EX-13 3 ex13.htm EXHIBIT 13

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
3-26
   
Management's Annual Report on Internal Control Over Financial Reporting
27
   
Report of Independent Registered Public Accounting Firm
28
   
Report of Independent Registered Public Accounting Firm
29
   
Consolidated Balance Sheets as of December 27, 2014 and December 28, 2013
30-31
   
Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 27, 2014, December 28, 2013, and December 29, 2012
32
   
Consolidated Statements of Shareholders' Equity for the Years Ended December 27, 2014, December 28, 2013, and December 29, 2012
33-35
   
Consolidated Statements of Cash Flows for the Years Ended December 27, 2014, December 28, 2013, and December 29, 2012
36-37
   
Notes to Consolidated Financial Statements
38-61
   
Price Range of Common Stock and Dividends
62
   
Stock Performance Graph
63
   
Directors and Executive Officers
64
   
Shareholder Information
65-66

 

SELECTED FINANCIAL DATA
(In thousands, except per share and statistics data)
 
   
2014
   
2013
   
2012
   
2011
   
2010
 
Consolidated Statement of Earnings Data
                   
Net sales
 
$
2,660,329
   
$
2,470,448
   
$
2,054,933
   
$
1,822,336
   
$
1,890,851
 
Gross profit
   
325,342
     
280,552
     
225,109
     
199,727
     
229,955
 
Earnings before income taxes
   
95,713
     
70,258
     
41,064
     
8,787
     
27,111
 
Net earnings attributable to controlling interest
   
57,551
     
43,082
     
23,934
     
4,549
     
17,411
 
Diluted earnings per share
 
$
2.86
   
$
2.15
   
$
1.21
   
$
0.23
   
$
0.89
 
Dividends per share
 
$
0.610
   
$
0.410
   
$
0.400
   
$
0.400
   
$
0.400
 
                                         
Consolidated Balance Sheet Data
                                       
Working capital(1)
 
$
397,546
   
$
357,299
   
$
338,389
   
$
225,399
   
$
263,578
 
Total assets
   
1,023,800
     
916,987
     
860,540
     
764,007
     
789,396
 
Total debt and capital lease obligations
   
98,645
     
84,700
     
95,790
     
52,470
     
55,291
 
Shareholders' equity
   
699,560
     
649,734
     
607,525
     
582,599
     
581,176
 
                                         
Statistics
                                       
Gross profit as a percentage of
                                       
net sales
   
12.2
%
   
11.4
%
   
11.0
%
   
11.0
%
   
12.2
%
Net earnings attributable to controlling interest as a percentage of net sales
   
2.2
%
   
1.7
%
   
1.2
%
   
0.2
%
   
0.9
%
Return on beginning equity(2)
   
8.8
%
   
7.1
%
   
4.1
%
   
0.8
%
   
3.1
%
Current ratio
   
3.27
     
3.59
     
3.95
     
2.70
     
3.21
 
Debt to equity ratio
   
0.14
     
0.13
     
0.16
     
0.09
     
0.10
 
Book value per common share(3)
 
$
35.01
   
$
32.57
   
$
30.68
   
$
29.69
   
$
30.06
 

(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.
 

2

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Universal Forest Products, Inc. (“the Company”) is a holding company that provides capital, management and administrative resources to subsidiaries that supply wood, wood composite and other products to three primary markets: retail, housing and construction, and industrial.  Our retail market is comprised of building materials sold primarily to national home center retailers, retail-oriented regional lumber yards and contractor-oriented lumber yards.  Our housing and construction market is comprised of three submarkets, manufactured housing customers, residential construction customers and commercial construction customers.  Our industrial market is generally defined as industrial manufacturers and other customers for packaging, material handling and other applications.  Founded in 1955, the Company is headquartered in Grand Rapids, Mich., with affiliates throughout North America.  For more about Universal Forest Products, go to www.ufpi.com.

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

OVERVIEW
 
Our results for 2014 were impacted by the following:

· Our sales increased 8% in 2014 due to an 8% increase in our unit sales, as selling prices remained flat.  See “Historical Lumber Prices”.  Our unit sales increased in three of five of our market classifications, with our strongest growth occurring in our commercial construction  market.  Our unit sales to the retail building materials and industrial markets each reported an increase of approximately 12%. Our decline in unit sales to the manufactured housing and residential construction markets are discussed in the following paragraphs.
 
3

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
· National housing starts increased approximately 8% in the period from December 2013 through November 2014, compared to the same period of the prior year (our sales trail housing starts by about a month).  Although national housing starts increased, our unit sales to the residential construction market decreased 8% in 2014, primarily due to being more selective in the business that we select, particularly in our framing operations within our Site-Built segment, which primarily supplies engineered wood components and framing services in certain regions for construction of housing and small commercial structures.  We expect our selective pricing policies and conservative approach to adding capacity to serve this market may continue to impact our sales growth relative to industry growth.

· Shipments of HUD code manufactured homes were up 6% in the period from January through November 2014, compared to the same period of the prior year, and modular home starts decreased by 3.3% in the first nine months of 2014 (the last period reported).  Our unit sales to the manufactured housing market remained flat as the impact of a modest overall increase in industry production on our sales was offset by a decline in sales to one of our large customers. This customer began to produce its own trusses and lumber components used in its homes in certain regions of the United States.

· Our profitability has improved to $57.6 million in net earnings attributable to controlling interest from $43.1 million last year primarily due to a combination of the unit sales growth mentioned above, being more selective in the business that we select with residential construction customers, improvements in our sales mix, and relatively steady lumber prices during 2014 compared to lumber prices that were falling at key times during 2013.

· We completed several strategic business acquisitions in 2014 that are outlined in the Notes to Consolidated Financial Statements, Note C, "Business Combinations".

HISTORICAL LUMBER PRICES

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

   
Random Lengths Composite
 
   
Average $/MBF
 
   
2014
   
2013
   
2012
 
January
 
$
395
   
$
393
   
$
281
 
February
   
394
     
409
     
286
 
March
   
387
     
436
     
300
 
April
   
367
     
429
     
308
 
May
   
377
     
367
     
342
 
June
   
375
     
329
     
330
 
July
   
381
     
343
     
323
 
August
   
401
     
353
     
340
 
September
   
398
     
368
     
332
 
October
   
381
     
384
     
324
 
November
   
367
     
398
     
354
 
December
   
375
     
385
     
370
 
Annual average
 
$
383
   
$
383
   
$
324
 
Annual percentage change
   
0
%
   
18.2
%
       
 
4

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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
 
   
2014
   
2013
   
2012
 
January
 
$
375
   
$
397
   
$
269
 
February
   
398
     
426
     
278
 
March
   
406
     
445
     
300
 
April
   
392
     
436
     
314
 
May
   
402
     
383
     
341
 
June
   
406
     
355
     
314
 
July
   
396
     
366
     
300
 
August
   
419
     
364
     
315
 
September
   
416
     
360
     
319
 
October
   
393
     
356
     
313
 
November
   
386
     
362
     
350
 
December
   
399
     
360
     
362
 
Annual average
 
$
399
   
$
384
   
$
315
 
Annual percentage change
   
3.9
%
   
21.9
%
       
 
5

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market").  We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide.  As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products.  Lumber costs are  approximately 60% of our material costs.  Material costs as a percentage of sales were 71.3%, 73.2%, and 69.7% in 2014, 2013, 2012, 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.

Ÿ 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.

Ÿ Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profits.  These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry.  For these products, we estimate the customers' needs and we carry anticipated levels of inventory.  Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins.  For these products, our margins are exposed to changes in the trend of lumber prices.  As a result of the decline in the housing market and our sales to residential and commercial builders, a greater percentage of our sales fall into this general pricing category.  Consequently, we believe our profitability may be impacted to a greater extent to changes in the trend of lumber prices.
 
6

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Changes in the trend of lumber prices have their greatest impact on the following products:

Ÿ Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market.  In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 15% of our total sales.  This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to the higher rate of inventory turnover.  We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs.  (Please refer to the “Risk Factors” section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)

Ÿ 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.

BUSINESS COMBINATIONS AND ASSET PURCHASES
 
We completed five business acquisitions during 2014 and four during 2013 and each was accounted for using the purchase method.  The aggregate annual revenue of these acquisitions totaled $77.7 million.  These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2014 and 2013 are not presented.
 
See Notes to Consolidated Financial Statements, Note C, "Business Combinations" for additional information.
 
7

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 27, 2014
   
December 28, 2013
   
December 29, 2012
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
Cost of goods sold
   
87.8
     
88.6
     
89.0
 
Gross profit
   
12.2
     
11.4
     
11.0
 
Selling, general, and administrative expenses
   
8.6
     
8.3
     
9.0
 
Loss contingency for anti-dumping duty assessments
   
0.1
     
0.1
     
0.1
 
Net loss (gain) on disposition of assets and other impairment charges
   
(0.1
)
   
-
     
(0.3
)
Earnings from operations
   
3.7
     
3.0
     
2.2
 
Other expense, net
   
0.1
     
0.2
     
0.2
 
Earnings before income taxes
   
3.6
     
2.8
     
2.0
 
Income taxes
   
1.3
     
1.0
     
0.7
 
Net earnings
   
2.3
     
1.9
     
1.3
 
Less net earnings attributable to noncontrolling interest
   
(0.2
)
   
(0.1
)
   
(0.1
)
Net earnings attributable to controlling interest
   
2.2
%
   
1.7
%
   
1.2
%

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:

Ÿ 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.

Ÿ Expanding geographically in our core businesses, domestically and internationally.

Ÿ Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail building materials market, specialty wood packaging, engineered wood components, and "wood alternative" products. Engineered wood components include roof trusses, wall panels, and floor systems.  Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.
 
8

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Ÿ Developing new products and expanding our product offering for existing customers.  New product sales were $149.1 million in 2014 and $85.0 million in 2013.

Ÿ 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
27,
2014
   
%
Change
   
December
 28,
2013
   
%
Change
   
December
29,
2012
 
Retail Building Materials
 
$
1,028,783
     
9.9
   
$
936,141
     
12.0
   
$
835,553
 
Industrial
   
783,805
     
12.0
     
699,688
     
18.4
     
590,921
 
                                         
Manufactured Housing
   
381,564
     
(2.4
)
   
391,051
     
24.1
     
315,208
 
Residential Construction
   
355,393
     
(1.5
)
   
360,762
     
39.1
     
259,301
 
Commercial Construction
   
148,391
     
27.6
     
116,270
     
36.8
     
85,022
 
Housing and Construction
   
885,348
             
868,083
             
659,531
 
Total Gross Sales
   
2,697,936
     
7.8
     
2,503,912
     
20.0
     
2,086,005
 
Sales Allowances
   
(37,607
)
           
(33,464
)
           
(31,072
)
Total Net Sales
 
$
2,660,329
     
7.7
   
$
2,470,448
     
20.2
   
$
2,054,933
 

Note: During 2014, 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
 
2014 versus 2013
   
8
%
   
0
%
   
8
%
2013 versus 2012
   
20
%
   
12
%
   
8
%
2012 versus 2011
   
12
%
   
8
%
   
4
%

Retail Building Materials:

Gross sales to the retail building materials 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 is primarily due an improvement in consumer demand.  Our large retail customers have also reported year over year increases in their same store sales.
 
9

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Gross sales to the retail building materials market increased 12% in 2013 compared to 2012 due to an 11% increase in lumber prices and an estimated 1% increase in overall unit sales.  Within this market, sales to our big box customers increased 11% while our sales to other retailers increased 13%.  We believe that our increase in unit sales was due to a slight increase in market share.  Sales to this market for the first half of 2013 were adversely impacted by inclement weather, resulting in a shifting of some consumer demand to our third quarter.

Industrial:
 
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 (Container Systems, Inc., Packnet Ltd, and Bigs Packaging and Lumber, LLC), 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.
 
Gross sales to the industrial market increased 18% in 2013 compared to 2012, resulting from a 10% increase in selling prices and an 8% increase in unit sales.  We acquired two new operations (Nepa Pallet and Container Co, Inc. and Custom Caseworks, Inc.), which contributed to our growth in unit sales.  Our sales also increased as a result of adding 218 new customers during the year.  Demand from our existing customers was soft for much of the year.

Manufactured Housing:

Gross sales to the manufactured housing market decreased approximately 2% in 2014 compared to 2013, due to unit sales remaining flat and a 2% decrease in selling prices due to the lumber market and commodity prices for OSB panels which we distribute.  Industry production of HUD-code homes increased 6% compared to 2013 and modular home starts decreased over 3% for the first nine months of 2014 (the last period reported).  Our unit sales to the manufactured housing market remained flat as the impact of a modest overall increase in industry production on our sales was offset by a decline in sales to one of our large customers.  This customer began to produce its own trusses and lumber components used its homes in certain regions of the United States.
 
Gross sales to the manufactured housing market increased 24% in 2013 compared to 2012, due to an 11% increase in unit sales and a 13% increase in selling prices due to the lumber market.  Production of HUD-code homes increased 9% compared to 2012 and modular home starts increased 5% for the first nine months of 2013 (the last period reported).  In addition to industry production growth, market share gains in our distribution business contributed to our increase in sales.
 
10

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

Gross sales to the residential construction market decreased almost 2% in 2014 compared to 2013 due to an 8% decrease in unit sales offset by a 6% increase in estimated selling prices.   By comparison, national housing starts increased approximately 7% in the period of December 2013 through November 2014 (our sales typically trail housing starts by about a month), compared to the same period of 2013.  Our sales growth trailed the growth in national housing starts primarily due to being more selective in the business that we select, particularly in our framing operations within our Site-Built segment.  We expect our selective pricing policies and conservative approach to adding capacity to serve this market may continue to impact our sales growth relative to industry growth.

Gross sales to the residential construction market increased 39% in 2013 compared to 2012 due to an estimated 18% increase in unit sales and a 21% increase in selling prices.  By comparison, national housing starts increased approximately 21% in the period from December 2012 through November of 2013 (our sales trail housing starts by about a month), compared to the same period of 2012.

Commercial Construction:

Gross sales to the commercial construction market increased 28% in 2014 compared to 2013 due to a 29% increase in unit sales offset by a 1% decrease in selling prices.  Within this market, sales to commercial builders increased 11%, and sales of products used to make concrete forms increased 35.8% due to our continued focus on growing our share of this market.

Gross sales to the commercial construction market increased 37% in 2013 compared to 2012 due to a 24%  increase in unit sales and a 13%  increase in selling prices.  Within this market, sales to commercial builders increased 42%, and sales of products used to make concrete forms increased 35%  due to our continued focus on growing our share of this market.  Our sales to commercial builders increased primarily due to a new product offering of installed cabinets to customers in our Gulf Region.

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
 
2014
   
58.5
%
   
41.5
%
2013
   
58.1
%
   
41.9
%
2012
   
58.7
%
   
41.3
%
 

11

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
COST OF GOODS SOLD AND GROSS PROFIT

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 exceeds our 8% increase in unit sales.  The improvement in our profitability in 2014 is 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 building materials market as well an improvement in margin on those sales due to a more favorable trend in lumber prices in 2014 compared to 2013;
· 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.
 
Our gross profit percentage increased from 11.0% in 2012 to 11.4% in 2013.  This improvement in profitability resulted from unit sales growth combined with operating leverage in our cost structure, as well as an improvement in our sales mix, whereby our sales of higher margin products increased.  In addition, the pricing pressure we experienced on sales to our residential construction customers eased as market activity has improved.  These factors were offset by the higher level of lumber prices in 2013 relative to 2012.  As explained previously, based upon the manner in which the sale price of certain of our products is established, higher relative lumber prices tend to reduce our gross profits as a percentage of sales.  (See "Impact of Lumber Market on Our Operating Results".)  We also measure our relative profitability by comparing our gross profit dollars to changes in unit sales.  For 2013, our gross profit dollars increased by 24.6%, exceeding our 8% increase in unit sales.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

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.

Selling, general and administrative ("SG&A") expenses increased by approximately $19.5 million, or 10.5%, in 2013 compared to 2012, while we reported an 8% increase in unit sales.  The increase in SG&A was primarily due to increases in base wages and other incentive compensation.
 
12

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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.  We continue to work with US Customs and Border Protection to mitigate potential charges.  This duty is unrelated to the Canadian duty assessment disclosed below.

In 2012, we recorded a $2.3 million loss contingency for a Canadian anti-dumping duty. The Canadian government imposed retroactive assessments for antidumping and countervailing duties tied to certain extruded aluminum products imported from China.  An additional $0.6 million was recorded during 2013.

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.

We incurred a $0.4 million net loss in 2013 comprising a $0.1 million net gain from the sales of properties and $0.5 million in losses from asset impairments and other costs associated with idled facilities.  See Notes to Consolidated Financial Statements, Note D “Net Loss (Gain) on Disposition of Assets and Other Impairment Charges.”

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

· Current and projected earnings, cash flow and return on investment
· Current and projected market demand
· Market share
· Competitive factors
· Future growth opportunities
· Personnel and management
 
INTEREST, NET

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.

Net interest costs were higher in 2013 compared to 2012, due to higher debt levels in 2013 resulting from the impact of higher lumber prices and greater sales volumes on working capital and the issuance of long-term debt at the end of 2012 which carried a higher interest rate than our revolving credit facility.
13

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 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.  See Notes to Consolidated Financial Statements, Note K, “Income Taxes”.

Our effective tax rate decreased to 34.8% in 2013 compared to 36.6% in 2012.  This decrease was due to a decline in the state income tax rate resulting from franchise taxes which remained relatively unchanged even when income increased, along with research and development and certain other tax credits related to 2012, which Congress approved in 2013.
 
SEGMENT REPORTING

The following table presents, for the periods indicated, our net sales and earnings from operations by reportable segment.
 
(in thousands)
  Net Sales  
   
December 27, 2014
   
December 28, 2013
   
December 29, 2012
   
2014 vs 2013
   
2013 vs 2012
 
Eastern
 
$
1,113,525
   
$
1,037,066
   
$
858,539
     
7.4
%
   
20.8
%
Western
   
1,062,565
     
950,685
     
776,639
     
11.8
     
22.4
 
Site-Built
   
260,118
     
272,114
     
222,824
     
(4.4
)
   
22.1
 
All Other
   
224,121
     
210,583
     
196,931
     
6.4
     
6.9
 
Total
 
$
2,660,329
   
$
2,470,448
   
$
2,054,933
     
7.7
%
   
20.2
%
 
(in thousands)
  Earnings from Operations  
   
December 27, 2014
   
December 28, 2013
   
December 29, 2012
   
2014 vs 2013
   
2013 vs 2012
 
Eastern
 
$
37,522
   
$
37,416
   
$
25,156
     
0.3
%
   
48.7
%
Western
   
53,576
     
42,003
     
35,417
     
27.6
     
18.6
 
Site-Built
   
19,574
     
7,947
     
1,299
     
146.3
     
511.8
 
All Other
   
3,520
     
(2,366
)
   
(11,316
)
   
248.8
     
79.1
 
Corporate1
   
(16,825
)
   
(10,732
)
   
(6,028
)
   
(56.8
)
   
(78.0
)
Total
 
$
97,367
   
$
74,268
   
$
44,528
     
31.1
%
   
66.8
%
 
1Corporate primarily represents over (under) allocated administrative costs and certain incentive compensation expense.
 
14

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Eastern
 
Net sales of the Eastern reportable segment increased by 7.4% in 2014 compared to 2013, due to an increase in sales to retail, industrial, and commercial construction customers primarily due to improved demand.  These increases were offset by a decline in sales to manufactured housing due to a vertical integration strategy recently implemented by one of our largest customers.

Net sales of the Eastern reportable segment increased by 20.8% in 2013 compared to 2012, due to:
 
· Higher lumber prices.
· An increase in commercial construction and concrete forming sales primarily due to new products introduced in our Gulf region and other market share gains.
· A slight increase in sales to retail, industrial, and commercial construction customers due to market share gains.
 
Earnings from operations for the Eastern reportable segment increased slightly in 2014 primarily due to the growth in our sales to the retail, industrial and commercial construction markets, and the impact of a more favorable lumber market.  These improvements were offset by unfavorable cost variances in our first and fourth quarters due to inclement weather and a decline in sales to manufactured housing.
 
Earnings from operations for the Eastern reportable segment increased in 2013 primarily due to greater unit sales and operating leverage on labor and overhead costs as well as improvements in our sales mix whereby our sales of higher margin products increased.

Western

Net sales of the Western reportable segment increased by 11.8% in 2014 compared to 2013, due to:
· An increase in sales to the commercial construction market;
· Growth in sales to the industrial market as a result of gaining new customers, increased demand from existing customers, and acquiring businesses and adding capacity to our existing locations to grow our share of the industrial market;
· These increases were offset by a decline in sales to manufactured housing due to a vertical integration strategy recently implemented by one of our largest customers.

Net sales of the Western reportable segment increased by 22.4% in 2013 compared to 2012, due to:
· Higher lumber prices.
· Recently acquired businesses that serve the industrial market.
· An increase in manufactured housing sales due to an increase in industry production of HUD code homes.
 
15

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Earnings from operations for the Western 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.

Earnings from operations for the Western reportable segment increased in 2013 primarily due to greater unit sales and operating leverage on labor and overhead costs.

Site-Built

Net sales of the Site-Built reportable segment decreased 4.4% in 2014 compared to 2013 despite an increase in housing starts, primarily due to our operations being selective in the business we take, particularly in our framing operations.

Net sales of the Site-Built reportable segment increased 22.1% in 2013 compared to 2012. This increase was primarily due to increased selling prices due to higher lumber prices and an easing of pricing pressure with customers, as well as an increase in housing starts.

Earnings from operations for the Site-Built reportable segment increased in 2014 compared to 2013, primarily due to being more selective in the business we elected to undertake.

Earnings from operations for the Site-Built reportable segment increased in 2013 compared to 2012 primarily due to an increase in unit sales and operating leverage on labor and overhead costs as well as an easing of pricing pressure.  These factors were affected by reduced profits of our turn-key framing operations, which were adversely impacted by an unexpected rise in labor and lumber costs early in the year on certain projects.

All Other

Net sales of all other segments increased 6.4% in 2014 compared to 2013 primarily due to:

· An increase in sales to the Manufactured Housing market by our UFP Distribution operations primarily due to market share gains.
· An increase in sales to the Industrial market by our Pinelli Universal partnership, which manufactures moulding and millwork products out of its plant in Durango, Mexico.
· An increase in sales by our Universal Consumer Products operations due to market share gains and an increase in customer demand.

Net sales of all other segments increased 6.9% in 2013 compared to 2012. This increase was primarily due to:
· An increase in sales to the Manufactured Housing market by our UFP Distribution operations, primarily due to an increase in industry production of HUD code homes and market share gains from adding new product lines.
 
16

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
· An increase in sales to the Industrial market by our Pinelli Universal partnership.
· An increase in sales by our Universal Consumer Products operations due to market share gains.
 
Earnings from operations for all other segments improved in 2014 compared to 2013, primarily due to improved profitability of our Universal Consumer Products 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.

Earnings from operations for all other segments improved in 2013 compared to 2012, primarily due to improved profitability of our Universal Consumer Products operations resulting from operational improvements and our Pinelli Universal partnership due to the higher level of lumber prices.  These factors were partially offset by $7.5 million of additional development costs associated with our new Eovations product line.

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 27, 2014 (in thousands).

   
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
 
$
-
   
$
-
   
$
-
   
$
98,645
   
$
98,645
 
Estimated interest on long-term debt
   
2,979
     
5,957
     
5,957
     
12,150
     
27,043
 
Operating leases
   
4,865
     
6,922
     
2,430
     
-
     
14,217
 
Capital project purchase obligations
   
7,008
     
-
     
-
     
-
     
7,008
 
Total
 
$
14,852
   
$
12,879
   
$
8,387
   
$
110,795
   
$
146,913
 

As of December 27, 2014, we also had $26.3 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 27,
2014
   
December 28,
2013
   
December 29,
2012
 
Cash from operating activities
 
$
73,120
   
$
54,440
   
(5,721
)
Cash from investing activities
   
(67,063
)
   
(43,603
)
   
(34,223
)
Cash from financing activities
   
(5,205
)
   
(18,422
)
   
36,695
 
Effect of exchange rate changes on cash
   
(852
)
   
(62
)
   
244
 
Net change in cash and cash equivalents
   
-
     
(7,647
)
   
(3,005
)
Cash and cash equivalents, beginning of year
   
-
     
7,647
     
10,652
 
Cash and cash equivalents, end of year
 
$
-
   
$
-
   
$
7,647
 
 
17

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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.  In 2014, higher unit sales caused our investment in accounts receivable and inventory to increase.  Industry challenges with transportation also caused us to carry greater levels of safety stock.

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 50 days in 2014 from 49 days in 2013 due to a 2 day increase in our days supply of inventory, offset by a 1 day extension in our payables cycle.  We carried higher levels of safety stock inventory in 2014 due to industry transportation challenges.  In addition, adverse weather in the first quarter of 2014 resulted in weaker than expected unit sales and lower inventory turnover during that period.

Cash generated from operating activities was approximately $73.1 million in 2014, which was comprised of net earnings of $61.6 million and $39.4 million of non-cash expenses, partially offset by a $27.9 million increase in working capital since the end of 2013.  Working capital at the end of 2014 is higher than the end of 2013, primarily due to new businesses we’ve added in 2014, as well as the impact of higher year over year unit sales on receivables and higher inventory levels due to an anticipated increase in unit sales in 2015.

Capital expenditures were $45.3 million in 2014, and we have outstanding purchase commitments on existing capital projects totaling approximately $7.0 million at December 27, 2014.  Included within capital expenditures was $9.0 million for expansion to support new product offerings, sales growth into new geographic markets, and growing our manufacturing capabilities to serve our industrial customers.  We intend to fund capital expenditures and purchase commitments through our operating cash flows and amounts available under our revolving credit facility.
 
18

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Proceeds from the sale of property, plant, and equipment totaled $9 million in 2014.  Included within these proceeds were collections of approximately $8 million related to the sale of five idle real estate properties associated with plants we previously closed.  See Notes to Consolidated Financial Statements, Note D “Net Loss (Gain) on Disposition of Assets and Impairment Charges”.

Cash flows used in investing activities also included $34.6 million spent to acquire the net assets of Container Systems Inc, Upshur Forest Products LLC, High Level Components LLC, Packnet Ltd, and Bigs Packaging and Lumber LLC.  See Notes to Consolidated Financial Statements, Note C “Business Combinations”.

In 2014, cash flows used in financing activities included $12.2 million of dividends paid to shareholders.  Our Board of Directors approved semi-annual dividends of $0.21 per share and $0.40 per share, which were paid in June and December of 2014, respectively.  In addition, we repurchased approximately 105,000 shares of our stock for an amount totaling approximately $4.9 million.  The company currently has remaining authorization to repurchase up to approximately 2.9 million shares.

On December 17, 2012, we entered into a Note Purchase Agreement under which we issued senior notes in two tranches totaling $75 million.  See Notes to Unaudited Consolidated Condensed Financial Statements, Note F “Debt”.  A portion of these proceeds were used to retire $40 million senior notes due in December 2012, while the balance of the proceeds was used to repay amounts owed under our revolving credit facility.

On December 27, 2014, we had $13.9 million outstanding on our $295 million revolving credit facility.  On December 28, 2013, we had no outstanding balance.  The revolving credit facility is scheduled to mature in November of 2019.  The revolving credit facility supports letters of credit totaling approximately $9.8 million on December 27, 2014 and December 28, 2013.  Financial covenants on the unsecured revolving credit facility and 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 27, 2014 and December 28, 2013.

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.
19

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 28, 2014, the fair values of each of the Company’s reporting units substantially exceeded their carrying values.
 
   
Eastern Division
   
Western Division
   
Site-Built
   
All Other
 
                 
Excess Fair Value over Carrying Value
   
21.8
%
   
87.8
%
   
150.2
%
   
52.6
%
 
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.

In the second quarter of fiscal 2013, we changed our annual testing date for evaluating goodwill and indefinite-lived intangible asset impairment from the last day of the fiscal year to the first day of the Company’s fourth fiscal quarter for all reporting units and indefinite-lived intangible assets. This voluntary change in accounting method is preferable under the circumstances because it will allow us more time to complete the annual goodwill and indefinite-lived intangible asset impairment testing in advance of our year-end reporting.  This change does not delay, accelerate or avoid an impairment charge. The change was not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight.
 
20

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 27, 2014.  Our accounting policies with respect to the reserves are as follows:

Ÿ General liability, automobile, and workers' compensation reserves are accrued based on third party actuarial valuations of the expected future liabilities.

Ÿ Health benefits are self-insured by us 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.

Ÿ 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 27, 2014, there were fifteen 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 $1.8 million at December 27, 2014 and $0.9 million at December 28, 2013, 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.
 
21

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

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. In addition, the Company is targeting EBITDA margins of 5 percent to 6 percent of sales.

Our general long-term objectives continue to be to:

· Achieve sales growth primarily through new product introduction, international business expansion, and gaining additional share, particularly of our industrial and commercial construction markets;

· Increase our profitability through cost reductions, productivity improvements as volume improves, and a more favorable mix of higher margin value-added products; and
 
22

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
· Earn a return on invested capital in excess of our weighted average cost of capital.

RETAIL BUILDING MATERIALS 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.  We anticipate that this gain in market share could add up to $80 million to our sales to the retail building materials market in 2015.

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, and services for this market.

· Adding new products or new markets 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 increasing the size of our dedicated industrial sales force.  We also plan to evaluate strategic acquisition opportunities.

MANUFACTURED HOUSING MARKET

The National Association of Home Builders forecasts a 10% decrease in manufactured home shipments in 2015 followed by a 38% increase in 2016.  Over the long-term, we believe the HUD code market will regain a greater share of the overall housing market as credit conditions normalize and as consumers seek more affordable housing alternatives.

We anticipate modular housing will also gain additional share of the housing market as developers try to control the building environment and costs.  We will strive to maintain our market share of trusses produced for the modular market as a result of our strong relationships with modular builders, design services, and proprietary products.
 

23

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
We may continue to expand our product offering to distribute additional products to our manufactured housing customers.  In addition, we may continue to rely upon strategic business acquisitions to help us achieve this goal.

RESIDENTIAL CONSTRUCTION MARKET

The Mortgage Bankers Association of America forecasts a 12% increase in national housing starts to an estimated 1.1 million starts in 2015.  The National Association of Home Builders forecasts starts of 1.2 million, a 17% increase from 2014.  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, due to our continued focus on profitability and cash flow and our conservative approach to adding capacity to serve this market, our growth may continue to trail the market in 2015.

On a long-term basis, we anticipate growth in our sales to the residential construction market as market conditions improve.

COMMERCIAL CONSTRUCTION MARKET

It continues to be our long term objective to gain additional share of this market through our ability to provide value added products and services to these customers.

GROSS PROFIT

We believe the following factors may impact our gross profits and margins in 2015:

· 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 continue to 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.
24

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
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 2015, 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 building materials and manufactured housing markets.  Our investment in trade receivables and inventory will continue to be impacted by the level of lumber prices.

Management expects to spend approximately $45 million on capital expenditures in 2015 and incur depreciation of approximately $35 million and amortization and other non-cash expenses of approximately $6 million.  On December 27, 2014, we had outstanding purchase commitments on capital projects of approximately $7.0 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.

We have no present plan to change our dividend policy, which was increased in December 2014 to $0.40 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.
 
25

UNIVERSAL FOREST PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Our Board of Directors has approved a share repurchase program, and as of December 27, 2014, 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.
 

26

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 27, 2014, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework)  (“COSO”).  Based on that evaluation, management has concluded that as of December 27, 2014, 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 25, 2015
27

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 27, 2014, based on criteria established in Internal Control — Integrated Framework (1992) 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 27, 2014, based on the criteria established in Internal Control — Integrated Framework (1992) 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 27, 2014 of the Company and our report dated February 25, 2015 expressed an unqualified opinion on those consolidated financial statements.


/s/ Deloitte & Touche LLP

Grand Rapids, Michigan
February 25, 2015

28

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 27, 2014 and the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows for the year 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 audit provides a reasonable basis for our opinion.
 
In our opinion, such 2014 consolidated financial statements present fairly, in all material respects, the financial position of Universal Forest Products, Inc. and subsidiaries as of December 27, 2014, and the results of their operations and their cash flows for the year 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 27, 2014, based on the criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan
February 25, 2015
 
29

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 each of the two fiscal years 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 each of the two fiscal years 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 25, 2015
 
30

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

   
December 27,
2014
   
December 28,
2013
 
ASSETS
       
CURRENT ASSETS:
       
Restricted cash
 
$
405
   
$
720
 
Accounts receivable, net
   
195,912
     
180,452
 
Inventories:
               
Raw materials
   
183,770
     
161,226
 
Finished goods
   
156,278
     
126,079
 
Total inventories
   
340,048
     
287,305
 
Refundable  income taxes
   
11,934
     
2,235
 
Deferred income taxes
   
6,284
     
6,866
 
Other current assets
   
18,423
     
18,820
 
TOTAL CURRENT ASSETS
   
573,006
     
496,398
 
                 
DEFERRED INCOME TAXES
   
1,079
     
1,365
 
OTHER ASSETS
   
9,565
     
12,087
 
GOODWILL
   
183,062
     
160,146
 
INDEFINITE-LIVED INTANGIBLE ASSETS
   
2,340
     
2,340
 
OTHER INTANGIBLE ASSETS, NET
   
6,479
     
7,241
 
PROPERTY, PLANT AND EQUIPMENT:
               
Land and improvements
   
114,157
     
115,155
 
Building and improvements
   
175,340
     
173,641
 
Machinery and equipment
   
284,981
     
260,807
 
Furniture and fixtures
   
23,397
     
23,233
 
Construction in progress
   
6,523
     
5,866
 
PROPERTY, PLANT AND EQUIPMENT, GROSS
   
604,398
     
578,702
 
Less accumulated depreciation and amortization
   
(356,129
)
   
(341,292
)
PROPERTY, PLANT AND EQUIPMENT, NET
   
248,269
     
237,410
 
TOTAL ASSETS
 
$
1,023,800
   
$
916,987
 
 
See notes to consolidated financial statements.
 
31

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
 
 
December 27,
2014
December 28,
2013
LIABILITIES AND SHAREHOLDERS' EQUITY
               
CURRENT LIABILITIES:
               
Cash overdraft
 
$
621
   
$
1,079
 
Accounts payable
   
89,105
     
72,918
 
Accrued liabilities:
               
Compensation and benefits
   
62,143
     
45,018
 
Other
   
23,591
     
20,084
 
TOTAL CURRENT LIABILITIES
   
175,460
     
139,099
 
                 
LONG-TERM DEBT
   
98,645
     
84,700
 
DEFERRED INCOME TAXES
   
30,933
     
26,788
 
OTHER LIABILITIES
   
19,202
     
16,666
 
TOTAL LIABILITIES
   
324,240
     
267,253
 
                 
SHAREHOLDERS' EQUITY:
               
Controlling interest shareholders' equity:
               
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
 
$
-
   
$
-
 
Common stock, no par value; shares authorized 40,000,000; issued and outstanding, 19,984,451 and 19,948,270
   
19,984
     
19,948
 
Additional paid-in capital
   
162,483
     
156,129
 
Retained earnings
   
502,334
     
461,812
 
Accumulated other comprehensive earnings
   
1,348
     
3,466
 
Employee stock notes receivable
   
(455
)
   
(732
)
Total controlling interest shareholders' equity
   
685,694
     
640,623
 
Noncontrolling interest
   
13,866
     
9,111
 
TOTAL SHAREHOLDERS' EQUITY
   
699,560
     
649,734
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
1,023,800
   
$
916,987
 

See notes to consolidated financial statements.
 

32

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

(in thousands, except per share data)

   
Year Ended
 
   
December 27,
   
December 28,
   
December 29,
 
   
2014
   
2013
   
2012
 
             
NET SALES
 
$
2,660,329
   
$
2,470,448
   
$
2,054,933
 
                         
COST OF GOODS SOLD
   
2,334,987
     
2,189,896
     
1,829,824
 
                         
GROSS PROFIT
   
325,342
     
280,552
     
225,109
 
                         
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
229,775
     
204,390
     
184,919
 
ANTI-DUMPING DUTY ASSESSMENTS
   
1,600
     
1,526
     
2,328
 
NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND IMPAIRMENT CHARGES
   
(3,400
)
   
368
     
(6,666
)
                         
EARNINGS FROM OPERATIONS
   
97,367
     
74,268
     
44,528
 
                         
INTEREST EXPENSE
   
4,267
     
4,851
     
4,053
 
INTEREST INCOME
   
(2,235
)
   
(640
)
   
(510
)
EQUITY IN EARNINGS OF INVESTEE
   
(378
)
   
(201
)
   
(79
)
     
1,654
     
4,010
     
3,464
 
                         
EARNINGS BEFORE INCOME TAXES
   
95,713
     
70,258
     
41,064
 
                         
INCOME TAXES
   
34,149
     
24,454
     
15,054
 
                         
NET EARNINGS
   
61,564
     
45,804
     
26,010
 
                         
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(4,013
)
   
(2,722
)
   
(2,076
)
                         
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
 
$
57,551
   
$
43,082
   
$
23,934
 
                         
EARNINGS PER SHARE - BASIC
 
$
2.87
   
$
2.16
   
$
1.21
 
                         
EARNINGS PER SHARE - DILUTED
 
$
2.86
   
$
2.15
   
$
1.21
 
                         
OTHER COMPRESHENSIVE INCOME:
                       
                         
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
   
(3,116
)
   
(784
)
   
980
 
                         
COMPREHENSIVE INCOME
   
58,448
     
45,020
     
26,990
 
                         
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
   
(3,015
)
   
(2,730
)
   
(2,398
)
                         
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTERST
 
$
55,433
   
$
42,290
   
$
24,592
 

See notes to consolidated financial statements.
 
33

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 31, 2011
 
$
19,624
   
$
143,988
   
$
410,848
   
$
3,600
   
$
(1,255
)
 
$
5,794
   
$
582,599
 
Net earnings
                   
23,934
                     
2,076
     
26,010
 
Foreign currency translation adjustment
                           
658
             
322
     
980
 
Capital contribution from noncontrolling interest
                                           
436
     
436
 
Distributions to noncontrolling interest
                                           
(871
)
   
(871
)
Cash dividends - $0.400 per share
                   
(7,905
)
                           
(7,905
)
Issuance of 89,574 shares under employee stock plans
   
90
     
1,971
                                     
2,061
 
Issuance of 49,536 shares under stock grant programs
   
50
     
37
     
10
                             
97
 
Issuance of 37,437 shares under deferred compensation plans
   
37
     
(37
)
                                   
-
 
Tax benefits from non-qualified stock options exercised
           
765
                                     
765
 
Expense associated with share-based compensation arrangements
           
1,270
                                     
1,270
 
Accrued expense under deferred compensation plans
           
1,836
                                     
1,836
 
Note receivable adjustment
   
(1
)
   
(25
)
                   
27
             
1
 
Payments received on employee stock notes receivable
                                   
246
             
246
 
Balance at December 29, 2012
 
$
19,800
   
$
149,805
   
$
426,887
   
$
4,258
   
$
(982
)
 
$
7,757
   
$
607,525
 
 
See notes to consolidated financial statements
 
34

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
                   
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
 
35

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
 
36

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

   
Year Ended
 
   
December 27,
   
December 28,
   
December 29,
 
   
2014
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings
 
$
61,564
   
$
45,804
   
$
26,010
 
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
                       
Depreciation
   
33,913
     
31,091
     
30,461
 
Amortization of intangibles
   
2,410
     
2,473
     
2,918
 
Expense associated with share-based compensation arrangements
   
1,919
     
1,874
     
1,270
 
Excess tax benefits from share-based compensation arrangements
   
(14
)
   
(112
)
   
(75
)
Expense associated with stock grant plans
   
94
     
58
     
97
 
Loss reserve on notes receivable
   
-
     
15
     
2,131
 
Deferred income taxes
   
4,926
     
4,453
     
2,526
 
Equity in earnings of investee
   
(378
)
   
(201
)
   
(79
)
Net (gain) loss on sale or impairment of property, plant and equipment
   
(3,400
)
   
297
     
(6,890
)
Changes in:
                       
Accounts receivable
   
(9,710
)
   
(17,886
)
   
(32,274
)
Inventories
   
(49,575
)
   
(42,287
)
   
(45,529
)
Accounts payable and cash overdraft
   
15,390
     
7,835
     
16,281
 
Accrued liabilities and other
   
15,981
     
21,026
     
(2,568
)
NET CASH FROM OPERATING ACTIVITIES
   
73,120
     
54,440
     
(5,721
)
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Purchases of property, plant and equipment
   
(45,305
)
   
(40,023
)
   
(30,344
)
Proceeds from sale of property, plant and equipment
   
9,005
     
1,778
     
18,240
 
Acquisitions, net of cash received
   
(34,641
)
   
(11,478
)
   
(16,974
)
Purchase of patents & product technology
   
-
     
(143
)
   
(95
)
Advances on notes receivable
   
(6,201
)
   
(2,673
)
   
(1,183
)
Collections on notes receivable
   
9,926
     
2,814
     
2,839
 
Cash restricted as to use
   
315
     
6,111
     
(6,178
)
Other, net
   
(162
)
   
11
     
(528
)
NET CASH FROM INVESTING ACTIVITIES
   
(67,063
)
   
(43,603
)
   
(34,223
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Borrowings under revolving credit facilities
   
211,770
     
251,801
     
294,055
 
Repayments under revolving credit facilities
   
(197,825
)
   
(262,891
)
   
(282,965
)
Repayment of long-term debt
   
-
     
-
     
(42,774
)
Borrowings of long-term debt
   
-
     
-
     
75,000
 
Debt issuance costs
   
(724
)
   
(46
)
   
(266
)
Proceeds from issuance of common stock
   
541
     
2,144
     
2,061
 
Distributions to noncontrolling interest
   
(1,910
)
   
(1,460
)
   
(871
)
Capital contribution from noncontrolling interest
   
-
     
84
     
281
 
Dividends paid to shareholders
   
(12,205
)
   
(8,166
)
   
(7,905
)
Repurchase of common stock
   
(4,866
)
   
-
     
-
 
Excess tax benefits from share-based compensation arrangements
   
14
     
112
     
75
 
Other, net
   
-
     
-
     
4
 
NET CASH FROM FINANCING ACTIVITIES
   
(5,205
)
   
(18,422
)
   
36,695
 
                         
Effect of exchange rate changes on cash
   
(852
)
   
(62
)
   
244
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
-
     
(7,647
)
   
(3,005
)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
   
(0
)
   
7,647
     
10,652
 
                         
CASH AND CASH EQUIVALENTS, END OF PERIOD
 
$
(0
)
 
$
(0
)
 
$
7,647
 
 

37

UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -
(CONTINUED)
 
(In thousands)

   
Year Ended
 
   
December 27,
2014
   
December 28,
2013
   
December 29,
2012
 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
           
Interest paid
 
$
4,334
   
$
4,883
   
$
3,982
 
Income taxes paid
   
38,475
     
14,427
     
16,751
 
                         
NON-CASH INVESTING ACTIVITIES
                       
Accounts receivable exchanged for notes receivable
 
$
2,768
     
1,635
     
-
 
Notes receivable exchanged for property
   
3,000
     
3,900
     
-
 
                         
NON-CASH FINANCING ACTIVITIES:
                       
Common stock issued under deferred compensation plans
 
$
2,567
     
1,800
     
1,310
 

See notes to consolidated financial statements
38

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 retail building materials home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the residential construction market, and specialty wood packaging and components and packing materials for various industries. We also provide framing services for the residential market and forming products for concrete construction. Our consumer products operations offer a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide.

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 50% owned entities over which we 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 2014, 2013, and 2012 relate to the fiscal years ended December 27, 2014, December 28, 2013, and December 29, 2012, respectively.  Fiscal years 2014, 2013, and 2012 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:
 
39

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
Ÿ Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges.
 
Ÿ 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.
 
Ÿ 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.  There were no cash equivalents as of December 27, 2014 or December 28, 2013.

Restricted cash consists of amounts required to be held for loss funding totaling $0.4 and $0.7 million as of December 27, 2014 and December 28, 2013, respectively.

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.
 
40

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
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 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
 
                                 
Year Ended December 29, 2012:
                               
Allowance for possible losses on accounts receivable
 
$
2,053
   
$
16,687
   
(16,190
)
 
$
2,550
 

* 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 $6.0 million and $8.3 million as of December 27, 2014 and December 28, 2013, respectively.  All amounts are expected to be collected within 18 months.  Concentration of accounts receivable related to our largest customer totaled $26.5 million and $19.8 million as of December 27, 2014 and December 28, 2013, 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 $5.2 million and $0.8 million at December 27, 2014 and December 28, 2013, respectively and are included in “Other Current Assets”. The long-term portion of notes receivable, net of allowance, totaled $3.0 million and $5.1 million at December 27, 2014 and December 28, 2013, respectively and are included in “Other Assets”.
 
41

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
The following table presents the activity in our notes receivable allowances (in thousands):
 
   
Beginning Balance
   
Additions
   
Deductions
   
Ending
Balance
 
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
 
 
Year Ended December 29, 2012:
Allowance for possible losses on
Notes receivable
   
-
   
$
3,226
     
-
   
$
3,226
 

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 $12.9 million as of December 27, 2014 and $11.4 million as of December 28, 2013.

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
15 to 31.5 years
Machinery, equipment and office furniture
3 to 10 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

In the second quarter of fiscal 2013, we changed our annual testing date for evaluating goodwill and indefinite-lived intangible asset impairment from the last day of the fiscal year to the first day of the Company’s fourth fiscal quarter for all reporting units and indefinite-lived intangible assets. This voluntary change in accounting method is preferable under the circumstances because it will allow us more time to complete the annual goodwill and indefinite-lived intangible asset impairment testing in advance of our year-end reporting.  This change does not delay, accelerate or avoid an impairment charge. The change is not applied retrospectively as it is impracticable to do so because retrospective application would require application of significant estimates and assumptions with the use of hindsight. Accordingly, the change will be applied prospectively.
 
42

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

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 27, 2014 and December 28, 2013.  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 27, 2014, Ardellis had 15 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 $1.8 million at December 27, 2014 and $0.9 million at December 28, 2013, 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.
 
43

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
 
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 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 27, 2014 and December 28, 2013 which are included in other current assets and other accrued liabilities, respectively (in thousands):

   
2014