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 April 1, 2017

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 April 1, 2017

 

 

Common stock, no par value

 

20,518,049

 

 

 

 

 

 

 


 

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 April 1, 2017, December 31, 2016 and March 26, 2016

3

 

 

 

 

 

 

Consolidated Condensed Statements of Earnings and Comprehensive Income for the Three Months Ended April 1, 2017 and March 26, 2016

4

 

 

 

 

 

 

Consolidated Condensed Statements of Shareholders’ Equity for the Three Months Ended April 1, 2017 and March 26, 2016

5

 

 

 

 

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended April 1, 2017 and March 26, 2016

6

 

 

 

 

 

 

Notes to Unaudited Consolidated Condensed Financial Statements

7

 

 

 

 

 

Item 2.

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

14

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

 

 

Item 4.

Controls and Procedures

25

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings – NONE

 

 

 

 

 

 

Item 1A.

Risk Factors – NONE

26

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

 

 

Item 3.

Defaults upon Senior Securities – NONE

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures – NONE

 

 

 

 

 

 

Item 5.

Other Information – NONE

26

 

 

 

 

 

Item 6.

Exhibits

27

 

 

 

2


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

April 1,

 

December 31,

 

March 26,

 

    

2017

    

2016

    

2016

ASSETS

 

 

 

  

 

 

  

 

 

CURRENT ASSETS:

 

 

 

  

 

 

  

 

 

Cash and cash equivalents

 

$

31,020

    

$

34,091

  

$

43,065

Restricted cash and cash equivalents

 

 

909

 

 

398

  

 

1,139

Investments

 

 

5,928

 

 

10,348

  

 

6,737

Accounts receivable, net

 

 

365,620

 

 

282,253

  

 

287,374

Inventories:

 

 

 

  

 

 

  

 

 

Raw materials

 

 

232,647

 

 

198,954

  

 

176,983

Finished goods

 

 

239,369

 

 

198,273

  

 

150,194

Total inventories

 

 

472,016

 

 

397,227

  

 

327,177

Refundable income taxes

 

 

3,170

 

 

11,459

  

 

 —

Other current assets

 

 

20,650

 

 

20,662

  

 

16,889

TOTAL CURRENT ASSETS

 

 

899,313

 

 

756,438

 

 

682,381

RESTRICTED CASH

 

 

3,800

 

 

 —

 

 

 —

DEFERRED INCOME TAXES

 

 

1,960

 

 

1,546

  

 

2,664

OTHER ASSETS

 

 

12,573

 

 

8,617

  

 

7,760

GOODWILL

 

 

211,061

 

 

198,535

  

 

181,280

INDEFINITE-LIVED INTANGIBLE ASSETS

 

 

2,340

 

 

2,340

  

 

2,340

OTHER INTANGIBLE ASSETS, NET

 

 

36,759

 

 

26,731

  

 

14,718

PROPERTY, PLANT AND EQUIPMENT:

 

 

 

  

 

 

  

 

 

Property, plant and equipment

 

 

720,912

 

 

699,462

  

 

639,881

Less accumulated depreciation and amortization

 

 

(411,059)

 

 

(401,611)

  

 

(385,247)

PROPERTY, PLANT AND EQUIPMENT, NET

 

 

309,853

 

 

297,851

  

 

254,634

TOTAL ASSETS

 

$

1,477,659

 

$

1,292,058

  

$

1,145,777

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

  

 

 

  

 

 

CURRENT LIABILITIES:

 

 

 

  

 

 

  

 

 

Cash overdraft

 

$

21,566

 

$

19,761

  

$

 —

Accounts payable

 

 

156,030

 

 

124,660

  

 

116,525

Accrued liabilities:

 

 

 

  

 

 

  

 

 

Compensation and benefits

 

 

58,491

 

 

92,441

  

 

61,314

Income taxes

 

 

 —

 

 

 —

 

 

7,182

Other

 

 

39,473

 

 

32,281

  

 

29,414

Current portion of long-term debt

 

 

2,280

 

 

2,634

  

 

886

TOTAL CURRENT LIABILITIES

 

 

277,840

 

 

271,777

  

 

215,321

LONG-TERM DEBT

 

 

252,904

 

 

109,059

  

 

84,525

DEFERRED INCOME TAXES

 

 

21,364

 

 

20,817

  

 

24,991

OTHER LIABILITIES

 

 

28,198

 

 

29,939

  

 

26,012

TOTAL LIABILITIES

 

 

580,306

 

 

431,592

  

 

350,849

SHAREHOLDERS’ EQUITY:

 

 

 

  

 

 

  

 

 

Controlling interest shareholders’ equity:

 

 

 

  

 

 

  

 

 

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

 

$

 —

 

$

 —

  

$

 —

Common stock, no par value; shares authorized 80,000,000; issued and outstanding, 20,518,049, 20,342,069, and 20,301,084.

 

 

20,518

 

 

20,342

  

 

20,301

Additional paid-in capital

 

 

197,356

 

 

185,333

  

 

180,395

Retained earnings

 

 

670,115

 

 

649,135

  

 

584,848

Accumulated other comprehensive income

 

 

(3,450)

 

 

(5,630)

  

 

(3,946)

Total controlling interest shareholders’ equity

 

 

884,539

 

 

849,180

  

 

781,598

Noncontrolling interest

 

 

12,814

 

 

11,286

  

 

13,330

TOTAL SHAREHOLDERS’ EQUITY

 

 

897,353

 

 

860,466

  

 

794,928

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

1,477,659

 

$

1,292,058

  

$

1,145,777

 

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

 

April 1,

 

March 26,

 

2017

    

2016

NET SALES

$

846,130

    

$

682,151

COST OF GOODS SOLD

 

725,390

 

 

579,412

GROSS PROFIT

 

120,740

 

 

102,739

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

86,919

 

 

70,828

EARNINGS FROM OPERATIONS

 

33,821

 

 

31,911

INTEREST EXPENSE

 

1,504

 

 

1,076

INTEREST INCOME

 

(82)

 

 

(104)

EQUITY IN EARNINGS OF INVESTEE

 

(5)

 

 

(81)

 

 

1,417

 

 

891

EARNINGS BEFORE INCOME TAXES

 

32,404

 

 

31,020

INCOME TAXES

 

10,770

 

 

10,765

NET EARNINGS

 

21,634

 

 

20,255

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(572)

 

 

(1,043)

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

21,062

 

$

19,212

 

 

 

 

 

 

EARNINGS PER SHARE - BASIC

$

1.03

 

$

0.95

EARNINGS PER SHARE - DILUTED

$

1.03

 

$

0.95

 

 

 

 

 

 

NET EARNINGS

 

21,634

 

 

20,255

OTHER COMPREHENSIVE GAIN

 

3,035

 

 

442

COMPREHENSIVE INCOME

 

24,669

 

 

20,697

LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(1,427)

 

 

(846)

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST

$

23,242

 

$

19,851

 

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 26, 2015

 

$

20,142

    

$

171,562

  

$

565,636

    

$

(4,585)

  

$

13,654

  

$

766,409

Net earnings

 

 

 

  

 

 

  

 

19,212

 

 

  

 

 

1,043

  

 

20,255

Foreign currency translation adjustment

 

 

 

  

 

 

  

 

 

  

 

666

 

 

(197)

  

 

469

Unrealized gain (loss) on investment

 

 

 

  

 

 

  

 

 

  

 

(27)

 

 

  

 

 

(27)

Distributions to noncontrolling interest

 

 

 

  

 

 

  

 

 

  

 

 

  

 

(1,170)

 

 

(1,170)

Issuance of 1,850 shares under employee stock plans

 

 

 2

 

 

128

  

 

 

  

 

 

  

 

 

  

 

130

Issuance of 114,739 shares under stock grant programs

 

 

114

 

 

5,118

  

 

 

  

 

 

  

 

 

  

 

5,232

Issuance of 42,786 shares under deferred compensation plans

 

 

43

 

 

(43)

  

 

 

  

 

 

  

 

 

  

 

 —

Expense associated with share-based compensation arrangements

 

 

 

  

 

432

 

 

  

 

 

  

 

 

  

 

 

432

Accrued expense under deferred compensation plans

 

 

 

  

 

3,198

 

  

  

 

  

  

 

  

  

 

  

3,198

Balance at March 26, 2016

 

$

20,301

 

$

180,395

  

$

584,848

 

$

(3,946)

  

$

13,330

  

$

794,928

Balance at December 31, 2016

 

$

20,342

 

$

185,333

 

$

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 1,738 shares under employee stock plans

 

 

 2

 

 

144

  

 

 

  

 

 

  

 

 

  

 

146

Issuance of 135,776 shares under stock grant programs

 

 

136

 

 

7,107

  

 

 

  

 

 

  

 

 

  

 

7,243

Issuance of 39,346 shares under deferred compensation plans

 

 

39

 

 

(39)

  

 

 

  

 

 

  

 

 

  

 

 —

Repurchase of 880 shares

 

 

(1)

 

 

 

 

 

(82)

 

 

 

 

 

 

 

 

(83)

Expense associated with share-based compensation arrangements

 

 

 

  

 

571

 

 

  

 

 

  

 

 

  

 

 

571

Accrued expense under deferred compensation plans

 

 

 

  

 

4,240

 

 

  

 

 

  

 

 

  

 

 

4,240

Balance at April 1, 2017

 

$

20,518

 

$

197,356

  

$

670,115

 

$

(3,450)

  

$

12,814

  

$

897,353

 

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

 

 

April 1,

 

March 26,

 

    

2017

    

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

  

 

 

Net earnings

 

$

21,634

    

$

20,255

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

 

 

 

  

 

 

Depreciation

 

 

11,392

 

 

9,492

Amortization of intangibles

 

 

1,119

 

 

693

Expense associated with share-based compensation arrangements

 

 

571

 

 

432

Expense associated with stock grant plans

 

 

46

 

 

37

Deferred income taxes (credits)

 

 

224

 

 

(156)

Equity in earnings of investee

 

 

(5)

 

 

(81)

Net loss on disposition and impairment of assets

 

 

(64)

 

 

(10)

Changes in:

 

 

 

  

 

 

Accounts receivable

 

 

(67,766)

 

 

(64,276)

Inventories

 

 

(60,984)

 

 

(22,159)

Accounts payable and cash overdraft

 

 

32,769

 

 

21,498

Accrued liabilities and other

 

 

(9,676)

 

 

4,318

NET CASH FROM OPERATING ACTIVITIES

 

 

(70,740)

 

 

(29,957)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

  

 

 

Purchases of property, plant and equipment

 

 

(16,531)

 

 

(12,941)

Proceeds from sale of property, plant and equipment

 

 

353

 

 

132

Acquisitions and purchase of noncontrolling interest, net of cash received

 

 

(55,441)

 

 

 —

Advances of notes receivable

 

 

(228)

 

 

(1,259)

Collections on notes receivable

 

 

721

 

 

1,408

Purchases of investments

 

 

(819)

 

 

 —

Proceeds from sale of investments

 

 

1,204

 

 

 —

Other

 

 

142

 

 

(173)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(70,599)

 

 

(12,833)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

  

 

 

Borrowings under revolving credit facilities

 

 

281,090

 

 

1,235

Repayments under revolving credit facilities

 

 

(137,767)

 

 

(1,495)

Proceeds from issuance of common stock

 

 

146

 

 

130

Distributions to noncontrolling interest

 

 

(1,673)

 

 

(1,170)

Repurchase of common stock

 

 

(83)

 

 

 —

Other

 

 

(16)

 

 

(5)

NET CASH FROM (USED IN) FINANCING ACTIVITIES

 

 

141,697

 

 

(1,305)

Effect of exchange rate changes on cash

 

 

882

 

 

(43)

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

 

1,240

 

 

(44,138)

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

 

 

34,489

 

 

88,342

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

 

$

35,729

 

$

44,204

 

 

 

 

 

 

 

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

$

34,091

 

$

87,756

Restricted cash, beginning of period

 

 

398

 

 

586

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

 

$

34,489

 

$

88,342

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$

31,020

 

$

43,065

Restricted cash, end of period

 

 

4,709

 

 

1,139

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

 

$

35,729

 

$

44,204

 

 

 

 

 

 

 

SUPPLEMENTAL INFORMATION:

 

 

 

  

 

 

Interest paid

 

$

497

 

$

355

Income taxes paid (refunded)

 

 

2,337

 

 

(4,080)

NON-CASH FINANCING ACTIVITIES:

 

 

 

  

 

 

Common stock issued under deferred compensation plans

 

 

3,793

 

 

2,955

 

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 31, 2016.

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 March 26, 2016 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2017

 

March 26, 2016

 

 

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

 

$

64

    

$

4,564

    

$

4,628

    

$

65

    

$

3,142

    

$

3,207

Fixed income funds

 

 

4,055

 

 

 —

 

 

4,055

 

 

1,174

 

 

1,983

 

 

3,157

Equity securities

 

 

5,928

 

 

 —

 

 

5,928

 

 

3,233

 

 

 

 

3,233

Mutual funds:

 

 

 

  

 

 

 

 

 

  

 

 

 

 

 

  

 

 

Domestic stock funds

 

 

316

 

 

 —

 

 

316

 

 

598

 

 

 

 

598

International stock funds

 

 

81

 

 

 —

 

 

81

 

 

62

 

 

 

 

62

Target funds

 

 

246

 

 

 —

 

 

246

 

 

216

 

 

 

 

216

Bond funds

 

 

203

 

 

 —

 

 

203

 

 

192

 

 

 

 

192

Total mutual funds

 

 

846

 

 

 —

 

 

846

 

 

1,068

 

 

 

 

1,068

Assets at fair value

 

$

10,893

 

$

4,564

 

$

15,457

 

$

5,540

 

$

5,125

 

$

10,665

 

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

7


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Equivalents”, “Restricted Cash”, and “Other Assets”. 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 April 1, 2017 or March 26, 2016. 

In November 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-18, “Statement of Cash Flows (Topic 230)” (ASU 2016-18). Under ASU 2016-18, an entity will be required to explain changes in the statement of cash flows during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The amendments in this update should be applied using retrospective transition method to each period presented.  Companies are required to adopt the new standard for fiscal years beginning after December 15, 2017. Early adoption of ASU 2016-18 is permitted, including adoption in an interim period. The Company has early adopted this standard during the first quarter of 2017.

 

On March 28, 2017, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”) transferred $4.1 million in fixed income securities from its Investment Account and funded an additional $3.8 million in cash to 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 will be classified as restricted investments within “Other Assets” and “Restricted Cash”, respectively.

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $10.0 million as of April 1, 2017, consisting of domestic and international stocks, and fixed income bonds. 

Ardellis’ available for sale investment portfolio consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

    

Cost

    

Gain/(Loss)

    

Fair Value

Fixed Income

 

$

4,030

    

$

25

  

$

4,055

Equity

 

 

5,209

 

 

719

  

 

5,928

Total

 

$

9,239

 

$

744

  

$

9,983

 

Our Fixed Income investments consist of short, intermediate, and long term bonds, as well as fixed blend bonds. Within the fixed income investments, we maintain a specific mixture of US treasury notes, US agency mortgage backed securities, private label mortgage backed securities, and various corporate securities. 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 $744 thousand. Carrying amounts above are recorded in the investments line item within the balance sheet as of April 1, 2017. During 2017, Ardellis investments reported a net realized loss of $45 thousand, which was recorded in interest income on the statement of earnings.

 

 

 

 

C.       REVENUE RECOGNITION

Revenue is recognized at the time the product is shipped to the customer. Generally, title passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day.

8


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

Earnings on construction contracts are reflected in operations using percentage-of-completion accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations. Under percentage-of-completion using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under percentage-of-completion using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. 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. Construction contract revenue decreased to approximately $32.0 million, during the first quarter of 2017, from $32.5 million during the same period of 2016.

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 the balances of percentage-of-completion accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

April 1,

 

December 31,

 

March 26,

 

    

2017

    

2016

    

2016

Cost and Earnings in Excess of Billings

 

$

3,063

    

$

2,573

    

$

5,621

Billings in Excess of Cost and Earnings

 

 

4,352

 

 

4,748

 

 

3,700

 

 

D.       EARNINGS PER SHARE

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

 

 

 

 

 

 

 

Three Months Ended

 

April 1,

    

March 26,

 

2017

 

2016

Numerator:

 

  

 

 

  

Net earnings attributable to controlling interest

$

21,062

 

$

19,212

Adjustment for earnings allocated to non-vested restricted common stock

 

(362)

 

 

(274)

Net earnings for calculating EPS

$

20,700

 

$

18,938

Denominator:

 

  

 

 

  

Weighted average shares outstanding

 

20,470

 

 

20,281

Adjustment for non-vested restricted common stock

 

(351)

 

 

(290)

Shares for calculating basic EPS

 

20,119

 

 

19,991

Effect of dilutive stock options

 

33

 

 

29

Shares for calculating diluted EPS

 

20,152

 

 

20,020

Net earnings per share:

 

  

 

 

  

Basic

$

1.03

 

$

0.95

Diluted

$

1.03

 

$

0.95

 

No options were excluded from the computation of diluted EPS for the quarters ended April 1, 2017 or March 26, 2016.

9


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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; Auburndale, FL; and Medley, 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 $3.6 million and $3.5 million on April 1, 2017, and March 26, 2016, 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 $0.3 million. As a result, this amount is recorded in other long-term liabilities on April 1, 2017.

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 April 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; however, because of the duration and unique nature of this proceeding, any potential, adverse financial implications to the Company are uncertain.

In addition, on April 1, 2017, 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 April 1, 2017, we had outstanding purchase commitments on commenced capital projects of approximately $24.5 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.

10


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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 April 1, 2017 we had approximately $8.2 million outstanding payment and performance bonds for open projects. We had approximately $0.5 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On April 1, 2017, we had outstanding letters of credit totaling $25.7 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $15.9 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 2017 which would require us to recognize a liability on our balance sheet.

11


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

F.       BUSINESS COMBINATIONS

We completed the following acquisitions in three months ended 2017 and 2016 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

Business Description

Robbins Manufacturing Co. ("Robbins")

March 6, 2017

$31,818
cash paid for 100% asset purchase

$

7,533

$

24,285

South

A manufacturer of treated wood products with facilities in Florida, Georgia, and North Carolina.  Robbins has annual sales of approximately $86 million.

Quality Hardwood Sales, LLC ("Quality")

March 6, 2017

$23,613
cash paid for 100% asset purchase

$

14,266

$

9,347

North

A manufacturer and supplier of hardwood products, including components of cabinets used in homes and recreational vehicles.  Quality has annual sales of approximately $30 million.

The UBEECO Group Pty. Ltd. ("Ubeeco")

November 29, 2016

$9,455
cash paid for 100% stock purchase

$

7,313

$

2,142

All Other

A manufacturer and distributor of a variety of wood packaging and alternative material products, including boxes, crates, pallets, skids, protective packaging, packaging accessories and loose lumber. Ubeeco has annual sales of approximately $20 million.

idX Holdings, Inc. ("idX")

September 16, 2016

$66,046

cash paid for 100% stock purchase which includes $11,337 in net cash received. Also, paid $86,294 to retire outstanding debt and $6,536 of certain other obligations.

$

17,016

$

49,030

All Other

A designer, producer, and installer of customized in-store environments that are used in a range of end markets. idX has annual sales of $300 million.

Seven D Truss, L.P.

July 29, 2016

$1,246
cash paid for asset purchase

$

405

$

841

North

A manufacturer and distributor of roof and floor trusses. 7D had annual sales of approximately $4.0 million.

Idaho Western, Inc. ("IWI")

June 30, 2016

$10,787
cash paid for 100% stock purchase plus $500 holdback.

$

6,817

$

4,248

West

A supplier of products ranging from lumber and plywood to siding and doors. IWI had annual sales of approximately $21 million.

Packnet Ltd (“Packnet”)

November 24, 2014 (majority interest) April 15, 2016 (minority interest)

$7,506
November 24, 2014 cash paid for controlling interest and $1,877 cash paid for noncontrolling asset purchase.

$

7,885

$

1,498

West

A supplier of industrial packaging and services based in Eagan, MN. Packnet had annual sales of $9.6 million.

Capital Components & Millwork, Inc. ("CCM")

April 15, 2016

$1,682
cash paid for asset purchase plus $205 assumed liability

$

 —

$

1,887

North

A producer of doors and trim for customers in the greater Washington, D.C., metro area and Virginia. CCM had approximately $16.6 million in annual sales.

 

The intangible assets for each acquisition were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2017, excluding idX, Ubeeco, Quality, and Robbins.  Initial estimates have been made for idX, Ubeeco, Quality, and Robbins’ identifiable intangible and goodwill allocations and deferred tax which will be completed in 2017.

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, and West 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

12


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

 

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 recently acquired 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.