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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 28, 2019.

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

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, $1 par value

UFPI

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)   Yes             No

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

Large accelerated filer

Accelerated filer 

Non-accelerated filer

Smaller Reporting Company 

Emerging growth company 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-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 28, 2019 was $2,198,105,632 computed at the closing price of $38.06 on that date.

As of February 1, 2020, 61,416,053 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 28, 2019 are incorporated by reference into Part I and II of this Report.
(2)Certain portions of the registrant’s Proxy Statement for its 2019 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 28, 2019

TABLE OF CONTENTS

PART I

Item 1.

Business.

2

Item 1A.

Risk Factors.

5

Item 1B.

Unresolved Staff Comments.

6

Item 2.

Properties.

7

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.

9

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.

10

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. (now known as UFP Industries) is a holding company with subsidiaries throughout North America, Europe, Asia, and 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 28, 2019 ("2019 Annual Report") under the caption "Management’s Discussion and Analysis of Financial Condition and Results of Operations."  Selected portions of the 2019 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 Northern, Southern, and Western divisions.  Our operating segments that are aggregated into the All Other reportable segment are the Alternative Materials, International, idX, and Corporate business units.

Beginning on January 1, 2020, management of the Company’s operations has been re-organized around the markets it serves (as described below) rather than based on geography.

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

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 2019, 2018 and 2017.

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 and wood composite decking and related accessories and decorative lawn and garden products. Products sold to this market include those sold under the following trademarks: ProWood, Deckorators, UFP-Edge, Outdoor Essentials, Dimensions, and ProWood FR. We also sell engineered wood

2

components to retail lumber yards, which include roof trusses, wall panels and engineered floor systems (see "Construction Market" below).

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.

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. 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. We believe that providing a comprehensive turn-key package, including installation, provides a competitive advantage.

Our commercial 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.

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 $1.4 billion and consist of the following species and their respective percent of total lumber purchases: southern yellow pine (64%), spruce-pine-fur (19%), and douglas fir (3%), while the remaining 14% of lumber purchases comprise various other species and imports outside of North America.  Additionally, we purchase approximately $0.5 billion in plywood, oriented strand board (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 favorable 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 28, 2019 and December 29, 2018, we estimate that backlog orders associated with our customized interior fixture businesses approximated $75.0 million and $75.4 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.

On December 28, 2019 and December 29, 2018, we estimate that backlog orders associated with our construction businesses approximated $110.1 million and $95.1 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 L 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 28, 2019, we had approximately 12,000 employees.

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.

Reports to Security Holders.

Not applicable.

4

Enforceability of Civil Liabilities Against Foreign Persons.

Not applicable.

Item 1A. Risk Factors.

We may be impacted by a significant change 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 $472.4 million and $111.3 million, respectively, in 2019.  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 42.7%, 50.6%, and 49.1% in 2019, 2018, and 2017, 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 2019, 2018 and 2017.

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 industry capacity of products we supply. 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 relative success of these acquisitions.

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

5

for our company. Our health care costs totaled approximately $69.1 million, $69.2 million, and $58.9 million in 2019, 2018, and 2017, 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 9.5%, 9.3%, and 9.0% of sales in 2019, 2018, and 2017, 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 M “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.

We may be impacted by new tariffs and duties on U.S. imports and foreign export sales.  Instability of established free trade agreements may lead to raw material and finished goods price volatility.  An increase in foreign tariffs on U.S. goods could curtail our export sales to other countries which was approximately $111.3 million in 2019.  Increased tariffs and duties on U.S. imports will increase pricing by adding duty cost, where the duty is sustainable in light of overall unit price, or otherwise constrain supply by eliminating historical production sources by country or commodity type with unsustainable duties.  Our purchases that are impacted by foreign tariffs were approximately $472.4 million in 2019.  UFP’s U.S. import of Canadian Softwood Lumber was approximately $249.5 million in 2019, which is the primary imported commodity.  In addition, there is a risk that U.S. tariffs on imports and countering tariffs on U.S. exports could trigger broader international trade conflicts that could adversely impact our business.

Our restructuring efforts may not be successful.  Effective as of January 1, 2020, in connection with the change in the Company's name to UFP Industries, management implemented a significant change in its organizational and operating structure. For many years, the Company was managed primarily on a geographic basis. Under that structure, local plants operated on a somewhat autonomous basis, manufacturing and supplying customers based upon their respective expertise, capacity and local customer needs. Those plants reported through and were managed by their respective regions and via the regions their respective divisions. Beginning on January 1, 2020, the operational and organizational structure of the Company changed. As of that date, the Company's business will be managed through three business segments: retail, construction and industrial. The Company believes that this new organizational and management structure will provide significant benefits and foster a greater likelihood of continued growth and profitability. As part of that structure, the Company believes that it will be more efficient in allocating capital among its operations, will better understand the markets in which it serves and expedite the development and sale of new products and services. While the Company believes that the implementation of this change will result in improved financial performance, there are always meaningful risks associated with significant changes in which management and its workforce conducts its business. Those risks include the departure of management talent, disruptions in business practices and related inefficiencies.

Item 1B. Unresolved Staff Comments.

Not applicable.

6

Item 2. Properties.

Our corporate headquarters building is located in suburban Grand Rapids, Michigan. We currently have approximately 204 facilities and parcels of land 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 8 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 94 facilities and parcels of land which are leased. We believe all of these operating facilities are adequate in capacity and condition to service our existing markets.

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, 2020. 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

59

Chief Executive Officer

Patrick M. Webster

60

President and Chief Operating Officer

Michael R. Cole

53

Chief Financial Officer and Treasurer

Allen T. Peters

52

President and Chief Operating Officer of UFP Retail, LLC

Patrick M. Benton

50

President of UFP Construction, LLC

Scott A. Worthington

49

President of UFP Industrial, LLC

Chad C. Uhlig Eastin

48

Executive Vice President of ProWood

Scott T. Bravata

55

Vice President of Accounting

David A. Tutas

50

Secretary and Chief Compliance Officer

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, and on January 1, 2020, he became President and COO of UFP Retail, LLC.

7

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.  On February 1, 2017, Mr. Benton became President of the UFP Northern Division, and on January 1, 2020, he became President of UFP Construction, LLC.

Scott A. Worthington joined us in 1997. In 2007, he became General Manager of Operations of our plant in New Waverly, TX, and on August 1, 2014, he became Regional Vice President of the South Texas Region. On January 1, 2020, he became President of UFP Industrial, LLC

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, and on January 1, 2020, he became Executive Vice President of ProWood.

Scott T. Bravata joined us in 1988. He became Director of Wholesale Accounting in 1989 and became Corporate Controller in 1997. On February 27, 2006, he became Vice President of Accounting.

David A. Tutas joined us in 2003 as a staff counsel. In 2007, he was promoted to Director of Legal Services. On August 1, 2011, he was promoted to General Counsel. On January 18, 2013, he became Secretary of the Company, and on February 1, 2019, he became Chief Compliance Officer.

PART II

The following information items in this Part II, which are contained in the 2019 Annual Report, are specifically incorporated by reference into this Form 10-K Report. These portions of the 2019 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 2019 Annual Report under the caption “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)

September 29 – November 2, 2019

 

 

 

 

1,860,354

November 3 – 30, 2019

 

 

 

1,860,354

December 1 – 28, 2019

 

 

 

1,860,354

(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 existing share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 1.9 million.  

8

Item 6. Selected Financial Data.

The information required by this Item is incorporated by reference from the 2019 Annual Report under the caption "Selected Financial Data."

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 2019 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 28, 2019, the estimated fair value of our long-term debt, including the current portion, was $170.8 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:

($US equivalent, in thousands)

2020

2021

2022

2023

2024

Thereafter

Total

Long-term Debt:

Fixed Rate ($US)

$

52

$

28

$

34,977

$

$

39,976

$

74,974

$

150,007

Average interest rate

 

5.00%

 

5.06%

 

3.89%

 

 

3.89%

 

4.23%

 

Variable Rate ($US)

$

2,700

$

$

3,700

$

3,976

$

$

3,300

$

13,676

Average interest rate (1)

1.78%

1.73%

1.88%

1.63%

(1) Average of rates at December 29, 2018

Item 8. Financial Statements and Supplementary Data.

The information required by this Item is incorporated by reference from the 2019 Annual Report under the following captions:

"Management’s 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"

9

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

None.

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 28, 2019 (the "Evaluation Date"), have concluded that, as of such date, our disclosure controls and procedures were effective.
(2)Management’s Report on Internal Control Over Financial Reporting.  Management’s Report on Internal Control Over Financial Reporting is included in the 2019 Annual Report under the caption “Management’s 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 2019 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 28, 2019, 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 28, 2019 for the 2019 Annual Meeting of Shareholders, as filed with the Commission ("2020 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 2020 Proxy Statement under the caption "Executive Compensation."  The "Personnel and Compensation Committee Report" included in the 2020 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 2020 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 28, 2019, 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

    

    

$

    

2,497,329

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 28, 2019, is as follows: 524,260 shares for our Employee Stock Purchase Plan, 246,877 shares for our Directors’ Retainer Stock Plan, and 18,687 shares for our Employee Stock Gift Program. In addition, of the remaining 1,707,505 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.  

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 2020 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 2020 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 2019 Annual Report:

Management’s 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 Restated and Amended Articles of Incorporation were filed as Exhibit 3.1 to a Registrant’s Current Report 8-K (dated April 27, 2017) and the same is incorporated herein by reference.

(b)

Amended Bylaws was filed as Exhibit 3(b) to a Form 10-K, Annual Report for the year-ended December 31, 2016 (Commission file No.: 0-22684) and the same incorporated herein by reference.

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.

(b)

Description of Registrant’s Securities

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.

*(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)(2)

Credit Agreement dated November 1, 2018 was filed as Exhibit 10(i)(2) to a Form 8-K Current Report dated November 2, 2018 and the same is incorporated herein by reference.

(k)(1)

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.

(k)(2)

Note Purchase Agreements for Series C and D Senior Notes dated June 14, 2018, was filed as Exhibit 10(k)(2) to Registrant’s Form 10-K, Annual Report for the year ended December 29, 2018 (Commission file No.: 0-22684) and the same is incorporated herein by reference.

1

*(l)

Universal Forest Products, Inc. Employee Stock Purchase Plan is incorporated by reference from Appendix A to the Company’s proxy statement dated and filed with the Commission on March 9, 2018.

*(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 Restated Long Term Stock Incentive Plan is incorporated by reference from Appendix B to the Company’s proxy statement dated and filed with the Commission on March 9, 2018.

(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 28, 2019.

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 in iXBRL (Inline eXtensible Business Reporting Language).

(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.

104

Cover Page Interactive Data File (the cover page XBRL tags are embedded in the inline XBRL 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 26, 2020

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 26th day of February, 2020, 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/ Joan A. Budden

/s/ William G. Currie

Joan A. Budden, Director

William G. Currie, Director

/s/ Benjamin J. McLean

/s/ Bruce A. Merino

Benjamin J. McLean, 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_Ex4_b

Exhibit 4(b)

 

DESCRIPTION OF THE REGISTRANT’S SECURITIES

REGISTERED PURSUANT TO SECTION 12 OF

THE SECURITIES EXCHANGE ACT OF 1934

 

The following is a brief description of the common stock of Universal Forest Products, Inc. (the “Company”). This summary does not purport to be complete in all respects and is subject to and qualified in its entirety by reference to the Company’s Restated and Amended Articles of Incorporation (the "Articles of Incorporation") and Amended Bylaws (the "Bylaws"),  each of which are filed as exhibits to the Annual Report on Form 10-K of which this Exhibit 4(b) is a part.

 

Authorized Capital Stock

 

The Company’s authorized capital stock consists of 80,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of December 28, 2019, there were no shares of preferred stock outstanding.

 

Dividend and Liquidation Rights

 

Subject to the prior rights of the holders of shares of preferred stock that may be issued and outstanding, if any, the holders of common stock are entitled to receive:

 

dividends when, as, and if declared by the Company’s Board of Directors out of funds legally available for the payment of dividends; and

 

in the event of dissolution of the Company, to share ratably in all assets remaining after payment of liabilities and satisfaction of the liquidation preferences, if any, of then outstanding shares of preferred stock, as provided in the Articles of Incorporation.

 

Voting Rights

 

Each holder of common stock is entitled to one vote for each share held of record on all matters presented to a vote at a shareholders meeting, including the election of directors. Holders of common stock have no cumulative voting rights.

 

The Company’s Articles of Incorporation provide that the Company’s Board of Directors be divided into three classes of nearly equal size, with the classes to hold office for staggered terms of three years each.

 

The vote required for the election of a director shall, except in a contested election, be the affirmative vote of a majority of the votes cast in the election of a nominee. For this purpose, a “majority of the votes cast” means that the number of votes cast “for” a director’s election exceeds the number of votes cast “against” that director’s election. Abstentions and broker non-votes are not counted as votes cast either “for” or “against” a director’s election. In a contested election, directors are elected by a plurality of the votes cast at the meeting of shareholders.

An election is considered contested if there are more nominees for election than positions on the Board of Directors to be filled by election at that meeting.

 

Listing

 

The Company’s common stock is currently traded on the Nasdaq Global Select Market under the symbol “ufpi.”

 

Applicable Anti-Takeover Provisions

 

The Company's Articles of Incorporation and Bylaws contain provisions that could also have an anti-takeover effect. Some of the provisions also may make it difficult for shareholders to replace incumbent directors with new directors who may be willing to entertain changes that shareholders may believe will lead to improvements in the combined company’s business.

 

Other

 

All of the outstanding shares of the Company’s common stock are fully paid and non-assessable. Holders of common stock have no preemptive rights to purchase or subscribe for any additional shares of common stock or other securities, and there are no conversion rights or redemption or sinking fund provisions with respect to the Company’s common stock.

 

The transfer agent for the Company’s common stock is American Stock Transfer & Trust Co., 6201 15th Avenue, Brooklyn, NY 11219.

 

 

0000.00320000000006140858960883749000000000truefalsetrueP1YP5YP1YP1YP10YP1YP10YP7Y3M14D69000000

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

Management’s Report on Internal Control Over Financial Reporting

22

Report of Independent Registered Public Accounting Firm

23

Report of Independent Registered Public Accounting Firm

24

Consolidated Balance Sheets as of December 28, 2019 and December 29, 2018

25

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

26

Consolidated Statements of Shareholders’ Equity for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

27

Consolidated Statements of Cash Flows for the Years Ended December 28, 2019, December 29, 2018, and December 30, 2017

28

Notes to Consolidated Financial Statements

29-52

Market Information for our Common Stock

53

Stock Performance Graph

54

Directors and Executive Officers

55

Shareholder Information

56

Table of Contents

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

    

2019

    

2018

    

2017

    

2016

    

2015

 

Consolidated Statement of Earnings Data

 

  

 

  

 

  

 

  

 

  

Net sales

$

4,416,009

$

4,489,180

$

3,941,182

$

3,240,493

$

2,887,071

Gross profit

 

685,518

 

592,894

 

542,826

 

474,590

 

399,904

Earnings before income taxes(6)

 

240,674

 

197,853

 

176,007

 

160,671

 

131,002

Net earnings attributable to controlling interest

$

179,650

$

148,598

$

119,512

$

101,179

$

80,595

Diluted earnings per share

$

2.91

$

2.40

$

1.94

$

1.65

$

1.33

Dividends per share

$

0.400

$

0.360

$

0.320

$

0.290

$

0.273

Consolidated Balance Sheet Data

 

  

 

  

 

  

 

  

 

  

Working capital(1)

$

739,030

$

685,108

$

560,241

$

484,661

$

444,057

Total assets

 

1,889,477

 

1,647,548

 

1,464,677

 

1,292,058

 

1,107,679

Total debt

 

163,683

 

202,278

 

146,003

 

111,693

 

85,895

Shareholders’ equity

 

1,257,733

 

1,088,684

 

974,023

 

860,466

 

766,409

Statistics

 

  

 

  

 

  

 

  

 

  

Gross profit as a percentage of net sales

 

15.5

%  

 

13.2

%  

 

13.8

%  

 

14.6

%  

 

13.9

%

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

 

4.1

%  

 

3.3

%  

 

3.0

%  

 

3.1

%  

 

2.8

%

Return on beginning equity(2)

 

16.5

%  

 

15.3

%  

 

13.9

%  

 

13.2

%  

 

11.5

%

Current ratio(4)

 

3.09

 

3.21

 

2.85

 

2.78

 

3.17

Debt to equity ratio(5)

 

0.13

 

0.19

 

0.15

 

0.13

 

0.11

Book value per common share(3)

$

20.48

$

17.88

$

15.92

$

14.10

$

12.68

(1)

Current assets less current liabilities.

(2)

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

(3)

Shareholders’ equity divided by common stock outstanding.

(4)

Current assets divided by current liabilities.

(5)

Total debt divided by shareholders’ equity.

(6) 2018 includes an approximately $7 million gain on the sale of one of our facilities.

Acquisition growth is one of the primary contributing factors to material increases over the period from 2015 to 2019. Refer to Note C under the “Notes to the Consolidated Financial Statements” for further discussion on the Company’s business combinations and impact on financials.

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 2019.

OVERVIEW

Our results for 2019 were impacted by the following:

Our sales decreased almost 2% in 2019 due to an 8% decrease in overall selling prices (see “Historical Lumber Prices”) offset by a 6% increase in our unit sales. Our unit sales increase was primarily driven by our organic growth in the retail and construction markets and acquiring businesses that serve the industrial market.  Overall, businesses we acquired contributed 1% to our unit sales growth in 2019 (see Note C of the Notes to Consolidated Financial Statements) and we achieved 5% organic unit sales growth.  
The Home Improvement Research Institute reported a 4% increase in home improvement sales in 2019. Comparatively, our unit sales to the retail market increased organically by 7%.
Our unit sales to the industrial market increased 7% in 2019 as businesses we acquired contributed 5% to unit sales growth and organic growth was 2%. Comparatively, the Federal Reserve’s Industrial Production Index noted that national industrial production decreased almost 1% in the period from December 2018 to November 2019.
National housing starts were up approximately 3% in 2019 compared to 2018. Comparatively, our unit sales to residential construction customers increased 5% in 2019.
Production of HUD code manufactured homes declined 3% in the period from January through November 2019, compared to the same period of the prior year. Comparatively, our unit sales to the manufactured housing market were flat in 2019 compared to 2018.  We estimate that 72% of our sales volume is for HUD homes, 25% is for modular homes, and 3% is for recreational vehicles.
Earnings from operations increased 18% to $244.9 million. Acquired businesses contributed approximately $4.1 million to earnings from operations for the year.  The remaining $240.8 million, or 16.1%, increase was primarily

3

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

due to an increase in gross profits driven by low lumber prices and opportunistic buying, organic unit sales growth combined with leveraging fixed costs, and favorable improvements in sales mix, among other factors.
Our cash flow from operating activities increased by $233 million due to a $46 million increase in our net earnings and non-cash expenses and a $187 million favorable change in our investment in working capital (See “Liquidity and Capital Resources”). The decline in working capital was primarily driven by opportunistic purchases of inventory during the fourth quarter of 2018, which was sold in the first six months of 2019. Lower lumber prices of Southern Yellow Pine in the fourth quarter of 2019 also contributed to the increase in cash flow from operating activities.
We invested $84.9 million in capital expenditures to support and grow our business and invested $39.1 million in acquired businesses.
We returned $24.5 million to shareholders through dividends.
Finally, our net cash surplus (interest bearing debt and cash overdraft less available cash) was $4.7 million at the end of 2019, which when considered with our earnings before interest, taxes, depreciation and amortization, indicates a strong credit profile and abundant unused debt capacity available for future investments to grow the business.

HISTORICAL LUMBER PRICES

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

Random Lengths Composite

 

Average $/MBF

 

    

2019

    

2018

    

 

January

$

331

$

449

February

 

370

 

496

March

 

365

 

505

April

 

354

 

496

May

 

346

 

554

June

 

329

 

572

July

 

356

 

525

August

 

346

 

449

September

 

364

 

443

October

360

375

November

373

339

December

371

338

Annual average

$

355

$

462

Annual percentage change

 

(23.2)

%  

 

12.1

%  

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 comprise approximately 64% of total lumber purchases, excluding plywood, for 2019 and 2018.

Southern Yellow Pine

Average $/MBF

    

2019

    

2018

    

January

$

370

$

418

February

 

403

 

459

March

 

408

 

480

April

 

401

 

483

May

 

383

 

535

June

 

344

 

562

July

 

359

 

512

August

 

348

 

449

September

 

355

 

440

October

345

410

November

344

378

December

335

377

Annual quarter average

$

366

$

459

Annual percentage change

(20.3)

%  

12.5

%  

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 42.7% and 50.6% of our gross sales in 2019 and 2018, respectively.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

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

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

5

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our profitability. In other words, for these products, our margins are exposed to changes in the trend of lumber prices.  We believe our sales of these products are at their highest relative level in our second quarter, primarily due to treated lumber sold to the retail market.

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

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 16% of our total sales. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to our higher rate of inventory turnover of these products. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory programs. (Please refer to the “Risk Factors” section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)
Products with fixed selling prices sold under long-term supply arrangements, particularly those involving multi-family construction projects. We attempt to mitigate this risk through our purchasing practices by locking in costs or including re-pricing triggers if lumber prices change in excess of an agreed upon percentage.

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

    

Period 1

    

Period 2

 

Lumber cost

$

300

$

400

Conversion cost

 

50

 

50

= Product cost

 

350

 

450

Adder

 

50

 

50

= Sell price

$

400

$

500

Gross margin

 

12.5

%  

 

10.0

%

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

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed three business acquisitions during 2019 and seven during 2018. The annual historical sales attributable to acquisitions in 2019 and 2018 were approximately $37 million and $140 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2019 and 2018 are not presented.

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

6

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of net sales. Please see our 2018 10-K for discussion of our 2018 results of operations compared to 2017.

Year Ended

    

December 28,

    

December 29,

    

2019

 

2018

 

Net sales

100.0

%  

100.0

%  

Cost of goods sold

84.5

 

86.8

 

Gross profit

15.5

 

13.2

 

Selling, general, and administrative expenses

10.0

 

8.8

 

Net gain on disposition and impairment of assets

 

(0.1)

 

Earnings from operations

5.5

 

4.6

 

Other expense, net

0.1

 

0.2

 

Earnings before income taxes

5.5

 

4.4

 

Income taxes

1.3

 

1.0

 

Net earnings

4.1

 

3.4

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

4.1

%  

3.3

%  

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

The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of sales, adjusted to restate 2019 sales and cost of goods sold to be based on 2018 lumber prices.  The restated sales amounts were calculated by applying unit sales growth from 2019 to 2018 sales.  By eliminating the “pass-through” impact of higher or lower lumber prices on sales and cost of goods sold from year to year, we believe this provides an enhanced view of our change in profitability and costs as a percentage of sales.  The amount of the adjustment to 2019 sales was also applied to cost of goods sold so that gross profit remains unchanged.

Adjusted for Lumber Market Change

Year Ended

    

December 28,

    

December 29,

    

2019

 

2018

 

Net sales

100.0

%  

100.0

%  

Cost of goods sold

85.6

 

86.8

 

Gross profit

14.4

 

13.2

 

Selling, general, and administrative expenses

9.2

 

8.8

 

Net gain on disposition  and impairment of assets

 

(0.1)

 

Earnings from operations

5.1

 

4.6

 

Other expense, net

0.1

 

0.2

 

Earnings before income taxes

5.0

 

4.4

 

Income taxes

1.2

 

1.0

 

Net earnings

3.8

 

3.4

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

3.8

%  

3.3

%  

7

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents, for the periods included, our selling, general, and administrative (SG&A) costs as a percentage of gross profit.  Given our strategies to enhance our capabilities and improve our value-added product offering and recognizing the higher relative level of SG&A costs these strategies require, we believe this ratio provides an enhanced view of our effectiveness in managing these costs and mitigates the impact of changing lumber prices.

SG&A as a Percentage of Gross Profit

Year Ended

    

December 28,

    

December 29,

 

2019

 

2018

Gross profit

 

685,518

 

592,894

Selling, general, and administrative expenses

 

439,047

 

392,235

SG&A as percentage of gross profit

 

64.0%

 

66.2%

GROSS SALES

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

Maximizing unit sales growth while achieving return on investment goals
Diversifying our end market sales mix by increasing sales of specialty wood and protective packaging to industrial users, increasing our penetration of the concrete forming market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, increasing our market share with independent retailers, and increasing our sales of customized interior fixtures, casework and millwork used in a variety of commercial markets.
Expanding geographically in our core businesses, domestically and internationally.
Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail market, specialty wood packaging, engineered wood components, customized interior fixtures, casework and millwork, and "wood alternative" products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, preservative treated lumber is not presently included in the value-added sales, unless it has been processed in another manner.

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

    

Value-Added

    

Commodity-Based

  

2019

69.1

%  

30.9

%

2018

64.4

%  

35.6

%

Developing new products and expanding our product offering. New product sales are presented by market in the table below (in thousands).

8

Table of Contents

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

New Product Sales by Market

Twelve Months Ended

    

December 28,

%

    

December 29,

Market Classification

2019

Change

2018

Retail

$

361,954

14.5

$

316,017

Industrial

 

97,765

11.0

 

88,063

Construction

 

80,067

6.5

 

75,173

Total New Product Sales

 

539,786

12.6

 

479,253

Note: Certain prior year product reclassifications resulted in a decrease and increase in new product sales in 2018.

Our annual goal is for 2019 was to achieve new product sales of $525 million.  The definition we use for a new product includes sales of products developed and launched in a previous year that are continuing to increase each year.  We remove new products from the reporting above in the year following when growth in sales has stopped.

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

Year Ended

    

December 28,

    

%

    

December 29,

Market Classification

2019

Change

2018

Retail

$

1,638,885

 

(1.2)

$

1,659,503

Industrial

 

1,329,245

 

1.7

 

1,307,350

Construction

 

1,524,053

 

(4.7)

 

1,598,896

Total Gross Sales

 

4,492,183

 

(1.6)

 

4,565,749

Sales Allowances

 

(76,174)

 

(0.5)

 

(76,569)

Total Net Sales

$

4,416,009

 

(1.6)

$

4,489,180