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 September 28, 2019
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 every Interactive Data File required to be submitted 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 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 a 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 September 28, 2019
Common stock, $1 par value
61,390,216
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, no par value
UFPI
The Nasdaq Stock Market, LLC
UNIVERSAL FOREST PRODUCTS, INC.
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION.
Page No.
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at September 28, 2019, December 29, 2018 and September 29, 2018
3
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended September 28, 2019 and September 29, 2018
4
Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended September 28, 2019 and September 29, 2018
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2019 and September 29, 2018
6
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
33
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors
34
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities – NONE
Mine Safety Disclosures – NONE
Item 5.
Other Information – NONE
Item 6.
Exhibits
35
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
September 28,
December 29,
September 29,
2019
2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
64,498
27,316
26,327
Restricted cash
729
882
1,024
Investments
17,028
14,755
15,809
Accounts receivable, net
474,648
343,450
454,935
Inventories:
Raw materials
239,585
271,871
257,983
Finished goods
239,771
284,349
252,074
Total inventories
479,356
556,220
510,057
Refundable income taxes
1,550
14,130
9,124
Other current assets
54,295
38,525
29,575
TOTAL CURRENT ASSETS
1,092,104
995,278
1,046,851
DEFERRED INCOME TAXES
2,284
2,668
2,176
RESTRICTED INVESTMENTS
16,082
13,267
13,117
RIGHT OF USE ASSETS
75,436
—
OTHER ASSETS
23,085
8,662
7,052
GOODWILL
232,411
224,117
218,631
INDEFINITE-LIVED INTANGIBLE ASSETS
7,339
7,360
7,373
OTHER INTANGIBLE ASSETS, NET
46,877
41,486
35,662
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
880,274
814,645
807,023
Less accumulated depreciation and amortization
(495,267)
(459,935)
(460,714)
PROPERTY, PLANT AND EQUIPMENT, NET
385,007
354,710
346,309
TOTAL ASSETS
1,880,625
1,647,548
1,677,171
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
27,367
31,115
Accounts payable
180,767
136,901
175,912
Accrued liabilities:
Compensation and benefits
127,500
104,109
99,786
Other
61,463
41,645
51,316
Current portion of lease liability
15,566
Current portion of long-term debt
152
148
149
TOTAL CURRENT LIABILITIES
385,448
310,170
358,278
LONG-TERM DEBT
162,853
202,130
186,539
LEASE LIABILITY
59,870
14,897
15,687
13,701
OTHER LIABILITIES
28,454
30,877
26,929
TOTAL LIABILITIES
651,522
558,864
585,447
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, 61,390,216, 60,883,749, and 61,656,181
61,390
60,884
61,656
Additional paid-in capital
189,820
178,540
176,671
Retained earnings
969,564
839,917
841,431
Accumulated other comprehensive income
(5,315)
(5,938)
(3,638)
Total controlling interest shareholders’ equity
1,215,459
1,073,403
1,076,120
Noncontrolling interest
13,644
15,281
15,604
TOTAL SHAREHOLDERS’ EQUITY
1,229,103
1,088,684
1,091,724
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated condensed financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
NET SALES
1,163,026
1,212,702
3,417,969
3,500,999
COST OF GOODS SOLD
975,756
1,054,029
2,889,706
3,045,748
GROSS PROFIT
187,270
158,673
528,263
455,251
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
115,652
102,704
334,283
300,505
NET (GAIN) LOSS ON DISPOSITION OF ASSETS AND IMPAIRMENT OF ASSETS
1,151
(1,022)
830
(7,079)
EARNINGS FROM OPERATIONS
70,467
56,991
193,150
161,825
INTEREST EXPENSE
1,900
1,945
6,767
5,971
INTEREST AND INVESTMENT INCOME
(410)
(211)
(2,685)
(1,109)
NET INTEREST EXPENSE
1,490
1,734
4,082
4,862
EARNINGS BEFORE INCOME TAXES
68,977
55,257
189,068
156,963
INCOME TAXES
16,396
13,189
45,340
36,183
NET EARNINGS
52,581
42,068
143,728
120,780
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(722)
(849)
(1,814)
(2,684)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
51,859
41,219
141,914
118,096
EARNINGS PER SHARE - BASIC
0.84
0.67
2.30
1.91
EARNINGS PER SHARE - DILUTED
0.66
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE GAIN (LOSS)
(1,200)
1,174
644
(3,170)
COMPREHENSIVE INCOME
51,381
43,242
144,372
117,610
LESS COMPREHENSIVE LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(358)
(1,583)
(1,835)
(3,296)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
51,023
41,659
142,537
114,314
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share data)
Controlling Interest Shareholders’ Equity
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Noncontrolling
Stock
Capital
Earnings
Interest
Total
Balance at December 30, 2017
61,192
161,928
736,212
144
14,547
974,023
Net earnings
2,684
Foreign currency translation adjustment
(3,562)
612
(2,950)
Unrealized gain (loss) on investment & foreign currency
(220)
Distributions to noncontrolling interest
(2,239)
Cash dividends - $0.180 per share
(11,090)
Issuance of 25,449 shares under employee stock plans
25
731
756
Issuance of 348,140 shares under stock grant programs
348
4,911
5,259
Issuance of 147,188 shares under deferred compensation plans
147
(147)
Repurchase of 56,484 shares
(56)
(1,787)
(1,843)
Expense associated with share-based compensation arrangements
2,613
Accrued expense under deferred compensation plans
6,635
Balance at September 29, 2018
Balance at December 29, 2018
1,814
170
21
191
Unrealized gain on debt securities
453
(1,634)
Additional purchase of noncontrolling interest
(5,015)
(1,838)
(6,853)
Cash dividends - $0.200 per share
(12,270)
Issuance of 26,869 shares under employee stock purchase plans
27
785
812
Issuance of 310,320 shares under stock grant programs
310
5,766
6,079
Issuance of 169,278 shares under deferred compensation plans
169
(169)
2,968
6,945
Balance at September 28, 2019
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation
44,652
40,490
Amortization of intangibles
4,690
4,274
Expense associated with share-based and grant compensation arrangements
3,105
2,762
Deferred income taxes credits
(367)
(583)
Unrealized gain on investments
(1,611)
Net (gain) loss on disposition of assets and impairment of assets
Changes in:
Accounts receivable
(127,841)
(121,067)
Inventories
80,178
(39,448)
Accounts payable and cash overdraft
14,293
38,611
Accrued liabilities and other
36,423
21,361
NET CASH PROVIDED BY OPERATING ACTIVITIES
198,080
60,101
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(66,338)
(74,541)
Proceeds from sale of property, plant and equipment
1,180
37,612
Acquisitions, net of cash received
(38,710)
(38,963)
Purchases of investments
(6,475)
(12,401)
Proceeds from sale of investments
4,159
3,298
199
(620)
NET CASH USED IN INVESTING ACTIVITIES
(105,985)
(85,615)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
421,464
636,798
Repayments under revolving credit facilities
(460,537)
(668,941)
Borrowings of debt
927
Repayment of debt
(3,099)
(5,511)
Issuance of long-term debt
75,000
Proceeds from issuance of common stock
Dividends paid to shareholders
Repurchase of common stock
41
(55)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(55,223)
23,802
Effect of exchange rate changes on cash
157
247
NET CHANGE IN CASH AND CASH EQUIVALENTS
37,029
(1,465)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
28,198
28,816
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
65,227
27,351
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
28,339
Restricted cash, beginning of period
477
Cash, cash equivalents, and restricted cash, beginning of period
Cash and cash equivalents, end of period
Restricted cash, end of period
Cash, cash equivalents, and restricted cash, end of period
SUPPLEMENTAL INFORMATION:
Interest paid
5,287
4,955
Income taxes paid
33,106
38,675
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
5,620
5,312
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED 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 29, 2018.
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 September 29, 2018 balances in the accompanying unaudited condensed consolidated 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:
September 28, 2019
September 29, 2018
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
56,781
843
57,624
56
1,381
1,437
Fixed income funds
733
14,566
15,299
2,846
9,484
12,330
Equity securities
8,840
8,203
Alternative investments
1,895
1,725
Mutual funds:
Domestic stock funds
2,630
2,970
International stock funds
2,054
948
Target funds
268
255
Bond funds
825
208
635
Alternative funds
1,531
1,364
Total mutual funds
7,308
5,745
6,380
73,662
15,409
90,966
16,850
11,500
30,075
Assets at fair value
From the assets measured at fair value as of September 28, 2019, listed in the table above, $56.8 million of money market funds are held in Cash and Cash Equivalents, $17.0 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 $15.3 million of fixed income funds and $0.8 million of money markets funds are held in Restricted Investments.
We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan, 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 captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $32.3 million as of September 28, 2019, consisting of domestic and international stocks, alternative investments, and fixed income bonds.
8
Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following (in thousands):
Unrealized
Cost
Gain/(Loss)
Fair Value
Fixed Income
14,969
330
Equity
7,584
1,256
Mutual Funds
6,391
(98)
6,293
Alternative Investments
1,790
105
30,734
1,593
32,327
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 unrealized gain was $1.6 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of September 28, 2019.
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.
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
9
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:
Market Classification
% Change
FOB Shipping Point Revenue
1,140,853
1,197,959
-4.8%
3,358,520
3,461,208
-3.0%
Construction Contract Revenue
43,177
35,731
20.8%
121,622
104,518
16.4%
Total Gross Sales
1,184,030
1,233,690
-4.0%
3,480,142
3,565,726
-2.4%
Sales Allowances
(21,004)
(20,988)
0.1%
(62,173)
(64,727)
-3.9%
Total Net Sales
-4.1%
In the third quarter of 2019, the North and West segments comprise the construction contract revenue above, $29.6 million and $13.6 million, respectively, compared to $24.8 million and $10.9 million, respectively, during the same period of 2018. Similarly, in the first nine months of 2019, the North and West segments comprise the construction contract revenue above, $77.0 million and $44.6 million, respectively, compared to $72.0 million and $32.5 million, respectively, during the same period of 2018. Construction contract revenue is primarily made up of site-built and framing customers.
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):
Cost and Earnings in Excess of Billings
6,815
5,167
Billings in Excess of Cost and Earnings
6,666
3,245
10
D. EARNINGS PER SHARE
The computation of earnings per share (“EPS”) is as follows (in thousands):
Numerator:
Net earnings attributable to controlling interest
Adjustment for earnings allocated to non-vested restricted common stock
(1,299)
(952)
(3,547)
(2,678)
Net earnings for calculating EPS
50,560
40,267
138,367
115,418
Denominator:
Weighted average shares outstanding
61,717
61,954
61,609
61,838
Adjustment for non-vested restricted common stock
(1,546)
(1,430)
(1,540)
(1,402)
Shares for calculating basic EPS
60,171
60,524
60,069
60,436
Effect of dilutive restricted common stock
24
90
22
84
Shares for calculating diluted EPS
60,195
60,614
60,091
60,520
Net earnings per share:
Basic
Diluted
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.
On a consolidated basis, we have reserved approximately $2.0 million and $2.5 million on September 28, 2019, and September 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 September 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 September 28, 2019, we had outstanding purchase commitments on commenced capital projects of approximately $46.1 million.
We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also 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
11
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 these bonds. As of September 28, 2019, we had approximately $14.6 million outstanding payment and performance bonds for open projects. We had approximately $9.0 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On September 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. As of September 28, 2019, we 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.
Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2012 and 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 the third quarter of 2019 which would require us to recognize a liability on our balance sheet.
12
F. BUSINESS COMBINATIONS
We completed the following acquisitions in 2019 and 2018, which were accounted for using the purchase method in thousands unless otherwise noted:
Net
Company
Acquisition
Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Segment
September 16, 2019
$12,276cash paid for 100% asset purchase
7,318
4,958
East
Pallet USA, LLC ("Pallet USA")
A manufacturer and distributor of wood pallet and crate products in the Midwest. Pallet USA had annual sales of approximately $18 million. The acquisition of Pallet USA allows us to expand our industrial product capacity and services in the Midwest.
August 12, 2019
$15,100cash paid for 100% asset purchase
5,301
9,799
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 value-added siding and trim for customers in the Northwest and Mountain West regions.
May 1, 2019
$5,034cash paid for 100% asset purchase
4,046
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
$15,115cash paid for 100% asset purchase
8,592
6,523
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 our presence in this region.
July 31, 2018
$1,016cash paid for 100% asset purchase
250
766
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
$23,866cash paid for 100% asset purchase
12,497
11,369
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
$3,890cash paid for 100% asset purchase
2,235
1,655
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.
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April 3, 2018
$1,347cash paid for 100% asset purchase
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
$2,942cash paid for 100% asset purchase
850
2,092
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
$5,784cash paid for 100% asset purchase
50
5,734
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 2018 and 2019, except for the Wolverine, Northwest, and Pallet USA acquisitions. In aggregate, acquisitions completed since the end of September 2018 and not consolidated with other operations contributed approximately $7.9 million and $56.8 million in revenue and a $0.7 million and $3.7 million in operating profit during the third quarter and first nine months of 2019, respectively.
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.
14
During the third quarter and the first nine months of 2019, management retrospectively reallocated the related bonus expense from Corporate to their respective segment to better assess the reporting unit’s productivity.
Three Months Ended September 28, 2019
Corporate
Net sales to outside customers
352,642
227,896
413,183
169,305
Intersegment net sales
15,928
15,462
12,982
54,512
98,884
Segment operating profit
22,914
12,968
28,949
(505)
6,141
Three Months Ended September 29, 2018
341,334
270,077
434,123
167,168
15,259
21,360
14,121
56,771
107,511
12,061
8,304
21,404
5,171
10,051
Nine Months Ended September 28, 2019
1,011,217
730,939
1,194,553
481,260
46,000
54,796
40,602
177,259
318,657
63,105
42,710
77,626
(421)
10,130
Nine Months Ended September 29, 2018
1,002,341
803,417
1,253,416
441,825
45,841
60,683
44,183
181,450
332,157
36,680
39,489
65,923
5,894
13,839
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 sales approach among all Universal operations, more efficient use of resources and capital, and quicker introduction of new products and services.
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 23.8% in the third quarter of 2019 compared to 23.9% for same period in 2018. Our effective tax rate was 24.0% in the first nine months of 2019 compared to 23.1% for the same period in 2018. The increase was primarily due to recording certain discrete tax benefits in 2018 related to state income tax and stock-based compensation deduction, which lowered the effective tax rate last year and additional non-deductible compensation in 2019.
I. 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
15
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, there was no cumulative effect adjustment to retained earnings or other components of equity.
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 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.
We believe finance leases will have no significant impact to our consolidated balance sheet and income statement as of September 28, 2019.
As of September 28, 2019, we have no leases that have not yet commenced that would significantly impact the rights, obligations, and financial position of the Company.
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 5-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 collectively representation of our lease population.
Future minimum payments under non-cancelable operating leases on September 28, 2019 are as follows (in thousands):
Leases
2019 (remainder of year)
4,389
2020
16,258
2021
13,945
2022
11,511
2023
8,907
Thereafter
22,471
Total minimum lease payments
77,481
Less present value discount
(2,045)
Total lease liability
Rent expense was approximately $7.0 million and $4.7 million during the third quarter of 2019 and 2018, respectively.
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For comparison purposes, we have included the future minimum payments under non-cancelable operating leases on December 29, 2018, (in thousands):
12/29/2018
17,242
11,969
9,784
8,346
6,382
22,498
76,221
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, however, only a minor portion of the property sold was leased back.
As of September 28, 2019, the weighted average lease term for operating leases is 7.25 years. Similarly, the weighted average discount rate for operating leases is 3.02%.
J. COMMON STOCK
Below is a summary of common stock issuances for the first nine months of 2019 and 2018:
Share Issuance Activity
Common Stock
Average Share Price
Shares issued under the employee stock purchase plan
35.52
Shares issued under the employee stock gift program
33.91
Shares issued under the director retainer stock program
35.44
Shares issued under the long term stock incentive plan
211
30.83
Shares issued under the executive stock match grants
109
31.57
Forfeitures
(17)
-
Total shares issued under stock grant programs
31.17
Shares issued under the deferred compensation plans
33.20
506
32.05
17
34.97
35.91
99
16.91
164
34.75
94
32.94
(10)
349
29.38
36.09
521
31.50
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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 the third quarter of 2019 were impacted by the following:
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
January
331
449
February
370
496
March
365
505
April
354
May
346
554
June
329
572
July
356
525
August
September
364
443
Third quarter average
355
472
Year-to-date average
351
499
Third quarter percentage change
(24.8)
%
Year-to-date percentage change
(29.7)
In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprised approximately 45% and 44% of total lumber purchases through the first nine months of 2019 and 2018, respectively.
Southern Yellow Pine
418
403
459
408
480
401
483
383
535
344
562
359
512
440
467
375
482
(24.2)
(22.2)
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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 42.6% and 51.5% of our sales in the first nine months of 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.
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:
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
= Product cost
350
450
Adder
= Sell price
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 three business acquisitions during the first nine months of 2019 and seven during all of 2018. The annual historical sales attributable to acquisitions completed in the first nine months of 2019 and all of 2018 were approximately $37 million and $140 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 2019 or 2018 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.
Net sales
100.0
Cost of goods sold
83.9
86.9
84.5
87.0
Gross profit
16.1
13.1
15.5
13.0
Selling, general, and administrative expenses
9.9
8.5
9.8
8.6
Net gain on disposition and impairment of assets
0.1
(0.1)
(0.2)
Earnings from operations
6.1
4.7
5.7
4.6
Other expense, net
Earnings before income taxes
5.9
5.5
4.5
Income taxes
1.4
1.1
1.3
1.0
3.5
4.2
3.4
Less net earnings attributable to noncontrolling interest
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 net sales, adjusted to restate 2019 net sales and cost of goods sold at prior year lumber prices. The restated sales amounts were calculated by applying the decrease in lumber prices in 2019 to 2018 sales levels. By eliminating the “pass-through” impact of higher or lower lumber prices on net 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 net sales was also applied to cost of goods sold so that gross profit remains unchanged.
Adjusted for Lumber Market Change
85.6
85.7
14.4
14.3
8.9
9.0
5.4
5.2
5.3
5.1
1.2
4.1
3.9
4.0
3.8
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:
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New Product Sales by Market
Change
Retail
97,022
88,949
9.1
295,962
258,171
14.6
Industrial
25,562
26,364
(3.0)
72,797
64,444
Construction
20,302
18,698
60,029
58,959
1.8
Total New Product Sales
142,886
134,011
6.6
428,788
381,574
12.4
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.
Value-Added
67.6
62.1
66.9
61.2
Commodity-Based
32.4
37.9
33.1
38.8
The following table presents, for the periods indicated, our gross sales and percentage change in gross sales by market classification.
437,092
441,916
(1.1)
1,315,543
1,356,920
Industrial (1)
332,537
353,660
(6.0)
1,019,535
986,410
Construction (1)
414,401
438,115
(5.4)
1,145,064
1,222,395
(6.3)
1,233,691
(4.0)
3,565,725
(2.4)
(20,989)
(64,726)
(3.9)
(4.1)
Note: During 2019, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.
Gross sales in the third quarter of 2019 decreased 4% compared to the same period of 2018, due to a 7% increase in unit sales, offset by an 11% decrease in selling prices primarily due to the Lumber Market. Acquired operations contributed 1% to our unit sales growth, and our organic unit sales growth was 6%.
Gross sales in the first nine months of 2019 decreased 2% compared to the same period of 2018, due to a 6% increase in unit sales, offset by an 8% decrease in selling prices primarily due to the Lumber Market. Acquired operations contributed 2% to our unit sales growth, and our organic unit sales growth was 4%.
Changes in our gross sales by market are discussed below.
Retail:
Gross sales to the retail market decreased 1% in the third quarter of 2019 compared to the same period of 2018, due to a 10% increase in unit sales, offset by an 11% decrease in selling prices. Within this market, sales to our big box customers increased over 5%, and sales to other independent retailers decreased almost 10%. Our organic unit growth was primarily due to an increase in new product sales, market share gains we achieved in our Deckorators product category and an increase in demand with one of our big box customers.
Gross sales to the retail market decreased 3% in the first nine months of 2019 compared to the same period of 2018, due to a 6% increase in organic unit sales, offset by a 9% decrease in selling prices. Within this market, sales to our big box customers increased over 3%, and sales to other independent retailers decreased over 12%. Our organic unit growth was primarily due to the same reasons mentioned above.
Industrial:
Gross sales to the industrial market decreased 6% in the third quarter of 2019 compared to the same period of 2018, resulting from a 4% increase in unit sales, offset by a 10% decrease in selling prices. Businesses we acquired since the third quarter of 2018 contributed 2% to our growth in unit sales. Our organic unit growth was primarily due to gaining $10 million of sales to new customers in 2019.
Gross sales to the industrial market increased 3% in the first nine months of 2019 compared to the same period of 2018, resulting from an 8% increase in unit sales, offset by a 5% decrease in selling prices. Businesses we acquired since the third quarter of 2018 contributed 5% to our growth in unit sales. Our organic growth in unit sales of 3% was primarily due to increasing our share of business with existing customers and adding new products and customers.
Construction:
Gross sales to the construction market decreased 5% in the third quarter of 2019 compared to 2018. The decrease was due to an 8% increase in unit sales, offset by a 13% decrease in our selling prices. Our increase in unit sales was driven by a 15% increase to commercial construction customers, a 6% increase to residential construction customers, and a 1% increase to manufactured housing customers.
By comparison (and based upon various industry publications):
Our growth in sales to commercial construction was primarily due to idX and adding 5 new customers in our Texas and Great Lakes regions.
Gross sales to the construction market decreased 6% in the first nine months of 2019 compared to 2018. The decrease was due to a 5% increase in unit sales, offset by an 11% decrease in our selling prices. Our increase in unit sales was driven by
an 11% increase to commercial construction customers and a 6% increase to residential construction customers, offset by a 1% decrease to manufactured housing customers.
COST OF GOODS SOLD AND GROSS PROFIT
Our gross margin increased to 16.1% from 13.1% comparing the third quarter of 2019 to the same period of 2018 due to:
Our $28.6 million, or 18.0%, increase in gross profit dollars compares favorably to our 7% increase in unit sales during the same period due to the factors above. In addition, acquired operations contributed $2.2 million of gross profit in the third quarter of 2019. Excluding acquisitions, our gross profits increased by $26 million, or 16.3%, over the same period and was comprised of the following changes by market:
Our gross margin increased to 15.5% from 13.0% comparing the first nine months of 2019 to the same period of 2018 due to the same factors discussed above along with atypical buying opportunities when lumber prices were low in the fourth quarter of 2018, which benefitted our gross profits in Q1 and Q2. Our $73 million, or 16.0%, increase in gross profit dollars compares favorably to our 6% increase in unit sales during the same period due to the factors above. In addition, acquired operations contributed $9.5 million of gross profit in the first nine months of 2019. Excluding acquisitions, our gross profits increased by $64 million, or 14%, over the same period last year was comprised of the following changes by market:
Due to several factors, including the variety of species we buy, the variety and number of products we sell, and pricing methodologies, estimating the impact of market-favorable lumber buying, that occurred in the fourth quarter of 2018, on our gross profits is difficult. Nevertheless, we estimate this contributed approximately $6 million to $7 million in additional gross profits in 2019.
Selling, general and administrative (“SG&A”) expenses increased by approximately $13.7 million, or 13.4%, in the third quarter of 2019 compared to the same period of 2018, while we reported a 7% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled $22.6 million in the third quarter of 2019 compared to $14.3 million in 2018. Acquired operations since the third quarter of 2018 contributed approximately $1.4 million to our year over year increase in SG&A. The remaining increase was primarily due to sales incentives, marketing costs, and increases in wages, benefits, and payroll taxes associated with headcount and rate increases.
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Selling, general and administrative (“SG&A”) expenses increased by approximately $33.9 million, or 11.3%, in the first nine months of 2019 compared to the same period of 2018, while we reported a 6% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled $53.3 million in the first nine months of 2019 compared to $37.9 million in 2018. Acquired operations since the third quarter of 2018 contributed approximately $5.8 million to our year over year increase in SG&A. The remaining increase was primarily due to an increase in wages and benefits costs associated with headcount and rate increases, sales incentives, medical costs, and marketing expenses.
INTEREST, NET
Interest expense was flat in the third quarter and higher in the first nine months of 2019 compared to the same periods of 2018. Our year to date interest rate increased as a result of a long-term debt issuance that we completed in June 2018 and used the proceeds to pay down our revolving credit facility. The impact of a higher overall rate was offset by lower debt levels in 2019.
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 23.8% in the third quarter of 2019 compared to 23.9% for same period in 2018. Our effective tax rate was 24.0% in the first nine months of 2019 compared to 23.1% for the same period in 2018. The increase was primarily due to recording certain discrete tax benefits in 2018 related to state income tax and stock-based compensation deduction, which lowered the effective tax rate last year, and additional non-deductible compensation in 2019.
SEGMENT REPORTING
Net Sales
Earnings from Operations
11,308
3.3
10,853
90.0
(42,181)
(15.6)
4,664
56.2
(20,940)
(4.8)
7,545
35.3
2,137
(5,676)
(109.8)
(3,910)
(38.9)
(49,676)
13,476
23.6
8,876
0.9
26,425
72.0
(72,478)
(9.0)
3,221
8.2
(58,863)
(4.7)
11,703
17.8
39,435
(6,315)
(107.1)
(3,709)
(26.8)
(83,030)
31,325
19.4
North Segment by Market
162,170
152,538
6.3
448,055
439,432
2.0
60,278
53,281
187,234
161,267
138,015
143,666
397,315
423,728
(6.2)
360,463
349,485
3.1
1,032,604
1,024,427
0.8
(7,821)
(8,151)
(21,387)
(22,086)
(3.2)
The increase in sales to the industrial market was primarily due to acquired operations, which contributed $6.0 million to sales. The increase to the retail market was primarily due to an increase in demand with one of our big box customers. The decrease to the construction market was due to a combination of market growth and market share gains, offset by lower lumber prices.
Earnings from operations for the North reportable segment increased in the third quarter of 2019 by $10.9 million, or 90.0%, due to a $14.4 million increase in gross profits, offset by a $3.5 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of $4.8 million, $4.2 million, and $3.5 million within the retail, industrial, and construction markets, respectively, and due to the same factors discussed above.
In spite of lower lumber prices, net sales attributable to the North reportable segment increased in the first nine months of 2019 compared to 2018 primarily due to an increase in unit sales to existing retail customers and acquired operations, which contributed $15 million in sales to the industrial market. The decrease to the construction market was due to market growth and market share gains, offset by lower lumber prices.
Earnings from operations for the North reportable segment increased in the first nine months of 2019 by $26.4 million, or 72.0%, due to a $33.8 million increase in gross profits, offset by a $7.4 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of $10.2 million, $11.1 million, and $12.5 million within the retail, industrial, and construction markets, respectively, and was due to the same factors discussed above.
South Segment by Market
97,104
109,212
(11.1)
309,888
355,271
(12.8)
90,291
111,564
(19.1)
301,389
295,106
2.1
45,251
54,337
(16.7)
134,698
168,964
(20.3)
232,646
275,113
(15.4)
745,975
819,341
(4,750)
(5,036)
(5.7)
(15,036)
(15,924)
(5.6)
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Net sales attributable to the South reportable segment decreased in the third quarter of 2019 compared to 2018 primarily due to the impact of a lower lumber market. In addition, sales to our manufactured housing customers in the Southeast and East Central regions decreased in certain commodity product categories.
Earnings from operations for the South reportable segment increased in the third quarter of 2019 by $4.7 million, or 56.2%, due to a $6.7 million increase in gross profits, offset by a $2.0 million increase in SG&A expenses compared to last year. Gross profits were higher due to increases of $3.5 million, $3.2 million, and $1 million within the retail, industrial and construction markets, respectively.
Net sales attributable to the South reportable segment decreased in the first nine months of 2019 compared to 2018 primarily due to a lower lumber market, offset by acquired operations which contributed $37.0 million in sales to the industrial market. In addition, sales to our manufactured housing customers in the Southeast and East Central regions declined in certain commodity product categories.
Earnings from operations for the South reportable segment increased in the first nine months of 2019 compared to the same period of 2018. Excluding the impact of the gain on the sale of our Medley, FL, plant in 2018, earnings from operations increased $10.2 million due to an increase of $17.8 million in gross profits offset by an increase in SG&A expenses of $7.6 million compared to the same period of 2018. Gross profits were higher due to increases of $3.4 million, $12.0 million, and $2.7 million within the retail, industrial, and construction markets, respectively, and due to the same factors discussed above. Acquired operations contributed $1.6 million to our earnings from operations during the first nine months of 2019.
West Segment by Market
127,431
125,534
1.5
371,666
391,713
(5.1)
144,935
151,771
(4.5)
427,081
432,671
(1.3)
147,011
162,981
(9.8)
413,765
447,463
(7.5)
419,377
440,286
1,212,512
1,271,847
(6,194)
(6,163)
0.5
(17,959)
(18,431)
(2.6)
Net sales attributable to the West reportable segment decreased in the third quarter of 2019 compared to 2018 primarily due to the impact of a lower lumber market, offset by increases in unit sales to the retail and industrial markets.
Earnings from operations for the West reportable segment increased in the third quarter of 2019 by $7.5 million, or 35.3%, compared to the same period in 2018 due to a $11.4 million increase in gross profit, offset by a $3.9 million increase in SG&A expenses. Gross profits were higher due to increases of $4.0 million and $5.9 million in the retail and industrial markets, respectively, offset by a $0.5 million decrease in our construction market, as well as the same factors discussed above.
Net sales attributable to the West reportable segment decreased in the first nine months of 2019 compared to 2018 primarily due to the lower lumber market, offset by increases in unit sales to the retail and industrial markets.
Earnings from operations for the West reportable segment increased in the first nine months of 2019 by $11.7 million, or 17.8%, compared to the same period in 2018 due to a $19.5 million increase in gross profit, offset by a $7.8 million
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increase in SG&A expenses. Gross profits were higher due to increases of $2.1 million, $13.8 million, and $1.3 million within the retail, industrial and construction markets, respectively, and due to the same factors discussed above.
All Other Segment by Market
50,386
54,631
(7.8)
185,934
170,505
37,033
37,045
(0.0)
103,831
97,367
84,124
77,130
199,362
182,240
9.4
171,543
168,806
1.6
489,127
450,112
8.7
Sales Allowances & Other
(2,238)
(1,638)
36.6
(7,867)
(8,287)
Our All Other reportable segment consists of our Alternative Materials, International, idX, and certain other segments that are not significant.
Net sales attributable to All Other reportable segments increased in the third quarter of 2019 compared to 2018 primarily due to our sales to the construction market which increased primarily due to our idX business unit.
Earnings from operations for All Other reportable segments decreased during the third quarter of 2019 by $5.7 million primarily due to losses realized in our construction market within our idX business unit.
Net sales attributable to All Other reportable segments increased in the first nine months of 2019 compared to 2018 due to increases in sales to all our markets. The increase in sales to the retail market was primarily due to a $50.3 million increase to one of our big-box customers within our Alternative Materials segment, offset by decreases in sales to certain independent retailers. Our sales to the construction market increased primarily due to our idX business unit.
Earnings from operations for All Other reportable segments decreased during the first nine months of 2019 by $6.3 million primarily due to losses realized in our construction market within our idX business unit and expenses associated with an advertising campaign launched in 2019 for our Deckorators brand within our Alternative Materials segment.
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OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
Cash provided by (used in) operating activities
Cash used in investing activities
Cash (used in) provided by financing activities
Net change in all cash and cash equivalents
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 September. Consequently, our working capital increases during our first and second quarters which typically results 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 increased to 52 days from 51 days during the third quarter of 2019 compared to the prior periods.
Days of sales outstanding
32
Days supply of inventory
40
39
44
Days payables outstanding
(21)
(20)
Days in cash cycle
52
51
The increase in days supply of inventory for the first nine months was primarily due to opportunistic buying when lumber prices were low during the fourth quarter of 2018 to improve 2019 gross profits and higher levels of “safety stock” we carried to address transportation challenges and ensure timely deliveries to our customers.
In the first nine months of 2019, our cash provided by operating activities was $198.1 million, which was comprised of net earnings of $143.7 million, $51.3 million of non-cash expenses, and $3.1 million decrease in working capital since the
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end of December 2018. Comparatively, in the first nine months of 2018, our cash provided by operating activities was $60.1 million, which was comprised of net earnings of $120.8 million and $39.9 million of non-cash expenses, offset by a $100.5 million seasonal increase in working capital since the end of December 2017. Our investment in working capital declined in 2019 due to opportunistic inventory buying in the fourth quarter of 2018 of products sold in 2019, and lower lumber prices in 2019.
Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first nine months of 2019 and totaled $38.7 million and $66 million, respectively. Outstanding purchase commitments on existing capital projects totaled approximately $46.1 million on September 28, 2019. We currently plan to spend up to $100 million for the year on capital expenditures. Notable areas of spending include projects to replace our capacity in South Florida resulting from the sale of our Medley facility last year, expand capacity and enhance the productivity of our Deckorators decking product line due to favorable demand trends and share gains we’ve achieved, as well as several projects to expand manufacturing capacity to serve industrial customers and achieve efficiencies through automation. We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. The sale and purchase of investments totaling $4.2 million and $6.5 million, respectively, are due to investment activity in our captive insurance subsidiary. Comparatively, acquisitions and purchases of property, plant, and equipment during the first nine months of 2018 totaled $39.0 million and $74.5 million, respectively, and proceeds from the sale of our Medley, FL, plant provided approximately $36 million in net cash proceeds.
Cash flows from financing activities primarily consisted of net repayments under our revolving credit facility of approximately $39.1 million. Additionally, we paid a semi-annual dividend totaling $12.3 million or $0.20 per share.
On September 28, 2019, we had $3.3 million outstanding on our $375 million revolving credit facility, and we had approximately $361.9 million in remaining availability after considering $9.8 million in outstanding letters of credit. Additionally, we have $150 million in availability under an amended “shelf agreement” for long term debt with a current lender after considering the second quarter 2018 issuance of long-term Senior Notes. 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 September 28, 2019.
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 29, 2018.
On an ongoing basis, we evaluate long-lived assets for indicators of impairment. Although there were no indicators for impairment for any of our reporting units, we continue to monitor the results of the idX reporting unit. They have performed below expectations year-to-date through September; however, management believes the long-term projection for idX is still reasonable and attainable. While the risk of impairment exists, management does not 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.
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 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 2018, which have since expired, 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.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Fiscal Month
(a)
(b)
(c)
(d)
June 30 - August 3, 2019
1,860,354
August 4 - August 31, 2019
September 1 - 28, 2019
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 share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 1.9 million.
Item 5. 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:
Certifications.
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).
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).
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).
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).
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Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language).
(INS)
iXBRL Instance Document.
(SCH)
iXBRL Schema Document.
(CAL)
iXBRL Taxonomy Extension Calculation Linkbase Document.
(LAB)
iXBRL Taxonomy Extension Label Linkbase Document.
(PRE)
iXBRL Taxonomy Extension Presentation Linkbase Document.
(DEF)
iXBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).
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.
Date: October 30, 2019
By:
/s/ Matthew J. Missad
Matthew J. Missad,
Chief Executive Officer and Principal Executive Officer
/s/ Michael R. Cole
Michael R. Cole,
Chief Financial Officer,
Principal Financial Officer and
Principal Accounting Officer
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