combination of acquisition and organic growth. Businesses we acquired contributed 4% to our unit sales growth in 2015. See Note C of the Notes to Consolidated Financial Statements.

The Home Improvement Research Institute reported a 4.5% increase in home improvement sales in 2015. Comparatively, our unit sales to the retail market increased 12% in 2015.

Our sales to the industrial market increased 13.5% in 2015, despite a decline in national industrial production of 3.4%.
National housing starts increased approximately 11% in the period from December 2014 through November 2015, compared to the same period of the prior year (our sales trail housing starts by about a month).  Comparatively, our unit sales to residential construction customers increased 4% in 2015. 
Shipments of HUD code manufactured homes were up 8.7% in the period from January through November 2015, compared to the same period of the prior year, and year over year modular home starts remained flat in the first nine months of 2015 (the last period reported). Comparatively, our unit sales to the manufactured housing market increased 2% in 2015.
Our profitability improved to $80.6 million in net earnings attributable to controlling interest from $57.6 million last year primarily due to a combination of strong organic sales growth, businesses we acquired (see Note C of the Notes to Consolidated Financial Statements), favorable improvements in sales mix, and low lumber costs on products sold with fixed selling prices.




3

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


HISTORICAL LUMBER PRICES

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

 
Random Lengths Composite
Average $/MBF
 
2015
 
2014
 
2013
January
$
379

 
$
395

 
$
393

February
361

 
394

 
409

March
339

 
387

 
436

April
334

 
367

 
429

May
315

 
377

 
367

June
328

 
375

 
329

July
346

 
381

 
343

August
327

 
401

 
353

September
300

 
398

 
368

October
308

 
381

 
384

November
326

 
367

 
398

December
314

 
375

 
385

Annual average
$
331

 
$
383

 
$
383

Annual percentage change
(13.6
)%
 
0.0%

 
 

 
In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below.  Sales of products produced using this species may comprise up to 23% of our sales volume.

 
Random Lengths SYP
Average $/MBF
 
2015
 
2014
 
2013
January
$
411

 
$
375

 
$
397

February
399

 
398

 
426

March
393

 
406

 
445

April
400

 
392

 
436

May
368

 
402

 
383

June
354

 
406

 
355

July
344

 
396

 
366

August
321

 
419

 
364

September
290

 
416

 
360

October
318

 
393

 
356

November
348

 
386

 
362

December
347

 
399

 
360

Annual average
$
358

 
$
399

 
$
384

Annual percentage change
(10.3
)%
 
3.9
%
 
 


 
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

4

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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  approximately 60% of our material costs, and our material costs as a percentage of sales were 68.7%, 71.3%, and 73.2% in 2015, 2014, 2013, respectively.

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.

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. 
 
The greatest risk associated with changes in the trend of lumber prices is 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 18% 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.


5

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


BUSINESS COMBINATIONS AND ASSET PURCHASES
 
We completed two business acquisitions during 2015 and five during 2014 and each was accounted for using the purchase method.  The aggregate annual revenue of these acquisitions totaled $92.4 million.  These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2015 and 2014 are not presented.
 
See Notes to 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 Consolidated Statements of Earnings as a percentage of net sales.

 
Years Ended
 
December 26, 2015
 
December 27, 2014
 
December 28, 2013
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold
86.1

 
87.8

 
88.6

Gross profit
13.9

 
12.2

 
11.4

Selling, general, and administrative expenses
9.2

 
8.6

 
8.3

Loss contingency for anti-dumping duty assessments

 
0.1

 
0.1

Net loss (gain) on disposition of assets and other impairment charges

 
(0.1
)
 

Earnings from operations
4.7

 
3.7

 
3.0

Other expense, net
0.2

 
0.1

 
0.2

Earnings before income taxes
4.5

 
3.6

 
2.8

Income taxes
1.6

 
1.3

 
1.0

Net earnings
2.9

 
2.3

 
1.9

Less net earnings attributable to noncontrolling interest
(0.2
)
 
(0.2
)
 
(0.1
)
Net earnings attributable to controlling interest
2.8
 %
 
2.2
 %
 
1.7
 %

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:
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 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 $250.1 million in 2015 and $186.2 million in 2014. (Certain prior year product reclassifications resulted in an increase in new product sales in 2014.)

6

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Maximizing unit sales growth while achieving return on investment goals.

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

 
Years Ended
Market Classification
December
26,
2015
 
%
Change
 
December
27,
2014
 
%
Change
 
December
 28,
2013
Retail
$
1,132,178

 
10.8
 
$
1,022,037

 
9.7
 
$
931,815

Industrial
896,587

 
13.5
 
789,798

 
12.2
 
703,987

Construction
898,328

 
1.4
 
886,101

 
2.1
 
868,110

Total Gross Sales
2,927,093

 
8.5
 
2,697,936

 
7.8
 
2,503,912

Sales Allowances
(40,022
)
 
6.4
 
(37,607
)
 
12.4
 
(33,464
)
Total Net Sales
$
2,887,071

 
8.5
 
$
2,660,329

 
7.7
 
$
2,470,448


Note: During 2015, certain customers were reclassified to a different market.  Prior year information has been restated to reflect these changes.

The following table presents estimates, for the periods indicated, of our percentage change in gross sales which were attributable to changes in overall selling prices versus changes in units shipped.

 
% Change
 
in Sales
 
in Selling Prices
 
in Units
2015 versus 2014
8.5
%
 
(3.0
)%
 
11.5
%
2014 versus 2013
7.7
%
 
 %
 
7.7
%
2013 versus 2012
20.0
%
 
12.0
 %
 
8.0
%

Retail:

Gross sales to the retail market increased almost 11% in 2015 compared to 2014 due to a 12% increase in unit sales, offset by a 1% decrease in selling prices.  Within this market, sales to our big box customers increased 15% while our sales to other retailers increased 5%.  We believe that our increase in unit sales was primarily due to a combination of significant share gains in existing product lines with certain large retailers, an improvement in consumer demand, and growth in our new product sales. Our large retail customers have reported good year over year same store sales growth. 
 
Gross sales to the retail market increased almost 10% in 2014 compared to 2013 due to a 12% increase in overall unit sales, offset by a 2% decrease in selling prices.  Within this market, sales to our big box customers increased 12% while our sales to other retailers increased 7%.  We believe that our increase in unit sales was primarily due an improvement in consumer demand as our large retail customers reported year over year increases in their same store sales.

Industrial:

Gross sales to the industrial market increased 14% in 2015 compared to 2014, resulting from a 17% increase in overall unit sales, offset by a 3% decrease in selling prices. Businesses we acquired contributed 12% to our growth in unit sales. Our organic growth in unit sales of 5% was due to share gains achieved with several existing customers, as well as adding 168 new customers.

Gross sales to the industrial market increased 12% in 2014 compared to 2013, resulting from a 12% increase in overall unit sales while selling prices remained flat.  We acquired three new operations, which contributed 2% to our growth in unit sales, and expanded our capacity at several existing locations to take advantage of market share growth opportunities.  Our unit sales also increased as a result of adding 192 new customers during the year and improved demand from our existing customers.


7

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


See Notes to Consolidated Financial Statements, Note C, "Business Combinations" for additional information concerning acquired businesses.

Construction:

Gross sales to the construction market increased about 1% in 2015 compared to 2014, due to a unit sales increase of 5%, offset by a 4% decrease in selling prices. Unit sales increased due to a 4% increase in units shipped to residential construction customers, a 15% increase in shipments to commercial construction customers, and a 2% increase in shipments to manufactured housing customers. Comparatively, year over year housing starts increased 11% nationally, the commercial construction market increased 11%, industry production of HUD-code homes increased 8.7%, and modular home starts remained flat for the first nine months of 2015 (the last period reported). 

Gross sales to the construction market increased about 2% in 2014 compared to 2013, due to a unit sales increase of 1% and a 1% increase in selling prices. Unit sales increased due to a 29% increase in units shipped to commercial construction customers, offset by an 8% decrease in shipments to residential construction customers. Shipments to manufactured housing customers remained flat. Comparatively, year over year housing starts increased 9%, the commercial construction market increased 6%, industry production of HUD-code homes increased 6%, and modular home starts decreased 1% in 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.

 
Value-Added
 
Commodity-Based
2015
59.8
%
 
40.2
%
2014
58.5
%
 
41.5
%
2013
58.1
%
 
41.9
%

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased from 12.2% in 2014 to 13.9% in 2015.  Additionally, our gross profit dollars increased by almost $75 million, or 23%, which exceeds our 11.5% increase in unit sales.  The improvement in our profitability in 2015 is attributable to the following factors:

Our growth in unit sales to the industrial market and a significant margin improvement on those sales contributed almost $50 million to our gross profit improvement. The gross margin improvement is attributable to an improvement in our sales mix and benefiting from lower lumber costs relative to our fixed selling prices in the last six months of 2015. We estimate lower lumber costs contributed $17 million to $20 million to our overall improvement in gross profits.

Approximately $17 million of the increase is attributable to our growth in unit sales to the retail market and a slight improvement in margin on those sales. New product sales contributed to our margin improvement;

Over $9 million of our gross profit improvement was due to growth in sales and an improvement in margins on sales to the residential construction market. Margins improved primarily as a result of efforts to be more selective in the business that we take as market conditions have improved.

Our gross profit percentage increased from 11.4% in 2013 to 12.2% in 2014.  Additionally, our gross profit dollars increased by almost $45 million, or 16%, which exceeded our 8% increase in unit sales.  The improvement in our profitability in 2014 was attributable to the following factors:

Over $20 million of the improvement reflects our efforts to be more selective in the business that we select on sales to the residential construction market, particularly in our framing operations, as well as operational efficiencies.

Approximately $12 million of the increase is attributable to our growth in unit sales to the retail market as well an improvement in margin on those sales due to a more favorable trend in lumber prices in 2014 compared to 2013.

8

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our growth in unit sales to the industrial and commercial construction markets, as well as improvements in our product mix to sell more higher margin products, contributed to gross profit increases of approximately $17 million and $6 million, respectively.

The improvements above were offset to some extent by unfavorable cost variances as a result of inclement weather in our first and fourth quarters of 2014.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $34.5 million, or 15%, in 2015 compared to 2014, while we reported an 11.5% increase in unit sales.  The increase in SG&A was primarily due to a $12 million increase in compensation and related expenses resulting from annual raises and hiring additional sales and design personnel to support sales growth, and a $16 million increase in incentive compensation expense tied to profitability and return on investment.

Selling, general and administrative ("SG&A") expenses increased by approximately $25.4 million, or 12.4%, in 2014 compared to 2013, while we reported an 8% increase in unit sales.  The increase in SG&A was primarily due to a $13 million increase in compensation and related expenses resulting from annual raises and hiring additional sales and design personnel to support sales growth, and an $8 million increase in incentive compensation expense tied to profitability and return on investment.

ANTI-DUMPING DUTY ASSESSMENTS

We accrued $1.6 million and $0.9 million related to estimated anti-dumping duty assessments in 2014 and 2013, respectively, imposed by the US government on plywood and steel nails imported from China.  Additionally, we recorded $0.6 million for a Canadian anti-dumping duty in 2013 related to certain extruded aluminum products imported from China.

NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENT CHARGES

The net gain on disposition and impairment of assets totaled $3.4 million in 2014.  Included within the $3.4 million net gain was a gain on the sale of certain real estate totaling $2.7 million completed by a 50% owned subsidiary of the Company.    During 2014, we also recognized a net gain on the sale of other properties and equipment totaling $1.9 million. These gains were offset by a $1.2 million impairment loss recorded to reduce the value of one of our vacant properties.

INTEREST, NET

Net interest costs were higher in 2015 compared to 2014, due to a higher outstanding balance on our revolving line of credit throughout 2015 resulting in additional associated interest expense and the loss of interest income related to notes receivable collected in late 2014 and 2015. 

Net interest costs were lower in 2014 compared to 2013, due to a lower outstanding balance on our revolving line of credit throughout 2014 resulting in less associated interest expense.  Additionally, interest income increased by $1.6 million due to certain investments made in notes receivable.

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 decreased to 35.0% in 2015 compared to 35.7% in 2014.  The decrease in the 2015 tax rate is due to an increase in our domestic manufacturing deduction and a reduction in our estimated state tax rate.

Our effective tax rate increased to 35.7% in 2014 compared to 34.8% in 2013.  The increase is due to the 2013 tax rate including additional research and development and certain other tax credits relating to 2012 that were retroactively approved by Congress in 2013.

SEGMENT REPORTING

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


9

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(in thousands)
Net Sales
 
December 26, 2015
 
December 27, 2014
 
December 28, 2013
 
2015 vs 2014
 
2014 vs 2013
North
$
922,092

 
$
840,277

 
$
811,438

 
9.7
%
 
3.6
%
South
656,550

 
611,700

 
568,237

 
7.3

 
7.6

West
1,133,398

 
1,062,565

 
950,684

 
6.7

 
11.8

All Other
175,031

 
145,787

 
140,089

 
20.1

 
4.1

Total
$
2,887,071

 
$
2,660,329

 
$
2,470,448

 
8.5
%
 
7.7
%

(in thousands)
Earnings from Operations
 
December 26, 2015
 
December 27, 2014
 
December 28, 2013
 
2015 vs 2014
 
2014 vs 2013
North
$
53,879

 
$
32,988

 
$
21,167

 
63.3
 %
 
55.8
 %
South
30,740

 
24,474

 
23,680

 
25.6

 
3.4

West
70,220

 
53,575

 
42,003

 
31.1

 
27.6

All Other
3,038

 
3,155

 
(1,850
)
 
(3.7
)
 
270.5

Corporate1
(22,410
)
 
(16,825
)
 
(10,732
)
 
(33.2
)
 
(56.8
)
Total
$
135,467

 
$
97,367

 
$
74,268

 
39.1
 %
 
31.1
 %

1Corporate primarily represents over (under) allocated administrative costs and certain incentive compensation expense.

North

Net sales attributable to the North reportable segment increased by 9.7% in 2015, due to an increase in sales to our retail, residential construction, and manufactured housing customers. These increases were offset by a decline in sales to our industrial customers.

Net sales attributable to the North reportable segment increased by 3.6% in 2014, due to an increase in sales to our retail, industrial, and commercial construction customers.  These increases were offset by a decline in sales to our residential construction customers as we were more selective in the business that we pursued, particularly in our framing operations.


Earnings from operations for the North reportable segment increased in 2015 primarily due to the growth in our sales to retail and residential construction customers.  Margin improvements were also achieved due to a more favorable product sales mix and a decline in lumber costs in the last six months of 2015 on products we sell with fixed selling prices.

Earnings from operations for the North reportable segment increased in 2014, compared to 2013, primarily due to the growth in our sales to the retail and industrial markets.  These improvements were offset by unfavorable cost variances in our first and fourth quarters due to inclement weather.

South

Net sales attributable to the South reportable segment increased by 7.3% in 2015, primarily due to an increase in sales to our retail, industrial, and manufactured housing customers.

Net sales attributable to the South reportable segment increased by 7.6% in 2014, due to an increase in sales to our retail and industrial customers, offset by a decrease in sales to manufactured housing due to a vertical integration strategy implemented by one of our largest customers.


Earnings from operations for the South reportable segment increased in 2015 primarily due to the growth in our sales to the retail and industrial markets and margin improvements. These improvements were primarily due to a more favorable product sales mix and low lumber costs in the last six months of 2015 on products we sell with fixed selling prices.


10

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Earnings from operations for the South reportable segment increased in 2014, primarily due to growth in our sales to retail and industrial customers, as well as a slight margin improvement. These factors were offset by a decline in sales to manufactured housing customers.

West

Net sales of the West reportable segment increased by 6.7% in 2015, due to an increase in sales to the retail, commercial construction, and industrial markets. Acquired businesses contributed to our growth in sales to the industrial market. These increases were offset by a decline in sales to manufactured housing and residential construction customers.

Net sales of the West reportable segment increased by 11.8% in 2014, due to an increase in sales to the commercial construction and industrial markets. Acquired businesses contributed to our growth in sales to the industrial market. These increases were offset by a decline in sales to manufactured housing customers.

Earnings from operations for the West reportable segment increased in 2015 primarily due to the growth in our sales to the retail and industrial markets and an improvement in margins. Our margins increased due to an improvement in our sales mix and lower lumber prices in the last six months of 2015 on products we sell with fixed selling prices. 

Earnings from operations for the West reportable segment increased in 2014 primarily due to the growth in our sales to the retail, industrial, and construction markets; the impact of a more favorable lumber market; and an improvement in our product mix such that we sold more higher margin, value-added products.  These improvements were offset to some extent by unfavorable cost variances in our first and fourth quarters due to inclement weather, and a decline in sales to manufactured housing.


All Other

Net sales of all other segments increased 20.1% in 2015 primarily due to:
An increase in sales by our Alternative Materials operations to retail customers. Our Alternative Materials operations primarily manufacturer, distribute, and sell composite decking, decorative post caps and balusters, and a variety of other deck accessories to retail customers.
An increase in sales to the Industrial market by our Pinelli Universal partnership. Pinelli Universal manufactures moulding and millwork products out of its plant in Durango, Mexico.
Our Integra Packaging partnership, acquired in 2015, which manufactures and distributes specialty packaging products.

Net sales of all other segments increased 4.1% in 2014 primarily due to:
A 7% increase in sales to the Industrial market by our Pinelli Universal partnership.
A 12% increase in sales by our Alternative Materials operations.

Earnings from operations for all other segments decreased slightly in 2015, primarily due to a gain on the sale of certain real estate in Mexico recorded in the third quarter of 2014 totaling $2.7 million offset by margin improvements achieved by our Pinelli Universal partnership on its sales to industrial customers in 2015.

Earnings from operations for all other segments improved in 2014, primarily due to improved profitability of our Alternative Materials operations due, in part, to operational improvements, and our Pinelli Universal partnership, which recorded a $2.7 million gain on the sale of certain real estate.

OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS

We have no significant off-balance sheet commitments other than operating leases.  The following table summarizes our contractual obligations as of December 26, 2015 (in thousands).


11

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


 
Payments Due by Period
Contractual Obligation
Less than
1 Year
 
1 – 3
Years
 
3 – 5
Years
 
After
5 Years
 
Total
Long-term debt and capital lease obligations
$
1,145

 
$
48

 
$
2,702

 
$
82,000

 
$
85,895

Estimated interest on long-term debt and capital lease obligations
3,057

 
5,959

 
5,950

 
9,160

 
24,126

Operating leases
6,008

 
9,497

 
1,110

 

 
16,615

Capital project purchase obligations
3,324

 

 

 

 
3,324

Total
$
13,534

 
$
15,504

 
$
9,762

 
$
91,160

 
$
129,960


As of December 26, 2015, we also had $25.4 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.

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

 
December 26,
2015
 
December 27,
2014
 
December 28,
2013
Cash from operating activities
$
168,796

 
$
73,120

 
$
54,440

Cash from investing activities
(46,817
)
 
(67,063
)
 
(43,603
)
Cash from financing activities
(33,002
)
 
(5,205
)
 
(18,422
)
Effect of exchange rate changes on cash
(1,221
)
 
(852
)
 
(62
)
Net change in cash and cash equivalents
87,756

 

 
(7,647
)
Cash and cash equivalents, beginning of year

 

 
7,647

Cash and cash equivalents, end of year
$
87,756

 
$

 
$


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 issuances 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 carrying less debt than we believe we could based on our internal targets.  We have recently increased our semi-annual dividend rate, completed repurchases of our stock when the price is at a targeted level, increased our capital expenditures to expand our capacity to serve certain targeted markets, and completed several strategic business acquisitions.

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. 

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days 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 53 days in 2015 from 50 days in 2014.  In 2015, we carried higher levels of safety stock inventory.  In addition, adverse weather in the first quarter of 2015 resulted in weaker than expected unit sales and lower inventory turnover during that period.

Cash generated from operating activities was approximately $168.8 million in 2015, which was comprised of net earnings of $85.1 million, $41.6 million of non-cash expenses, and a $42.1 million decrease in working capital since the end of 2014. Working capital declined primarily due to reducing inventory to targeted levels and an increase in accrued liabilities resulting from a $17 million increase in accrued compensation.


12

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Capital expenditures were $43.5 million in 2015, and we have outstanding purchase commitments on existing capital projects totaling approximately $3.3 million on December 26, 2015.  We intend to fund capital expenditures and purchase commitments through our operating cash flows and amounts available under our revolving credit facility.

Cash flows used in investing activities also included:
Cash advances on notes receivable of $7.0 million, which was more than offset by $11.4 million in collections, associated with our Mexican subsidiary; and
Purchases of investments of $7.9 million by our captive insurance subsidiary.

In 2015, cash flows used in financing activities included $16.5 million of dividends paid to shareholders.  Our Board of Directors approved semi-annual dividends of $0.40 per share and $0.42 per share, which were paid in June and December of 2015, respectively.  In addition, we repaid the $13.9 million outstanding balance on our revolving credit facility.

On December 26, 2015, we had no outstanding balance on our $295 million revolving credit facility, which also supports letters of credit totaling approximately $9.8 million on December 26, 2015 and December 27, 2014.  The revolving credit facility is scheduled to mature in November of 2019. Financial covenants on this unsecured revolving credit facility and our unsecured senior notes include minimum interest 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 December 26, 2015 and December 27, 2014.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Consolidated Financial Statements, Note M, “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.  Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

ACCOUNTS RECEIVABLE ALLOWANCES

We record provisions against gross revenues for estimated returns and cash discounts in the period when the related revenue is recorded.  These estimates are based on factors that include, but are not limited to, historical discounts taken, analysis of credit memorandums activity, and customer demand.  We also evaluate the allowance for uncollectible accounts receivable and discounts based on historical collection experience and specific identification of other potential problems, including the economic climate.  Actual collections can differ, requiring adjustments to the allowances.

LONG-LIVED ASSETS AND GOODWILL

We evaluate long-lived assets for indicators of impairment when events or circumstances indicate that this risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance and estimated future cash flows.  The discounted cash flow analysis uses the following assumption:  a business is worth today what it can generate in future cash flows; cash received today is worth more than an equal amount of cash received in the future; and future cash flows can be reasonably estimated.  The discounted cash flow analysis is based on the present value of projected cash flows and residual values.

As of September 27, 2015, our assessment date, the fair values of each of the Company’s operating segments substantially exceeded their carrying values.

 
North
 
South
 
West
 
All Other
Excess Fair Value over Carrying Value
101.0
%
 
29.7
%
 
79.4
%
 
39.4
%


13

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


If the carrying value of a long-lived asset is considered impaired, a level two analysis will be conducted and an impairment charge is recorded to adjust the asset to its fair value.  Changes in forecasted operations and changes in discount rates can materially affect these estimates.  In addition, we test goodwill annually for impairment or more frequently if changes in circumstances or the occurrence of other events suggest impairments exist.  The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples.  Changes in these estimates may result in the recognition of an impairment loss.

INSURANCE RESERVES

We are primarily self-insured for certain employee health benefits, and have self-funded retentions for general liability, automobile liability, property and workers' compensation.  We are fully self-insured for environmental liabilities.  The general liability, automobile liability, property, workers' compensation, and certain environmental liabilities are managed through a wholly-owned insurance captive; the related assets and liabilities of which are included in the consolidated financial statements as of December 26, 2015.  Our accounting policies with respect to the reserves are as follows:
General liability, automobile, and workers' compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities.
Health benefits are self-insured up to our pre-determined stop loss limits.  These reserves, including incurred but not reported claims, are based on internal computations.  These computations consider our historical claims experience, independent statistics, and trends.
The environmental reserve is based on known remediation activities at certain wood preservation facilities and the potential for undetected environmental matters at other sites. The reserve for known activities is based on expected future costs and is computed by in-house experts responsible for managing our monitoring and remediation activities.

In addition to providing coverage for the Company, our wholly-owned insurance captive provides Excess Loss Insurance (primarily medical and prescription drug) to certain third parties.  As of December 26, 2015, there were 21 such contracts in place.  The contracts have specific and/or aggregate coverage loss limits based on the election of the third parties.  Reserves associated with these contracts were $2.0 million at December 26, 2015 and $1.8 million at December 27, 2014, and are accrued based on third party actuarial valuations of the expected future liabilities.

INCOME TAXES

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future.  Such deferred income tax asset and liability computations are based on enacted tax laws and rates.  Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities.

Tax laws are complex and subject to different interpretations by taxpayers and respective government taxing authorities, which results in judgment in determining our tax expense and in evaluating our tax positions.  Our tax positions are reviewed quarterly and adjusted as new information becomes available.

REVENUE RECOGNITION

Revenue for product sales is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment.  In certain circumstances, the customer takes title when the shipment arrives at the destination.  However, our shipping process is typically completed the same day.

Performance on construction contracts is reflected in operations using percentage-of-completion accounting, under either the cost to cost or units of delivery methods, 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 per the contract.  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.

14

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration.  Therefore, our operating results are impacted by, among many other things, labor rates and commodity costs.  During the year, we update our estimated costs to complete our projects using current labor and commodity costs and recognize losses to the extent that they exist.

FORWARD OUTLOOK

GOALS

The Company’s goal is to achieve sales growth that exceeds positive GDP growth by 4 percent to 6 percent.

Our general long-term objectives also include:
Achieving sales growth primarily through new product introduction, international business expansion, and gaining additional market share, particularly of our industrial and commercial construction markets;
Increasing our profitability through cost reductions, productivity improvements as volume improves, and a more favorable mix of higher margin value-added products; and
Earning a return on invested capital in excess of our weighted average cost of capital.

RETAIL MARKET
 
The Home Improvement Research Institute (“HIRI”) anticipates growth in home improvement spending and has forecasted a 4.4% compounded annual growth rate until 2019.

We continue to compete for market share for certain retail customers and face intense pricing pressure from other suppliers to this market.  Nevertheless, we were successful in our attempt to gain a greater share of our customers business in 2015 and were awarded many new stores and some additional product lines through 2016. 

Our long-term goal is to achieve sales growth by:
Increasing our market share of value-added and preservative-treated products, particularly with independent retail customers.
Developing new, value-added products, such as our Eovations product line.
Adding new products and customers through strategic business acquisitions or alliances.
Increasing our emphasis on product innovation and product differentiation in order to counter commoditization trends and influences.

INDUSTRIAL MARKET

Our goal is to increase our sales of wood and alternative packaging products to a wide variety of industrial and OEM users.  We believe the vast amount of hardwood and softwood lumber consumed for industrial applications, combined with the highly fragmented nature of this market provides us with growth opportunities as a result of our competitive advantages in manufacturing, purchasing, and material utilization.  We plan to continue to obtain market share by expanding our manufacturing capabilities and product offerings and increasing the size of our dedicated industrial sales force.  We also plan to pursue strategic acquisition opportunities.

CONSTRUCTION MARKET

The National Association of Home Builders forecasts a 3% decrease in manufactured home shipments in 2016 followed by a 14% increase in 2017. We will strive to maintain our market share of trusses produced for this market.

The Mortgage Bankers Association of America forecasts an 11% increase in national housing starts to an estimated 1.2 million starts in 2016.  The National Association of Home Builders forecasts starts of 1.3 million, a 13% increase from 2015.  We believe we are well-positioned to capture our share of any increase that may occur in housing starts in the regions we operate.  However,

15

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


due to our continued focus on profitability and our conservative approach to adding capacity to serve this market, our growth may continue to trail the market in future years.

GROSS PROFIT

We believe the following factors may impact our gross profits and margins in 2016:
End market demand.
Our ability to maintain market share and gross margins on products sold to our largest customers.  We believe our level of service, geographic diversity, and quality of products provides an added value to our customers.  However, if our customers are unwilling to pay for these advantages, our sales and gross margins may be reduced.  Excess capacity exists for suppliers in each of our markets.  As a result, we may experience pricing pressure in the future.
Product mix.
Fluctuations in the relative level of the Lumber Market and the trend in the market place of lumber.  (See "Impact of the Lumber Market on our Operating Results.")
Fuel and transportation costs.
Our ability to continue to achieve productivity improvements as our unit sales increase and planned cost reductions through our continuous improvement and other initiatives.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

In recent years, selling, general and administrative (SG&A) expenses have increased as we have added personnel needed to take advantage of growth opportunities and execute our initiatives designed to increase our sales of new products and improve our sales mix of higher margin, value-added products.  We anticipate our trend of increases in these costs will continue in 2016, but it is an objective to reduce these costs as a percentage of sales (assuming lumber prices remain stable) as we grow as a result of fixed costs and through improved productivity of our people.  In addition, bonus and other incentive expenses for all salaried and sales employees is based on profitability and the effective management of our assets and will continue to fluctuate based on our results.

On a long-term basis, we expect that our SG&A expenses will primarily be impacted by:
Our growth in sales to the industrial market and, as industry conditions continue to improve, the residential construction market.  Our sales to these markets require a higher ratio of SG&A costs due, in part, to product design requirements.
Sales of new products which may require higher development, marketing, and advertising costs.
Our incentive compensation programs which are tied to gross profits, pre-bonus earnings from operations, and return on investment.
Our growth and success in achieving continuous improvement objectives designed to improve our productivity and leveraging our fixed costs.

LIQUIDITY AND CAPITAL RESOURCES

Our cash cycle will continue to be impacted in the future by our mix of sales by market.  Sales to the residential and commercial construction and industrial markets require a greater investment in working capital (inventory and accounts receivable) than our sales to the retail and manufactured housing markets.  Additionally, our investment in trade receivables and inventory will continue to be impacted by the level of lumber prices.

In 2016, management expects to spend between $70 million and $75 million on capital expenditures, incur depreciation of approximately $40 million, and incur amortization and other non-cash expenses of approximately $6 million.  On December 26, 2015, we had outstanding purchase commitments on capital projects of approximately $3.3 million.  We intend to fund capital expenditures and purchase commitments through our operating cash flows and availability under our revolving credit facility which is considered sufficient to meet these commitments and working capital needs.


16

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


We have no present plan to change our dividend policy, which was recently increased to a semi-annual rate of $0.42 per share.  Our dividend rates are reviewed and approved at our April and October board meetings and payments are made in June and December of each year.

We have a share repurchase program approved by our Board of Directors, and as of December 26, 2015, we have authorization to buy back approximately 2.9 million shares. In the past, we have repurchased shares in order to offset the effect of issuances resulting from our employee benefit plans and at opportune times when our stock price falls to predetermined levels.

17


Management’s Annual Report on Internal Control Over Financial Reporting

The management of Universal Forest Products, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.  Our internal control system was designed to provide reasonable assurance to us and the Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. 

We assessed the effectiveness of our internal control over financial reporting as of December 26, 2015, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework)  (“COSO”).  Based on that evaluation, management has concluded that as of December 26, 2015, our internal control over financial reporting was effective.

The effectiveness of the Company’s internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which follows our report.

Universal Forest Products, Inc.

February 24, 2016

18


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Universal Forest Products, Inc.
Grand Rapids, Michigan

We have audited the internal control over financial reporting of Universal Forest Products, Inc. and subsidiaries (the "Company") as of December 26, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 26, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 26, 2015 of the Company and our report dated February 24, 2016 expressed an unqualified opinion on those consolidated financial statements.


/s/ Deloitte & Touche LLP

Grand Rapids, Michigan
February 24, 2016

19


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Universal Forest Products, Inc.
Grand Rapids, Michigan

We have audited the accompanying consolidated balance sheets of Universal Forest Products, Inc. and subsidiaries (the "Company") as of December 26, 2015 and December 27, 2014, and the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Universal Forest Products, Inc. and subsidiaries as of December 26, 2015 and December 27, 2014, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 26, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan
February 24, 2016


20


Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Universal Forest Products, Inc.

We have audited the accompanying consolidated balance sheet of Universal Forest Products, Inc. and subsidiaries as of December 28, 2013, and the related consolidated statements of earnings and comprehensive income, shareholders’ equity, and cash flows for the fiscal year in the period ended December 28, 2013. These financial statements are the responsibility of Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Universal Forest Products, Inc. and subsidiaries at December 28, 2013, and the consolidated results of their operations and their cash flows for the fiscal year in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles.


/s/ Ernst & Young LLP

Grand Rapids, Michigan
February 26, 2014, except for Note N, as to which the date is February 24, 2016


21


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
 
December 26,
2015
 
December 27,
2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and Cash Equivalents
$
87,756

 
$

Investments
6,743

 

Restricted cash
586

 
405

Accounts receivable, net
222,964

 
195,912

Inventories:
 

 
 

Raw materials
168,548

 
183,770

Finished goods
136,370

 
156,278

Total inventories
304,918

 
340,048

Refundable  income taxes
7,784

 
11,934

Deferred income taxes

 
6,284

Other current assets
17,481

 
18,423

TOTAL CURRENT ASSETS
648,232

 
573,006

DEFERRED INCOME TAXES
1,312

 
1,079

OTHER ASSETS
8,298

 
9,565

GOODWILL
180,990

 
183,062

INDEFINITE-LIVED INTANGIBLE ASSETS
2,340

 
2,340

OTHER INTANGIBLE ASSETS, NET
15,357

 
6,479

PROPERTY, PLANT AND EQUIPMENT:
 

 
 

Land and improvements
118,701

 
114,157

Building and improvements
180,066

 
175,340

Machinery and equipment
303,081

 
284,981

Furniture and fixtures
21,682

 
23,397

Construction in progress
4,515

 
6,523

PROPERTY, PLANT AND EQUIPMENT, GROSS
628,045

 
604,398

Less accumulated depreciation and amortization
(376,895
)
 
(356,129
)
PROPERTY, PLANT AND EQUIPMENT, NET
251,150

 
248,269

TOTAL ASSETS
$
1,107,679

 
$
1,023,800

 
See notes to consolidated financial statements.


22


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
 
December 26,
2015
 
December 27,
2014
LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

CURRENT LIABILITIES:
 

 
 

Cash overdraft
$

 
$
621

Accounts payable
95,041

 
89,105

Accrued liabilities:
 

 
 

Compensation and benefits
78,877

 
62,143

Other
29,112

 
23,591

Current portion of long-term debt
1,145

 

TOTAL CURRENT LIABILITIES
204,175

 
175,460

LONG-TERM DEBT
84,750

 
98,645

DEFERRED INCOME TAXES
23,838

 
30,933

OTHER LIABILITIES
28,507

 
19,202

TOTAL LIABILITIES
341,270

 
324,240

SHAREHOLDERS' EQUITY:
 

 
 

Controlling interest shareholders' equity:
 

 
 

Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
$

 
$

Common stock, $1 par value; shares authorized 40,000,000; issued and outstanding, 20,141,709 and 19,984,451
20,142

 
19,984

Additional paid-in capital
171,562

 
162,483

Retained earnings
565,636

 
502,334

Accumulated other comprehensive earnings
(4,585
)
 
1,348

Employee stock notes receivable

 
(455
)
Total controlling interest shareholders' equity
752,755

 
685,694

Noncontrolling interest
13,654

 
13,866

TOTAL SHAREHOLDERS' EQUITY
766,409

 
699,560

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
1,107,679

 
$
1,023,800


See notes to consolidated financial statements.


23


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(in thousands, except per share data)
 
Year Ended
 
December 26,
2015
 
December 27,
2014
 
December 28,
2013
NET SALES
$
2,887,071

 
$
2,660,329

 
$
2,470,448

COST OF GOODS SOLD
2,487,167

 
2,334,987

 
2,189,896

GROSS PROFIT
399,904

 
325,342

 
280,552

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
264,265

 
229,775

 
204,390

ANTI-DUMPING DUTY ASSESSMENTS

 
1,600

 
1,526

NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND IMPAIRMENT CHARGES
172

 
(3,400
)
 
368

EARNINGS FROM OPERATIONS
135,467

 
97,367

 
74,268

INTEREST EXPENSE
5,133

 
4,267

 
4,851

INTEREST INCOME
(294
)
 
(2,235
)
 
(640
)
EQUITY IN EARNINGS OF INVESTEE
(374
)
 
(378
)
 
(201
)
 
4,465

 
1,654

 
4,010

EARNINGS BEFORE INCOME TAXES
131,002

 
95,713

 
70,258

INCOME TAXES
45,870

 
34,149

 
24,454

NET EARNINGS
85,132

 
61,564

 
45,804

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,537
)
 
(4,013
)
 
(2,722
)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
$
80,595

 
$
57,551

 
$
43,082

EARNINGS PER SHARE - BASIC
3.99

 
2.87

 
2.16

EARNINGS PER SHARE - DILUTED
3.99

 
2.86

 
2.15

OTHER COMPREHENSIVE INCOME:
 

 
 

 
 

OTHER COMPREHENSIVE LOSS
(7,257
)
 
(3,116
)
 
(784
)
COMPREHENSIVE INCOME
77,875

 
58,448

 
45,020

LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(3,213
)
 
(3,015
)
 
(2,730
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
$
74,662

 
$
55,433

 
$
42,290


See notes to consolidated financial statements.

24


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except share and per share data)
 
Controlling Interest Shareholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulat-ed Other Comprehen-sive Earnings
 
Employees Stock Notes Receivable
 
Noncontrolling Interest
 
Total
Balance at December 29, 2012
$
19,800

 
$
149,805

 
$
426,887

 
$
4,258

 
$
(982
)
 
$
7,757

 
$
607,525

Net earnings
 
 
 

 
43,082

 
 

 
 

 
2,722

 
45,804

Foreign currency translation adjustment
 

 
 

 
 

 
(792
)
 
 

 
8

 
(784
)
Capital contribution from noncontrolling interest
 

 
 

 
 

 
 

 
 

 
84

 
84

Distributions to noncontrolling interest
 

 
 

 
 

 
 

 
 

 
(1,460
)
 
(1,460
)
Cash dividends - $0.410 per share
 

 
 

 
(8,166
)
 
 

 
 

 
 

 
(8,166
)
Issuance of 76,492 shares under employee stock plans
76

 
2,068

 
 

 
 

 
 

 
 

 
2,144

Issuance of 30,808 shares under stock grant programs
31

 
20

 
9

 
 

 
 

 
 

 
60

Issuance of 43,914 shares under deferred compensation plans
44

 
(44
)
 
 

 
 

 
 

 
 

 

Tax benefits from non-qualified stock options exercised
 

 
290

 
 

 
 

 
 

 
 

 
290

Expense associated with share-based compensation arrangements
 

 
1,874

 
 

 
 

 
 

 
 

 
1,874

Accrued expense under deferred compensation plans
 

 
2,219

 
 

 
 

 
 

 
 

 
2,219

Note receivable adjustment
(3
)
 
(103
)
 
 

 
 

 
106

 
 

 

Payments received on employee stock notes receivable
 

 
 

 
 

 
 

 
144

 
 

 
144

Balance at December 28, 2013
$
19,948

 
$
156,129

 
$
461,812

 
$
3,466

 
$
(732
)
 
$
9,111

 
$
649,734

 
See notes to consolidated financial statements

25


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except share and per share data)
 
 
Controlling Interest Shareholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulat-ed Other Comprehen-sive Earnings
 
Employees Stock Notes Receivable
 
Noncontrolling Interest
 
Total
Net earnings
 
 
 
 
57,551
 
 
 
 
 
4,013
 
61,564
Foreign currency translation adjustment
 
 
 
 
 
 
(2,118)
 
 
 
(998)
 
(3,116)
Noncontrolling interest associated with business acquisitions
 
 
 
 
 
 
 
 
 
 
3,650
 
3,650
Distributions to noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(1,910)
 
(1,910)
Cash dividends - $0.210 & $0.400 per share - semiannually
 
 
 
 
(12,205)
 
 
 
 
 
 
 
(12,205)
Issuance of 15,639 shares under employee stock plans
16
 
525
 
 
 
 
 
 
 
 
 
541
Issuance of 77,970 shares under stock grant programs
78
 
1,125
 
13
 
 
 
 
 
 
 
1,216
Issuance of 49,337 shares under deferred compensation plans
49
 
(49)
 
 
 
 
 
 
 
 
 
Repurchase of 105,012 shares
(105)
 
 
 
(4,761)
 
 
 
 
 
 
 
(4,866)
Tax benefits from non-qualified stock options exercised
 
 
319
 
 
 
 
 
 
 
 
 
319
Expense associated with share-based compensation arrangements
 
 
1,919
 
 
 
 
 
 
 
 
 
1,919
Accrued expense under deferred compensation plans
 
 
2,515
 
 
 
 
 
 
 
 
 
2,515
Note receivable adjustment
(2)
 

 
(76)
 
 
 
78
 
 
 
Payments received on employee stock notes receivable
 
 
 
 
 
 
 
 
199
 
 
 
199
Balance at December 27, 2014
$
19,984

 
$
162,483

 
$
502,334

 
$
1,348

 
$
(455
)
 
$
13,866

 
$
699,560

 
See notes to consolidated financial statements

26


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except share and per share data)
 
Controlling Interest Shareholders' Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulat-ed Other Comprehen-sive Earnings
 
Employees Stock Notes Receivable
 
Noncontrolling Interest
 
Total
Net earnings
 
 
 
 
80,595
 
 
 
 
 
4,537
 
85,132
Foreign currency translation adjustment
 
 
 
 
 
 
(5,892)
 
 
 
(1,324)
 
(7,216)
Unrealized gain (loss) on investment
 
 
 
 
 
 
(41)
 
 
 
 
 
(41)
Noncontrolling interest associated with business acquisitions
 
 
 
 
 
 
 
 
 
 
1,019
 
1,019
Distributions to noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(3,188)
 
(3,188)
Purchase of noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(1,256)
 
(1,256)
Cash dividends - $0.400 & $0.420 per share - semiannually
 
 
 
 
(16,507)
 
 
 
 
 
 
 
(16,507)
Issuance of 30,213 shares under employee stock plans
31
 
1,044
 
 
 
 
 
 
 
 
 
1,075
Issuance of 75,604 shares under stock grant programs
76
 
1,836
 
 
 
 
 
 
 
 
 
1,912
Issuance of 65,054 shares under deferred compensation plans
65
 
(65)
 
 
 
 
 
 
 
 
 
Repurchase of 13,613 shares
(14)
 
 
 
(786)
 
 
 
304
 
 
 
(496)
Tax benefits from non-qualified stock options exercised
 
 
370
 
 
 
 
 
 
 
 
 
370
Expense associated with share-based compensation arrangements
 
 
1,846
 
 
 
 
 
 
 
 
 
1,846
Accrued expense under deferred compensation plans
 
 
4,048
 
 
 
 
 
 
 
 
 
4,048
Payments received on employee stock notes receivable
 
 
 
 
 
 
 
 
151
 
 
 
151
Balance at December 26, 2015
$20,142
 
$171,562
 
$565,636
 
$(4,585)
 
$—
 
$13,654
 
$766,409

See notes to consolidated financial statements


27


UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
 
Year Ended
 
December 26,
2015
 
December 27,
2014
 
December 28,
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
Net earnings
$
85,132

 
$
61,564

 
$
45,804

Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
 

 
 

 
 

Depreciation
37,710

 
33,913

 
31,091

Amortization of intangibles
3,531

 
2,410

 
2,473

Expense associated with share-based compensation arrangements
1,846

 
1,919

 
1,874

Excess tax benefits from share-based compensation arrangements
(33
)
 
(14
)
 
(112
)
Expense associated with stock grant plans
109

 
94

 
58

Loss reserve on notes receivable

 

 
15

Deferred income taxes
(1,369
)
 
4,926

 
4,453

Equity in earnings of investee
(374
)
 
(378
)
 
(201
)
Net (gain) loss on sale or impairment of property, plant and equipment
172

 
(3,400
)
 
297

Changes in:
 

 
 

 
 

Accounts receivable
(26,007
)
 
(9,710
)
 
(17,886
)
Inventories
34,139

 
(49,575
)
 
(42,287
)
Accounts payable and cash overdraft
4,798

 
15,390

 
7,835

Accrued liabilities and other
29,142

 
15,981

 
21,026

NET CASH FROM OPERATING ACTIVITIES
168,796

 
73,120

 
54,440

CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

 
 

Purchases of property, plant and equipment
(43,522
)
 
(45,305
)
 
(40,023
)
Proceeds from sale of property, plant and equipment
2,843

 
9,005

 
1,778

Acquisitions, net of cash received
(2,505
)
 
(34,641
)
 
(11,478
)
Purchase of remaining noncontrolling interest in subsidiary
(1,256
)
 

 

Advances on notes receivable
(6,994
)
 
(6,201
)
 
(2,673
)
Collections on notes receivable
11,446

 
9,926

 
2,814

Purchases of investments
(7,858
)
 

 

Proceeds from sale of investments
1,115

 

 

Cash restricted as to use
(181
)
 
315

 
6,111

Other, net
95

 
(162
)
 
(132
)
NET CASH FROM INVESTING ACTIVITIES
(46,817
)
 
(67,063
)
 
(43,603
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

 
 

Borrowings under revolving credit facilities
297,711

 
211,770

 
251,801

Repayments under revolving credit facilities
(311,271
)
 
(197,825
)
 
(262,891
)
Debt issuance costs
(54
)
 
(724
)
 
(46
)
Proceeds from issuance of common stock
1,074

 
541

 
2,144

Distributions to noncontrolling interest
(3,188
)
 
(1,910
)
 
(1,460
)
Dividends paid to shareholders
(16,507
)
 
(12,205
)
 
(8,166
)
Repurchase of common stock
(800
)
 
(4,866
)
 

Excess tax benefits from share-based compensation arrangements
33

 
14

 
112

Other, net

 

 
84


28


NET CASH FROM FINANCING ACTIVITIES
(33,002
)
 
(5,205
)
 
(18,422
)
Effect of exchange rate changes on cash
(1,221
)
 
(852
)
 
(62
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
87,756

 

 
(7,647
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
0

 
0

 
7,647

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
87,756

 
$
0

 
$
0

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
 
 
 
 
 
Interest paid
$
5,118

 
$
4,334

 
$
4,883

Income taxes paid
42,767

 
38,475

 
14,427

NON-CASH INVESTING ACTIVITIES
 

 
 

 
 

Accounts receivable exchanged for notes receivable
$

 
$
2,768

 
1,635

Notes receivable exchanged for property
389

 
3,000

 
3,900

NON-CASH FINANCING ACTIVITIES:
 

 
 

 
 

Common stock issued under deferred compensation plans
$
3,461

 
$
2,567

 
1,800

Property exchanged for notes receivable
300

 

 

Acquisition earnout and noncompete adjustment prior to final purchase accounting
14,195

 

 


See notes to consolidated financial statements


29


UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

We design, manufacture and market wood and wood-alternative products for large home centers and other retailers, structural lumber, engineered wood components, framing services, and other products for the construction market, and specialty wood packaging, components, packing materials, and other wood-based products for various industries.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships.  In addition, we consolidate any entity which we own 50% or more and exercise control.  Intercompany transactions and balances have been eliminated.

NONCONTROLLING INTEREST IN SUBSIDIARIES

Noncontrolling interest in results of operations of consolidated subsidiaries represents the noncontrolling shareholders' share of the income or loss of various consolidated subsidiaries.  The noncontrolling interest reflects the original investment by these noncontrolling shareholders combined with their proportional share of the earnings or losses of these subsidiaries, net of distributions paid.

FISCAL YEAR

Our fiscal year is a 52 or 53 week period, ending on the last Saturday of December.  Unless otherwise stated, references to 2015, 2014, and 2013 relate to the fiscal years ended December 26, 2015, December 27, 2014, and December 28, 2013, respectively.  Fiscal years 2015, 2014, and 2013 were comprised of 52 weeks.


FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS

We follow ASC Topic 820, Fair Value Measurements and Disclosures, which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. This topic requires fair value measurements to be classified and disclosed in one of the following three categories:
Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges.
Level 2 — Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. Financial instrument values are determined using prices for recently traded financial instruments with similar underlying terms and direct or indirect observational inputs, such as interest rates and yield curves at commonly quoted intervals.
Level 3 — Financial instruments not actively traded on a market exchange and there is little, if any, market activity. Values are determined using significant unobservable inputs or valuation techniques.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of cash and highly-liquid investments purchased with an original maturity of three months or less. 

Restricted cash consists of amounts required to be held for loss funding totaling $0.6 and $0.4 million as of December 26, 2015 and December 27, 2014, respectively.

INVESTMENTS


30

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


Investments are deemed to be "available for sale" and are, accordingly, carried at fair value being the quoted market value. Unrealized investment gains or losses, net of deferred taxes, are reported as a separate component of comprehensive income or loss until sold.

ACCOUNTS RECEIVABLE AND ALLOWANCES

We perform periodic credit evaluations of our customers and generally do not require collateral.  Accounts receivable are due under a range of terms we offer to our customers.  Discounts are offered, in most instances, as an incentive for early payment.

We base our allowances related to receivables on historical credit and collections experience, and the specific identification of other potential problems, including the general economic climate.  Actual collections can differ, requiring adjustments to the allowances.  Individual accounts receivable balances are evaluated on a monthly basis, and those balances considered uncollectible are charged to the allowance.

The following table presents the activity in our accounts receivable allowances (in thousands):

 
Beginning
Balance
 
Additions
Charged to
Costs and
Expenses
 
Deductions*
 
Ending
Balance
Year Ended December 26, 2015:
 
 
 
 
 
 
 
Allowance for possible losses on accounts receivable
$
2,390

 
$
20,538

 
$
(20,256
)
 
$
2,672

Year Ended December 27, 2014:
 

 
 

 
 

 
 

Allowance for possible losses on accounts receivable
$
2,060

 
$
18,871

 
$
(18,541
)
 
$
2,390

Year Ended December 28, 2013:
 

 
 

 
 

 
 

Allowance for possible losses on accounts receivable
$
2,550

 
$
17,114

 
$
(17,604
)
 
$
2,060


* Includes accounts charged off, discounts given to customers and actual customer returns and allowances.

We record estimated sales returns, discounts, and other applicable adjustments as a reduction of net sales in the same period revenue is recognized.

Accounts receivable retainage amounts related to long term construction contracts totaled $6.5 million and $6.0 million as of December 26, 2015 and December 27, 2014, respectively.  All amounts are expected to be collected within 18 months.  Concentration of accounts receivable related to our largest customer totaled $39.1 million and $26.5 million as of December 26, 2015 and December 27, 2014, respectively.

NOTES RECEIVABLE AND ALLOWANCES

We have written agreements to receive repayment of funds borrowed from us, consisting of principal as well as any accrued interest, at a specified future date. We record a valuation allowance relating to these agreements for the portion that is expected to be uncollectible. The current portion of notes receivable, net of allowance, totaled $2.0 million and $5.2 million at December 26, 2015 and December 27, 2014, respectively and are included in “Other Current Assets”. The long-term portion of notes receivable, net of allowance, totaled $2.4 million and $3.0 million at December 26, 2015 and December 27, 2014, respectively and are included in “Other Assets”.

The following table presents the activity in our notes receivable allowances (in thousands):


31

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


 
Beginning Balance
 
Additions
 
Deductions
 
Ending
Balance
Year Ended December 26, 2015:
Allowance for possible losses on
Notes receivable
$
826

 
$

 
$
(826
)
 
$

 
 
 
 
 
 
 
 
Year Ended December 27, 2014:
Allowance for possible losses on
Notes receivable
$
1,025

 
$
1,599

 
$
(1,798
)
 
$
826

 
 
 
 
 
 
 
 
Year Ended December 28, 2013:
Allowance for possible losses on
Notes receivable
3,226

 
$
887

 
(3,088
)
 
$
1,025


INVENTORIES

Inventories are stated at the lower of cost or market.  The cost of inventories includes raw materials, direct labor, and manufacturing overhead.  Cost is determined on a weighted average basis.  Raw materials consist primarily of unfinished wood products expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale.  We have inventory on consignment at customer locations valued at $11.7 million as of December 26, 2015 and $12.9 million as of December 27, 2014. During 2015, management decided to discontinue certain product lines in our Gulf region which resulted in a $2.5 million inventory write-down.

PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are stated at cost.  Expenditures for renewals and betterments are capitalized, and maintenance and repairs are expensed as incurred.  Amortization of assets held under capital leases is included in depreciation and amortized over the shorter of the estimated useful life of the asset or the lease term.  Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets as follows:

Land improvements
5 to 15 years
Buildings and improvements
10 to 32 years
Machinery, equipment and office furniture
2 to 8 years

LONG-LIVED ASSETS

In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), when an indicator of potential impairment exists, we evaluate the recoverability of our long-lived assets by determining whether unamortized balances could be recovered through undiscounted future operating cash flows over the remaining lives of the assets.  If the sum of the expected future cash flows was less than the carrying value of the assets, an impairment loss would be recognized for the excess of the carrying value over the fair value.

GOODWILL

Our annual testing date for evaluating goodwill and indefinite-lived intangible asset impairment in the first day of the Company’s fourth fiscal quarter for all reporting units. Additionally, the Company reviews various triggering events throughout the year to ensure that a mid-year impairment analysis is not required. The reasonableness of our segment values determined in our valuation is measured against our market capitalization at the measurement date.

FOREIGN CURRENCY

Our foreign operations use the local currency as their functional currency.  Accordingly, assets and liabilities are translated at exchange rates as of the balance sheet date and revenues and expenses are translated using weighted average rates, with translation adjustments included as a separate component of shareholders' equity. Gains and losses arising from re-measuring foreign currency transactions are included in earnings.

INSURANCE RESERVES

32

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED



Our wholly-owned insurance captive, Ardellis Insurance Ltd.(“Ardellis”), was incorporated on April 21, 2001 under the laws of Bermuda and is licensed as a Class 3 insurer under the Insurance Act 1978 of Bermuda.

We are primarily self-insured for certain employee health benefits, and have self-funded retentions for general liability, automobile liability, property and workers' compensation.  We are fully self-insured for environmental liabilities.  The general liability, automobile liability, property, workers' compensation, and certain environmental liabilities are managed through Ardellis; the related assets and liabilities of which are included in the consolidated financial statements as of December 26, 2015 and December 27, 2014.  Our policy is to accrue amounts equal to actuarially determined or internally computed liabilities.  The actuarial and internal valuations are based on historical information along with certain assumptions about future events.  Changes in assumptions for such matters as legal actions, medical cost trends, and changes in claims experience could cause these estimates to change in the future.

In addition to providing coverage for the Company, Ardellis provides Excess Loss Insurance (primarily medical and prescription drug) to certain third parties.  As of December 26, 2015, Ardellis had 21 such contracts in place.  The contracts have aggregate coverage loss limits based on the election of the third parties.  Reserves associated with these contracts were $2.0 million at December 26, 2015 and $1.8 million at December 27, 2014, and are accrued based on third party actuarial valuations of the expected future liabilities.

INCOME TAXES

Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future.  Such deferred income tax asset and liability computations are based on enacted tax laws and rates.  Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized.  Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities. The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-17 - Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, on November 2, 2015, which simplifies the accounting for deferred tax assets and deferred tax liabilities. In accordance with this standard, the Company has early adopted the presentation of deferred income taxes, which requires all deferred tax assets and deferred tax liabilities to be classified as noncurrent as opposed to the former US GAAP Standard which requires entities to split their deferred tax assets and deferred tax liabilities between current and noncurrent based on the balance sheet classification of the related asset or liability. At the end of 2015 and prospectively, the deferred tax assets and deferred tax liabilities were classified as noncurrent.

DEBT

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03 - Simplifying the Presentation of Debt Issuance Costs on April 7, 2015 and effective for fiscal years beginning after December 15, 2015. The ASU requires the presentation of debt issuance costs in the balance sheet as a direct deduction from the recognized debt liability rather than as an asset and amortization of the costs is reported as interest expense. In accordance with ASU 2015-03, the Company will comply with this ASU during the first interim reporting period of 2016.

REVENUE RECOGNITION

Revenue is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment.  In certain circumstances, the customer takes title when the shipment arrives at the destination.  However, our shipping process is typically completed the same day.

Earnings on construction contracts are reflected in operations using percentage-of-completion accounting, under either the cost to cost or units of delivery methods, 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.

Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration.  Therefore, our operating results are impacted by, among many other things, labor rates and commodity

33

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


costs.  During the year, we update our estimated costs to complete our projects using current labor and commodity costs and recognized losses to the extent that they exist.

The following table presents the balances of percentage-of-completion accounts on December 26, 2015 and December 27, 2014 which are included in other current assets and other accrued liabilities, respectively (in thousands):

 
2015
 
2014
Cost and Earnings in Excess of Billings
$
3,624

 
$
5,244

Billings in Excess of Cost and Earnings
4,978

 
4,682


SHIPPING AND HANDLING OF PRODUCT

Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenue.  Costs incurred related to the shipment and handling of products are classified in cost of goods sold.

EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):

 
December 26,
2015
 
December 27,
2014
 
December 28,
2013
Numerator:
 
 
 
 
 
Net earnings attributable to controlling interest
$
80,595

 
$
57,551

 
$
43,082

Adjustment for earnings allocated to non-vested restricted common stock
(1,059
)
 
(718
)
 
(412
)
Net earnings for calculating EPS
$
79,536

 
$
56,833

 
$
42,670

Denominator:
 

 
 

 
 

Weighted average shares outstanding
20,184

 
20,081

 
19,952

Adjustment for non-vested restricted common stock
(265
)
 
(250
)
 
(191
)
Shares for calculating basic EPS
19,919

 
19,831

 
19,761

Effect of dilutive stock options
36

 
23

 
54

Shares for calculating diluted EPS
19,955

 
19,854

 
19,815

Net earnings per share:
 

 
 

 
 

Basic
$
3.99

 
$
2.87

 
$
2.16

Diluted
$
3.99

 
$
2.86

 
$
2.15


No options were excluded from the computation of diluted EPS for 2015, 2014, or 2013.

USE OF ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period.  We believe our estimates to be reasonable; however, actual results could differ from these estimates.

B.
FAIR VALUE

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


34

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED


 
December 26, 2015
 
December 27, 2014
(in thousands)