EX-13 2 ufpi-20171230ex133eec344.htm EX-13 ufpi_Ex13

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 

3-23

 

 

Management’s Annual Report on Internal Control Over Financial Reporting 

24

 

 

Report of Independent Registered Public Accounting Firm 

25

 

 

Report of Independent Registered Public Accounting Firm 

26

 

 

Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016 

27

 

 

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 30, 2017,  December 31, 2016, and December 26, 2015 

28

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended December 30, 2017, December 31, 2016, and December 26, 2015 

29

 

 

Consolidated Statements of Cash Flows for the Years Ended December 30, 2017, December 31, 2016, and December 26, 2015 

30

 

 

Notes to Consolidated Financial Statements 

31-54

 

 

Price Range of Common Stock and Dividends 

55

 

 

Stock Performance Graph 

56

 

 

Directors and Executive Officers 

57

 

 

Shareholder Information 

58

 

 

 

 

 


 

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

Consolidated Statement of Earnings Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Net sales

 

$

3,941,182

 

$

3,240,493

 

$

2,887,071

 

$

2,660,329

 

$

2,470,448

 

Gross profit

 

 

542,826

 

 

474,590

 

 

399,904

 

 

325,342

 

 

280,552

 

Earnings before income taxes

 

 

176,007

 

 

160,671

 

 

131,002

 

 

95,713

 

 

70,258

 

Net earnings attributable to controlling interest

 

$

119,512

 

$

101,179

 

$

80,595

 

 

57,551

 

 

43,082

 

Diluted earnings per share

 

$

1.94

 

$

1.65

 

$

1.33

 

$

0.95

 

$

0.72

 

Dividends per share

 

$

0.320

 

$

0.290

 

$

0.273

 

$

0.203

 

$

0.137

 

Consolidated Balance Sheet Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Working capital(1)

 

$

560,241

 

$

484,661

 

$

444,057

 

$

397,546

 

$

357,299

 

Total assets

 

 

1,464,677

 

 

1,292,058

 

 

1,107,679

 

 

1,023,800

 

 

916,987

 

Total debt

 

 

146,003

 

 

111,693

 

 

85,895

 

 

98,645

 

 

84,700

 

Shareholders’ equity

 

 

974,023

 

 

860,466

 

 

766,409

 

 

699,560

 

 

649,734

 

Statistics

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Gross profit as a percentage of net sales

 

 

13.8

%  

 

14.6

%  

 

13.9

%  

 

12.2

%  

 

11.4

%

Net earnings attributable to controlling interest as a percentage of net sales

 

 

3.0

%  

 

3.1

%  

 

2.8

%  

 

2.2

%  

 

1.7

%

Return on beginning equity(2)

 

 

13.9

%  

 

13.2

%  

 

11.5

%  

 

8.8

%  

 

7.1

%

Current ratio(4)

 

 

2.85

 

 

2.78

 

 

3.17

 

 

3.27

 

 

3.59

 

Debt to equity ratio(5)

 

 

0.15

 

 

0.13

 

 

0.11

 

 

0.14

 

 

0.13

 

Book value per common share(3)

 

$

15.92

 

$

14.10

 

$

12.68

 

$

11.67

 

$

10.86

 


(1)Current assets less current liabilities.

(2)Net earnings attributable to controlling interest divided by beginning shareholders’ equity.

(3)Shareholders’ equity divided by common stock outstanding.

(4)Current assets divided by current liabilities.

(5)Total debt divided by shareholders’ equity.

 

Acquisition growth is the primary contributing factor to material increases over the period from 2013 to 2017.  Refer to Note C under the“Notes to the Consolidated Financial Statements” for further discussion on the Company’s business combinations and impact on financials.

 

 

2


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and in Australia that supply wood, wood composite and other products to three robust markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Mich. For more information about Universal Forest Products, Inc., or its affiliated operations, go to www.ufpi.com.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company’s reports on Form 10‑K and 10‑Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2017.

OVERVIEW

Our results for 2017 were impacted by the following:

·

Our sales increased almost 22% in 2017 due to a 15% increase in our unit sales and a 7% increase in overall selling prices (see “Historical Lumber Prices”). Our unit sales increased in all three of our markets - retail, industrial, and construction - and were driven by a combination of acquisition and organic growth. Overall, businesses we acquired contributed 11% to our unit sales growth in 2017 (see Note C of the Notes to Consolidated Financial Statements) and we achieved 4% organic unit sales growth.  In 2016, we had 53 weeks in our fiscal year which contributed an additional $60 million of sales compared to 2017, which was a 52 week year (See Note A of the Notes to Consolidated Financial Statements).

·

The Home Improvement Research Institute reported a 5% increase in home improvement sales in 2017. Comparatively, our unit sales to the retail market increased 10% in 2017, including approximately 7% contributed from acquired businesses.

·

Our sales to the industrial market increased 35% in 2017. Businesses we acquired contributed 25% to unit sales growth. Comparatively, the Federal Reserve’s Industrial Production noted that national industrial production increased less than 1% in 2017.

·

National housing starts increased approximately 4% in the period from December 2016 through November 2017, compared to the same period of the prior year (our sales trail housing starts by about a month). Comparatively, our unit sales to residential construction customers increased 7% in 2017.

·

Production of HUD code manufactured homes were up 16% in the period from January through November 2017, compared to the same period of the prior year. Comparatively, our unit sales to the manufactured housing market increased 9% in 2017.

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Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

Our earnings from operations increased 10.4% to $181.5 million in 2017 from $164.4 million in 2016.  Acquired businesses contributed $6.7 million to our increase, which was below our expectations primarily due to idX.  The remaining $10.4 million, or 6.3%, increase was primarily driven by our organic unit sales growth and a decline in our incentive bonus expense due to a decrease in our return on investment which is a key performance metric for determining incentive bonus payments.

·

Finally, the Tax Act, as defined in Note K to our 2017 Annual Financial Statements, resulted in a $6.4 million decrease to our net deferred tax liability and income taxes in 2017.  Excluding the impact of the Tax Act, our net earnings attributable to controlling interest was $113.1 million, compared to $101.2 million in 2016, an 11.8% increase.

·

Our cash flow from operating activities decreased to $137 million due to an increase in our investment in working capital resulting from higher year over year lumber prices in the fourth quarter of 2017 compared with the fourth quarter of 2016 as presented in the tables below.

HISTORICAL LUMBER PRICES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Random Lengths Composite

 

 

 

Average $/MBF

 

 

    

2017

    

2016

    

2015

 

January

 

$

356

 

$

316

 

$

379

 

February

 

 

393

 

 

310

 

 

361

 

March

 

 

401

 

 

321

 

 

339

 

April

 

 

424

 

 

345

 

 

334

 

May

 

 

416

 

 

356

 

 

315

 

June

 

 

399

 

 

353

 

 

328

 

July

 

 

411

 

 

351

 

 

346

 

August

 

 

417

 

 

367

 

 

327

 

September

 

 

416

 

 

354

 

 

300

 

October

 

 

437

 

 

356

 

 

308

 

November

 

 

436

 

 

346

 

 

326

 

December

 

 

433

 

 

357

 

 

314

 

 

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

412

 

$

344

 

$

331

 

Annual percentage change

 

 

19.8

%  

 

3.9

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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. Our purchases of this species comprises approximately 44% and 43% of total lumber purchases for 2017 and 2016, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

Southern Yellow Pine

 

 

Average $/MBF

 

    

2017

    

2016

    

2015

January

 

$

397

 

$

358

 

$

411

February

 

 

420

 

 

357

 

 

399

March

 

 

433

 

 

366

 

 

393

April

 

 

438

 

 

389

 

 

400

May

 

 

416

 

 

397

 

 

368

June

 

 

399

 

 

382

 

 

354

July

 

 

381

 

 

380

 

 

344

August

 

 

383

 

 

391

 

 

321

September

 

 

387

 

 

375

 

 

290

October

 

 

417

 

 

385

 

 

318

November

 

 

412

 

 

387

 

 

348

December

 

 

418

 

 

400

 

 

347

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

408

 

$

381

 

$

358

Annual percentage change

 

 

7.1

%  

 

6.4

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

The significant increases in lumber prices from 2016 to 2017 can primarily be attributed to the following factors:

·

Duties on imported lumber from Canada - The U.S. Department of Commerce has preliminarily determined that subsidies are being provided to producers and exporters of certain softwood lumber products (softwood lumber) from Canada and duties are being assessed ranging from 7% to 23%.

·

Canadian Wildfires - In 2017, British Columbia experienced its worst wildfire season in history which impacted the producers and exporters of lumber products.

·

Hurricanes Irma and Harvey - Caused catastrophic damage in parts of the U.S. and the Caribbean.  The necessity for lumber to prevent and repair hurricane damage resulted in a surge in lumber demand during the third and fourth quarters of 2017.

 

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 were 49.1%, 48.4%, and 48.9% of our gross sales in 2017, 2016, and 2015, 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

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

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

·

Products with fixed selling prices. These products include value-added products such as decking and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential construction market, and most industrial packaging products. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs with our suppliers for these sales commitments. Also, the time period and quantity limitations generally allow us to eventually re-price our products for changes in lumber costs from our suppliers.

·

Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profits. These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry. For these products, we estimate the customers’ needs and we carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our gross margins. For these products, our margins are exposed to changes in the trend of lumber prices.

The greatest risk associated with changes in the trend of lumber prices is on the following products:

·

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 19% 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 our higher rate of inventory turnover of these products. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs. (Please refer to the “Risk Factors” section of our annual report on form 10‑K, filed with the United States Securities and Exchange Commission.)

·

Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs or including re-pricing triggers if lumber prices change in excess of an agreed upon percentage.

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

%

 

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Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. As a result of this factor, we believe it is useful to compare our change in units shipped with our change in gross profits, operating profits, and selling, general, and administrative expenses as a method of evaluating our profitability and efficiency.

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed four business acquisitions during 2017 and six during 2016. The annual historical sales attributable to acquisitions in 2017 and 2016 were approximately $127 million and $362 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2017 and 2016 are not presented.

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

RESULTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

    

December 30,

    

December 31,

    

December 26,

 

 

 

2017

 

2016

 

2015

 

Net sales

 

100.0

%  

100.0

%  

100.0

%

Cost of goods sold

 

86.2

 

85.4

 

86.1

 

Gross profit

 

13.8

 

14.6

 

13.9

 

Selling, general, and administrative expenses

 

9.1

 

9.6

 

9.2

 

Earnings from operations

 

4.6

 

5.1

 

4.7

 

Other expense (income), net

 

0.1

 

0.1

 

0.2

 

Earnings before income taxes

 

4.5

 

5.0

 

4.5

 

Income taxes

 

1.3

 

1.7

 

1.6

 

Net earnings

 

3.1

 

3.3

 

2.9

 

Less net earnings attributable to noncontrolling interest

 

(0.1)

 

(0.1)

 

(0.2)

 

Net earnings attributable to controlling interest

 

3.0

%  

3.1

%  

2.8

%

 

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, specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a variety of retail stores, commercial and other structures. Our strategic long-term sales objectives include:

·

Maximizing unit sales growth while achieving return on investment goals

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Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

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, increasing our market share with independent retailers, and increasing our sales of customized interior fixtures used in a variety of markets.

·

Expanding geographically in our core businesses, domestically and internationally.

·

Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail  market, specialty wood packaging, engineered wood components, customized interior fixtures, 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.

·

Developing new products and expanding our product offering for existing customers. New product sales were $418.4 million in 2017, $338.6 million in 2016, and $298.0 million in 2015 and are presented by market in the table below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

New Product Sales by Market

 

 

Twelve Months Ended

 

    

December 30,

    

December 31,

    

December 26,

Market Classification

 

2017

 

2016

 

2015

Retail

 

$

241,009

 

$

191,619

 

$

167,938

Industrial

 

 

109,892

 

 

97,718

 

 

77,723

Construction

 

 

67,536

 

 

49,290

 

 

52,378

Total New Product Sales

 

 

418,437

 

 

338,627

 

 

298,039

    

Note:  Certain prior year product reclassifications resulted in a decrease and increase in new product sales in 2016 and 2015,        respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 30,

    

%

    

December 31,

    

%

    

December 26,

Market Classification

2017

 

Change

 

2016

 

Change

 

2015

Retail

$

1,493,366

 

15.4

 

$

1,294,273

 

13.8

 

$

1,137,109

Industrial

 

1,334,082

 

35.4

 

 

984,968

 

10.6

 

 

890,179

Construction

 

1,178,755

 

15.8

 

 

1,018,136

 

12.5

 

 

905,193

Total Gross Sales

 

4,006,203

 

21.5

 

 

3,297,377

 

12.4

 

 

2,932,481

Sales Allowances

 

(65,021)

 

14.3

 

 

(56,884)

 

25.3

 

 

(45,410)

Total Net Sales

$

3,941,182

 

21.6

 

$

3,240,493

 

12.2

 

$

2,887,071

 

Note: During 2017, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

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Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

 

2017 versus 2016

 

21.5

%  

6.6

%  

14.9

%

2016 versus 2015

 

12.4

%  

1.2

%  

11.2

%

2015 versus 2014

 

8.5

%  

(3.0)

%  

11.5

%

 

Retail:

Gross sales to the retail market increased over 15% in 2017 compared to 2016 due to a 10% increase in unit sales and a 5% increase in selling prices. Within this market, sales to our big box customers increased 16% while our sales to other retailers increased 14%. Businesses we acquired contributed 7% to our growth, while new products contributed to our 3% organic unit sales growth. Comparatively, our large retail customers reported year over year same store sales growth of approximately 8% during the first nine months of 2017, the latest information available to us.

Gross sales to the retail market increased almost 14% in 2016 compared to 2015 due to a 10% increase in unit sales and a 4% increase in selling prices. Within this market, sales to our big box customers increased 17% while our sales to other retailers increased 10%. Our increase in unit sales primarily consisted of organic growth achieved through a combination of share gains in existing product lines with certain retailers, an improvement in consumer demand, and growth in our new product sales. Our large retail customers reported year over year same store sales growth of approximately 6% during 2016.

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

Industrial:

Gross sales to the industrial market increased 35% in 2017 compared to 2016, resulting from a 29% increase in overall unit sales and a 6% increase in selling prices. Businesses we acquired contributed 25% to our growth in unit sales. Our organic unit sales growth of 4% was primarily achieved through share gains including adding 390 new customers during the year and increasing the number of locations we serve of existing customers by 142 new stores.

Gross sales to the industrial market increased 11% in 2016 compared to 2015, resulting from a 13% increase in overall unit sales, offset by a 2% decrease in selling prices. Businesses we acquired contributed 10% to our growth in unit sales. Our organic growth in unit sales was 3% as a result of share gains achieved by adding 191 new customers during the year and increasing the number of locations we serve certain large customers. We believe overall market demand decreased in 2016 due, in part, to the strong U.S. dollar which impacted our customers with export sales.

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

Construction:

Gross sales to the construction market increased almost 16% in 2017 compared to 2016, due to a unit sales increase of 7% and a 9% increase in selling prices. Unit sales increased due to a 7% increase in units shipped to residential construction customers and a 9% increase in shipments to manufactured housing customers while unit sales to commercial construction customers remained flat. Businesses we acquired in 2017 contributed 1% to unit sales growth. Comparatively, the

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Mortgage Bankers Association of America reported year over year national housing starts increased 4%, the commercial construction market increased 3% and the National Association of Home Builders reported industry production of HUD-code homes increased over 15%.

Gross sales to the construction market increased over 12% in 2016 compared to 2015, due to a unit sales increase of 11% and a 1% increase in selling prices. Unit sales increased due to a 17% increase in units shipped to residential construction customers, a 10% increase in shipments to commercial construction customers, and a 5% increase in shipments to manufactured housing customers. Businesses we acquired in 2016 contributed 2% in unit sales growth to manufactured housing customers. Comparatively, the Mortgage Bankers Association of America reported year over year national housing starts increased 5%, the commercial construction market increased 5%, the National Association of Home Builders reported industry production of HUD-code homes increased 14%, and modular home starts decreased 1% in 2016 (the last period reported). The increases in our sales to residential and commercial construction above  nationally recognized market data are primarily due to a combination of increased demand and market share in certain areas of our geographic footprint. Our growth in the manufactured housing market was less than the national average, which was primarily due to a reduction in market share resulting from the loss of certain customers.

 

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

  

2017

 

 

63.3

%  

 

36.7

%

2016

 

 

62.6

%  

 

37.4

%

2015

 

 

59.8

%  

 

40.2

%

 

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage decreased from 14.6% in 2016 to 13.8% in 2017 due, in part, to the high level of lumber prices. This is evident when comparing our increase in gross profits with our increase in units shipped.  Our gross profit dollars increased by over $68 million, or 14%, which is slightly below our 15% increase in unit sales. Our profitability in 2017 was impacted by the following factors:

·

Approximately $8 million, a 5% increase in our gross profit in the retail market, was attributable to our growth in unit sales to that market. Businesses we acquired in 2017 contributed $1.6 million of this increase.  Our increase in gross profit was less than our increase in unit sales as a result of (1) Lumber Market volatility, particularly in the second quarter which is our primary selling season, and (2) the acquisition of Robbins in the first quarter of 2017, which primarily sells lower margin treated lumber products.

·

Our growth in unit sales to the industrial market resulted in a $34 million, or 20%, increase in our gross profit, which was due primarily to businesses we acquired in 2017 and 2016. Our increase in gross profit was less than our increase in unit sales primarily due to the impact of higher lumber prices on our products sold with fixed selling prices.

·

Almost $13 million, or 9%, of our gross profit improvement was due to growth in sales to the residential construction and manufactured housing markets.  Our gross profit increase exceeded our increase in unit sales

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

primarily due to leveraging our fixed manufacturing costs, which helped offset the impact of Lumber Market volatility and higher labor rates and benefit costs.

·

The remaining $13 million increase in our gross profit was due to a variety of factors including favorable labor and overhead cost variances, increases in vendor rebates, and a decrease in customer rebates compared to 2017.

 

Our gross profit percentage increased from 13.9% in 2015 to 14.6% in 2016. Additionally, our gross profit dollars increased by over $75 million, or 19%, which exceeded our 11% increase in unit sales. The improvement in our profitability in 2016 is attributable to the following factors:

·

Approximately $38 million of the increase was attributable to our growth in unit sales to the retail market and an improvement in margin on those sales. New product sales, effective inventory positioning leading to lower lumber costs, and the favorable impact of selling into a rising lumber market on variable priced products contributed to our margin improvement.

·

Our growth in unit sales to the industrial market and  margin improvement on those sales for most of the year resulted in a $22 million improvement in our gross profit. Businesses we acquired in 2016 contributed $16 million to this increase. The gross margin improvement was attributable to a favorable improvement in our product sales mix of more value-added products.

·

Almost $16 million of our gross profit improvement was due to growth in sales to the residential construction, commercial construction, and manufactured housing markets as our gross margins remained relatively flat.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $52.1 million, or 16.7%, in 2017 compared to 2016, while we reported a 15% increase in unit sales. Acquired businesses contributed $41.0 million to our increase. The remaining increase in SG&A was primarily due to a $11.1 million increase in compensation and related costs resulting from annual raises, greater benefit costs, and hiring additional personnel to support sales growth.  Our annual incentive bonus expense was almost $44 million compared to $45 million last year.  This decrease, in spite of an increase in profits, was due to a decline in our return on investment, a key performance metric for determining incentive compensation bonus payments.

Selling, general and administrative ("SG&A") expenses increased by approximately $45.9 million, or 17%, in 2016 compared to 2015, while we reported an 11% increase in unit sales. Acquired businesses contributed $17 million to this increase. The remaining increase in SG&A was primarily due to an $11 million increase in compensation and benefit costs resulting from annual raises, other cost increases, and hiring additional personnel to support sales growth, and a $14 million increase in incentive compensation expense tied to our return on investment.

INTEREST, NET

Net interest costs were higher in 2017 compared to 2016, due to a higher outstanding balance on our revolving line of credit throughout 2017 as well as an increase in the borrowing rate on our revolving credit facility which is tied to LIBOR.

Net interest costs were lower in 2016 compared to 2015, due to a lower outstanding balance on our revolving line of credit throughout 2016.

 

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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, permanent tax differences, and the impact of the Tax Act in the U.S. Our effective tax rate decreased to 29.5% in 2017 compared to 34.3% in 2016. The decrease in the 2017 tax rate is primarily due to the impact of the Tax Act, which resulted in a $6.4 million reduction in our net deferred tax liability at the end of December 2017.  The remaining decrease was due to increases in tax credits and permanent tax differences.

Our effective tax rate decreased to 34.3% in 2016 compared to 35.0% in 2015.  The decrease in the 2016 tax rate is primarily due to a reduction in our estimated state tax rate.

 

SEGMENT REPORTING

The following tables present, for the periods indicated, our net sales and earnings from operations by reportable segment (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

December 30,

 

December 31,

 

December 26,

 

 

 

 

 

 

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

 

North

 

$

1,133,656

 

$

1,000,426

 

$

922,092

 

13.3

%  

8.5

%

South

 

 

837,370

 

 

711,862

 

 

656,550

 

17.6

 

8.4

 

West

 

 

1,417,924

 

 

1,251,093

 

 

1,133,398

 

13.3

 

10.4

 

All Other

 

 

552,232

 

 

277,112

 

 

175,031

 

99.3

 

58.3

 

Total

 

$

3,941,182

 

$

3,240,493

 

$

2,887,071

 

21.6

%  

12.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from Operations

 

 

 

December 30,

 

December 31,

 

 December 26, 

 

 

 

 

 

 

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

 

North

 

$

61,326

 

$

59,408

 

$

53,879

 

3.2

%  

10.3

%

South

 

 

46,646

 

 

47,146

 

 

30,740

 

(1.1)

 

53.4

 

West

 

 

82,465

 

 

76,875

 

 

70,220

 

7.3

 

9.5

 

All Other

 

 

17,296

 

 

16,639

 

 

3,038

 

3.9

 

447.7

 

Corporate1

 

 

(26,264)

 

 

(35,630)

 

 

(22,410)

 

26.3

 

(59.0)

 

Total

 

$

181,469

 

$

164,438

 

$

135,467

 

10.4

 

21.4

%


1.

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

North

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of North Segment by Market

 

 

Twelve Months Ended

 

 

December 30,

 

December 31,

 

December 26,

 

% Change

 

% Change

Market Classification

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

Retail

 

$

488,871

 

$

467,619

 

$

416,635

 

4.5

 

12.2

Industrial

 

 

157,365

 

 

115,889

 

 

118,315

 

35.8

 

(2.1)

Construction

 

 

510,810

 

 

436,928

 

 

403,183

 

16.9

 

8.4

Total Gross Sales

 

 

1,157,046

 

 

1,020,436

 

 

938,133

 

13.4

 

8.8

Sales Allowances

 

 

(23,390)

 

 

(20,010)

 

 

(16,041)

 

16.9

 

24.7

Total Net Sales

 

$

1,133,656

 

$

1,000,426

 

$

922,092

 

13.3

 

8.5

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Net sales attributable to the North reportable segment increased by $133 million, or 13.3%, in 2017, due primarily to the following factors:

·

Acquired operations contributed over $29 million to our growth in sales to the industrial market.

·

Higher lumber prices resulted in an increase in our selling prices.

·

Organic unit sales growth to the industrial and construction markets was offset slightly by a decrease in unit sales to the retail market due to a reduction in demand from certain customers.

Earnings from operations for the North reportable segment increased in 2017 by $1.9 million, or 3.2%, due to an increase in gross profit of $9.2 million, offset by a $7.3 million increase in SG&A expenses compared to last year.  Acquired operations contributed $1.5 million to our operating profits in 2017.  Gross profits and SG&A were impacted by the same factors discussed under “Cost of Goods Sold and Gross Profit” and “Selling, General, and Administrative Expenses.”

Net sales attributable to the North reportable segment increased by 8.5% in 2016, due to increases in sales to our retail and residential construction markets, offset by a decrease in sales to our industrial customers as a result of the same factors discussed under "Gross Sales".

Earnings from operations for the North reportable segment increased in 2016 by $5.5 million, or 10.3%, due to an increase in gross profit of $13.6 million, offset by an  $8.1 million increase in SG&A expenses compared to the prior year.     Additionally, margin improvements were achieved on sales to the retail and industrial markets due to a more favorable product sales mix focused on value-added products.

South

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of South Segment by Market

 

 

Twelve Months Ended

 

 

December 30,

 

December 31,

 

December 26,

 

% Change

 

% Change

Market Classification

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

Retail

 

$

388,784

 

$

317,242

 

$

288,442

 

22.6

 

10.0

Industrial

 

 

271,005

 

 

246,849

 

 

244,380

 

9.8

 

1.0

Construction

 

 

196,471

 

 

161,999

 

 

135,512

 

21.3

 

19.5

Total Gross Sales

 

 

856,260

 

 

726,090

 

 

668,334

 

17.9

 

8.6

Sales Allowances

 

 

(18,890)

 

 

(14,228)

 

 

(11,784)

 

32.8

 

20.7

Total Net Sales

 

$

837,370

 

$

711,862

 

$

656,550

 

17.6

 

8.4

 

Net sales attributable to the South reportable segment increased by $125 million, or 17.6%, in 2017, primarily due to the following factors:

·

Acquired operations contributed $88.4 million, $5.0 million, and $6.1 million to our retail, industrial, and construction markets, respectively.

·

Higher lumber prices increased our selling prices.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

Organic unit sales growth to the construction and industrial markets was offset by a decline in unit sales to the retail market as a result of transferring our import and export business to our International segment and management team.  Our International segment was formed, among other reasons, to gain efficiencies by consolidating our international business into one unit.

Earnings from operations for the South reportable segment decreased in 2017 by $0.5 million, or 1.1%, as the increase in gross profit of $3.9 million was more than offset by a $4.4 million increase in SG&A expenses compared to last year.  Acquired operations contributed $3.5 million to our operating profits in 2017.  Our decline in profitability was due to customer attrition in our East Central and Southeast regions.

Net sales attributable to the South reportable segment increased by 8.4% in 2016, primarily due to an increase in sales to our retail and manufactured housing customers, as a result of the same factors discussed under "Gross Sales".

Earnings from operations for the South reportable segment increased in 2016 by $16.4 million, or 53.4%, due to an increase in gross profit of $17.9 million, offset by a $1.5 million increase in SG&A expenses compared to the prior year.   Additionally, we achieved margin improvements primarily due to improvements in our sales mix of more value-added products and the closure of certain under-performing operations. 

West

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of West Segment by Market

 

 

Twelve Months Ended

 

 

December 30,

 

December 31,

 

December 26,

 

% Change

 

% Change

Market Classification

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

Retail

 

$

439,667

 

$

382,117

 

$

322,215

 

15.1

 

18.6

Industrial

 

 

524,819

 

 

466,209

 

 

458,202

 

12.6

 

1.7

Construction

 

 

470,773

 

 

419,205

 

 

366,483

 

12.3

 

14.4

Total Gross Sales

 

 

1,435,259

 

 

1,267,531

 

 

1,146,900

 

13.2

 

10.5

Sales Allowances

 

 

(17,335)

 

 

(16,438)

 

 

(13,502)

 

5.5

 

21.7

Total Net Sales

 

$

1,417,924

 

$

1,251,093

 

$

1,133,398

 

13.3

 

10.4

 

Net sales of the West reportable segment increased by $167 million, or 13.3%, in 2017, primarily due to the following factors:

·

Acquired operations contributed $4.9 million, $3.2 million, and $6.8 million to our retail, industrial, and construction markets, respectively.

·

Higher lumber prices increased our selling prices.

·

Organic unit sales growth in each of our markets due to the factors discussed under “Gross Sales”.

Earnings from operations for the West reportable segment increased in 2017 by $5.6 million, or 7.3%, due to an increase in gross profit of $12.1 million, offset by a $6.5 million increase in SG&A expenses compared to last year due to the same factors discussed under “Cost of Goods Sold and Gross Profit” and “Selling, General, and Administrative Expenses.” 

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net sales of the West reportable segment increased by 10.4% in 2016, primarily due to an increase in sales to the retail and construction markets, as a result of the same factors discussed under "Gross Sales". Additionally, newly acquired businesses contributed $11.3 million in gross sales to the retail and construction markets in 2016.

Earnings from operations for the West reportable segment increased in 2016 by $6.7 million, or 9.5%, due to an increase in gross profit of $15.1 million, offset by a $8.4 million increase in SG&A expenses compared to the prior year.  Our margins increased due to an improvement in our sales mix of value-added products.  

All Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of All Other Segment by Market

 

 

Twelve Months Ended

 

    

December 30,

 

December 31,

 

December 26,

 

% Change

 

% Change

Market Classification

 

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

Retail

 

$

176,043

 

$

127,294

 

$

109,818

 

38.3

 

15.9

Industrial

 

 

380,892

 

 

156,022

 

 

69,282

 

144.1

 

125.2

Construction

 

 

289

 

 

 3

 

 

12

 

9,533.3

 

(75.0)

Total Gross Sales

 

 

557,224

 

 

283,319

 

 

179,112

 

96.7

 

58.2

Sales Allowances

 

 

(4,992)

 

 

(6,207)

 

 

(4,081)

 

(19.6)

 

52.1

Total Net Sales

 

$

552,232

 

$

277,112

 

$

175,031

 

99.3

 

58.3

 

Note that prior years have been restated to reflect the reclassification of captive insurance external revenue from the sales allowances line item into the industrial market.  We believe these amounts to be immaterial to the financial statements.

Our All Other reportable segment consists of our Alternative Materials, International, idX, and certain other segments which are not significant.

Net sales of all other segments increased $275.1 million, or 99.3%, in 2017 primarily due to:

·

Acquired operations, including idX, contributed $196 million to our sales growth to the industrial market.  Additionally, the Mexico reporting unit of our international segment increased its sales to the industrial market.

·

Our increase in sales to the retail market was due to the transfer of our import and export business into our international segment.

Earnings from operations for the All Other reportable segment increased in 2017 by $0.7 million, or 3.9%, due to an increase in gross profit of $46.5 million, offset by a $45.8 million increase in SG&A expenses compared to last year.  Acquired operations increased earnings from operations by $1.7 million in 2017.

Net sales of all other segments increased $102.1 million, or 58.3%, in 2016 primarily due to:

·

The idX acquisition on September 16, 2016, which contributed $87.0 million in sales to the industrial market.

·

An increase in sales by our Alternative Materials operations, primarily due to an increase in market share with certain Big Box retailers.

Earnings from operations for the All Other reportable segment increased in 2016 by $13.6 million, or 448%, due to an increase in gross profit of $23.9 million, offset by a $10.3 million increase in SG&A expenses compared to the prior year. 

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase was primarily due to the idX acquisition’s contribution during the fourth quarter of 2016 and sales growth and operational improvements of our Alternative Materials operations and to a lesser extent the performance of our captive insurance subsidiary, Ardellis.

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 30, 2017 (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

    

Less than

    

1 – 3

    

3 – 5

    

After

    

 

 

Contractual Obligation

 

1 Year

 

Years

 

Years

 

5 Years

 

Total

Long-term debt and capital lease obligations

 

$

1,290

 

$

62,575

 

$

38,878

 

$

43,260

 

$

146,003

Estimated interest on long-term debt and capital lease obligations

 

 

5,239

 

 

8,161

 

 

6,174

 

 

3,393

 

 

22,967

Operating leases

 

 

19,405

 

 

23,154

 

 

13,725

 

 

17,640

 

 

73,924

Capital project purchase obligations

 

 

7,743

 

 

 —

 

 

 —

 

 

 —

 

 

7,743

Total

 

$

33,677

 

$

93,890

 

$

58,777

 

$

64,293

 

$

250,637

 

As of December 30, 2017, we also had $26.5 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 30,

 

December 31,

 

December 26,

 

    

2017

    

2016

    

2015

Cash from operating activities

 

 

136,583

 

 

172,520

 

 

168,796

Cash used in investing activities

 

 

(137,659)

 

 

(227,657)

 

 

(46,636)

Cash from (used in) financing activities

 

 

(5,247)

 

 

3,211

 

 

(33,002)

Effect of exchange rate changes on cash

 

 

650

 

 

(1,927)

 

 

(1,221)

Net change in cash and cash equivalents

 

 

(5,673)

 

 

(53,853)

 

 

87,937

Cash, cash equivalents, and restricted cash, beginning of year

 

 

34,489

 

 

88,342

 

 

405

Cash, cash equivalents, and restricted cash, end of year

 

$

28,816

 

$

34,489

 

$

88,342

 

In general, we financed our growth in the past through a combination of operating cash f