ufpi_Current_Folio_10Q

Table of Contents

 

 

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0‑22684

UNIVERSAL FOREST PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Michigan

    

38‑1465835

 

 

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification Number)

 

 

organization)

 

 

 

 

 

 

 

 

 

2801 East Beltline NE, Grand Rapids, Michigan

 

49525

 

 

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (616) 364‑6161

 

 

 

 

NONE

 

 

(Former name or former address, if changed since last report.)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller reporting company  

 

 

 

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with an new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b‑2 of the Exchange Act). Yes    No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

 

 

 

Class

    

Outstanding as of March 31, 2018

 

 

Common stock, $1 par value

 

61,543,902

 

 

 

 

 

 

 


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

TABLE OF CONTENTS

PART I.

 

FINANCIAL INFORMATION.

Page No.

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Consolidated Condensed Balance Sheets at March 31, 2018, December 30, 2017 and April 1, 2017

3

 

 

 

 

 

 

Consolidated Condensed Statements of Earnings and Comprehensive Income for the Three Months Ended March 31, 2018 and April 1, 2017

4

 

 

 

 

 

 

Consolidated Condensed Statements of Shareholders’ Equity for the Three Months Ended March 31, 2018 and April 1, 2017

5

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2018 and April 1, 2017

6

 

 

 

 

 

 

Notes to Unaudited Consolidated Condensed Financial Statements

7

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

 

 

Item 4.

Controls and Procedures

26

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings – NONE

 

 

 

 

 

 

Item 1A.

Risk Factors – NONE

27

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

 

 

Item 3.

Defaults upon Senior Securities – NONE

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures – NONE

 

 

 

 

 

 

Item 5.

Other Information – NONE

27

 

 

 

 

 

Item 6.

Exhibits

28

 

 

 

2


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

March 31,

 

December 30,

 

April 1,

 

 

    

2018

    

2017

    

2017

 

ASSETS

 

 

 

  

 

 

  

 

 

 

CURRENT ASSETS:

 

 

 

  

 

 

  

 

 

 

Cash and cash equivalents

 

$

25,326

    

$

28,339

  

$

31,020

 

Restricted cash

 

 

32,425

 

 

477

  

 

909

 

Investments

 

 

10,701

 

 

11,269

  

 

5,928

 

Accounts receivable, net

 

 

430,251

 

 

327,751

  

 

365,620

 

Inventories:

 

 

 

  

 

 

  

 

 

 

Raw materials

 

 

261,808

 

 

234,354

  

 

232,647

 

Finished goods

 

 

259,898

 

 

225,954

  

 

239,369

 

Total inventories

 

 

521,706

 

 

460,308

  

 

472,016

 

Refundable income taxes

 

 

 —

 

 

7,228

  

 

3,170

 

Other current assets

 

 

23,304

 

 

28,115

  

 

20,650

 

TOTAL CURRENT ASSETS

 

 

1,043,713

 

 

863,487

 

 

899,313

 

DEFERRED INCOME TAXES

 

 

2,273

 

 

1,865

  

 

1,960

 

RESTRICTED INVESTMENTS

 

 

10,238

 

 

8,359

  

 

3,800

 

OTHER ASSETS

 

 

7,123

 

 

7,368

  

 

12,573

 

GOODWILL

 

 

212,596

 

 

212,644

  

 

211,061

 

INDEFINITE-LIVED INTANGIBLE ASSETS

 

 

7,407

 

 

7,415

  

 

2,340

 

OTHER INTANGIBLE ASSETS, NET

 

 

34,543

 

 

34,910

  

 

36,759

 

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

  

 

 

  

 

 

 

  Property, plant and equipment

 

 

754,603

 

 

763,101

 

 

720,912

 

Less accumulated depreciation and amortization

 

 

(441,032)

 

 

(434,472)

  

 

(411,059)

 

       PROPERTY, PLANT AND EQUIPMENT, NET

 

 

313,571

 

 

328,629

 

 

309,853

 

TOTAL ASSETS

 

 

1,631,464

 

 

1,464,677

 

 

1,477,659

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

  

 

 

  

 

 

 

CURRENT LIABILITIES:

 

 

 

  

 

 

  

 

 

 

Cash overdraft

 

$

30,026

 

$

25,851

  

$

21,566

 

Accounts payable

 

 

176,469

 

 

140,106

  

 

156,030

 

Accrued liabilities:

 

 

 

  

 

 

  

 

 

 

Compensation and benefits

 

 

61,976

 

 

97,556

  

 

58,491

 

Income taxes

 

 

1,600

 

 

 —

 

 

 —

 

Other

 

 

42,633

 

 

38,404

  

 

39,473

 

Current portion of long-term debt

 

 

425

 

 

1,329

  

 

2,280

 

TOTAL CURRENT LIABILITIES

 

 

313,129

 

 

303,246

  

 

277,840

 

LONG-TERM DEBT

 

 

261,327

 

 

144,674

  

 

252,904

 

DEFERRED INCOME TAXES

 

 

13,894

 

 

14,079

  

 

21,364

 

OTHER LIABILITIES

 

 

26,192

 

 

28,655

  

 

28,198

 

TOTAL LIABILITIES

 

 

614,542

 

 

490,654

  

 

580,306

 

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,  61,543,902,  61,191,888 and 61,554,147

 

 

61,544

 

 

61,192

  

 

61,554

 

Additional paid-in capital

 

 

172,929

 

 

161,928

  

 

156,320

 

Retained earnings

 

 

768,223

 

 

736,212

  

 

670,115

 

Accumulated other comprehensive income

 

 

(1,140)

 

 

144

  

 

(3,450)

 

Total controlling interest shareholders’ equity

 

 

1,001,556

 

 

959,476

  

 

884,539

 

Noncontrolling interest

 

 

15,366

 

 

14,547

  

 

12,814

 

TOTAL SHAREHOLDERS’ EQUITY

 

 

1,016,922

 

 

974,023

  

 

897,353

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,631,464

 

$

1,464,677

  

$

1,477,659

 

 

See notes to consolidated condensed financial statements.

3


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

Three Months Ended

 

 

March 31,

 

April 1,

 

 

2018

    

2017

    

NET SALES

$

993,857

    

$

846,130

    

COST OF GOODS SOLD

 

862,968

 

 

725,390

 

GROSS PROFIT

 

130,889

 

 

120,740

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

93,206

 

 

86,983

 

NET GAIN ON DISPOSITION OF ASSETS

 

(6,534)

 

 

(64)

 

EARNINGS FROM OPERATIONS

 

44,217

 

 

33,821

 

INTEREST EXPENSE

 

1,778

 

 

1,504

 

INTEREST AND INVESTMENT INCOME

 

(717)

 

 

(82)

 

EQUITY IN EARNINGS OF INVESTEE

 

 —

 

 

(5)

 

 

 

1,061

 

 

1,417

 

EARNINGS BEFORE INCOME TAXES

 

43,156

 

 

32,404

 

INCOME TAXES

 

9,574

 

 

10,770

 

NET EARNINGS

 

33,582

 

 

21,634

 

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(749)

 

 

(572)

 

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

32,833

 

$

21,062

 

 

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

$

0.53

 

$

0.34

 

EARNINGS PER SHARE - DILUTED

$

0.53

 

$

0.34

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

NET EARNINGS

 

33,582

 

 

21,634

 

OTHER COMPREHENSIVE GAIN (LOSS)

 

(439)

 

 

3,035

 

COMPREHENSIVE INCOME

 

33,143

 

 

24,669

 

LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(1,594)

 

 

(1,427)

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST

$

31,549

 

$

23,242

 

 

See notes to consolidated condensed financial statements.

4


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

 

 

  

 

 

  

 

21,062

 

 

  

 

 

572

  

 

21,634

Foreign currency translation adjustment

 

 

 

  

 

 

  

 

 

  

 

1,971

 

 

855

  

 

2,826

Unrealized gain (loss) on investment & foreign currency

 

 

 

  

 

 

  

 

 

  

 

209

 

 

  

 

 

209

Distributions to noncontrolling interest

 

 

 

  

 

 

  

 

 

  

 

 

  

 

(1,673)

 

 

(1,673)

Additional purchases of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,774

 

 

1,774

Issuance of 5,214 shares under employee stock plans

 

 

 5

 

 

142

  

 

 

  

 

 

  

 

 

  

 

147

Issuance of 407,328 shares under stock grant programs

 

 

408

 

 

6,836

  

 

 

  

 

 

  

 

 

  

 

7,244

Issuance of 118,038 shares under deferred compensation plans

 

 

118

 

 

(118)

  

 

 

  

 

 

  

 

 

  

 

 —

Repurchase of 2,640 shares

 

 

(3)

 

 

  

 

 

(82)

  

 

 

  

 

  

 

 

(85)

Expense associated with share-based compensation arrangements

 

 

 

  

 

571

 

 

  

 

 

  

 

 

  

 

 

571

Accrued expense under deferred compensation plans

 

 

 

  

 

4,240

 

  

  

 

  

  

 

  

  

 

  

4,240

Balance at April 1, 2017

 

$

61,554

 

$

156,320

  

$

670,115

 

$

(3,450)

  

$

12,814

  

$

897,353

Balance at December 30, 2017

 

 

61,192

 

 

161,928

 

 

736,212

 

 

144

 

 

14,547

 

 

974,023

Net earnings

 

 

 

  

 

 

  

 

32,833

 

 

  

 

 

749

  

 

33,582

Foreign currency translation adjustment

 

 

 

  

 

 

  

 

 

  

 

(785)

 

 

845

  

 

60

Unrealized gain (loss) on investment & foreign currency

 

 

 

  

 

 

  

 

 

  

 

(499)

 

 

  

 

 

(499)

Distributions to noncontrolling interest

 

 

 

  

 

 

  

 

 

  

 

 

  

 

(775)

 

 

(775)

Additional purchases of noncontrolling interest

 

 

 

  

 

 

 

 

  

 

 

  

 

 

 —

  

 

 —

Net purchase and dissolution of noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 —

 

 

 —

Issuance of 7,469 shares under employee stock plans

 

 

 8

 

 

199

  

 

 

  

 

 

  

 

 

  

 

207

Issuance of 253,289 shares under stock grant programs

 

 

253

 

 

5,292

  

 

 

  

 

 

  

 

 

  

 

5,545

Issuance of 117,068 shares under deferred compensation plans

 

 

117

 

 

(117)

  

 

 

  

 

 

  

 

 

  

 

 —

Repurchase of 25,812 shares

 

 

(26)

 

 

 

 

 

(822)

 

 

 

 

 

 

 

 

(848)

Expense associated with share-based compensation arrangements

 

 

 

  

 

1,034

 

 

  

 

 

  

 

 

  

 

 

1,034

Accrued expense under deferred compensation plans

 

 

 

  

 

4,593

 

 

  

 

 

  

 

 

  

 

 

4,593

Balance at March 31, 2018

 

$

61,544

 

$

172,929

  

$

768,223

 

$

(1,140)

  

$

15,366

  

$

1,016,922

 

See notes to consolidated condensed financial statements.

5


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

(in thousands)

 

Three Months Ended

 

 

 

March 31,

 

April 1,

 

 

    

2018

    

2017

    

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

  

 

 

 

Net earnings

 

$

33,582

    

$

21,634

 

Adjustments to reconcile net earnings to net cash from operating activities:

 

 

 

  

 

 

 

Depreciation

 

 

12,712

 

 

11,392

 

Amortization of intangibles

 

 

1,228

 

 

1,119

 

Expense associated with share-based and grant compensation arrangements

 

 

1,094

 

 

617

 

Deferred income taxes (credits)

 

 

(519)

 

 

224

 

Equity in earnings of investee

 

 

 —

 

 

(5)

 

Net gain on disposition of assets

 

 

(6,534)

 

 

(64)

 

Changes in:

 

 

 

  

 

 

 

Accounts receivable

 

 

(99,765)

 

 

(67,766)

 

Inventories

 

 

(57,403)

 

 

(60,984)

 

Accounts payable and cash overdraft

 

 

39,935

 

 

32,769

 

Accrued liabilities and other

 

 

(8,502)

 

 

(9,676)

 

NET CASH USED IN OPERATING ACTIVITIES

 

 

(84,172)

 

 

(70,740)

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

  

 

 

 

Purchases of property, plant and equipment

 

 

(24,362)

 

 

(16,531)

 

Proceeds from sale of property, plant and equipment

 

 

36,250

 

 

353

 

Acquisitions, net of cash received

 

 

(8,787)

 

 

(55,441)

 

Advances of notes receivable

 

 

(12)

 

 

(228)

 

Collections on notes receivable

 

 

482

 

 

721

 

Purchases of investments

 

 

(6,718)

 

 

(819)

 

Proceeds from sale of investments

 

 

5,045

 

 

1,204

 

Other

 

 

(594)

 

 

142

 

NET CASH FROM (USED IN) INVESTING ACTIVITIES

 

 

1,304

 

 

(70,599)

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

  

 

 

 

Borrowings under revolving credit facilities

 

 

296,342

 

 

281,090

 

Repayments under revolving credit facilities

 

 

(179,429)

 

 

(137,767)

 

Borrowings of debt

 

 

1,376

 

 

 —

 

Repayment of debt

 

 

(5,232)

 

 

 —

 

Proceeds from issuance of common stock

 

 

206

 

 

146

 

Distributions to noncontrolling interest

 

 

(775)

 

 

(1,673)

 

Repurchase of common stock

 

 

(848)

 

 

(83)

 

Other

 

 

(70)

 

 

(16)

 

NET CASH FROM FINANCING ACTIVITIES

 

 

111,570

 

 

141,697

 

Effect of exchange rate changes on cash

 

 

233

 

 

882

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

28,935

 

 

1,240

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR

 

 

28,816

 

 

34,489

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD

 

$

57,751

 

$

35,729

 

 

 

 

 

 

 

 

 

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

28,339

 

$

34,091

 

Restricted cash, beginning of period

 

 

477

 

 

398

 

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

 

$

28,816

 

$

34,489

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

25,326

 

$

31,020

 

Restricted cash, end of period

 

 

32,425

 

 

4,709

 

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

 

$

57,751

 

$

35,729

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

  

 

 

 

Interest paid

 

$

843

 

$

497

 

Income taxes paid

 

 

1,245

 

 

2,337

 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Common stock issued under deferred compensation plans

 

 

4,237

 

 

3,793

 

See notes to consolidated condensed financial statements.

6


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

 

NOTES TO UNAUDITED

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A.       BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements (the “Financial Statements”) include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All intercompany transactions and balances have been eliminated.

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10‑K for the fiscal year ended December 30, 2017.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the April 1, 2017 balances in the accompanying unaudited consolidated condensed balance sheets.

 

B.       FAIR VALUE

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets measured at fair value are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

April 1, 2017

 

 

Quoted

 

Prices with

 

 

 

 

Quoted

 

Prices with

 

 

 

 

 

Prices in

 

Other

 

 

 

 

Prices in

 

Other

 

 

 

 

 

Active

 

Observable

 

 

 

 

Active

 

Observable

 

 

 

 

 

Markets

 

Inputs

 

 

 

 

Markets

 

Inputs

 

 

 

(in thousands)

    

(Level 1)

    

(Level 2)

    

Total

    

(Level 1)

    

(Level 2)

    

Total

Money market funds

 

$

65

    

$

4,744

    

$

4,809

    

$

64

    

$

4,564

    

$

4,628

Fixed income funds

 

 

2,159

 

 

7,111

 

 

9,270

 

 

4,055

 

 

 —

 

 

4,055

Equity securities

 

 

7,202

 

 

 —

 

 

7,202

 

 

5,928

 

 

 —

 

 

5,928

Mutual funds:

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

Domestic stock funds

 

 

1,158

 

 

 —

 

 

1,158

 

 

316

 

 

 —

 

 

316

International stock funds

 

 

1,159

 

 

 —

 

 

1,159

 

 

81

 

 

 —

 

 

81

Target funds

 

 

281

 

 

743

 

 

1,024

 

 

246

 

 

 —

 

 

246

Bond funds

 

 

207

 

 

347

 

 

554

 

 

203

 

 

 —

 

 

203

Total mutual funds

 

 

2,805

 

 

1,090

 

 

3,895

 

 

846

 

 

 —

 

 

846

Total

 

$

12,231

 

$

12,945

 

$

25,176

 

$

10,893

 

$

4,564

 

$

15,457

Assets at fair value

 

$

12,231

 

$

12,945

 

$

25,176

 

$

10,893

 

$

4,564

 

$

15,457

 

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. These funds are valued at prices quoted in an active

7


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

exchange market and are included in “Cash and Cash Equivalents”, “Investments”, “Restricted Cash”, 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.

We did not maintain any Level 3 assets or liabilities at March 31, 2018, or April 1, 2017. 

In 2017, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”) transferred $4.1 million in fixed income securities from its Investment Account and purchased an additional $3.8 million in fixed income securities which are held in a newly formed collateral trust account in line with regulatory requirements in the State of Michigan to allow Ardellis to act as an admitted carrier in the State.  These funds are intended to safeguard the insureds of the Michigan Branch of Ardellis.  The funds are classified as “Restricted Investments”.

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $19.4 million as of March 31, 2018, consisting of domestic and international stocks, and fixed income bonds. 

Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

March 31,2018

 

 

 

 

 

Unrealized

 

 

 

 

    

Cost

    

Gain/(Loss)

    

Fair Value

Fixed Income

 

$

9,437

    

$

(167)

  

$

9,270

Equity

 

 

6,389

 

 

813

  

 

7,202

Mutual Funds

 

 

2,947

 

 

(34)

  

 

2,913

Total

 

$

18,773

 

$

612

  

$

19,385

 

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. The net pre-tax effected unrealized gain was $0.6 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of March 31, 2018. During the first three months of 2018, Ardellis’ investments reported a net realized gain of $256 thousand, which was recorded in interest income on the statement of earnings.

 

 

 

 

C.       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.

8


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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.

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 the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration.  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 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.

The following table presents our gross revenues disaggregated by revenue source:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(in thousands)

    

March 31,

    

April 1,

    

 

Market Classification

 

2018

 

2017

 

% Change

FOB Shipping Point Revenue

 

$

981,691

 

$

826,876

 

18.72%

Construction Contract Revenue

 

 

29,976

 

 

31,981

 

-6.27%

Total Sales

 

 

1,011,667

 

 

858,857

 

17.79%

 

The North and West segments comprise the construction contract revenue above, $20.6 million and $9.4 million, respectively.  Construction contract revenue is primarily made up of site-built and framing customers.

9


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

The following table presents the balances of over time accounting accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 30,

 

April 1,

 

 

    

2018

    

2017

    

2017

    

Cost and Earnings in Excess of Billings

 

$

2,517

    

$

5,005

    

$

3,063

    

Billings in Excess of Cost and Earnings

 

 

3,386

 

 

4,435

 

 

4,352

 

 

 

D.       EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

    

April 1,

    

 

2018

 

2017

 

Numerator:

 

  

 

 

  

 

Net earnings attributable to controlling interest

$

32,833

 

$

21,062

 

Adjustment for earnings allocated to non-vested restricted common stock

 

(724)

 

 

(362)

 

Net earnings for calculating EPS

$

32,109

 

$

20,700

 

Denominator:

 

  

 

 

  

 

Weighted average shares outstanding

 

61,636

 

 

61,410

 

Adjustment for non-vested restricted common stock

 

(1,358)

 

 

(1,053)

 

Shares for calculating basic EPS

 

60,278

 

 

60,357

 

Effect of dilutive restricted common stock

 

85

 

 

99

 

Shares for calculating diluted EPS

 

60,363

 

 

60,456

 

Net earnings per share:

 

  

 

 

  

 

Basic

$

0.53

 

$

0.34

 

Diluted

$

0.53

 

$

0.34

 

 

No options were excluded from the computation of diluted EPS for the quarters ended March 31, 2018, or April 1, 2017.

On October 17, 2017, our Board of Directors declared a three-for-one stock split effected in the form of a stock dividend.  The record date of the stock split was on October 31, 2017, and the eventual stock distribution to shareholders occurred on November 14, 2017.  As a result of the stock split, all historical per share data and number of shares outstanding presented in future financial statements are retroactively adjusted.

E.       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.

10


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

On a consolidated basis, we have reserved approximately $2.6 million and $3.6 million on March 31, 2018, and April 1, 2017, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

Many of our wood treating operations utilize “Subpart W” drip pads, defined as hazardous waste management units by the Environmental Protection Agency. The rules regulating drip pads require that a pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste. Closure involves identification and disposal of contaminants which are required to be removed from the facility. The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed. Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.2 million. As a result, this amount is recorded in other long-term liabilities on March 31, 2018.

In February 2014, one of our operations was served with a federal grand jury subpoena from the Southern District of New York. The subpoena was issued in connection with an investigation being conducted by the US Attorney’s Office for the Southern District of New York. The subpoena requested documents relating to a developer and construction projects for which our operation had provided materials and labor. Following receipt of the subpoena, the Audit Committee of the Company’s Board of Directors retained outside counsel to conduct an internal investigation and respond to the subpoena. The Company cooperated in all respects with the US Attorney’s Office, complied with this subpoena and voluntarily provided additional information. As a result of the internal investigation, in 2014, two Company employees were terminated for violating the Company’s Code of Business Conduct and Ethics. In May 2015, those ex-employees were indicted by the grand jury. In April 2016, one of the two former employees pled guilty to four of the charges included in the indictment. In May 2016, the other former employee was found guilty by a jury on four of the charges included in the indictment. The Company has not been named as a target and continues to cooperate with the US Attorney’s Office in this matter.  Based upon prior communications with the US Attorney’s Office, we do not believe that the resolution of this matter will have a material adverse impact on our financial condition or the results of our operations.

In addition, on March 31, 2018, 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 March 31, 2018, we had outstanding purchase commitments on commenced capital projects of approximately $28.5 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 March 31, 2018, we had approximately $12.9 million outstanding payment and performance bonds for open projects. We had approximately $6.8 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On March 31, 2018, we had outstanding letters of credit totaling $26.4 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

11


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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 $16.6 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.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 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 the first quarter of 2018 which would require us to recognize a liability on our balance sheet.

F.       BUSINESS COMBINATIONS

We completed the following acquisitions in three months ended 2018 and 2017 which were accounted for using the purchase method in thousands unless otherwise noted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net 

 

Company

Acquisition 

 

Intangible 

Tangible 

Operating

Name

Date

Purchase Price

Assets

Assets

Segment

 

January 23, 2018

$2,942
cash paid for 100% asset purchase

$

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

$5,845
cash paid for 100% asset purchase

$

50

$

5,795

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.

 

October 16, 2017

$931
cash paid for 100% asset purchase

$

909

$

22

All Other

Silverwater Box

A manufacturer and distributor of total packaging solutions in timber, plastic, steel, fiberglass, and cardboard.  Silverwater Box had annual sales of approximately $2.8 million.  The acquisition of Silverwater Box allows us to make progress on our goal of becoming a global provider of packaging solutions.

 

May 26, 2017

$5,042
cash paid for 100% asset purchase

$

4,880

$

162

South

Go Boy Pallets, LLC ("Go Boy")

A manufacturer and distributor of industrial pallets and packaging in Georgia and North Carolina.  Go Boy had annual sales of approximately $8 million.  The acquisition of Go Boy enabled us to expand our industrial packaging product offering and lumber sourcing in this region.

12


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

 

March 6, 2017

$31,818
cash paid for 100% asset purchase

$

7,653

$

24,165

South

Robbins Manufacturing Co. ("Robbins")

A manufacturer of treated wood products with facilities in Florida, Georgia, and North Carolina.  Robbins had annual sales of approximately $86 million.  The acquisition of Robbins allowed us to expand our presence in this region and serve customers more cost effectively. 

 

March 6, 2017

$22,789
cash paid for 100% asset purchase

$

14,341

$

8,448

North

Quality Hardwood Sales, LLC ("Quality")

A manufacturer and supplier of hardwood products, including components of cabinets used in homes and recreational vehicles.  Quality had annual sales of approximately $30 million.  The acquisition of Quality enabled us to expand our product offering to include hardwood-based products.

The intangible assets for each acquisition were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2018.  In aggregate, acquisitions completed since the end of March 2017 contributed approximately $38.7 million in revenue and $0.8 million in operating profit during the first quarter of 2018.

G.       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, 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 (b) the Company’s distribution unit (referred to as UFPD) which distributes a variety of products to the manufactured housing industry nation-wide and is accounted for as a reporting unit within the North segment, and (c) the idX division, which designs, produces, and installs customized in-store environments, for customers world-wide.

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.

Our Alternative Materials, International and idX division have been included in the “All Other” column of the table below. The “Corporate” column includes unallocated administrative costs and certain incentive compensation expense.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

    

      North      

    

      South      

    

      West      

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

 

$

270,186

 

$

242,020

 

$

362,468

 

$

119,183

 

$

 —

 

$

993,857

Intersegment net sales

 

 

12,025

 

 

18,649

 

 

15,599

 

 

62,720

 

 

 —

 

 

108,993

Segment operating profit (loss)

 

 

8,694

 

 

19,544

 

 

21,083

 

 

(3,100)

 

 

(2,004)

 

 

44,217

 

13


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended April 1, 2017

 

    

      North      

    

      South      

    

      West      

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

 

$

227,920

 

$

188,743

 

$

319,161

 

$

110,306

 

$

 —

 

$

846,130

Intersegment net sales

 

 

16,171

 

 

17,278

 

 

21,833

 

 

20,006

 

 

 —

 

 

75,288

Segment operating profit

 

 

9,978

 

 

10,689

 

 

18,305

 

 

604

 

 

(5,755)

 

 

33,821

 

 

 

H.       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 22.2% in the first quarter of 2018 compared to 33.2% for same period in 2017.  This decrease was due primarily to the Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.  Pursuant to SAB 118, the accounting for the Tax Act was incomplete at December 30, 2017 and is still incomplete as of March 31, 2018.    As noted at year-end, however, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax, a provisional decrease for certain of our Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) related to the reduced corporate tax rate, and a provisional benefit related to our intent to fully expense all qualifying expenditures under the new cost recovery rules.

 

We have not made any additional measurement-period adjustments related to these items during the quarter.  However, we are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

 

As noted at year-end, we were not yet able to reasonably estimate the effects for Global Intangible Low-Taxed Income (GILTI).  Therefore, no provisional adjustment was recorded.

 

Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Act and the application of ASC 740.  Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”).  Our selection of an accounting policy related to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be.  Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on a number of different aspects or our estimated future results of global operations, we are not yet able to reasonably estimate the long-term effects of this provision of the Act.  Therefore, we have not recorded any potential deferred tax effects related to GILTI in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.  We have however, included an estimate of the estimated 2018 current GILTI impact in our Annual Effective Tax Rate (AETR) for 2018.  We expect to complete our accounting within the prescribed measurement period.

 

I.       PROPERTY SALE

The Company completed a sale of a property in Medley, Florida, during the first quarter of 2018. The sale price for the property was approximately $36 million and created a $7 million pre-tax gain.  The transaction is part of a strategy to create efficiencies and advantages not possible with the current facility by optimizing the capacity of its other three Florida operations, including two it acquired from Robbins Manufacturing in 2017, and adding a state-of-the-art facility in South Florida.  The Company will lease back the Medley, Florida, facility for two years as it executes its long-term plan for Florida and the Southeast region, however, only a minor portion of the property sold was leased back, the entire gain is included in income.

14


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2018.

OVERVIEW

Our results for the first quarter of 2018 were impacted by the following:

·

Our gross sales increased by 18% compared to the first quarter of 2017, which was comprised of a 9% increase in unit sales and a 9% increase in selling prices primarily due to the commodity lumber market (see Historical Lumber Prices below).  Acquired operations contributed 4% to our unit sales growth.  All of our markets contributed to our 5% overall organic growth rate.   

·

Our operating profits increased by 30.7% compared to the first quarter of 2017, which was primarily due to a  pre-tax net gain of approximately $6.5 million as a result of the of sale of certain assets including our Medley, FL, plant.  Excluding the impact of the sale, our operating profits increased by 11%, which is comparable with our 9% increase in unit sales. 

·

Our effective tax rate was approximately 22% primarily due to the change in tax law.

·

Cash flow used in operating activities was $84 million due to seasonal working capital requirements totaling approximately $126 million since year end. 

15


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

HISTORICAL LUMBER PRICES

We experience significant fluctuations in the cost of commodity lumber products from primary producers (“Lumber Market”). The following table presents the Random Lengths framing lumber composite price:

 

 

 

 

 

 

 

 

 

 

Random Lengths Composite

 

 

 

Average $/MBF

 

 

    

2018

    

2017

    

January

 

$

449

 

$

356

 

February

 

 

496

 

 

393

 

March

 

 

505

 

 

401

 

 

 

 

 

 

 

 

 

First quarter average

 

$

483

 

$

383

 

 

 

 

 

 

 

 

 

First quarter percentage change

 

 

26.1

%  

 

 

 

 

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprised approximately 42% and 44% of total lumber purchases through the first three months of 2018 and 2017, respectively.

 

 

 

 

 

 

 

 

 

 

Random Lengths SYP

 

 

 

Average $/MBF

 

 

    

2018

    

2017

    

January

 

$

418

 

$

397

 

February

 

 

459

 

 

420

 

March

 

 

480

 

 

433

 

 

 

 

 

 

 

 

 

First quarter average

 

$

452

 

$

417

 

 

 

 

 

 

 

 

 

First quarter percentage change

 

 

8.4

%

 

 

 

 

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

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 53.1% and 52.1% of our sales in the first three months of 2018 and 2017, 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 deck components and fencing sold to retail customers, as well as trusses, wall panels and other components sold to the 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

16


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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 eventually allow us to re-price our products for changes in lumber costs from our suppliers. 

·

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

For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.

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

·

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

·

Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs.

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

 

 

 

 

 

 

 

 

 

    

Period 1

    

Period 2

 

Lumber cost

 

$

300

 

$

400

 

Conversion cost

 

 

50

 

 

50

 

= Product cost

 

 

350

 

 

450

 

Adder

 

 

50

 

 

50

 

= Sell price

 

$

400

 

$

500

 

Gross margin

 

 

12.5

%  

 

10.0

%

 

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.  In order to more effectively evaluate our profitability in such periods, we believe it is useful to compare our change in units shipped with our changes in costs and profits.

BUSINESS COMBINATIONS

We completed two business acquisitions during the first three months of 2018 and four during all of 2017. The annual historical sales attributable to acquisitions completed in the first three months 2018 and all of 2017 were approximately

17


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

$33 million and $127 million, respectively.  These business combinations were not significant to our quarterly or year-to-date operating results individually or in aggregate and thus pro forma results for 2018 or 2017 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.

RESULTS OF OPERATIONS

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

 

 

 

 

 

 

Three Months Ended

 

 

March 31,

    

April 1,

 

 

2018

 

2017

 

Net sales

100.0

%  

100.0

%

Cost of goods sold

86.8

 

85.7

 

Gross profit

13.2

 

14.3

 

Selling, general, and administrative expenses

9.4

 

10.3

 

Net gain on disposition  and impairment of assets

(0.7)

 

 —

 

Earnings from operations

4.4

 

4.0

 

Other expense, net

0.1

 

0.2

 

Earnings before income taxes

4.3

 

3.8

 

Income taxes

1.0

 

1.3

 

Net earnings

3.4

 

2.6

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

3.3

%  

2.5

%

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

GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, specialty wood packaging, components and packing materials for various industries, and customized interior fixtures used in a variety of retail stores, commercial and other structures.  Our strategic long-term sales objectives include:

·

Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, increasing our penetration of the concrete forming market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, increasing our market share with independent retailers, and increasing our sales of customized interior fixtures used in a variety of markets.

·

Expanding geographically in our core businesses, domestically and internationally.

·

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

18


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

·

Maximizing unit sales growth while achieving return on investment goals.

·

Developing new products and expanding our product offering for existing customers. New product sales were $103.9 million in the first quarter of 2018 compared to $86.2 million during the first quarter of 2017. 

 

 

 

 

 

 

 

 

 

 

 

New Product Sales by Market

 

 

Three Months Ended

(in thousands)

    

March 31,

    

April 1,

    

 

Market Classification

 

2018

 

2017

 

% Change

Retail

 

$

55,243

 

$

48,014

 

15.1

Industrial

 

 

28,955

 

 

24,420

 

18.6

Construction

 

 

19,668

 

 

13,745

 

43.1

Total New Product Sales

 

$

103,866

 

$

86,179

 

20.5

Note:  Certain prior year product reclassifications and the change in designation of certain products as “new” resulted in a change in prior year’s sales.

Value-Added and Commodity-Based Sales:

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales. Value-added products generally carry higher gross margins than our commodity-based products.

 

 

 

 

 

 

 

Three Months Ended

 

March 31,

 

April 1,

 

2018

 

2017

Value-Added

61.7

%  

 

62.9

%

Commodity-Based

38.3

%  

 

37.1

%

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

(in thousands)

 

March 31,

    

April 1,

    

%

Market Classification

 

2018

 

2017

 

Change

Retail

 

$

370,961

 

$

312,352

 

18.8

Industrial

 

 

332,966

 

 

280,599

 

18.7

Construction

 

 

307,740

 

 

265,906

 

15.7

Total Gross Sales

 

$

1,011,667

 

$

858,857

 

17.8

Sales Allowances

 

 

(17,810)

 

 

(12,727)

 

39.9

Total Net Sales

 

$

993,857

 

$

846,130

 

17.5

Note:  During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Gross sales in the first quarter of 2018 increased 18% compared to the same period of 2017, due to a 9% increase in unit sales and a 9% increase in selling prices primarily due to the Lumber Market.  Acquired operations contributed 4% to our unit sales growth, and our organic unit sales growth was 5%.

Changes in our gross sales by market are discussed below.

19


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Retail:

Gross sales to the retail market increased almost 19% in the first quarter of 2018 compared to the same period of 2017, due to a 10% increase in unit sales and a 9% increase in selling prices. Within this market, sales to our big box customers increased over 15%, and sales to other independent retailers increased 24%.  Businesses we acquired contributed 7% to our growth in unit sales, primarily to independent retail customers.  Our organic unit growth was 3% for the quarter and was adversely impacted by inclement weather in certain areas of the U.S. 

Industrial:

Gross sales to the industrial market increased almost 19% in the first quarter of 2018 compared to the same period of 2017, resulting from an 11% increase in unit sales and an 8% increase in selling prices. Businesses we acquired contributed 4% to our growth in unit sales.  Our organic growth in unit sales of 7% was due to adding over 300 new customers and 46 new locations of existing customers as well as greater customer demand.

Construction:

Gross sales to the construction market increased almost 16% in the first quarter of 2018 compared to 2017. The increase was due to a 6% increase in unit sales and a 10% increase in our selling prices. Our increase in unit sales was driven by a 10% increase to manufactured housing customers, a 3% increase to residential construction customers, and a 5% increase to commercial construction customers.  Our sales to residential construction customers were impacted by inclement weather in certain areas of the U.S.

By comparison (and based upon various industry publications):

·

Production of HUD-code manufactured homes in January and February 2018, the most recent period reported, was up 10.3% compared to the same period of 2017.

·

Non-residential construction activity in January and February increased approximately 8.2% compared to the same period of 2017.

·

National housing starts increased approximately 2.6% in the period from December 2017 through February 2018 (our sales trail housing starts by about a month) compared to the same period of 2017. 

COST OF GOODS SOLD AND GROSS PROFIT

Our gross margin decreased to 13.2% from 14.3% comparing the first quarter of 2018 to the same period of 2017 due to the higher level of lumber prices as our 8.4% increase in gross profit dollars was in line with our 9% increase in unit sales during the same period.  Acquired operations contributed $2.3 million of gross profit in the first quarter of 2018.  Excluding acquisitions, our gross profits increased by $7.4 million, or 6.5%, over the same period last year as follows:

·

Our gross profit on sales to the retail market increased by approximately $0.8 million, primarily due to new product growth.

·

Our gross profit on sales to the industrial market increased by approximately $4.7 million, due to a combination of growth and more effectively passing on lumber cost increases in our selling prices.

·

Our gross profit on sales to the construction market increased by over $1.9 million, primarily due to organic growth.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses increased by approximately $6.2 million, or 7.2%, in the first quarter of 2018 compared to the same period of 2017, while we reported a 9% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled $9.1 million in the first quarter of

20


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

2018 compared to $8.1 million in 2017.  Acquired operations contributed approximately $1.5 million to our year over year increase.  The remaining increase was primarily due to an increase in base wages and benefits ($2.4 million) as well as sales incentive expenses ($1.0 million). 

INTEREST, NET

Net interest costs were lower in the first quarter of 2018 compared to the same period of 2017 primarily due to approximately $500 thousand in investment income from our captive insurance company.  The increase in investment income is due to an overall increase in investments compared to the same period of 2017.

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 22.2% in the first quarter of 2018 compared to 33.2% for same period in 2017.  This decrease was due primarily to the Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018.  In addition, we recognized a favorable permanent tax difference related to our share-based compensation plans.

 

SEGMENT REPORTING

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

Earnings from Operations

 

 

Three Months Ended

 

 

Three Months Ended

 

    

March 31,

    

April 1,

    

$

    

%

    

  

March 31,

    

April 1,

    

$

    

%

 

(in thousands)

 

2018

 

2017

 

    Change    

 

Change

 

 

2018

 

2017

 

    Change    

 

Change

North

 

$

270,186

 

$

227,920

 

$

42,266

 

18.5

%  

 

 

$

8,694

 

$

9,978

 

$

(1,284)

 

(12.9)

%

South

 

 

242,020

 

 

188,743

 

 

53,277

 

28.2

%  

 

 

 

19,544

 

 

10,689

 

 

8,855

 

82.8

%

West

 

 

362,468

 

 

319,161

 

 

43,307

 

13.6

%  

 

 

 

21,083

 

 

18,305

 

 

2,778

 

15.2

%

All Other

 

 

119,183

 

 

110,306

 

 

8,877

 

8.0

%  

 

 

 

(3,100)

 

 

604

 

 

(3,704)

 

(613.2)

%

Corporate

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 

 

(2,004)

 

 

(5,755)

 

 

3,751

 

65.2

%

Total

 

$

993,857

 

$

846,130

 

$

147,727

 

17.5

%  

 

 

$

44,217

 

$

33,821

 

$

10,396

 

30.7

%


(1)

Corporate primarily represents over (under) allocated administrative costs and accrued bonus expense.

North

 

 

 

 

 

 

 

 

 

 

Net Sales

 

North Segment by Market

 

Three Months Ended

(in thousands)

March 31,

    

April 1,

    

 

 

Market Classification

2018

 

2017

 

% Change

Retail

$

95,809

 

$

87,445

 

9.6

%

Industrial

 

51,620

 

 

32,490

 

58.9

%

Construction

 

127,448

 

 

112,191

 

13.6

%

Total Gross Sales

 

274,877

 

 

232,126

 

18.4

%

Sales Allowances

 

(4,691)

 

 

(4,206)

 

11.5

%

Total Net Sales

$

270,186

 

$

227,920

 

18.5

%

Note:  During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the North reportable segment increased in the first quarter of 2018 compared to 2017 as a result of increased sales to each of our markets primarily due to the same factors previously discussed.  Acquired operations contributed $10.8 million to our industrial sales increase.

21


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Earnings from operations for the North reportable segment decreased in the first quarter of 2018 by $1.3 million, or 12.9%, due to a decrease in gross profit of $0.2 million and a $1.1 million increase in SG&A expenses compared to last year.  Acquired operations contributed $0.3 million to our operating profits in the first quarter.  Many of our plants in the North segment were impacted by inclement weather in the first quarter,  which had a corresponding adverse impact on earnings.

South

 

 

 

 

 

 

 

 

 

 

Net Sales

 

South Segment by Market

 

Three Months Ended

(in thousands)

March 31,

    

April 1,

    

 

 

Market Classification

2018

 

2017

 

% Change

Retail

$

115,197

 

$

84,260

 

36.7

%

Industrial

 

81,009

 

 

62,710

 

29.2

%

Construction

 

51,070

 

 

45,856

 

11.4

%

Total Gross Sales

 

247,276

 

 

192,826

 

28.2

%

Sales Allowances

 

(5,256)

 

 

(4,083)

 

28.7

%

Total Net Sales

$

242,020

 

$

188,743

 

28.2

%

Note:  During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the South reportable segment increased in the first quarter of 2018 compared to 2017 due to increased sales to all markets primarily due to the same factors previously discussed.  Acquired operations contributed $26.5 million and $1.4 million to our growth in sales to the retail and industrial market, respectively. 

Earnings from operations for the South reportable segment increased in the first quarter of 2018 by $8.9 million, or 82.8%, compared to the same period in 2017.  Excluding the impact of our Medley plant sale, earnings from operations increased during the first quarter of 2018 by $1.9 million due to an increase in gross profit dollars of $3.9 million, offset by an increase in SG&A expenses of $2.0 million compared to the same period of 2017.  Acquired operations contributed $1.4 million to gross profits, $1.0 million to SG&A, and $0.4 million to operating profits in the first quarter.  The increase in gross profit was driven by the retail and industrial markets due to the same factors previously discussed.

West

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

West Segment by Market

 

 

Three Months Ended

 

(in thousands)

March 31,

    

April 1,

    

 

 

 

Market Classification

2018

 

2017

 

% Change

 

Retail

$

111,024

 

$

99,011

 

12.1

%  

 

Industrial

 

127,589

 

 

116,269

 

9.7

%  

 

Construction

 

129,171

 

 

107,745

 

19.9

%  

 

Total Gross Sales

 

367,784

 

 

323,025

 

13.9

%  

 

Sales Allowances

 

(5,316)

 

 

(3,864)

 

37.6

%  

 

Total Net Sales

$

362,468

 

$

319,161

 

13.6

%  

 

Note:  During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the West reportable segment increased in the first quarter of 2018 compared to 2017 due to increases in sales to all markets primarily due to factors previously discussed. 

22


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Earnings from operations for the West reportable segment increased in the first quarter of 2018 by $2.8 million, or 15.2%, compared to the same period in 2017 due to a $4.1 million increase in gross profit offset by a $1.3 million increase in SG&A expenses.  Gross profits increased primarily due to organic sales growth and improved gross profits on sales to the industrial market due to the same factors previously discussed. 

All Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

 

All Other Segment by Market

 

 

 

 

Three Months Ended

 

 

(in thousands)

    

March 31,

    

April 1,

    

 

 

 

    

Market Classification

 

2018

 

2017

 

% Change

 

 

Retail

 

$

48,931

 

$

41,636

 

17.5

%

 

 

Industrial

 

 

72,749

 

 

69,130

 

5.2

%

 

 

Construction

 

 

50

 

 

115

 

(56.5)

%

 

 

Total Gross Sales

 

 

121,730

 

 

110,881

 

9.8

%

 

 

Sales Allowances & Other

 

 

(2,547)

 

 

(575)

 

343.0

%

 

 

Total Net Sales

 

$

119,183

 

$

110,306

 

8.0

%

 

 

Note:  During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

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

Net sales attributable to All Other reportable segments increased in the first quarter of 2018 compared to 2017 due to increases in sales to the retail and industrial markets.  Our increase in sales to the retail market was primarily due to a $6.4 million increase in sales within our International segment.

Earnings from operations for All Other reportable segments decreased during the first quarter of 2018 by $3.7 million due to a $0.5 million decrease in gross profit and $3.2 million increase in SG&A expenses, compared to the same period of 2017.  The overall decrease in earnings from operations was primarily due to the Alternative Materials segment.

23


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.

LIQUIDITY AND CAPITAL RESOURCES

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

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31,

    

April 1,

 

 

2018

 

2017

Cash used in operating activities

 

$

(84,172)

 

$

(70,740)

Cash from (used in) investing activities

 

 

1,304

 

 

(70,599)

Cash from financing activities

 

 

111,570

 

 

141,697

Effect of exchange rate changes on cash

 

 

233

 

 

882

Net change in all cash and cash equivalents

 

 

28,935

 

 

1,240

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

 

 

28,816

 

 

34,489

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

 

$

57,751

 

$

35,729

In general, we funded 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 have not issued equity to finance growth except in the case of a large acquisition. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.

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.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle decreased to 57 days from 59 days during the first quarter of 2018 compared to the prior periods.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

April 1,

 

 

 

2018

 

2017

 

Days of sales outstanding

    

 

32

    

 

32

    

Days supply of inventory

 

 

46

 

 

48

 

Days payables outstanding

 

 

(21)

 

 

(21)

 

Days in cash cycle

 

 

57

 

 

59

 

In the first three months of 2018, our cash used in operating activities was $84.2 million, which was comprised of net earnings of $33.6 million and $8.0 million of non-cash expenses, offset by a $125.8 million seasonal increase in working capital since the end of December 2017.  Comparatively in the first three months of 2017, our cash used in operating activities was $70.8 million, which was comprised of net earnings of $21.6 million, $13.2 million of non-cash expenses, and a $105.6 million seasonal increase in working capital.  The increase in working capital compared to the same period last year was primarily due to growth in our business and higher lumber prices.

24


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first three months of 2018 and totaled $8.8 million and $24.4 million, respectively. Proceeds from the sale of our Medley, FL, plant provided approximately $36 million in net cash proceeds.  Outstanding purchase commitments on existing capital projects totaled approximately $28.5 million on March 31, 2018. We currently plan to spend $85 million for the year in 2018 on capital expenditures.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.  Comparatively, capital expenditures were $16.5 million during the first three months of 2017.  The increase in our capital expenditures in 2018 is primarily due to the additional requirements of recently acquired operations and certain real estate purchases as we continue to grow our business.  The sale and purchase of investments totaling $5.0 million and $6.7 million, respectively, are due to investment activity in our captive insurance subsidiary.

Cash flows from financing activities primarily consisted of net borrowings under our revolving credit facility of approximately $116.9 million, primarily as a result of seasonal working capital requirements. 

On March 31, 2018, we had $176.2 million outstanding on our $295 million revolving credit facility. The outstanding revolving credit facility also includes letters of credit totaling approximately $9.8 million on March 31, 2018; as a result, we have approximately $109.0 million in remaining availability on our revolver after considering letters of credit. Additionally, we have $225 million in availability under an amended “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 March 31, 2018.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, “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. There have been no material changes in our policies or estimates since December 30, 2017.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.

For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.

We are subject to fluctuations in the price of lumber. We experience significant fluctuations in the cost of commodity lumber products from primary producers (the “Lumber Market”). A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices. While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross

25


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

margins, and our profitability. We anticipate that these fluctuations will continue in the future. (See “Impact of the Lumber Market on Our Operating Results.”)

Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We entered into forward foreign exchange rate contracts in 2017 and may enter into further forward contracts in the future associated with mitigating the foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended March 31, 2018 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)

Changes in Internal Controls. During the quarter ended March 31, 2018, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

26


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

PART II. OTHER INFORMATION

Item 1A. Risk Factors.

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)

None.

(b)

None.

(c)

Issuer purchases of equity securities.

 

 

 

 

 

 

 

 

 

Fiscal Month

    

(a)

    

(b)

    

(c)

    

(d)

December 31, 2017 - February 3, 2018

 

 —

 

 —

 

 —

 

2,721,023

February 4 - March 3, 2018

 

 —

 

 —

 

 —

 

2,721,023

March 4 - 31, 2018

 

25,812

 

32.85

 

 —

 

2,695,211


(a)

Total number of shares purchased.

(b)

Average price paid per share.

(c)

Total number of shares purchased as part of publicly announced plans or programs.

(d)

Maximum number of shares that may yet be purchased under the plans or programs.

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, 2011, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 2.7 million.

Item 5. Other Information.

None.

27


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

PART II. OTHER INFORMATION

Item 6. Exhibits.

The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:

 

 

 

31

Certifications.

 

 

 

 

(a)

Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

 

(b)

Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

32

Certifications.

 

 

 

 

(a)

Certificate of the Chief Executive Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

 

(b)

Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

 

 

 

101

Interactive Data File.

 

 

 

 

(INS)

XBRL Instance Document.

 

 

 

 

(SCH)

XBRL Schema Document.

 

 

 

 

(CAL)

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

(LAB)

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

(PRE)

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

(DEF)

XBRL Taxonomy Extension Definition Linkbase Document.


 

28


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNIVERSAL FOREST PRODUCTS, INC.

 

 

 

Date: May 2, 2018

By:

/s/ Matthew J. Missad

 

Matthew J. Missad,

 

Chief Executive Officer and Principal Executive Officer

 

 

 

 

 

 

Date: May 2, 2018

By:

/s/ Michael R. Cole

 

Michael R. Cole,

 

Chief Financial Officer,

 

Principal Financial Officer and

 

Principal Accounting Officer

 

29