EX-13 3 ufpi-20181229ex139791152.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 

3-24

 

 

Management’s Annual Report on Internal Control Over Financial Reporting 

25

 

 

Report of Independent Registered Public Accounting Firm 

26

 

 

Report of Independent Registered Public Accounting Firm 

27

 

 

Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017 

28

 

 

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 29, 2018, December 30, 2017, and December 31, 2016 

29

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended December 29, 2018, December 30, 2017, and December 31, 2016 

30

 

 

Consolidated Statements of Cash Flows for the Years Ended December 29, 2018, December 30, 2017, and December 31, 2016 

31

 

 

Notes to Consolidated Financial Statements 

32-54

 

 

Market Information for our Common Stock 

55

 

 

Stock Performance Graph 

56

 

 

Directors and Executive Officers 

57

 

 

Shareholder Information 

58

 

 

 

 

 


 

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2017

    

 

2016

    

 

2015

    

 

2014

 

Consolidated Statement of Earnings Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Net sales

 

$

4,489,180

 

$

3,941,182

 

$

3,240,493

 

$

2,887,071

 

$

2,660,329

 

Gross profit

 

 

592,894

 

 

542,826

 

 

474,590

 

 

399,904

 

 

325,342

 

Earnings before income taxes(6)

 

 

197,853

 

 

176,007

 

 

160,671

 

 

131,002

 

 

95,713

 

Net earnings attributable to controlling interest

 

$

148,598

 

$

119,512

 

$

101,179

 

$

80,595

 

 

57,551

 

Diluted earnings per share

 

$

2.40

 

$

1.94

 

$

1.65

 

$

1.33

 

$

0.95

 

Dividends per share

 

$

0.360

 

$

0.320

 

$

0.290

 

$

0.273

 

$

0.203

 

Consolidated Balance Sheet Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Working capital(1)

 

$

685,108

 

$

560,241

 

$

484,661

 

$

444,057

 

$

397,546

 

Total assets

 

 

1,647,548

 

 

1,464,677

 

 

1,292,058

 

 

1,107,679

 

 

1,023,800

 

Total debt

 

 

202,278

 

 

146,003

 

 

111,693

 

 

85,895

 

 

98,645

 

Shareholders’ equity

 

 

1,088,684

 

 

974,023

 

 

860,466

 

 

766,409

 

 

699,560

 

Statistics

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Gross profit as a percentage of net sales

 

 

13.2

%  

 

13.8

%  

 

14.6

%  

 

13.9

%  

 

12.2

%

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

 

 

3.3

%  

 

3.0

%  

 

3.1

%  

 

2.8

%  

 

2.2

%

Return on beginning equity(2)

 

 

15.3

%  

 

13.9

%  

 

13.2

%  

 

11.5

%  

 

8.8

%

Current ratio(4)

 

 

3.21

 

 

2.85

 

 

2.78

 

 

3.17

 

 

3.27

 

Debt to equity ratio(5)

 

 

0.19

 

 

0.15

 

 

0.13

 

 

0.11

 

 

0.14

 

Book value per common share(3)

 

$

17.88

 

$

15.92

 

$

14.10

 

$

12.68

 

$

11.67

 


(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.

(6)  2018 includes an approximately $7 million gain on the sale of one of our facilities.

 

Acquisition growth is one of the primary contributing factors to material increases over the period from 2014 to 2018.  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 2018.

OVERVIEW

Our results for 2018 were impacted by the following:

·

Our sales increased almost 14% in 2018 due to a 7% 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 3% to our unit sales growth in 2018 (see Note C of the Notes to Consolidated Financial Statements) and we achieved 4% organic unit sales growth. 

·

The Home Improvement Research Institute reported a 5% increase in home improvement sales in 2018. Comparatively, our unit sales to the retail market increased 4% in 2018, including approximately 2% contributed from acquired businesses.

·

Our unit sales to the industrial market increased 10% in 2018. Businesses we acquired contributed 5% to unit sales growth. Comparatively, the Federal Reserve’s Industrial Production noted that national industrial production increased almost 4% in 2018.

·

National housing starts increased approximately 4% in the period from December 2017 through November 2018, 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 2018.

·

Production of HUD code manufactured homes were up 5% in the period from January through November 2018, compared to the same period of the prior year. Comparatively, our unit sales to the manufactured housing market increased 4% in 2018.

·

Our earnings from operations increased 14.2% to $207.3 million in 2018 from $181.5 million in 2017, which includes a pre-tax gain of approximately $6.7 million as a result of the sale of certain assets including our Medley,

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FL, plant for $36.0 million in proceeds.  Acquired businesses contributed approximately $1.1 million to earnings from operations for the year.  The remaining $18.0 million, or 9.9%, increase was primarily driven by our strong organic unit sales growth and favorable improvements in sales mix, among other factors.

·

Net earnings attributable to controlling interest increased 24% to $148.6 million due to the factors above along with the reduction in our U.S Federal income tax rate in 2018.  Our overall effective rate decreased from 29.5% in 2017 to 23.0% in 2018.

·

Our cash flow from operating activities decreased by  $20 million due to an increase in our investment in working capital (See “Liquidity and Capital Resources”) and opportunistic purchases of inventory in the second half of 2018.

·

We re-invested $95.9 million in capital expenditures to support and grow our business organically and invested $54.0 million in acquired businesses.

·

We returned $22.1 million to shareholders through dividends and bought back $24.6 million of our common stock at an average price of $28.62 per share.

·

Finally, our net debt (debt plus cash overdraft less surplus cash) increased to $202.3 million, representing a ratio of 0.76x earnings before interest, taxes, depreciation and amortization, which we believe along with other factors, indicates a strong credit profile.

HISTORICAL LUMBER PRICES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Random Lengths Composite

 

 

 

Average $/MBF

 

 

    

2018

    

2017

    

2016

 

January

 

$

449

 

$

356

 

$

316

 

February

 

 

496

 

 

393

 

 

310

 

March

 

 

505

 

 

401

 

 

321

 

April

 

 

496

 

 

424

 

 

345

 

May

 

 

554

 

 

416

 

 

356

 

June

 

 

572

 

 

399

 

 

353

 

July

 

 

525

 

 

411

 

 

351

 

August

 

 

449

 

 

417

 

 

367

 

September

 

 

443

 

 

416

 

 

354

 

October

 

 

375

 

 

437

 

 

356

 

November

 

 

339

 

 

436

 

 

346

 

December

 

 

338

 

 

433

 

 

357

 

 

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

462

 

$

412

 

$

344

 

Annual percentage change

 

 

12.1

%  

 

19.8

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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 comprise approximately 58% of total lumber purchases, excluding plywood, for 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

Southern Yellow Pine

 

 

Average $/MBF

 

    

2018

    

2017

    

2016

January

 

$

418

 

$

397

 

$

358

February

 

 

459

 

 

420

 

 

357

March

 

 

480

 

 

433

 

 

366

April

 

 

483

 

 

438

 

 

389

May

 

 

535

 

 

416

 

 

397

June

 

 

562

 

 

399

 

 

382

July

 

 

512

 

 

381

 

 

380

August

 

 

449

 

 

383

 

 

391

September

 

 

440

 

 

387

 

 

375

October

 

 

410

 

 

417

 

 

385

November

 

 

378

 

 

412

 

 

387

December

 

 

377

 

 

418

 

 

400

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

459

 

$

408

 

$

381

Annual percentage change

 

 

12.5

%  

 

7.1

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

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 50.6%, 49.1%, and 48.4% of our gross sales in 2018, 2017, and 2016, respectively.

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

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

·

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

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 profitability.  In other words, for these products, our margins are exposed to changes in the trend of lumber prices.  We believe our sales of these products are at their highest relative level in our second quarter, primarily due to treated lumber sold to the retail market.

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

·

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 18% of our total sales. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to 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

%

 

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 seven business acquisitions during 2018 and four during 2017. The annual historical sales attributable to acquisitions in 2018 and 2017 were approximately $140 million and $127 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2018 and 2017 are not presented.

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

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Table of Contents

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.

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

    

December 29,

    

December 30,

    

December 31,

 

 

 

2018

 

2017

 

2016

 

Net sales

 

100.0

%  

100.0

%  

100.0

%

Cost of goods sold

 

86.8

 

86.2

 

85.4

 

Gross profit

 

13.2

 

13.8

 

14.6

 

Selling, general, and administrative expenses

 

8.8

 

9.1

 

9.6

 

Net gain on disposition  and impairment of assets

 

(0.1)

 

 —

 

 —

 

Earnings from operations

 

4.6

 

4.6

 

5.1

 

Other expense (income), net

 

0.2

 

0.1

 

0.1

 

Earnings before income taxes

 

4.4

 

4.5

 

5.0

 

Income taxes

 

1.0

 

1.3

 

1.7

 

Net earnings

 

3.4

 

3.1

 

3.3

 

Less net earnings attributable to noncontrolling interest

 

(0.1)

 

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

 

3.3

%  

3.0

%  

3.1

%

 

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

The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of sales,  adjusted to restate 2017 and 2018 sales and cost of goods sold at lumber prices.  The restated sales amounts were calculated by applying unit sales growth from 2017 and 2018 to 2016 sales levels.  By eliminating the “pass-through” impact of higher or lower lumber prices on sales and cost of goods sold from year to year, we believe this provides an enhanced view of our change in profitability and costs as a percentage of sales.  The amount of the adjustment to 2017 and 2018 sales was also applied to cost of goods sold so that gross profit remains unchanged.

 

 

 

 

 

 

 

 

 

 

Adjusted for Lumber Market Volatility

 

 

 

Year Ended

 

 

    

December 29,

    

December 30,

    

December 31,

 

 

 

2018

 

2017

 

2016

 

Net sales

 

100.0

%  

100.0

%  

100.0

%

Cost of goods sold

 

85.1

 

85.4

 

85.4

 

Gross profit

 

14.9

 

14.6

 

14.6

 

Selling, general, and administrative expenses

 

9.9

 

9.7

 

9.6

 

Net gain on disposition  and impairment of assets

 

(0.2)

 

 —

 

 —

 

Earnings from operations

 

5.2

 

4.9

 

5.1

 

Other expense (income), net

 

0.2

 

0.1

 

0.1

 

Earnings before income taxes

 

5.0

 

4.7

 

5.0

 

Income taxes

 

1.1

 

1.4

 

1.7

 

Net earnings

 

3.8

 

3.3

 

3.3

 

Less net earnings attributable to noncontrolling interest

 

(0.1)

 

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

 

3.7

%  

3.2

%  

3.1

%

 

The following table presents, for the periods included, our selling, general, and administrative (SG&A) costs as a percentage of gross profit.  Given our strategies to enhance our capabilities and improve our value-added product offering

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

and recognizing the higher relative level of SG&A costs these strategies require, we believe this ratio provides an enhanced view of our efficiency in managing these costs.

 

 

 

 

 

 

 

 

 

SG&A as a Percentage of Gross Profit

 

 

Year Ended

 

    

December 29,

    

December 30,

    

December 31,

 

 

2018

 

2017

 

2016

Gross profit

 

592,894

 

542,826

 

474,590

Selling, general, and administrative expenses

 

392,235

 

362,220

 

310,152

SG&A as percentage of gross profit

 

66.2%

 

66.7%

 

65.4%

 

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

·

Diversifying our end market sales mix by increasing sales of specialty wood and other 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.

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

  

2018

 

 

62.5

%  

 

37.5

%

2017

 

 

63.3

%  

 

36.7

%

2016

 

 

62.6

%  

 

37.4

%

 

·

Developing new products and expanding our product offering. New product sales are presented by market in the table below (in thousands).

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New Product Sales by Market

 

 

Twelve Months Ended

 

    

December 29,

 

%

    

December 30,

    

%

 

December 31,

Market Classification

 

2018

 

Change

 

2017

 

Change

 

2016

Retail

 

$

291,654

 

20.7

 

$

241,662

 

26.1

 

$

191,619

Industrial

 

 

141,791

 

25.3

 

 

113,120

 

15.8

 

 

97,718

Construction

 

 

79,735

 

17.4

 

 

67,929

 

37.8

 

 

49,290

Total New Product Sales

 

 

513,180

 

21.4

 

 

422,711

 

24.8

 

 

338,627

    

Note:  Certain prior year product reclassifications resulted in a decrease and increase in new product sales in 2017 and 2016,        respectively.

Our goal is for our new product sales to comprise at least 10% of our total sales.

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 29,

    

%

    

December 30,

    

%

    

December 31,

Market Classification

2018

 

Change

 

2017

 

Change

 

2016

Retail

$

1,662,895

 

11.4

 

$

1,492,552

 

15.4

 

$

1,293,797

Industrial

 

1,557,011

 

16.1

 

 

1,341,319

 

35.8

 

 

988,050

Construction

 

1,345,843

 

14.8

 

 

1,172,332

 

15.4

 

 

1,015,530

Total Gross Sales

 

4,565,749

 

14.0

 

 

4,006,203

 

21.5

 

 

3,297,377

Sales Allowances

 

(76,569)

 

17.8

 

 

(65,021)

 

14.3

 

 

(56,884)

Total Net Sales

$

4,489,180

 

13.9

 

$

3,941,182

 

21.6

 

$

3,240,493

 

Note: During 2018, 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

 

2018 versus 2017

 

14.0

%  

7.0

%  

7.0

%

2017 versus 2016

 

21.5

%  

6.6

%  

14.9

%

2016 versus 2015

 

12.4

%  

1.2

%  

11.2

%

 

Retail:

Gross sales to the retail market increased over 11% in 2018 compared to 2017 due to a 4% increase in unit sales and a 7% increase in selling prices. Within this market, sales to our big box customers increased 8% while our sales to other retailers increased 17%. Businesses we acquired contributed 2% to our growth, while new products contributed to our 2% organic unit sales growth. Comparatively, our large retail customers reported year over year store sales growth of approximately 6% during the first nine months of 2018, the latest information available to us.  In the third and fourth quarter of 2017, our sales increased due to hurricanes Irma and Harvey.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

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

Industrial:

Gross sales to the industrial market increased 16% in 2018 compared to 2017, resulting from a 10% increase in overall unit sales and a 6% increase in selling prices. Businesses we acquired contributed 5% to our growth in unit sales. Our organic unit sales growth of 5% was primarily achieved through share gains including adding 200 new customers during the year and increasing the number of locations we serve of existing customers by 346.

Gross sales to the industrial market increased 36% in 2017 compared to 2016, resulting from a 30% 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 5% was primarily achieved through share gains including adding 390 new customers during the year and increasing the number of locations we serve existing customers by 142.

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 15% in 2018 compared to 2017, due to a unit sales increase of 7% and an 8% increase in selling prices. Unit sales increased due to a 7% increase in units shipped to residential construction customers, a 4% increase in shipments to manufactured housing customers, and a 14% increase in unit sales to commercial construction customers. Businesses we acquired in 2018 contributed 4% to our commercial construction unit sales growth. Comparatively, the Mortgage Bankers Association of America reported year over year national housing starts increased 4%, the United States Census Bureau reported commercial construction market increased 6% and the National Association of Home Builders reported industry production of HUD-code homes increased almost 5%.

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

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage decreased from 13.8% in 2017 to 13.2% in 2018 due, in part, to the high level of lumber prices in 2018. This is evident when comparing our increase in gross profits with our increase in units shipped.  Our gross profit

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

dollars increased by over $50 million, or 9.2%, which exceeds our 6.8% increase in unit sales. Our profitability in 2018 was impacted by the following factors:

·

An $8 million, or 5%, increase in our gross profit on sales to the retail market, primarily driven by a 4% increase in unit sales.

·

A $27 million, or 13%, increase in our gross profit on sales to the industrial market, primarily driven by a 10% increase in unit sales as well as favorable changes in product mix and a decline in lumber prices in the last six months of 2018.  Most products sold to this market have fixed selling prices for a period of time.

·

A $24 million, or 15%, increase in gross profit  on sales to the construction market, primarily driven by unit growth and a decline in lumber prices in the last six months of 2018.  Acquired businesses contributed $1 million of this gross profit increase.

·

The remaining $9 million decrease in our gross profit was due to a variety of factors including unfavorable labor and overhead cost variances in certain areas of our business and an increase in customer rebates compared to 2017.

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:

·

An  $8 million, or 5%, increase in our gross profit on sales to the retail market,  was primarily driven by a 10% increase in unit sales to that market. Businesses we acquired in 2017 contributed $1.6 million of our gross profit increase.  Our increase in gross profit was less than our increase in unit sales as a result of adverse changes in lumber prices, particularly in the second quarter which is our primary selling season, and the acquisition of Robbins in the first quarter of 2017, which primarily sells lower margin treated lumber products.

·

Our 30% 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 during part of the year.

·

Almost $13 million, or 9%, of our gross profit improvement was primarily due to 7% unit sales growth on sales to the construction market.  Our gross profit increase exceeded our increase in unit sales primarily due to leveraging our fixed manufacturing costs, which helped offset the impact of higher lumber prices on products sold with fixed selling prices during part of the year 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 in certain areas of our business, increases in vendor rebates, and a decrease in customer rebates compared to 2016.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $30.0 million, or 8.3%, in 2018 compared to 2017, while we reported a 7% increase in unit sales. Acquired businesses contributed $8.3 million to our increase. The remaining increase in SG&A was primarily due to an $11.4 million increase in compensation and benefit costs resulting from annual raises, healthcare cost increases, and hiring additional personnel to support sales growth, and

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

a $6.1 million increase in sales and other incentive compensation.  Finally, our annual bonus expense increased by $4 million to almost $48 million in 2018 compared to last year.  Our annual bonus expense is tied to operating profits and return on investment.

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 an $11.1 million increase in compensation and related costs resulting from annual raises, greater benefit costs, and hiring additional personnel to support sales growth.  Finally, our annual bonus expense was almost $44 million compared to $45 million in 2016.  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 the annual bonus amount.

INTEREST, NET

Net interest costs were higher in 2018 compared to 2017, due to a higher outstanding balance on our revolving line of credit throughout 2018, an increase in variable borrowing rates, and issuance of additional long-term Senior Notes under our shelf facility at an average rate of 4.23%.

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.

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 23.0% in 2018 compared to 29.5% in 2017.  The decrease in the 2018 effective tax rate was primarily due to the impact of the Tax Act, which reduced the statutory federal income tax rate from 35% to 21%.

Our effective tax rate decreased to 29.5% in 2017 compared to 34.3% in 2016.  The decrease in the 2017 tax rate was 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.

 

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 29,

 

December 30,

 

December 31,

 

% Change

 

% Change

 

 

    

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

 

North

 

$

1,279,459

 

$

1,133,656

 

$

1,000,426

 

12.9

%  

13.3

%

South

 

 

1,024,747

 

 

837,370

 

 

711,862

 

22.4

 

17.6

 

West

 

 

1,599,274

 

 

1,417,924

 

 

1,251,093

 

12.8

 

13.3

 

All Other

 

 

585,700

 

 

552,232

 

 

277,112

 

6.1

 

99.3

 

Total

 

$

4,489,180

 

$

3,941,182

 

$

3,240,493

 

13.9

%  

21.6

%

 

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from Operations

 

 

 

December 29,

 

December 30,

 

 December 31, 

 

% Change

 

% Change

 

 

    

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

 

North

 

$

66,239

 

$

61,326

 

$

59,408

 

8.0

%  

3.2

%

South

 

 

60,049

 

 

46,646

 

 

47,146

 

28.7

 

(1.1)

 

West

 

 

103,357

 

 

82,465

 

 

76,875

 

25.3

 

7.3

 

All Other

 

 

6,779

 

 

17,296

 

 

16,639

 

(60.8)

 

3.9

 

Corporate1

 

 

(29,161)

 

 

(26,264)

 

 

(35,630)

 

(11.0)

 

26.3

 

Total

 

$

207,263

 

$

181,469

 

$

164,438

 

14.2

%

10.4

%


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 29,

 

December 30,

 

December 31,

 

% Change

 

% Change

 

Market Classification

    

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

 

Retail

 

$

541,798

 

$

489,269

 

$

465,601

 

10.7

%  

5.1

%

Industrial

 

 

213,178

 

 

157,633

 

 

115,867

 

35.2

 

36.0

 

Construction

 

 

550,630

 

 

510,144

 

 

438,968

 

7.9

 

16.2

 

Total Gross Sales

 

 

1,305,606

 

 

1,157,046

 

 

1,020,436

 

12.8

%

13.4

%

Sales Allowances

 

 

(26,147)

 

 

(23,390)

 

 

(20,010)

 

(11.8)

 

(16.9)

 

Total Net Sales

 

$

1,279,459

 

$

1,133,656

 

$

1,000,426

 

12.9

%

13.3

%

 

Net sales attributable to the North reportable segment increased by $145.8 million, or 12.9%, in 2018, due primarily to the following factors:

·

Acquired operations contributed almost $27 million and $6 million to our growth in sales to the industrial and construction markets, respectively.

·

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

·

Organic unit sales growth primarily to the retail and industrial markets.

Earnings from operations for the North reportable segment increased in 2018 by $4.9 million, or 8.0%, due to an increase in gross profit of $7.9 million, offset by a $3.0 million increase in SG&A expenses compared to last year.  Acquired operations contributed $1.6 million to the North’s operating profits in 2018.  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 $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.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

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 decline 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 the North’s 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.”

South

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of South Segment by Market

 

 

 

Twelve Months Ended

 

 

 

December 29,

 

December 30,

 

December 31,

 

% Change

 

% Change

 

Market Classification

    

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

 

Retail

 

$

441,050

 

$

388,273

 

$

317,003

 

13.6

%  

22.5

%

Industrial

 

 

392,971

 

 

276,848

 

 

251,475

 

41.9

 

10.1

 

Construction

 

 

211,792

 

 

191,139

 

 

157,612

 

10.8

 

21.3

 

Total Gross Sales

 

 

1,045,813

 

 

856,260

 

 

726,090

 

22.1

%

17.9

%

Sales Allowances

 

 

(21,066)

 

 

(18,890)

 

 

(14,228)

 

(11.5)

 

(32.8)

 

Total Net Sales

 

$

1,024,747

 

$

837,370

 

$

711,862

 

22.4

%

17.6

%

 

Net sales attributable to the South reportable segment increased by $187 million, or 22.4%, in 2018, primarily due to the following factors:

·

Acquired operations contributed $33 million and $40 million to our retail and industrial markets, respectively.

·

Higher lumber prices increased our selling prices.

·

Strong organic unit sales growth, particularly to the industrial market.

Earnings from operations for the South reportable segment increased in 2018 by $13.4 million, or 28.7%, which includes a $6.7 million gain from the sale of our Medley, Florida, plant and an increase in gross profit of $8.9 million, which was offset by a $2.2 million increase in SG&A expenses compared to last year.  Acquired operations had a $0.3 million operating loss in 2018. 

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.

·

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

West

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of West Segment by Market

 

 

 

Twelve Months Ended

 

 

 

December 29,

 

December 30,

 

December 31,

 

% Change

 

% Change

 

Market Classification

    

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

 

Retail

 

$

479,494

 

$

438,967

 

$

383,899

 

9.2

%  

14.3

%

Industrial

 

 

559,277

 

 

525,946

 

 

464,686

 

6.3

 

13.2

 

Construction

 

 

582,761

 

 

470,346

 

 

418,946

 

23.9

 

12.3

 

Total Gross Sales

 

 

1,621,532

 

 

1,435,259

 

 

1,267,531

 

13.0

%

13.2

%

Sales Allowances

 

 

(22,258)

 

 

(17,335)

 

 

(16,438)

 

28.4

 

5.5

 

Total Net Sales

 

$

1,599,274

 

$

1,417,924

 

$

1,251,093

 

12.8

%

13.3

%

 

Net sales of the West reportable segment increased by $181 million, or 12.8%, in 2018, primarily due to the following factors:

·

Higher lumber prices increased our selling prices.

·

Organic unit sales growth to the retail and construction markets.

Earnings from operations for the West reportable segment increased in 2018 by $20.9 million, or 25.3%, due to an increase in gross profit of $26.3 million, offset by a $5.4 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.”

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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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of All Other Segment by Market

 

 

Twelve Months Ended

 

    

December 29,

 

December 30,

 

December 31,

 

% Change

 

% Change

Market Classification

 

2018

    

2017

    

2016

    

2018 vs 2017

    

2017 vs 2016

Retail

 

$

200,554

 

$

176,043

 

$

127,294

 

13.9

 

38.3

Industrial

 

 

391,585

 

 

380,892

 

 

156,022

 

2.8

 

144.1

Construction

 

 

659

 

 

289