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 24, 2022
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 24, 2022
Common stock, $1 par value
61,637,514
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
3
Condensed Consolidated Balance Sheets at September 24, 2022, December 25, 2021 and September 25, 2021
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended September 24, 2022 and September 25, 2021
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 24, 2022 and September 25, 2021
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 24, 2022 and September 25, 2021
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
36
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors - NONE
37
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
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
September 24,
December 25,
September 25,
2022
2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
449,135
286,662
138,637
Restricted cash
729
4,561
17,592
Investments
33,113
36,495
33,723
Accounts receivable, net
877,776
737,805
783,959
Inventories:
Raw materials
425,765
416,043
368,185
Finished goods
581,118
547,277
532,480
Total inventories
1,006,883
963,320
900,665
Refundable income taxes
28,771
4,806
14,134
Other current assets
39,956
39,827
34,040
TOTAL CURRENT ASSETS
2,436,363
2,073,476
1,922,750
DEFERRED INCOME TAXES
3,139
3,462
2,330
RESTRICTED INVESTMENTS
19,552
19,310
18,925
RIGHT OF USE ASSETS
101,001
96,703
94,481
OTHER ASSETS
94,090
31,876
29,168
GOODWILL
319,183
315,038
292,318
INDEFINITE-LIVED INTANGIBLE ASSETS
7,332
7,369
7,380
OTHER INTANGIBLE ASSETS, NET
113,880
109,017
93,984
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
1,323,896
1,212,113
1,156,070
Less accumulated depreciation and amortization
(679,889)
(623,093)
(603,159)
PROPERTY, PLANT AND EQUIPMENT, NET
644,007
589,020
552,911
TOTAL ASSETS
3,738,547
3,245,271
3,014,247
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
4,174
17,030
10,812
Accounts payable
323,404
319,125
292,933
Accrued liabilities:
Compensation and benefits
298,384
289,196
249,242
Other
111,596
84,853
90,348
Current portion of lease liability
23,767
23,155
22,242
Current portion of long-term debt
41,536
42,683
93
TOTAL CURRENT LIABILITIES
802,861
776,042
665,670
LONG-TERM DEBT
275,417
277,567
310,119
LEASE LIABILITY
80,903
76,632
75,548
62,436
60,964
39,198
OTHER LIABILITIES
40,628
37,497
46,238
TOTAL LIABILITIES
1,262,245
1,228,702
1,136,773
TEMPORARY EQUITY:
Redeemable noncontrolling interest
7,563
—
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 160,000,000; issued and outstanding, 61,637,514, 61,901,851 and 61,887,770
61,638
61,902
61,888
Additional paid-in capital
284,025
243,995
239,563
Retained earnings
2,102,764
1,678,121
1,552,593
Accumulated other comprehensive loss
(11,348)
(5,405)
(3,278)
Total controlling interest shareholders’ equity
2,437,079
1,978,613
1,850,766
Noncontrolling interest
31,660
37,956
26,708
TOTAL SHAREHOLDERS’ EQUITY
2,468,739
2,016,569
1,877,474
TOTAL LIABILITIES, TEMPORARY EQUITY 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
2,322,855
2,093,784
7,713,042
6,619,329
COST OF GOODS SOLD
1,872,679
1,766,229
6,281,051
5,583,926
GROSS PROFIT
450,176
327,555
1,431,991
1,035,403
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
214,327
169,467
649,015
504,104
OTHER (GAINS) LOSS, NET
(1,195)
(10,037)
1,341
(11,248)
EARNINGS FROM OPERATIONS
237,044
168,125
781,635
542,547
INTEREST EXPENSE
3,516
3,433
10,213
10,483
INTEREST AND INVESTMENT LOSS (INCOME)
1,658
371
6,905
(3,614)
EQUITY IN EARNINGS OF INVESTEE
1,208
946
2,740
2,411
6,382
4,750
19,858
9,280
EARNINGS BEFORE INCOME TAXES
230,662
163,375
761,777
533,267
INCOME TAXES
58,561
37,628
188,692
127,909
NET EARNINGS
172,101
125,747
573,085
405,358
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,860)
(4,706)
(13,023)
(7,624)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
167,241
121,041
560,062
397,734
EARNINGS PER SHARE – BASIC
2.68
1.94
8.93
6.40
EARNINGS PER SHARE – DILUTED
2.66
8.89
6.38
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE LOSS
(4,477)
(2,024)
(5,676)
(1,500)
COMPREHENSIVE INCOME
167,624
123,723
567,409
403,858
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,273)
(4,496)
(13,290)
(7,608)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
163,351
119,227
554,119
396,250
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
Temporary
Stock
Capital
Earnings
Interest
Total
Equity
Balance on December 26, 2021
Net earnings
189,703
3,428
193,131
Foreign currency translation adjustment
2,930
949
3,879
Unrealized loss on debt securities
(695)
Distributions to noncontrolling interest
(2,053)
Cash dividends - $0.20 per share - quarterly
(12,541)
Issuance of 9,734 shares under employee stock purchase plan
10
653
663
Issuance of 787,045 shares under stock grant programs
787
8,959
9,746
Issuance of 79,973 shares under deferred compensation plans
80
(80)
Repurchase of 44,442 shares
(45)
(3,499)
(3,544)
Expense associated with share-based compensation arrangements
6,883
Accrued expense under deferred compensation plans
6,134
Balance on March 26, 2022
62,734
266,544
1,851,784
(3,170)
40,280
2,218,172
203,118
4,735
207,853
(3,660)
(95)
(3,755)
(628)
Cash dividends - $0.25 per share - quarterly
(15,474)
Issuance of 13,875 shares under employee stock purchase plan
14
781
795
Issuance of 28,154 shares under stock grant programs
28
1,092
1,120
Issuance of 11,605 shares under deferred compensation plans
12
(12)
Repurchase of 1,165,268 shares
(1,165)
(88,506)
(89,671)
5,556
1,100
Balance on June 25, 2022
61,623
275,061
1,950,922
(7,458)
44,920
2,325,068
4,380
171,621
480
(3,330)
(29)
(3,359)
(558)
(560)
(9,970)
(7,641)
7,641
(15,405)
Issuance of 10,678 shares under employee stock purchase plans
11
641
652
Net forfeitures of 6,396 shares under stock grant programs
(6)
(159)
6
Issuance of 10,705 shares under deferred compensation plans
(10)
7,407
1,085
Balance on September 24, 2022
Balance on December 27, 2020
61,206
218,224
1,182,680
(1,794)
22,836
1,483,152
103,311
940
104,251
(374)
(526)
(900)
(1,296)
(2,914)
Cash dividends - $0.15 per share - quarterly
(9,274)
Issuance of 5,816 shares under employee stock purchase plan
357
363
Net issuance of 536,970 shares under stock grant programs
537
3,888
4,430
Issuance of 89,690 shares under deferred compensation plans
89
(89)
2,936
5,795
Balance on March 27, 2021
61,838
231,111
1,276,722
(3,464)
20,336
1,586,543
173,382
1,978
175,360
1,759
720
2,479
Unrealized gain on debt securities
241
(9,276)
Issuance of 9,282 shares under employee stock purchase plan
9
564
573
Net forfeitures of 5,718 shares under stock grant programs
(224)
(225)
Issuance of 8,913 shares under deferred compensation plans
2,728
1,140
Balance on June 26, 2021
61,851
235,309
1,440,833
(1,464)
23,034
1,759,563
4,706
(1,897)
(210)
(2,107)
83
Additional purchase and adjustment of noncontrolling interest
(822)
(9,281)
Issuance of 10,008 shares under employee stock purchase plan
583
Net issuance of 17,165 shares under stock grant programs
17
(115)
(98)
Issuance of 9,864 shares under deferred compensation plans
2,657
1,149
Balance on September 25, 2021
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
68,881
61,741
Amortization of intangibles
13,448
9,369
Expense associated with share-based and grant compensation arrangements
19,979
8,444
Deferred income taxes (credit)
(269)
(594)
Unrealized loss (gain) on investments and other
8,453
(1,756)
Equity in loss of investee
Net loss (gain) on sale and disposition of assets
352
(10,482)
Changes in:
Accounts receivable
(137,607)
(141,088)
Inventories
(36,259)
(204,144)
Accounts payable and cash overdraft
(11,247)
53,437
Accrued liabilities and other
31,490
99,067
NET CASH FROM OPERATING ACTIVITIES
533,046
281,763
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(113,725)
(110,092)
Proceeds from sale of property, plant and equipment
2,303
26,597
Acquisitions, net of cash received and purchase of equity method investment
(105,212)
(433,275)
Purchases of investments
(16,925)
(17,866)
Proceeds from sale of investments
10,036
9,857
911
(3,478)
NET CASH USED IN INVESTING ACTIVITIES
(222,612)
(528,257)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
570,700
886,966
Repayments under revolving credit facilities
(571,075)
(888,335)
Repayments of debt
(1,957)
Contingent consideration payments and other
(2,564)
(2,664)
Proceeds from issuance of common stock
2,110
1,519
Dividends paid to shareholders
(43,420)
(27,831)
(12,023)
Repurchase of common stock
(93,215)
(334)
NET CASH USED IN FINANCING ACTIVITIES
(151,654)
(33,593)
Effect of exchange rate changes on cash
(139)
(292)
NET CHANGE IN CASH AND CASH EQUIVALENTS
158,641
(280,379)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
291,223
436,608
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
449,864
156,229
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
436,507
Restricted cash, beginning of period
101
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
9,997
10,360
Income taxes paid
213,117
136,893
NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable
3,211
2,366
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
8,424
6,778
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 25, 2021.
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 25, 2021 balances in the accompanying unaudited condensed consolidated balance sheets.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires that an acquirer recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
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 (in thousands):
September 24, 2022
September 25, 2021
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
19
4,825
4,844
2,631
2,650
Fixed income funds
2,584
16,321
18,905
962
17,021
17,983
Treasury securities
343
310
Equity securities
15,674
18,543
Alternative investments
4,136
3,536
Mutual funds:
Domestic stock funds
11,859
9,968
International stock funds
1,279
1,675
Target funds
23
Bond funds
132
146
Alternative funds
527
497
Total mutual funds
13,805
12,309
32,425
21,146
57,707
32,143
19,652
55,331
Assets at fair value
From the assets measured at fair value as of September 24, 2022, listed in the table above, $33.2 million of mutual funds, equity securities, and alternative investments are held in Investments, $4.7 million of money market funds are held in Cash and Cash Equivalents, $0.5 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $19.2 million of fixed income funds and $0.1 million of money market funds are held in Restricted Investments.
We maintain money market, mutual funds, bonds, and/or equity securities 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 $52.4 million as of September 24, 2022, which has been included in the aforementioned table of total investments. This portfolio consists of domestic and international equity securities, 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
Gain
Fixed Income
21,199
(2,294)
17,293
690
Treasury Securities
15,392
282
14,392
4,151
Mutual Funds
13,430
(128)
13,302
9,210
2,435
11,645
Alternative Investments
3,079
1,057
3,370
166
53,443
(1,083)
52,360
44,575
7,442
52,017
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 a private real estate income trust which is valued as a Level 3 asset. The net unrealized loss of the portfolio was $1.1 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of September 24, 2022 and September 25, 2021.
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 third party. Installation revenue is recognized upon completion. If we use a third party for installation, the party will act as an agent to us until completion of the installation. Installation revenue represents an immaterial share of our total net sales.
We utilize 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 relative 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 relative 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 net sales disaggregated by revenue source (in thousands):
% Change
Point in Time Revenue
2,270,438
2,063,647
10.0%
7,571,128
6,530,204
15.9%
Over Time Revenue
52,417
30,137
73.9%
141,914
89,125
59.2%
Total Net Sales
10.9%
16.5%
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
8,477
5,602
3,776
Billings in Excess of Cost and Earnings
10,743
10,744
10,373
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
(6,857)
(3,952)
(21,970)
(12,800)
Net earnings for calculating EPS
160,384
117,089
538,092
384,934
Denominator:
Weighted average shares outstanding
62,445
62,266
62,743
62,162
Adjustment for non-vested restricted common stock
(2,560)
(2,033)
(2,461)
(2,001)
Shares for calculating basic EPS
59,885
60,233
60,282
60,161
Effect of dilutive restricted common stock
307
168
255
137
Shares for calculating diluted EPS
60,192
60,401
60,537
60,298
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.
In addition, on September 24, 2022, 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 24, 2022, we had outstanding purchase commitments on commenced capital projects of approximately $65.4 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. 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 24, 2022, we had approximately $22.7 million in outstanding payment and performance bonds for open projects. We had approximately $30.6 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On September 24, 2022, we had outstanding letters of credit totaling $59.9 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 24, 2022, we have irrevocable letters of credit outstanding totaling approximately $52.8 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 $7.1 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 2022 which would require us to recognize a liability on our balance sheet.
F. BUSINESS COMBINATIONS AND EQUITY METHOD INVESTMENTS
We completed the following acquisitions in fiscal 2022 and since the end of September 2021, which were accounted for using the purchase or equity method. Dollars below are in thousands unless otherwise noted:
Net
Company
Acquisition
Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Segment
June 27, 2022
$65,858 cash paid for equity method investment
32,048
33,810
Industrial
Dempsey Wood Products, Inc. (Dempsey)
Located in Orangeburg, South Carolina and founded in 1988, Dempsey is a sawmill which produces products such as kiln dried finished lumber, industrial lumber, green cut stock lumber, pine chips and shavings, landscaping mulch, and sawdust. The Company had sales of approximately $69 million in 2021.
May 9, 2022
$15,398cash paid for 100% asset purchase
4,821
10,577
Retail
Cedar Poly, LLC
Located in Tipton, Iowa, Cedar Poly is a full-service recycler of high-density and low-density polyethylene (HDPE and LDPE) flakes and pellets used in various products, including composite decking. The company also recycles corrugate and operates its own transportation fleet. Cedar Poly had 2021 sales of approximately $17.3 million and will operate in UFP’s Deckorators business unit.
December 27, 2021
$24,057cash paid for 100% stock purchase, net of acquired cash
17,484
6,573
Ultra Aluminum Manufacturing, Inc. (Ultra)
Located in Howell, Michigan and founded in 1996, Ultra is a leading manufacturer of aluminum fencing, gates and railing. The company designs and produces an extensive selection of ornamental aluminum fence and railing products for contractors, landscapers, fence dealers and wholesalers. The Company had sales of approximately $45 million in 2021.
December 20, 2021
$20,754cash paid for 100% stock purchase
11,417
9,337
Advantage Labels & Packaging, Inc. (Advantage)
Based in Grand Rapids, Michigan, Advantage provides blank and customized labels, printers, label applicators and other packaging supplies. Key industries served by the company include beer and beverage; body armor; food production and processing; greenhouse and nursery; hobby and craft; manufacturing; and automotive. The company had trailing 12-month sales through November 2021 of approximately $19.8 million.
November 22, 2021
$10,831cash paid for 70% stock purchase and noncontrolling interest, net of acquired cash
9,562
1,269
Ficus Pax Private Limited (Ficus)
Headquartered in Bangalore, India, Ficus manufactures mixed-material cases and crates, nail-less plywood boxes, wooden pallets and other packaging products through 10 facilities located in major industrial markets throughout southern India. Ficus also owns a majority stake in Wadpack, a manufacturer of corrugated fiber board containers, corrugated pallets and display solutions. The Company had trailing 12-month sales through August 2021 of approximately $39 million USD.
13
November 1, 2021
$5,984cash paid for 100% asset purchase and estimated contingent consideration
5,681
303
Boxpack Packaging (Boxpack)
Based near Melbourne, Australia, Boxpack specializes in flexographic and lithographic cardboard packaging, using the latest CAD design and finishing techniques. Boxpack serves multiple industries, including food and beverage, confectionary, pharmaceutical, industrial and agricultural. The Company had trailing 12-month sales through June 30, 2021, of $6.2 million USD ($8.2 million AUD).
September 27, 2021
$6,443cash paid for 100% asset purchase and estimated contingent consideration
4,039
2,404
Construction
Shelter Products, Inc. (Shelter)
Based in Haleyville, Alabama, Shelter operates its distribution and logistics business from an 87,800 sq.-ft. warehouse that specializes in manufactured housing industry customers. Shelter’s facility is adjacent to a UFP manufacturing facility that supplies trusses to manufactured housing builders, and the proximity will enable additional operational synergies. The Company had sales of approximately $11.4 million in 2020.
The intangible assets for the above investments have not been finalized and allocated to their respective identifiable asset and goodwill accounts. In aggregate, investments completed since the end of September 2021 and not consolidated with other operations contributed approximately $93.3 million in net sales and $6.1 million in operating profits during the first nine months of 2022.
As a result of the investment in Dempsey on June 27, 2022, we own 50% of the issued equity of the Company, and the remaining 50% of the issued equity is owned by the previous owners (“Sellers”). The investment in Dempsey is an unconsolidated variable interest entity and we have accounted for it using the equity method of accounting because we do not have a controlling financial interest in the entity. Per the contracts, the Sellers have a put right to sell their equity interest to us for $50 million and we have a call right to purchase the Seller’s equity interest for $70 million, which are both first exercisable in June 2025 and expire in June 2030. As of September 24, 2022, the carrying value of our investment in Dempsey is $67.0 million and is recorded in Other Assets. Our maximum exposure to loss consists of our investment amount and any contingent loss that may occur in the future as a result of a change in the fair value of Dempsey relative to the strike price of the put option.
G. SEGMENT REPORTING
We operate manufacturing, treating and distribution facilities internationally, but primarily in the United States. Our business segments consist of UFP Retail Solutions, UFP Industrial and UFP Construction and align with the end markets we serve. This segment structure allows for a specialized and consistent sales approach among Company operations, efficient use of resources and capital, and quicker introduction of new products and services. We manage the operations of our 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. In the case of locations which serve multiple segments, results are allocated and accounted for by segment.
The exception to this market-centered reporting and management structure is our International segment, which comprises our Mexico, Canada, Europe, India, and Australia operations and sales and buying offices in other parts of the world and our Ardellis segment, which represents our wholly owned fully licensed captive insurance company based in Bermuda. Our International and Ardellis segments do not meet the quantitative thresholds in order to be separately reported and accordingly, the International and Ardellis segments have been aggregated in the “All Other” segment for reporting purposes.
“Corporate” includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consist of net sales to external customers initiated by UFP Purchasing and UFP Transportation and over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns, leases and operates transportation equipment, are also included in the Corporate column. Inter-company lease and service charges are assessed to our operating segments for the use of these assets and services at fair market value rates. Total assets in 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., UFP Transportation, Inc., UFP Purchasing, Inc., and UFP RMS, LLC. The tables below are presented in thousands:
Three Months Ended September 24, 2022
All Other
Corporate
Net sales to outside customers
845,304
584,808
777,126
112,203
3,414
Intersegment net sales
87,362
19,778
31,352
102,927
(241,419)
Earnings from operations
28,932
77,298
110,384
13,705
6,725
Three Months Ended September 25, 2021
696,201
573,234
722,872
98,689
2,788
50,546
23,148
27,574
122,470
(223,738)
(26,153)
70,408
84,205
20,283
19,382
Nine Months Ended September 24, 2022
2,959,976
1,872,510
2,538,973
332,186
9,397
220,922
63,438
88,570
338,592
(711,522)
124,856
253,899
322,034
51,268
29,578
Nine Months Ended September 25, 2021
2,714,440
1,633,289
2,021,106
243,736
6,758
163,279
66,039
62,069
345,920
(637,307)
89,443
190,344
184,330
44,565
33,865
The following table presents goodwill by segment as of September 24, 2022, and December 25, 2021 (in thousands):
Balance as of December 25, 2021
73,376
128,541
89,000
24,121
2022 Acquisitions
11,958
2022 Purchase Accounting Adjustments
293
(5,830)
(1,074)
659
(5,952)
Foreign Exchange, Net
(215)
(1,646)
(1,861)
Balance as of September 24, 2022
85,627
122,711
87,711
23,134
15
The following table presents total assets by segment as of September 24, 2022, and December 25, 2021 (in thousands).
Total Assets by Segment
Segment Classification
975,733
844,189
15.6
%
855,240
741,672
15.3
834,917
736,157
13.4
324,113
343,363
(5.6)
748,544
579,890
29.1
Total Assets
15.2
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 2022 compared to 23.0% in the third quarter of 2021 and was 24.8% in the first nine months of 2022 compared to 24.0% for the same period in 2021. The increase was primarily due to one-time tax credits recorded as discrete items in 2021 that are not available in 2022.
I. COMMON STOCK
Below is a summary of common stock issuances for the first nine months of 2022 and 2021 (in thousands, except average share price):
Share Issuance Activity
Common Stock
Average Share Price
Shares issued under the employee stock purchase plan
34
71.65
Shares issued under the employee stock gift program
78.60
Shares issued under the director retainer stock program
83.24
Shares issued under the bonus plan
755
82.73
Shares issued under the executive stock match plan
62
82.87
Forfeitures
(13)
Total shares issued under stock grant programs
809
Shares issued under the deferred compensation plans
102
82.36
During the first nine months of 2022, we repurchased approximately 1,210,000 shares of our common stock at an average share price of $77.06.
16
25
71.18
76.80
69.80
487
57.06
Shares issued under the executive stock grants plan
77
60.24
(21)
549
57.64
108
62.48
During the first nine months of 2021, we did not repurchase any of our shares of common stock.
J. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. The cost of inventories includes raw materials, direct labor, and manufacturing overhead. Cost is determined on a weighted average FIFO basis. Raw materials consist primarily of unfinished wood products and other materials expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale.
We write down the value of inventory, the impact of which is reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future demand and market conditions and analysis of historical experience. There was no lower of cost or net realizable value adjustment to inventory as of September 24, 2022 and the lower of cost or net realizable value adjustment to inventory as September 25, 2021 was $1.3 million.
K. SUBSEQUENT EVENTS
Subsequent to our reporting date, we repurchased approximately 32,000 shares for $2.2 million, at an average share price of $69.31.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UFP Industries, 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. We are headquartered in Grand Rapids, Michigan. For more information about UFP Industries, Inc., or our 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 2022.
OVERVIEW
Our results for the third quarter of 2022 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
1,112
890
February
1,225
954
March
1,321
1,035
April
1,051
1,080
May
948
1,428
June
670
1,344
July
621
August
625
443
September
556
412
Third quarter average
601
515
Year-to-date average
903
920
Third quarter percentage change
16.7
Year-to-date percentage change
(1.8)
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.
Southern Yellow Pine
1,010
858
1,115
1,198
938
902
922
732
1,150
574
1,052
547
589
448
533
438
483
800
808
15.1
(1.0)
The sequential decrease in overall lumber prices for the third quarter of the year was primarily due to demand in the retail and housing markets beginning to return to more normalized levels and improvements in supply chain constraints. A change in lumber prices impacts 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 51.9% and 58.0% of our sales in the first nine months of 2022 and 2021, respectively. The decrease from the prior year ratio reflects an improvement in our sales mix of value-added products as well as our value-based selling practices.
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.
20
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
350
450
Adder
= Sell price
500
Gross margin
12.5
10.0
As is apparent from the preceding example, the level of lumber prices does not impact our overall profits but does impact our margins. Gross margins and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.
21
BUSINESS COMBINATIONS
We completed three business acquisitions during the first nine months of fiscal 2022 and nine during all of fiscal 2021. The annual historical sales attributable to acquisitions completed in the first nine months of fiscal 2022 was approximately $131 million, while the annual historical sales attributable to acquisitions completed during the last quarter of 2021 was approximately $76 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2022 and 2021 are not presented.
See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our Unaudited Condensed Consolidated Statements of Earnings as a percentage of net sales.
Net sales
100.0
Cost of goods sold
80.6
84.4
81.4
Gross profit
19.4
18.6
Selling, general, and administrative expenses
9.2
8.1
8.4
7.6
Other (gains) losses, net
(0.1)
(0.5)
(0.2)
10.2
8.0
10.1
8.2
Other expense, net
0.3
0.2
0.1
Earnings before income taxes
9.9
7.8
Income taxes
2.5
1.8
2.4
1.9
7.4
6.0
6.1
Less net earnings attributable to noncontrolling interest
7.2
5.8
7.3
Note: Actual percentages are calculated and may not sum to total due to rounding.
As a result of the impact of the level of lumber prices on the percentages displayed in the table above (see Impact of the Lumber Market on Our Operating Results), we believe it is useful to compare our change in units sold with our change in gross profits, selling, general, and administrative expenses, and operating profits as presented in the following table. The percentages displayed below represent the percentage change from the prior year comparable period.
Percentage Change
Units sold
5.0
13.0
30.0
37.4
35.9
38.3
68.8
26.5
25.9
28.7
40.9
41.0
57.7
44.1
110.6
22
The following table presents, for the periods indicated, our selling, general, and administrative expenses (SG&A) 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 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 percentage of gross profit
47.6%
51.7%
45.3%
48.7%
Bonus expense, which is a component of SG&A, increased in the third quarter to $58 million compared to $44 million in the prior year. Modifications made to our bonus plan during 2022 are intended to reduce the payout rate when higher levels of pre-bonus earnings from operations are achieved. The adjustment to reduce bonus expense based on the new parameters was recorded in the second quarter and totaled $17 million. As a result of this change, our year to date bonus accrual rate has decreased to 19.0% of pre-bonus earnings from operations from a historical rate of approximately 21.0%. Bonus rates continue to be derived based on return on investment achieved. Bonus expense in the first nine months of 2022 totaled $183 million compared to $141 million in the prior year.
Operating Results by Segment:
Our business segments consist of UFP Retail Solutions, UFP Industrial and UFP Construction, and align with the end markets we serve. Among other things, this structure 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. We manage the operations of our 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 our International segment, which comprises our Mexico, Canada, Europe, Asia, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) are 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, leases, and operates transportation equipment, are also included in the Corporate column. Inter-company lease and services charges are assessed to our operating segments for the use of these assets and services at fair market value rates.
The following tables present our operating results, for the periods indicated, by segment (in thousands).
767,841
440,975
577,552
82,740
3,571
77,463
143,833
199,574
29,463
(157)
Selling, general, administrative expenses
48,435
66,521
89,455
16,752
(6,836)
96
(265)
(994)
(46)
685,369
446,822
568,809
63,082
2,147
10,832
126,412
154,063
35,607
36,899
55,723
70,663
15,996
(9,814)
86
281
(805)
(672)
(8,927)
2,674,996
1,417,006
1,950,671
230,100
8,278
284,980
455,504
588,302
102,086
1,119
159,490
200,987
266,430
49,733
(27,625)
634
618
(162)
(834)
2,480,804
1,292,102
1,644,069
160,853
6,098
233,636
341,187
377,037
82,883
660
144,375
150,739
193,144
40,021
(24,175)
(182)
104
(437)
(1,703)
(9,030)
24
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
90.8
75.4
74.3
73.7
24.6
25.7
26.3
5.7
11.4
11.5
14.9
(0.9)
3.4
13.2
14.2
12.2
98.4
77.9
78.7
63.9
1.6
22.1
21.3
36.1
5.3
9.7
9.8
16.2
(0.7)
(3.8)
12.3
11.6
20.6
90.4
75.7
76.8
69.3
9.6
24.3
23.2
30.7
5.4
10.7
10.5
15.0
4.2
13.6
12.7
15.4
91.4
79.1
81.3
66.0
8.6
20.9
18.7
34.0
16.4
3.3
11.7
9.1
18.3
We design, manufacture and market wood and wood-alternative products, primarily used to enhance outdoor living environments, for national home centers and other retailers, engineered wood components, structural lumber, and other products for factory-built and site-built residential and commercial construction, customized interior fixtures used in a variety of retail stores, commercial, and other structures, and structural wood packaging, components and packing materials for various industries. Our strategic long-term sales objectives include:
in Sales
in Selling Prices
in Units
Acquisition Unit Change
Organic Unit Change
Third quarter 2022 versus third quarter 2021
10.9
5.9
2.0
3.0
Year-to-date 2022 versus year-to-date 2021
16.5
The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales by our segments:
Value-Added
Commodity-Based
46.6
53.4
48.6
51.4
73.8
26.2
69.2
30.8
81.1
18.9
74.5
25.5
All Other and Corporate
76.7
23.3
70.7
29.3
Total Sales
66.3
33.7
64.1
26
44.2
55.8
43.3
56.7
70.6
29.4
66.6
33.4
75.9
24.1
70.5
29.5
74.9
25.1
71.6
28.4
62.2
37.8
58.2
41.8
Note: Certain prior year product reclassifications and the change in designation of certain products as "value-added" resulted in a change in prior year's sales.
Our overall unit sales of value-added products increased approximately 9% in the third quarter of 2022 compared to 2021, comprised of a 4% contribution from acquisitions and 5% organic growth. Our overall unit sales of value-added products increased approximately 7% in the first nine months of 2022 compared to the same period last year, comprised of a 3% contribution from acquisitions and 4% organic growth. Our organic unit sales of commodity-based products increased approximately 1% quarter-over-quarter and our overall unit sales of commodity-based products increased approximately 4% in the first nine months of 2022 compared to the same period last year, comprised of a 3% contribution from acquisitions and 1% organic growth.
The table below presents new product sales in thousands:
New Product Sales by Segment
Change
80,237
56,847
41.1
247,410
176,814
39.9
63,965
42,066
52.1
203,388
107,544
89.1
33,300
28,858
111,098
71,157
56.1
481
763
(37.0)
1,875
1,671
Total New Product Sales
177,983
128,534
38.5
563,771
357,186
57.8
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.
Retail Segment
Net sales in the third quarter of 2022 increased by 21% compared to the same period of 2021, primarily due to a 15% increase in selling prices, a 2% decrease due to the transfer of certain product sales to the Construction segment this year, an organic unit increase of 5%, and unit growth from acquisitions of 3%. We experienced organic unit growth in our Sunbelt (20%), UFP Edge (17%), Deckorators (8%), and ProWood (8%) business units. These increases were offset by organic unit decreases in our Outdoor Essentials (17%) and Handprint (13%) business units. Capacity expansion contributed to our unit increases in UFP Edge and our Deckorators mineral-based composite decking. Finally, sales to big box customers were up 30%, while sales to independent retailers increased 7%.
27
Gross profits increased by $66.6 million, or 615% to $77.5 million for the third quarter of 2022 compared to the same period last year. The increase in gross profit was attributable to the following:
SG&A increased by approximately $11.5 million, or 31.3%, in the third quarter of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added roughly $1.7 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $5.1 million from the third quarter of 2021 and totaled approximately $8.0 million for the quarter. The remaining increase was primarily due to increases in salaries and wages of $1.9 million, sales incentive compensation of $0.5 million, and travel related expenses of $0.5 million.
Earnings from operations for the Retail reportable segment in the third quarter of 2022 were $28.9 million compared to a loss from operations in 2021 of $26.2 million, as a result of the factors mentioned above.
Net sales in the first nine months of 2022 increased by 9% compared to the same period of 2021, due to a 7% increase in selling prices and acquisition unit growth of 5%, offset by a 2% decrease due to the transfer of certain sales to the Construction segment, and an organic unit decrease of 1%. We experienced organic unit growth in our UFP Edge (9%), ProWood (1%), and Sunbelt (1%) business units. This increase was offset by organic unit decreases in our Deckorators (5%),Outdoor Essentials (15%), and Handprint (18%) business units. Capacity expansion contributed to our unit increase in UFP Edge. Finally, sales to big box customers increased 11%, while sales to independent retailers increased 3%.
Gross profits increased by $51.3 million, or 22.0% to $285.0 million for the first nine months of 2022 compared to the same period last year. Our increase in gross profit was attributable to the following:
SG&A increased by approximately $15.1 million, or 10.5%, in the first nine months of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added $5.8 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $5.4 million and totaled approximately $32.5 million for the first nine months of 2022. Bonus expense decreased due to the plan modification disclosed above. The remaining increase in SG&A was primarily due to increases in salaries and wages of $3.8 million, advertising of $2.0 million, travel-related expenses of $1.9 million, bad debt expenses of $1.1 million and employee benefits of $1.1 million.
Earnings from operations for the Retail reportable segment increased in the first nine months of 2022 compared to 2021 by $35.4 million, or 39.6%, as a result of the factors mentioned above.
Industrial Segment
Net sales in the third quarter of 2022 increased 2% compared to the same period of 2021, due to a 1% increase in selling prices and acquisition unit growth of 3%, offset by a 2% decrease in organic unit sales. The components of our change in organic unit sales includes increases associated with $12 million in sales to new customers, $22 million of sales to new locations of existing customers, and $12 million of new product sales. These increases were offset by decreases in unit sales on other accounts.
Gross profits increased by $17.4 million, or 13.8%, for the third quarter of 2022 compared to the same period last year. Acquisitions contributed $3.7 million to the increase in gross profit. The remaining increase is a result of executing value-based selling initiatives and maintaining pricing discipline as we operate in an environment of elevated demand and capacity constraints, as well as favorable changes in our value-added sales mix. Excluding acquisitions, we estimate that value-added products contributed an $18.6 million increase in gross profit, while commodity-based products experienced a $4.9 million decline in gross profit. Value-added sales increased to 73.8% of total net sales in the third quarter of 2022 compared to 69.2% of total net sales in the third quarter of 2021. The increase in value-added sales and gross profits is due in part to new products which contributed $7.3 million to gross profits this year ($1.5 million from acquisitions).
SG&A increased by approximately $10.8 million, or 19.4%, in the third quarter of 2022 compared to the same period of 2021. Acquired operations since the third quarter of 2021 contributed approximately $2.2 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $1.2 million relative to the third quarter of 2021, and totaled $19.9 million for the quarter. Bonus expense was impacted by the plan modification disclosed above. The remaining increase was primarily due to increases in bad debt expense of $4.9 million and travel related expenses of $0.6 million.
Earnings from operations for the Industrial reportable segment increased in the third quarter of 2022 compared to 2021 by $6.9 million, or 9.8%, due to the factors discussed above.
Net sales in the first nine months of 2022 increased 15% compared to the same period of 2021, due to a 16% increase in selling prices and acquisition unit growth of 2%, offset by a 3% decrease in organic unit sales. The increase in our selling prices is a result of passing along higher lumber prices and other operating costs, executing value-based selling initiatives and maintaining pricing discipline as we operate in an environment of elevated demand and capacity constraints. The components of our change in organic unit sales includes increases associated with $44 million in sales to new customers, $64 million of sales to new locations of existing customers, and $80 million of new product sales ($16.7 million from acquisitions). These increases were offset by decreases in unit sales on other accounts.
Gross profits increased by $114.3 million, or 33.5%, for the first nine months of 2022 compared to the same period last year. Acquisitions contributed $6.8 million to the increase in gross profit. The remaining increase is a result of the pricing increases discussed above as well as favorable changes in our value-added sales mix. Excluding acquisitions, we estimate that value-added products and commodity-based products contributed $104.7 million and $2.8 million, respectively, to the increase in gross profit. Value-added sales increased to 70.6% of total net sales in the first nine months of 2022 compared to 66.6% of total net sales in the first nine months of 2021. The increase in value-added sales and gross profits is due in part to new products which contributed $33 million to gross profits this year ($4.6 million from acquisitions).
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SG&A increased by approximately $50.2 million, or 33.3%, in the first nine months of 2022 compared to the same period of 2021. Acquired operations since the first nine months of 2021 contributed approximately $4.5 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $12.9 million, and totaled $63.3 million for the nine months of 2022. Bonus expense was also impacted by the plan modification disclosed above. The remaining increase was primarily due to increases in bad debt expense of $12.9 million, sales incentive compensation of $6.2 million, travel related expenses of $1.6 million, medical benefits expense of $1.3 million, and salaries and wages of $1.0 million.
Earnings from operations for the Industrial reportable segment increased in the first nine months of 2022 compared to 2021 by $63.6 million, or 33.4%, due to the factors discussed above.
Construction Segment
Net sales in the third quarter of 2022 increased 8% compared to the same period of 2021, due to organic unit sales growth of 6% and a 2% increase due to the transfer of certain sales from the Retail segment. Organic unit changes within this segment consist of increases of 36% in commercial construction, 36% in concrete forming, 9% in factory-built housing, offset by a 7% decrease in site-built construction.
Gross profits increased by $45.5 million, or 29.5%, for the third quarter of 2022 compared to the same period of 2021. The increase in our gross profit was comprised of the following factors:
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SG&A increased by approximately $18.8 million, or 26.6%, in the third quarter of 2022 compared to the same period of 2021. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $8.0 million, and totaled $27.5 million for the quarter. Bonus expense was also impacted by previously discussed modifications in our plan. The remaining increase was primarily due to increases in professional fees of $2.6 million, sales incentive compensation of $2.2 million, bad debt expense of $1.3 million, salaries and wages of $1.1 million, and travel related expenses of $0.5 million.
Earnings from operations for the Construction reportable segment increased in the third quarter of 2022 compared to 2021 by $26.2 million, or 31.1%, due to the factors mentioned above.
Net sales in the first nine months of 2022 increased 25.6% compared to the same period of 2021, due to a 13% increase in selling prices, 3% due to the transfer of certain product sales from the Retail segment, and organic unit sales growth of 10%. Organic unit changes within this segment consisted of increases of 30% in concrete forming, 43% in commercial construction, and 14% in factory-built housing. The organic unit sales of our site-built business unit decreased by 3% due to capacity constraints.
Gross profits increased by $211.3 million, or 56.0%, for the first nine months of 2022 compared to the same period of 2021. The increase in our gross profit was comprised of the following factors:
SG&A increased by approximately $73.3 million, or 37.9%, in the first nine months of 2022 compared to the same period of 2021. Acquired operations since the first nine months of 2021 contributed approximately $1.2 million to the increase in SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $32.6 million, and totaled $78.8 million for the first nine months of 2022. Bonus expense was also impacted by previously discussed modifications in our plan. The remaining increase was primarily due to increases in sales incentive compensation of $18.0 million, bad debt expense of $4.0 million, salaries and wages of $3.0 million, professional fees of $2.2 million, travel related expenses of $1.9 million, and medical benefits of $1.2 million.
Earnings from operations for the Construction reportable segment increased in the first nine months of 2022 compared to 2021 by $137.7 million, or 74.7%, 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.
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The corporate segment consists of over (under) allocated costs that are not significant, and in the prior year it also consisted of gains on the sale of certain real estate.
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 from operating activities
Cash used in investing activities
Cash used in financing activities
Net change in all cash and cash equivalents
In general, we fund our growth through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We have not issued equity to finance growth except in the case of a large acquisition. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.
Seasonality has a significant impact on our working capital due to our primary selling season which occurs during the period from March to September. Consequently, our working capital increases during our first and second quarters which typically results in negative or modest cash flows from operations during those periods. Conversely, we 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.
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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 decreased to 55 days from 57 days during the third quarter of 2022 compared to the prior year period.
Days of sales outstanding
35
Days supply of inventory
40
43
39
38
Days payables outstanding
(20)
Days in cash cycle
55
57
53
52
The decrease in our cash cycle in the third quarter of 2022 compared to the same period of 2021 was primarily due to a three day decrease in our days supply of inventory partially offset by a one day decrease in our payables cycle. The decrease in our days supply of inventory in the third quarter was due to more typical seasonal demand trends in the current year which allowed us to improve our inventory turns.
Our cash flows from operations for the first nine months of 2022 increased to $533 million compared to $282 million of cash from operations during the first nine months of 2021. This improvement in operational cash flows is due to net earnings and non-cash expenses totaling $687 million, compared to $475 million last year, offset by a $154 million increase in net working capital since the end of last year, compared to a $193 million increase in the prior year. This year, customer demand, particularly in our retail segment, followed more typical seasonal trends which allowed us to improve our inventory turns.
Purchases of property, plant, and equipment and acquisitions (refer to Note F for Business Combinations) comprised most of our cash used in investing activities during the first nine months of 2022 and totaled $113.7 million and $105.2 million, respectively. Net purchases of investments totaled $6.9 million. Total proceeds from the sales of property, plant, and equipment were $2.3 million. Outstanding purchase commitments on existing capital projects totaled approximately $65.4 million on September 24, 2022. Capital spending primarily consists of several projects to expand capacity to manufacture new and value-added products, achieve efficiencies through automation, make improvements to a number of facilities, and increase our transportation capacity (tractors, trailers) in order to meet higher volumes and replace older rolling stock. We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. We currently plan to spend approximately $175 million on capital projects for the year subject to significant variability due to extended supplier lead times. Notable areas of capital spending include projects to increase the capacity and efficiency of our plants that produce our Deckorators mineral-based composite and wood-plastic composite decking and our UFP Edge siding, pattern and trim products, expand our capacity to produce machine-built pallets and engineered wood components, and take advantage of automation opportunities.
Cash flows from financing activities consisted of cash paid for repurchases of common stock of $93.2 million. We repurchased approximately 1.21 million shares of our common stock for $93.2 million for the year at an average share price of $77.06. The total number of remaining shares that may be repurchased under the program is approximately 1.4 million. Dividends paid during the first nine months of 2022 include first quarter dividends of $12.5 million ($0.20 per share) and second and third quarter dividends of $30.9 million ($0.25 per share). On October 19, 2022, the Board approved a quarterly dividend payment of $0.25 per share, payable on December 15, 2022, to shareholders of record on December 1, 2022. Net repayments of debt were approximately $2.3 million and distributions to noncontrolling interests were $12.0 million. We have debt maturities of $38.7 million due in December of this year which we intend to repay through operating cash flows and available cash balances.
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On September 24, 2022, we had $6.9 million outstanding on our $550 million revolving credit facility, and we had approximately $536.0 million in remaining availability after considering $7.1 million in outstanding letters of credit. 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 24, 2022.
At the end of the third quarter of 2022, we have approximately $1.5 billion in total liquidity, consisting of our net cash surplus and remaining availability under our revolving credit facility and a shelf agreement with certain lenders providing up to $500 million in borrowing capacity.
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 25, 2021.
FORWARD OUTLOOK
Most recently, our long-term goals have been to:
We believe the effective execution of our strategies will allow us to achieve these long-term goals in the future. However, current economic conditions indicate the U.S. economy is either in or headed towards a recession, which will impact our results and vary depending on its severity and duration. The following factors should be considered when evaluating our future results:
Capital Allocation:
We believe the strength of our cash flow generation and conservative capital structure will provide us with sufficient resources to grow our business and also return to shareholders. We plan to continue to pursue a balanced and return driven approach to capital allocation across dividends, share buybacks, capital investments and acquisitions. Specifically:
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 may enter into forward foreign exchange rate contracts in the future to mitigate foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Fiscal Month
(a)
(b)
(c)
(d)
June 26 – July 30, 2022
1,394,248
July 31 – August 27, 2022
August 28 – September 24, 2022
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 2 million shares to be repurchased under our share repurchase program. On February 15, 2022, our Board authorized an additional 1.5 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 1.4 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).
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.
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: November 3, 2022
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