0000.00320000000006140858960883749000000000truefalsetrueP1YP5YP1YP1YP10YP1YP10YP7Y3M14D69000000

Table of Contents

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

Management’s Report on Internal Control Over Financial Reporting

22

Report of Independent Registered Public Accounting Firm

23

Report of Independent Registered Public Accounting Firm

24

Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018

25

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

26

Consolidated Statements of Shareholders’ Equity for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

27

Consolidated Statements of Cash Flows for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

28

Notes to Consolidated Financial Statements

29-52

Market Information for our Common Stock

53

Stock Performance Graph

54

Directors and Executive Officers

55

Shareholder Information

56

Table of Contents

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

    

2019

    

2018

    

2017

    

2016

    

2015

 

Consolidated Statement of Earnings Data

 

  

 

  

 

  

 

  

 

  

Net sales

$

4,416,009

$

4,489,180

$

3,941,182

$

3,240,493

$

2,887,071

Gross profit

 

685,518

 

592,894

 

542,826

 

474,590

 

399,904

Earnings before income taxes(6)

 

240,674

 

197,853

 

176,007

 

160,671

 

131,002

Net earnings attributable to controlling interest

$

179,650

$

148,598

$

119,512

$

101,179

$

80,595

Diluted earnings per share

$

2.91

$

2.40

$

1.94

$

1.65

$

1.33

Dividends per share

$

0.400

$

0.360

$

0.320

$

0.290

$

0.273

Consolidated Balance Sheet Data

 

  

 

  

 

  

 

  

 

  

Working capital(1)

$

739,030

$

685,108

$

560,241

$

484,661

$

444,057

Total assets

 

1,889,477

 

1,647,548

 

1,464,677

 

1,292,058

 

1,107,679

Total debt

 

163,683

 

202,278

 

146,003

 

111,693

 

85,895

Shareholders’ equity

 

1,257,733

 

1,088,684

 

974,023

 

860,466

 

766,409

Statistics

 

  

 

  

 

  

 

  

 

  

Gross profit as a percentage of net sales

 

15.5

%  

 

13.2

%  

 

13.8

%  

 

14.6

%  

 

13.9

%

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

 

4.1

%  

 

3.3

%  

 

3.0

%  

 

3.1

%  

 

2.8

%

Return on beginning equity(2)

 

16.5

%  

 

15.3

%  

 

13.9

%  

 

13.2

%  

 

11.5

%

Current ratio(4)

 

3.09

 

3.21

 

2.85

 

2.78

 

3.17

Debt to equity ratio(5)

 

0.13

 

0.19

 

0.15

 

0.13

 

0.11

Book value per common share(3)

$

20.48

$

17.88

$

15.92

$

14.10

$

12.68

(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 2015 to 2019. 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

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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 2019.

OVERVIEW

Our results for 2019 were impacted by the following:

Our sales decreased almost 2% in 2019 due to an 8% decrease in overall selling prices (see “Historical Lumber Prices”) offset by a 6% increase in our unit sales. Our unit sales increase was primarily driven by our organic growth in the retail and construction markets and acquiring businesses that serve the industrial market.  Overall, businesses we acquired contributed 1% to our unit sales growth in 2019 (see Note C of the Notes to Consolidated Financial Statements) and we achieved 5% organic unit sales growth.  
The Home Improvement Research Institute reported a 4% increase in home improvement sales in 2019. Comparatively, our unit sales to the retail market increased organically by 7%.
Our unit sales to the industrial market increased 7% in 2019 as businesses we acquired contributed 5% to unit sales growth and organic growth was 2%. Comparatively, the Federal Reserve’s Industrial Production Index noted that national industrial production decreased almost 1% in the period from December 2018 to November 2019.
National housing starts were up approximately 3% in 2019 compared to 2018. Comparatively, our unit sales to residential construction customers increased 5% in 2019.
Production of HUD code manufactured homes declined 3% in the period from January through November 2019, compared to the same period of the prior year. Comparatively, our unit sales to the manufactured housing market were flat in 2019 compared to 2018.  We estimate that 72% of our sales volume is for HUD homes, 25% is for modular homes, and 3% is for recreational vehicles.
Earnings from operations increased 18% to $244.9 million. Acquired businesses contributed approximately $4.1 million to earnings from operations for the year.  The remaining $240.8 million, or 16.1%, increase was primarily

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

due to an increase in gross profits driven by low lumber prices and opportunistic buying, organic unit sales growth combined with leveraging fixed costs, and favorable improvements in sales mix, among other factors.
Our cash flow from operating activities increased by $233 million due to a $46 million increase in our net earnings and non-cash expenses and a $187 million favorable change in our investment in working capital (See “Liquidity and Capital Resources”). The decline in working capital was primarily driven by opportunistic purchases of inventory during the fourth quarter of 2018, which was sold in the first six months of 2019. Lower lumber prices of Southern Yellow Pine in the fourth quarter of 2019 also contributed to the increase in cash flow from operating activities.
We invested $84.9 million in capital expenditures to support and grow our business and invested $39.1 million in acquired businesses.
We returned $24.5 million to shareholders through dividends.
Finally, our net cash surplus (interest bearing debt and cash overdraft less available cash) was $4.7 million at the end of 2019, which when considered with our earnings before interest, taxes, depreciation and amortization, indicates a strong credit profile and abundant unused debt capacity available for future investments to grow the business.

HISTORICAL LUMBER PRICES

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

Random Lengths Composite

 

Average $/MBF

 

    

2019

    

2018

    

 

January

$

331

$

449

February

 

370

 

496

March

 

365

 

505

April

 

354

 

496

May

 

346

 

554

June

 

329

 

572

July

 

356

 

525

August

 

346

 

449

September

 

364

 

443

October

360

375

November

373

339

December

371

338

Annual average

$

355

$

462

Annual percentage change

 

(23.2)

%  

 

12.1

%  

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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 64% of total lumber purchases, excluding plywood, for 2019 and 2018.

Southern Yellow Pine

Average $/MBF

    

2019

    

2018

    

January

$

370

$

418

February

 

403

 

459

March

 

408

 

480

April

 

401

 

483

May

 

383

 

535

June

 

344

 

562

July

 

359

 

512

August

 

348

 

449

September

 

355

 

440

October

345

410

November

344

378

December

335

377

Annual quarter average

$

366

$

459

Annual percentage change

(20.3)

%  

12.5

%  

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 42.7% and 50.6% of our gross sales in 2019 and 2018, 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 trusses sold to the manufactured housing industry. For these products, we estimate the customers’ needs and we

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 16% 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 three business acquisitions during 2019 and seven during 2018. The annual historical sales attributable to acquisitions in 2019 and 2018 were approximately $37 million and $140 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2019 and 2018 are not presented.

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

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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. Please see our 2018 10-K for discussion of our 2018 results of operations compared to 2017.

Year Ended

    

December 28,

    

December 29,

    

2019

 

2018

 

Net sales

100.0

%  

100.0

%  

Cost of goods sold

84.5

 

86.8

 

Gross profit

15.5

 

13.2

 

Selling, general, and administrative expenses

10.0

 

8.8

 

Net gain on disposition and impairment of assets

 

(0.1)

 

Earnings from operations

5.5

 

4.6

 

Other expense, net

0.1

 

0.2

 

Earnings before income taxes

5.5

 

4.4

 

Income taxes

1.3

 

1.0

 

Net earnings

4.1

 

3.4

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

4.1

%  

3.3

%  

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 2019 sales and cost of goods sold to be based on 2018 lumber prices.  The restated sales amounts were calculated by applying unit sales growth from 2019 to 2018 sales.  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 2019 sales was also applied to cost of goods sold so that gross profit remains unchanged.

Adjusted for Lumber Market Change

Year Ended

    

December 28,

    

December 29,

    

2019

 

2018

 

Net sales

100.0

%  

100.0

%  

Cost of goods sold

85.6

 

86.8

 

Gross profit

14.4

 

13.2

 

Selling, general, and administrative expenses

9.2

 

8.8

 

Net gain on disposition  and impairment of assets

 

(0.1)

 

Earnings from operations

5.1

 

4.6

 

Other expense, net

0.1

 

0.2

 

Earnings before income taxes

5.0

 

4.4

 

Income taxes

1.2

 

1.0

 

Net earnings

3.8

 

3.4

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

3.8

%  

3.3

%  

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 and recognizing the higher relative level of SG&A costs these strategies require, we believe this ratio provides an enhanced view of our effectiveness in managing these costs and mitigates the impact of changing lumber prices.

SG&A as a Percentage of Gross Profit

Year Ended

    

December 28,

    

December 29,

 

2019

 

2018

Gross profit

 

685,518

 

592,894

Selling, general, and administrative expenses

 

439,047

 

392,235

SG&A as percentage of gross profit

 

64.0%

 

66.2%

GROSS SALES

We primarily 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, customized interior fixtures used in a variety of retail stores, commercial and other structures, and specialty wood packaging, components and other packing materials for various industries. 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 protective 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, casework and millwork used in a variety of commercial 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, casework and millwork, 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, preservative treated lumber is not presently included in the value-added sales, unless it has been processed in another manner.

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

  

2019

69.1

%  

30.9

%

2018

64.4

%  

35.6

%

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 28,

%

    

December 29,

Market Classification

2019

Change

2018

Retail

$

361,954

14.5

$

316,017

Industrial

 

97,765

11.0

 

88,063

Construction

 

80,067

6.5

 

75,173

Total New Product Sales

 

539,786

12.6

 

479,253

Note: Certain prior year product reclassifications resulted in a decrease and increase in new product sales in 2018.

Our annual goal is for 2019 was to achieve new product sales of $525 million.  The definition we use for a new product includes sales of products developed and launched in a previous year that are continuing to increase each year.  We remove new products from the reporting above in the year following when growth in sales has stopped.

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 28,

    

%

    

December 29,

Market Classification

2019

Change

2018

Retail

$

1,638,885

 

(1.2)

$

1,659,503

Industrial

 

1,329,245

 

1.7

 

1,307,350

Construction

 

1,524,053

 

(4.7)

 

1,598,896

Total Gross Sales

 

4,492,183

 

(1.6)

 

4,565,749

Sales Allowances

 

(76,174)

 

(0.5)

 

(76,569)

Total Net Sales

$

4,416,009

 

(1.6)

$

4,489,180

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

Acquisition Unit Change

Organic Unit Change

2019 versus 2018

(1.6)

%  

(7.9)

%  

6.3

1.5

%  

4.8

%  

2018 versus 2017

 

14.0

%  

8.0

%  

6.0

3.0

%  

3.0

%  

Retail:

Gross sales to the retail market decreased 1% in 2019 compared to 2018 due to a 7% increase in unit sales and an 8% decrease in selling prices. Within this market, sales to our big box customers increased 5% while our sales to other retailers decreased 10%. Comparatively, our large retail customers reported year over year store sales growth of approximately 3% during the first nine months of 2019, the latest information available to us.  New products and market share gains we achieved, including our Deckorators product category with one of our big box customers, contributed to our 7% organic unit sales growth.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Industrial:

Gross sales to the industrial market increased 2% in 2019 compared to 2018, resulting from a 7% increase in overall unit sales offset by a 5% decrease in selling prices. Businesses we acquired contributed 5% to our growth in unit sales. Our organic unit sales growth of 2% was primarily due to adding $15 million of sales to new customers in 2019 (net of customers that we sold to in the prior year that we did not sell to this year) and $26 million of sales added from selling to additional locations of existing customers.

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

Construction:

Gross sales to the construction market decreased 5% in 2019 compared to 2018, due to a 10% decrease in selling prices  offset by a unit sales increase of 5%. Unit sales increased due to a 5% increase in units shipped to residential construction customers and an 11% increase in unit sales to commercial construction customers, while unit sales to manufactured housing customers remained flat. Comparatively, the United States Census Bureau reported year over year national housing starts increased 3% and the commercial construction market was flat compared to last year. The National Association of Home Builders reported industry production of HUD-code homes decreased 3%.

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage increased from 13.2% in 2018 to 15.5% in 2019 due, in part, to the low lumber prices in 2019, which we believe contributed 110 basis points of the 230 basis-point increase.  We believe the remaining 120 basis point increase reflects improvements we have made in our business and profitability.  The improvement in our profitability is also evident when comparing our increase in gross profits compared with our increase in units shipped.  Our gross profit dollars increased by nearly $93 million, or 15.6%, which exceeds our 6% increase in unit sales. Factors contributing to our improved profitability include a more favorable sales mix of value added products, including new products, the impact of lower lumber costs on products we sell with fixed prices, and organic growth combined with leveraging fixed manufacturing costs.  Gross profit increases by market area are as follows:

A $32 million, or 20%, increase in our gross profit on sales to the retail market, primarily driven by a 7% increase in unit sales and an increase in value-added and new product sales, which include sales of our Deckorators branded products.
A $43 million, or 22%, increase in our gross profit on sales to the industrial market, primarily driven by a 7% increase in unit sales, favorable changes in product mix, and lower lumber costs in 2019 as most products sold to this market have fixed selling prices for a period of time.
An $8 million, or 3%, increase in gross profit on sales to the construction market, primarily driven by unit growth in the residential construction market and the impact of lower lumber costs on products we sell with fixed selling prices. These factors were offset by $13 million of losses incurred on a small number of construction projects.
The remaining $10 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.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $46.8 million, or 11.9%, in 2019 compared to 2018, while we reported a 6% increase in unit sales. Acquired businesses contributed $7.2 million to our increase. The remaining increase in SG&A was primarily due to:

A $21 million increase in our annual bonus expense to almost $69 million in 2019 due to an increase in our bonus rate and an increase in operating profit.  Our bonus rate is tied to return on investment, which increased in 2019.
An $8.1 million increase in compensation and benefit costs resulting primarily from annual raises and hiring additional personnel to support sales growth.
A $3.5 million increase in sales and other incentive compensation.
A $3 million increase in marketing costs mostly related to our Deckorators branded product.
A variety of other smaller increases.  

INTEREST, NET

Net interest costs were lower in 2019 compared to 2018, due to a lower outstanding balance on our revolving line of credit throughout 2019 and a decrease in variable borrowing rates.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes, and permanent tax differences. Our effective tax rate was 24.2% in 2019 compared to 23.0% in 2018.  The increase was primarily due to recording certain discrete tax benefits in 2018 related to state income taxes, which lowered the effective tax rate last year.

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 28,

December 29,

% Change

    

2019

    

2018

    

2019 vs 2018

    

North

$

1,302,067

$

1,279,459

1.8

%  

South

 

936,964

 

1,024,747

(8.6)

 

West

 

1,548,098

 

1,599,274

(3.2)

 

All Other

 

628,880

 

585,700

7.4

 

Total

$

4,416,009

$

4,489,180

(1.6)

%  

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Earnings from Operations

December 28,

December 29,

% Change

    

2019

    

2018

    

2019 vs 2018

    

North

$

95,728

$

66,239

44.5

%  

South

 

64,517

 

60,049

7.4

 

West

 

118,444

 

103,357

14.6

 

All Other

 

8,913

 

6,779

31.5

 

Corporate1

 

(42,696)

 

(29,161)

(46.4)

 

Total

$

244,906

$

207,263

18.2

%

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 28,

December 29,

% Change

Market Classification

    

2019

    

2018

    

2019 vs 2018

    

Retail

$

557,491

$

541,105

3.0

%  

Industrial

 

247,985

 

215,882

14.9

Construction

 

522,223

 

550,200

(5.1)

Total Gross Sales

 

1,327,699

 

1,307,187

1.6

%

Sales Allowances

 

(25,632)

 

(27,728)

7.6

Total Net Sales

$

1,302,067

$

1,279,459

1.8

%

In spite of lower lumber prices, net sales attributable to the North segment increased by $22.6 million, or 1.8%, due primarily to the following factors:

An increase in unit sales to retail customers due to organic growth with existing customers.
An increase in unit sales to industrial customers due to acquired operations, which contributed $21 million of growth, new customer growth, and selling to more locations of existing customers.
These increases were offset by a decline in sales to our manufactured housing customers.

Earnings from operations of the North segment increased in 2019 by $29.4 million, or 44.5%, due to:

An increase in gross profit of $43.2 million, primarily consisting of increases of $11.8 million, $11.7 million, and $12 million in our retail, industrial, and construction market gross profits, respectively, and $7.7 million of favorable labor and overhead cost variances. These changes in gross profits are primarily due to the same factors discussed “Cost of Goods Sold and Gross Profits”.
A $13.8 million increase in SG&A expenses compared to last year.  The change in SG&A expenses was primarily due to the same factors discussed under “Selling, General, and Administrative Expenses”.

In addition, earnings from operations of acquired operations was $1.9 million in 2019.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

South

Net Sales of South Segment by Market

Twelve Months Ended

December 28,

December 29,

% Change

Market Classification

    

2019

    

2018

    

2019 vs 2018

    

Retail

$

390,031

$

440,701

(11.5)

%  

Industrial

 

384,894

 

390,533

(1.4)

Construction

 

180,742

 

213,000

(15.1)

Total Gross Sales

 

955,667

 

1,044,234

(8.5)

%

Sales Allowances

 

(18,703)

 

(19,487)

4.0

Total Net Sales

$

936,964

$

1,024,747

(8.6)

%

Net sales attributable to the South segment decreased by $88 million, or 8.6%, in 2019, primarily due to:

Lower lumber prices decreased our selling prices of products sold to the retail, industrial, and construction markets, which primarily consist of or are manufactured from lumber.
An increase in unit sales to the industrial market due to acquired operations, which contributed $37 million of growth, offset by a decline in demand of existing customers.

Earnings from operations of the South segment increased in 2019 compared to 2018. Excluding the gain from the sale of our Medley, Florida, plant in 2018, our earnings from operations increased $11.2 million due to:

An increase in gross profits of $20.7 million, comprised of increases of $5.4 million, $15.1 million, and $3.3 million in our retail, industrial, and construction market gross profits, respectively, offset by $3.1 million of unfavorable labor and overhead cost variances. These changes in gross profits are primarily due to the same factors discussed “Cost of Goods Sold and Gross Profits”.
A $9.7 million increase in SG&A expenses compared to last year.  The change in SG&A expenses was primarily due to the same factors discussed under “Selling, General, and Administrative Expenses”.

West

Net Sales of West Segment by Market

Twelve Months Ended

December 28,

December 29,

% Change

Market Classification

    

2019

    

2018

    

2019 vs 2018

    

Retail

$

471,104

$

477,134

(1.3)

%  

Industrial

 

553,495

 

561,701

(1.5)

Construction

 

545,744

 

582,697

(6.3)

Total Gross Sales

 

1,570,343

 

1,621,532

(3.2)

%

Sales Allowances

 

(22,245)

 

(22,258)

0.1

Total Net Sales

$

1,548,098

$

1,599,274

(3.2)

%

Net sales of the West reportable segment decreased by $51.2 million, or 3.2%, in 2019, primarily due to:

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Lower lumber prices decreased our selling prices.
An increase in unit sales to the retail market due to acquired operations, which contributed $6 million of growth, and an increase in demand of existing customers.
An increase in unit sales to the industrial market due to organic growth of value-added products with existing customers.
An increase in unit sales to the construction market due to new customers in our Texas region.

Earnings from operations of the West segment increased in 2019 by $15.1 million, or 14.6%, due to:

An increase in gross profit of $26.3 million, comprised of increases of $4.8 million and $16.4 million to the retail and industrial markets, respectively, and $5.1 million of favorable labor and overhead cost variances. These changes in gross profits are primarily due to the same factors discussed “Cost of Goods Sold and Gross Profits”.
An $11.2 million increase in SG&A expenses compared to last year.  The change in SG&A expenses was primarily due to the same factors discussed under “Selling, General, and Administrative Expenses”.

All Other

Net Sales of All Other Segment by Market

Twelve Months Ended

    

December 28,

December 29,

% Change

Market Classification

2019

    

2018

    

2019 vs 2018

    

Retail

$

220,259

$

200,562

9.8

%  

Industrial

 

142,871

 

139,237

2.6

Construction

 

275,156

 

252,999

8.8

Total Gross Sales

 

638,286

 

592,798

7.7

%

Sales Allowances

 

(9,406)

 

(7,098)

(32.5)

Total Net Sales

$

628,880

$

585,700

7.4

%

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.  In addition, we reclassified idX from industrial to the construction market to better align idX’s core business, design, manufacture, distribution and installation of customized interior fixtures for a variety of retail and commercial structures, with the commercial construction market. The reclassification was recorded retrospectively.

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

Net sales of all other segments increased $43.2 million, or 7.4%, in 2019 primarily due to:

An increase in sales to the retail market primarily due to a market share gain our Alternative Materials segment achieved with our Deckorators branded product with one of our big box customers.
Our sales to the construction market increased primarily due to our idX business unit.

Earnings from operations for the All Other reportable segment increased in 2019 by $2.1 million, or 31.5%, due to an increase in gross profit of $5.7 million, offset by a $3.6 million increase in SG&A expenses compared to last year.  

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 28, 2019 (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

$

2,752

$

38,705

$

43,953

$

78,273

$

163,683

Estimated interest on long-term debt and capital lease obligations

 

6,376

 

12,534

 

9,641

 

14,346

 

42,897

Operating leases

 

17,633

 

27,698

 

18,282

 

29,115

 

92,728

Capital project purchase obligations

 

33,806

 

 

 

 

33,806

Total

$

60,567

$

78,937

$

71,876

$

121,734

$

333,114

As of December 28, 2019, we also had $37.3 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.

LIQUIDITY AND CAPITAL RESOURCES

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

December 28,

December 29,

    

2019

    

2018

    

Cash from operating activities

 

349,291

 

116,685

 

Cash used in investing activities

 

(142,037)

 

(121,232)

 

Cash from (used in) financing activities

 

(67,268)

 

4,393

 

Effect of exchange rate changes on cash

 

482

 

(464)

 

Net change in cash and cash equivalents

 

140,468

 

(618)

 

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

 

28,198

 

28,816

 

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

$

168,666

$

28,198

In general, we financed our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe these financial ratios are among many other important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.

Seasonality has a significant impact on our working capital due to our primary selling season which occurs during the period from March to August. Consequently, our working capital increases during our first and second quarters resulting in negative or modest cash flows from operations during those periods. Conversely, we experience a substantial decrease in working capital once we move beyond our peak selling season which typically results in significant cash flows from operations in our third and fourth quarters.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days sales are outstanding plus days supply of inventory less days payables are outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle increased to 56 days in 2019 from 54 days in 2018.

Twelve Months Ended

December 28,

December 29,

2019

2018

Days of sales outstanding

    

33

    

32

Days supply of inventory

 

44

 

43

Days payables outstanding

 

(21)

 

(21)

Days in cash cycle

 

56

 

54

The increase in our days’ supply of inventory was primarily due to opportunistic lumber purchases in the fourth quarter of 2018 of product that was sold in the first six months of 2019 and contributed to our improved profitability.

Our cash flows from operating activities in 2019 was $349.3 million, which was comprised of net earnings of $182.4 million, $77 million of non-cash expenses, and an $89.8 million decrease in working capital since the end of December 2018. Comparatively, cash generated from operating activities was approximately $116.7 million in 2018, which was comprised of net earnings of $152.4 million, $61.1 million of non-cash expenses, and a $96.8 million increase in working capital since the end of 2017.  The trends in working capital discussed above were primarily due to opportunistic purchases of lumber purchases in the fourth quarter of 2018 as well as higher lumber prices in 2018 which declined in 2019.  Non-cash expenses increased primarily due to depreciation and deferred income taxes.

Our cash used in investing activities during 2019 was $142 million, which was comprised primarily of purchases of property, plant, and equipment totaling $84.9 million, business acquisitions totaling $39.1 million, and investments in life insurance contracts totaling $15.2 million. The decrease in our capital expenditures in 2019 was primarily due to extended lead times with contractors and equipment suppliers on capital projects.  Consequently, our outstanding purchase commitments on existing capital projects totaled approximately $34 million on December 28, 2019.  Our capital expenditures primarily consist of “maintenance” capital expenditures totaling approximately $54.2 million, as well as “expansionary and efficiency” capital expenditures tied to initiatives including adding capacity in South Florida to replace the Medley plant we sold last year, expanding our capacity to produce new and valued value-added products, and automation. We also purchased real estate and equipment for geographic expansion.  The sale and purchase of investments totaling $9.8 million and $13.3 million, respectively, are due to investment activity in our captive insurance subsidiary.

In 2018, investments in business acquisitions and purchases of property, plant, and equipment were $54 million and $95.9 million, respectively, and proceeds from the sale of property, plant and equipment were $38.4 million, primarily due to the sale of the Medley, FL, plant for $36 million. Outstanding purchase commitments on existing capital projects totaled approximately $14.3 million on December 29, 2018.

Cash flows from financing activities primarily consisted of $422.1 million of borrowings under the revolving credit facilities (See Notes to Consolidated Financial Statements “Debt”), repayments under these facilities of approximately $460.1 million, and $24.5 million in dividend payments. We paid semi-annual dividends in June and December of 2019 at a semi-annual rate of $0.20 per share.  Comparatively in 2018, cash flows from financing activities primarily consisted of $75 million in proceeds from the issuance of Senior A and B Notes, net borrowings under our revolving credit facility of approximately $16.1 million, $22.1 million in dividend payments at a semi-annual rate of $0.18 per share, and $24.6 million of stock repurchases at an average price of $28.62 per share.

On November 1, 2018, we entered into a five-year, $375 million unsecured revolving credit facility with a syndicate of U.S. and Canadian banks led by JPMorgan Chase Bank, N.A., as administrative agent and Wells Fargo Bank, N.A., as syndication agent.  The facilities include up to $40 million which may be advanced in the form of letters of credit, and up

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

to $100 million (U.S. dollar equivalent) which may be advanced in Canadian dollars, Australian dollars, pounds Sterling, Euros and such other foreign currencies as may subsequently be agreed upon among the parties. This facility replaced our $295 million unsecured revolving credit facility.

On December 28, 2019, we had $4 million outstanding on our $375 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $9.8 million on December 28, 2019. As a result, we have approximately $361 million in remaining availability on our revolver. Additionally, we have $150 million in availability under a "shelf agreement" for long term debt with a current lender. Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements on December 28, 2019.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Consolidated Financial Statements, Note L, “Commitments, Contingencies, and Guarantees”.

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

GOODWILL

We evaluate goodwill for indicators of impairment when events or circumstances indicate that this risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance and estimated future cash flows. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which the Company has consistently estimated using primarily a weighted average between income and market approach. The Company believes this approach is the most appropriate and accurate method to measure the fair value of our intangible assets. We use the discounted cash flow analysis with the following assumption:  a business is worth today what it can generate in future cash flows; cash received today is worth more than an equal amount of cash received in the future; and future cash flows can be reasonably estimated. The discounted cash flow analysis is based on the present value of projected cash flows and residual values.

As our annual testing date of September 28, 2019, the fair values exceed the carrying values for each of the Company’s reporting units.

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

For 2019, there were no indicators for impairment for any of the reporting units, but we continue to monitor the results of the idX reporting unit. They have performed below expectations through year-end; however, management believes the long-term projection for idX is still reasonable and attainable. While the risk of impairment exists, management does not

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

feel an impairment is necessary. Should the Company’s future analysis indicate a significant change in any of the triggering events for this reporting unit, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company’s future goodwill impairment testing will not result in a charge to earnings. The goodwill and identifiable intangibles of the idX reporting unit total $10.3 million and $4.5 million, respectively, on September 28, 2019.

REVENUE RECOGNITION

Revenue for product sales is recognized at the time the performance obligation is satisfied, which is primarily when the goods are delivered to the carrier, Free On Board (FOB) shipping point.  Generally, title passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day.

Performance on construction contracts is reflected in operations using percentage-of-completion accounting, under either the cost to cost or units of delivery methods, depending on the nature of the business at individual operations. Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units per the contract. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.

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

FORWARD OUTLOOK

GOALS

The Company’s goal is to achieve long-term unit sales growth that exceeds positive U.S. GDP growth by 4 percent to 6 percent, including business acquisitions.

Our general long-term objectives also include:

Achieving sales growth primarily through new product introduction, international business expansion, and gaining additional market share, particularly in our core retail, industrial and commercial construction markets;
Identifying new growth opportunities in businesses with adjacencies to our core businesses, primarily through strategic business acquisitions;
Increasing our profitability through cost reductions, productivity improvements as volume improves, and a more favorable mix of value-added products resulting in growth in earnings from operations in excess of our unit sales growth; and
Earning a return on invested capital in excess of our weighted average cost of capital.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Under our new structure starting January 1, 2020, the Company will be re-organized around the markets it serves (retail, construction, and industrial) rather than geography. We believe this change in segmentation will, among other factors, allow for a more specialized and consistent sales approach among all Universal operations, more efficient use of resources and capital, and quicker introduction of new products and services, which will enhance our ability to achieve the long term objectives noted above.

RETAIL MARKET

The Home Improvement Research Institute (“HIRI”) anticipates growth in home improvement spending and has forecasted a 2.7% compounded annual growth rate through 2023.

We continue to compete for market share for certain retail customers and face intense pricing pressure from other suppliers to this market.

Our long-term goal is to achieve sales growth by:

Increasing our market share of value-added products, including our Deckorators product line.
Developing new products.
Adding new products and customers through strategic business acquisitions or alliances.
Increasing our emphasis on product innovation and product differentiation in order to counter commoditization trends and influences.

INDUSTRIAL MARKET

Our goal is to increase our sales of wood, wood alternative, and other packaging products to a wide variety of industrial and OEM users. We believe the vast amount of hardwood and softwood lumber consumed for industrial applications, combined with the highly fragmented nature of this market, provides us with growth opportunities as a result of our competitive advantages in manufacturing, purchasing, and material utilization. In addition, purchasers of packaging products with a wide geographic footprint increasingly desire to reduce the number of suppliers they buy from, which provides an opportunity to gain market share due to our national presence.  We plan to continue to obtain market share by expanding our manufacturing capacity, enhancing our capabilities and product offerings, and improving our ability to serve large regional and national customers in targeted markets. We plan to pursue acquisition opportunities that meet our strategic criteria and help us meet these objectives.

CONSTRUCTION MARKET

The National Association of Home Builders forecasts a 13.8% increase in manufactured home shipments in 2020 followed by an 11.2% increase in 2021. We currently supply approximately 40% of the trusses used in manufactured housing and we will strive to maintain our market share of trusses produced for this market.

The Mortgage Bankers Association of America forecasts a 3.3% increase in national housing starts to an estimated 1.3 million starts in 2020. The National Association of Home Builders forecasts starts of 1.3 million, a 1.6% increase from 2019. We believe we are well-positioned to capture our share of any increase that may occur in housing starts in the regions we operate, which is primarily Texas, Colorado, the Southeast, and the Northeast. However, due to our conservative approach to adding capacity to serve this market and focus on managing potential channel conflicts with certain customers, our growth may trail the market in future years.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GROSS PROFIT

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

End market demand and our ability to grow and leverage fixed costs.
Our ability to maintain market share and gross margins on products sold to our largest customers. We believe our level of service, geographic diversity, and quality of products provides an added value to our customers. However, if our customers are unwilling to pay for these advantages, our sales and gross margins may be reduced.
Sales mix of value-added and commodity products.
Fluctuations in the relative level of the Lumber Market and trends in the market price of lumber. (See "Impact of the Lumber Market on our Operating Results.")
Fuel and transportation costs.
Rising labor and benefit costs.
Our ability to continue to achieve productivity improvements as our unit sales increase and planned cost reductions through continuous improvement activities, automation, and other initiatives.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

In recent years, selling, general and administrative (SG&A) expenses have increased as we have added personnel needed to take advantage of growth opportunities and execute our initiatives intended to increase our sales of new products and improve our sales mix of value-added products. We anticipate our trend of increases in these costs will continue in 2020; however, our objective is to reduce these costs on a per unit basis and as a percentage of gross profits as we grow through the improved productivity of our people and as a result of fixed costs. In addition, bonus and other incentive expenses for all salaried and sales employees is based on our profitability and the effective management of our assets and will continue to fluctuate based on our results.

On a long-term basis, we expect that our SG&A expenses will primarily be impacted by:

Our growth in sales to the industrial market and the construction market. Our sales to these markets require a higher ratio of SG&A costs due, in part, to product design and engineering requirements.
Sales of new products and value-added products to the retail market, which generally require higher development, marketing, advertising, and other selling costs.
Our incentive compensation programs which are tied to gross profits, pre-bonus earnings from operations and return on investment.
Our growth and success in achieving continuous improvement objectives designed to improve our productivity and leverage our fixed costs.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

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

Additionally, management expects to spend approximately $100 million on capital expenditures, incur depreciation of approximately $65 million, and incur amortization and other non-cash expenses of approximately $11 million in 2020.

On December 28, 2019, we had outstanding purchase commitments on capital projects of approximately $34 million. We intend to fund capital expenditures and purchase commitments through our operating cash flows and availability under our revolving credit facility which is considered sufficient to meet these commitments and working capital needs.

In January 2020, our Board approved a plan to increase the frequency of our dividend payments from semi-annually to quarterly and increased the pro-rata rate by 25%.  Our dividend rates are reviewed and approved at each of our January, April, July, and October board meetings and payments are made in March, June, September, and December of each year.

We have a share repurchase program approved by our Board of Directors, and as of December 28, 2019, we have authorization to buy back approximately 1.9 million shares. In the past, we have repurchased shares in order to offset the effect of issuances resulting from our employee benefit plans and at opportune times when our stock price falls to predetermined levels.

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Management’s Report on Internal Control Over Financial Reporting

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

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

We assessed the effectiveness of our internal control over financial reporting as of December 28, 2019, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”). Based on that evaluation, management has concluded that as of December 28, 2019, our internal control over financial reporting was effective.

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

Universal Forest Products, Inc.

February 26, 2020

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Universal Forest Products, Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Universal Forest Products, Inc. and subsidiaries (the “Company”) as of December 28, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 28, 2019, of the Company and our report dated February 26, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan   

February 26, 2020

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Universal Forest Products, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Universal Forest Products, Inc. and subsidiaries (the "Company") as of December 28, 2019 and December 29, 2018, the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 28, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2019 and December 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 28, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 28, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan  

February 26, 2020

We have served as the Company's auditor since 2014.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 28,

December 29,

    

2019

    

2018

ASSETS

  

  

CURRENT ASSETS:

  

  

Cash and cash equivalents

    

$

168,336

  

$

27,316

Restricted cash

 

330

  

 

882

Investments

 

18,527

  

 

14,755

Accounts receivable, net

 

364,027

  

 

343,450

Inventories:

  

  

Raw materials

 

236,283

  

 

271,871

Finished goods

 

250,591

  

 

284,349

Total inventories

 

486,874

  

 

556,220

Refundable income taxes

 

13,272

  

 

14,130

Other current assets

 

41,706

  

 

38,525

TOTAL CURRENT ASSETS

 

1,093,072

 

995,278

DEFERRED INCOME TAXES

 

2,763

  

 

2,668

RESTRICTED INVESTMENTS

16,214

13,267

RIGHT OF USE ASSETS

80,167

OTHER ASSETS

 

24,884

  

 

8,662

GOODWILL

 

229,536

  

 

224,117

INDEFINITE-LIVED INTANGIBLE ASSETS

 

7,354

  

 

7,360

OTHER INTANGIBLE ASSETS, NET

 

48,313

  

 

41,486

PROPERTY, PLANT AND EQUIPMENT:

  

  

Land and improvements

125,097

120,324

Building and improvements

253,589

239,906

Machinery and equipment

467,963

419,115

Furniture and fixtures

16,972

16,960

Construction in progress

21,342

18,340

PROPERTY, PLANT AND EQUIPMENT,GROSS

 

884,963

  

 

814,645

Less accumulated depreciation and amortization

 

(497,789)

  

 

(459,935)

PROPERTY, PLANT AND EQUIPMENT, NET

387,174

354,710

TOTAL ASSETS

$

1,889,477

$

1,647,548

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

  

CURRENT LIABILITIES:

  

  

Cash overdraft

$

  

$

27,367

Accounts payable

 

142,479

  

 

136,901

Accrued liabilities:

  

  

Compensation and benefits

 

141,892

  

 

104,109

Other

 

51,572

  

 

41,645

Current portion of lease liability

15,283

Current portion of long-term debt

 

2,816

  

 

148

TOTAL CURRENT LIABILITIES

 

354,042

  

 

310,170

LONG-TERM DEBT

 

160,867

  

 

202,130

LEASE LIABILITY

64,884

DEFERRED INCOME TAXES

 

22,880

  

 

15,687

OTHER LIABILITIES

 

29,071

  

 

30,877

TOTAL LIABILITIES

 

631,744

  

 

558,864

SHAREHOLDERS’ EQUITY:

  

  

Controlling interest shareholders’ equity:

  

  

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

$

  

$

Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,408,589 and 60,883,749

 

61,409

  

 

60,884

Additional paid-in capital

 

192,173

  

 

178,540

Retained earnings

 

995,022

  

 

839,917

Accumulated other comprehensive income

 

(4,889)

  

 

(5,938)

Total controlling interest shareholders’ equity

 

1,243,715

  

 

1,073,403

Noncontrolling interest

 

14,018

  

 

15,281

TOTAL SHAREHOLDERS’ EQUITY

 

1,257,733

  

 

1,088,684

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

1,889,477

  

$

1,647,548

See notes to consolidated financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

Year Ended

December 28,

December 29,

December 30,

    

2019

    

2018

    

2017

NET SALES

    

$

4,416,009

  

$

4,489,180

  

$

3,941,182

COST OF GOODS SOLD

 

3,730,491

  

 

3,896,286

  

 

3,398,356

GROSS PROFIT

 

685,518

  

 

592,894

  

 

542,826

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

439,047

  

 

392,235

  

 

362,220

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

1,565

(6,604)

(863)

EARNINGS FROM OPERATIONS

 

244,906

  

 

207,263

  

 

181,469

INTEREST EXPENSE

 

8,700

  

 

8,893

  

 

6,218

INTEREST INCOME

 

(1,945)

  

 

(1,371)

  

 

(731)

UNREALIZED LOSS (GAIN) ON INVESTMENTS AND OTHER

(2,523)

1,888

(25)

 

4,232

  

 

9,410

  

 

5,462

EARNINGS BEFORE INCOME TAXES

 

240,674

  

 

197,853

  

 

176,007

INCOME TAXES

 

58,270

  

 

45,441

  

 

51,967

NET EARNINGS

 

182,404

  

 

152,412

  

 

124,040

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(2,754)

  

 

(3,814)

  

 

(4,528)

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

179,650

  

$

148,598

  

$

119,512

EARNINGS PER SHARE - BASIC

$

2.91

  

$

2.41

  

$

1.95

EARNINGS PER SHARE - DILUTED

$

2.91

  

$

2.40

  

$

1.94

OTHER COMPREHENSIVE INCOME:

NET EARNINGS

 

182,404

  

 

152,412

  

 

124,040

OTHER COMPREHENSIVE GAIN (LOSS)

 

1,513

  

 

(5,076)

  

 

6,130

COMPREHENSIVE INCOME

 

183,917

  

 

147,336

  

 

130,170

LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(3,218)

  

 

(3,873)

  

 

(4,884)

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST

$

180,699

  

$

143,463

  

$

125,286

See notes to consolidated financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share data)

Controlling Interest Shareholders’ Equity

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Noncontrolling

    

Stock

    

Capital

    

Earnings

    

Earnings

    

Interest

    

Total

Balance at December 31, 2016

$

61,026

$

144,649

  

$

649,135

$

(5,630)

  

$

11,286

  

$

860,466

Net earnings

  

  

 

119,512

 

  

 

4,528

  

 

124,040

Foreign currency translation adjustment

  

  

  

 

5,070

 

356

  

 

5,426

Unrealized gain (loss) on investment & foreign currency

  

  

  

 

704

 

  

 

704

Distributions to noncontrolling interest

  

  

  

  

 

(4,032)

 

(4,032)

Additional purchase of noncontrolling interest

2,409

2,409

Cash dividends - $0.150 & $0.170 per share - semiannually

  

  

 

(19,607)

 

  

 

  

 

(19,607)

Issuance of 23,691 shares under employee stock plans

 

24

 

637

  

  

  

  

 

661

Issuance of 428,622 shares under stock grant programs

 

429

 

5,769

  

  

  

  

 

6,198

Issuance of 159,108 shares under deferred compensation plans

 

159

 

(159)

  

  

  

  

 

Repurchase of 445,740 shares

 

(446)

 

297

 

(12,828)

  

  

 

  

 

(12,977)

Expense associated with share-based compensation arrangements

  

 

3,618

 

  

 

  

 

  

 

3,618

Accrued expense under deferred compensation plans

  

 

7,117

  

  

  

  

  

  

  

7,117

Balance at December 30, 2017

$

61,192

$

161,928

  

$

736,212

$

144

  

$

14,547

  

$

974,023

Net earnings

  

  

 

148,598

 

  

 

3,814

  

 

152,412

Foreign currency translation adjustment

  

  

  

 

(4,973)

 

59

  

 

(4,914)

Unrealized gain (loss) on investment & foreign currency