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 June 25, 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 June 25, 2022
Common stock, $1 par value
61,622,527
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 June 25, 2022, December 25, 2021 and June 26, 2021
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Six Months Ended June 25, 2022 and June 26, 2021
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six Months Ended June 25, 2022 and June 26, 2021
5
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 25, 2022 and June 26, 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
34
Item 4.
Controls and Procedures
35
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors - NONE
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
36
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
June 25,
December 25,
June 26,
2022
2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
138,071
286,662
44,286
Restricted cash
729
4,561
629
Investments
35,475
36,495
33,827
Accounts receivable, net
1,046,543
737,805
980,571
Inventories:
Raw materials
490,923
416,043
540,289
Finished goods
615,379
547,277
486,199
Total inventories
1,106,302
963,320
1,026,488
Refundable income taxes
13,083
4,806
—
Other current assets
36,241
39,827
36,699
TOTAL CURRENT ASSETS
2,376,444
2,073,476
2,122,500
DEFERRED INCOME TAXES
3,568
3,462
2,362
RESTRICTED INVESTMENTS
19,885
19,310
18,896
RIGHT OF USE ASSETS
107,825
96,703
97,597
OTHER ASSETS
32,186
31,876
29,631
GOODWILL
320,532
315,038
318,108
INDEFINITE-LIVED INTANGIBLE ASSETS
7,350
7,369
7,401
OTHER INTANGIBLE ASSETS, NET
117,869
109,017
98,601
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
1,286,037
1,212,113
1,120,381
Less accumulated depreciation and amortization
(660,873)
(623,093)
(587,194)
PROPERTY, PLANT AND EQUIPMENT, NET
625,164
589,020
533,187
TOTAL ASSETS
3,610,823
3,245,271
3,228,283
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
11,926
17,030
34,229
Accounts payable
386,833
319,125
359,484
Accrued liabilities:
Compensation and benefits
252,723
289,196
213,655
Income taxes
11,188
Other
107,112
84,853
90,153
Current portion of lease liability
24,903
23,155
22,511
Current portion of long-term debt
40,496
42,683
97
TOTAL CURRENT LIABILITIES
823,993
776,042
731,317
LONG-TERM DEBT
276,315
277,567
571,856
LEASE LIABILITY
86,464
76,632
78,564
63,389
60,964
34,983
OTHER LIABILITIES
35,594
37,497
52,000
TOTAL LIABILITIES
1,285,755
1,228,702
1,468,720
SHAREHOLDERS’ EQUITY:
Controlling interest shareholders’ equity:
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,622,527, 61,901,851 and 61,850,733
61,623
61,902
61,851
Additional paid-in capital
275,061
243,995
235,309
Retained earnings
1,950,922
1,678,121
1,440,833
Accumulated other comprehensive loss
(7,458)
(5,405)
(1,464)
Total controlling interest shareholders’ equity
2,280,148
1,978,613
1,736,529
Noncontrolling interest
44,920
37,956
23,034
TOTAL SHAREHOLDERS’ EQUITY
2,325,068
2,016,569
1,759,563
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated condensed financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended
Six Months Ended
NET SALES
2,900,874
2,700,541
5,390,187
4,525,545
COST OF GOODS SOLD
2,397,422
2,279,247
4,408,372
3,817,697
GROSS PROFIT
503,452
421,294
981,815
707,848
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
214,538
184,539
434,688
334,637
OTHER GAINS, NET
3,348
(180)
2,536
(1,211)
EARNINGS FROM OPERATIONS
285,566
236,935
544,591
374,422
INTEREST EXPENSE
3,395
3,899
6,697
7,050
INTEREST AND INVESTMENT LOSS (INCOME)
4,154
(1,689)
5,247
(3,985)
EQUITY IN EARNINGS OF INVESTEE
1,017
835
1,532
1,465
8,566
3,045
13,476
4,530
EARNINGS BEFORE INCOME TAXES
277,000
233,890
531,115
369,892
INCOME TAXES
69,147
58,530
130,131
90,281
NET EARNINGS
207,853
175,360
400,984
279,611
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,735)
(1,978)
(8,163)
(2,918)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
203,118
173,382
392,821
276,693
EARNINGS PER SHARE – BASIC
3.24
2.79
6.25
4.46
EARNINGS PER SHARE – DILUTED
3.23
2.78
6.22
4.45
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE GAIN (LOSS)
(4,383)
2,720
(1,199)
524
COMPREHENSIVE INCOME
203,470
178,080
399,785
280,135
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,640)
(2,698)
(9,017)
(3,112)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
198,830
175,382
390,768
277,023
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands, except share and per share data)
Controlling Interest Shareholders’ Equity
Accumulated
Additional
Common
Paid-In
Retained
Comprehensive
Noncontrolling
Stock
Capital
Earnings
Interest
Total
Balance 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
4,735
(3,660)
(95)
(3,755)
(628)
Cash dividends - $0.25 per share - quarterly
(15,474)
Issuance of 13,875 shares under employee stock plans
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
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
6
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
1,978
1,759
720
2,479
Unrealized gain on debt securities
241
Additional purchase of noncontrolling interest
(9,276)
Issuance of 9,282 shares under employee stock plans
9
564
573
Net forfeitures of 5,718 shares under stock grant programs
(6)
(224)
(225)
Issuance of 8,913 shares under deferred compensation plans
(10)
2,728
1,140
Balance on June 26, 2021
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation
44,034
38,342
Amortization of intangibles
8,740
7,193
Expense associated with share-based and grant compensation arrangements
12,542
5,742
Deferred income taxes
179
177
Unrealized loss (gain) on investments and other
6,181
(2,784)
Equity in earnings of investee
Net loss (gain) on sale and disposition of assets
766
(1,577)
Changes in:
Accounts receivable
(304,715)
(336,094)
Inventories
(134,653)
(329,577)
Accounts payable and cash overdraft
56,120
143,018
Accrued liabilities and other
(1,313)
78,751
NET CASH FROM (USED IN) OPERATING ACTIVITIES
90,397
(115,733)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(71,675)
(79,028)
Proceeds from sale of property, plant and equipment
2,029
6,673
Acquisitions and purchases of non-controlling interest, net of cash received
(39,343)
(433,239)
Purchases of investments
(15,166)
(14,581)
Proceeds from sale of investments
8,221
6,885
(2,829)
(708)
NET CASH USED IN INVESTING ACTIVITIES
(118,763)
(513,998)
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
570,700
849,944
Repayments under revolving credit facilities
(571,075)
(589,695)
Repayments of debt
(2,485)
Contingent consideration payments and other
(2,553)
Proceeds from issuance of common stock
1,457
936
Dividends paid to shareholders
(28,015)
(18,550)
Repurchase of common stock
(90,805)
(184)
(331)
NET CASH (USED IN) FROM FINANCING ACTIVITIES
(125,013)
237,926
Effect of exchange rate changes on cash
956
112
NET CHANGE IN CASH AND CASH EQUIVALENTS
(152,423)
(391,693)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
291,223
436,608
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
138,800
44,915
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
7,008
7,107
Income taxes paid
138,420
73,174
NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable
2,856
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
7,563
6,064
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 June 26, 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):
June 25, 2022
June 26, 2021
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
19
4,170
4,189
2,840
2,859
Fixed income funds
2,684
16,654
19,338
244
17,610
17,854
Treasury securities
342
307
Equity securities
17,249
19,014
Alternative investments
4,079
3,304
Mutual funds:
Domestic stock funds
12,723
10,037
International stock funds
1,378
1,463
Target funds
21
22
Bond funds
134
145
Alternative funds
510
501
Total mutual funds
14,766
12,168
35,060
20,824
59,963
31,752
20,450
55,506
Assets at fair value
From the assets measured at fair value as of June 25, 2022, listed in the table above, $35.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $4.0 million of money market funds are held in Cash and Cash Equivalents, $0.6 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $19.7 million of fixed income funds and $0.2 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 $55.2 million as of June 25, 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
Fair Value
Fixed Income
20,875
(1,537)
17,066
788
Treasury Securities
Equity
15,668
1,581
14,760
4,254
Mutual Funds
13,405
742
14,147
8,769
2,740
11,509
Alternative Investments
3,053
1,026
2,953
351
53,343
1,812
55,155
43,548
8,133
51,681
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 gain of the portfolio was $1.8 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of June 25, 2022 and June 26, 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
2,850,409
2,669,159
6.8%
5,300,690
4,466,558
18.7%
Over Time Revenue
50,465
31,382
60.8%
89,497
58,987
51.7%
Total Net Sales
7.4%
19.1%
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
6,413
5,602
4,201
Billings in Excess of Cost and Earnings
10,046
10,744
8,239
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
(8,270)
(5,670)
(15,045)
(8,807)
Net earnings for calculating EPS
194,848
167,712
377,776
267,886
Denominator:
Weighted average shares outstanding
62,766
62,242
62,889
62,087
Adjustment for non-vested restricted common stock
(2,555)
(2,035)
(2,409)
(1,976)
Shares for calculating basic EPS
60,211
60,207
60,480
60,111
Effect of dilutive restricted common stock
205
156
220
121
Shares for calculating diluted EPS
60,416
60,363
60,700
60,232
Net earnings per share:
Basic
Diluted
11
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 June 25, 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 June 25, 2022, we had outstanding purchase commitments on commenced capital projects of approximately $80.4 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, some of which are no longer in business. While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.
As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances, we are required to post payment and performance bonds to ensure the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims properly made against these bonds. As of June 25, 2022, we had approximately $13.8 million in outstanding payment and performance bonds for open projects. We had approximately $26.7 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On June 25, 2022, we had outstanding letters of credit totaling $60.0 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 June 25, 2022, we have irrevocable letters of credit outstanding totaling approximately $50.1 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 second quarter of 2022 which would require us to recognize a liability on our balance sheet.
F. BUSINESS COMBINATIONS
We completed the following acquisitions in fiscal 2022 and since the end of June 2021, which were accounted for using the purchase method. Dollars below are in thousands unless otherwise noted:
Net
Company
Acquisition
Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Segment
May 9, 2022
$15,386cash paid for 100% asset purchase
4,801
10,585
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
Industrial
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
$11,155cash paid for 70% stock purchase
9,562
1,593
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.
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).
13
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 acquisitions have not been finalized and allocated to their respective identifiable asset and goodwill accounts. In aggregate, acquisitions completed since the end of June 2021 and not consolidated with other operations contributed approximately $53.7 million in net sales and $3.2 million in operating profits during the first six months of 2022.
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 June 25, 2022
All Other
Corporate
Net sales to outside customers
1,121,440
676,333
975,376
124,416
3,309
Intersegment net sales
67,612
21,487
31,866
125,893
(246,858)
Earnings from operations
24,527
94,210
132,832
22,748
11,249
Three Months Ended June 26, 2021
1,259,218
611,181
738,704
89,470
1,968
65,147
24,985
20,034
126,054
(236,220)
62,051
79,526
67,107
16,304
11,947
Six Months Ended June 25, 2022
2,114,672
1,287,702
1,761,847
219,983
5,983
133,560
43,660
57,218
235,665
(470,103)
95,924
176,601
211,650
37,563
22,853
Six Months Ended June 26, 2021
2,018,239
1,060,055
1,298,234
145,047
3,970
112,733
42,891
34,495
223,450
(413,569)
115,596
119,936
100,125
24,282
14,483
The following table presents goodwill by segment as of June 25, 2022, and December 25, 2021 (in thousands):
Balance as of December 25, 2021
73,376
128,541
89,000
24,121
2022 Acquisitions
11,938
2022 Purchase Accounting Adjustments
293
(5,830)
(674)
595
(5,616)
Foreign Exchange, Net
(32)
(796)
(828)
Balance as of June 25, 2022
85,607
122,711
88,294
23,920
The following table presents total assets by segment as of June 25, 2022, and December 25, 2021 (in thousands).
Total Assets by Segment
Segment Classification
1,075,310
844,189
27.4
%
835,735
741,672
12.7
912,507
736,157
24.0
341,877
343,363
(0.4)
445,394
579,890
(23.2)
Total Assets
11.3
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 25.0% in the second quarter of 2022 and 2021 and was 24.5% in the first six months of 2022 compared to 24.4% for the same period in 2021. Permanent tax differences and credits have remained relatively consistent from 2021 to 2022, which is the primary reason the rate increased only slightly.
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I. COMMON STOCK
Below is a summary of common stock issuances for the first six 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
24
72.58
Shares issued under the employee stock gift program
78.57
Shares issued under the director retainer stock program
79.46
Shares issued under the bonus plan
755
82.73
Shares issued under the executive stock match plan
62
82.87
Forfeitures
Total shares issued under stock grant programs
815
82.72
Shares issued under the deferred compensation plans
92
82.59
72.94
1
79.64
67.77
468
53.68
Shares issued under the executive stock grants plan
77
60.24
(18)
531
54.71
99
61.50
During the first six months of 2022, we repurchased approximately 1,210,000 shares of our common stock at an average share price of $77.06.
During the first six months of 2021, we did not repurchase any of our shares of common stock.
16
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. The lower of cost or net realizable value adjustment to inventory as of June 25, 2022 and June 26, 2021 was $9.3 million and $23.2 million, respectively.
K. SUBSEQUENT EVENTS
On June 27, 2022, we acquired 50% of the equity of Dempsey Wood Products, LLC, for $66.0 million. Based in Orangeburg, South Carolina, Dempsey Wood Products produces kiln-dried lumber, pallet lumber, and other industrial wood products.
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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 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 second quarter of 2022.
OVERVIEW
Our results for the second 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
Second quarter average
1,284
Year-to-date average
1,055
1,122
Second quarter percentage change
(30.7)
Year-to-date percentage change
(6.0)
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
903
1,198
938
902
922
732
1,150
574
1,052
736
1,041
971
(29.3)
(5.0)
The decrease in overall lumber prices for the second 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 54.8% and 63.7% of our sales in the first six 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.
BUSINESS COMBINATIONS
We completed two business acquisition during the first six months of fiscal 2022 and nine during all of fiscal 2021. The annual historical sales attributable to acquisitions completed in the first six months of fiscal 2022 is approximately $62 million, while acquisitions completed during the last six months of 2021 have annual sales of 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
82.6
84.4
81.8
Gross profit
17.4
15.6
18.2
Selling, general, and administrative expenses
7.4
6.8
8.1
Other (gains) losses, net
0.1
9.8
8.8
10.1
8.3
Other expense, net
0.3
Earnings before income taxes
9.5
8.7
9.9
8.2
2.4
2.2
2.0
7.2
6.5
6.2
Less net earnings attributable to noncontrolling interest
(0.2)
(0.1)
7.0
6.4
7.3
6.1
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
3.0
47.0
6.0
41.0
19.5
105.6
38.7
90.2
16.3
62.2
29.9
50.0
20.5
156.5
45.4
148.0
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
42.6%
43.8%
44.3%
47.3%
Bonus expense, which is a component of SG&A, decreased in the second quarter to $55 million from $61 million in the prior year due to modifications made to our bonus plan 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 17.5% of pre-bonus earnings from operations from a historical rate of approximately 20.0%. Bonus rates continue to be derived based on return on investment achieved. Bonus expense in the first six months of 2022 totaled $124 million compared to $98 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).
1,048,260
514,216
748,060
83,336
3,549
2,397,421
73,180
162,117
227,316
41,080
(240)
503,453
Selling, general, administrative expenses
48,387
67,235
94,638
16,356
(12,078)
266
672
(154)
1,976
589
3,349
23
1,136,887
476,731
604,414
59,745
1,470
122,331
134,450
134,290
29,725
498
60,376
54,903
66,936
13,604
(11,280)
(96)
247
(183)
(169)
1,907,155
976,031
1,373,119
147,360
4,707
207,517
311,671
388,728
72,623
1,276
111,055
134,466
176,975
32,981
(20,789)
538
604
103
2,079
(788)
1,795,435
845,280
1,075,260
97,771
3,951
222,804
214,775
222,974
47,276
107,476
95,016
122,481
24,025
(14,361)
(268)
(177)
368
(1,031)
(103)
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
93.5
76.0
76.7
67.0
23.3
33.0
4.3
9.7
13.1
1.6
13.9
13.6
18.3
90.3
78.0
66.8
22.0
33.2
4.8
9.0
9.1
15.2
4.9
13.0
75.8
77.9
24.2
22.1
5.3
10.4
15.0
0.9
4.5
13.7
12.0
17.1
89.0
79.7
82.8
67.4
11.0
20.3
17.2
32.6
9.4
16.6
(0.7)
5.7
7.7
16.7
25
We design, manufacture and market wood and wood-alternative products, primarily used to enhance outdoor living environments, for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, customized interior fixtures used in a variety of retail stores, commercial, and other structures, and specialty wood packaging, components and 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
Second quarter 2022 versus Second quarter 2021
4.4
1.0
Year-to-date 2022 versus Year-to-date 2021
19.1
4.0
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
45.3
54.7
39.7
60.3
70.5
29.5
63.8
36.2
74.7
25.3
67.9
32.1
All Other and Corporate
75.5
24.5
73.4
26.6
Total Sales
37.8
53.8
46.2
26
43.2
56.8
41.5
58.5
69.2
30.8
65.1
34.9
73.7
26.3
68.3
31.7
73.9
26.1
72.7
27.3
60.5
39.5
55.5
44.5
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 6% in the second quarter of 2022 compared to 2021, comprised of a 2% contribution from acquisitions and 4% organic growth. Our overall unit sales of value-added products increased approximately 6% in the first six months of 2022 compared to the same period last year, comprised of a 3% contribution from acquisitions and 3% organic growth. Our organic unit sales of commodity-based products decreased approximately 1% quarter-over-quarter and our overall unit sales of commodity-based products increased approximately 5% in the first six months of 2022 compared to the same period last year, comprised of a 4% contribution from acquisitions and 1% organic growth.
The table below presents new product sales in thousands:
New Product Sales by Segment
Change
71,410
68,064
137,855
119,966
14.9
68,108
37,108
83.5
130,945
65,432
100.1
40,692
26,326
54.6
77,499
42,200
83.6
623
594
1,393
907
53.6
Total New Product Sales
180,833
132,092
36.9
347,692
228,505
52.2
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 second quarter of 2022 decreased by 11% compared to the same period of 2021, due to a 5% decrease in selling prices, a 2% decrease due to the transfer of certain sales to the Construction segment this year, and an organic unit decrease of 4%. These factors were offset by acquisition unit growth of 1%. The decline in organic unit sales was experienced in nearly all of our retail business units as consumer demand begins to return to more normalized levels. By business unit, we experienced organic unit growth of 3% in UFP Edge and this was offset by organic unit decreases in our ProWood (1%), Retail Building Products (2%), Sunbelt (8%), Deckorators (9%), Handprint (18%), and Outdoor Essentials (22%) business units. Capacity expansion contributed to our unit increase in UFP Edge, and we believe investments we’ve made to expand capacity in our Deckorators and UFP Edge business units will add planned sales of nearly $100 million to the Retail segment for all of 2022. Finally, sales to big box customers were down 10%, while sales to independent retailers decreased 15%.
27
Gross profits decreased by $49.2 million, or 40.2% to $73.2 million for the second quarter of 2022 compared to the same period last year. The decrease in gross profit was attributable to the following:
SG&A decreased by approximately $12.0 million, or 19.9%, in the second quarter of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added roughly $1.5 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $17.2 million from the second quarter of 2021 and totaled approximately $3.8 million for the quarter. Bonus expense was also impacted by the plan modification disclosed above. The decrease was partially offset by increases in advertising of $1.3 million, bad debt expenses of $1.1 million, travel related expenses of $0.8 million, and salaries and wages of $0.6 million.
Earnings from operations for the Retail reportable segment decreased in the second quarter of 2022 compared to 2021 by $37.5 million, or 60.5%, as a result of the factors mentioned above.
Net sales in the first six months of 2022 increased by 5% compared to the same period of 2021, due to a 4% increase in selling prices and acquisition unit growth of 6%, offset by a 2% decrease due to the transfer of certain sales to the Construction segment, and an organic unit decrease of 3%. We experienced organic unit growth of 5% in our UFP Edge business unit. This increase was offset by organic unit decreases in our ProWood (1%), Retail Building Products (4%), Sunbelt (6%), Deckorators (8%), Outdoor Essentials (14%), and Handprint (19%) business units. Capacity expansion contributed to our unit increase in UFP Edge. Finally, sales to big box customers increased 5%, while sales to independent retailers increased 3%.
Gross profits decreased by $15.3 million, or 6.9% to $207.5 million for the first six months of 2022 compared to the same period last year. Our decrease in gross profit was attributable to the following:
SG&A increased by approximately $3.6 million, or 3.3%, in the first six months of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added $4.1 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximtely $10.4 million and totaled approximately $24.5 million for the first six months of 2022. Bonus expense was also impacted by the plan modification disclosed above. The remaining increase was primarily due to increases in salaries and wages of $2.7 million, advertising of $1.8 million, travel-related expenses of $1.4 million, and bad debt expenses of $0.9 million.
Earnings from operations for the Retail reportable segment decreased in the first six months of 2022 compared to 2021 by $19.7 million, or 17.0%, as a result of the factors mentioned above.
Industrial Segment
Net sales in the second quarter of 2022 increased 11% compared to the same period of 2021, due to an 11% increase in selling prices and acquisition unit growth of 1%, offset by a 1% decrease in organic unit sales. The increase in our selling prices 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. The components of our change in organic unit sales includes gains associated with $17 million in sales to new customers, $24 million of sales to new locations of existing customers, and $26 million of new product sales. These gains were offset by the loss of unit sales on less profitable accounts.
Gross profits increased by $27.7 million, or 20.6%, for the second quarter of 2022 compared to the same period last year. Acquisitions contributed $1.4 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 contributed $36.5 million to the increase in gross profit, while commodity-based products contributed to a decline of $10.2 million in gross profit. Value-added sales increased to 70.5% of total net sales in the second quarter of 2022 compared to 63.8% of total net sales in the second quarter of 2021. Additionally, the increase in new product sales contributed $11.2 million to gross profits this year ($1.4 million from acquisitions).
SG&A increased by approximately $12.3 million, or 22.5%, in the second quarter of 2022 compared to the same period of 2021. Acquired operations since the second quarter of 2021 contributed approximately $1.0 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $1.4 million relative to the second quarter of 2021, and totaled $19.7 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 $6.4 million, sales incentive compensation of $2.0 million, medical benefits expense of $0.6 million, salaries and wages of $0.4 million, and travel related expenses of $0.4 million.
Earnings from operations for the Industrial reportable segment increased in the second quarter of 2022 compared to 2021 by $14.7 million, or 18.5%, due to the factors discussed above.
Net sales in the first six months of 2022 increased 21% compared to the same period of 2021, due to a 23% increase in selling prices and acquisition unit growth of 1%, offset by a 3% decrease in organic unit sales. The increase in our selling prices 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. The components of our change in organic unit sales includes gains associated with $40 million in sales to new customers, $42 million of sales to new locations of existing customers, and $55 million of new product sales. These gains were offset by the loss of unit sales on less profitable accounts.
Gross profits increased by $96.9 million, or 45.1%, for the first six months of 2022 compared to the same period last year. Acquisitions contributed $3.1 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 $86.4 million and $7.4 million, respectively, to the increase in gross profit. Value-added sales increased to 69.2% of total net sales in the first six months of 2022 compared to 65.1% of total net sales in the first six months of 2021. Additionally, the increase in new product sales contributed $23 million to gross profits this year ($3.1 million from acquisitions).
SG&A increased by approximately $39.5 million, or 41.5%, in the first six months of 2022 compared to the same period of 2021. Acquired operations since the first six months of 2021 contributed approximately $2.3 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $11.7 million, and totaled $43.4 million for the six 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 $8.0 million, sales incentive compensation of $6.8 million, salaries and wages of $2.0 million, travel related expenses of $1.0 million, and medical benefits expense of $0.7 million.
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Earnings from operations for the Industrial reportable segment increased in the first six months of 2022 compared to 2021 by $56.7 million, or 47.2%, due to the factors discussed above.
Construction Segment
Net sales in the second quarter of 2022 increased 32% compared to the same period of 2021, due to a 15% increase in selling prices, 2% due to the transfer of certain sales from the Retail segment and organic unit sales growth of 15%. The increase in our selling prices is due to a combination of an improvement in our product mix of value-added products which tend to be sold on a fixed price, elevated end market demand, and selectively selling to maximize profitability. Organic unit changes within this segment consist of increases of 63% in commercial construction, 35% in concrete forming, 16% in factory-built housing, and 1% in site-built construction.
Gross profits increased by $93.0 million, or 69.3%, for the second 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 $27.7 million, or 41.4%, in the second quarter of 2022 compared to the same period of 2021. Acquired operations since the second quarter of 2021 contributed approximately $0.3 million to total SG&A for the quarter. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $11.0 million, and totaled $28.7 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 sales incentive compensation of $8.9 million, salaries and wages of $1.3 million, bad debt expense of $1.3 million, and travel related expenses of $0.7 million.
Earnings from operations for the Construction reportable segment increased in the second quarter of 2022 compared to 2021 by $65.7 million, or 97.9%, due to the factors mentioned above.
Net sales in the first six months of 2022 increased 36% compared to the same period of 2021, due to a 20% increase in selling prices, 3% due to the transfer of certain sales from the Retail segment, and organic unit sales growth of 13%. Organic unit changes within this segment consisted of increases of 48% in commercial construction, 26% in concrete forming, and 16% in factory-built housing. The organic unit sales of our site-built business unit remained flat due to capacity constraints.
Gross profits increased by $165.8 million, or 74.3%, for the first six 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 $54.5 million, or 44.5%, in the first six months of 2022 compared to the same period of 2021. Acquired operations since the first six months of 2021 contributed approximately $1.2 million to total SG&A for the quarter. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $24.6 million, and totaled $51.3 million for the first six 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 $15.5 million, salaries and wages of $3.4 million, bad debt expense of $2.7 million, and travel related expenses of $1.4 million.
Earnings from operations for the Construction reportable segment increased in the first six months of 2022 compared to 2021 by $111.5 million, or 111.4%, 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.
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 25.0% in the second quarter of 2022 compared to 25.0% for same period in 2021 and was 24.5% in the first six months of 2022 compared to 24.4% for the same period in 2021. Permanent tax differences and credits have remained relatively consistent from 2021 to 2022, which is the primary reason the rate increased only slightly.
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 (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, 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 increased to 51 days from 48 days during the second quarter of 2022 compared to the prior year period.
Days of sales outstanding
33
Days supply of inventory
38
Days payables outstanding
(19)
Days in cash cycle
51
48
52
49
The increase in our cash cycle in the second quarter of 2022 compared to the same period of 2021 was primarily due to a two day increase in our days supply of inventory as well as a one day increase in our receivables cycle. The increase in our cash cycle in the first six months of 2022 compared to the same period of 2021 was primarily due to a three day increase in our days supply of inventory. The increases in our days supply of inventory are generally due to carrying greater amounts of safety stock due to supply and transportation constraints.
Our cash flows from operations for the first six months of 2022 increased to $90 million compared to $116 million of cash used in operations during the first six months of 2021. This improvement in operational cash flows is due to net earnings and non-cash expenses totaling $475 million, compared to $328 million last year, offset by a $385 million increase in net working capital since the end of last year, compared to a $444 million increase in the prior year. Last year, our inventories increased more significantly from the beginning of the year until the end of June primarily due to an increase in lumber prices, which remained elevated at the end of the second quarter.
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 six months of 2022 and totaled $71.7 million and $39.3 million, respectively. Net purchases of investments totaled $6.9 million. Total proceeds from the sales of property, plant, and equipment were $2.0 million. Outstanding purchase commitments on existing capital projects totaled approximately $80.4 million on June 25, 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 between $175 million to $225 million on capital projects for the year with variability due to uncertainty about 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 the capacity of machine-built pallet and site-built business units, and take advantage of automation opportunities.
Cash flows from financing activities consisted of cash paid for repurchases of common stock of $90.8 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, of which $90.8 million was paid in cash and the remaining $2.4 million was accrued. The total number of remaining shares that may be repurchased under the program is approximately 1.4 million. Dividends paid during the first six months of 2022 include first quarter dividends of $12.5 million ($0.20 per share) and second quarter dividends of $15.5 million ($0.25 per share). On July 20, 2022, the Board approved a quarterly dividend payment of $0.25 per share, payable on September 15, 2022, to shareholders of record on September 1, 2022. Net repayments of debt were approximately $2.9 million and distributions to noncontrolling interests were $2.1 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.
On June 25, 2022, we had $7.2 million outstanding on our $550 million revolving credit facility, and we had approximately $535.7 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 June 25, 2022.
At the end of the second quarter of 2022, we have approximately $1.2 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.
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)
March 27 – April 30, 2022
755,558
77.40
1,803,958
May 1 – 28, 2022
363,659
77.54
1,440,299
May 29 – June 25, 2022
46,051
65.00
1,394,248
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.
104
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: August 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
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