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 March 26, 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 March 26, 2022
Common stock, $1 par value
62,734,161
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, no par value
UFPI
The Nasdaq Stock Market, LLC
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION.
Page No.
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at March 26, 2022, December 25, 2021 and March 27, 2021
3
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three Months Ended March 26, 2022 and March 27, 2021
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months Ended March 26, 2022 and March 27, 2021
5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 26, 2022 and March 27, 2021
6
Notes to Unaudited Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
28
Item 4.
Controls and Procedures
29
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
30
Item 6.
Exhibits
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
March 26,
December 25,
March 27,
2022
2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
73,783
286,662
44,399
Restricted cash
729
4,561
629
Investments
35,465
36,495
31,439
Accounts receivable, net
1,095,362
737,805
808,105
Inventories:
Raw materials
576,023
416,043
438,762
Finished goods
654,328
547,277
384,652
Total inventories
1,230,351
963,320
823,414
Refundable income taxes
—
4,806
Other current assets
36,727
39,827
29,072
TOTAL CURRENT ASSETS
2,472,417
2,073,476
1,737,058
DEFERRED INCOME TAXES
3,590
3,462
2,290
RESTRICTED INVESTMENTS
19,390
19,310
17,209
RIGHT OF USE ASSETS
99,914
96,703
98,404
OTHER ASSETS
32,544
31,876
27,358
GOODWILL
317,631
315,038
314,189
INDEFINITE-LIVED INTANGIBLE ASSETS
7,396
7,369
7,401
OTHER INTANGIBLE ASSETS, NET
120,205
109,017
93,812
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
1,244,070
1,212,113
1,060,893
Less accumulated depreciation and amortization
(643,191)
(623,093)
(572,526)
PROPERTY, PLANT AND EQUIPMENT, NET
600,879
589,020
488,367
TOTAL ASSETS
3,673,966
3,245,271
2,786,088
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
61,711
17,030
47,140
Accounts payable
425,956
319,125
299,398
Accrued liabilities:
Compensation and benefits
189,509
289,196
137,208
Income taxes
54,682
25,565
Other
102,434
84,853
78,560
Current portion of lease liability
26,015
23,155
23,051
Current portion of long-term debt
42,895
42,683
109
TOTAL CURRENT LIABILITIES
903,202
776,042
611,031
LONG-TERM DEBT
379,015
277,567
426,310
LEASE LIABILITY
76,969
76,632
76,408
61,278
60,964
34,940
OTHER LIABILITIES
35,330
37,497
50,856
TOTAL LIABILITIES
1,455,794
1,228,702
1,199,545
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, 62,734,161, 61,901,851 and 61,838,256
62,734
61,902
61,838
Additional paid-in capital
266,544
243,995
231,111
Retained earnings
1,851,784
1,678,121
1,276,722
Accumulated other comprehensive loss
(3,170)
(5,405)
(3,464)
Total controlling interest shareholders’ equity
2,177,892
1,978,613
1,566,207
Noncontrolling interest
40,280
37,956
20,336
TOTAL SHAREHOLDERS’ EQUITY
2,218,172
2,016,569
1,586,543
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
NET SALES
2,489,313
1,825,004
COST OF GOODS SOLD
2,010,950
1,538,450
GROSS PROFIT
478,363
286,554
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
220,150
150,098
OTHER GAINS, NET
(812)
(1,031)
EARNINGS FROM OPERATIONS
259,025
137,487
INTEREST EXPENSE
3,302
3,151
INTEREST AND INVESTMENT LOSS (INCOME)
1,093
(2,296)
EQUITY IN EARNINGS OF INVESTEE
515
630
4,910
1,485
EARNINGS BEFORE INCOME TAXES
254,115
136,002
INCOME TAXES
60,984
31,751
NET EARNINGS
193,131
104,251
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(3,428)
(940)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
189,703
103,311
EARNINGS PER SHARE – BASIC
3.01
1.67
EARNINGS PER SHARE – DILUTED
3.00
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE GAIN (LOSS)
3,184
(2,196)
COMPREHENSIVE INCOME
196,315
102,055
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,377)
(414)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
191,938
101,641
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 25, 2021
Net earnings
3,428
Foreign currency translation adjustment
2,930
949
3,879
Unrealized loss on debt securities
(695)
Distributions to noncontrolling interest
(2,053)
Additional purchase of noncontrolling interest
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
Balance on December 26, 2020
61,206
218,224
1,182,680
(1,794)
22,836
1,483,152
940
(374)
(526)
(900)
(1,296)
(2,914)
Cash dividends - $0.15 per share - quarterly
(9,274)
Issuance of 5,816 shares under employee stock purchase plan
357
363
Net issuance of 536,970 shares under stock grant programs
537
3,888
4,430
Issuance of 89,690 shares under deferred compensation plans
89
(89)
2,936
5,795
Balance on March 27, 2021
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation
21,842
18,733
Amortization of intangibles
4,672
3,998
Expense associated with share-based and grant compensation arrangements
6,931
2,981
Deferred income taxes
101
142
Unrealized loss (gain) on investments and other
1,601
(1,754)
Equity in earnings of investee
Net gain on sale and disposition of assets
(306)
(532)
Changes in:
Accounts receivable
(352,928)
(253,323)
Inventories
(258,019)
(207,768)
Accounts payable and cash overdraft
143,895
121,892
Accrued liabilities and other
(6,466)
14,090
NET CASH USED IN OPERATING ACTIVITIES
(245,031)
(196,660)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(32,072)
(34,656)
Proceeds from sale of property, plant and equipment
1,207
5,062
Acquisitions and purchases of non-controlling interest, net of cash received
(24,571)
(261,133)
Purchases of investments
(6,030)
(8,738)
Proceeds from sale of investments
4,725
3,381
(2,995)
NET CASH USED IN INVESTING ACTIVITIES
(59,736)
(296,498)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
242,950
236,280
Repayments under revolving credit facilities
(141,438)
(121,570)
Repayments of debt
(199)
Contingent consideration payments and other
(551)
(627)
Proceeds from issuance of common stock
Dividends paid to shareholders
Repurchase of common stock
(501)
(331)
NET CASH PROVIDED BY FINANCING ACTIVITIES
86,330
101,927
Effect of exchange rate changes on cash
1,726
(349)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(216,711)
(391,580)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
291,223
436,608
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
74,512
45,028
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
436,507
Restricted cash, beginning of period
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
2,896
2,964
Income taxes paid
1,700
249
NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable
2,512
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
6,705
5,359
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 March 27, 2021 balances in the accompanying unaudited condensed consolidated balance sheets.
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):
March 26, 2022
March 27, 2021
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
18
9,641
9,659
19
1,127
1,146
Fixed income funds
2,279
16,128
18,407
244
16,264
16,508
Treasury securities
342
Equity securities
19,289
18,496
Alternative investments
3,964
2,126
Mutual funds:
Domestic stock funds
10,576
9,388
International stock funds
1,621
1,395
Target funds
22
21
Bond funds
141
145
Alternative funds
501
496
Total mutual funds
12,861
11,445
34,789
25,769
64,522
30,204
17,391
49,721
Assets at fair value
From the assets measured at fair value as of March 26, 2022, listed in the table above, $35.4 million of mutual funds, equity securities, and alternative investments are held in Investments, $9.0 million of money market funds are held in Cash and Cash Equivalents, $0.7 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $18.7 million of fixed income funds and $0.7 million of money markets 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 $54.2 million as of March 26, 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
19,049
(642)
15,867
642
16,509
Treasury Securities
Equity
15,347
3,942
14,664
3,832
Mutual Funds
9,392
2,820
12,212
8,769
2,049
10,818
Alternative Investments
3,028
936
1,929
197
47,158
7,056
54,214
41,229
6,720
47,949
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 $7.1 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of March 26, 2022 and March 27, 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.
8
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
2,450,281
1,797,399
36.3%
Over Time Revenue
39,032
27,605
41.4%
Total Net Sales
36.4%
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
6,759
5,602
3,408
Billings in Excess of Cost and Earnings
12,634
10,744
9,396
9
D. EARNINGS PER SHARE
The computation of earnings per share (“EPS”) is as follows (in thousands):
Numerator:
Net earnings attributable to controlling interest
Adjustment for earnings allocated to non-vested restricted common stock
(6,806)
(3,175)
Net earnings for calculating EPS
182,897
100,136
Denominator:
Weighted average shares outstanding
63,009
61,889
Adjustment for non-vested restricted common stock
(2,261)
(1,902)
Shares for calculating basic EPS
60,748
59,987
Effect of dilutive restricted common stock
225
Shares for calculating diluted EPS
60,973
60,015
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 March 26, 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 March 26, 2022, we had outstanding purchase commitments on commenced capital projects of approximately $68.7 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 March 26, 2022, we had approximately $30.0 million in outstanding payment and performance bonds for open projects. We had approximately $11.1 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On March 26, 2022, we had outstanding letters of credit totaling $51.7 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 March 26, 2022, we have irrevocable letters of credit outstanding totaling approximately $44.6 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 first quarter of 2022 which would require us to recognize a liability on our balance sheet.
11
F. BUSINESS COMBINATIONS
We completed the following acquisitions in fiscal 2022 and since the end of March 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
December 27, 2021
$24,571cash paid for 100% stock purchase, net of acquired cash
15,959
8,612
Retail
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
$20,817cash paid for 100% stock purchase
11,480
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
9,106
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 $8.2 million AUD.
September 27, 2021
$6,443cash paid for 100% asset purchase and estimated contingent consideration
4,039
2,404
Construction
Shelter Products, Inc. (Shelter)
Based in Haleyville, Alabama, Shelter operates its distribution and logistics business from an 87,800 sq.-ft. warehouse that specializes in manufactured housing industry customers. Shelter’s facility is adjacent to a UFP manufacturing facility that supplies trusses to manufactured housing builders, and the proximity will enable additional operational synergies. The Company had sales of approximately $11.4 million in 2020.
12
April 29, 2021
$10,129cash paid for 100% asset purchase
7,099
3,030
Endurable Building Products, LLC (Endurable)
Based near Minneapolis, Minnesota, Endurable is a leading manufacturer of customized structural aluminum systems and products for exterior purposes, such as deck framing, balconies, sunshades, railings and stairs. The company’s trademarked alumiLAST aluminum deck and balcony systems are known for their low-maintenance design and ease of installation. Endurable serves general contractors in the multifamily market throughout the U.S. and had sales of approximately $15 million in 2020.
April 19, 2021
$8,549cash paid for 100% asset purchase
1,526
7,023
Walnut Hollow Farm, Inc.
Walnut Hollow Farm, located in Wisconsin, is engaged in the business of designing, manufacturing, selling, and distributing wood products, tools, and accessories for the craft and hobby, outdoor sportsman art, personalized home décor, and hardware categories, with sales of approximately $11.6 million in 2020.
April 12, 2021
$153,462cash paid for 100% asset purchase
153,462
Spartanburg Forest Products, Inc.
Headquartered in Greer, South Carolina, Spartanburg Forest Products and its affiliates are a premier wood treating operation in the U.S., with approximately 150 employees and operations in five states. Its affiliates include Appalachian Forest Products, Innovative Design Industries, Blue Ridge Wood Preserving, Blue Ridge Wood Products, and Tidewater Wood Products and had combined sales of approximately $543.0 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 March 2021 and not consolidated with other operations contributed approximately $124.6 million in net sales and $10.3 million in operating profits during the first three 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.
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“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 March 26, 2022
All Other
Corporate
Net sales to outside customers
993,232
611,369
786,471
95,567
2,674
Intersegment net sales
65,948
22,173
25,352
109,772
(223,245)
Segment operating profit
71,397
82,391
78,818
14,815
11,604
Three Months Ended March 27, 2021
759,021
448,874
559,530
55,577
2,002
47,586
17,906
14,461
97,396
(177,349)
53,545
40,410
33,018
7,978
2,536
The following table presents goodwill by segment as of March 26, 2022, and December 25, 2021 (in thousands):
Balance as of December 25, 2021
73,376
128,541
89,000
24,121
2022 Acquisitions
8,012
2022 Purchase Accounting Adjustments
293
(5,715)
(674)
99
(5,997)
Foreign Exchange, Net
156
422
578
Balance as of March 26, 2022
81,681
122,826
88,482
24,642
The following table presents total assets by segment as of March 26, 2022, and December 25, 2021 (in thousands).
Total Assets by Segment
December 26,
Segment Classification
1,205,382
844,189
42.8
%
857,706
741,672
15.6
858,901
736,157
16.7
356,568
343,363
3.8
395,409
579,890
(31.8)
Total Assets
13.2
H. INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 24.0% in the first quarter of 2022 compared to 23.3% for same period in 2021. The increase was primarily due to one-time tax credit refunds recorded as a discrete item in the first quarter of 2021 that are not available in 2022.
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I. COMMON STOCK
Below is a summary of common stock issuances for the first three 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
80.04
Shares issued under the employee stock gift program
1
84.85
Shares issued under the director retainer stock program
80.78
Shares issued under the bonus plan
725
79.61
Shares issued under the executive stock match plan
62
82.87
Forfeitures
(2)
Total shares issued under stock grant programs
79.87
Shares issued under the deferred compensation plans
83.84
73.28
79.91
56.80
468
53.68
Shares issued under the executive stock grants plan
77
60.24
(11)
54.63
59.75
During the first three months of 2022, we repurchased approximately 44,442 shares of our common stock at an average share price of $79.74. In April 2022, we repurchased approximately 756,000 shares for $58.5 million, at an average share price of $77.40.
During the first three months of 2021, we did not repurchase any of our shares of common stock.
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J. INVENTORIES
Inventories are stated at the lower of cost or net realizable value. The cost of inventories includes raw materials, direct labor, and manufacturing overhead. Cost is determined on a weighted average FIFO basis. Raw materials consist primarily of unfinished wood products and other materials expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale.
We write down the value of inventory, the impact of which is reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future demand and market conditions and analysis of historical experience. There were no lower of cost or net realizable value adjustments to inventory as of March 26, 2022 and March 27, 2021.
K. SUBSEQUENT EVENTS
In April 2022, we added $500 million of borrowing capacity by entering into a shelf facility with multiple lenders to support future growth. No amounts have been drawn on this facility.
Additionally in April 2022, we repurchased approximately 756,000 shares for $58.5 million, at an average share price of $77.40.
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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 first quarter of 2022.
OVERVIEW
Our results for the first 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
First quarter average
1,219
960
First quarter percentage change
27.0
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
1,108
900
23.1
The sequential increase in overall lumber prices for the first quarter of the year was primarily due to strong market demand as well as certain constraints in the supply chain of lumber. 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 61.4% and 63.1% of our sales in the first three 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.
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 one business acquisition during the first three months of fiscal 2022 and nine during all of fiscal 2021. The annual historical sales attributable to acquisitions completed in the first three months of fiscal 2022 is approximately $85 million, while acquisitions completed during the last nine months of 2021 have annual sales of approximately $626 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2022 and 2021 are not presented.
See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our Unaudited Condensed Consolidated Statements of Earnings as a percentage of net sales.
Net sales
100.0
Cost of goods sold
80.8
84.3
Gross profit
19.2
15.7
Selling, general, and administrative expenses
8.8
8.2
Other (gains) losses, net
(0.1)
Earnings from operations
10.4
7.6
Other expense, net
0.2
0.1
Earnings before income taxes
10.2
7.5
2.4
1.7
7.8
5.7
Less net earnings attributable to noncontrolling interest
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
33.0
66.9
71.3
46.7
37.3
88.4
134.5
20
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 costs these strategies require, we believe this ratio provides an enhanced view of our effectiveness in managing these costs and mitigates the impact of changing lumber prices.
SG&A as percentage of gross profit
46.0%
52.4%
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).
858,895
461,815
625,059
64,024
1,157
134,337
149,554
161,412
31,543
1,517
Selling, general, administrative expenses
62,668
67,231
82,337
16,625
(8,711)
272
(68)
257
103
(1,376)
658,548
368,549
470,846
38,026
2,481
100,473
80,325
88,684
17,551
(479)
47,100
40,113
55,545
10,421
(3,081)
(172)
(198)
121
(848)
66
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
86.5
75.5
79.5
67.0
13.5
24.5
20.5
6.3
11.0
10.5
17.4
7.2
15.5
86.8
82.1
84.2
68.4
17.9
15.8
31.6
6.2
8.9
9.9
18.8
(1.5)
7.1
9.0
5.9
14.4
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
First quarter 2022 versus First quarter 2021
36.4
26.4
6.8
3.2
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
40.8
59.2
44.5
55.5
67.8
32.2
33.1
72.4
27.6
68.9
31.1
All Other and Corporate
28.7
Total Sales
58.4
41.6
58.2
41.8
Note: Certain prior year product reclassifications and the change in designation of certain products as "value-added" resulted in a change in prior year's sales.
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The increase in our ratio of commodity-based product sales to total sales in the retail segment reflected in the table above is primarily due to the impact of higher lumber prices in the first quarter of 2022 as the selling prices of these products are generally indexed to the current Lumber Market at the time they are shipped and lumber costs comprise a much higher percentage of the selling price than they do for value-added products. The acquisition of Spartanburg also contributed to the increase in commodity-based sales of treated lumber in our retail segment. Our overall unit sales of value-added products increased approximately 6% in the first quarter of 2022 compared to 2021, including a 3% contribution from acquisitions and 3% organic growth. Our unit sales of commodity-based products increased approximately 15%, including a 12% contribution from acquisitions and 3% organic growth.
The table below presents new product sales in thousands:
New Product Sales by Segment
Change
65,765
51,902
26.7
48,705
27,200
79.1
35,662
15,794
125.8
770
313
146.0
Total New Product Sales
150,902
95,209
58.5
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 2022 increased by 31% compared to the same period of 2021, due to a 19% increase in selling prices, acquisition unit growth of 12%, a 3% decrease due to the transfer of certain sales to the Construction segment, and an organic unit increase of 1%. We experienced organic unit growth in our UFP Edge (7%) and Retail Building Products (4%) business units. These increases were offset by organic unit decreases in our Sunbelt (3%), ProWood (2%), Deckorators (7%), Handprint (21%), and Outdoor Essentials (2%) business units. Our Deckorators business unit includes a variety of other products besides composite decking. Sales of accessories, such as plastic lattice, post caps, and balusters, reported a decline of 13%, while our composite decking unit sales increased by 5%. Capacity expansion contributed to our unit increases in Deckorators decking and UFP Edge, and we believe the investments we’ve made in these business units will add planned sales of nearly $100 million to the Retail segment in 2022. Finally, sales to big box customers were up 30%, while sales to independent retailers increased 31%.
Gross profits increased by $33.9 million, or 33.7% to $134.3 million for the first quarter of 2022 compared to the same period last year. Our increase in gross profit was attributable to the following:
24
Selling, general and administrative (“SG&A”) expenses increased by approximately $15.6 million, or 33.1%, in the first quarter of 2022 compared to the same period of 2021. The SG&A of recently acquired businesses contributed $2.6 million to the change in SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximtely $6.7 million and totaled approximately $20.7 million for the quarter. The remaining change was primarily due to increases in salaries and wages of $2.9 million, travel related expenses of $0.8 million, and sales incentive compensation of $0.6 million.
Earnings from operations for the Retail reportable segment increased in the first quarter of 2022 compared to 2021 by $17.8 million, or 33%, as a result of the factors mentioned above.
Industrial Segment
Net sales in the first quarter of 2022 increased 36% compared to the same period of 2021, due to a 39% increase in selling prices, acquisition unit growth of 1%, and a 4% decrease in organic unit sales. The increase in our selling prices is a result of increases in lumber and other operating costs we’ve been able to pass on to customers, 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 market share gains associated with $36 million in sales to new customers, $18 million of sales to new locations of existing customers, and $22 million of new product sales. These gains were offset by the loss of unit sales on less profitable accounts.
Gross profits increased by $69.2 million, or 86.2%, for the first quarter of 2022 compared to the same period last year. Acquisitions contributed $1.7 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 and commodity-based products contributed $49.9 million and $17.8 million, respectively, to the increase in gross profit.
Selling, general and administrative (“SG&A”) expenses increased by approximately $27.1 million, or 67.6%, in the first quarter of 2022 compared to the same period of 2021. Acquired operations since the second quarter of 2021 contributed approximately $1.3 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $13.0 million, and totaled $23.7 million for the quarter. The remaining increase was primarily due to increases in sales incentive compensation of $4.7 million, salaries and wages of $2.7 million, bed debt expense of $1.7 million, and travel related expenses of $0.7 million.
Earnings from operations for the Industrial reportable segment increased in the first quarter of 2022 compared to 2021 by $42.0 million, or 103.9%, due to the factors discussed above.
Construction Segment
Net sales in the first quarter of 2022 increased 41% compared to the same period of 2021, due to a 26% increase in selling prices, 3% due to the transfer of certain sales from the Retail segment, organic unit sales growth of 11%, and 1% growth from recent acquisitions. Organic unit changes within this segment consisted of increases of 30% in commercial construction, 16% in factory-built housing, 1% in site-built construction, and 13% in concrete forming. As of March 26, 2022 and December 25, 2021, we estimate that backlog orders associated with commercial construction approximated $93.0 million and $84.6 million, respectively. As of March 26, 2022 and December 25, 2021, we estimate that backlog orders associated with site-built construction approximated $141 million and $113.5 million, respectively. We expect that the orders above will be primarily filled within the next fiscal year; however, it is possible that some orders could be canceled.
25
Gross profits increased by $73.0 million, or 82.0%, for the first quarter of 2022 compared to the same period of 2021. The increase in our gross profit was comprised of the following factors:
Selling, general and administrative (“SG&A”) expenses increased by approximately $26.8 million, or 48.2%, in the first quarter of 2022 compared to the same period of 2021. Acquired operations since the second quarter of 2021 contributed approximately $0.9 million to total SG&A expenses for the quarter. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $13.7 million, and totaled $22.7 million for the quarter. The remaining increase was primarily due to increases in sales incentive compensation of $5.0 million, salaries and wages of $1.9 million, bad debt expense of $1.4 million, and travel related expenses of $0.6 million.
Earnings from operations for the Construction reportable segment increased in the first quarter of 2022 compared to 2021 by $45.8 million, or 138.7%, due to the factors mentioned above.
All Other Segment
Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant.
The corporate segment consists of over (under) allocated costs that are not significant.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
26
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 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.
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 53 days from 48 days during the first quarter of 2022 compared to the prior year period.
Days of sales outstanding
32
Days supply of inventory
41
38
Days payables outstanding
(20)
Days in cash cycle
53
48
The increase in our days supply of inventory in the first three months of 2022 compared to the same period of 2021 was primarily due to a four day increase in our days supply of inventory to ensure we meet the delivery expectations or our customers and a one day increase in our receivables cycle.
In the first three months of 2022, our cash consumed by operating activities was $245.0 million, which was comprised of net earnings of $193.1 million and $35.4 million of non-cash expenses, offset by a $473.5 million increase in working capital since the end of December 2021. Our cash flows used by operations increased by $48.4 million compared to the same period of last year primarily due to an increase in our investment in net working capital of $148.4 million compared to the prior year period, offset by an increase in our net earnings and non-cash expenses of $100.0 million. The increase in net working capital was due to higher lumber prices. the growth of our business, and an increase in our days supply of inventory.
27
Purchases of property, plant, and equipment and acquisitions (refer to Note F for Business Combinations) and comprised most of our cash used in investing activities during the first three months of 2022 and totaled $32.1 million and $24.6 million, respectively. Total proceeds from the sales of property, plant, and equipment were $1.2 million. Outstanding purchase commitments on existing capital projects totaled approximately $68.7 million on March 26, 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 old 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 primarily consisted of net borrowings of debt of approximately $101.5 million, the payment of quarterly dividends totaling $12.5 million ($0.20 per share), cash paid for repurchases of common stock of $0.5 million, and distributions to noncontrolling interests of $2.1 million. On April 20, 2022, our board of directors approved an increase in our second quarter dividend to $0.25 per share, payable on June 15, 2022, to shareholders of record on June 1, 2022. Additionally, in April 2022, we repurchased approximately 756,000 shares for $58.5 million, at an average share price of $77.40.
On March 26, 2022, we had $109.7 million outstanding on our $550 million revolving credit facility, and we had approximately $433.2 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 March 26, 2022.
At the end of the first quarter of 2022, we have approximately $445.3 million in total liquidity, consisting of our net cash surplus and remaining availability under our revolving credit facility. As lumber prices normalize and we move beyond our peak selling season we anticipate the increase in net working capital will turn into strong operating cash flow in the third and fourth quarters.
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)
December 26, 2021 – January 29, 2022
2,603,958
January 30 – February 26, 2022
6,300
79.53
2,597,658
February 27 – March 26, 2022
38,142
79.77
2,559,516
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 2.6 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:
31
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: May 4, 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