Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22684
UFP INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan
38-1465835
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification Number)
organization)
2801 East Beltline NE, Grand Rapids, Michigan
49525
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (616) 364-6161
NONE
(Former name or former address, if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ⌧
Accelerated Filer ◻
Non-Accelerated Filer ◻
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
Outstanding as of September 26, 2020
Common stock, $1 par value
61,186,636
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, no par value
UFPI
The Nasdaq Stock Market, LLC
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION.
Page No.
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at September 26, 2020, December 28, 2019 and September 28, 2019
3
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended September 26, 2020 and September 28, 2019
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 26, 2020 and September 28, 2019
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2020 and September 28, 2019
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
34
Item 4.
Controls and Procedures
35
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors
36
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities – NONE
Mine Safety Disclosures – NONE
Item 5.
Other Information – NONE
Item 6.
Exhibits
37
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
September 26,
December 28,
September 28,
2020
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
346,154
168,336
64,498
Restricted cash
724
330
729
Investments
20,530
18,527
17,028
Accounts receivable, net
583,079
364,027
474,648
Inventories:
Raw materials
286,418
236,283
239,585
Finished goods
242,316
250,591
239,771
Total inventories
528,734
486,874
479,356
Refundable income taxes
—
13,272
1,550
Other current assets
32,888
41,706
54,295
TOTAL CURRENT ASSETS
1,512,109
1,093,072
1,092,104
DEFERRED INCOME TAXES
2,070
2,763
2,284
RESTRICTED INVESTMENTS
17,327
16,214
16,082
RIGHT OF USE ASSETS
77,412
80,167
75,436
OTHER ASSETS
24,216
24,884
23,085
GOODWILL
245,925
229,536
232,411
INDEFINITE-LIVED INTANGIBLE ASSETS
7,361
7,354
7,339
OTHER INTANGIBLE ASSETS, NET
58,205
48,313
46,877
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
935,639
884,963
880,274
Less accumulated depreciation and amortization
(529,644)
(497,789)
(495,267)
PROPERTY, PLANT AND EQUIPMENT, NET
405,995
387,174
385,007
TOTAL ASSETS
2,350,620
1,889,477
1,880,625
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
231,111
142,479
180,767
Accrued liabilities:
Compensation and benefits
171,472
141,892
127,500
Income taxes
3,024
Other
69,888
51,572
61,463
Current portion of lease liability
15,349
15,283
15,566
Current portion of long-term debt
2,760
2,816
152
TOTAL CURRENT LIABILITIES
493,604
354,042
385,448
LONG-TERM DEBT
311,267
160,867
162,853
LEASE LIABILITY
62,100
64,884
59,870
22,478
22,880
14,897
OTHER LIABILITIES
47,367
29,071
28,454
TOTAL LIABILITIES
936,816
631,744
651,522
SHAREHOLDERS’ EQUITY:
Controlling interest shareholders’ equity:
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,186,636, 61,408,589 and 61,390,216
61,187
61,409
61,390
Additional paid-in capital
216,002
192,173
189,820
Retained earnings
1,127,375
995,022
969,564
Accumulated other comprehensive income
(6,974)
(4,889)
(5,315)
Total controlling interest shareholders’ equity
1,397,590
1,243,715
1,215,459
Noncontrolling interest
14,018
13,644
TOTAL SHAREHOLDERS’ EQUITY
1,413,804
1,257,733
1,229,103
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated condensed financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
NET SALES
1,486,227
1,163,026
3,760,290
3,417,969
COST OF GOODS SOLD
1,245,153
975,756
3,147,049
2,889,706
GROSS PROFIT
241,074
187,270
613,241
528,263
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
134,649
115,958
357,770
334,165
OTHER
(176)
845
(2,120)
948
EARNINGS FROM OPERATIONS
106,601
70,467
257,591
193,150
INTEREST EXPENSE
2,486
1,900
6,291
6,767
INTEREST INCOME
(1,011)
(317)
(1,541)
(1,074)
UNREALIZED GAIN ON INVESTMENTS AND OTHER
(554)
(93)
(82)
(1,611)
921
1,490
4,668
4,082
EARNINGS BEFORE INCOME TAXES
105,680
68,977
252,923
189,068
INCOME TAXES
26,819
16,396
63,798
45,340
NET EARNINGS
78,861
52,581
189,125
143,728
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(1,657)
(722)
(5,299)
(1,814)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
77,204
51,859
183,826
141,914
EARNINGS PER SHARE - BASIC
1.25
0.84
2.98
2.30
EARNINGS PER SHARE - DILUTED
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE GAIN (LOSS)
1,687
(1,200)
(4,030)
644
COMPREHENSIVE INCOME
80,548
51,381
185,095
144,372
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(1,922)
(358)
(3,354)
(1,835)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
78,626
51,023
181,741
142,537
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share data)
Controlling Interest Shareholders’ Equity
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Noncontrolling
Stock
Capital
Earnings
Interest
Total
Balance at December 28, 2019
Net earnings
40,159
411
40,570
Foreign currency translation adjustment
(5,951)
(2,335)
(8,286)
Unrealized loss on debt securities
(270)
Distributions to noncontrolling interest
(299)
Additional purchase of noncontrolling interest
130
(225)
(95)
Cash dividends - $0.125 per share - quarterly
(7,730)
Issuance of 10,549 shares under employee stock plans
10
309
319
Net issuance of 350,124 shares under stock grant programs
350
12,454
1
12,805
Issuance of 89,616 shares under deferred compensation plans
89
(89)
Repurchase of 756,397 shares
(756)
(28,456)
(29,212)
Expense associated with share-based compensation arrangements
1,404
Accrued expense under deferred compensation plans
5,343
Balance at March 28, 2020
61,102
211,724
998,996
(11,110)
11,570
1,272,282
66,463
3,231
69,694
2,026
125
2,151
688
(7,644)
Issuance of 9,714 shares under employee stock plans
367
377
Net issuance of 42,880 shares under stock grant programs
43
(174)
(129)
Issuance of 14,106 shares under deferred compensation plans
14
(14)
824
1,082
Balance at June 27, 2020
61,169
213,809
1,057,817
(8,396)
14,926
1,339,325
1,657
1,319
265
1,584
103
(634)
(7,646)
Issuance of 7,511 shares under employee stock plans
338
345
Net forfeiture of 1,382 shares under stock grant programs
(1)
(56)
(57)
Issuance of 11,326 shares under deferred compensation plans
12
(12)
826
1,097
Balance at September 26, 2020
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, CONTINUED
Balance at December 29, 2018
60,884
178,540
839,917
(5,938)
15,281
1,088,684
35,540
462
36,002
982
224
1,206
Unrealized gain (loss) on investment & foreign currency
167
(500)
Issuance of 10,259 shares under employee stock plans
251
261
Net issuance of 320,069 shares under stock grant programs
320
6,101
6,421
Issuance of 138,295 shares under deferred compensation plans
138
(138)
1,226
4,899
Balance at March 30, 2019
61,352
190,879
875,457
(4,789)
15,467
1,138,366
54,515
630
55,145
151
161
312
159
(400)
Cash dividends - $0.200 per share - semiannually
(12,271)
Issuance of 8,694 shares under employee stock plans
9
272
281
Net forfeiture of 10,819 shares under stock grant programs
(11)
(262)
Issuance of 16,433 shares under deferred compensation plans
17
(17)
885
1,026
Balance at June 29, 2019
61,367
192,783
917,704
(4,479)
15,858
1,183,233
722
(963)
(364)
(1,327)
127
(734)
(5,015)
(1,838)
(6,853)
Issuance of 7,916 shares under employee stock plans
262
270
Net issuance of 1,070 shares under stock grant programs
(73)
(72)
Issuance of 14,550 shares under deferred compensation plans
857
1,020
Balance at September 28, 2019
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation
47,226
44,652
Amortization of intangibles
5,863
4,690
Expense associated with share-based and grant compensation arrangements
3,152
3,105
Deferred income taxes (credit)
110
(367)
Unrealized loss (gain) on investments
(81)
Net (gain) loss on disposition of assets and impairment of assets
(662)
830
Changes in:
Accounts receivable
(211,238)
(127,841)
Inventories
(39,167)
80,178
Accounts payable and cash overdraft
85,354
14,293
Accrued liabilities and other
105,401
36,423
NET CASH FROM OPERATING ACTIVITIES
185,083
198,080
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(67,024)
(66,338)
Proceeds from sale of property, plant and equipment
2,588
1,180
Acquisitions and purchases of non-controlling interest, net of cash received
(34,820)
(38,710)
Purchases of investments
(24,266)
(6,475)
Proceeds from sale of investments
22,281
4,159
314
199
NET CASH USED IN INVESTING ACTIVITIES
(100,927)
(105,985)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
6,862
421,464
Repayments under revolving credit facilities
(6,498)
(460,537)
Contingent consideration payment and other
(3,087)
(3,099)
Issuance of long-term debt
150,000
Proceeds from issuance of common stock
1,042
812
Dividends paid to shareholders
(23,020)
(12,270)
(932)
(1,634)
Repurchase of common stock
23
41
NET CASH FROM (USED IN) FINANCING ACTIVITIES
95,178
(55,223)
Effect of exchange rate changes on cash
(1,122)
157
NET CHANGE IN CASH AND CASH EQUIVALENTS
178,212
37,029
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
168,666
28,198
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
346,878
65,227
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
27,316
Restricted cash, beginning of period
882
Cash, cash equivalents, and restricted cash, beginning of period
Cash and cash equivalents, end of period
Restricted cash, end of period
Cash, cash equivalents, and restricted cash, end of period
SUPPLEMENTAL INFORMATION:
Interest paid
4,112
5,287
Income taxes paid
47,301
33,106
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
6,195
5,620
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated condensed financial statements (the “Financial Statements”) include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All intercompany transactions and balances have been eliminated.
In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 28, 2019.
On April 22, 2020, our shareholders approved changing the name of the Company from Universal Forest Products, Inc., to UFP Industries, Inc.
Seasonality has a significant impact on our working capital from March to August, which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the September 28, 2019 balances in the accompanying unaudited condensed consolidated balance sheets.
On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We cannot reasonably estimate the length or severity of this pandemic and government restrictions on business activity, or the extent to which these restrictions may materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.
B. FAIR VALUE
We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets measured at fair value are as follows:
September 26, 2020
September 28, 2019
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
64
3,133
3,197
56,781
843
57,624
Fixed income funds
248
16,522
16,770
733
14,566
15,299
Equity securities
10,524
8,840
Alternative investments
1,926
1,895
Mutual funds:
Domestic stock funds
6,826
2,630
International stock funds
1,243
2,054
Target funds
260
268
Bond funds
208
825
Alternative funds
433
1,531
Total mutual funds
8,970
7,308
19,806
19,655
41,387
73,662
15,409
90,966
Assets at fair value
From the assets measured at fair value as of September 26, 2020, listed in the table above, $20.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $0.9 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $16.8 million of fixed income funds and $3.2 million of money markets funds are held in Restricted Investments.
We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan, our wholly owned licensed captive insurance company, and assets held in financial institutions. These funds are valued at prices quoted in an active exchange market and are included in “Cash and Cash Equivalents”, “Investments”, “Other Assets”, and “Restricted Investments”. We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.
In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $37.3 million as of September 26, 2020, which has been included in the aforementioned table of total investments. This portfolio consists of domestic and international stocks, alternative investments, and fixed income bonds.
Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following (in thousands):
Unrealized
Cost
Gain/(Loss)
Fair Value
Fixed Income
15,750
14,969
Equity
9,121
1,403
7,584
1,256
Mutual Funds
7,228
852
8,080
6,391
(98)
6,293
Alternative Investments
1,881
45
1,790
105
33,980
3,320
37,300
30,734
1,593
32,327
Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our mutual fund investments consist of domestic and international stock. Our alternative investments consist of the private real estate income trust which is valued as a Level 3 asset. The net unrealized gain was $3.3 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of September 26, 2020 and September 28, 2019.
C. REVENUE RECOGNITION
Within the three primary segments (Retail, Industrial, and Construction) that the Company operates, there are a variety of written agreements governing the sale of our products and services. The transaction price is stated at the purchase order level, which includes shipping and/or freight costs and any applicable governmental authority taxes. The majority of our contracts have a single performance obligation concentrated around the delivery of goods to the carrier, Free On Board (FOB) shipping point. Therefore, revenue is recognized when this performance obligation is satisfied. Generally, title and control passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day.
Certain customer products that we provide require installation by the Company or a 3rd party. Installation revenue is recognized upon completion. If the Company uses a 3rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.
The Company utilizes rebates, credits, discounts and/or cash-based incentives with certain customers which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. The allocation of these costs are applied at the invoice level and recognized in conjunction with revenue. Additionally, returns and refunds are estimated on a historical and expected basis which is a reduction of revenue recognized.
Earnings on construction contracts are reflected in operations using over time accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations, which is in accordance with ASC 606 as revenue is recognized when certain performance obligations are performed. Under over time accounting using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under over time accounting using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.
Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration. Therefore, our operating results are impacted by, among many other things, labor rates and commodity costs. During the year, we update our estimated costs to complete our projects using current labor and commodity costs and recognize losses to the extent that they exist.
The following table presents our gross revenues disaggregated by revenue source:
Market Classification
% Change
FOB Shipping Point Revenue
1,490,050
1,140,853
30.6%
3,749,122
3,358,520
11.6%
Construction Contract Revenue
32,007
43,177
-25.9%
97,150
121,622
-20.1%
Total Gross Sales
1,522,057
1,184,030
28.5%
3,846,272
3,480,142
10.5%
Sales Allowances
(35,830)
(21,004)
70.6%
(85,982)
(62,173)
38.3%
Total Net Sales
27.8%
10.0%
The Construction segment comprises the construction contract revenue shown above. Construction contract revenue is primarily made up of site-built and framing customers.
The following table presents the balances of over time accounting accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):
Cost and Earnings in Excess of Billings
4,130
6,815
Billings in Excess of Cost and Earnings
11,264
6,622
6,666
11
D. EARNINGS PER SHARE
The computation of earnings per share (“EPS”) is as follows (in thousands):
Numerator:
Net earnings attributable to controlling interest
Adjustment for earnings allocated to non-vested restricted common stock
(2,195)
(1,299)
(5,110)
(3,547)
Net earnings for calculating EPS
75,009
50,560
178,716
138,367
Denominator:
Weighted average shares outstanding
61,548
61,717
61,642
61,609
Adjustment for non-vested restricted common stock
(1,750)
(1,546)
(1,713)
(1,540)
Shares for calculating basic EPS
59,798
60,171
59,929
60,069
Effect of dilutive restricted common stock
20
24
19
22
Shares for calculating diluted EPS
59,818
60,195
59,948
60,091
Net earnings per share:
Basic
Diluted
E. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, Ardellis Insurance Ltd., a licensed captive insurance company.
We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at wood preservation facilities in Stockertown, PA; Elizabeth City, NC; and Auburndale, FL. In addition, a reserve was established for our facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.
On a consolidated basis, we have reserved approximately $1.9 million on September 26, 2020 and $2.0 million on September 28, 2019, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.
In addition, on September 26, 2020, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.
On September 26, 2020, we had outstanding purchase commitments on commenced capital projects of approximately $21.3 million.
We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also distribute products manufactured by other companies, some of which are no longer in business. While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.
As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances, we are required to post payment and performance bonds to ensure the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims properly made against these bonds. As of September 26, 2020, we had approximately $7.0 million outstanding payment and performance bonds for open projects. We had approximately $7.6 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On September 26, 2020, we had outstanding letters of credit totaling $43.8 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. As of September 26, 2020, we have irrevocable letters of credit outstanding totaling approximately $33.8 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the bond trustees for all industrial development revenue bonds that have been issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.
Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of UFP Industries, Inc. in certain debt agreements, including the Series 2012, 2018 and 2020 Senior Notes and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.
We did not enter into any new guarantee arrangements during the third quarter of 2020 which would require us to recognize a liability on our balance sheet.
13
F. BUSINESS COMBINATIONS
We completed the following acquisitions in 2020 and since the end of September 2019, which were accounted for using the purchase method in thousands unless otherwise noted:
Net
Company
Acquisition
Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Segment
July 14, 2020
$19,173cash paid for 100% asset purchase and estimated contingent consideration
13,098
6,075
Industrial
T&R Lumber Company ("T&R")
A manufacturer and distributor of a range of products used primarily by nurseries, including plastic growing containers, pots and trays; wooden stakes; trellises; tree boxes; shipping racks; and other nursery supplies based in Rancho Cucamonga, California. T&R had annual sales of approximately $31 million. The acquisition of T&R will allow us to leverage their expertise using our national manufacturing capacity to grow our agricultural product offerings and customer base across the country.
March 13, 2020
$21,787cash paid for 100% asset purchase and estimated contingent consideration
19,098
2,689
Construction
Quest Design & Fabrication and Quest Architectural Millwork ("Quest")
A designer, fabricator, and installer of premium millwork and case goods for a variety of commercial uses. Quest had annual sales of approximately $22 million. The acquisition of Quest expands our architectural millwork capabilities and expertise in our commercial construction business unit, and will allow us to use our national manufacturing capacity to grow and diversify our sales to this end market
The intangible assets for the T&R and Quest acquisitions have not been finalized and allocated to their respective identifiable asset and goodwill accounts. In aggregate, acquisitions completed since the end of September 2019 and not consolidated with other operations contributed approximately $10.8 million in net sales and $0.2 million in operating profits during the third quarter of 2020 and $17.8 million in net sales and $1.5 million in operating profits in the first nine months of 2020.
G. SEGMENT REPORTING
The Company operates manufacturing, treating and distribution facilities internationally, but primarily in the United States. Effective January 1, 2020, the Company re-organized around the markets it serves rather than geography. The prior periods have been recast to reflect the new segment structure. The business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. This change allows for a more specialized and consistent sales approach among Company operations, more efficient use of resources and capital, and quicker introduction of new products and services. The Company manages the operations of its individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail, Industrial, and Construction segments. The exception to this market-centered reporting and management structure is the Company’s International segment, which comprises our Mexico, Canada, and Australia operations and sales and buying offices in other parts of the world.
Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below.
The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates. Total assets of the Corporate column include unallocated cash and cash equivalents, certain prepaid assets, certain property, equipment and other assets pertaining to the centralized activities of Corporate, UFP Real Estate, Inc., and UFP Transportation Ltd.
Three Months Ended September 26, 2020
Retail
All Other
Corporate
Net sales to outside customers
700,522
282,124
447,103
56,700
(222)
Intersegment net sales
45,416
11,773
17,909
76,029
(151,127)
Segment operating profit
62,181
22,037
16,513
7,449
(1,579)
Three Months Ended September 28, 2019
397,140
271,667
445,505
48,066
648
32,400
9,748
16,057
45,918
(104,123)
14,297
20,768
21,406
3,561
10,435
Nine Months Ended September 26, 2020
1,661,873
763,046
1,187,429
148,503
(561)
109,378
32,788
49,685
196,908
(388,759)
122,082
53,837
50,544
20,573
10,555
Nine Months Ended September 28, 2019
1,212,330
837,671
1,225,467
142,845
(344)
101,203
34,406
42,393
155,637
(333,639)
47,597
60,208
56,263
9,490
19,592
15
Identifiable intangibles have been transferred and goodwill was re-allocated, based on their relative fair values, to our new segments and reporting units. The following table presents goodwill by segment as of September 26, 2020, and December 28, 2019 (in thousands):
Balance as of December 28, 2019
58,098
81,276
82,911
7,251
2020 Acquisitions
6,549
9,953
16,502
2020 Purchase Accounting Adjustments
202
204
Foreign Exchange, Net
229
(546)
Balance as of September 26, 2020
58,300
87,827
93,093
6,705
The following table presents total assets by segment as of September 26, 2020, and December 28, 2019.
Total Assets by Segment
Segment Classification
631,238
402,221
56.9
%
389,806
377,329
3.3
525,596
522,638
0.6
161,945
136,990
18.2
642,035
450,299
42.6
Total Assets
24.4
Note: During 2020, certain assets were reclassified to a different segment. Prior year information in this table has been restated to reflect these changes
H. INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 25.4% in the third quarter of 2020 compared to 23.8% for same period in 2019 and was 25.2% in the first nine months of 2020 compared to 24.0% for the same period in 2019. The increase was primarily due to the foreign tax rate differential on foreign income as well as a variety of other discrete tax items none of which are individually significant.
I. COMMON STOCK
Below is a summary of common stock issuances for the first nine months of 2020 and 2019 (in thousands, except average share price):
Share Issuance Activity
Common Stock
Average Share Price
Shares issued under the employee stock purchase plan
28
44.14
Shares issued under the employee stock gift program
45.93
Shares issued under the director retainer stock program
46
24.80
Shares issued under the long-term stock incentive plan
271
47.51
Shares issued under the executive stock match grants
79
47.60
Forfeitures
(7)
Total shares issued under stock grant programs
391
44.92
Shares issued under the deferred compensation plans
115
53.85
16
During the first nine months of 2020, we repurchased approximately 756,000 shares of our common stock at an average share price of $38.62.
27
35.52
33.91
35.44
211
30.83
109
31.57
310
31.17
169
33.20
During the first nine months of 2019, we did not repurchase any of our common stock.
J. SUBSEQUENT EVENTS
On September 30, 2020, we entered into a joint venture with Atlante S.p.A. to create Enwrap Logistic & Packaging S.r.l. (Enwrap) and acquired a 50% ownership interest in Enwrap for $5.3 million. Enwrap is headquartered in Milan, Italy and is an industrial packaging business, which provides high-value, mixed material industrial packaging and logistics services through 14 facilities in Italy.
On October 1, 2020, we acquired the equity of Fire Retardant Chemical Technologies, LLC (FRCT), for $5.9 million. Founded in 2014 and based in Matthews, North Carolina, FRCT’s business includes a research and development laboratory specializing in developing and testing a wide range of high-performance chemicals, including fire retardants and water repellants.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UFP Industries, Inc. (formerly Universal Forest Products, Inc.) 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, Mich. For more information about UFP Industries, 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, government imposed “stay at home” orders and directives to cease or curtail operations; 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 the third quarter of 2020.
OVERVIEW
Our results for the third quarter of 2020 include the following highlights:
HISTORICAL LUMBER PRICES
We experience significant fluctuations in the cost of commodity lumber products from primary producers (“Lumber Market”). The following table presents the Random Lengths framing lumber composite price:
Random Lengths Composite
Average $/MBF
January
331
February
402
370
March
420
365
April
358
354
May
394
346
June
455
329
July
530
356
August
716
September
934
364
Third quarter average
727
355
Year-to-date average
510
351
Third quarter percentage change
104.8
Year-to-date percentage change
45.3
In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprise almost two-thirds of our total lumber purchases.
Random Lengths SYP
403
360
408
333
401
412
383
494
344
552
359
348
886
495
375
104.0
32.0
The sequential increase in lumber prices above is due to a combination of mill production curtailments and demand for lumber much higher than expectations. We anticipate lumber prices will normalize to lower levels during the fourth quarter, which will impact our profitability of products sold with fixed and variable prices as discussed below.
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 48.7% and 42.6% of our sales in the first nine months of 2020 and 2019, respectively.
Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.
Below is a general description of the primary ways in which our products are priced.
For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.
The greatest risk associated with changes in the trend of lumber prices is on the following products:
In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.
Period 1
Period 2
Lumber cost
300
400
Conversion cost
50
= Product cost
450
Adder
= Sell price
500
Gross margin
12.5
10.0
As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. In order to more effectively evaluate our profitability in such periods, we believe it is useful to compare our change in units shipped with our changes in costs and profits.
BUSINESS COMBINATIONS
We completed two business acquisitions during the first nine months of 2020 and three during all of 2019. The annual historical sales attributable to acquisitions completed in the first nine months of 2020 and all of 2019 were approximately $38 million and $37 million, respectively. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2020 and 2019 are not presented.
21
See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our Unaudited Condensed Consolidated Statements of Earnings as a percentage of net sales.
Net sales
100.0
Cost of goods sold
83.8
83.9
83.7
84.5
Gross profit
16.2
16.1
16.3
15.5
Selling, general, and administrative expenses
9.1
9.9
9.5
9.8
0.1
(0.1)
Earnings from operations
7.2
6.1
6.9
5.7
Other expense, net
Earnings before income taxes
7.1
5.9
6.7
5.5
1.8
1.4
1.7
1.3
5.3
4.5
5.0
4.2
Less net earnings attributable to noncontrolling interest
5.2
4.9
Note: Actual percentages are calculated and may not sum to total due to rounding.
The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of net sales, adjusted to restate 2020 net sales and cost of goods sold at prior year lumber prices. The restated net sales amounts were calculated by adjusting 2020 sales for the change in our selling prices resulting primarily from underlying movements in commodity lumber prices in 2020 from 2019. By eliminating the “pass-through” impact of higher or lower lumber prices on net sales and cost of goods sold from year to year, we believe this provides an enhanced view of our change in profitability and costs as a percentage of sales. The amount of the adjustment to 2020 net sales was also applied to cost of goods sold so that gross profit remains unchanged.
Adjusted for Lumber Market Change
80.8
82.6
19.2
17.4
10.7
10.2
8.5
7.3
8.4
2.1
6.3
5.4
(0.2)
6.2
Operating Results by Segment:
Effective January 1, 2020, the Company re-organized around the markets it serves rather than geography. Our new business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. Among other things, this change allows for a more specialized and consistent sales approach among Company operations, more efficient use of resources and capital, and quicker introduction of new products and services. The Company manages the operations of its individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail, Industrial, and Construction segments. The exception to this market-centered reporting and management structure is the Company’s International segment, which comprises our Mexico, Canada, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates.
The following tables present our operating results, for the periods indicated, by segment.
594,896
233,971
385,028
38,543
(7,285)
105,626
48,153
62,075
18,157
7,063
Selling, general, administrative expenses
43,515
26,080
45,411
10,499
9,144
(70)
209
(502)
353,291
224,363
373,181
35,532
(10,611)
43,849
47,304
72,324
12,534
11,259
29,534
26,522
49,897
9,359
646
1,021
(386)
178
1,429,229
635,424
1,002,932
101,240
(21,776)
232,644
127,622
184,497
47,263
21,215
110,596
134,098
28,228
11,186
(34)
123
(145)
(1,538)
(526)
1,076,672
702,390
1,024,647
107,101
(21,104)
135,658
135,281
200,820
35,744
20,760
88,123
75,083
143,497
26,259
1,203
(62)
(10)
1,060
(5)
(35)
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
84.9
82.9
86.1
68.0
15.1
17.1
13.9
9.2
18.5
0.4
8.9
7.8
3.7
13.1
89.0
73.9
11.0
26.1
7.4
11.2
19.5
0.2
(0.8)
3.6
7.6
4.7
7.5
86.0
83.3
68.2
14.0
16.7
31.8
9.7
11.3
19.0
(1.0)
4.3
88.8
83.6
75.0
16.4
25.0
9.0
11.7
18.4
3.9
4.6
6.6
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, customized interior fixtures used in a variety of retail and commercial applications, and specialty wood packaging, components and packaging materials for various industries. Our strategic long-term sales objectives generally include:
25
The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total net sales by our primary segments (Retail, Industrial, and Construction). Value-added products are typically sold at fixed selling prices for a pre-determined time period and carry higher gross margins than our commodity-based products. The increase in our ratio of commodity-based product sales to total sales reflected in the tables below is primarily due to the impact of dramatically higher lumber prices in the third quarter of 2020 as the selling prices of these products are generally indexed to the current Lumber Market at the time they are shipped. For example, a majority of our commodity-based sales are sold through our ProWood business unit and selling prices were up 66% compared to the third quarter of 2019. Also, our Industrial and Construction segments primarily sell value-added products and their unit sales were down 2% and 9% from last year, respectively.
Value-Added
Commodity-Based
49.6
50.4
57.5
42.5
63.9
36.1
67.1
32.9
74.3
25.7
82.5
17.5
Total Sales
60.6
39.4
70.0
30.0
54.4
45.6
58.4
41.6
65.7
34.3
66.4
33.6
77.3
22.7
81.1
18.9
64.6
35.4
69.1
30.9
New Product Sales by Segment
Change
115,321
72,411
59.3
297,363
229,642
29.5
20,207
17,789
13.6
50,909
50,274
15,768
15,228
3.5
41,923
44,708
(6.2)
2,394
3,235
(26.0)
7,895
9,594
(17.7)
Total New Product Sales
153,690
108,663
41.4
398,090
334,218
19.1
Note: Certain prior year product reclassifications and the change in designation of certain products as "new" resulted in a change in prior year's sales.
26
Retail Segment
Net sales in the third quarter of 2020 increased approximately 76% compared to the same period of 2019, due to a 34% increase in organic unit sales and a 42% increase in selling prices. Our organic unit growth was primarily driven by a 57% increase in our Dimensions Home & Décor products including project panels and short lumber, a 50% increase in Deckorators composite decking and railing, a 30% increase in our ProWood pressure-treated products, and a 28% increase in Outdoor Essentials Fence, Lawn & Garden products. Our new product sales contributed to these increases and were up 59% for the quarter. Finally, our sales to big box customers increased 80%, and sales to other independent retailers increased 71%. Our unit sales increases were primarily due to an increase in demand as consumers invested in home improvement activities over other alternatives. We believe that the pandemic and related disruptions in the lives of consumers contributed to this increase in demand.
Gross profits increased by $61.8 million, or 140.9% to $105.6 million for the third quarter of 2020 compared to the same period last year as gross margins increased to 15.1% compared to 11.0% for the same period of 2019. We estimate the higher level of lumber prices (see “Impact of the Lumber Market on Our Operating Results”) reduced gross margin by 470 basis points. Our increase in gross profits was due to the following factors:
Selling, general and administrative (“SG&A”) expenses increased by approximately $14.0 million, or 47.3%, in the third quarter of 2020 compared to the same period of 2019, while we reported a 34% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $10.7 million and totaled approximately $15.0 million for the quarter. The remaining increase was primarily due to increases in salaries and wages which were partially offset by decreases in advertising and travel and related costs.
Earnings from operations for the Retail reportable segment increased in the third quarter of 2020 compared to 2019 by $47.9 million, or 335%, well in excess of our 34% increase in unit sales as a result of the factors above.
Net sales in the first nine months of 2020 increased 37% compared to the same period of 2019, due to a 22% increase in unit sales and a 15% increase in selling prices. Acquired operations contributed 1% to our unit sales growth, and organic unit sales growth was 21%. Our organic unit growth was primarily driven by a 53% increase in our Dimensions Home & Décor products including project panels and short lumber, a 25% increase in our ProWood pressure-treated products, a 21% increase in Outdoor Essentials Fence, Lawn & Garden products, and an 11% increase in Deckorators composite decking and railing. Our new product sales contributed to these increases and were up 29.5%. Sales to big box customers were up 42% and sales to other independent retailers increased 28%.
Gross profits in the first nine months of 2020 increased 71.5% to $232.6 million compared to the same period of 2019 as gross margins increased to 14.0% compared to 11.2% for the same period of 2019. The impact of higher lumber prices contributed to a 170 basis point decline in our gross margin. Improvements in our profitability were primarily due to:
Selling, general and administrative (“SG&A”) expenses increased by approximately $22.5 million, or 25.5%, in the first nine months of 2020 compared to the same period of 2019, while we reported a 22% increase in unit sales. Acquired operations since the third quarter of 2019 contributed approximately $1.9 million to this increase. Accrued bonus expense increased approximately $14.9 million and totaled approximately $26.9 for the first nine months of 2020. The remaining increase was due to increases in salaries and wages and in-store merchandising costs, offset by a decline in advertising and travel and related costs.
Earnings from operations for the Retail reportable segment increased in the first nine months of 2020 compared to 2019 by $74.5 million, or 156.5%, well in excess of our 22% increase in unit sales as a result of the factors mentioned above.
Industrial Segment
Net sales in the third quarter of 2020 increased 4% compared to the same period of 2019, due to a 6% increase in selling prices attributable to the Lumber Market, offset by a 2% decrease in unit sales due to the impact of the pandemic and government imposed shutdowns.
Gross profits increased by 1.8% to $48.2 million for the third quarter of 2020 compared to the same period of 2019. We estimate the higher level of lumber prices (see “Impact of the Lumber Market on Our Operating Results”) caused a decline in margin of 100 basis points as our gross margins dropped to 17.1% from 17.4% last year. We experienced a 70 basis point improvement in our profitability due to the impact of favorable changes in product mix and effectively passing along increases in commodity lumber costs to our customers.
Selling, general and administrative (“SG&A”) expenses decreased by approximately $.4 million, or 1.7%, in the third quarter of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately $0.9 million to our costs. Accrued bonus expense, which varies with our pre-bonus operating profit and return on investment, decreased approximately $.9 million, and totaled $6.1 million for the quarter. The remaining decrease was due to a variety of factors.
Earnings from operations for the Industrial reportable segment increased in the third quarter of 2020 compared to 2019 by $1.3 million, or 6.1%, due to the factors discussed above.
Net sales in the first nine months of 2020 decreased 9% compared to the same period of 2019, due to a 10% decrease in unit sales, reflective of the impact of the pandemic on our Industrial business.
Gross profits in the first nine months of 2020 declined 5.7% to $127.6 million compared to the same period of 2019, while gross margins increased to 16.7% compared to 16.1% for the same period of 2019. We estimate the higher level of lumber prices caused a decline in margin of 20 basis points. The improvement in our gross margin was primarily due to the impact of effective inventory positioning resulting in lower lumber costs early in the year, favorable changes in product mix, and effectively passing along increases in commodity lumber costs to our customers.
Selling, general and administrative (“SG&A”) expenses decreased by approximately $1.4 million, or 1.9%, in the first nine months of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately $2.0 million to total SG&A expenses. Accrued bonus expense decreased approximately $4.2 million compared to the same period of 2019 and totaled approximately $12.5 for the first nine months of 2020. This reduction was partially offset by increases in salaries and wages, sales compensation, and amortization expense.
Earnings from operations for the Industrial reportable segment decreased in the first nine months of 2020 compared to 2019 by $6.4 million, or 10.6%, due to the factors mentioned above.
Construction Segment
Net sales in the third quarter of 2020 were flat compared to the same period of 2019, due to a 9% increase in selling prices attributable to the Lumber Market, offset by a 9% decrease in unit sales due to the impact of the pandemic. Unit changes within this segment consisted of declines of 2% in concrete forming, 8% in site-built construction, and 37% in commercial construction, offset by a 7% increase in factory-built housing.
Gross profits decreased by $10.2 million, or 14.2% to $62.1 million for the third quarter of 2020 compared to the same period of 2019. Gross margin decreased to 13.9% from 16.2% for the same period last year. We estimate the higher level of the lumber prices (see “Impact of the Lumber Market on Our Operating Results”) caused a 140 basis point decrease in our gross margin. The decrease in our gross profit was comprised of the following factors:
Selling, general and administrative (“SG&A”) expenses decreased by approximately $4.5 million, or 8.9%, in the third quarter of 2020 compared to the same period of 2019, while we reported a 9% decrease in unit sales. Acquired operations since the third quarter of 2019 contributed approximately $1.7 million to total SG&A expenses for the quarter. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $2.2 million, and totaled $4.7 million for the quarter. Decreases in salaries and wages, sales compensation, and travel expenses also contributed to the overall decrease in SG&A.
Earnings from operations for the Construction reportable segment decreased in the third quarter of 2020 compared to 2019 by $4.9 million, or 22.9%, due to the factors mentioned above.
Net sales in the first nine months of 2020 decreased 3% compared to the same period of 2019, due to an 8% decrease in unit sales due to the impact of the pandemic, offset by a 5% increase in selling prices primarily due to the Lumber Market. Unit changes within this segment consisted of declines of 1% in factory-built housing, 8% in site-built construction, and 20% in commercial construction. These declines were offset by unit increases of 2% in concrete forming.
Gross profits in the first nine months of 2020 declined 8.1% to $184.5 million compared to the same period of 2019. Gross margins decreased to 15.5% from 16.4% for the same period of 2019. We estimate the higher level of lumber prices caused an 80 basis point decrease in our gross margin. The decrease in our gross profits was primarily due to the same factors discussed above.
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Selling, general and administrative (“SG&A”) expenses decreased by approximately $9.4 million, or 6.5%, in the first nine months of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately $2.7 million to total SG&A expenses. Accrued bonus expense decreased approximately $4.1 million compared to the same period of 2019 and totaled approximately $11.4 million for the first nine months of 2020. Decreases in salaries and wages, travel and medical expenses also contributed to the overall decrease in SG&A.
Earnings from operations for the Construction reportable segment decreased in the first nine months of 2020 compared to 2019 by $5.7 million, or 10.2%, due to the factors mentioned above.
All Other Segment
Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant.
The corporate segment consists of over (under) allocated costs that are not significant.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
Cash provided by operating activities
Cash used in investing activities
Cash used in financing activities
Net change in all cash and cash equivalents
In general, we funded our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We have not issued equity to finance growth except in the case of a large acquisition. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.
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Seasonality has a significant impact on our working capital due to our primary selling season which occurs during the period from March to September. Consequently, our working capital increases during our first and second quarters which typically results in negative or modest cash flows from operations during those periods. Conversely, we typically experience a substantial decrease in working capital once we move beyond our peak selling season which typically results in significant cash flows from operations in our third and fourth quarters. As explained in more detail below, the unusually large increase in lumber prices this year, as well as the significant increase in sales attributable to our Retail segment, resulted in an increase in net working capital this year.
Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle improved to 43 days from 52 days during the third quarter and to 49 days from 56 days during the first nine months of 2020 compared to the prior periods.
Days of sales outstanding
31
33
32
Days supply of inventory
40
44
Days payables outstanding
(19)
(21)
(20)
Days in cash cycle
52
49
56
The decrease in our days supply of inventory for the first nine months of 2020 was primarily due to opportunistic buying when lumber prices were low during the fourth quarter of 2018 and early 2019 to improve gross profits and higher levels of “safety stock” we carried to address transportation challenges and ensure timely deliveries to our customers. We did not engage in this level of opportunistic buying in late 2019 and early 2020. Strong demand in our retail segment and shortages of supply contributed to higher inventory turns in the third quarter of 2020.
In the first nine months of 2020, our cash provided by operating activities was $185.1 million, which was comprised of net earnings of $189.1 million and $55.6 million of non-cash expenses, offset by a $59.7 million seasonal increase in working capital since the end of December 2019. Our operating cash flow this year declined by $13.0 million compared to the same period of last year primarily due to an increase in our net working capital since the end of 2019. Conversely, our net working capital at the end of the third quarter of 2019 decreased compared to the end of 2018. Our net working capital at the end of the third quarter of 2020 increased due to unusually high lumber prices as well the strong sales growth of our retail segment, which resulted in an increase in our accounts receivable.
Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first nine months of 2020 and totaled $34.8 million and $67.0 million, respectively. Outstanding purchase commitments on existing capital projects totaled approximately $21.3 million on September 26, 2020. Notable areas of capital spending include projects to expand capacity and enhance the productivity of our Deckorators product line, several projects to expand manufacturing capacity to serve industrial customers and achieve efficiencies through automation, improvements to a number of facilities, and an increase our transportation capacity (tractors, trailers) in order to meet higher volumes and replace old rolling stock. We intend to fund capital expenditures and purchase commitments through our operating cash flows or cash surplus for the balance of the year. The sales and purchases of investments totaling $22.3 million and $24.3 million, respectively, are due to investment activity in our captive insurance subsidiary.
Cash flows from financing activities primarily consisted of issuances of long-term debt of $150 million, net repayments of debt of approximately $3.1 million, the payment of quarterly dividends totaling $23.0 million, or $0.125 per share, and repurchases of approximately 756,000 shares of our common stock for $29.2 million resulting in an average price paid of $38.62.
On September 26, 2020, we had $4.4 million outstanding on our $375 million revolving credit facility, and we had approximately $360.6 million in remaining availability after considering $9.8 million in outstanding letters of credit. There is no availability remaining under an existing “shelf agreement” for long term debt, after a $150 million note was issued in August 2020. Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements on September 26, 2020.
At the end of the third quarter of 2020 we have approximately $700 million in total liquidity, consisting of our cash surplus and remaining availability under our revolving credit facility. We plan to use a portion of this amount to fund our future growth.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, “Commitments, Contingencies, and Guarantees.”
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. There have been no material changes in our policies or estimates since December 28, 2019.
Under the recent re-organization of our reportable segments now centered on our primary markets (retail, industrial, and construction), there were no indicators of impairment for any of the new reporting units. We continue to monitor the results of our commercial business unit (a reporting unit under the Construction segment), which primarily includes idX, as it has performed below expectations through 2019. While idX has faced challenging end market conditions resulting in this under-performance, we believe our growth and operating improvement strategies and related long-term projections for idX are still reasonable and attainable. Consequently, while the risk of impairment exists, management does not believe an impairment is currently required. Should the Company’s future analysis indicate a significant change in any of the triggering events for this reporting unit, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company’s future goodwill impairment testing will not result in a charge to earnings. The total value of goodwill and identifiable intangibles associated with the commercial reporting unit is $12.3 million and $4.5 million, respectively, at the end of September 2020.
FORWARD OUTLOOK
Most recently, the Company’s long-term goals have been to:
While we believe the effective execution of our strategies will allow us to continue to achieve these long-term goals in the future, our ability to achieve them over the next year may be adversely impacted by a variety of external factors such as continuing developments in the COVID-19 pandemic, trends in commodity lumber prices, the availability and cost of labor and materials, and general election results in the U.S. The following variables should be considered when evaluating our performance over the next year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.
We are subject to fluctuations in the price of lumber. We experience significant fluctuations in the cost of commodity lumber products from primary producers (the “Lumber Market”). A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices. While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability. We anticipate that these fluctuations will continue in the future. (See “Impact of the Lumber Market on Our Operating Results.”)
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. Dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We entered into forward foreign exchange rate contracts in 2018, which have since expired, and may enter into further forward contracts in the future associated with mitigating the foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
We may be adversely affected by the impact of COVID-19 (Coronavirus) pandemic. Disease outbreaks, such as the COVID-19 pandemic, could have an adverse impact on the Company's operations and financial results. These outbreaks may adversely impact our business, consolidated results of operations and financial condition, such as the current COVID-19 pandemic. COVID-19, as well as measures taken by governmental authorities and businesses to limit the spread of this virus, may result in an adverse change in customer demand and our sales, interfere with the ability of our employees and suppliers to perform and function in a manner consistent with targeted objectives and otherwise adversely impact the efficiency of our operations. This has caused, and may continue to cause, us to materially curtail certain segments, and could have a material adverse effect on the results of our operations and cash flow.
Adverse economic conditions and our customers’ ability to operate may impact their ability to pay. This may result in higher write-offs of receivables than we normally experience. We continue to monitor our customers’ business activities, payment patterns, and credit profiles carefully and make changes in our terms when necessary in response to this risk. As a result, our accounts receivable aging at the end of September was approximately 95% current. Most recently our bad debt expense as a percentage of sales was 0.09%, 0.03%, and 0.03%, in 2019, 2018, and 2017, respectively. During the most difficult collection period of the Great Recession, from 2008 through 2010, our bad debt expense as a percentage of sales averaged 0.25%.
There could be limited future availability of materials from our suppliers. Many of our suppliers reduced their manufacturing capacity in response to the anticipated reduction in demand from the pandemic, which in turn impacted our ability to fulfill all of our customers’ orders. Our suppliers are currently taking actions to increase capacity to meet expectations of future demand.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Fiscal Month
(a)
(b)
(c)
(d)
June 28 – August 1, 2020
1,103,957
August 2 – 29, 2020
August 30 – September 26, 2020
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 1.1 million.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
Certifications.
Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
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Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language).
(INS)
iXBRL Instance Document.
(SCH)
iXBRL Schema Document.
(CAL)
iXBRL Taxonomy Extension Calculation Linkbase Document.
(LAB)
iXBRL Taxonomy Extension Label Linkbase Document.
(PRE)
iXBRL Taxonomy Extension Presentation Linkbase Document.
(DEF)
iXBRL Taxonomy Extension Definition Linkbase Document.
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Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 28, 2020
By:
/s/ Matthew J. Missad
Matthew J. Missad,
Chief Executive Officer and Principal Executive Officer
/s/ Michael R. Cole
Michael R. Cole,
Chief Financial Officer,
Principal Financial Officer and
Principal Accounting Officer
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