Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22684
UFP INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Michigan
38-1465835
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification Number)
organization)
2801 East Beltline NE, Grand Rapids, Michigan
49525
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (616) 364-6161
NONE
(Former name or former address, if changed since last report.)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ⌧
Accelerated Filer ◻
Non-Accelerated Filer ◻
Smaller Reporting Company ☐
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
Outstanding as of September 25, 2021
Common stock, $1 par value
61,887,770
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange On Which Registered
Common Stock, no par value
UFPI
The Nasdaq Stock Market, LLC
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION.
Page No.
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets at September 25, 2021, December 26, 2020 and September 26, 2020
3
Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended September 25, 2021 and September 26, 2020
4
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 25, 2021 and September 26, 2020
5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 25, 2021 and September 26, 2020
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
PART II.
OTHER INFORMATION
Legal Proceedings – NONE
Item 1A.
Risk Factors - NONE
35
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities – NONE
Mine Safety Disclosures – NONE
Item 5.
Other Information – NONE
Item 6.
Exhibits
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
September 25,
December 26,
September 26,
2021
2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
138,637
436,507
346,154
Restricted cash
17,592
101
724
Investments
33,723
24,308
20,530
Accounts receivable, net
783,959
470,504
583,079
Inventories:
Raw materials
368,185
316,481
286,418
Finished goods
532,480
250,813
242,316
Total inventories
900,665
567,294
528,734
Refundable income taxes
14,134
5,836
—
Other current assets
34,040
33,812
32,888
TOTAL CURRENT ASSETS
1,922,750
1,538,362
1,512,109
DEFERRED INCOME TAXES
2,330
2,413
2,070
RESTRICTED INVESTMENTS
18,925
17,565
17,327
RIGHT OF USE ASSETS
94,481
77,245
77,412
OTHER ASSETS
29,168
20,298
24,216
GOODWILL
292,318
252,193
245,925
INDEFINITE-LIVED INTANGIBLE ASSETS
7,380
7,401
7,361
OTHER INTANGIBLE ASSETS, NET
93,984
72,252
58,205
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment
1,156,070
974,497
935,639
Less accumulated depreciation and amortization
(603,159)
(557,335)
(529,644)
PROPERTY, PLANT AND EQUIPMENT, NET
552,911
417,162
405,995
TOTAL ASSETS
3,014,247
2,404,891
2,350,620
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft
10,812
Accounts payable
292,933
211,518
231,111
Accrued liabilities:
Compensation and benefits
249,242
166,478
171,472
Income taxes
3,024
Other
90,348
69,104
69,888
Current portion of lease liability
22,242
16,549
15,349
Current portion of long-term debt
93
100
2,760
TOTAL CURRENT LIABILITIES
665,670
463,749
493,604
LONG-TERM DEBT
310,119
311,607
311,267
LEASE LIABILITY
75,548
61,509
62,100
39,198
25,266
22,478
OTHER LIABILITIES
46,238
59,608
47,367
TOTAL LIABILITIES
1,136,773
921,739
936,816
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, 61,887,770, 61,205,780 and 61,186,636
61,888
61,206
61,187
Additional paid-in capital
239,563
218,224
216,002
Retained earnings
1,552,593
1,182,680
1,127,375
Accumulated other comprehensive loss
(3,278)
(1,794)
(6,974)
Total controlling interest shareholders’ equity
1,850,766
1,460,316
1,397,590
Noncontrolling interest
26,708
22,836
16,214
TOTAL SHAREHOLDERS’ EQUITY
1,877,474
1,483,152
1,413,804
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
See notes to consolidated condensed financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
NET SALES
2,093,784
1,486,227
6,619,329
3,760,290
COST OF GOODS SOLD
1,766,229
1,245,153
5,583,926
3,147,049
GROSS PROFIT
327,555
241,074
1,035,403
613,241
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
169,467
134,649
504,104
357,770
OTHER GAINS, NET
(10,037)
(176)
(11,248)
(2,120)
EARNINGS FROM OPERATIONS
168,125
106,601
542,547
257,591
INTEREST EXPENSE
3,433
2,486
10,483
6,291
INTEREST AND INVESTMENT LOSS (INCOME)
371
(1,565)
(3,614)
(1,623)
EQUITY IN EARNINGS OF INVESTEE
946
2,411
4,750
921
9,280
4,668
EARNINGS BEFORE INCOME TAXES
163,375
105,680
533,267
252,923
INCOME TAXES
37,628
26,819
127,909
63,798
NET EARNINGS
125,747
78,861
405,358
189,125
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,706)
(1,657)
(7,624)
(5,299)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
121,041
77,204
397,734
183,826
EARNINGS PER SHARE – BASIC
1.94
1.25
6.40
2.98
EARNINGS PER SHARE – DILUTED
6.38
OTHER COMPREHENSIVE INCOME:
OTHER COMPREHENSIVE GAIN (LOSS)
(2,024)
1,687
(1,500)
(4,030)
COMPREHENSIVE INCOME
123,723
80,548
403,858
185,095
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST
(4,496)
(1,922)
(7,608)
(3,354)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST
119,227
78,626
396,250
181,741
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, 2020
Net earnings
103,311
940
104,251
Foreign currency translation adjustment
(374)
(526)
(900)
Unrealized loss on debt securities
(1,296)
Distributions to noncontrolling interest
(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)
Expense associated with share-based compensation arrangements
2,936
Accrued expense under deferred compensation plans
5,795
Balance on March 27, 2021
61,838
1,276,722
(3,464)
20,336
1,586,543
173,382
1,978
175,360
1,759
720
2,479
Unrealized gain on debt securities
241
(9,276)
Issuance of 9,282 shares under employee stock 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
(10)
2,728
1,140
Balance on June 26, 2021
61,851
235,309
1,440,833
(1,464)
23,034
1,759,563
4,706
(1,897)
(210)
(2,107)
83
Additional purchase and adjustment of noncontrolling interest
(822)
(9,281)
Issuance of 10,008 shares under employee stock plans
583
Net issuance of 17,165 shares under stock grant programs
17
(115)
(98)
Issuance of 9,864 shares under deferred compensation plans
2,657
1,149
Balance on September 25, 2021
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, CONTINUED
Balance on December 28, 2019
61,409
192,173
995,022
(4,889)
14,018
1,257,733
40,159
411
40,570
(5,951)
(2,335)
(8,286)
(270)
(299)
Additional purchase of noncontrolling interest
130
(95)
Cash dividends - $0.125 per share - quarterly
(7,730)
Issuance of 10,549 shares under employee stock purchase plan
309
319
Net issuance of 350,124 shares under stock grant programs
350
12,454
1
12,805
Issuance of 89,616 shares under deferred compensation plans
Repurchase of 756,397 shares
(756)
(28,456)
(29,212)
1,404
5,343
Balance on March 28, 2020
61,102
211,724
998,996
(11,110)
11,570
1,272,282
66,463
3,231
69,694
2,026
125
2,151
688
(7,644)
Issuance of 9,714 shares under employee stock plans
367
377
Net issuance of 42,880 shares under stock grant programs
43
(174)
(129)
Issuance of 14,106 shares under deferred compensation plans
14
(14)
824
1,082
Balance on June 27, 2020
61,169
213,809
1,057,817
(8,396)
14,926
1,339,325
1,657
1,319
265
1,584
103
(634)
(7,646)
Issuance of 7,511 shares under employee stock plans
338
345
Net forfeiture of 1,382 shares under stock grant programs
(1)
(56)
(57)
Issuance of 11,326 shares under deferred compensation plans
12
(12)
826
1,097
Balance on September 26, 2020
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
61,741
47,226
Amortization of intangibles
9,369
5,863
Expense associated with share-based and grant compensation arrangements
8,444
3,152
Deferred income taxes
(594)
110
Unrealized gain on investments and other
(1,756)
(81)
Equity in earnings of investee
Net gain on sale and disposition of assets
(10,482)
(662)
Changes in:
Accounts receivable
(141,088)
(211,238)
Inventories
(204,144)
(39,167)
Accounts payable and cash overdraft
53,437
85,354
Accrued liabilities and other
99,067
105,401
NET CASH PROVIDED BY OPERATING ACTIVITIES
281,763
185,083
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(110,092)
(67,024)
Proceeds from sale of property, plant and equipment
26,597
2,588
Acquisitions and purchases of non-controlling interest, net of cash received
(433,275)
(34,820)
Purchases of investments
(17,866)
(24,266)
Proceeds from sale of investments
9,857
22,281
(3,478)
314
NET CASH USED IN INVESTING ACTIVITIES
(528,257)
(100,927)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities
886,966
6,862
Repayments under revolving credit facilities
(888,335)
(6,498)
Contingent consideration payments and other
(2,664)
(3,087)
Issuance of long-term debt
150,000
Proceeds from issuance of common stock
1,519
1,042
Dividends paid to shareholders
(27,831)
(23,020)
(932)
Repurchase of common stock
(334)
23
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(33,593)
95,178
Effect of exchange rate changes on cash
(292)
(1,122)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(280,379)
178,212
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR
436,608
168,666
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD
156,229
346,878
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period
168,336
Restricted cash, beginning of period
330
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
10,360
4,112
Income taxes paid
136,893
47,301
NON-CASH INVESTING ACTIVITIES
Capital expenditures included in accounts payable
2,366
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans
6,778
6,195
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. Certain prior year amounts have been reclassified to conform to the current year presentation.
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 26, 2020.
Seasonality has a significant impact on our working capital from March to August, which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the September 26, 2020 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):
September 25, 2021
September 26, 2020
Quoted
Prices with
Prices in
Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Money market funds
19
2,631
2,650
64
3,133
3,197
Fixed income funds
962
17,021
17,983
248
16,522
16,770
Treasury securities
310
Equity securities
18,543
10,524
Alternative investments
3,536
1,926
Mutual funds:
Domestic stock funds
9,968
6,826
International stock funds
1,675
1,243
Target funds
260
Bond funds
146
208
Alternative funds
497
433
Total mutual funds
12,309
8,970
32,143
19,652
55,331
19,806
19,655
41,387
Assets at fair value
From the assets measured at fair value as of September 25, 2021, listed in the table above, $33.6 million of mutual funds, equity securities, and alternative investments are held in Investments, $0.1 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 $18.3 million of fixed income funds and $2.6 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 $52.0 million as of September 25, 2021, 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
17,293
690
15,750
1,020
Treasury Securities
Equity
14,392
4,151
9,121
1,403
Mutual Funds
9,210
2,435
11,645
7,228
852
8,080
Alternative Investments
3,370
166
1,881
45
44,575
7,442
52,017
33,980
3,320
37,300
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 $7.4 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of September 25, 2021 and September 26, 2020.
C. REVENUE RECOGNITION
Within the three primary segments (Retail, Industrial, and Construction) that the Company operates, there are a variety of written agreements governing the sale of our products and services. The transaction price is stated at the purchase order level, which includes shipping and/or freight costs and any applicable governmental authority taxes. The majority of our contracts have a single performance obligation concentrated around the delivery of goods to the carrier, Free On Board (FOB) shipping point. Therefore, revenue is recognized when this performance obligation is satisfied. Generally, title and control passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day.
Certain customer products that we provide require installation by the Company or a 3rd party. Installation revenue is recognized upon completion. If the Company uses a 3rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.
The Company utilizes rebates, credits, discounts and/or cash-based incentives with certain customers which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. The allocation of these costs are applied at the invoice level and recognized in conjunction with revenue. Additionally, returns and refunds are estimated on a historical and expected basis which is a reduction of revenue recognized.
Earnings on construction contracts are reflected in operations using over time accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations, which is in accordance with ASC 606 as revenue is recognized when certain performance obligations are performed. Under over time accounting using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred 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
FOB Shipping Point Revenue
2,063,647
1,454,220
41.9%
6,530,204
3,663,140
78.3%
Construction Contract Revenue
30,137
32,007
(5.8)%
89,125
97,150
(8.3)%
Total Net Sales
40.9%
76.0%
The Construction segment comprises the construction contract revenue shown above. Construction contract revenue is primarily made up of site-built and framing customers.
The following table presents the balances of over time accounting accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):
Cost and Earnings in Excess of Billings
3,776
4,169
4,130
Billings in Excess of Cost and Earnings
10,373
11,530
11,264
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
(3,952)
(2,195)
(12,800)
(5,110)
Net earnings for calculating EPS
117,089
75,009
384,934
178,716
Denominator:
Weighted average shares outstanding
62,266
61,548
62,162
61,642
Adjustment for non-vested restricted common stock
(2,033)
(1,750)
(2,001)
(1,713)
Shares for calculating basic EPS
60,233
59,798
60,161
59,929
Effect of dilutive restricted common stock
168
20
137
Shares for calculating diluted EPS
60,401
59,818
60,298
59,948
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 September 25, 2021, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.
On September 25, 2021, we had outstanding purchase commitments on commenced capital projects of approximately $44.1 million.
We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also distribute products manufactured by other companies, some of which are no longer in business. While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.
As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances, we are required to post payment and performance bonds to ensure the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims properly made against these bonds. As of September 25, 2021, we had approximately $39.6 million outstanding payment and performance bonds for open projects. We had approximately $2.1 million in payment and performance bonds outstanding for completed projects which are still under warranty.
On September 25, 2021, we had outstanding letters of credit totaling $52.6 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. As of September 25, 2021, we have irrevocable letters of credit outstanding totaling approximately $45.5 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.
We are required to provide irrevocable letters of credit in favor of the bond trustees for all industrial development revenue bonds that have been issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $7.1 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.
Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of UFP Industries, Inc. in certain debt agreements, including the Series 2012, 2018 and 2020 Senior Notes and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.
We did not enter into any new guarantee arrangements during the third quarter of 2021 which would require us to recognize a liability on our balance sheet.
F. BUSINESS COMBINATIONS
We completed the following acquisitions in 2021 and since the end of September 2020, which were accounted for using the purchase method in thousands unless otherwise noted:
Net
Company
Acquisition
Intangible
Tangible
Operating
Name
Date
Purchase Price
Assets
Segment
April 29, 2021
$10,108cash paid for 100% asset purchase
7,099
3,009
Construction
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
Retail
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.
March 1, 2021
$4,724cash paid for 100% asset purchase and estimated contingent consideration
4,264
460
J.C. Gilmore Pty Ltd (Gilmores)
Founded in 1988 and operating from its distribution facility in Port Melbourne, Australia, Gilmores is a leading distributor in the industrial and construction industries of packaging tapes, stretch films, packaging equipment, strapping, construction protection products and other items, with 2020 sales of $15 million AUD ($10 million USD).
December 28, 2020
$259,011cash paid for 100% stock purchase
66,899
192,112
Retail/Industrial
PalletOne, Inc. (PalletOne)
Based in Bartow, Florida, PalletOne is a leading manufacturer of new pallets in the U.S., with 17 pallet manufacturing facilities in the southern and eastern regions of the country. The company also supplies other specialized industrial packaging, including custom bins and crates, and its Sunbelt Forest Products (Sunbelt) subsidiary operates five pressure-treating facilities in the Southeastern U.S. PalletOne and its affiliates had 2019 and 2020 sales of $525 million and $698 million, respectively.
13
November 10, 2020
$21,268cash paid for 100% asset purchase
11,923
9,345
Atlantic Prefab, Inc.; Exterior Designs, LLC; and Patriot Building Systems, LLC
Based in Wilton, New Hampshire, Atlantic Prefab produces prefabricated steel wall panels and light gauge metal trusses. The company’s steel component and prefinished wall panel lines are new, value-added product additions for UFP Construction that help shorten project timelines. Exterior Designs is a leading installer of siding and exterior cladding such as fiber cement, ACM (aluminum composite material) panels, phenolic panels, and EIFS (exterior insulation and finish systems). The company is based in Londonderry, New Hampshire, and serves commercial and multi-family clients throughout the Northeast. Also based in Londonderry, Patriot Building Systems provides commercial and multi-family framing services in the Northeast and will focus on markets not currently served by companies of UFP Industries. The companies had combined annual sales of approximately $28 million.
October 1, 2020
$5,936cash paid for 100% asset purchase
5,222
714
Fire Retardant Chemical Technologies, LLC (FRCT)
Founded in 2014 and based in Matthews, North Carolina, FRCT’s business includes a research and development laboratory specializing in developing and testing a wide range of high-performance chemicals, including fire retardants and water repellants. The company had annual sales of approximately $6.4 million.
September 30, 2020
$3,475cash paid for 50% stock purchase and estimated contingent consideration
7,267
(1,369)
Enwrap Logistic & Packaging S.r.l. (Enwrap)
Enwrap is a newly formed company dedicated to the logistics and packaging business of its predecessor, Job Service S.p.A. Headquartered in Milan, Italy, Enwrap provides high-value, mixed material industrial packaging and logistics services through eight locations in Italy. These locations generated annual sales of approximately $14 million.
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 September 2020 and not consolidated with other operations contributed approximately $903.0 million in net sales and $26.0 million in operating profits during the first nine months of 2021.
G. SEGMENT REPORTING
The Company operates manufacturing, treating and distribution facilities internationally, but primarily in the United States. The business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. The Company manages the operations of its individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail, Industrial, and Construction segments. 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 the Company’s International segment, which comprises our Mexico, Canada, and Australia operations and sales and buying offices in other parts of the world.
Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below.
The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates. Total assets of the Corporate column include unallocated cash and cash equivalents, certain prepaid assets, certain property, equipment and other assets pertaining to the centralized activities of Corporate, UFP Real Estate, Inc., and UFP Transportation Ltd. The tables below are presented in thousands:
Three Months Ended September 25, 2021
Industrial
All Other
Corporate
Net sales to outside customers
696,201
573,234
722,872
98,689
2,788
Intersegment net sales
50,546
23,148
27,574
122,470
(223,738)
Segment operating profit
(26,153)
70,408
84,205
20,283
19,382
Three Months Ended September 26, 2020
700,522
282,124
447,103
56,700
(222)
45,416
11,773
17,909
76,029
(151,127)
62,181
22,037
16,513
7,449
(1,579)
Nine Months Ended September 25, 2021
2,714,440
1,633,289
2,021,106
243,736
6,758
163,279
66,039
62,069
345,920
(637,307)
89,443
190,344
184,330
44,565
33,865
Nine Months Ended September 26, 2020
1,661,873
763,046
1,187,429
148,503
(561)
109,378
32,788
49,685
196,908
(388,759)
122,082
53,837
50,544
20,573
10,555
The following table presents goodwill by segment as of September 25, 2021, and December 26, 2020 (in thousands):
Balance as of December 26, 2020
61,943
87,827
90,729
11,694
2021 Acquisitions
18,441
43,844
2,427
4,176
68,888
2021 Purchase Accounting Adjustments
(1,682)
(17,937)
(6,227)
(2,575)
(28,421)
Foreign Exchange, Net
(443)
(342)
Balance as of September 25, 2021
78,702
113,734
87,030
12,852
15
The following table presents total assets by segment as of September 25, 2021, and December 26, 2020 (in thousands).
Total Assets by Segment
Segment Classification
829,745
510,464
62.5
%
740,206
416,487
77.7
725,419
510,972
42.0
284,626
196,856
44.6
434,251
770,112
(43.6)
Total Assets
25.3
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 23.0% in the third quarter of 2021 compared to 25.4% for same period in 2020 and was 24.0% in the first nine months of 2021 compared to 25.2% for the same period in 2020. The decrease was primarily due to a decrease in permanent tax differences in 2021 compared to the prior year, none of which are individually significant.
I. COMMON STOCK
Below is a summary of common stock issuances for the first nine months of 2021 and 2020 (in thousands, except average share price):
Share Issuance Activity
Common Stock
Average Share Price
Shares issued under the employee stock purchase plan
25
71.18
Shares issued under the employee stock gift program
76.80
Shares issued under the director retainer stock program
69.80
Shares issued under the bonus plan
487
57.06
Shares issued under the executive stock match grants plan
77
60.24
Forfeitures
(21)
Total shares issued under stock grant programs
549
57.64
Shares issued under the deferred compensation plans
108
62.48
16
28
44.14
45.93
46
24.80
271
47.51
79
47.60
(7)
391
44.92
115
53.85
During the first nine months of 2021, we did not repurchase any of our shares of common stock.
During the first nine months of 2020, we repurchased approximately 756,000 shares of our common stock at an average share price of $38.62.
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.
The Company writes 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 the Company expects 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 September 25, 2021 and September 26, 2020 was $1.3 million and $0, respectively.
K. SUBSEQUENT EVENTS
On September 27, 2027, we acquired the equity of Shelter Products, Inc., for $6.5 million. Based in Haleyville, Alabama, Shelter Products provides distribution and logistics support to factory-built manufacturers through nine warehouses across the U.S.
On October 29, 2021, we acquired the assets of The Box Pack Trust, operating as Boxpack Packaging (Boxpack) for $5.2 million. Based near Melbourne, Australia, Boxpack specializes in flexographic and lithographic cardboard packaging, using the latest CAD design and finishing techniques.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UFP Industries, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and Australia that supply wood, wood composite and other products to three markets: retail, industrial, and construction. We are headquartered in Grand Rapids, Michigan. For more information about UFP Industries, Inc., or our affiliated operations, go to www.ufpi.com.
This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations, government imposed “stay at home” orders and directives to cease or curtail operations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of the third quarter of 2021.
OVERVIEW
Our results for the third quarter of 2021 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
890
February
954
402
March
1,035
420
April
1,080
358
May
1,428
394
June
1,344
455
July
530
August
443
716
September
412
934
Third quarter average
515
727
Year-to-date average
920
510
Third quarter percentage change
(29.2)
Year-to-date percentage change
80.4
In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprise almost two-thirds of our total lumber purchases.
Random Lengths SYP
858
346
903
938
360
922
333
1,150
1,052
494
552
448
729
438
886
483
722
808
495
(33.1)
63.2
The sequential increase in overall lumber prices for the first half of the year was primarily due to strong market demand as well as certain constraints in the supply chain of lumber. Prices began to fall in June 2021 as pandemic related restrictions were lifted, the economy re-opened, and consumers shifted their spending to other areas. We believe prices in the third quarter of 2021 reflect normalized levels. A decline 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 58.0% and 48.7% of our sales in the first nine months of 2021 and 2020, respectively. The increase from the prior year ratio reflects the impact of higher lumber prices and the results of PalletOne’s subsidiaries, Sunbelt and Spartanburg Forest Products.
Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.
Below is a general description of the primary ways in which our products are priced.
For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.
The greatest risk associated with changes in the trend of lumber prices is on the following products:
In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.
Period 1
Period 2
Lumber cost
300
400
Conversion cost
50
= Product cost
450
Adder
= Sell price
500
Gross margin
12.5
10.0
As is apparent from the preceding example, the level of lumber prices does not impact our overall profits but does impact our margins. Gross margins and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.
21
BUSINESS COMBINATIONS
We completed five business acquisitions during the first nine months of fiscal 2021 and five during all of fiscal 2020. The annual historical sales attributable to acquisitions completed in the first nine months of fiscal 2021 is approximately $1.3 billion, while acquisitions completed during the last quarter of 2020 have annual sales of approximately $48 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2021 and 2020 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
84.4
83.8
83.7
Gross profit
15.6
16.2
16.3
Selling, general, and administrative expenses
8.1
9.1
7.6
9.5
Other gains, net
(0.5)
(0.2)
(0.1)
Earnings from operations
8.0
7.2
8.2
6.9
Other expense, net
0.2
0.1
Earnings before income taxes
7.8
7.1
6.7
1.8
1.9
1.7
6.0
5.3
6.1
5.0
Less net earnings attributable to noncontrolling interest
5.8
5.2
4.9
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
13.0
30.0
3.0
35.9
28.7
68.8
16.1
25.9
40.9
57.7
51.3
110.6
33.4
22
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
51.7%
55.9%
48.7%
58.3%
Operating Results by Segment:
Our business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. The Company manages the operations of its individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our retail, industrial, and construction segments. 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 the Company’s International segment, which comprises our Mexico, Canada, Australia, and Italy operations and sales and purchasing offices in other parts of the world. Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates.
The following tables present our operating results, for the periods indicated, by segment (in thousands).
685,369
446,822
568,809
63,082
2,147
10,832
126,412
154,063
35,607
641
Selling, general, administrative expenses
36,899
55,723
70,663
15,996
(9,814)
86
281
(805)
(672)
(8,927)
594,896
233,971
385,028
38,543
(7,285)
105,626
48,153
62,075
18,157
7,063
43,515
26,080
45,411
10,499
9,144
(70)
36
151
209
(502)
2,480,804
1,292,102
1,644,069
160,853
6,098
233,636
341,187
377,037
82,883
660
144,375
150,739
193,144
40,021
(24,175)
(182)
104
(437)
(1,703)
(9,030)
1,429,229
635,424
1,002,932
101,240
(21,776)
232,644
127,622
184,497
47,263
21,215
110,596
73,662
134,098
28,228
11,186
(34)
123
(145)
(1,538)
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
N/A
98.4
77.9
78.7
63.9
1.6
22.1
21.3
36.1
9.7
9.8
(0.7)
(3.8)
12.3
11.6
20.6
24
84.9
82.9
86.1
68.0
15.1
17.1
13.9
32.0
6.2
9.2
10.2
18.5
0.4
8.9
3.7
13.1
91.4
79.1
81.3
66.0
8.6
20.9
18.7
34.0
9.6
16.4
3.3
11.7
18.3
86.0
83.3
84.5
68.2
14.0
16.7
15.5
31.8
11.3
19.0
(1.0)
7.3
4.3
We design, manufacture and market wood and wood-alternative products, primarily used to enhance outdoor living environments, for national home centers and other retailers, 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
Third quarter 2021 versus Third quarter 2020
27.9
16.0
(3.0)
Year-to-date 2021 versus Year-to-date 2020
76.0
46.0
25.0
Value-Added
Commodity-Based
48.6
51.4
49.7
50.3
69.2
30.8
63.7
36.3
74.5
25.5
74.3
25.7
All Other and Corporate
70.7
29.3
74.1
Total Sales
64.1
60.5
39.5
26
43.3
56.7
54.4
45.6
66.6
65.5
34.5
70.5
29.5
77.4
22.6
71.6
28.4
75.0
58.2
41.8
64.6
35.4
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.
The increase in our ratio of commodity-based sales to total sales during the first nine months of 2021 reflected in the table above is primarily due to the impact of dramatically higher lumber prices in the first half of 2021, which have normalized during the third quarter. This is due to the fact that 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 Sunbelt and Spartanburg also contributed to the increase in commodity-based sales of treated lumber in our retail segment, while PalletOne contributed to the increase in value-added sales in the industrial segment. Our unit sales of value-added products increased approximately 17% in the third quarter of 2021 compared to 2020, including a 15% contribution from acquisitions and 2% organic growth. Our unit sales of commodity-based products increased approximately 7%, including a 19% contribution from acquisitions and an organic unit decline of 12%.
27
New Product Sales by Segment
Change
111,795
118,731
(5.8)
375,798
301,602
24.6
41,436
21,468
93.0
115,542
51,582
124.0
37,524
16,229
131.2
95,414
42,038
127.0
5,998
2,495
140.4
13,419
8,082
Total New Product Sales
196,753
158,923
23.8
600,173
403,304
48.8
Note: Certain prior year product reclassifications and the change in designation of certain products as "new" resulted in a change in prior year's sales.
Retail Segment
Net sales in the third quarter of 2021 decreased by 1% compared to the same period of 2020, due to acquisition unit growth of 18%, which was offset by an organic unit decline of 19%. The price variance for this period was flat as the impact of lower prices on commodity-based products was offset by higher prices on value-added products which are generally sold at a fixed price. Organic unit decreases of 29% in our Handprint Home & Décor products, 28% in our ProWood pressure-treated products, 14% in our Deckorators composite decking and railing products, and 8% in our Outdoor Essentials Fence, Lawn & Garden products were offset by organic unit growth of 12% in our UFP Edge siding, pattern, and trim products. The decline in our unit sales is primarily due to a shift in consumer spending as a result of the end of pandemic-related restrictions on certain activities. The increase in unit sales of UFP Edge was largely due to investments made to increase our capacity to produce these products as well as market share gains. Lastly, approximately $13 million of sales to customers that distribute products for concrete forming were transferred from the construction segment to the retail segment. Sales to big box customers were down 8%, while sales to independent retailers increased 14%.
Gross profits decreased by $94.8 million, or 89.7% to $10.8 million for the third quarter of 2021 compared to the same period last year. Our decrease in gross profit was attributable to the following:
Selling, general and administrative (“SG&A”) expenses decreased by approximately $6.6 million, or 15.2%, in the third quarter of 2021 compared to the same period of 2020. The SG&A of recently acquired businesses contributed $4.8 million to the change in SG&A. This was offset by accrued bonus expense, which varies with our overall profitability and return on investment, which decreased by $12.0 million and totaled approximately $3.0 million for the quarter. The remaining change was primarily due to increases in salaries and wages and travel related expenses, offset by decreases in sales incentive compensation and bad debt expense.
Earnings from operations for the Retail reportable segment decreased in the third quarter of 2021 compared to 2020 by $88.3 million, or 142%, as a result of the factors mentioned above.
Net sales in the first nine months of 2021 increased 63% compared to the same period of 2020, due to a 33% increase in selling prices and a 36% increase in unit sales from acquired operations, offset by a 6% decrease in organic unit sales. Organic unit increases of 21% of UFP Edge, 13% of Deckorators, and 7% of Outdoor Essentials, were offset by organic unit declines of 19% of ProWood and 11% of Handprint. The transfer of approximately $29 million in sales to the retail segment from the construction segment discussed above contributed to unit growth in the retail segment. Sales to big box customers were up 55% (12% organic), while sales to independent retailers decreased 5% (6% organic).
Gross profits increased 0.4% to $233.6 million in the first nine months of 2021 compared to the same period of 2020. Our change in gross profit was attributable to the following:
Selling, general and administrative (“SG&A”) expenses increased by approximately $33.8 million, or 30.5%, in the first nine months of 2021 compared to the same period of 2020. The SG&A of recently acquired businesses contributed approximately $12.7 million to this increase. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $11.0 million and totaled approximately $37.9 for the first nine months of 2021. The remaining increase was primarily due to increases in salaries and wages, sales incentive compensation, and travel related expenses.
Earnings from operations for the Retail reportable segment decreased in the first nine months of 2021 compared to 2020 by $32.6 million, or 26.7% as a result of the factors mentioned above.
Industrial Segment
Net sales in the third quarter of 2021 increased 103% compared to the same period of 2020, due to a 34% increase in unit sales from recent acquisitions and a 69% increase in selling prices attributable to favorable sales mix changes as well as the Lumber Market.
Gross profits increased by $78.3 million, or 162.5%, for the third quarter of 2021 compared to the same period last year. Acquisitions contributed $21.5 million to the increase in gross profit. The remaining increase was primarily due to favorable changes in sales mix and the decline in lumber costs. We estimate that value-added and commodity-based products contributed $36.5 million and $20.2 million, respectively, to the increase in gross profit.
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Selling, general and administrative (“SG&A”) expenses increased by approximately $29.6 million, or 113.7%, in the third quarter of 2021 compared to the same period of 2020. Acquired operations since the third quarter of 2020 contributed approximately $7.4 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $12.6 million, and totaled $18.7 million for the quarter. The remaining increase was primarily due to increases in salaries and wages, sales incentive compensation, and travel related expenses.
Earnings from operations for the Industrial reportable segment increased in the third quarter of 2021 compared to 2020 by $48.4 million, or 219.5%, due to the factors discussed above.
Net sales in the first nine months of 2021 increased 114% compared to the same period of 2020, due to a 67% increase in selling prices attributable to the Lumber Market and favorable sales mix changes, a 10% increase in organic unit sales, and a 37% increase in unit sales from recent acquisitions.
Gross profits in the first nine months of 2021 increased 167.3% to $213.6 million compared to the same period of 2020. Acquisitions contributed $57.9 million to the increase in gross profit. The remaining increase was primarily due to organic unit sales growth and leveraging fixed costs as well as favorable changes in sales mix. In addition, in the first six months of the year we were able to maintain our profit per unit by more effectively passing on commodity lumber and other cost increases in our selling prices.
Selling, general and administrative (“SG&A”) expenses increased by approximately $77.1 million, or 104.6%, in the first nine months of 2021 compared to the same period of 2020. Acquired operations since the third quarter of 2020 contributed approximately $21.3 million to total SG&A expenses. Accrued bonus expense increased approximately $37.9 million compared to the same period of 2020 and totaled approximately $50.4 for the first nine months of 2021. The remaining increase was primarily due to increases in salaries and wages and sales incentive compensation.
Earnings from operations for the Industrial reportable segment increased in the first nine months of 2021 compared to 2020 by $136.5 million, or 253.6%, due to the factors mentioned above.
Construction Segment
Net sales in the third quarter of 2021 increased 62% compared to the same period of 2020, due to a 43% increase in selling prices attributable to the Lumber Market and unit sales growth of 19%, including 3% from recent acquisitions. Organic unit changes within this segment consisted of increases of 26% in commercial construction, 23% in site-built construction, and 17% in factory-built housing, offset by a 37% decrease in concrete forming. The transfer of approximately $13 million in sales to the retail segment from the construction segment discussed above contributed to the unit decline in the concrete forming business unit.
Gross profits increased by $92.0 million, or 148.2%, for the third quarter of 2021 compared to the same period of 2020. The increase in our gross profit was comprised of the following factors:
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Selling, general and administrative (“SG&A”) expenses increased by approximately $25.2 million, or 55.6%, in the third quarter of 2021 compared to the same period of 2020. Acquired operations since the third quarter of 2020 contributed approximately $1.1 million to total SG&A expenses for the quarter. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $14.8 million, and totaled $19.5 million for the quarter. The remaining increase was primarily due to increases in salaries and wages, sales incentive compensation, medical expenses, and travel related expenses.
Earnings from operations for the Construction reportable segment increased in the third quarter of 2021 compared to 2020 by $67.7 million, or 409.9%, due to the factors mentioned above.
Net sales in the first nine months of 2021 increased 70% compared to the same period of 2020, due to a 52% increase in selling prices primarily due to the Lumber Market and unit sales growth of 18%, including 3% from acquisitions. Organic unit changes within this segment consisted of increases of 27% in factory-built housing, 21% in site-built construction, and 8% in commercial construction. These increases were offset by a unit decline of 37% in concrete forming. The transfer of approximately $29 million in sales to the retail segment from the construction segment discussed above contributed to the unit decline in the concrete forming business unit.
Gross profits increased by $192.5 million, or 104.4% for the first nine months of 2021 compared to the same period of 2020. The increase in our gross profits was comprised of the following factors:
Selling, general and administrative (“SG&A”) expenses increased by approximately $59.0 million, or 44.0%, in the first nine months of 2021 compared to the same period of 2020. Acquired operations since the third quarter of 2020 contributed approximately $3.8 million to total SG&A expenses. Accrued bonus expense increased approximately $34.8 million compared to the same period of 2020 and totaled approximately $46.2 million for the first nine months of 2021. The remaining increase was primarily due to increases in salaries and wages, sales incentive compensation, medical expenses, and professional design fees.
Earnings from operations for the Construction reportable segment increased in the first nine months of 2021 compared to 2020 by $133.8 million, or 264.7%, due to the factors mentioned above.
All Other Segment
Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant.
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The corporate segment consists of over (under) allocated costs that are not significant and gains on the sale of certain real estate.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
Cash from operating activities
Cash used in investing activities
Cash (used in) 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. As explained in more detail below, the unusually large increase in lumber prices this year, as well as the significant increase in sales, resulted in a more significant increase in net working capital this year relative to prior years.
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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 57 days from 43 days during the third quarter and to 52 days from 49 days during the first nine months of 2021 compared to the respective prior periods.
Days of sales outstanding
Days supply of inventory
38
37
Days payables outstanding
(19)
(20)
Days in cash cycle
57
52
49
The increase in our days supply of inventory in the first nine months of 2021 compared to the same period of 2020 was primarily due to lower retail demand than our customers anticipated for our inventory planning. The four day increase in our receivables cycle was primarily due to longer payment terms for new customers attributable to recent acquisitions.
In the first nine months of 2021, our cash provided by operating activities was $281.8 million, which was comprised of net earnings of $405.4 million and $69.1 million of non-cash expenses, offset by a $192.7 million increase in working capital since the end of December 2020. Our operating cash flow this year increased by $96.7 million compared to the same period of last year primarily due to an increase in our net earnings and non-cash expenses of $229.8 million, offset by an increase in our investment in net working capital of $133.1 million compared to the prior year period. This increase was due to unusually high lumber prices and increased demand in our industrial and construction segments. PalletOne and other acquisitions also contributed to the increase in our seasonal investment in net working capital.
Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first nine months of 2021 and totaled $433.3 million and $110.1 million, respectively. Total proceeds from the sales of property, plant, and equipment were $26.6 million. Outstanding purchase commitments on existing capital projects totaled approximately $44.1 million on September 25, 2021. 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 approximately $147 million on capital projects for the year. Notable areas of capital spending include projects to increase the capacity and efficiency of our plants that produce our Deckorators mineral-based composite and wood-plastic composite decking and our UFP Edge siding, pattern and trim products, expand our machine-built pallet capacity, and take advantage of automation opportunities.
Cash flows from financing activities primarily consisted of net repayments of debt of approximately $1.4 million, the payment of quarterly dividends totaling $27.8 million ($0.15 per share), and distributions to noncontrolling interests of $2.9 million. On October 20, 2021, our board of directors approved an increase in our fourth quarter dividend to $0.20 per share, payable on December 15, 2021, to shareholders of record on December 1, 2021.
On September 25, 2021, we had $3.2 million outstanding on our $550 million revolving credit facility, and we had approximately $539.7 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 September 25, 2021.
At the end of the third quarter of 2021, we have approximately $667.5 million in total liquidity, consisting of our net cash surplus and remaining availability under our revolving credit facility. We anticipate our liquidity will continue to increase in the last three months of 2021 as lumber prices and demand continue to normalize and we convert our seasonal increase in net working capital to cash.
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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 26, 2020.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.
For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.
We are subject to fluctuations in the price of lumber. We experience significant fluctuations in the cost of commodity lumber products from primary producers (the “Lumber Market”). A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices. While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability. We anticipate that these fluctuations will continue in the future. (See “Impact of the Lumber Market on Our Operating Results.”)
Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. Dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We may enter into forward foreign exchange rate contracts in the future to mitigate foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.
Item 4. Controls and Procedures.
PART II. OTHER INFORMATION
Item 1A. Risk Factors.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Fiscal Month
(a)
(b)
(c)
(d)
June 27 – July 31, 2021
1,103,957
August 1 – 28, 2021
August 29 – September 25, 2021
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 1.1 million.
Item 5. Other Information.
None.
Item 6. Exhibits.
The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
Certifications.
Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language).
(INS)
iXBRL Instance Document.
(SCH)
iXBRL Schema Document.
(CAL)
iXBRL Taxonomy Extension Calculation Linkbase Document.
(LAB)
iXBRL Taxonomy Extension Label Linkbase Document.
(PRE)
iXBRL Taxonomy Extension Presentation Linkbase Document.
(DEF)
iXBRL Taxonomy Extension Definition Linkbase Document.
Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 3, 2021
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