ufpi_Current_Folio_10K

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 30, 2017.

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period of ____ to _____.

Commission File No.:  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 organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2801 East Beltline, N.E., Grand Rapids, Michigan

 

49525

(Address of principal executive offices)

 

(Zip Code)

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title Of Each Class

Name of Each Exchange on Which Registered

Common Stock, $1 par value

The NASDAQ Global Select Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes ☒            No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐            No ☒

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 in the past 90 days.   Yes ☒            No ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Items 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,  a non-accelerated filer or a smaller reporting company. (Check one):

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

Smaller Reporting Company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12‑2 of the Act.)   Yes ☐            No ☒

The aggregate market value of the common stock held by non-affiliates of the registrant (i.e. excluding shares held by executive officers, directors, and control persons as defined in Rule 405, 17 CFR 230.405) on June 30, 2017 was $1,676,557,004 computed at the closing price of $29.10 on that date, which was retroactively adjusted for the 3 for 1 stock split.

As of February 3, 2018, 61,210,113 shares of the registrant’s common stock, $1 par value, were outstanding.

Documents incorporated by reference:

(1)

Certain portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 30, 2017 are incorporated by reference into Part I and II of this Report.

(2)

Certain portions of the registrant’s Proxy Statement for its 2017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

Exhibit Index located on page E‑1.

 

 

 

 


 

ANNUAL REPORT ON FORM 10‑K

DECEMBER 30, 2017

TABLE OF CONTENTS

 

 

 

PART I 

 

 

 

Item 1. 

Business.

2

Item 1A. 

Risk Factors.

5

Item 1B. 

Unresolved Staff Comments.

6

Item 2. 

Properties.

6

Item 3. 

Legal Proceedings.

7

Item 4. 

Mine Safety Disclosures.

7

 

 

 

Additional item  Executive Officers of the Registrant. 

7

 

 

 

PART II 

 

 

 

Item 5. 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

8

Item 6. 

Selected Financial Data.

8

Item 7. 

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

9

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk.

9

Item 8. 

Financial Statements and Supplementary Data.

9

Item 9. 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

9

Item 9A. 

Controls and Procedures.

10

Item 9B. 

Other Information.

10

 

 

 

PART III 

 

 

 

Item 10. 

Directors, Executive Officers and Corporate Governance.

10

Item 11. 

Executive Compensation.

10

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

10

Item 13. 

Certain Relationships and Related Transactions, and Director Independence.

11

Item 14. 

Principal Accountant Fees and Services.

11

 

 

 

PART IV 

 

 

 

Item 15. 

Exhibits, Financial Statement Schedules.

11

 

1


 

PART I

Item 1. Business.

General Development of the Business.

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 markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Michigan. For more information about Universal Forest Products, Inc., or its affiliated operations, go to www.ufpi.com.

Information relating to current developments in our business is incorporated by reference from our Annual Report to Shareholders for the fiscal year ended December 30, 2017 ("2017 Annual Report") under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations."  Selected portions of the 2017 Annual Report are filed as Exhibit 13 with this Form 10‑K Report.

Financial Information About Segments.

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.

Our operating segments that are stand-alone reportable segments consist of our North, South, and West.  Our operating segments that are aggregated into the All Other reportable segment are the Alternative Materials, International, idX, and Corporate divisions. Separate financial information about our segments is incorporated by reference from Note N of the Consolidated Financial Statements presented under Item 8 herein.

Narrative Description of Business.

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 and commercial structures. Each of our markets, Retail, Industrial and Construction, are discussed in the paragraphs which follow. Our locations generally serve customers in multiple markets.

Retail. The customers comprising this market are national home center retailers, retail-oriented regional lumberyards and contractor-oriented lumberyards. Generally, terms of sale are established for annual or bi-annual periods, and orders are placed with our regional facilities in accordance with established terms. One customer, The Home Depot, accounted for approximately 19% of our total sales in fiscal 2017, 20% in 2016, and 19% in 2015.

We currently supply customers in this market from many of our locations. These regional facilities are able to supply mixed truckloads of products which can be delivered to customers with rapid turnaround from receipt of an order. Freight costs are a factor in the ability to competitively service this market, especially with treated wood products because of their heavier weight. The close proximity of our regional facilities to the various outlets of these customers is a factor when negotiating annual sales programs.

The products offered to customers in this market include dimensional lumber (both preserved and unpreserved) and various "value-added products," some of which are sold under our trademarks. In addition to our conventional lumber products, we offer a large portfolio of outdoor living products, including wood composite decking and decorative lawn and garden products. Products sold to this market include those sold under the following trademarks: (1) ProWood  (2) Deckorators (3) UFP-Edge. We also sell engineered wood components to this market, which include roof trusses, wall panels and engineered floor systems (see "Construction Market" below).

2


 

We are not aware of any competitor that currently manufactures, treats and distributes a full line of both value-added and commodity products on a national basis. We face competition on individual products from several different producers, but the majority of these competitors tend to be regional in their efforts and/or do not offer a full line of outdoor lumber products. We believe the breadth of our product offering, geographic dispersion, close proximity of our plants to core customers, purchasing and manufacturing expertise, and service capabilities provide competitive advantages in this market.

Industrial Market. We define our industrial market as manufacturers and agricultural customers who use pallets, specialty crates, wooden boxes, and other containers used for packaging, shipping and material handling purposes, as well as various other products, used in a variety of different applications. Many of the products sold to this market may be produced from the by-product of other manufactured products, thereby allowing us to increase our raw material yields while expanding our business. Competition is fragmented and includes virtually every supplier of lumber convenient to the customer. We service this market with our dedicated local sales teams and through national sales support efforts.

Our industrial market also includes the results of operations of idX Holdings, Inc. ("idX"). idX is a designer, manufacturer and installer of highly customized interior fixtures that are used in retail and commercial structures representing several end markets. We acquired idX on September 16, 2016.

Construction Market. Our construction market is made up of customers in three submarkets - manufactured housing, residential construction and commercial construction.

The customers comprising the manufactured housing market are producers of mobile, modular and prefabricated homes and recreational vehicles (RV). Products sold to customers in this market consist primarily of roof trusses, lumber cut and shaped to the customer’s specification, plywood, oriented strand board and dimensional lumber, all intended for use in the construction of manufactured housing. Sales are made by personnel located at each regional facility based on customer orders. Our principal competitive advantages include our product knowledge, the strength of our engineering support services, the close proximity of our regional facilities to our customers, our purchasing and manufacturing expertise and our ability to provide national sales programs to certain customers. These factors have enabled us to accumulate significant market share in the products we supply. We also distribute products such as siding, electrical and plumbing products to manufactured housing and RV customers.

The customers comprising the residential construction market are primarily large-volume, multi-tract builders and smaller volume custom builders. We also supply builders engaged in multi-family and commercial construction. In addition, we supply wood forms and related products to set or form concrete for various structures including large parking garages, stadiums and bridges. Generally, terms of sale and pricing are determined based on contracts we entered into with our customers.

We currently supply customers in these markets from manufacturing facilities located in many different states. These facilities manufacture various engineered wood components used to frame residential or light commercial projects, including roof and floor trusses, wall panels, I-joists and lumber packages. Freight costs are a factor in the ability to competitively service this market due to the space requirements of these products on each truckload. We also provide framing services for customers in certain regional markets, in which we erect the wood structure. We believe that providing a comprehensive turn-key package, including installation, provides a competitive advantage.

Competition in this market is primarily fragmented, but we do compete with a small number of national and regional retail contractor yards who also manufacture components and provide framing services, as well as regional manufacturers of components. We believe our primary competitive advantages relate to the engineering and design capabilities of our regional staff, purchasing and manufacturing expertise, product quality, timeliness of delivery, and financial strength.

Suppliers. We are one of the largest domestic buyers of solid sawn softwood lumber from primary producers (lumber mills). We use primarily southern yellow pine in our pressure-treating operations and site-built component plants in the Southeastern United States, which we obtain from mills located throughout the states comprising the Sunbelt. Other species we use include "spruce-pine-fir" from various provinces in Canada; hemlock, douglas fir and cedar from the Pacific Northwest; inland species of pine, plantation grown radiata and southern yellow pines from South America; and European

3


 

spruce. Our annual purchases of lumber are approximately $1.5 billion and consist of the following species and their respective percent of total lumber purchases: southern yellow pine (58%), spruce-pine-fur (23%), and douglas fir (4%), while the remaining 15% of lumber purchases were various other species.  Additionally, we purchase approximately $0.5 billion in plywood, OSB, and a variety of other wood-based products on an annual basis.  There are numerous primary producers for all varieties we use, and we are not dependent on any particular source of supply. Our financial resources and size, in combination with our strong sales network and ability to remanufacture lumber, enable us to purchase a large percentage of a primary producer’s output (as opposed to only those dimensions or grades in immediate need), thereby lowering our average cost of raw materials and allowing us to obtain programs such as consigned inventory. We believe this represents a competitive advantage.

Intellectual Property. We own several patents and have several patents pending on technologies related to our business. In addition, we own numerous registered trademarks and claim common law trademark rights to several others. As we develop proprietary brands, we may pursue registration or other formal protection. While we believe our patent and trademark rights are valuable, the loss of a patent or any trademark would not be likely to have a material adverse impact on our competitive position.

Backlog. Due to the nature of our retail and industrial businesses, backlog information is not meaningful. The maximum time between receipt of a firm order and shipment does not usually exceed a few days. Therefore, we would not normally have a backlog of unfilled orders in a material amount. The relationships with our major customers are such that we are either the exclusive supplier of certain products and/or certain geographic areas, or the designated source for a specified portion of the customer’s requirements. In such cases, either we are able to forecast the customer’s requirements or the customer may provide an estimate of its future needs. In neither case, however, will we receive firm orders until just prior to the anticipated delivery dates for the products in question.

On December 30, 2017 and December 31, 2016, we estimate that backlog orders associated with our construction and customized interior fixture businesses approximated $141.7 million and $127.3 million, respectively. With respect to the former, we expect that these orders will be primarily filled within the next fiscal year; however, it is possible that some orders could be canceled.

Environmental. Information required for environmental disclosures is incorporated by reference from Note M of the Consolidated Financial Statements presented under Item 8 herein.

Seasonality.  Information required for seasonality disclosures is incorporated by reference from Item 1A. Risk Factors under the caption “Seasonality and weather conditions could adversely affect us.”

Employees. On December 30, 2017, we had approximately 10,000 employees.

Financial Information About Geographic Areas.

The dominant portion of our operations and sales occur in the United States. Separate financial information about foreign and domestic operations and export sales is incorporated by reference from Note N "Segment Reporting" of the Consolidated Financial Statements presented under Item 8 herein.

Available Information.

Our Internet address is www.ufpi.com. Through our Internet website under "Financial Information" in the Investor Relations section, we make available free of charge, as soon as reasonably practical after such information has been filed with the SEC, our annual report on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act. Also available through our Internet website under "Corporate Governance" in the Investor Relations section is our Code of Ethics for Senior Financial Officers.

4


 

Reports to Security Holders.

Not applicable.

Enforceability of Civil Liabilities Against Foreign Persons.

Not applicable.

Item 1A. Risk Factors.

We are subject to regional, national and global economic conditions. A decline in economic conditions throughout the United States could reduce demand for our products.

We may be impacted by a decline in the value of the U.S. dollar. We purchase a variety of raw materials and finished goods from sources around the world and export certain products. The impact of a change in U.S. dollar exchange rates would impact our import purchases and export sales, which totaled $132.6 million and $110.8 million, respectively, in 2017.  In addition, many of our industrial customers export their products.

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 and 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, cost of materials, and gross profits. Our products are generally priced to the customer based on a quoted, fixed selling price or "indexed" to the Lumber Market with a fixed dollar adder to cover conversion costs and profit. The impact on our profitability from changes in lumber prices is discussed in the "Historical Lumber Prices"  and "Impact of the Lumber Market on Our Operating Results" captions of our Management’s Discussion and Analysis of Financial Condition and Results of Operations section under Item 7 of this Form 10‑K. Our lumber costs as a percentage of gross sales were 49.1%, 48.4%, and 48.9% in 2017, 2016,  and 2015, respectively.

Our growth may be limited by the markets we serve, including our construction market which is highly cyclical.  Our sales growth is dependent, in part, upon the growth of the markets we serve. If our markets do not achieve anticipated growth, or if we fail to maintain our market share, financial results could be impaired.

A significant portion of our sales are concentrated with one customer. Our sales to The Home Depot comprised 19% of our total sales in 2017, 20% in 2016, and 19% in 2015.

Economic and credit market conditions impact our ability to collect a greater percentage of our receivables. Economic and credit conditions may impact our bad debt expense. We continue to monitor our customers’ credit profiles carefully and make changes in our terms when necessary in response to this risk. Bad debt expense as a percentage of sales was 0.03%, 0.06%, and 0.05% in 2017, 2016, and 2015, respectively.

We may be impacted by vertical integration strategies. In certain markets and product lines, our customers or vendors could pursue vertical integration strategies that could have an adverse effect on our sales. We strive to add value and be a low-cost producer while maintaining competitive pricing in each of our markets to mitigate this risk.

We may be impacted by excess capacity among suppliers. There is excess capacity among suppliers of certain products in some of the markets we serve. Our selling prices and gross margins have been and are likely to continue to be impacted by this excess capacity.

Our growth may be limited by our ability to make successful acquisitions. A key component of our growth strategy is to complete business combinations. Business combinations involve inherent risks, including assimilation and successfully managing growth. While we conduct extensive due diligence and have taken steps to ensure successful assimilation, factors beyond our control could influence the results of these acquisitions.

5


 

We may be adversely affected by the impact of environmental and safety regulations. We are subject to the requirements of federal, state, and local environmental and occupational health and safety laws and regulations. There can be no assurance that we are at all times in complete compliance with all of these requirements. We have made and will continue to make capital and other expenditures to comply with environmental regulations. If additional laws and regulations are enacted, which restrict our ability to manufacture and market our products, including our treated lumber products, it could adversely affect our sales and profits. Changes in the interpretation of existing laws could also adversely impact our financial results.

The current version of federal health care legislation may significantly increase our costs. The federal health care legislation enacted in 2010 and future regulations called for under the legislation may have a significant cost implication for our company. Our total health care costs totaled approximately $58.9 million, $52.7 million, and $41.3 million in 2017, 2016, and 2015, respectively.

Seasonality and weather conditions could adversely affect us. Some aspects of our business are seasonal in nature and results of operations vary from quarter to quarter. In addition, the majority of our products sold to the Retail and Construction markets are used or installed in outdoor construction applications; therefore, short-term sales volume, productivity and gross profits can be negatively affected by adverse weather conditions, particularly in our first and fourth quarters.

Inbound and outbound transportation costs represent a significant part of our cost structure. An increase in fuel and other operating expenses will significantly increase our costs. While we attempt to pass these costs along to our customers, there can be no assurance that they would agree to these price increases. Our total inbound and outbound transportation costs were approximately 9.0%, 9.6%, and 9.9% of sales in 2017, 2016, and 2015, respectively.

New alternatives may be developed to replace traditional treated wood products. The manufacturers of wood preservatives continue to develop new preservatives. While we believe treated products are reasonably priced relative to alternative products such as composites or vinyl, new alternatives may impact the sales of treated wood products. In addition, new preservatives could increase our cost of treating products in the future. See Footnote N “Segment Reporting” within the Notes to Consolidated Financial Statements for our sales by product category.

Cybersecurity breaches could interfere with operations. We rely upon information technology systems and network products and the secure operation of these systems and products.  Despite security measures, these systems and products may be vulnerable to physical damage, hackers, computer viruses, or breaches due to errors or malfeasance by employees, vendors, or customers.  We have experienced such events in the past and, although past events were immaterial, future events may occur and may be material.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Our corporate headquarters building is located in suburban Grand Rapids, Michigan. We currently have approximately 127 facilities located throughout the United States, Canada, Mexico, Europe, Asia, and Australia. Depending upon function and location, these facilities typically utilize office, manufacturing, and indoor and outdoor storage space. Of these facilities, approximately 6 facilities are closed and are currently listed for sale or are being leased.

We own all of our properties, free from any significant mortgage or other encumbrance, except for approximately 36 facilities which are leased. We believe all of these operating facilities are adequate in capacity and condition to service our existing markets.

6


 

Item 3. Legal Proceedings.

Information regarding our legal proceedings is set forth in Note M of our Consolidated Financial Statements which are presented under Item 8 of this Form 10‑K and are incorporated herein by reference.

Item 4. Mine Safety Disclosures.

Not applicable.

Additional Item:  Executive Officers of the Registrant.

The following table lists the names, ages, and positions of our executive officers as of February 1, 2018. Executive officers are elected annually by the Board of Directors at the first meeting of the Board following the annual meeting of shareholders.

 

 

 

 

 

Name

    

Age

    

Position

Matthew J. Missad

 

57

 

Chief Executive Officer, Universal Forest Products, Inc.

Patrick M. Webster

 

58

 

President and Chief Operating Officer, Universal Forest Products, Inc.

Michael R. Cole

 

51

 

Chief Financial Officer and Treasurer, Universal Forest Products, Inc.

Allen T. Peters

 

50

 

President, UFP Western Division, Inc.

Patrick Benton

 

48

 

President, UFP Eastern Division - North

Jonathan West

 

47

 

President, UFP Eastern Division - South

Robert D. Coleman

 

63

 

Executive Vice President of Manufacturing, Universal Forest Products, Inc.

C. Scott Greene

 

61

 

Executive Vice President of Marketing, Universal Forest Products, Inc.

Donald L. James

 

58

 

Executive Vice President of National Sales, Universal Forest Products, Inc.

Michael F. Mordell

 

60

 

Executive Vice President of International Operations.

Chad C. Uhlig Eastin

 

46

 

Executive Vice President of Purchasing, Inc.

 

Matthew J. Missad joined us in 1985. In February 1996, Mr. Missad was promoted to Executive Vice President of the Company. On July 13, 2011, Mr. Missad became Chief Executive Officer of the Company.

Patrick M. Webster joined us in 1985. Mr. Webster became Vice President of the Far West Region in 1999, on July 1, 2007, he became President of UFP Western Division, Inc., and on January 1, 2009 became President and Chief Operating Officer of the Company.

Michael R. Cole, CPA, CMA, joined us in 1993. In December 1999, he was promoted to Vice President of Finance. On July 19, 2000, Mr. Cole became Chief Financial Officer of the Company.

Allen T. Peters joined us in 1997.  In 2004 he became the General Manager of Operations of our plant in Harrisonville, MO and in 2007 became Regional Vice President of our Gulf Region. On January 1, 2011, Mr. Peters became President of UFP Western Division, Inc.

Patrick M. Benton joined us in 1993. In 2008 he became Operations Vice President of the South Texas Region, and on July 1, 2014, he became Executive Vice President of UFP Eastern Division – North.

Jonathan E. West joined us in 1994. In 2007 he became Regional Vice President of the Southeast Region, and on July 1, 2014, he became Executive Vice President of UFP Eastern Division – South.

Robert D. Coleman, joined us in 1979. On January 1, 1999, Mr. Coleman was named the Executive Vice President of Manufacturing of the Company.

C. Scott Greene joined us in 1991. In 2000, Mr. Greene became President of UFP Eastern Division, Inc. On October 1, 2011, Mr. Greene became Executive Vice President of New Business Development and on October 14, 2013, he became Executive Vice President of Marketing.

7


 

Donald L. James joined us in 1998. On October 1, 2011, Mr. James became Executive Vice President of National Sales. Before this, he was Regional Vice President of operations in UFP Eastern Division, Inc.

Michael F. Mordell joined us in 1993. In 1999 he became Executive Vice President of Purchasing of Universal Forest Products Western Division, Inc. In November 2007, he became General Manager of Operations for our facility in Lafayette, CO, and on January 1, 2010, Mr. Mordell became Executive Vice President of Purchasing. On October 1, 2016, he became Executive Vice President of International Operations.

Chad C. Uhlig Eastin joined us in 1998. In 2007, he became General Manager of Operations of our plant in Chandler, AZ, and in 2014 he became Operations Vice President of our Mountain West Region, and became Regional Vice President of that region in 2015. On October 1, 2016, Mr. Eastin became the Executive Vice President of Purchasing for the Company.

PART II

The following information items in this Part II, which are contained in the 2017 Annual Report, are specifically incorporated by reference into this Form 10‑K Report. These portions of the 2017 Annual Report that are specifically incorporated by reference are filed as Exhibit 13 with this Form 10‑K Report.

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.

(a)

The information relating to market, holders and dividends is incorporated by reference from the 2017 Annual Report under the captions “Price Range of Common Stock and Dividends” and “Stock Performance Graph.”

There were no sales of unregistered securities during the last three years.

(b)

Not applicable.

(c)

Issuer purchases of equity securities during the fourth quarter.

 

 

 

 

 

 

 

 

 

Fiscal Month

    

(a)

    

(b)

    

(c)

    

(d)

October 1 – November 4, 2017

 

 —

 

 —

 

 —

 

 2,721,023

November 5 – December 2, 2017

 

 —

 

 —

 

 —

 

 2,721,023

December 3 – December 30, 2017

 

 —

 

 —

 

 —

 

 2,721,023


(a)

Total number of shares purchased.

(b)

Average price paid per share.

(c)

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

(d)

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

On November 14, 2001 the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 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 2.7 million.    

Item 6. Selected Financial Data.

The information required by this Item is incorporated by reference from the 2017 Annual Report under the caption "Selected Financial Data."

8


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information required by this item is incorporated by reference from the 2017 Annual Report under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

Item 7A. 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.

On December 30, 2017, the estimated fair value of our long-term debt, including the current portion, was $148.0 million. The estimated fair value is based on rates anticipated to be available to us for debt with similar terms and maturities. The estimated fair value of notes payable included in current liabilities and the revolving credit facility approximated the carrying values as these debt instruments have interest rates that fluctuate with current market conditions.

Expected cash flows over the next five years related to debt instruments are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2018

    

2019

    

2020

    

2021

    

2022

    

Thereafter

    

Total

($US equivalents, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term Debt:

 

  

 

  

 

  

 

  

 

 

  

 

 

  

 

 

  

Fixed Rate ($US)

 

 318

 

288

 

165

 

113

 

 

 35,065

 

$

39,960

 

$

 75,909

Average interest rate

 

4.65

%  

4.55

%  

4.14

%  

3.65

%  

 

3.89

%  

 

3.98

%  

 

  

Variable Rate ($US)

 

972

 

59,422

 

2,700

 

—  

 

$

3,700

 

$

3,300

 

$

70,094

Average interest rate(1)

 

6.18

%  

2.49

%  

1.02

%  

—  

%  

 

1.01

%

 

0.96

%  

 

  


(1)

Average of rates at December 30, 2017.

Item 8. Financial Statements and Supplementary Data.

The information required by this Item is incorporated by reference from the 2017 Annual Report under the following captions:

"Management’s Annual Report on Internal Control Over Financial Reporting"

"Report of Independent Registered Public Accounting Firm"

"Report of Independent Registered Public Accounting Firm"

"Consolidated Balance Sheets"

"Consolidated Statements of Earnings and Comprehensive Income"

"Consolidated Statements of Shareholders’ Equity"

"Consolidated Statements of Cash Flows"

"Notes to Consolidated Financial Statements"

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

9


 

Item 9A. Controls and Procedures.

(1)

Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a - 15e and 15d - 15e) as of the year ended December 30, 2017 (the "Evaluation Date"), have concluded that, as of such date, our disclosure controls and procedures were effective.

(2)

Management’s Annual Report on Internal Control Over Financial Reporting.  Management’s Annual Report on Internal Control Over Financial Reporting is included in the 2017 Annual Report under the caption “Management’s Annual Report on Internal Control Over Financial Reporting” and is incorporated herein by reference. Our independent registered public accounting firm’s attestation Report on our internal control over financial reporting is also included in the 2017 Annual Report in the caption “Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting” and is incorporated herein by reference.

(3)

Changes in Internal Controls. During the fourth quarter ended December 30, 2017, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Information relating to our directors, compliance with Section 16(a) of the Securities and Exchange Act of 1934 and various corporate governance matters is incorporated by reference from our definitive Proxy Statement for the year ended December 30, 2017 for the 2017 Annual Meeting of Shareholders, as filed with the Commission ("2018 Proxy Statement"), under the captions "Election of Directors," "Corporate Governance and Board Matters," and "Section 16(a) Beneficial Ownership Reporting Compliance."  Information relating to executive officers is included in this report in the last Section of Part I under the caption "Additional Item: Executive Officers of the Registrant."  Information relating to our code of ethics is included in this report in Part I, Item 1 under the caption “Available Information”.

Item 11. Executive Compensation.

Information relating to director and executive compensation is incorporated by reference from the 2018 Proxy Statement under the caption "Executive Compensation."  The "Personnel and Compensation Committee Report" included in the 2018 Proxy Statement is incorporated by reference for the purpose of being furnished herein and is not and shall not be deemed to be filed under the Securities Exchange Act of 1934, as amended.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.

Information relating to security ownership of certain beneficial owners and management is incorporated by reference from our 2018 Proxy Statement under the captions "Ownership of Common Stock" and "Securities Ownership of Management."

10


 

Information relating to securities authorized for issuance under equity compensation plans as of December 30, 2017, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

 

 

 

 

 

 

remaining

 

 

 

 

 

 

 

available for 

 

 

 

 

 

 

future

 

 

Number of

 

Weighted

 

issuance under

 

 

shares to be

 

average

 

equity

 

 

issued upon

 

exercise

 

compensation

 

 

exercise of

 

price of

 

plans [excluding

 

 

outstanding

 

outstanding

 

shares reflected in

 

 

options

 

options

 

column (a)] (1)

 

 

(a)

 

(b)

 

(c)

Equity compensation plans approved by security holders

    

    

$

 —

    

10,524,581

Equity compensation plans not approved by security holders

 

none

  

 

 

  

 


(1)

The number of shares remaining available for future issuance under equity compensation plans, excluding outstanding options, warrants, or similar rights, as of December 30, 2017, is as follows: 295,698 shares for our Employee Stock Purchase Plan, 295,591 shares for our Directors’ Retainer Stock Plan, and 11,467 shares for our Employee Stock Gift Program. In addition, of the remaining 9,921,825 shares available for future issuance under our Long-Term Stock Incentive Plan, those awards may be made in the form of options as well as stock appreciation rights, restricted stock, performance shares, or other stock-based awards.  All shares remaining to be issued were retroactively impacted by the 3 to 1 stock split on November 14, 2017.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Information relating to certain relationships and related transactions, and director independence is incorporated by reference from the 2018 Proxy Statement under the captions "Election of Directors", “Affirmative Determination Regarding Director Independence and Other Matters” and "Related Party Transactions."

Item 14. Principal Accountant Fees and Services.

Information relating to the types of services rendered by our Independent Registered Public Accounting Firm and the fees paid for these services is incorporated by reference from our 2018 Proxy Statement under the caption "Independent Registered Public Accounting Firm – Disclosure of Fees.”

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)

1.    Financial Statements. The following are incorporated by reference, under Item 8 of this report, from the 2017 Annual Report:

Management’s Annual Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Earnings and Comprehensive Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

2.    Financial Statement Schedules. All schedules required by this Form 10‑K Report have been omitted because they were inapplicable, included in the Consolidated Financial Statements or Notes to Consolidated Financial Statements, or otherwise not required under instructions contained in Regulation S-X.

11


 

3.    Exhibits. Reference is made to the Exhibit Index which is included in this Form 10‑K Report.

(b)

Reference is made to the Exhibit Index which is included in this Form 10‑K Report.

(c)

Not applicable

 

 

12


 

 

EXHIBIT INDEX

Exhibit #

    

Description

 

 

 

 

3

 

Articles of Incorporation and Bylaws.

 

 

 

 

 

 

(a)

Registrant’s Articles of Incorporation were filed as Exhibit 3(a) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference.

 

 

 

 

 

 

(b)

Amended Bylaws

 

 

 

 

4

 

Instruments Defining the Rights of Security Holders.

 

 

 

 

 

 

(a)

Specimen form of Stock Certificate for Common Stock was filed as Exhibit 4(a) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference.

 

 

 

 

10

 

Material Contracts.

 

 

 

 

 

 

 

 

 

 

*(a)(6)

Form of Conditional Share Grant Agreement utilized under the Company’s Long Term Stock Incentive Plan was filed as Exhibit 10(a)(6) to a Form 10‑K, Annual Report for the year ended December 25, 2010 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

 

 

(b)

Form of Indemnity Agreement entered into between the Registrant and each of its directors was filed as Exhibit 10(b) to a Registration Statement on Form S-1 (No. 33-69474) and the same is incorporated herein by reference.

 

 

 

 

 

 

*(e)(1)

Form of Executive Stock Option Agreement was filed as Exhibit 10(e)(1) to a  Registration Statement on Form S‑1 (No. 33‑69474) and the same is incorporated herein by reference.

 

 

 

 

 

 

*(e)(2)

Form of Officers’ Stock Option Agreement was filed as Exhibit 10(e)(2) to a Registration Statement on Form S‑1 (No. 33‑69474) and the same is incorporated herein by reference.

 

 

 

 

 

 

*(f)

Performance Bonus Plan Summary Plan Description was filed as Exhibit 10(f) to a Form 10‑K, Annual Report for the year ended December 25, 2010 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

 

 

*(g)

Universal Forest Products, Inc. Deferred Compensation Plan as amended and restated effective June 1, 2011 was filed as Exhibit 10(g) to a Form 10‑K, Annual Report for the year ended December 31, 2011 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

 

 

*(h)

Executive Stock Grant Program was filed as Exhibit 10(h) to a Form 10‑K, Annual Report for the year ended December 31, 2011 (Commission file No.: 0-22684) and the same is incorporated herein by reference. 

 

 

 

 

 

 

(i)(1)

Credit Agreement dated November 3, 2014 was filed as Exhibit 10(1) to a Form 8‑K Current Report dated November 7, 2014 and the same is incorporated herein by reference.

 

 

 

 

 

 

(k)

Note Purchase Agreement dated December 17, 2012 was filed as Exhibit 10(k) to a Form 8‑K Current Report dated December 17, 2012 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

1


 

 

 

(l)

Universal Forest Products, Inc. 2002 Employee Stock Purchase Plan was filed as Exhibit 10(l) to a Form 10‑K, Annual Report for the year ended December 27, 2014 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

 

 

(m)

Universal Forest Products, Inc. Director Retainer Stock Plan was filed as Exhibit 10(m) to a Form 10‑K, Annual Report for the year ended December 31, 2016 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

 

 

 

 

 

 

(n)

Universal Forest Products, Inc. Amended and Restricted Long Term Stock Incentive Plan in incorporated by reference from Appendix A to the Company’s proxy statement dated and filed with the Commission on March 6, 2012.

 

 

 

 

 

 

(o)

Amended and restated agreement and plan of merger by and among Universal Forest Products, Inc., UFP Apple Merger Sub, Inc., idX Holdings, Inc. dated September 7, 2016 and filed as Exhibit 10(o) to Form 10‑Q, quarter ended September 24, 2016, and the same is incorporated herein by reference.

 

 

 

 

13

 

Selected portions of the Company’s Annual Report to Shareholders for the fiscal year ended December 30, 2017.

 

 

 

 

14

 

Code of Ethics for Senior Financial Officers

 

 

 

 

 

 

(a)

Code of Ethics for Chief Financial Officer was filed as Exhibit 14(a) to a Form 10-K, Annual Report for the year ended December 25, 2010 and the same is incorporated herein by reference.

 

 

 

 

21

 

Subsidiaries of the Registrant.

 

 

 

 

23

 

Consent of Deloitte & Touche LLP.

 

 

 

 

31

 

Certifications.

 

 

 

 

 

 

(a)

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

 

 

 

 

 

 

(b)

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

 

 

 

 

32

 

Certifications.

 

 

 

 

 

 

(a)

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

 

 

 

 

 

 

(b)

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

 

 

 

 

101

 

Interactive Data File.

 

 

 

 

 

 

(INS) XBRL Instance Document.

 

 

 

 

 

 

(SCH) XBRL Schema Document.

 

 

 

 

 

 

(CAL) XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

 

 

(LAB) XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

 

 

(PRE) XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

2


 

 

 

(DEF) XBRL Taxonomy Extension Definition Linkbase Document.


*

Indicates a compensatory arrangement.

 

3


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

Dated: February 28, 2018

UNIVERSAL FOREST PRODUCTS, INC.

 

 

 

 

By:

/s/ Matthew J. Missad

 

 

Matthew J. Missad,

 

 

Chief Executive Officer and

 

 

Principal Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 28th day of February, 2018, by the following persons on behalf of us and in the capacities indicated.

 

 

 

 

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

 

Each Director whose signature appears below hereby appoints Matthew J. Missad and Michael R. Cole, and each of them individually, as his or her attorney-in-fact to sign in his or her name and on his or her behalf as a Director, and to file with the Commission any and all amendments to this report on Form 10‑K to the same extent and with the same effect as if done personally.

 

 

 

 

 

 

 

 

 

/s/ William G. Currie

 

/s/ John M. Engler

William G. Currie, Director

 

John M. Engler, Director

 

 

 

/s/ Gary F. Goode

 

/s/ Bruce A. Merino

Gary F. Goode, Director

 

Bruce A. Merino, Director

 

 

 

/s/ Matthew J. Missad

 

/s/ Thomas W. Rhodes

Matthew J. Missad, Director

 

Thomas W. Rhodes, Director

 

 

 

/s/ Mary E. Tuuk

 

/s/ Brian C. Walker

Mary E. Tuuk, Director

 

Brian C. Walker, Director

 

 

 

/s/ Michael G. Wooldridge

 

 

Michael G. Wooldridge, Director

 

 

 

 

4


ufpi_Ex13

Table of Contents

Exhibit 13

UNIVERSAL FOREST PRODUCTS, INC.

FINANCIAL INFORMATION

Table of Contents

 

 

Selected Financial Data 

2

 

 

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

3-23

 

 

Management’s Annual Report on Internal Control Over Financial Reporting 

24

 

 

Report of Independent Registered Public Accounting Firm 

25

 

 

Report of Independent Registered Public Accounting Firm 

26

 

 

Consolidated Balance Sheets as of December 30, 2017 and December 31, 2016 

27

 

 

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 30, 2017,  December 31, 2016, and December 26, 2015 

28

 

 

Consolidated Statements of Shareholders’ Equity for the Years Ended December 30, 2017, December 31, 2016, and December 26, 2015 

29

 

 

Consolidated Statements of Cash Flows for the Years Ended December 30, 2017, December 31, 2016, and December 26, 2015 

30

 

 

Notes to Consolidated Financial Statements 

31-54

 

 

Price Range of Common Stock and Dividends 

55

 

 

Stock Performance Graph 

56

 

 

Directors and Executive Officers 

57

 

 

Shareholder Information 

58

 

 

 

 

 


 

Table of Contents

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

Consolidated Statement of Earnings Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Net sales

 

$

3,941,182

 

$

3,240,493

 

$

2,887,071

 

$

2,660,329

 

$

2,470,448

 

Gross profit

 

 

542,826

 

 

474,590

 

 

399,904

 

 

325,342

 

 

280,552

 

Earnings before income taxes

 

 

176,007

 

 

160,671

 

 

131,002

 

 

95,713

 

 

70,258

 

Net earnings attributable to controlling interest

 

$

119,512

 

$

101,179

 

$

80,595

 

 

57,551

 

 

43,082

 

Diluted earnings per share

 

$

1.94

 

$

1.65

 

$

1.33

 

$

0.95

 

$

0.72

 

Dividends per share

 

$

0.320

 

$

0.290

 

$

0.273

 

$

0.203

 

$

0.137

 

Consolidated Balance Sheet Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Working capital(1)

 

$

560,241

 

$

484,661

 

$

444,057

 

$

397,546

 

$

357,299

 

Total assets

 

 

1,464,677

 

 

1,292,058

 

 

1,107,679

 

 

1,023,800

 

 

916,987

 

Total debt

 

 

146,003

 

 

111,693

 

 

85,895

 

 

98,645

 

 

84,700

 

Shareholders’ equity

 

 

974,023

 

 

860,466

 

 

766,409

 

 

699,560

 

 

649,734

 

Statistics

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Gross profit as a percentage of net sales

 

 

13.8

%  

 

14.6

%  

 

13.9

%  

 

12.2

%  

 

11.4

%

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

 

 

3.0

%  

 

3.1

%  

 

2.8

%  

 

2.2

%  

 

1.7

%

Return on beginning equity(2)

 

 

13.9

%  

 

13.2

%  

 

11.5

%  

 

8.8

%  

 

7.1

%

Current ratio(4)

 

 

2.85

 

 

2.78

 

 

3.17

 

 

3.27

 

 

3.59

 

Debt to equity ratio(5)

 

 

0.15

 

 

0.13

 

 

0.11

 

 

0.14

 

 

0.13

 

Book value per common share(3)

 

$

15.92

 

$

14.10

 

$

12.68

 

$

11.67

 

$

10.86

 


(1)Current assets less current liabilities.

(2)Net earnings attributable to controlling interest divided by beginning shareholders’ equity.

(3)Shareholders’ equity divided by common stock outstanding.

(4)Current assets divided by current liabilities.

(5)Total debt divided by shareholders’ equity.

 

Acquisition growth is the primary contributing factor to material increases over the period from 2013 to 2017.  Refer to Note C under the“Notes to the Consolidated Financial Statements” for further discussion on the Company’s business combinations and impact on financials.

 

 

2


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company’s reports on Form 10‑K and 10‑Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2017.

OVERVIEW

Our results for 2017 were impacted by the following:

·

Our sales increased almost 22% in 2017 due to a 15% increase in our unit sales and a 7% increase in overall selling prices (see “Historical Lumber Prices”). Our unit sales increased in all three of our markets - retail, industrial, and construction - and were driven by a combination of acquisition and organic growth. Overall, businesses we acquired contributed 11% to our unit sales growth in 2017 (see Note C of the Notes to Consolidated Financial Statements) and we achieved 4% organic unit sales growth.  In 2016, we had 53 weeks in our fiscal year which contributed an additional $60 million of sales compared to 2017, which was a 52 week year (See Note A of the Notes to Consolidated Financial Statements).

·

The Home Improvement Research Institute reported a 5% increase in home improvement sales in 2017. Comparatively, our unit sales to the retail market increased 10% in 2017, including approximately 7% contributed from acquired businesses.

·

Our sales to the industrial market increased 35% in 2017. Businesses we acquired contributed 25% to unit sales growth. Comparatively, the Federal Reserve’s Industrial Production noted that national industrial production increased less than 1% in 2017.

·

National housing starts increased approximately 4% in the period from December 2016 through November 2017, compared to the same period of the prior year (our sales trail housing starts by about a month). Comparatively, our unit sales to residential construction customers increased 7% in 2017.

·

Production of HUD code manufactured homes were up 16% in the period from January through November 2017, compared to the same period of the prior year. Comparatively, our unit sales to the manufactured housing market increased 9% in 2017.

3


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

Our earnings from operations increased 10.4% to $181.5 million in 2017 from $164.4 million in 2016.  Acquired businesses contributed $6.7 million to our increase, which was below our expectations primarily due to idX.  The remaining $10.4 million, or 6.3%, increase was primarily driven by our organic unit sales growth and a decline in our incentive bonus expense due to a decrease in our return on investment which is a key performance metric for determining incentive bonus payments.

·

Finally, the Tax Act, as defined in Note K to our 2017 Annual Financial Statements, resulted in a $6.4 million decrease to our net deferred tax liability and income taxes in 2017.  Excluding the impact of the Tax Act, our net earnings attributable to controlling interest was $113.1 million, compared to $101.2 million in 2016, an 11.8% increase.

·

Our cash flow from operating activities decreased to $137 million due to an increase in our investment in working capital resulting from higher year over year lumber prices in the fourth quarter of 2017 compared with the fourth quarter of 2016 as presented in the tables below.

HISTORICAL LUMBER PRICES

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Random Lengths Composite

 

 

 

Average $/MBF

 

 

    

2017

    

2016

    

2015

 

January

 

$

356

 

$

316

 

$

379

 

February

 

 

393

 

 

310

 

 

361

 

March

 

 

401

 

 

321

 

 

339

 

April

 

 

424

 

 

345

 

 

334

 

May

 

 

416

 

 

356

 

 

315

 

June

 

 

399

 

 

353

 

 

328

 

July

 

 

411

 

 

351

 

 

346

 

August

 

 

417

 

 

367

 

 

327

 

September

 

 

416

 

 

354

 

 

300

 

October

 

 

437

 

 

356

 

 

308

 

November

 

 

436

 

 

346

 

 

326

 

December

 

 

433

 

 

357

 

 

314

 

 

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

412

 

$

344

 

$

331

 

Annual percentage change

 

 

19.8

%  

 

3.9

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4


 

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprises approximately 44% and 43% of total lumber purchases for 2017 and 2016, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

Southern Yellow Pine

 

 

Average $/MBF

 

    

2017

    

2016

    

2015

January

 

$

397

 

$

358

 

$

411

February

 

 

420

 

 

357

 

 

399

March

 

 

433

 

 

366

 

 

393

April

 

 

438

 

 

389

 

 

400

May

 

 

416

 

 

397

 

 

368

June

 

 

399

 

 

382

 

 

354

July

 

 

381

 

 

380

 

 

344

August

 

 

383

 

 

391

 

 

321

September

 

 

387

 

 

375

 

 

290

October

 

 

417

 

 

385

 

 

318

November

 

 

412

 

 

387

 

 

348

December

 

 

418

 

 

400

 

 

347

 

 

 

 

 

 

 

 

 

 

Annual average

 

$

408

 

$

381

 

$

358

Annual percentage change

 

 

7.1

%  

 

6.4

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

The significant increases in lumber prices from 2016 to 2017 can primarily be attributed to the following factors:

·

Duties on imported lumber from Canada - The U.S. Department of Commerce has preliminarily determined that subsidies are being provided to producers and exporters of certain softwood lumber products (softwood lumber) from Canada and duties are being assessed ranging from 7% to 23%.

·

Canadian Wildfires - In 2017, British Columbia experienced its worst wildfire season in history which impacted the producers and exporters of lumber products.

·

Hurricanes Irma and Harvey - Caused catastrophic damage in parts of the U.S. and the Caribbean.  The necessity for lumber to prevent and repair hurricane damage resulted in a surge in lumber demand during the third and fourth quarters of 2017.

 

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 49.1%, 48.4%, and 48.9% of our gross sales in 2017, 2016, and 2015, 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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

·

Products with fixed selling prices. These products include value-added products such as decking and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential construction market, and most industrial packaging products. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs with our suppliers for these sales commitments. Also, the time period and quantity limitations generally allow us to eventually re-price our products for changes in lumber costs from our suppliers.

·

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

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

·

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

·

Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs or including re-pricing triggers if lumber prices change in excess of an agreed upon percentage.

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

 

 

 

 

 

 

 

 

 

    

Period 1

    

Period 2

 

Lumber cost

 

$

300

 

$

400

 

Conversion cost

 

 

50

 

 

50

 

= Product cost

 

 

350

 

 

450

 

Adder

 

 

50

 

 

50

 

= Sell price

 

$

400

 

$

500

 

Gross margin

 

 

12.5

%  

 

10.0

%

 

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits but does impact our margins. Gross margins and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. As a result of this factor, we believe it is useful to compare our change in units shipped with our change in gross profits, operating profits, and selling, general, and administrative expenses as a method of evaluating our profitability and efficiency.

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed four business acquisitions during 2017 and six during 2016. The annual historical sales attributable to acquisitions in 2017 and 2016 were approximately $127 million and $362 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2017 and 2016 are not presented.

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

RESULTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

    

December 30,

    

December 31,

    

December 26,

 

 

 

2017

 

2016

 

2015

 

Net sales

 

100.0

%  

100.0

%  

100.0

%

Cost of goods sold

 

86.2

 

85.4

 

86.1

 

Gross profit

 

13.8

 

14.6

 

13.9

 

Selling, general, and administrative expenses

 

9.1

 

9.6

 

9.2

 

Earnings from operations

 

4.6

 

5.1

 

4.7

 

Other expense (income), net

 

0.1

 

0.1

 

0.2

 

Earnings before income taxes

 

4.5

 

5.0

 

4.5

 

Income taxes

 

1.3

 

1.7

 

1.6

 

Net earnings

 

3.1

 

3.3

 

2.9

 

Less net earnings attributable to noncontrolling interest

 

(0.1)

 

(0.1)

 

(0.2)

 

Net earnings attributable to controlling interest

 

3.0

%  

3.1

%  

2.8

%

 

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

GROSS SALES

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

·

Maximizing unit sales growth while achieving return on investment goals

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

·

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

·

Expanding geographically in our core businesses, domestically and internationally.

·

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

·

Developing new products and expanding our product offering for existing customers. New product sales were $418.4 million in 2017, $338.6 million in 2016, and $298.0 million in 2015 and are presented by market in the table below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

New Product Sales by Market

 

 

Twelve Months Ended

 

    

December 30,

    

December 31,

    

December 26,

Market Classification

 

2017

 

2016

 

2015

Retail

 

$

241,009

 

$

191,619

 

$

167,938

Industrial

 

 

109,892

 

 

97,718

 

 

77,723

Construction

 

 

67,536

 

 

49,290

 

 

52,378

Total New Product Sales

 

 

418,437

 

 

338,627

 

 

298,039

    

Note:  Certain prior year product reclassifications resulted in a decrease and increase in new product sales in 2016 and 2015,        respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

December 30,

    

%

    

December 31,

    

%

    

December 26,

Market Classification

2017

 

Change

 

2016

 

Change

 

2015

Retail

$

1,493,366

 

15.4

 

$

1,294,273

 

13.8

 

$

1,137,109

Industrial

 

1,334,082

 

35.4

 

 

984,968

 

10.6

 

 

890,179

Construction

 

1,178,755

 

15.8

 

 

1,018,136

 

12.5

 

 

905,193

Total Gross Sales

 

4,006,203

 

21.5

 

 

3,297,377

 

12.4

 

 

2,932,481

Sales Allowances

 

(65,021)

 

14.3

 

 

(56,884)

 

25.3

 

 

(45,410)

Total Net Sales

$

3,941,182

 

21.6

 

$

3,240,493

 

12.2

 

$

2,887,071

 

Note: During 2017, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents estimates, for the periods indicated, of our percentage change in gross sales which were attributable to changes in overall selling prices versus changes in units shipped.

 

 

 

 

 

 

 

 

 

 

% Change

 

 

    

in Sales

    

in Selling Prices

    

in Units

 

2017 versus 2016

 

21.5

%  

6.6

%  

14.9

%

2016 versus 2015

 

12.4

%  

1.2

%  

11.2

%

2015 versus 2014

 

8.5

%  

(3.0)

%  

11.5

%

 

Retail:

Gross sales to the retail market increased over 15% in 2017 compared to 2016 due to a 10% increase in unit sales and a 5% increase in selling prices. Within this market, sales to our big box customers increased 16% while our sales to other retailers increased 14%. Businesses we acquired contributed 7% to our growth, while new products contributed to our 3% organic unit sales growth. Comparatively, our large retail customers reported year over year same store sales growth of approximately 8% during the first nine months of 2017, the latest information available to us.

Gross sales to the retail market increased almost 14% in 2016 compared to 2015 due to a 10% increase in unit sales and a 4% increase in selling prices. Within this market, sales to our big box customers increased 17% while our sales to other retailers increased 10%. Our increase in unit sales primarily consisted of organic growth achieved through a combination of share gains in existing product lines with certain retailers, an improvement in consumer demand, and growth in our new product sales. Our large retail customers reported year over year same store sales growth of approximately 6% during 2016.

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

Industrial:

Gross sales to the industrial market increased 35% in 2017 compared to 2016, resulting from a 29% increase in overall unit sales and a 6% increase in selling prices. Businesses we acquired contributed 25% to our growth in unit sales. Our organic unit sales growth of 4% was primarily achieved through share gains including adding 390 new customers during the year and increasing the number of locations we serve of existing customers by 142 new stores.

Gross sales to the industrial market increased 11% in 2016 compared to 2015, resulting from a 13% increase in overall unit sales, offset by a 2% decrease in selling prices. Businesses we acquired contributed 10% to our growth in unit sales. Our organic growth in unit sales was 3% as a result of share gains achieved by adding 191 new customers during the year and increasing the number of locations we serve certain large customers. We believe overall market demand decreased in 2016 due, in part, to the strong U.S. dollar which impacted our customers with export sales.

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

Construction:

Gross sales to the construction market increased almost 16% in 2017 compared to 2016, due to a unit sales increase of 7% and a 9% increase in selling prices. Unit sales increased due to a 7% increase in units shipped to residential construction customers and a 9% increase in shipments to manufactured housing customers while unit sales to commercial construction customers remained flat. Businesses we acquired in 2017 contributed 1% to unit sales growth. Comparatively, the

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Mortgage Bankers Association of America reported year over year national housing starts increased 4%, the commercial construction market increased 3% and the National Association of Home Builders reported industry production of HUD-code homes increased over 15%.

Gross sales to the construction market increased over 12% in 2016 compared to 2015, due to a unit sales increase of 11% and a 1% increase in selling prices. Unit sales increased due to a 17% increase in units shipped to residential construction customers, a 10% increase in shipments to commercial construction customers, and a 5% increase in shipments to manufactured housing customers. Businesses we acquired in 2016 contributed 2% in unit sales growth to manufactured housing customers. Comparatively, the Mortgage Bankers Association of America reported year over year national housing starts increased 5%, the commercial construction market increased 5%, the National Association of Home Builders reported industry production of HUD-code homes increased 14%, and modular home starts decreased 1% in 2016 (the last period reported). The increases in our sales to residential and commercial construction above  nationally recognized market data are primarily due to a combination of increased demand and market share in certain areas of our geographic footprint. Our growth in the manufactured housing market was less than the national average, which was primarily due to a reduction in market share resulting from the loss of certain customers.

 

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

    

Commodity-Based

  

2017

 

 

63.3

%  

 

36.7

%

2016

 

 

62.6

%  

 

37.4

%

2015

 

 

59.8

%  

 

40.2

%

 

COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage decreased from 14.6% in 2016 to 13.8% in 2017 due, in part, to the high level of lumber prices. This is evident when comparing our increase in gross profits with our increase in units shipped.  Our gross profit dollars increased by over $68 million, or 14%, which is slightly below our 15% increase in unit sales. Our profitability in 2017 was impacted by the following factors:

·

Approximately $8 million, a 5% increase in our gross profit in the retail market, was attributable to our growth in unit sales to that market. Businesses we acquired in 2017 contributed $1.6 million of this increase.  Our increase in gross profit was less than our increase in unit sales as a result of (1) Lumber Market volatility, particularly in the second quarter which is our primary selling season, and (2) the acquisition of Robbins in the first quarter of 2017, which primarily sells lower margin treated lumber products.

·

Our growth in unit sales to the industrial market resulted in a $34 million, or 20%, increase in our gross profit, which was due primarily to businesses we acquired in 2017 and 2016. Our increase in gross profit was less than our increase in unit sales primarily due to the impact of higher lumber prices on our products sold with fixed selling prices.

·

Almost $13 million, or 9%, of our gross profit improvement was due to growth in sales to the residential construction and manufactured housing markets.  Our gross profit increase exceeded our increase in unit sales

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

primarily due to leveraging our fixed manufacturing costs, which helped offset the impact of Lumber Market volatility and higher labor rates and benefit costs.

·

The remaining $13 million increase in our gross profit was due to a variety of factors including favorable labor and overhead cost variances, increases in vendor rebates, and a decrease in customer rebates compared to 2017.

 

Our gross profit percentage increased from 13.9% in 2015 to 14.6% in 2016. Additionally, our gross profit dollars increased by over $75 million, or 19%, which exceeded our 11% increase in unit sales. The improvement in our profitability in 2016 is attributable to the following factors:

·

Approximately $38 million of the increase was attributable to our growth in unit sales to the retail market and an improvement in margin on those sales. New product sales, effective inventory positioning leading to lower lumber costs, and the favorable impact of selling into a rising lumber market on variable priced products contributed to our margin improvement.

·

Our growth in unit sales to the industrial market and  margin improvement on those sales for most of the year resulted in a $22 million improvement in our gross profit. Businesses we acquired in 2016 contributed $16 million to this increase. The gross margin improvement was attributable to a favorable improvement in our product sales mix of more value-added products.

·

Almost $16 million of our gross profit improvement was due to growth in sales to the residential construction, commercial construction, and manufactured housing markets as our gross margins remained relatively flat.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses increased by approximately $52.1 million, or 16.7%, in 2017 compared to 2016, while we reported a 15% increase in unit sales. Acquired businesses contributed $41.0 million to our increase. The remaining increase in SG&A was primarily due to a $11.1 million increase in compensation and related costs resulting from annual raises, greater benefit costs, and hiring additional personnel to support sales growth.  Our annual incentive bonus expense was almost $44 million compared to $45 million last year.  This decrease, in spite of an increase in profits, was due to a decline in our return on investment, a key performance metric for determining incentive compensation bonus payments.

Selling, general and administrative ("SG&A") expenses increased by approximately $45.9 million, or 17%, in 2016 compared to 2015, while we reported an 11% increase in unit sales. Acquired businesses contributed $17 million to this increase. The remaining increase in SG&A was primarily due to an $11 million increase in compensation and benefit costs resulting from annual raises, other cost increases, and hiring additional personnel to support sales growth, and a $14 million increase in incentive compensation expense tied to our return on investment.

INTEREST, NET

Net interest costs were higher in 2017 compared to 2016, due to a higher outstanding balance on our revolving line of credit throughout 2017 as well as an increase in the borrowing rate on our revolving credit facility which is tied to LIBOR.

Net interest costs were lower in 2016 compared to 2015, due to a lower outstanding balance on our revolving line of credit throughout 2016.

 

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UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes, permanent tax differences, and the impact of the Tax Act in the U.S. Our effective tax rate decreased to 29.5% in 2017 compared to 34.3% in 2016. The decrease in the 2017 tax rate is primarily due to the impact of the Tax Act, which resulted in a $6.4 million reduction in our net deferred tax liability at the end of December 2017.  The remaining decrease was due to increases in tax credits and permanent tax differences.

Our effective tax rate decreased to 34.3% in 2016 compared to 35.0% in 2015.  The decrease in the 2016 tax rate is primarily due to a reduction in our estimated state tax rate.

 

SEGMENT REPORTING

The following tables present, for the periods indicated, our net sales and earnings from operations by reportable segment (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

 

 

December 30,

 

December 31,

 

December 26,

 

 

 

 

 

 

    

2017

    

2016

    

2015

    

2017 vs 2016

    

2016 vs 2015

 

North

 

$

1,133,656

 

$

1,000,426

 

$

922,092

 

13.3

%  

8.5

%

South

 

 

837,370

 

 

711,862

 

 

656,550

 

17.6

 

8.4

 

West

 

 

1,417,924