Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2023
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 April 1, 2023
Common stock, $1 par value
62,095,570
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 April 1, 2023, December 31, 2022 and March 26, 2022
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three Months Ended April 1, 2023 and March 26, 2022
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended April 1, 2023 and March 26, 2022
5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended April 1, 2023 and March 26, 2022
6
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors - NONE
31
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
32
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
April 1,
December 31,
March 26,
2023
2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
423,299
559,397
73,783
Restricted cash
761
226
729
Investments
37,534
36,013
35,465
Accounts receivable, net
809,389
617,604
1,095,362
Inventories:
Raw materials
425,835
398,798
576,023
Finished goods
534,503
574,429
654,328
Total inventories
960,338
973,227
1,230,351
Refundable income taxes
—
33,126
Other current assets
35,692
42,520
36,727
TOTAL CURRENT ASSETS
2,267,013
2,262,113
2,472,417
DEFERRED INCOME TAXES
4,194
3,750
3,590
RESTRICTED INVESTMENTS
22,267
19,898
19,390
RIGHT OF USE ASSETS
116,564
107,517
99,914
OTHER ASSETS
99,516
101,262
32,544
GOODWILL
337,467
337,320
317,631
INDEFINITE-LIVED INTANGIBLE ASSETS
7,336
7,339
7,396
OTHER INTANGIBLE ASSETS, NET
142,277
143,892
120,205
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
1,408,360
1,379,968
1,244,070
Less accumulated depreciation and amortization
(708,205)
(690,986)
(643,191)
PROPERTY, PLANT AND EQUIPMENT, NET
700,155
688,982
600,879
TOTAL ASSETS
3,696,789
3,672,073
3,673,966
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
61,711
Accounts payable
277,989
206,941
425,956
Accrued liabilities:
Compensation and benefits
142,603
296,120
189,509
Income taxes
1,855
54,682
Other
77,054
80,255
102,434
Current portion of lease liability
27,838
25,577
26,015
Current portion of long-term debt
3,020
2,942
42,895
TOTAL CURRENT LIABILITIES
530,359
611,835
903,202
LONG-TERM DEBT
275,002
275,154
379,015
LEASE LIABILITY
92,182
85,419
76,969
51,254
51,265
61,278
OTHER LIABILITIES
35,550
44,697
35,330
TOTAL LIABILITIES
984,347
1,068,370
1,455,794
TEMPORARY EQUITY:
Redeemable noncontrolling interest
6,801
6,880
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, 62,095,570, 61,618,193 and 62,734,161
62,096
61,618
62,734
Additional paid-in capital
325,730
294,029
266,544
Retained earnings
2,293,025
2,217,410
1,851,784
Accumulated other comprehensive loss
(5,074)
(9,075)
(3,170)
Total controlling interest shareholders’ equity
2,675,777
2,563,982
2,177,892
Noncontrolling interest
29,864
32,841
40,280
TOTAL SHAREHOLDERS’ EQUITY
2,705,641
2,596,823
2,218,172
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
NET SALES
1,822,476
2,489,313
COST OF GOODS SOLD
1,464,147
2,010,950
GROSS PROFIT
358,329
478,363
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
194,683
220,150
OTHER LOSSES (GAINS), NET
1,938
(812)
EARNINGS FROM OPERATIONS
161,708
259,025
INTEREST EXPENSE
3,118
3,302
INTEREST AND INVESTMENT (INCOME) LOSS
(6,547)
1,093
EQUITY IN LOSS OF INVESTEE
588
515
(2,841)
4,910
EARNINGS BEFORE INCOME TAXES
164,549
254,115
INCOME TAXES
38,971
60,984
NET EARNINGS
125,578
193,131
NET LOSS (EARNINGS) ATTRIBUTABLE TO NONCONTROLLING INTEREST
491
(3,428)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
126,069
189,703
EARNINGS PER SHARE – BASIC
2.01
3.01
EARNINGS PER SHARE – DILUTED
1.98
3.00
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE INCOME
6,252
3,184
COMPREHENSIVE INCOME
131,830
196,315
COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(1,760)
(4,377)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
130,070
191,938
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 (NCI)
Total
Equity
Balance on December 31, 2022
Net earnings (loss)
(313)
125,756
(178)
Foreign currency translation adjustment
3,850
2,195
6,045
56
Unrealized gain on debt securities
151
Distributions to NCI
(4,859)
43
Cash dividends - $0.25 per share - quarterly
(15,642)
Issuance of 10,140 shares under employee stock purchase plan
10
675
685
Issuance of 824,669 shares under stock grant programs
825
14,356
15,187
Issuance of 93,165 shares under deferred compensation plans
93
(93)
Repurchase of 450,597 shares
(450)
(34,818)
(35,268)
Expense associated with share-based compensation arrangements
9,598
Accrued expense under deferred compensation plans
7,165
Balance on April 1, 2023
Balance on December 25, 2021
61,902
243,995
1,678,121
(5,405)
37,956
2,016,569
Net earnings
3,428
2,930
949
3,879
Unrealized loss on debt securities
(695)
(2,053)
Cash dividends - $0.20 per share - quarterly
(12,541)
Issuance of 9,734 shares under employee stock purchase plan
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)
6,883
6,134
Balance on March 26, 2022
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation
25,774
21,842
Amortization of intangibles
5,009
4,672
Expense associated with share-based and grant compensation arrangements
9,637
6,931
Deferred income taxes (credit)
(242)
101
Unrealized (gain) loss on investments and other
(149)
1,601
Equity in loss of investee
Net gain on sale and disposition of assets
(164)
(306)
Changes in:
Accounts receivable
(191,064)
(352,928)
Inventories
14,674
(258,019)
Accounts payable and cash overdraft
68,388
143,895
Accrued liabilities and other
(95,105)
(6,466)
NET CASH USED IN OPERATING ACTIVITIES
(37,076)
(245,031)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(38,166)
(32,072)
Proceeds from sale of property, plant and equipment
319
1,207
Acquisitions, net of cash received and purchase of equity method investment
(24,571)
Purchases of investments
(11,709)
(6,030)
Proceeds from sale of investments
8,849
4,725
(1,151)
(2,995)
NET CASH USED IN INVESTING ACTIVITIES
(41,858)
(59,736)
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
4,437
242,950
Repayments under revolving credit facilities
(4,518)
(141,438)
Repayments of debt
(29)
(199)
Contingent consideration payments and other
(6,179)
(551)
Proceeds from issuance of common stock
Dividends paid to shareholders
Distributions to noncontrolling interest
Repurchase of common stock
(33,288)
(501)
25
NET CASH (USED IN) FROM FINANCING ACTIVITIES
(59,368)
86,330
Effect of exchange rate changes on cash
2,739
1,726
NET CHANGE IN CASH AND CASH EQUIVALENTS
(135,563)
(216,711)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
559,623
291,223
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
424,060
74,512
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
286,662
Restricted cash, beginning of period
4,561
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
3,309
2,896
Income taxes paid
4,138
1,700
NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable
3,122
2,512
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
7,950
6,705
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 of America. All significant intercompany balances and transactions have been eliminated in consolidation.
We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and whether we are the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE. We account for unconsolidated VIEs using the equity method of accounting.
In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 31, 2022.
Seasonality has a significant impact on our working capital from March to August, which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the March 26, 2022 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 and is being applied prospectively to all business combinations occurring after this date.
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):
April 1, 2023
March 26, 2022
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
208,129
928
209,057
18
9,641
9,659
Fixed income funds
3,838
17,882
21,720
2,279
16,128
18,407
Treasury securities
343
342
Equity securities
16,977
19,289
Alternative investments
4,103
3,964
Mutual funds:
Domestic stock funds
10,108
10,576
International stock funds
1,092
1,621
Target funds
8
22
Bond funds
5,294
141
Alternative funds
468
501
Total mutual funds
16,970
12,861
246,257
18,810
269,170
34,789
25,769
64,522
From the assets measured at fair value as of April 1, 2023, listed in the table above, $208.8 million of money market funds are held in Cash and Cash Equivalents, $37.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $0.5 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $22.1 million of fixed income funds and $0.3 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 $59.6 million and $54.2 million as of April 1, 2023 and March 26, 2022, respectively, 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
Fixed Income
23,610
(1,890)
19,049
(642)
Treasury Securities
14,976
2,001
15,347
3,942
Mutual Funds
15,553
901
16,454
9,392
2,820
12,212
Alternative Investments
3,131
972
3,028
936
57,613
1,984
59,597
47,158
7,056
54,214
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 pre-tax unrealized gain of the portfolio was $2.0 million and $7.1 million as of April 1, 2023 and March 26, 2022, respectively. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of April 1, 2023 and March 26, 2022.
C. REVENUE RECOGNITION
Within the three primary segments, UFP Retail Solutions (“Retail”), UFP Packaging (“Packaging” and formerly known as UFP Industrial) and UFP Construction (“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.
9
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
1,784,456
2,450,281
(27.2)%
Over Time Revenue
38,020
39,032
(2.6)%
Total Net Sales
(26.8)%
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
5,415
6,798
6,759
Billings in Excess of Cost and Earnings
10,797
10,184
12,634
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 equivalents
(5,581)
(6,806)
Net earnings for calculating EPS
120,488
182,897
Denominator:
Weighted average shares outstanding
62,725
63,009
Adjustment for non-vested restricted common stock equivalents
(2,777)
(2,261)
Shares for calculating basic EPS
59,948
60,748
Effect of dilutive restricted common stock equivalents
855
225
Shares for calculating diluted EPS
60,803
60,973
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 April 1, 2023, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.
On April 1, 2023, we had outstanding purchase commitments on commenced capital projects of approximately $63.8 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 April 1, 2023, we had approximately $15.0 million in outstanding payment and performance bonds for open projects. We had approximately $24.8 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On April 1, 2023, we had outstanding letters of credit totaling $55.3 million, primarily related to certain insurance contracts, industrial development revenue bonds, and other debt agreements described further below.
11
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers and other third parties to guarantee our performance under certain insurance contracts and other legal agreements. As of April 1, 2023, we have irrevocable letters of credit outstanding totaling approximately $52.0 million for these types of arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under those 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 $3.3 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 first quarter of 2023 which would require us to recognize a liability on our balance sheet.
F. BUSINESS COMBINATIONS AND EQUITY METHOD INVESTMENTS
We completed the following acquisitions since the end of March 2022, 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
December 6, 2022
$71,009 cash paid for 100% asset purchase
48,812
22,197
Packaging
Titan Corrugated, Inc. (Titan) and All Boxed Up, LLC
Located in Flower Mound, TX and founded in 2003, Titan’s primary products include boxes used in moving and storage, jumbo boxes for industrial products, corrugated shipping containers, and point-of-purchase displays. All Boxed Up distributes common box sizes manufactured by Titan throughout the United States. The combined companies had trailing 12-month sales through October 2022 of approximately $46.5 million.
June 27, 2022
$69,791 cash paid for equity method investment
34,552
35,239
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.
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 March 2022 and not consolidated with
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other operations contributed approximately $12.8 million in net sales and $0.5 million in operating profits during the first three months of 2023.
As a result of the investment in Dempsey on June 27, 2022, we own 50% of the issued equity of that entity, 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 April 1, 2023, the carrying value of our investment in Dempsey is $66.7 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.
The business combinations mentioned above were not significant to our operating results individually or in aggregate, and thus pro forma results for 2023 and 2022 are not presented.
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 Packaging (formerly known as 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, Packaging, 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 April 1, 2023
Construction
All Other
Corporate
Net sales to outside customers
749,577
486,561
515,593
67,512
3,233
Intersegment net sales
223,325
20,050
25,836
77,487
(346,698)
Earnings from operations
41,056
54,732
54,248
4,034
7,638
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Three Months Ended March 26, 2022
993,232
611,369
786,471
95,567
2,674
65,948
22,173
25,352
109,772
(223,245)
71,397
82,391
78,818
14,815
11,604
The following table presents goodwill by segment as of April 1, 2023, and December 31, 2022 (in thousands):
Balance as of December 31, 2022
84,640
148,909
87,670
16,101
Foreign Exchange, Net
28
119
147
Balance as of April 1, 2023
87,698
16,220
The following table presents total assets by segment as of April 1, 2023, and December 31, 2022 (in thousands).
Total Assets by Segment
Segment Classification
1,077,283
889,417
21.1
%
856,966
885,878
(3.3)
709,347
712,837
(0.5)
299,510
308,688
(3.0)
753,683
875,253
(13.9)
Total Assets
0.7
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 23.7% in the first quarter of 2023 compared to 24.0% in the first quarter of 2022. The decrease was primarily due to a reduction in foreign income in higher tax jurisdictions.
I. COMMON STOCK
Below is a summary of common stock issuances for the first three months of 2023 and 2022 (in thousands, except average share price):
Share Issuance Activity
Common Stock
Average Share Price
Shares issued under the employee stock purchase plan
79.47
Shares issued under the employee stock gift program
1
90.30
Shares issued under the director retainer stock program
96.33
Shares issued under the bonus plan
756
86.14
Shares issued under the executive stock match plan
75
85.89
Forfeitures
(8)
Total shares issued under stock grant programs
86.12
Shares issued under the deferred compensation plans
85.33
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During the first three months of 2023, we repurchased 450,597 shares of our common stock at an average share price of $78.27.
80.04
84.85
80.78
725
79.61
Shares issued under the executive stock grants plan
62
82.87
(2)
79.87
83.84
During the first three months of 2022, we repurchased 44,442 shares of our common stock at an average share price of $79.74.
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 and is determined using the weighted average cost method. 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 a $0.7 million lower of cost or net realizable value adjustment to inventory as of April 1, 2023 and no adjustment as of March 26, 2022.
K. SUBSEQUENT EVENTS
Subsequent to our reporting date, we repurchased 150,000 shares of our common stock for approximately $12.0 million, at an average share price of $79.73.
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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 design, manufacture, and supply products made from wood, wood and non-wood composites, and other materials to three segments: retail, packaging, and construction. Our business segments are functionally interdependent and are supported by common corporate services, such as accounting and finance, information technology, human resources, marketing, legal and compliance, and others. We regularly invest in automation and create best practices to improve the efficiency of our manufacturing facilities across each of the segments. The results and improvements from these investments are shared among the segments. This exchange of improvements and ideas has also prompted better and faster innovation for new products, processes, and product improvements. While the majority of our facilities serve only one business segment, a variety of our larger facilities serve two or more segments.
We believe that our operating structure allows us to better evaluate market conditions and opportunities and more effectively allocate capital and resources to the appropriate segments and business units. Also, we believe that the diversification and manner in which we operate our business provides an inherent hedge against the inevitable business cycles that our markets experience and over which we have little control. Accordingly, our goal is to provide more stable earnings and cash flows to our shareholders. Our diversification and operating practices also mitigate the impact of more volatile lumber market conditions experienced by traditional lumber companies. We are 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. We do 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 currency and inflation; fluctuations in the price of lumber; adverse economic conditions in the markets we serve; concentration of sales to customers; vertical integration strategies; excess capacity or supply chain challenges; our ability to make successful business acquisitions; government regulations, particularly involving environmental and safety regulations; adverse or unusual weather conditions; inbound and outbound transportation costs; alternatives to replace treated wood products; Cybersecurity breaches; tariffs on import and export sales; and potential pandemics. Certain of these risk factors as well as other risk factors and additional information are included in our 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 first quarter of 2023.
OVERVIEW
Our results for the first quarter of 2023 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
386
1,112
February
437
1,225
March
411
1,321
First quarter average
1,219
First quarter percentage change
(66.3)
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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
406
1,010
452
1,115
464
1,198
441
1,108
(60.2)
Lower overall lumber prices in the first quarter of 2023 compared to the first quarter of 2022 is primarily due to increased capacity and supply of lumber in North America while demand for lumber has declined. 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 40.3% and 61.4% of our sales in the first three months of 2023 and 2022, respectively. The decrease from the prior year ratio reflects the significant decrease in the Lumber Market as well as an improvement in our sales mix of value-added products and 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.
For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices. As a result of the balance in our net sales of each category we believe our gross profits are more stable than those of our competitors who are less diversified.
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.
BUSINESS COMBINATIONS
We completed no business acquisitions during the first three months of fiscal 2023 and four during all of fiscal 2022. The annual historical sales attributable to acquisitions completed during the nine months of 2022 was approximately $133 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2023 and 2022 are not presented.
See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.
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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
80.3
80.8
Gross profit
19.7
19.2
Selling, general, and administrative expenses
10.7
8.8
Other losses (gains), net
0.1
8.9
10.4
Other expense, net
(0.2)
0.2
Earnings before income taxes
9.0
10.2
2.1
2.4
6.9
7.8
Less net earnings attributable to noncontrolling interest
(0.1)
7.6
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
(7.0)
(25.1)
66.9
(11.6)
46.7
(37.6)
88.4
The following table presents, for the periods indicated, our selling, general, and administrative (SG&A) costs as a percentage of gross profit. Given our strategies to enhance our capabilities and improve our value-added product offering, and recognizing the higher relative level of SG&A 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
54.3%
46.0%
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Operating Results by Segment:
Our business segments consist of UFP Retail Solutions (“Retail”), UFP Packaging (“Packaging” and formerly known as UFP Industrial) and UFP Construction (“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, Packaging, 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).
655,139
365,663
393,934
47,876
1,535
94,438
120,898
121,659
19,636
1,698
Selling, general, administrative expenses
53,355
66,252
67,338
13,522
(5,784)
27
(86)
73
2,080
(156)
858,895
461,815
625,059
64,024
1,157
134,337
149,554
161,412
31,543
1,517
62,668
67,231
82,337
16,625
(8,711)
272
(68)
257
103
(1,376)
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The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
87.4
75.2
76.4
70.9
12.6
24.8
23.6
29.1
7.1
13.6
13.1
20.0
3.1
5.5
11.2
10.5
6.0
86.5
75.5
79.5
67.0
13.5
24.5
20.5
33.0
6.3
11.0
17.4
7.2
15.5
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
First quarter 2023 versus first quarter 2022
(26.8)
(19.8)
0.5
(7.5)
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
50.1
49.9
40.8
59.2
76.9
23.1
67.8
32.2
83.3
16.7
72.4
27.6
77.4
22.6
71.9
28.1
61.6
38.4
73.0
27.0
Total Sales
67.5
32.5
58.4
41.6
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 decreased approximately 11% in the first quarter of 2023 compared to 2022 and was comprised of a 12% decline in organic unit sales, partially offset by a 1% contribution from acquisitions. Our overall unit sales of commodity-based products decreased approximately 5% quarter-over-quarter, which was all comprised of organic unit sales.
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The table below presents new product sales in thousands:
New Product Sales by Segment
% of Segment
Net Sales
68,169
9.1
78,648
7.9
(13.3)
70,041
14.4
68,098
11.1
2.9
27,928
5.4
37,909
4.8
(26.3)
All Other and Corporate
434
0.6
767
0.8
(43.4)
Total New Product Sales
166,572
185,422
7.4
(10.2)
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 first quarter of 2023 decreased by 25% compared to the same period of 2022, primarily due to a 23% decrease in selling prices and an organic unit decrease of 2%. Our selling prices of variable-priced products declined due to lower lumber prices. The selling prices of these products are indexed to the lumber market at the time they are shipped. Our unit sales to big box customers increased 6%, while unit sales to independent retailers decreased 17%.
Gross profits decreased by $39.9 million, or 29.7% to $94.4 million for the first quarter of 2023 compared to the same period last year. The decrease in gross profit was attributable to the following:
SG&A decreased by approximately $9.3 million, or 14.9%, in the first quarter of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $9.3 million from the first quarter of 2022 and totaled approximately $11.4 million for the quarter. Sales incentive compensation also contributed to the decrease in SG&A and decreased by $2.0 million from the prior year. The overall decrease in SG&A was partially offset by other minimal increases in various accounts.
Earnings from operations for the Retail reportable segment decreased in the first quarter of 2023 compared to 2022 by $30.3 million, or 42.5%, as a result of the factors mentioned above.
Packaging Segment
Net sales in the first quarter of 2023 decreased 20% compared to the same period of 2022, due to an 18% decrease in selling prices and 4% decrease in organic unit sales, offset by acquisition unit growth of 2%. The components of our change in organic unit sales includes approximately $28 million of sales to new accounts and $7.4 million of sales to new locations of existing customers. These increases were offset by a decline in prices and unit sales to existing accounts as market demand declined.
24
Gross profits decreased by $28.7 million, or 19.2%, for the first quarter of 2023 compared to the same period last year. Acquisitions contributed $2.4 million to gross profit. Excluding acquisitions, we estimate that gross profits on sales of value-added and commodity-based products declined by $8.3 million and $22.7 million, respectively. Value-added sales increased to 76.9% of total net sales in the first quarter of 2023 compared to 67.8% of total net sales in the first quarter of 2022 and is reflective of an improvement in sales mix.
SG&A decreased by approximately $1.0 million, or 1.5%, in the first quarter of 2023 compared to the same period of 2022. Acquired operations since the first quarter of 2022 contributed approximately $1.5 million to our SG&A costs. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $7.9 million relative to the first quarter of 2022, and totaled $15.8 million for the quarter. Sales incentive compensation also contributed to the decline in SG&A and decreased by $2.0 million from the prior year. These decreases were offset by increases in earnout expense of $3.7 million, professional fees of $1.4 million, and other minimal increases in several SG&A accounts.
Earnings from operations for the Packaging reportable segment decreased in the first quarter of 2023 compared to 2022 by $27.7 million, or 33.6%, due to the factors discussed above.
Construction Segment
Net sales in the first quarter of 2023 decreased 34% compared to the same period of 2022, due to an 18% decrease in selling prices and an organic unit decline of 16%. Organic unit changes within this segment consist of decreases of 19% in factory-built housing and 22% in site-built construction, which were partially offset by an increase of 8% in commercial construction and 5% in concrete forming. The organic unit declines in our factory-built housing and site-built construction business units is due to the impact of higher interest rates on the demand for housing. As of April 1, 2023 and March 26, 2022, we estimate that our backlog of orders in the commercial construction business unit were $139 million and $93 million, respectively. As of April 1, 2023 and March 26, 2022, we estimate that our backlog of orders in our site-built construction business unit were $91 million and $141 million, respectively.
Gross profits decreased by $39.8 million, or 24.6%, for the first quarter of 2023 compared to the same period of 2022. The decrease in our gross profit was comprised of the following factors:
SG&A decreased by approximately $15.0 million, or 18.2%, in the first quarter of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $7.9 million, and totaled $14.7 million for the quarter. The remaining decrease was primarily due to decreases in sales incentive compensation of $4.0 million and bad debt expense of $1.9 million.
Earnings from operations for the Construction reportable segment decreased in the first quarter of 2023 compared to 2022 by $24.6 million, or 31.2%, 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 decline in sales and earnings from operations is primarily due to our operation in Mexico that exports moulding and millwork products to the the U.S.
The corporate segment consists of over (under) allocated costs that are not significant.
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 23.7% in the first quarter of 2023 compared to 24.0% in the first quarter of 2022.
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 used in operating activities
Cash used in investing activities
Cash (used in) from 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, 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 that occurred many years ago. 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 resulting in negative or modest cash flows from operations during those periods. Conversely, we tend to 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.
26
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 increased to 71 days from 61 days during the first quarter of 2023 compared to the prior year period.
Days of sales outstanding
36
Days supply of inventory
48
41
Days payables outstanding1
(13)
(12)
Days in cash cycle
71
61
1 We’ve modified our calculation of days payables outstanding to be based on the cost of goods sold and accounts payable balances in our monthly financial statements. In prior periods, our calculation was based on invoice data. We’ve made this change to simplify the calculation and more easily integrate acquired operations into our financial metrics. The prior year metric has been restated for the new method which reduced days payables from a previously reported 20 days to 12 days.
The increase in our cash cycle in the first quarter of 2023 compared to the same period of 2022 was primarily due to a seven day increase in our days supply of inventory and a four day increase in our days of sales outstanding. The increase in our days supply of inventory is primarily due to carrying higher levels of safety stock and a drop in demand. The increase in our days of sales outstanding is due to receiving less timely payments from our customers. We continue to focus on past due account balances with customers and the percentage of our accounts receivable that are current is 93% at the end of the first quarter of 2023.
In the first three months of 2023, our cash consumed by operating activities was $37 million and was comprised of net earnings of $126 million and $40 million of non-cash expenses, offset by a $203 million increase in working capital since the end of December 2022. Our cash flows used by operations decreased by $208 million compared to the same period of last year primarily due to a decrease in our investment in net working capital of $270 million compared to the prior year period, offset by a decrease in our net earnings and non-cash expenses of $62 million. The decrease in net working capital was due to lower lumber prices and the softening of demand.
Purchases of property, plant, and equipment of $38 million comprised most of our cash used in investing activities during the first three months of 2023. Outstanding purchase commitments on existing capital projects totaled approximately $64 million on April 1, 2023. Capital spending primarily consists of several projects to expand capacity to manufacture new and value-added products, primarily in our Packaging segment and Deckorators and ProWood business units, achieve efficiencies through automation in all segments, make improvements to a number of facilities, and increase our transportation capacity (tractors, trailers). 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 between $200 million to $225 million on capital projects for the year subject to significant variability due to extended supplier lead times. We completed no acquisitions during the first three months of 2023, while cash used for acquisitions in the same period of the prior year amounted to $25 million.
Cash flows from financing activities consisted of cash paid for repurchases of common stock of $33 million. We repurchased approximately 451,000 shares of our common stock for $35 million ($2 million is recorded in accounts payable at the end of the quarter) for the year at an average share price of $78.27. The total number of remaining shares that may be repurchased under the program is approximately 1.5 million. Dividends paid during the first three months of 2023 include first quarter dividends of $16 million ($0.25 per share), a 25% increase over the quarterly dividend of $0.20 per share paid in the first quarter of 2022. On April 26, 2023, our board of directors approved our second quarter dividend of $0.25 per share, payable on June 15, 2023, to shareholders of record on June 1, 2023. Distributions to noncontrolling interests were $5 million. We have debt maturities of $3 million due later this year which we intend to repay through operating cash flows and available cash balances.
On April 1, 2023, we had $5 million outstanding on our $750 million revolving credit facility, and we had approximately $741 million in remaining availability after considering $3 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 April 1, 2023.
At the end of the first quarter of 2023, we have approximately $1.7 billion in total liquidity, consisting of our cash surplus, remaining availability under our revolving credit facility, and a shelf agreement with certain lenders providing up to $535 million in remaining 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 31, 2022.
FORWARD OUTLOOK
Most recently, our long-term goals have been to:
We believe effectively executing 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:
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Capital Allocation:
We believe the strength of our cash flow generation and conservative capital structure provides us with sufficient resources to grow our business and also fund returns to our 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 enter into any material 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
(1)
(3)
(4)
January 1 – February 4, 2023
2,000,000
February 5 – March 4, 2023
March 5 – April 1, 2023
450,597
78.27
1,549,403
On February 15, 2022, our Board authorized an additional 1.5 million shares to be repurchased under our existing share repurchase program. Upon expiration of this authorization on February 3, 2023, the Board gave management authorization to repurchase up to 2 million shares by February 5, 2024. The total number of remaining shares that may be repurchased under the program is approximately 1.5 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.
(a)
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).
(b)
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.
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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: May 10, 2023
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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