Table of Contents
Exhibit 13
UNIVERSAL FOREST PRODUCTS, INC.
FINANCIAL INFORMATION
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 |
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Management’s Report on Internal Control Over Financial Reporting | 22 |
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Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018 | 25 |
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29-52 | |
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SELECTED FINANCIAL DATA
(In thousands, except per share and statistics data)
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| 2019 |
| 2018 |
| | 2017 |
| | 2016 |
| | 2015 |
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Consolidated Statement of Earnings Data |
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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 | |
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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 | |
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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.
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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.
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| | Random Lengths Composite |
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| | Average $/MBF |
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| 2019 |
| 2018 |
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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.
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| | Southern Yellow Pine | |||||
| | Average $/MBF | |||||
|
| 2019 |
| 2018 |
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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.
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| Period 1 |
| Period 2 |
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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.
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| | Year Ended | |||
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| December 28, |
| December 29, |
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| | 2019 |
| 2018 |
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Net sales | | 100.0 | % | 100.0 | % |
Cost of goods sold | | 84.5 |
| 86.8 |
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Gross profit | | 15.5 |
| 13.2 |
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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.
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| | Adjusted for Lumber Market Change | |||
| | Year Ended | |||
|
| December 28, |
| December 29, |
|
| | 2019 |
| 2018 |
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Net sales | | 100.0 | % | 100.0 | % |
Cost of goods sold | | 85.6 |
| 86.8 |
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Gross profit | | 14.4 |
| 13.2 |
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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.
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| | 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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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
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● | 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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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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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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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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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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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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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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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.
21
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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
22
Table of Contents
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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Table of Contents
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.
24
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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.
26
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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 | | | |
| | |
| | 947 |
|
| (1,109) | |
|
| |
| (162) |
Distributions to noncontrolling interest | | | |
| | |
| | |
| | |
|
| (3,139) | |
| (3,139) |
Cash dividends - $0.180 per share - semiannually | | | |
| | |
|
| (22,072) | |
|
| |
|
| |
| (22,072) |
Issuance of 37,794 shares under employee stock plans | |
| 38 | |
| 988 |
| | |
| | |
| | |
|
| 1,026 |
Issuance of 348,208 shares under stock grant programs | |
| 348 | |
| 4,827 |
| | |
| | |
| | |
|
| 5,175 |
Issuance of 166,528 shares under deferred compensation plans | |
| 167 | |
| (167) |
| | |
| | |
| | |
|
| — |
Repurchase of 860,669 shares | | | (861) | | | | | | (23,768) | | | | | | | | | (24,629) |
Expense associated with share-based compensation arrangements | | | |
|
| 3,379 | |
|
| |
|
| |
|
| |
| 3,379 |
Accrued expense under deferred compensation plans | | | |
|
| 7,585 | |
|
| |
|
| |
|
| |
| 7,585 |
Balance at December 29, 2018 | | $ | 60,884 | | $ | 178,540 |
| $ | 839,917 | | $ | (5,938) |
| $ | 15,281 |
| $ | 1,088,684 |
Net earnings | | | |
| | |
|
| 179,650 | |
|
| |
| 2,754 |
|
| 182,404 |
Foreign currency translation adjustment | | | |
| | |
| | |
|
| 568 | |
| 464 |
|
| 1,032 |
Unrealized gain on debt securities | | | |
| | |
| | |
|
| 481 | |
|
| |
| 481 |
Distributions to noncontrolling interest | | | |
| | |
| | |
| | |
|
| (2,143) | |
| (2,143) |
Additional purchase of noncontrolling interest | | | | | | (4,737) | | | | | | | | | (2,338) | | | (7,075) |
Cash dividends - $0.200 per share - semiannually | | | |
| | |
|
| (24,549) | |
|
| |
|
| |
| (24,549) |
Issuance of 33,647 shares under employee stock plans | |
| 34 | |
| 1,059 |
| | |
| | |
| | |
|
| 1,093 |
Issuance of 309,628 shares under stock grant programs | |
| 310 | |
| 5,654 |
| | 4 |
| | |
| | |
|
| 5,968 |
Issuance of 181,565 shares under deferred compensation plans | |
| 181 | |
| (181) |
| | |
| | |
| | |
|
| — |
Expense associated with share-based compensation arrangements | | | |
|
| 3,843 | |
|
| |
|
| |
|
| |
| 3,843 |
Accrued expense under deferred compensation plans | | | |
|
| 7,995 | |
|
| |
|
| |
|
| |
| 7,995 |
Balance at December 28, 2019 | | $ | 61,409 | | $ | 192,173 |
| $ | 995,022 | | $ | (4,889) |
| $ | 14,018 |
| $ | 1,257,733 |
See notes to consolidated financial statements
27
Table of Contents
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | |
(in thousands) | | Year Ended | |||||||
| | December 28, | | December 29, | | December 30, | |||
|
| 2019 |
| 2018 |
| 2017 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| | |
| | |
Net earnings | | $ | 182,404 |
| $ | 152,412 |
| $ | 124,040 |
Adjustments to reconcile net earnings to net cash from operating activities: | | | |
| | |
| | |
Depreciation | |
| 60,494 | |
| 54,949 | |
| 48,536 |
Amortization of intangibles | |
| 6,325 | |
| 6,393 | |
| 4,860 |
Expense associated with share-based and grant compensation arrangements | |
| 4,007 | |
| 3,574 | |
| 3,805 |
Deferred income taxes credits | |
| 7,176 | |
| 857 | |
| (8,629) |
Unrealized (gain) loss on investments | |
| (2,523) | |
| 1,888 | |
| (25) |
Net (gain) loss on disposition of assets and impairment of assets | |
| 1,565 | |
| (6,604) | |
| (863) |
Changes in: | | | |
| | |
| | |
Accounts receivable | |
| (16,872) | |
| (8,512) | |
| (30,787) |
Inventories | |
| 73,120 | |
| (84,304) | |
| (49,262) |
Accounts payable and cash overdraft | |
| (24,132) | |
| (5,213) | |
| 21,159 |
Accrued liabilities and other | |
| 57,727 | |
| 1,245 | |
| 23,749 |
NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 349,291 | |
| 116,685 | |
| 136,583 |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| | |
| | |
Purchases of property, plant and equipment | |
| (84,933) | |
| (95,862) | |
| (71,116) |
Proceeds from sale of property, plant and equipment | |
| 1,777 | |
| 38,373 | |
| 2,919 |
Acquisitions and purchases of non-controlling interest, net of cash received | |
| (39,122) | |
| (54,017) | |
| (60,587) |
Investment in life insurance contracts | |
| (15,253) | |
| — | |
| — |
Purchases of investments | |
| (13,352) | |
| (13,338) | |
| (13,518) |
Proceeds from sale of investments | |
| 9,828 | |
| 3,678 | |
| 5,103 |
Other | |
| (982) | |
| (66) | |
| (460) |
NET CASH USED IN INVESTING ACTIVITIES | |
| (142,037) | |
| (121,232) | |
| (137,659) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| | |
| | |
Borrowings under revolving credit facilities | |
| 422,057 | |
| 732,370 | |
| 758,287 |
Repayments under revolving credit facilities | |
| (460,537) | |
| (748,496) | |
| (722,725) |
Borrowings of debt | | | — | | | 927 | | | 8,525 |
Repayment of debt | | | (3,136) | | | (5,540) | | | (13,347) |
Issuance of long-term debt | | | — | | | 75,000 | | | — |
Proceeds from issuance of common stock | |
| 1,093 | |
| 1,026 | |
| 660 |
Dividends paid to shareholders | |
| (24,549) | |
| (22,072) | |
| (19,607) |
Distributions to noncontrolling interest | | | (2,216) | | | (3,139) | | | (4,032) |
Repurchase of common stock | |
| — | |
| (24,629) | |
| (12,977) |
Other | |
| 20 | |
| (1,054) | |
| (31) |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | |
| (67,268) | |
| 4,393 | |
| (5,247) |
Effect of exchange rate changes on cash | |
| 482 | |
| (464) | |
| 650 |
NET CHANGE IN CASH AND CASH EQUIVALENTS | |
| 140,468 | |
| (618) | |
| (5,673) |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR | |
| 28,198 | |
| 28,816 | |
| 34,489 |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD | | $ | 168,666 | | $ | 28,198 | | $ | 28,816 |
| | | | | | | | | |
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH: | | | | | | | | | |
Cash and cash equivalents, beginning of period | | $ | 27,316 | | $ | 28,339 | | $ | 34,091 |
Restricted cash, beginning of period | | | 882 | | | 477 | | | 398 |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 28,198 | | $ | 28,816 | | $ | 34,489 |
| | | | | | | | | |
Cash and cash equivalents, end of period | | $ | 168,336 | | $ | 27,316 | | $ | 28,339 |
Restricted cash, end of period | | | 330 | | | 882 | | | 477 |
Cash, cash equivalents, and restricted cash, end of period | | $ | 168,666 | | $ | 28,198 | | $ | 28,816 |
| | | | | | | | | |
SUPPLEMENTAL INFORMATION: | | | |
| | |
| | |
Interest paid | | $ | 8,763 | | $ | 8,860 | | $ | 6,020 |
Income taxes paid | |
| 50,224 | |
| 51,578 | |
| 56,663 |
NON-CASH FINANCING ACTIVITIES: | | | | | | | | | |
Common stock issued under deferred compensation plans | | $ | 6,229 | | $ | 5,837 | | $ | 5,116 |
See notes to consolidated financial statements
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UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships. In addition, we consolidate any entity which we own 50% or more and exercise control. Intercompany transactions and balances have been eliminated.
NONCONTROLLING INTEREST IN SUBSIDIARIES
Noncontrolling interest in results of operations of consolidated subsidiaries represents the noncontrolling shareholders’ share of the income or loss of various consolidated subsidiaries. The noncontrolling interest reflects the original investment by these noncontrolling shareholders combined with their proportional share of the earnings or losses of these subsidiaries, net of distributions paid.
FISCAL YEAR
Our fiscal year is a 52 or 53 week period, ending on the last Saturday of December. Unless otherwise stated, references to 2019, 2018, and 2017 relate to the fiscal years ended December 28, 2019, December 29, 2018, and December 30, 2017, respectively. Fiscal years 2019, 2018, and 2017 were comprised of 52 weeks.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
We follow ASC Topic 820, Fair Value Measurements and Disclosures, which provides a consistent definition of fair value, focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-tier hierarchy for fair value measurements. This topic requires fair value measurements to be classified and disclosed in one of the following three categories:
● | Level 1 — Financial instruments with unadjusted, quoted prices listed on active market exchanges. |
● | Level 2 — Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. Financial instrument values are determined using prices for recently traded financial instruments with similar underlying terms and direct or indirect observational inputs, such as interest rates and yield curves at commonly quoted intervals. |
● | Level 3 — Financial instruments not actively traded on a market exchange and there is little, if any, market activity. Values are determined using significant unobservable inputs or valuation techniques. |
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments purchased with an original maturity of three months or less.
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INVESTMENTS
Investments are deemed to be "available for sale" and are, accordingly, carried at fair value being the quoted market value.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends ASC 825-10, Financial Instruments – Overall, this ASU changes the treatment for available-for-sale equity investments by recognizing unrealized fair value changes directly in net income and no longer in other comprehensive income. For public entities, the amendment is effective for fiscal years beginning after December 15, 2017. The ASU was adopted during fiscal 2018 with a cumulative-effect adjustment to retained earnings of $0.9 million at the beginning of 2018. The available-for-sale equity securities balance at December 28, 2019, and December 29, 2018 was $14.7 million and $11.0 million, respectively. The adoption of ASU No. 2016-01 resulted in an unrealized gain recorded as a non-operating income of $2.5 million in 2019, and an unrealized loss of $1.9 million recorded in non-operating expense in 2018.
ACCOUNTS RECEIVABLE AND ALLOWANCES
We perform periodic credit evaluations of our customers and generally do not require collateral. Accounts receivable are due under a range of terms we offer to our customers. Discounts are offered, in most instances, as an incentive for early payment.
We base our allowances related to receivables on historical credit and collections experience, and the specific identification of other potential problems, including the general economic climate. Actual collections can differ, requiring adjustments to the allowances. Individual accounts receivable balances are evaluated on a monthly basis, and those balances considered uncollectible are charged to the allowance.
The following table presents the activity in our accounts receivable allowances (in thousands):
| | | | | | | | | | | | |
|
| | |
| Additions |
| | |
| | | |
| | | | | Charged to | | | | | | | |
| | Beginning | | Costs and | | | | Ending | ||||
| | Balance | | Expenses | | Deductions* | | Balance | ||||
Year Ended December 28, 2019: |
| |
|
| |
|
| |
|
| |
|
Allowance for possible losses on accounts receivable | | $ | 2,601 | | $ | 39,481 | | $ | (37,642) | | $ | 4,440 |
Year Ended December 29, 2018: | |
|
| |
|
| |
|
| |
|
|
Allowance for possible losses on accounts receivable | | $ | 2,424 | | $ | 38,963 | | $ | (38,786) | | $ | 2,601 |
Year Ended December 30, 2017: | |
|
| |
|
| |
|
| |
|
|
Allowance for possible losses on accounts receivable | | $ | 2,845 | | $ | 28,102 | | $ | (28,523) | | $ | 2,424 |
* | Includes accounts charged off, discounts given to customers and actual customer returns and allowances. |
We record estimated sales returns, discounts, and other applicable adjustments as a reduction of net sales in the same period revenue is recognized.
Accounts receivable retainage amounts related to long term construction contracts totaled $7.4 million and $5.5 million as of December 28, 2019 and December 29, 2018, respectively. All amounts are expected to be collected within 18 months. Concentration of accounts receivable related to our largest customer totaled $42.8 million and $44.5 million as of December 28, 2019 and December 29, 2018, respectively.
In June 2016, the FASB issued ASU 2016-13, Financial Instrument-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which changes the current incurred loss model to a forward looking expected credit loss model for most financial assets, such as trade and other receivables, loans and other instruments. The ASU is effective for fiscal years beginning December 15, 2019, with early adoption permitted. Entities are required to apply the provisions of the standard through a cumulative-effect adjustment to retained earnings as of
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effective date. The Company evaluated the impact of the standard on its consolidated statements, particularly over accounts receivable, and does not expect the standard to have a material impact on its consolidated financial statements and disclosures, accounting processes, and internal controls.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of inventories includes raw materials, direct labor, and manufacturing overhead. Cost is determined on a weighted average basis. Raw materials consist primarily of unfinished wood products expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale. We have inventory on consignment at customer locations valued at $20.2 million as of December 28, 2019 and $16.8 million as of December 29, 2018.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Expenditures for renewals and betterments are capitalized, and maintenance and repairs are expensed as incurred. Amortization of assets held under capital leases is included in depreciation and amortized over the shorter of the estimated useful life of the asset or the lease term. Depreciation is computed principally by the straight-line method over the estimated useful lives of the assets as follows:
| | |
Land improvements |
| 5 to 15 years |
Buildings and improvements |
| 10 to 32 years |
Machinery, equipment and office furniture |
| 2 to 20 years |
Software costs are included in machinery and equipment on the balance sheet with gross amounts and accumulated amortization totaling $6.1 million and $5.2 million as of December 28, 2019, and $7.3 million and $5.7 million as of December 29, 2018, respectively.
LONG-LIVED ASSETS
In accordance with ASC 360, Property, Plant, and Equipment (“ASC 360”), when an indicator of potential impairment exists, we evaluate the recoverability of our long-lived assets by determining whether unamortized balances could be recovered through undiscounted future operating cash flows over the remaining lives of the assets. If the sum of the expected future cash flows was less than the carrying value of the assets, an impairment loss would be recognized for the excess of the carrying value over the fair value.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized and are subject to impairment tests at least annually in accordance with ASC 350, Intangibles-Goodwill and Other. We review the carrying amounts of goodwill and other non-amortizable intangibles by reporting unit to determine if such assets may be impaired. As the carrying amount of these assets are recoverable based upon a discounted cash flow and market approach analysis, no impairment was recognized.
Our annual testing date for evaluating goodwill and indefinite-lived intangible asset impairment is the first day of the Company’s fourth fiscal quarter for all reporting units. Additionally, the Company reviews various triggering events throughout the year to ensure that a mid-year impairment analysis is not required.
FOREIGN CURRENCY
Our foreign operations use the local currency as their functional currency. Accordingly, assets and liabilities are translated at exchange rates as of the balance sheet date and revenues and expenses are translated using weighted average rates, with translation adjustments included as a separate component of shareholders’ equity. Gains and losses arising from re-measuring foreign currency transactions are included in earnings.
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INSURANCE RESERVES
Our wholly-owned insurance company, Ardellis Insurance Ltd.(“Ardellis”), was incorporated on April 21, 2001 under the laws of Bermuda and is licensed as a Class 3A insurer under the Insurance Act 1978 of Bermuda. On April 14, 2017 the U.S. Branch of Ardellis Insurance Ltd. was granted its Certificate of Authority to transact property and casualty insurance lines as an admitted carrier in the State of Michigan.
We are primarily self-insured for certain employee health benefits, and have self-funded retentions for general liability, automobile liability, property and workers’ compensation. We are fully self-insured for environmental liabilities. The general liability, automobile liability, property, workers’ compensation, and certain environmental liabilities are managed through Ardellis; the related assets and liabilities of which are included in the consolidated financial statements as of December 28, 2019 and December 29, 2018. Our policy is to accrue amounts equal to actuarially determined or internally computed liabilities. The actuarial and internal valuations are based on historical information along with certain assumptions about future events. Changes in assumptions for such matters as legal actions, medical cost trends, and changes in claims experience could cause these estimates to change in the future.
In addition to providing coverage for the Company, Ardellis provides Excess Loss Insurance (primarily medical and prescription drug) to certain third parties. As of December 28, 2019, Ardellis had 42 such contracts in place. Reserves associated with these contracts were $5.7 million at December 28, 2019 and $4.9 million at December 29, 2018 and are accrued based on third party actuarial valuations of the expected future liabilities.
INCOME TAXES
Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred income tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities.
REVENUE RECOGNITION
On May 28, 2014, the FASB issued ASU No. 2014-09 (Accounting Standard Codification 606), Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company has adopted the requirements of the new standard as of January 1, 2018, and utilized the modified retrospective method of transition which was applied to all contracts.
The Company completed the new revenue recognition standard assessment and determined that there was no material impact to our consolidated financial statements, aside from additional required disclosures, thus no needed adjustment to the opening retained earnings for the annual reporting period.
Within the three markets (retail, industrial, and construction) that the Company operates, there are a variety of written and oral contracts that are utilized to generate revenue from the sale of wood, wood composite and other products. The transaction price is stated at the purchase order level, which includes shipping and/or freight costs and any applicable governmental authority taxes. The majority of our contracts have a single performance obligation concentrated around the delivery of goods to the carrier, Free On Board (FOB) shipping point. Therefore, revenue is recognized when this performance obligation is satisfied. Generally, title and control 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.
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Certain customer products that we provide require installation by the Company or a 3rd party. Installation revenue is recognized upon completion, which is typically 2-3 days after receipt. If it is determined to utilize a 3rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.
The Company utilizes rebates, credits, discounts and/or cash-based incentives with certain customers which are accounted for as variable consideration. We estimate these amounts based on historical and anticipated customer sales and reduce recognized revenues accordingly. We believe that there will not be significant changes to our estimates of variable consideration. Our estimates of variable consideration are considered not constrained as the likelihood and magnitude of a significant reversal are not probable. The allocation of these costs are applied at the invoice level and recognized in conjunction with revenue. Additionally, the volume returns and refunds are estimated on a historical and expected basis which is a reduction of revenue recognized.
Earnings on construction contracts are reflected in operations using over time accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations, which is in accordance with ASC 606 as revenue is recognized when certain performance obligations are performed. Under over time accounting 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 over time accounting using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.
Our construction contracts are generally entered into with a fixed price and completion of the projects and performance obligations 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. Invoices are issued routinely throughout the projects’ life and payments are primarily due 45-60 days after invoice date. 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.
The following table presents our gross revenues disaggregated by revenue source:
| | | | | | | | |
(in thousands) |
| December 28, |
| December 29, |
| | ||
Market Classification | | 2019 | | 2018 | | % Change | ||
FOB Shipping Point Revenue | | $ | 4,348,757 | | $ | 4,440,098 |
| -2.1% |
Construction Contract Revenue | |
| 143,426 | | | 125,651 |
| 14.1% |
Total Gross Sales | |
| 4,492,183 | | | 4,565,749 |
| -1.6% |
Sales Allowances | | | (76,174) | | | (76,569) | | -0.5% |
Total Net Sales | | $ | 4,416,009 | | $ | 4,489,180 | | -1.6% |
In 2019, $100.5 million and $42.9 million of our construction contract revenue was attributable to our North and West segments, respectively. Construction contract revenue is primarily made up of site-built and framing customers.
The following table presents the balances of percentage-of-completion accounts on December 28, 2019 and December 29, 2018 which are included in other current assets and other accrued liabilities, respectively (in thousands):
| | | | | | |
| | December 28, | | December 29, | ||
|
| 2019 |
| 2018 | ||
Cost and Earnings in Excess of Billings |
| $ | 4,690 |
| $ | 6,945 |
Billings in Excess of Cost and Earnings | |
| 6,622 |
|
| 3,245 |
SHIPPING AND HANDLING OF PRODUCT
Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenue. Costs incurred related to the shipment and handling of products are classified in cost of goods sold.
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EARNINGS PER SHARE
The computation of earnings per share (“EPS”) is as follows (in thousands), which incorporate the retroactive effect of the Company’s 3 for 1 stock split:
| | | | | | | | | |
| | | | | | | | | |
|
| December 28, |
| December 29, |
| December 30, | |||
| | 2019 | | 2018 | | 2017 | |||
Numerator: |
| |
|
| |
|
| |
|
Net earnings attributable to controlling interest | | $ | 179,650 | | $ | 148,598 | | $ | 119,512 |
Adjustment for earnings allocated to non-vested restricted common stock | |
| (4,496) | |
| (3,396) | |
| (2,225) |
Net earnings for calculating EPS | | $ | 175,154 | | $ | 145,202 | | $ | 117,287 |
Denominator: | |
|
| |
|
| |
|
|
Weighted average shares outstanding | |
| 61,649 | |
| 61,762 | |
| 61,416 |
Adjustment for non-vested restricted common stock | |
| (1,543) | |
| (1,411) | |
| (1,143) |
Shares for calculating basic EPS | |
| 60,106 | |
| 60,351 | |
| 60,273 |
Effect of dilutive restricted common stock | |
| 24 | |
| 82 | |
| 90 |
Shares for calculating diluted EPS | |
| 60,130 | |
| 60,433 | |
| 60,363 |
Net earnings per share: | |
|
| |
|
| |
|
|
Basic | | $ | 2.91 | | $ | 2.41 | | $ | 1.95 |
Diluted | | $ | 2.91 | | $ | 2.40 | | $ | 1.94 |
No options were excluded from the computation of diluted EPS for 2019, 2018, or 2017.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We believe our estimates to be reasonable; however, actual results could differ from these estimates.
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B.FAIR VALUE
We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets and liabilities measured at fair value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29, 2018 | ||||||||||||||||||||
| | Quoted | | Prices with | | | | | | | | Quoted | | Prices with | | | | | | | ||||
| | Prices in | | Other | | | Prices with | | | | | Prices in | | Other | | | Prices with | | | | ||||
| | Active | | Observable | | | Unobservable | | | | | Active | | Observable | | | Unobservable | | | | ||||
| | Markets | | Inputs | | | Inputs | | | | | Markets | | Inputs | | | Inputs | | | | ||||
(in thousands) |
| (Level 1) |
| (Level 2) | | | (Level 3) | | Total |
| (Level 1) |
| (Level 2) | | | (Level 3) |
| Total | ||||||
Money market funds | | $ | 162,626 |
| $ | 562 | | $ | — |
| $ | 163,188 |
| $ | 56 |
| $ | 5,267 | | | — |
| $ | 5,323 |
Fixed income funds | |
| 234 | |
| 15,495 | | | — |
|
| 15,729 | |
| 3,387 | |
| 9,738 | | | — |
|
| 13,125 |
Equity securities | |
| 9,734 | |
| — | | | — |
|
| 9,734 | |
| 7,262 | |
| — | | | — |
|
| 7,262 |
Alternative investments | | | — | | | — | | | 1,941 | | | 1,941 | | | — | | | — | | | 1,756 | | | 1,756 |
Mutual funds: | | | |
| | | | | |
| | |
| | |
| | | | | |
| | — |
Domestic stock funds | |
| 3,308 | |
| — | | | — |
|
| 3,308 | |
| 2,846 | |
| — | | | — |
|
| 2,846 |
International stock funds | |
| 1,741 | |
| — | | | — |
|
| 1,741 | |
| 937 | |
| — | | | — |
|
| 937 |
Target funds | |
| 281 | |
| — | | | — |
|
| 281 | |
| 237 | |
| — | | | — |
|
| 237 |
Bond funds | |
| 850 | |
| — | | | — |
|
| 850 | |
| 796 | |
| — | | | — |
|
| 796 |
Alternative funds | | | 1,747 | | | — | | | — | | | 1,747 | | | 1,318 | | | — | | | — | | | 1,318 |
Total mutual funds | |
| 7,927 | |
| — | | | — |
|
| 7,927 | |
| 6,134 | |
| — | | | — |
|
| 6,134 |
Total | | $ | 180,521 | | $ | 16,057 | | | 1,941 | | $ | 198,519 | | $ | 16,839 | | $ | 15,005 | | | 1,756 | | $ | 33,600 |
Assets at fair value | | $ | 180,521 | | $ | 16,057 | | | 1,941 |
| $ | 198,519 | | $ | 16,839 | | $ | 15,005 | | | 1,756 |
| $ | 33,600 |
From the assets measured at fair value as of December 28, 2019, listed in the table above, $162.6 million of money market funds are held in Cash and Cash Equivalents, $18.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $1.1 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $15.7 million of fixed income funds and $0.6 million of money market funds are held in Restricted Investments.
We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan and our wholly owned licensed captive insurance company, and assets held in financial institutions. These funds are valued at prices quoted in an active exchange market and are included in "Cash and Cash Equivalents", "Investments", "Other Assets", and “Restricted Investments.” We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.
During 2018, we purchased a private real estate income trust which is valued as a Level 3 asset and is categorized as an “Alternative Investment.”
In accordance with our investment policy, our wholly-owned company, Ardellis Insurance Ltd. ("Ardellis"), maintains an investment portfolio, totaling $34.3 million as of December 28, 2019, consisting of domestic and international stocks, alternative investments, and fixed income bonds.
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Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following (in thousands):
| | | | | | | | | | | | | | | | | | |
| | December 28, 2019 | | December 29,2018 | ||||||||||||||
| | | | | Unrealized | | | | | | | | Unrealized | | | | ||
|
| Cost |
| Gain/(Loss) |
| Fair Value |
| Cost |
| Gain/(Loss) |
| Fair Value | ||||||
Fixed Income | | $ | 15,376 |
| $ | 353 |
| $ | 15,729 | | $ | 13,301 |
| $ | (176) |
| $ | 13,125 |
Equity | |
| 7,958 | |
| 1,776 |
|
| 9,734 | |
| 7,141 | |
| 121 |
|
| 7,262 |
Mutual Funds | | | 6,568 | | | 284 |
| | 6,852 | | | 5,815 | | | (567) |
| | 5,248 |
Alternative Investments | | | 1,811 | | | 130 |
| | 1,941 | | | 1,722 | | | 34 |
| | 1,756 |
Total | | $ | 31,713 | | $ | 2,543 |
| $ | 34,256 | | $ | 27,979 | | $ | (588) |
| $ | 27,391 |
Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our alternative investments consist of the private real estate income trust which is valued as a Level 3 asset. The net pre-tax unrealized gain was $2.5 million for the year ended December 28, 2019. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of December 28, 2019.
C.BUSINESS COMBINATIONS
We completed the following business combinations in fiscal 2019 and 2018, which were accounted for using the purchase method (in thousands).
| | | | | | | |
---|---|---|---|---|---|---|---|
| | | | | Net | | |
Company | Acquisition | | Intangible | Tangible | Operating | ||
Name | Date | Purchase Price | Assets | Assets | Segment | ||
| September 16, 2019 | $12,422 | $ | 7,464 | $ | 4,958 | North |
Pallet USA, LLC ("Pallet USA") | A manufacturer and recycler of wood pallet and crating products in the Midwest. Pallet USA had annual sales of approximately $18 million. The acquisition of Pallet USA allows us to expand our capacity to manufacture wood-based industrial packaging products and offer new services to customers in the Midwest. | ||||||
| August 12, 2019 | $17,809 | $ | 8,089 | $ | 9,720 | West |
Northwest Painting, Inc. ("Northwest") | A supplier of pre-painted building materials, including composite lap siding, soffit, panels and trim to the Western U.S. Northwest had annual sales of approximately $14 million. The acquisition of Northwest will expand our capacity to produce coated siding and trim for customers in the Northwest and Mountain West regions. | ||||||
| May 1, 2019 | $7,168 | $ | 6,180 | $ | 988 | North |
Wolverine Wood Products, Inc. ("Wolverine") | A manufacturer of wood panel components for furniture, store fixtures and case goods. Wolverine had annual sales of approximately $5 million. The acquisition of Wolverine allows us to expand capacity to produce value-added wood components for customers in the Midwest. | ||||||
| October 22, 2018 | $15,115 | $ | 8,592 | $ | 6,523 | North |
Pak-Rite, LTD ("Pak-Rite") | A designer and manufacturer of packaging for high-value products, such as medical, aerospace and automation equipment. Pak-Rite had annual sales of approximately $15 million. The acquisition of Pak-Rite allows us to grow our portfolio of packaging products and customer markets, and expand our presence in this region. |
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| | | | | | | |
---|---|---|---|---|---|---|---|
| | | | | Net | | |
Company | Acquisition | | Intangible | Tangible | Operating | ||
Name | Date | Purchase Price | Assets | Assets | Segment | ||
| July 31, 2018 | $1,016 | $ | 250 | $ | 766 | West |
The Pallet Place, LLC ("Pallet Place") | A manufacturer and distributor of total packaging solutions in timber, crates, skids, and pallets. Pallet Place had annual sales of approximately $5 million. The acquisition of Pallet Place allows us to increase our industrial business and creates operating leverage by consolidating with another regional operation. | ||||||
| June 1, 2018 | $25,866 | $ | 9,496 | $ | 16,370 | South |
North American Container Corporation ("NACC") | A manufacturer of structural packaging products, including steel, corrugated and hardwood packaging. NACC had annual sales of approximately $71 million. The acquisition of NACC allows us to enhance our presence in this region, expand our product offering, and serve customers more cost effectively. | ||||||
| April 9, 2018 | $3,890 | $ | 2,235 | $ | 1,655 | West |
Fontana Wood Products ("Fontana") | A manufacturer and distributor of lumber and trusses in the Southern California region. Fontana had annual sales of approximately $12 million. The acquisition of Fontana allows us to expand our manufactured housing business and creates operating leverage by consolidating with another regional operation. | ||||||
| April 3, 2018 | $1,347 | $ | 1,287 | $ | 60 | All Other |
Expert Packaging ("Expert") | A manufacturer and distributor of total packaging solutions in timber, crates, pallets, and skids. Expert had annual sales of approximately $3.6 million. The acquisition of Expert allows us to make progress on our goal of becoming a global provider of packaging solutions. | ||||||
| January 23, 2018 | $2,942 | $ | 850 | $ | 2,092 | West |
Spinner Wood Products, LLC ("Spinner") | A manufacturer and distributor of agricultural bin and various industrial packaging. Spinner had annual sales of approximately $8 million. The acquisition of Spinner allows us to expand our industrial packaging product offering and creates operating leverage by consolidating with other regional operations. | ||||||
| January 15, 2018 | $5,784 | $ | 50 | $ | 5,734 | North |
Great Northern Lumber, LLC | A manufacturer of industrial products as well as serving the concrete forming market in the Chicago area. Great Northern Lumber had annual sales of approximately $25 million. The acquisition of Great Northern Lumber enables us to expand our concrete forming product offering and regional coverage. |
The intangible assets for each acquisition were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2019, except for our Wolverine, Northwest, and Pallet USA acquisitions. In aggregate, acquisitions not consolidated with other operations contributed approximately $70.3 million in revenue and $4.1 million in operating profit during 2019.
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At December 28, 2019, the amounts assigned to major intangible classes for the business combinations mentioned above are as follows (in thousands):
| | | | | | | | | | | | | | | |
|
| Non- |
| | |
| | | | | |
| Intangibles - | ||
| | Compete | | Customer | | | | | | | Tax | ||||
| | Agreements | | Relationships | | Tradename | | Goodwill | | Deductible | |||||
Pallet USA | | $ | — | | $ | 1,400 | * | $ | 1,898 | * | $ | 4,166 | * | $ | 7,464 |
Northwest | | | — | | | 4,500 | * | | 1,000 | * | | 2,589 | * | | 8,089 |
Wolverine | | | — | | | 3,232 | * | | 864 | * | | 2,084 | * | | 6,180 |
Pak-Rite | | | 30 | | | 3,750 | | | 1,060 | | | 3,752 | | | 8,592 |
Pallet Place | | | — | | | 250 | | | — | | | — | | | 250 |
NACC | | | — | | | 2,810 | | | 770 | | | 5,916 | | | 9,496 |
Fontana | | | — | | | 2,235 | | | — | | | — | | | 2,235 |
Expert Packaging | | | 221 | | | 809 | | | 257 | | | — | | | — |
Spinner | | | 850 | | | — | | | — | | | — | | | 850 |
Great Northern Lumber | | | 50 | | | — | | | — | | | — | | | 50 |
*(estimate)
The business combinations mentioned above were not significant to our operating results individually or in aggregate, and thus pro forma results for 2019 and 2018 are not presented.
D.GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the net carrying amount of goodwill by reporting segment for the years ended December 28, 2019 and December 29, 2018, are as follows (in thousands):
| | | | | | | | | | | | | | | |
|
| North |
| South |
| West |
| All Other |
| Total | |||||
Balance as of December 30, 2017 |
| | 51,127 |
| | 46,738 |
| | 87,730 |
| | 27,049 |
| | 212,644 |
2018 Acquisitions |
| | 4,292 |
| | 8,996 |
| | — |
| | — |
| | 13,288 |
Foreign Exchange, Net |
| | (365) |
| | — |
| | — |
| | (1,450) |
| | (1,815) |
Balance as of December 29, 2018 |
| | 55,054 |
| | 55,734 |
| | 87,730 |
| | 25,599 |
| | 224,117 |
2019 Acquisitions |
| | 5,710 |
| | (3,080) |
| | 2,589 |
| | — |
| | 5,219 |
Foreign Exchange, Net |
| | 182 |
| | — |
| | — |
| | 18 |
| | 200 |
Balance as of December 28, 2019 | | $ | 60,946 |
| $ | 52,654 | | $ | 90,319 | | $ | 25,617 | | $ | 229,536 |
Indefinite-lived intangible assets totaled $7.4 million as of December 28, 2019 and December 29, 2018 related to the idX, International, and Consumer Products reporting units which is included in the All Other reportable segment.
The following amounts were included in other amortizable intangible assets, net as of December 28, 2019 and December 29, 2018 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | ||||||||||||||
|
| | |
| Accumulated |
| | |
| | |
| Accumulated |
| | | ||
| | Assets | | Amortization | | Net Value | | Assets | | Amortization | | Net Value | ||||||
Non-compete agreements | | $ | 5,092 | | $ | (2,262) | | $ | 2,830 | | $ | 10,232 | | $ | (5,517) | | $ | 4,715 |
Customer relationships | |
| 48,084 | |
| (10,079) | | | 38,005 | |
| 40,307 | |
| (6,843) | |
| 33,464 |
Licensing agreements | |
| 4,589 | |
| (4,368) | | | 221 | |
| 4,589 | |
| (3,909) | |
| 680 |
Patents | |
| 914 | |
| (421) | | | 493 | |
| 792 | |
| (284) | |
| 508 |
Tradename | | | 7,966 | | | (1,202) | | | 6,764 | | | 2,879 | | | (760) | | | 2,119 |
Total | | $ | 66,645 | | $ | (18,332) | | $ | 48,313 | | $ | 58,799 | | $ | (17,313) | | $ | 41,486 |
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Amortization is computed principally by the straight-line method over the estimated useful lives of the intangible assets as follows:
| | | | |
|
| |
| Weighted Average |
Intangible Asset Type | | Estimated Useful Life | | Amortization Period |
Non-compete agreements |
| 3 to 15 years |
| 9.7 years |
Customer relationship |
| 5 to 15 years |
| 10.5 years |
Licensing agreements |
| 10 years |
| 10 years |
Tradename (amortizable) |
| 3 to 15 years |
| 11.5 years |
Amortization expense of intangibles totaled $6.3 million, $6.4 million and $4.9 million in 2019, 2018 and 2017, respectively. The estimated amortization expense for intangibles for each of the five succeeding fiscal years is as follows (in thousands):
| | | |
2020 |
| $ | 6,095 |
2021 | |
| 5,572 |
2022 | |
| 5,243 |
2023 | |
| 4,497 |
2024 | |
| 3,772 |
Thereafter | |
| 23,134 |
Total | | $ | 48,313 |
E.DEBT
On June 14, 2018, we entered into an unsecured Note Purchase Agreement (the "Agreement") under which we issued our 4.20% Series 2018 C Senior Notes, due June 14, 2028, in the aggregate principal amount of $40 million and our 4.27% Series 2018 D Senior Notes, due June 14, 2030, in the aggregate principal amount of $35 million. Proceeds from the sale of the Series C Senior Notes and Series D Senior Notes were used to pay down our revolving credit facility.
On December 17, 2012, we entered into an unsecured Note Purchase Agreement (the "Agreement") under which we issued our 3.89% Series 2012 A Senior Notes, due December 17, 2022, in the aggregate principal amount of $35 million and our 3.98% Series 2012 B Senior Notes, due December 17, 2024, in the aggregate principal amount of $40 million. Proceeds from the sale of the Series A Senior Notes and Series B Senior Notes were used to repay amounts due on our existing Series 2002-A Senior Notes, Tranche B totaling $40 million and our revolving credit facility.
On November 1, 2018, we entered into a five-year, $375 million unsecured revolving credit facility with a syndicate of U.S. 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 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. Cash borrowings are charged interest based upon an index selected by the Company, plus a margin that is determined based upon the index selected and upon the financial performance of the Company and certain of its subsidiaries. The Company is charged a facility fee on the entire amount of the lending commitment, at a per annum rate ranging from 12.5 to 30.0 basis points, also determined based upon the Company’s performance. The facility fee is payable quarterly in arrears.
Outstanding letters of credit extended on our behalf on December 28, 2019 and December 29, 2018 aggregated $37.3 million and $30.3 million; respectively, which includes approximately $9.8 million related to industrial development revenue bonds. The Company had an outstanding balance of $4.0 million and $42.5 million, which includes foreign subsidiary borrowings, on its revolver at December 28, 2019, and December 29, 2018, respectively. After considering letters of credit, the Company had $361.2 million and $322.7 million in remaining availability on its revolver on December 28, 2019, and December 29, 2018, respectively. Additionally, we have $150 million in availability under a "shelf agreement" for long term debt with a current lender. Letters of credit have one year terms and include an automatic renewal clause. The letters of credit related to industrial development revenue bonds are charged an annual interest rate of 112.5
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basis points, based upon our financial performance. The letters of credit related to workers’ compensation are charged an annual interest rate of 75 basis points.
Long-term debt obligations are summarized as follows on December 28, 2019 and December 29, 2018 (amounts in thousands):
| | | | | | |
|
| 2019 |
| 2018 | ||
Series 2018 Senior Notes C, due on June 14, 2028, interest payable semi-annually at 4.20% | | $ | 40,000 | | $ | 40,000 |
Series 2018 Senior Notes D, due on June 14, 2030, interest payable semi-annually at 4.27% | |
| 35,000 | |
| 35,000 |
Series 2012 Senior Notes Tranche A, due on December 17, 2022, interest payable semi-annually at 3.89% | | | 35,000 | | | 35,000 |
Series 2012 Senior Notes Tranche B, due on December 17, 2024, interest payable semi-annually at 3.98% | |
| 40,000 | |
| 40,000 |
Revolving credit facility totaling $375 million due on November 1, 2023, interest payable monthly at a floating rate (2.54% on December 28, 2019 and 3.39% on December 29, 2018) | |
| — | |
| 39,010 |
Foreign subsidiary borrowings under revolving credit facility, due on November 1, 2023, interest payable monthly at a floating rate (1.88% on December 28, 2019 and 2.94% on December 29, 2018) | | | 3,976 | | | 3,480 |
Series 1999 Industrial Development Revenue Bonds, due on August 1, 2029, interest payable monthly at a floating rate (1.14% on December 28, 2019 and 1.94% on December 29, 2018) | |
| 3,300 | |
| 3,300 |
Series 2000 Industrial Development Revenue Bonds, due on October 1, 2020, interest payable monthly at a floating rate (1.57% on December 28, 2019 and 2.00% on December 29, 2018) | |
| 2,700 | |
| 2,700 |
Series 2002 Industrial Development Revenue Bonds, due on December 1, 2022, interest payable monthly at a floating rate (1.79% on December 28, 2019 and 1.99% on December 29, 2018) | |
| 3,700 | |
| 3,700 |
Capital leases and foreign affiliate debt | |
| 174 | |
| 311 |
| |
| 163,850 | |
| 202,501 |
Less current portion | |
| (2,816) | |
| (148) |
Less debt issuance costs | |
| (167) | |
| (223) |
Long-term portion | | $ | 160,867 | | $ | 202,130 |
Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest coverage tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold among other industry standard covenants. We were within all of our lending requirements on December 28, 2019 and December 29, 2018.
On December 28, 2019, the principal maturities of long-term debt and capital lease obligations are as follows (in thousands):
| | | |
2020 |
| $ | 2,816 |
2021 | |
| 58 |
2022 | |
| 38,700 |
2023 | |
| 3,976 |
2024 | |
| 40,000 |
Thereafter | |
| 78,300 |
Total | | $ | 163,850 |
On December 28, 2019, the estimated fair value of our long-term debt, including the current portion, was $170.8 million, which was $7.0 million more than the carrying value. The estimated fair value is based on rates anticipated to be available to us for debt with similar terms and maturities. We consider the valuations of our long-term debt, including the
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current portion, to be Level 2 liabilities which rely on quoted prices in markets that are not active or observable inputs over the full term of the liability.
F.LEASES
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). Under ASU 2016-02, an entity will be required to recognize assets and liabilities for the rights and obligations created by leases on the entity’s balance sheet for both finance and operating leases. For leases with a term of 12 months or less, an entity can elect to not recognize lease assets and lease liabilities and expense the lease over a straight-line basis for the term of the lease. ASU 2016-02 requires new disclosures that depict the amount, timing, and uncertainty of cash flows pertaining to an entity’s leases. Companies are required to adopt the new standard for annual and interim periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The FASB decided to amend certain aspects of its new leasing standard in an attempt to provide a relief from implementation costs. Specifically, entities may elect not to restate their comparative periods in the period of adoption when transitioning to the new standard.
Upon adoption of ASC 842 on December 30, 2018, the Company recognized right-of-use assets and lease liabilities of approximately $69 million. As a result of the adoption of ASC 842, there was no cumulative effect adjustment to beginning retained earnings.
We elected the package of practical expedients whereby we are not required to 1) reassess whether any expired or existing contracts contain leases, 2) reassess the lease classification of existing leases, and 3) reassess initial direct costs for any existing leases. Additionally, we did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We did elect to account for lease and related non-lease components as a single lease component. We elected to not recognize leases with an original term of 12 months or less as they are not significant to our consolidated balance sheet and income statement. We have assessed and updated our business processes, systems, and controls to ensure compliance with the new accounting and disclosure requirements in accordance with the new standard.
We determine if an arrangement is a lease at inception. We lease certain real estate under non-cancelable operating lease agreements with typical original terms ranging from one to ten years. We are required to pay real estate taxes and other occupancy costs under certain leases, which are variable in nature and not included in the right of use asset or lease liability. Certain leases carry renewal options of five to fifteen years. We believe that future leases will likely have similar terms. We also lease motor vehicles, equipment, and an aircraft under operating lease agreements for periods of one to ten years. We do not typically enter into leases with residual value guarantees. There were no restrictions or covenants imposed by any lease agreements.
We believe finance leases have no significant impact to our consolidated balance sheet and income statement as of December 28, 2019.
As of December 28, 2019, we have no leases that have not yet commenced that would significantly impact the rights, obligations, and financial position of the Company.
There were no lease transactions between related parties as of December 28, 2019.
The rates implicit in our leases are primarily not readily available. To determine the discount rate used to present value the lease payments, the Company utilized the 7-year treasury note rate plus a blend of rate spreads associated with our revolver and 10-12-year senior notes along with estimated spreads based on current market conditions. We feel the determined rate is a reasonable representation of our lease population.
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Lease costs under non-cancelable operating leases on December 28, 2019 are as follows (in thousands):
| | | |
| | Operating | |
| | Leases | |
Operating lease cost | | $ | 20,771 |
Short-term lease cost | |
| 110 |
Variable lease cost | |
| 1,484 |
Sublease income | |
| (676) |
Total lease cost | | $ | 21,689 |
The amounts paid for operating leases, included in the measurement of lease liabilities, were $20 million for year ended December 28, 2019. In addition, right-of-use assets obtained in exchange for new operating leases liabilities were approximately $33.4 million for year ended December 29, 2019.
Future minimum payments under non-cancelable operating leases on December 28, 2019 are as follows (in thousands):
| | | |
|
| Operating | |
| | Leases | |
2020 | | $ | 17,633 |
2021 | |
| 15,074 |
2022 | |
| 12,624 |
2023 | |
| 10,434 |
2024 | |
| 7,848 |
Thereafter | |
| 29,115 |
Total minimum lease payments | | $ | 92,728 |
Less present value discount | | | (12,561) |
Total lease liability | | $ | 80,167 |
Rent expense was approximately $29.9 million, $28.1 million, and $24.2 million in 2019, 2018, and 2017, respectively.
During the first quarter of 2018, the Company completed a sale and leaseback transaction related to one facility in Medley, Florida. The sale price for the property was approximately $36 million and created a $7 million pre-tax gain, which was entirely recognized in 2018. The Company leased back the facility for two years as it executes its long-term plan for Florida and the Southeast region.
As of December 28, 2019, the weighted average lease term for operating leases is 7.29 years. Similarly, the weighted average discount rate for operating leases is 3.10%.
G.DEFERRED COMPENSATION
We have a program whereby certain executives irrevocably elected to defer receipt of certain compensation in 1985 through 1988. Deferred compensation payments to these executives will commence upon their retirement. We purchased life insurance on these executives, payable to us in amounts which, if assumptions made as to mortality experience, policy dividends, and other factors are realized, will accumulate cash values adequate to reimburse us for all payments for insurance and deferred compensation obligations. In the event cash values are not sufficient to fund such obligations, the program allows us to reduce benefit payments to such amounts as may be funded by accumulated cash values. Premiums payments, deferred compensation obligations, and accrued interest payments were funded through policy and premium loans provided by the insurer. The deferred compensation liabilities and related cash surrender value of life insurance policies totaled $2.0 million on December 29, 2018 and December 30, 2017 and are included in "Other Liabilities" and "Other Assets," respectively. During 2019, the Company settled with the program participants and paid out the remaining cash value due to them, with the exception of two participants who chose to take the settlement payment over a five-year period. The deferred compensation liability related to the remaining participant payouts on the balance
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sheet as of December 28, 2019, was $0.3 million. Also, during 2019, the Company increased its investment in life insurance contracts by $15.3 million to $16.6 million by extinguishing the previously mentioned policy and premium loans.
We also maintain a non-qualified deferred compensation plan (the "Plan") for the benefit of senior management employees who may elect to defer a portion of their annual bonus payments and salaries. The Plan provides investment options similar to our 401(k) plan, including our stock. The investment in our stock is funded by the issuance of shares to a Rabbi trust, and may only be distributed in kind. Assets held by the Plan totaled approximately $1.1 million and $1 million on December 28, 2019 and December 29, 2018, respectively, and are included in "Other Assets." Related liabilities totaled $33.1 million and $27.8 million on December 28, 2019 and December 29, 2018, respectively, and are included in "Other Liabilities" and "Shareholders’ Equity." Assets associated with the Plan are recorded at fair market value. The related liabilities are recorded at fair market value, with the exception of obligations associated with investments in our stock which are recorded at the market value on the date of deferral.
H.COMMON STOCK
We maintain and administer our shareholder approved Employee Stock Purchase Plan ("Stock Purchase Plan"). The Stock Purchase Plan allows eligible employees to purchase shares of our stock at a share price equal to 85% of fair market value on the purchase date. We have expensed the fair value of the compensation associated with these awards, which approximates the discount. The amount of expense is nominal.
We maintain and administer our shareholder approved Directors’ Retainer Stock Plan ("Stock Retainer Plan"). The Stock Retainer Plan allows eligible members of the Board of Directors to defer the cash portion of their retainer and committee fees and receive shares of our stock at the time of or following their retirement, disability or death. The number of shares to be received is equal to the amount of the cash portion of their retainer and committee fees deferred multiplied by 110%, divided by the fair market value of a share of our stock at the time of deferral. The number of shares is increased by the amount of dividends paid on the Company’s common stock. We recognized expense for this plan of $1.8 million in 2019, $1.7 million in 2018, and $1.7 million in 2017. Effective January 1, 2017, this plan was amended to allow directors to defer payment of the annual retainer paid in the form of our common stock. The number of shares to be received for their portion of the retainer that is deferred is equal to the amount of shares plus the number of shares attributable to cash dividends payable on those deferred shares.
Finally, we maintain and administer our shareholder approved Long Term Stock Incentive Plan (the "LTSIP”). The LTSIP provides for the grant of stock options, stock appreciation rights, restricted stock, performance shares and other stock-based awards.
On October 18, 2017, the Board of Directors approved a three-for-one split of the Company's outstanding shares of common stock effected as a stock dividend. On November 14, 2017, shareholders of record as of October 31, 2017, received two additional shares for each share held on the record date.
There is no unrecognized compensation expense remaining for stock options in 2019, 2018, and 2017.
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Below is a summary of common stock issuances for 2019 and 2018:
| | | | | |
|
| December 28, 2019 | |||
Share Issuance Activity |
| Common Stock | | | Average Share Price |
Shares issued under the employee stock purchase plan | | 34 | | $ | 32.47 |
| | | | | |
Shares issued under the employee stock gift program | | 4 | | | 35.68 |
Shares issued under the director retainer stock program | | 5 | | | 38.44 |
Shares issued under the long term stock incentive plan | | 211 | | | 30.83 |
Shares issued under the executive stock match grants | | 109 | | | 31.57 |
Forfeitures | | (19) | | | - |
Total shares issued under stock grant programs | | 310 | | $ | 31.25 |
| | | | | |
Shares issued under the deferred compensation plans | | 181 | | $ | 34.31 |
Total | | 525 | | $ | 32.35 |
| | | | | |
|
| December 29, 2018 | |||
Share Issuance Activity |
| Common Stock | | | Average Share Price |
Shares issued under the employee stock purchase plan | | 38 | | $ | 35.58 |
| | | | | |
Shares issued under the employee stock gift program | | 3 | | | 33.56 |
Shares issued under the director retainer stock program | | 101 | | | 17.17 |
Shares issued under the long term stock incentive plan | | 164 | | | 35.16 |
Shares issued under the executive stock match grants | | 94 | | | 32.94 |
Forfeitures | | (14) | | | - |
Total shares issued under stock grant programs | | 348 | | $ | 29.37 |
| | | | | |
Shares issued under the deferred compensation plans | | 167 | | $ | 36.98 |
Total | | 553 | | $ | 31.78 |
A summary of the nonvested restricted stock awards granted under the LTSIP is as follows:
| | | | | | | | | | |
|
| |
| | |
| | |
| Weighted- |
| | | | | | | Unrecognized | | Average | |
| | | | Weighted- | | Compensation | | Period to | ||
| | Restricted | | Average Grant | | Expense | | Recognize | ||
| | Awards | | Date Fair Value | | (in millions) | | Expense | ||
Nonvested at December 31, 2016 |
| 791,532 |
| | 19.32 |
| | 4.8 |
| 1.51 years |
Granted |
| 388,248 |
| | 32.03 |
| |
|
|
|
Vested |
| (141,111) |
| | 12.71 |
| |
|
|
|
Forfeited |
| (5,043) |
| | 30.14 |
| |
|
|
|
Nonvested at December 30, 2017 |
| 1,033,626 |
| | 24.24 |
| | 7.1 |
| 1.31 years |
Granted |
| 247,068 |
| | 36.52 |
| |
|
|
|
Vested |
| (107,865) |
| | 18.11 |
| |
|
|
|
Forfeited |
| (12,750) |
| | 24.19 |
| |
|
|
|
Nonvested at December 29, 2018 |
| 1,160,079 |
| | 23.32 |
| | 7.6 |
| 1.12 years |
Granted |
| 318,496 |
| | 32.60 |
| |
|
|
|
Vested |
| (224,894) |
| | 23.42 |
| |
|
|
|
Forfeited |
| (50,786) |
| | 24.18 |
| |
|
|
|
Nonvested at December 28, 2019 |
| 1,202,895 | | $ | 29.68 | | $ | 7.9 |
| 0.86 years |
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Under the Stock Purchase Plan and LTSIP, we recognized share-based compensation expense of $4.0 million, $3.6 million, and $3.6 million and the related total income tax benefits of $0.8 million, $0.7 million, and $1.0 million in 2019, 2018 and 2017, respectively.
In 2019, 2018 and 2017, cash received from share issuances under our plans was $1.1 million, $1.0 million and $0.7 million, respectively.
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our existing share repurchase program. We repurchased no shares in 2019 and 860,669 shares under this program in 2018. As of December 28, 2019, the cumulative total authorized shares available for repurchase is approximately 1.9 million shares.
I.RETIREMENT PLANS
We have a profit sharing and 401(k) plan for the benefit of substantially all of our employees, excluding the employees of certain wholly-owned subsidiaries. Amounts contributed to the plan are made at the discretion of the Board of Directors. We matched 25%of employee contributions in 2019, 2018, and 2017, on a discretionary basis, totaling $6.5 million, $3.4 million, and $4.8 million respectively. For years 2019 and 2017, hourly employee contributions included additional matched contributions of $2.6 million and $1.9 million for 2019 and 2017, respectively, based on meeting certain performance goals during those years. The basis for matching contributions may not exceed the lesser of 6% of the employee’s annual compensation or the IRS limitation.
The Company maintains a retirement plan for certain officers of the Company, excluding the Company’s CEO, (who have at least 20 years of service with the Company and at least 10 years of service as an officer) whereby we will pay, upon retirement, benefits totaling 150% of the officer’s highest base salary in the three years immediately preceding separation from service plus health care benefits for a specified period of time if certain eligibility requirements are met. Approximately $10.6 million and $9.1 million are accrued in “Other Liabilities” for this plan at December 28, 2019 and December 29, 2018, respectively.
J.INCOME TAXES
Income tax provisions for the years ended December 28, 2019, December 29, 2018, and December 30, 2017 are summarized as follows (in thousands):
| | | | | | | | | |
|
| 2019 | | 2018 |
| 2017 | |||
Currently Payable: |
| |
|
| |
|
| |
|
Federal | | $ | 35,267 | | $ | 31,492 | | $ | 44,413 |
State and local | |
| 10,071 | |
| 7,544 | |
| 8,579 |
Foreign | |
| 5,834 | |
| 5,527 | |
| 6,240 |
| |
| 51,172 | |
| 44,563 | |
| 59,232 |
Net Deferred: | |
|
| |
|
| |
|
|
Federal | |
| 6,895 | |
| 2,965 | |
| (7,681) |
State and local | |
| 805 | |
| (522) | |
| (864) |
Foreign | |
| (602) | |
| (1,565) | |
| 1,280 |
| |
| 7,098 | |
| 878 | |
| (7,265) |
| | $ | 58,270 | | $ | 45,441 | | $ | 51,967 |
The components of earnings before income taxes consist of the following:
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
U.S. | | $ | 220,532 | | $ | 180,261 | | $ | 151,395 |
Foreign | |
| 20,142 | |
| 17,592 | |
| 24,612 |
Total | | $ | 240,674 | | $ | 197,853 | | $ | 176,007 |
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The effective income tax rates are different from the statutory federal income tax rates for the following reasons:
| | | | | | | |
|
| 2019 |
| 2018 |
| 2017 |
|
Statutory federal income tax rate |
| 21.0 | % | 21.0 | % | 35.0 | % |
State and local taxes (net of federal benefits) |
| 3.9 |
| 3.8 |
| 3.0 | |
Effect of noncontrolling owned interest in earnings of partnerships |
| (0.1) |
| (0.1) |
| (0.2) | |
Manufacturing deduction |
| n/a |
| n/a |
| (2.5) | |
Tax credits, including foreign tax credit |
| (1.3) |
| (1.6) |
| (2.0) | |
Change in uncertain tax positions reserve |
| (0.1) |
| 0.1 |
| 0.4 | |
Other permanent differences |
| 0.5 |
| 0.6 |
| (0.1) | |
Other, net |
| 0.3 |
| (0.7) |
| (0.6) | |
Impact of Tax Act and reduction of corporate tax rate (a) | | n/a | | (0.1) | | (3.5) | |
Effective income tax rate |
| 24.2 | % | 23.0 | % | 29.5 | % |
(a) | On December 22, 2017, the U.S government enacted comprehensive tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Shortly after the Tax Act was enacted, the SEC issued accounting guidance, which provided a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act. As a result of the U.S. federal corporate rate reduction, the Company recorded a tax benefit of $6.1 million for the period ending December 30, 2017, and an additional tax benefit of $0.3 million for the period ending December 29, 2018. |
Temporary differences which give rise to deferred income tax assets and (liabilities) on December 28, 2019 and December 29, 2018 are as follows (in thousands):
| | | | | | |
|
| 2019 |
| 2018 | ||
Employee benefits | | $ | 22,420 | | $ | 20,914 |
Lease liability | | | 20,255 | | | — |
Net operating loss carryforwards | |
| 6,411 | |
| 6,520 |
Foreign subsidiary capital loss carryforward | |
| 519 | |
| 504 |
Other tax credits | |
| 620 | |
| 586 |
Inventory | |
| 993 | |
| 1,090 |
Reserves on receivables | |
| 1,266 | |
| 802 |
Accrued expenses | |
| 2,318 | |
| 1,593 |
Other, net | |
| 3,159 | |
| 2,785 |
Gross deferred income tax assets | |
| 57,961 | |
| 34,794 |
Valuation allowance | |
| (2,447) | |
| (2,707) |
Deferred income tax assets | |
| 55,514 | |
| 32,087 |
Depreciation | |
| (34,001) | |
| (24,881) |
Intangibles | |
| (21,375) | |
| (20,225) |
Right of use assets | | | (20,255) | | | — |
Other, net | |
| — | |
| — |
Deferred income tax liabilities | |
| (75,631) | |
| (45,106) |
Net deferred income tax liability | | $ | (20,117) | | $ | (13,019) |
As of December 28, 2019, the company had federal, state and foreign net operating loss carryforwards of $6.4 million and state tax credit carryforwards of $0.6 million, which will expire at various dates.
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The NOL and credit carryforwards expire as follows:
| | | | | | | | | | | | | | | |
| | Net Operating Losses | | Tax Credits | |||||||||||
|
| U.S. |
| State |
| Foreign |
| U.S. |
| State | |||||
2019 - 2023 | | $ | — | | $ | 173 | | $ | — | | $ | — | | $ | 620 |
2024 - 2028 | |
| — | |
| 285 | |
| 1,279 | |
| — | |
| — |
2029 - 2033 | |
| 2,124 | |
| 748 | |
| 213 | |
| — | |
| — |
2034 - 2038 | |
| 28 | |
| 854 | |
| — | |
| — | |
| — |
Thereafter | |
| — | |
| 243 | |
| 464 | |
| — | |
| — |
Total | | $ | 2,152 | | $ | 2,303 | | $ | 1,956 | | $ | — | | $ | 620 |
As of December 28, 2019, we believe that it is more likely than not that the benefit from certain state and foreign NOL carryforwards as well as certain state tax credit carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance against various NOL and tax credit carryforwards. Furthermore, there is a valuation allowance of $0.5 million against a capital loss carryforward we have for a wholly-owned subsidiary, UFP Canada, Inc. Based upon the business activity and the nature of the assets of this subsidiary, our ability to realize a future benefit from this carryforward is doubtful. The capital loss has an unlimited carryforward and therefore will not expire unless there is a change in control of the subsidiary.
The Company early adopted FASB ASU No. 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. The adoption of this update resulted in a reclassification between accumulative other comprehensive income and accumulated earnings in 2018.
K.ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
ASC 740, Income Taxes (“ASC 740”) clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, and disclosure requirements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | |
|
| 2019 |
| 2018 |
| 2017 | |||
Gross unrecognized tax benefits beginning of year | | $ | 4,378 | | $ | 4,000 | | $ | 3,381 |
Increase in tax positions for prior years | |
| (129) | |
| (366) | |
| 4 |
Increase in tax positions due to acquisitions | |
| — | |
| — | |
| — |
Increase in tax positions for current year | |
| 768 | |
| 1,326 | |
| 1,107 |
Settlements with taxing authorities | |
| — | |
| — | |
| (2) |
Lapse in statute of limitations | |
| (851) | |
| (582) | |
| (490) |
Gross unrecognized tax benefits end of year | | $ | 4,166 | | $ | 4,378 | | $ | 4,000 |
Our effective tax rate would have been affected by the unrecognized tax benefits had this amount been recognized as a reduction to income tax expense.
We recognized interest and penalties for unrecognized tax benefits in our provision for income taxes. The liability for unrecognized tax benefits included accrued interest and penalties of $0.5 million, $0.5 million, and $0.7 million at December 28, 2019, December 29, 2018, and December 30, 2017, respectively.
We file income tax returns in the United States and in various state, local and foreign jurisdictions. The federal and a majority of state and foreign jurisdictions are no longer subject to income tax examinations for years before 2016. A number of routine state and local examinations are currently ongoing. Due to the potential for resolution of state examinations, and the expiration of various statutes of limitation, and new positions that may be taken, it is reasonably possible that the amounts of unrecognized tax benefits could change in the next twelve months is $0.9 million.
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L.COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, Ardellis Insurance Ltd., a licensed captive insurance company.
We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at wood preservation facilities in Stockertown, PA; Elizabeth City, NC; and Auburndale, FL. In addition, a reserve was established for our facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.
On a consolidated basis, we have reserved approximately $2.0 million and $2.1 million on December 28, 2019 and December 29, 2018, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.
In addition, on December 28, 2019, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.
On December 28, 2019, we had outstanding purchase commitments on commenced capital projects of approximately $33.8 million.
We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We distribute products manufactured by other companies, some of which are no longer in business. While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.
As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances we are required to post payment and performance bonds to insure the project owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. As of December 28, 2019, we had approximately $10.8 million in outstanding payment and performance bonds for open projects. We had approximately $9.2 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On December 28, 2019, we had outstanding letters of credit totaling $37.3 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $27.5 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the bond trustees for all industrial development revenue bonds that have been issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.
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Table of Contents
Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 Senior Notes, the Series 2018 Senior Notes, and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.
We did not enter into any new guarantee arrangements during 2019 which would require us to recognize a liability on our balance sheet.
M.SEGMENT REPORTING
ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company operates manufacturing, treating and distribution facilities throughout North America, Europe, Asia and Australia, but primarily in the United States. The Company manages the operations of its individual locations primarily through a geographic reporting structure under which each location is included in a region and regions are included in our North, South, West, and International divisions. The exceptions to this geographic reporting and management structure are (a) the Company’s Alternative Materials Division, which offers a portfolio of non-wood products and distributes those products nation-wide and is accounted for as an operating segment within the All Other segment, (b) the Company’s distribution unit (referred to as UFPD) which distributes a variety of products to the manufactured housing industry and is accounted for as a reporting unit within the North segment, and (c) idX division, which designs, manufactures, and installs customized interior fixtures and is accounted for within the All Other segment.
With respect to the facilities in the north, south, and west segments, these facilities generally supply the three markets the Company serves nationally - Retail, Industrial, and Construction. Also, substantially all of our facilities support customers in the immediate geographical region surrounding the facility. One customer, The Home Depot, accounted for approximately 19% of our total sales in fiscal 2019, 2018 and 2017.
Our Alternative Materials, International, and idX divisions have been included in the “All Other” column of the table below. The “Corporate” column includes unallocated administrative costs and certain incentive compensation expense.
| | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | | | ||||||||||||||||
| | | | | | | | | | | All | | | | | | | | | | |
|
| North |
| South |
| West |
| Other |
| Corporate |
| Total | | | | ||||||
Net sales to outside customers | | $ | 1,302,067 | | $ | 936,964 | | $ | 1,548,098 | | $ | 628,880 | | $ | — | | $ | 4,416,009 | | | |
Intersegment net sales | |
| 57,675 | |
| 81,875 | |
| 52,601 | |
| 225,913 | |
| — | |
| 418,064 | | | |
Interest expense (income) | |
| (36) | |
| — | |
| 108 | |
| (1,949) | |
| 10,577 | |
| 8,700 | | | |
Amortization expense | |
| 1,217 | |
| 1,200 | |
| 2,049 | |
| 1,859 | |
| — | |
| 6,325 | | | |
Depreciation expense | |
| 13,624 | |
| 9,310 | |
| 17,062 | |
| 10,254 | |
| 10,244 | |
| 60,494 | | | |
Segment earnings from operations | |
| 95,728 | |
| 64,517 | |
| 118,444 | |
| 8,913 | |
| (42,696) | |
| 244,906 | | | |
Segment assets | |
| 396,010 | | | 249,053 | | | 485,674 | | | 513,081 | | | 245,659 | |
| 1,889,477 | | | |
Capital expenditures | |
| 21,292 | | | 18,051 | | | 19,682 | | | 23,576 | | | 2,332 | |
| 84,933 | | | |
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| | | | | | | | | | | | | | | | | | |
| | 2018 | ||||||||||||||||
| | | | | | | | | | | All | | | | | | | |
|
| North |
| South |
| West |
| Other |
| Corporate |
| Total | ||||||
Net sales to outside customers | | $ | 1,279,459 | | $ | 1,024,747 | | $ | 1,599,274 | | $ | 585,700 | | $ | — | | $ | 4,489,180 |
Intersegment net sales | |
| 56,682 | |
| 76,297 | |
| 56,004 | |
| 235,905 | |
| — | |
| 424,888 |
Interest expense | |
| 58 | |
| (6) | |
| 197 | |
| (1,486) | |
| 10,130 | |
| 8,893 |
Amortization expense | |
| 830 | |
| 1,292 | |
| 1,998 | |
| 2,273 | |
| — | |
| 6,393 |
Depreciation expense | |
| 12,062 | |
| 8,244 | |
| 14,836 | |
| 10,341 | |
| 9,466 | |
| 54,949 |
Segment earnings from operations | |
| 66,239 | |
| 60,049 | |
| 103,357 | |
| 6,779 | |
| (29,161) | |
| 207,263 |
Segment assets | |
| 386,483 | |
| 266,503 | |
| 496,939 | |
| 395,727 | |
| 101,896 | |
| 1,647,548 |
Capital expenditures | |
| 17,820 | |
| 9,185 | |
| 26,024 | |
| 39,168 | |
| 3,665 | |
| 95,862 |
| | | | | | | | | | | | | | | | | | |
| | 2017 | ||||||||||||||||
| | | | | | | | | | | All | | | | | | | |
|
| North |
| South |
| West |
| Other |
| Corporate |
| Total | ||||||
Net sales to outside customers | | $ | 1,133,656 | | $ | 837,370 | | $ | 1,417,924 | | $ | 552,232 | | $ | — | | $ | 3,941,182 |
Intersegment net sales | |
| 67,161 | |
| 74,566 | |
| 83,245 | |
| 167,568 | |
| — | |
| 392,540 |
Interest expense | |
| 4 | |
| 160 | |
| 293 | |
| (473) | |
| 6,234 | |
| 6,218 |
Amortization expense | |
| 559 | |
| 607 | |
| 1,723 | |
| 1,971 | |
| — | |
| 4,860 |
Depreciation expense | |
| 10,511 | |
| 6,880 | |
| 14,116 | |
| 8,586 | |
| 8,443 | |
| 48,536 |
Segment earnings from operations | |
| 61,326 | |
| 46,646 | |
| 82,465 | |
| 17,296 | |
| (26,264) | |
| 181,469 |
Segment assets | |
| 351,270 | |
| 240,661 | |
| 462,311 | |
| 356,264 | |
| 54,171 | |
| 1,464,677 |
Capital expenditures | |
| 23,026 | |
| 12,286 | |
| 23,212 | |
| 9,865 | |
| 2,727 | |
| 71,116 |
Beginning on January 1, 2020, the Company will be re-organized around the markets it serves rather than geography. The business segments will primarily align with the following markets: UFP Retail, UFP Construction and UFP Industrial. We believe this change in segmentation will, among other factors, allow for a more specialized and consistent approach among all UFP operations, more efficient use of resources and capital, and quicker introduction of new products and services.
Information regarding principal geographic areas was as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 | ||||||||||||
| | | | | Long-Lived | | | | | Long-Lived | | | | | Long-Lived | |||
| | | | | Tangible | | | | | Tangible | | | | | Tangible | |||
|
| Net Sales |
| Assets |
| Net Sales |
| Assets |
| Net Sales |
| Assets | ||||||
United States | | $ | 4,308,618 | | $ | 469,605 | | $ | 4,382,356 | | $ | 342,326 | | $ | 3,821,366 | | $ | 313,976 |
Foreign | |
| 107,391 | |
| 36,878 | |
| 106,824 | |
| 34,312 | |
| 119,816 | |
| 30,380 |
Total | | $ | 4,416,009 | | $ | 506,483 | | $ | 4,489,180 | | $ | 376,638 | | $ | 3,941,182 | | $ | 344,356 |
Sales generated in Canada and Mexico are primarily to customers in the United States of America.
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The following table presents, for the periods indicated, our gross sales (in thousands) by major product classification.
| | | | | | | | | |
| | Year Ended | |||||||
| | December 28, | | December 29, | | December 30, | |||
|
| 2019 |
| 2018 |
| 2017 | |||
Value-Added Sales | | | | | | | | | |
Trusses – residential, modular and manufactured housing | | $ | 438,621 | | $ | 421,996 | | $ | 368,591 |
Fencing | |
| 180,772 | |
| 180,783 | |
| 187,905 |
Decking and railing – composite, wood and other | |
| 310,311 | |
| 261,778 | |
| 244,910 |
Turn-key framing and installed sales | |
| 159,307 | |
| 151,397 | |
| 149,520 |
Industrial packaging and components | |
| 676,214 | |
| 591,314 | |
| 471,262 |
Engineered wood products (eg. LVL; i-joist) | |
| 86,954 | |
| 83,222 | |
| 76,507 |
In-store fixtures | |
| 274,580 | |
| 252,341 | |
| 260,174 |
Manufactured brite and other lumber | |
| 68,725 | |
| 92,255 | |
| 109,582 |
Wall panels | |
| 64,357 | |
| 69,889 | |
| 61,226 |
Outdoor DIY products (eg. stakes; landscape ties) | |
| 124,586 | |
| 128,711 | |
| 110,327 |
Construction and building materials (eg. door packages; drywall) | |
| 320,603 | |
| 314,965 | |
| 265,048 |
Lattice – plastic and wood | |
| 70,448 | |
| 62,598 | |
| 48,736 |
Manufactured brite and other panels | |
| 79,122 | |
| 94,469 | |
| 81,143 |
Siding, trim and moulding | |
| 111,230 | |
| 107,873 | |
| 85,016 |
Hardware | |
| 16,069 | |
| 16,742 | |
| 21,218 |
Manufactured treated lumber | |
| 92,277 | |
| 96,450 | |
| 69,844 |
Other | |
| 30,160 | |
| 11,946 | |
| 10,632 |
Total Value-Added Sales | | $ | 3,104,336 | | $ | 2,938,729 | | $ | 2,621,641 |
| | | | | | | | | |
Commodity-Based Sales | |
|
| |
|
| |
|
|
Non-manufactured brite and other lumber | |
| 594,534 | |
| 700,143 | |
| 545,430 |
Non-manufactured treated lumber | |
| 525,030 | |
| 585,628 | |
| 523,245 |
Non-manufactured brite and other panels | |
| 205,678 | |
| 278,898 | |
| 265,909 |
Non-manufactured treated panels | |
| 39,340 | |
| 42,958 | |
| 36,913 |
Other | |
| 23,266 | |
| 19,393 | |
| 13,065 |
Total Commodity-Based Sales | | $ | 1,387,848 | | $ | 1,627,020 | | $ | 1,384,562 |
Total Gross Sales | | $ | 4,492,184 | | $ | 4,565,749 | | $ | 4,006,203 |
Sales Allowances | |
| (76,175) | |
| (76,569) | |
| (65,021) |
Total Net Sales | | $ | 4,416,009 | | $ | 4,489,180 | | $ | 3,941,182 |
Note that the prior year information has been restated due to reclassification of certain products.
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N.QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected financial information for all of the quarters, consisting of 13 weeks during the years ended December 28, 2019 and December 29, 2018, respectively, (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | First | | Second | | Third | | Fourth | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||||
Net sales | | $ | 1,015,125 | | $ | 993,857 | | $ | 1,239,817 | | $ | 1,294,440 | | $ | 1,163,026 | | $ | 1,212,702 | | $ | 998,041 | | $ | 988,181 |
Gross profit | |
| 154,267 | |
| 130,889 | |
| 186,726 | |
| 165,689 | |
| 187,270 | |
| 158,673 | |
| 157,255 | |
| 137,643 |
Net earnings | |
| 36,002 | |
| 33,582 | |
| 55,145 | |
| 45,130 | |
| 52,581 | |
| 42,068 | |
| 38,676 | |
| 31,632 |
Net earnings attributable to controlling interest | |
| 35,540 | |
| 32,833 | |
| 54,515 | |
| 44,044 | |
| 51,859 | |
| 41,219 | |
| 37,736 | |
| 30,502 |
Basic earnings per share | |
| 0.58 | |
| 0.53 | |
| 0.88 | |
| 0.71 | |
| 0.84 | |
| 0.67 | |
| 0.61 | |
| 0.50 |
Diluted earnings per share | |
| 0.58 | |
| 0.53 | |
| 0.88 | |
| 0.71 | |
| 0.84 | |
| 0.66 | |
| 0.61 | |
| 0.50 |
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MARKET INFORMATION FOR OUR COMMON STOCK
Our common stock trades on The Nasdaq Stock Market (“NASDAQ”) under the symbol UFPI.
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STOCK PERFORMANCE GRAPH
The following graph depicts the cumulative total return on our common stock compared to the cumulative total return on the indices for The Nasdaq Stock Market (all U.S. companies) and an industry peer group we selected. The graph assumes an investment of $100 on December 28, 2013, and reinvestment of dividends in all cases.
The companies included in our self-determined industry peer group are as follows:
| |
American Woodmark Corporation | Louisiana-Pacific Corporation |
BlueLinx Holdings, Inc. | Masco Corporation |
BMC Stock Holdings, Inc. | Simpson Manufacturing Company, Inc. |
Boise Cascade, LLC | Sonoco Products Company |
Builders FirstSource, Inc. | Trex Company, Inc. |
Cornerstone Building Brands | Westrock Company |
Gibraltar Industries, Inc. | |
Greif, Inc. | |
The returns of each company included in the self-determined peer group are weighted according to each respective company’s stock market capitalization at the beginning of each period presented in the graph above. In determining the members of our peer group, we considered companies who selected UFPI as a member of their peer group, and looked for similarly sized companies or companies that are a good fit with the markets we serve.
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Directors and Executive Officers
| |
BOARD OF DIRECTORS | EXECUTIVE OFFICERS |
| |
William G. Currie Chairman of the Board Universal Forest Products, Inc. | Matthew J. Missad Chief Executive Officer |
| |
Matthew J. Missad Chief Executive Officer Universal Forest Products, Inc. | Patrick M. Webster President and Chief Operating Officer |
| |
Thomas W. Rhodes President and Chief Executive Officer TWR Enterprises, Inc. | Michael R. Cole Chief Financial Officer and Treasurer |
| |
Bruce A. Merino | Allen T. Peters President and Chief Operating Officer UFP Retail, LLC |
| |
Mary E. Tuuk President and Chief Executive Officer Grand Rapids Symphony | Patrick Benton President UFP Construction, LLC |
| |
Brian C. Walker Partner-Strategic Leadership Huron Capital | Scott A. Worthington President UFP Industrial, LLC |
| |
Michael G. Wooldridge Partner Varnum, LLP | Chad C. Uhlig Eastin Executive Vice President ProWood |
| |
Joan A. Budden President Priority Health | Scott T. Bravata Vice President of Accounting |
| |
Benjamin McLean Chief Executive Officer Ruan Transportation Management Systems, Inc. | David A. Tutas Chief Compliance Officer |
| |
| |
| |
| |
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Shareholder Information
ANNUAL MEETING
The annual meeting of Universal Forest Products, Inc. will be held at 8:30 a.m. on April 22, 2020, at 2880 East Beltline Lane NE, Grand Rapids, MI 49525.
SHAREHOLDER INFORMATION
Shares of the Company’s stock are traded under the symbol UFPI on the NASDAQ Stock Market. The Company’s 10-K report, filed with the Securities and Exchange Commission, will be provided free of charge to any shareholder upon written request. For more information contact:
Investor Relations Department
Universal Forest Products, Inc.
2801 East Beltline NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Web: www.ufpi.com
SECURITIES COUNSEL
Varnum, LLP
Grand Rapids, MI
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Grand Rapids, MI
TRANSFER AGENT/SHAREHOLDER INQUIRIES
American Stock Transfer & Trust Company serves as the transfer agent for the Corporation. Inquiries relating to stock transfers, changes of ownership, lost or stolen stock certificates, changes of address, and dividend payments should be addressed to:
American Stock Transfer & Trust Co.
6201 15th Ave
Brooklyn, NY 11219
Telephone: (800) 937-5449
UNIVERSAL FOREST PRODUCTS®, INC., CORPORATE HEADQUARTERS
2801 East Beltline NE
Grand Rapids, MI 49525
Telephone: (616) 364-6161
Facsimile: (616) 364-5558
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UNIVERSAL FOREST PRODUCTS®, INC., AND ITS AFFILIATES
Locations:
| | | | |
Adairsville, GA | | Hamilton, OH | | Riverside, CA |
Aiea, HI | | Harrisonville, MO | | Rockwell, NC |
Ashburn, GA | | Hartford, WI | | Rowesville, SC |
Athena, OR | | Hendersonville, NC | | Saginaw, TX |
Auburn, NY | | Hillsboro, TX | | Saint Bernard De Lacolle, Quebec |
Auburndale, FL | | Hudson, NY | | Salina, KS |
Aurora, CO | | Huntsville, TX | | Salisbury, NC |
Bangalore, India | | Janesville, WI | | San Antonio, TX |
Belchertown, MA | | Jefferson, GA | | Santee, NC |
Belle Glade, FL | | Jeffersonville, IN | | Sauk Rapids, MN |
Berlin, NJ | | Kansas City, MO | | Schertz, TX |
Blanchester, OH | | Kearneysville, WV | | Selma, AL |
Blue Island, IL | | Kyle, TX | | Shanghai, China |
Boise, ID | | Lafayette, CO | | Sharon, TN |
Bonner, MT | | Langdon, ND | | Shawnee, OK |
Burlington, IA | | Lansing, MI | | Shippenville, PA |
Burlington, NC | | Lawrenceburg, TN | | Sidney, NY |
Cabo San Lucas, Mexico | | Liberty, NC | | Silsbee, TX |
Cameron, SC | | Lockhart, FL | | Snohomish, WA |
Captiva, FL | | Locust, NC | | St. Louis, MO |
Cedar Hill, TX | | Lodi, OH | | Stanfield, NC |
Chaffee, NY | | London, United Kingdom | | Stockertown, PA |
Chandler, AZ | | Magna, UT | | Tampa, FL |
Chateauguay, Quebec | | Maricopa County, AZ | | Thomaston, GA |
Chesapeake, VA | | Marietta, GA | | Thornton, CA |
Chicago, IL | | Martin, TN | | Tokyo, Japan |
Chino, CA | | McMinnville, OR | | Union City, GA |
Church Hill, TN | | Medley, FL | | Vaughan, Ontario |
Clinton, NC | | Memphis, TN | | Vesper, WI |
Columbia, MD | | Mexico City, Mexico | | Warrens, WI |
Comal County, TX | | Miami, FL | | Washington, NC |
Conway, SC | | Milwaukee, WI | | Wenatchee, WA |
Cordele, GA | | Minneota, MN | | White Bear Lake, MN |
Dallas, TX | | Morristown, TN | | White City, OR |
Dayton, OH | | Moultrie, GA | | White Pigeon, MI |
Delano, PA | | Naches, WA | | Windsor, CO |
Eagan, MN | | Nampa, ID | | Winthrop, ME |
Earth City, MO | | Nappanee, IN | | Woodburn, OR |
Eatonton, GA | | Naugatuck, CT | | Wujiang City, Jiangsu Province |
Edina, MN | | New Delhi, India | | Yakima, WA |
Edwardsburg, MI | | New Hartford, NY | | Yeerongpilly, Austrailia |
Elizabeth City, NC | | New London, NC | | |
Elkhart, IN | | New Windsor, MD | | |
Elkwood, VA | | New York, NY | | |
Emlenton, PA | | Newnan, GA | | |
Erskine Park, AUS | | Norton Shores, MI | | |
Fernley, NV | | Ogden, TX | | |
Fisherville, VA | | Ontario, CA | | |
Folkston, GA | | Ooltewah, TN | | |
Fort Worth, TX | | Orangeburg, SC | | |
Franklinton, NC | | Parker, PA | | |
Fredericksburg, VA | | Pearisburg, VA | | |
Gainesville, GA | | Peru, IL | | |
Georgetown, DE | | Pitts, GA | | |
Gilmer, TX | | Plainville, MA | | |
Gordon, PA | | Poulsbo, WA | | |
Grand Rapids, MI | | Prairie du Chien, WI | | |
Grandview, TX | | Puerto Rico | | |
Granger, IN | | Puyallup, WA | | |
Haleyville, AL | | Ranson, WV | | |
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