UFP INDUSTRIES, INC. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UFP Industries, Inc. is a holding company with subsidiaries throughoutNorth America ,Europe ,Asia , andAustralia that supply wood, wood composite and other products to three markets: retail, industrial, and construction. We are headquartered inGrand Rapids, Michigan . For more information aboutUFP 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 theSecurities and Exchange Commission . We are pleased to present this overview of the third quarter of 2022. OVERVIEW Our results for the third quarter of 2022 include the following highlights:
Our net sales were up 11% compared to the third quarter of 2021, which was
comprised of a 6% increase in selling prices, a 2% increase in unit sales due
to acquisitions completed since September of last year, and a 3% increase in
organic unit sales. The overall increase in our selling prices is due to a
? combination of higher lumber prices and operating costs, an improvement in our
product mix of value-added products which tend to be sold on a fixed price,
elevated end market demand, and our value-based selling initiatives. Organic
unit growth of 6% in our construction segment and 5% in our retail segment was
offset by an organic unit decline of 2% in our industrial segment.
Our gross profits increased by
period of the prior year. Acquired operations contributed
? increase in our gross profits. Excluding the impact of acquisitions, gross
profits increased by
contributed
increase in gross profit.
Our operating profits increased
quarter of 2021. This increase resulted from a variety of factors including
improved leveraging of our fixed costs in business units that experienced
organic growth, increased sales of new and value-added products which have
? higher gross margins, and our ability to effectively include lumber and other
cost increases in the selling prices of our products. In addition, our
value-based and selective selling practices have enabled us to improve our
profit per unit. Acquisitions contributed approximately
increase in operating profits.
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UFP INDUSTRIES, INC. Our cash flows from operations for the first nine months of 2022 increased to
during the first nine months of 2021. The improved cash flows resulted from net
? earnings and non-cash expenses totaling
last year, offset by a
end of last year, compared to a
year, customer demand, particularly in our retail segment, followed more typical seasonal trends which allowed us to improve our inventory turns.
Our cash surplus at the end of
net debt (debt and cash overdraft less cash) of
?
and a shelf agreement with certain lenders along with our cash surplus resulted
in total liquidity of approximately$1.5 billion at the end of the third quarter of 2022. 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
2022 2021
January $ 1,112 $ 890
February 1,225 954
March 1,321 1,035
April 1,051 1,080
May 948 1,428
June 670 1,344
July 621 690
August 625 443
September 556 412
Third quarter average $ 601 $ 515
Year-to-date average $ 903 $ 920
Third quarter percentage change 16.7 %
Year-to-date percentage change (1.8) %
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UFP INDUSTRIES, INC.
In addition, a Southern
Southern Yellow Pine
Average $/MBF
2022 2021
January $ 1,010 $ 858
February 1,115 903
March 1,198 938
April 902 922
May 732 1,150
June 574 1,052
July 547 564
August 589 448
September 533 438
Third quarter average $ 556 $ 483
Year-to-date average $ 800 $ 808
Third quarter percentage change 15.1 %
Year-to-date percentage change (1.0) %
The sequential decrease in overall lumber prices for the third quarter of the
year was primarily due to demand in the retail and housing markets beginning to
return to more normalized levels and improvements in supply chain constraints. A
change in lumber prices impacts our profitability of products sold with fixed
and variable prices, as discussed below.
IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS
We generally price our products to pass lumber costs through to our customers so
that our profitability is based on the value-added manufacturing, distribution,
engineering, and other services we provide. As a result, our sales levels (and
working capital requirements) are impacted by the lumber costs of our products.
Lumber costs were 51.9% and 58.0% of our sales in the first nine months of 2022
and 2021, respectively. The decrease from the prior year ratio reflects an
improvement in our sales mix of value-added products as well as our value-based
selling practices.
Our gross margins are impacted by (1) the relative level of the Lumber Market
(i.e. whether prices are higher or lower from comparative periods), and (2) the
trend in the market price of lumber (i.e. whether the price of lumber is
increasing or decreasing within a period or from period to period). Moreover, as
explained below, our products are priced differently. Some of our products have
fixed selling prices, while the selling prices of other products are indexed to
the reported Lumber Market with a fixed dollar adder to cover conversion costs
and profits. Consequently, the level and trend of the Lumber Market impact our
products differently.
Below is a general description of the primary ways in which our products are priced.
Products with fixed selling prices. These products include value-added
products, such as manufactured items, sold within all segments. Prices for
these products are generally fixed at the time of the sales quotation for a
specified period of time. In order to reduce any exposure to adverse trends in
? the price of component lumber products, we attempt to lock in costs with our
suppliers or purchase necessary inventory for these sales commitments. The time
period limitation eventually allows us to periodically re-price our products
for changes in lumber costs from our suppliers. We believe our percentage of
sales of fixed price items is usually greatest in our third and fourth
quarters.
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UFP INDUSTRIES, INC. Products with selling prices indexed to the reported
dollar "adder" to cover conversion costs and profit. These products primarily
include treated lumber, panel goods, other commodity-type items, and trusses
sold to the manufactured housing industry. For these products, we estimate the
? customers' needs and we carry anticipated levels of inventory. Because lumber
costs are incurred in advance of final sale prices, subsequent increases or
decreases in the market price of lumber impact our gross margins. We believe
our sales of these products are at their highest relative level in our third
quarter, primarily due to pressure-treated lumber sold in our retail segment.
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:
Products with significant inventory levels with low turnover rates, whose
selling prices are indexed to the Lumber Market. In other words, the longer the
period of time these products remain in inventory, the greater the exposure to
changes in the price of lumber. This would include treated lumber, which
comprised approximately 22% of our total net sales in the first nine months of
2022. This exposure is less significant with remanufactured lumber, panel
? goods, other commodity-type items, and trusses sold to the manufactured housing
market due to the higher rate of inventory turnover. We attempt to mitigate the
risk associated with treated lumber through inventory consignment programs with
our vendors. We estimate that 17.3% of our total purchases for the first nine
months of 2022 were completed under these programs. (Please refer to the "Risk
Factors" section of our annual report on form 10-K, filed with the United
Products with fixed selling prices sold under long-term supply arrangements,
? particularly those involving multi-family construction projects. We attempt to
mitigate this risk through our purchasing practices and longer vendor
commitments.
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 50
= Product cost 350 450
Adder 50 50
= Sell price $ 400 $ 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.
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UFP INDUSTRIES, INC.
BUSINESS COMBINATIONS
We completed three business acquisitions during the first nine months of fiscal
2022 and nine during all of fiscal 2021. The annual historical sales
attributable to acquisitions completed in the first nine months of fiscal 2022
was approximately $131 million , while the annual historical sales attributable
to acquisitions completed during the last quarter of 2021 was approximately $76
million . These business combinations were not significant to our quarterly
results individually or in aggregate and thus pro forma results for 2022 and
2021 are not presented.
See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, "Business Combinations" for additional information.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the components of our
Unaudited Condensed Consolidated Statements of Earnings as a percentage of net
sales.
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 80.6 84.4 81.4 84.4
Gross profit 19.4 15.6 18.6 15.6
Selling, general, and administrative
expenses 9.2 8.1 8.4 7.6
Other (gains) losses, net (0.1) (0.5) - (0.2)
Earnings from operations 10.2 8.0 10.1 8.2
Other expense, net 0.3 0.2 0.3 0.1
Earnings before income taxes 9.9 7.8
9.9 8.1
Income taxes 2.5 1.8 2.4 1.9
Net earnings 7.4 6.0 7.4 6.1
Less net earnings attributable to
noncontrolling interest (0.2) (0.2) (0.2) (0.1)
Net earnings attributable to
controlling interest 7.2 % 5.8 % 7.3 % 6.0 %
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
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2022 2021 2022 2021
Units sold 5.0 % 13.0 % 5.0 % 30.0 %
Gross profit 37.4 35.9 38.3 68.8
Selling, general, and administrative
expenses 26.5 25.9 28.7 40.9
Earnings from operations 41.0 57.7 44.1 110.6
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UFP INDUSTRIES, INC.
The following table presents, for the periods indicated, our selling, general,
and administrative expenses (SG&A) as a percentage of gross profit. Given our
strategies to enhance our capabilities and improve our value-added product
offering, and recognizing the higher relative level of SG&A these strategies
require, we believe this ratio provides an enhanced view of our effectiveness in
managing these costs and mitigates the impact of changing lumber prices.
Three Months Ended Nine Months Ended
September 24, September 25, September 24, September 25,
2022 2021 2022 2021
Gross profit $ 450,176 $ 327,555 $ 1,431,991 $ 1,035,403
Selling, general, and
administrative expenses $ 214,327 $ 169,467 $ 649,015 $ 504,104
SG&A as percentage of gross
profit 47.6% 51.7% 45.3% 48.7%
Bonus expense, which is a component of SG&A, increased in the third quarter to$58 million compared to$44 million in the prior year. Modifications made to our bonus plan during 2022 are intended to reduce the payout rate when higher levels of pre-bonus earnings from operations are achieved. The adjustment to reduce bonus expense based on the new parameters was recorded in the second quarter and totaled$17 million . As a result of this change, our year to date bonus accrual rate has decreased to 19.0% of pre-bonus earnings from operations from a historical rate of approximately 21.0%. Bonus rates continue to be derived based on return on investment achieved. Bonus expense in the first nine months of 2022 totaled$183 million compared to$141 million in the prior year.
Operating Results by Segment:
Our business segments consist of UFP Retail Solutions,UFP Industrial andUFP Construction , and align with the end markets we serve. Among other things, this structure allows for a more specialized and consistent sales approach among Company operations, more efficient use of resources and capital, and quicker introduction of new products and services. We manage the operations of our individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail,Industrial, and Construction segments. The exception to this market-centered reporting and management structure is our International segment, which comprises ourMexico ,Canada ,Europe ,Asia , andAustralia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) are included in the "All Other" column of the table below. The "Corporate" column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results ofUFP Real Estate, Inc. , which owns and leases real estate, andUFP Transportation Ltd. , which owns, leases, and operates transportation equipment, are also included in the Corporate column. Inter-company lease and services charges are assessed to our operating segments for the use of these assets and services at fair market value rates. The following tables present our operating results, for the periods indicated, by segment (in thousands). Three Months Ended September 24, 2022 Retail Industrial Construction All Other Corporate Total Net sales$ 845,304 $ 584,808 $ 777,126 $ 112,203 $ 3,414 $ 2,322,855 Cost of goods sold 767,841 440,975 577,552 82,740 3,571 1,872,679 Gross profit 77,463 143,833 199,574 29,463 (157) 450,176 Selling, general, administrative expenses 48,435 66,521 89,455 16,752 (6,836) 214,327 Other 96 14 (265) (994) (46) (1,195) Earnings from operations$ 28,932 $ 77,298 $ 110,384 $ 13,705 $ 6,725 $ 237,044 23 Table of Contents UFP INDUSTRIES, INC. Three Months Ended September 25, 2021 Retail Industrial Construction All Other Corporate Total Net sales$ 696,201 $ 573,234 $ 722,872 $ 98,689 $ 2,788 $ 2,093,784 Cost of goods sold 685,369 446,822 568,809 63,082 2,147 1,766,229 Gross profit 10,832 126,412 154,063 35,607 641 327,555 Selling, general, administrative expenses 36,899 55,723 70,663 15,996 (9,814) 169,467 Other 86 281 (805) (672) (8,927) (10,037) Earnings from operations$ (26,153) $ 70,408 $ 84,205 $ 20,283 $ 19,382 $ 168,125 Nine Months Ended September 24, 2022 Retail Industrial Construction All Other Corporate Total Net sales$ 2,959,976 $ 1,872,510 $ 2,538,973 $ 332,186 $ 9,397 $ 7,713,042 Cost of goods sold 2,674,996 1,417,006 1,950,671 230,100 8,278 6,281,051 Gross profit 284,980 455,504 588,302 102,086 1,119 1,431,991 Selling, general, administrative expenses 159,490 200,987 266,430 49,733 (27,625) 649,015 Other 634 618 (162) 1,085 (834) 1,341 Earnings from operations$ 124,856 $ 253,899 $ 322,034 $ 51,268 $ 29,578 $ 781,635 Nine Months Ended September 25, 2021 Retail Industrial Construction All Other Corporate Total Net sales$ 2,714,440 $ 1,633,289 $ 2,021,106 $ 243,736 $ 6,758 $ 6,619,329 Cost of goods sold 2,480,804 1,292,102 1,644,069 160,853 6,098 5,583,926 Gross profit 233,636 341,187 377,037 82,883 660 1,035,403 Selling, general, administrative expenses 144,375 150,739 193,144 40,021 (24,175) 504,104 Other (182) 104 (437) (1,703) (9,030) (11,248) Earnings from operations$ 89,443 $ 190,344 $ 184,330 $ 44,565 $ 33,865 $ 542,547 24 Table of Contents UFP INDUSTRIES, INC.
The following tables present the components of our operating results, for the periods indicated, as a percentage of net sales by segment.
Three Months Ended September 24, 2022
Retail Industrial Construction All Other Corporate Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 % N/A 100.0 %
Cost of goods
sold 90.8 75.4 74.3 73.7 - 80.6
Gross profit 9.2 24.6 25.7 26.3 - 19.4
Selling, general,
administrative
expenses 5.7 11.4 11.5 14.9 - 9.2
Other - - - (0.9) - -
Earnings from
operations 3.4 % 13.2 % 14.2 % 12.2 % - 10.2 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
Three Months Ended September 25, 2021
Retail Industrial Construction All Other Corporate Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 % N/A 100.0 %
Cost of goods
sold 98.4 77.9 78.7 63.9 - 84.4
Gross profit 1.6 22.1 21.3 36.1 - 15.6
Selling, general,
administrative
expenses 5.3 9.7 9.8 16.2 - 8.1
Other - - (0.1) (0.7) - (0.5)
Earnings from
operations (3.8) % 12.3 % 11.6 % 20.6 % - 8.0 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
Nine Months Ended September 24, 2022
Retail Industrial Construction All Other Corporate Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 % N/A 100.0 %
Cost of goods
sold 90.4 75.7 76.8 69.3 - 81.4
Gross profit 9.6 24.3 23.2 30.7 - 18.6
Selling, general,
administrative
expenses 5.4 10.7 10.5 15.0 - 8.4
Other 0.2 - - 0.3 - -
Earnings from
operations 4.2 % 13.6 % 12.7 % 15.4 % - 10.1 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
Nine Months Ended September 25, 2021
Retail Industrial Construction All Other Corporate Total
Net sales 100.0 % 100.0 % 100.0 % 100.0 % N/A 100.0 %
Cost of goods
sold 91.4 79.1 81.3 66.0 - 84.4
Gross profit 8.6 20.9 18.7 34.0 - 15.6
Selling, general,
administrative
expenses 5.3 9.2 9.6 16.4 - 7.6
Other - - - (0.7) - (0.2)
Earnings from
operations 3.3 % 11.7 % 9.1 % 18.3 % - 8.2 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
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UFP INDUSTRIES, INC.
NET SALES
We design, manufacture and market wood and wood-alternative products, primarily
used to enhance outdoor living environments, for national home centers and other
retailers, engineered wood components, structural lumber, and other products for
factory-built and site-built residential and commercial construction, customized
interior fixtures used in a variety of retail stores, commercial, and other
structures, and structural wood packaging, components and packing materials for
various industries. Our strategic long-term sales objectives include:
Maximizing unit sales growth while achieving return on investment goals. The ? following table presents estimates, for the periods indicated, of our
percentage change in net sales which were attributable to changes in overall
selling prices versus changes in units shipped.
% Change
Organic
in Selling Acquisition Unit
in Sales Prices in Units Unit Change Change
Third quarter 2022 versus third quarter 2021 10.9 % 5.9 % 5.0 % 2.0 % 3.0 %
Year-to-date 2022 versus year-to-date 2021 16.5 % 11.5 % 5.0 % 3.0 % 2.0 %
Diversifying our end market sales mix by increasing sales of structural wood
and protective packaging to industrial users, increasing our penetration of the ? concrete forming market, increasing our sales of engineered wood components for
custom home, multi-family, military and light commercial construction, and
increasing our market share with independent retailers.
? Expanding geographically in our core businesses, domestically and
internationally.
Increasing our sales of "value-added" products and enhancing our product
offering with new or improved products. Value-added products generally consist
of fencing, decking, lattice, and other specialty products sold to the retail
market, structural wood packaging, engineered wood components, customized
interior fixtures, manufactured and assembled concrete forms, and "wood
alternative" products. Engineered wood components include roof trusses, wall ? panels, and floor systems. Wood alternative products consist of products
manufactured with wood and non-wood composites, metal, and plastics. Although
we consider the treatment of dimensional lumber and panels with certain
chemical preservatives a value-added process, treated lumber is not presently
included in the value-added sales totals.
are components of finished goods are also generally categorized as
"commodity-based" products.
The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales by our segments:
Three Months Ended September 24, 2022 Three Months Ended September 25, 2021
Value-Added Commodity-Based Value-Added Commodity-Based
Retail 46.6 % 53.4 % 48.6 % 51.4 %
Industrial 73.8 % 26.2 % 69.2 % 30.8 %
Construction 81.1 % 18.9 % 74.5 % 25.5 %
All Other and Corporate 76.7 % 23.3 % 70.7 % 29.3 %
Total Sales 66.3 % 33.7 % 64.1 % 35.9 %
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UFP INDUSTRIES, INC.
Nine Months Ended September 24, 2022 Nine Months Ended September 25, 2021
Value-Added Commodity-Based Value-Added Commodity-Based
Retail 44.2 % 55.8 % 43.3 % 56.7 %
Industrial 70.6 % 29.4 % 66.6 % 33.4 %
Construction 75.9 % 24.1 % 70.5 % 29.5 %
All Other and Corporate 74.9 % 25.1 % 71.6 % 28.4 %
Total Sales 62.2 % 37.8 % 58.2 % 41.8 %
Note: Certain prior year product reclassifications and the change in designation of certain products as "value-added" resulted in a change in prior year's sales.
Our overall unit sales of value-added products increased approximately 9% in the third quarter of 2022 compared to 2021, comprised of a 4% contribution from acquisitions and 5% organic growth. Our overall unit sales of value-added products increased approximately 7% in the first nine months of 2022 compared to the same period last year, comprised of a 3% contribution from acquisitions and 4% organic growth. Our organic unit sales of commodity-based products increased approximately 1% quarter-over-quarter and our overall unit sales of commodity-based products increased approximately 4% in the first nine months of 2022 compared to the same period last year, comprised of a 3% contribution from acquisitions and 1% organic growth.
Developing new products. We define new products as those that will generate
sales of at least
growing and gaining market penetration. New product sales in the third quarter
? of 2022 increased 38%. Approximately
first nine months of 2021, while still sold, were sunset in 2022 and excluded
from the table below because they no longer meet the definition above. Through
the first nine months of the year, we will have exceeded our goal of annual new
product sales of at least
The table below presents new product sales in thousands:
New Product Sales by Segment New Product Sales by Segment
Three Months Ended Nine Months Ended
September 24 , September 25 , % September 24 , September 25 , %
2022 2021 Change 2022 2021 Change
Retail $ 80,237 56,847 41.1 % $ 247,410 $ 176,814 39.9 %
Industrial 63,965 42,066 52.1 % 203,388 107,544 89.1 %
Construction 33,300 28,858 15.4 % 111,098 71,157 56.1 %
All Other and Corporate 481 763 (37.0) % 1,875 1,671 12.2 %
Total New Product Sales 177,983 128,534 38.5 % $ 563,771 $ 357,186 57.8 %
Note: Certain prior year product reclassifications and the change in designation of certain products as "new" resulted in a change in prior year's sales.
Retail Segment Net sales in the third quarter of 2022 increased by 21% compared to the same period of 2021, primarily due to a 15% increase in selling prices, a 2% decrease due to the transfer of certain product sales to the Construction segment this year, an organic unit increase of 5%, and unit growth from acquisitions of 3%. We experienced organic unit growth in our Sunbelt (20%), UFP Edge (17%),Deckorators (8%), and ProWood (8%) business units. These increases were offset by organic unit decreases in our Outdoor Essentials (17%) and Handprint (13%) business units. Capacity expansion contributed to our unit increases in UFP Edge and ourDeckorators mineral-based composite decking. Finally, sales to big box customers were up 30%, while sales to independent retailers increased 7%. 27 Table of ContentsUFP INDUSTRIES, INC.
Gross profits increased by$66.6 million , or 615% to$77.5 million for the third quarter of 2022 compared to the same period last year. The increase in gross profit was attributable to the following:
The gross profits of our Sunbelt and ProWood business units increased by a
total of
? compared to the same period of 2021. The products sold by these units consist
primarily of pressure treated lumber sold at a variable price tied to the
lumber market.
? Our UFP Edge and
increase in gross profits.
? Acquired operations contributed
The transfer of certain concrete forming business unit sales to the
? Construction segment partially offset the increase in gross profit by
million.
SG&A increased by approximately$11.5 million , or 31.3%, in the third quarter of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added roughly$1.7 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately$5.1 million from the third quarter of 2021 and totaled approximately$8.0 million for the quarter. The remaining increase was primarily due to increases in salaries and wages of$1.9 million , sales incentive compensation of$0.5 million , and travel related expenses of$0.5 million . Earnings from operations for the Retail reportable segment in the third quarter of 2022 were$28.9 million compared to a loss from operations in 2021 of$26.2 million , as a result of the factors mentioned above. Net sales in the first nine months of 2022 increased by 9% compared to the same period of 2021, due to a 7% increase in selling prices and acquisition unit growth of 5%, offset by a 2% decrease due to the transfer of certain sales to the Construction segment, and an organic unit decrease of 1%. We experienced organic unit growth in our UFP Edge (9%), ProWood (1%), and Sunbelt (1%) business units. This increase was offset by organic unit decreases in ourDeckorators (5%),Outdoor Essentials (15%), and Handprint (18%) business units. Capacity expansion contributed to our unit increase in UFP Edge. Finally, sales to big box customers increased 11%, while sales to independent retailers increased 3%. Gross profits increased by$51.3 million , or 22.0% to$285.0 million for the first nine months of 2022 compared to the same period last year. Our increase in gross profit was attributable to the following:
? The gross profits of our Sunbelt and ProWood business units increased by a
total of
? Acquired operations contributed
The transfer of certain concrete forming business unit sales to the
? Construction segment partially offset the increase in gross profit by
million.
SG&A increased by approximately$15.1 million , or 10.5%, in the first nine months of 2022 compared to the same period of 2021. SG&A of recently acquired businesses added$5.8 million to overall SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately$5.4 million and totaled approximately$32.5 million for the first nine months of 2022. Bonus expense decreased due to the plan modification disclosed above. The remaining increase in SG&A was primarily due to increases in salaries and wages of$3.8 million , advertising of$2.0 million , travel-related expenses of$1.9 million , bad debt expenses of$1.1 million and employee benefits of$1.1 million . 28 Table of ContentsUFP INDUSTRIES, INC.
Earnings from operations for the Retail reportable segment increased in the
first nine months of 2022 compared to 2021 by
Industrial Segment
Net sales in the third quarter of 2022 increased 2% compared to the same period of 2021, due to a 1% increase in selling prices and acquisition unit growth of 3%, offset by a 2% decrease in organic unit sales. The components of our change in organic unit sales includes increases associated with$12 million in sales to new customers,$22 million of sales to new locations of existing customers, and$12 million of new product sales. These increases were offset by decreases in unit sales on other accounts. Gross profits increased by$17.4 million , or 13.8%, for the third quarter of 2022 compared to the same period last year. Acquisitions contributed$3.7 million to the increase in gross profit. The remaining increase is a result of executing value-based selling initiatives and maintaining pricing discipline as we operate in an environment of elevated demand and capacity constraints, as well as favorable changes in our value-added sales mix. Excluding acquisitions, we estimate that value-added products contributed an$18.6 million increase in gross profit, while commodity-based products experienced a$4.9 million decline in gross profit. Value-added sales increased to 73.8% of total net sales in the third quarter of 2022 compared to 69.2% of total net sales in the third quarter of 2021. The increase in value-added sales and gross profits is due in part to new products which contributed$7.3 million to gross profits this year ($1.5 million from acquisitions). SG&A increased by approximately$10.8 million , or 19.4%, in the third quarter of 2022 compared to the same period of 2021. Acquired operations since the third quarter of 2021 contributed approximately$2.2 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately$1.2 million relative to the third quarter of 2021, and totaled$19.9 million for the quarter. Bonus expense was impacted by the plan modification disclosed above. The remaining increase was primarily due to increases in bad debt expense of$4.9 million and travel related expenses of$0.6 million .
Earnings from operations for the Industrial reportable segment increased in the
third quarter of 2022 compared to 2021 by
Net sales in the first nine months of 2022 increased 15% compared to the same period of 2021, due to a 16% increase in selling prices and acquisition unit growth of 2%, offset by a 3% decrease in organic unit sales. The increase in our selling prices is a result of passing along higher lumber prices and other operating costs, executing value-based selling initiatives and maintaining pricing discipline as we operate in an environment of elevated demand and capacity constraints. The components of our change in organic unit sales includes increases associated with$44 million in sales to new customers,$64 million of sales to new locations of existing customers, and$80 million of new product sales ($16.7 million from acquisitions). These increases were offset by decreases in unit sales on other accounts. Gross profits increased by$114.3 million , or 33.5%, for the first nine months of 2022 compared to the same period last year. Acquisitions contributed$6.8 million to the increase in gross profit. The remaining increase is a result of the pricing increases discussed above as well as favorable changes in our value-added sales mix. Excluding acquisitions, we estimate that value-added products and commodity-based products contributed$104.7 million and$2.8 million , respectively, to the increase in gross profit. Value-added sales increased to 70.6% of total net sales in the first nine months of 2022 compared to 66.6% of total net sales in the first nine months of 2021. The increase in value-added sales and gross profits is due in part to new products which contributed$33 million to gross profits this year ($4.6 million from acquisitions). 29 Table of ContentsUFP INDUSTRIES, INC.
SG&A increased by approximately$50.2 million , or 33.3%, in the first nine months of 2022 compared to the same period of 2021. Acquired operations since the first nine months of 2021 contributed approximately$4.5 million to our increase in costs. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately$12.9 million , and totaled$63.3 million for the nine months of 2022. Bonus expense was also impacted by the plan modification disclosed above. The remaining increase was primarily due to increases in bad debt expense of$12.9 million , sales incentive compensation of$6.2 million , travel related expenses of$1.6 million , medical benefits expense of$1.3 million , and salaries and wages of$1.0 million . Earnings from operations for the Industrial reportable segment increased in the first nine months of 2022 compared to 2021 by$63.6 million , or 33.4%, due
to the factors discussed above. Construction Segment Net sales in the third quarter of 2022 increased 8% compared to the same period of 2021, due to organic unit sales growth of 6% and a 2% increase due to the transfer of certain sales from the Retail segment. Organic unit changes within this segment consist of increases of 36% in commercial construction, 36% in concrete forming, 9% in factory-built housing, offset by a 7% decrease in site-built construction.
The organic increase in commercial is due primarily to an increase in customer
? demand in its retail business. As of
we estimate that backlog orders associated with commercial construction approximated$101.2 million and$84.6 million , respectively.
The organic unit increase in concrete forming is comprised of a 30% increase in
our value-added unit sales and a 6% increase in our commodity-based unit sales.
? The unit increase in value-added sales is due to an increase in manufactured
and assembled concrete forms and engineered wood product sales to new customers
and existing customers as well as geographic expansion in the northeast.
? The organic unit increase in factory-built is primarily due to an increase in
industry production.
Capacity constraints impacted our ability to grow our site-built business unit.
Consequently we have been selective in the business we take in order to
? maximize profitability. As of
estimate that backlog orders associated with site-built construction
approximated
Gross profits increased by$45.5 million , or 29.5%, for the third quarter of 2022 compared to the same period of 2021. The increase in our gross profit was comprised of the following factors:
Gross profits in our site-built construction business unit increased by
? million as a result of being more selective in the business that we take during
this period of elevated demand and capacity constraints.
? Gross profits in our factory-built housing business unit decreased
due to the impact of falling market prices on certain variable priced products.
The gross profit of our commercial construction business unit increased
? million as a result of increased unit sales, better productivity and other
operational improvements, as well as improved pricing discipline.
The gross profit of our concrete forming business unit increased by
? million, including$2.7 million as a result of the transfer of sales from the Retail segment. 30 Table of ContentsUFP INDUSTRIES, INC. SG&A increased by approximately$18.8 million , or 26.6%, in the third quarter of 2022 compared to the same period of 2021. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately$8.0 million , and totaled$27.5 million for the quarter. Bonus expense was also impacted by previously discussed modifications in our plan. The remaining increase was primarily due to increases in professional fees of$2.6 million , sales incentive compensation of$2.2 million , bad debt expense of$1.3 million , salaries and wages of$1.1 million , and travel related expenses of$0.5 million . Earnings from operations for the Construction reportable segment increased in the third quarter of 2022 compared to 2021 by$26.2 million , or 31.1%, due to the factors mentioned above. Net sales in the first nine months of 2022 increased 25.6% compared to the same period of 2021, due to a 13% increase in selling prices, 3% due to the transfer of certain product sales from the Retail segment, and organic unit sales growth of 10%. Organic unit changes within this segment consisted of increases of 30% in concrete forming, 43% in commercial construction, and 14% in factory-built housing. The organic unit sales of our site-built business unit decreased by 3% due to capacity constraints. Gross profits increased by$211.3 million , or 56.0%, for the first nine months of 2022 compared to the same period of 2021. The increase in our gross profit was comprised of the following factors:
Gross profits in our site-built construction business unit increased by
? million as a result of being more selective in the business that we take during
this period of elevated demand and capacity constraints. Gross profits in our factory-built housing business unit increased$31.6
million as a result of increased unit sales and leveraging fixed costs. In
? addition, value-added sales in this business unit increased to 56.5% of total
net sales in the first nine months of 2022 compared to 49.4% of total net sales
in the first nine months of 2021. The increase in new product sales contributed
approximately
The gross profit of our concrete forming business unit increased by
? million, including
Retail segment.
The gross profit of our commercial construction business unit increased
? million as a result of increased unit sales, better productivity and other
operational improvements, as well as improved pricing discipline.
? Acquired businesses contributed
SG&A increased by approximately$73.3 million , or 37.9%, in the first nine months of 2022 compared to the same period of 2021. Acquired operations since the first nine months of 2021 contributed approximately$1.2 million to the increase in SG&A. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately$32.6 million , and totaled$78.8 million for the first nine months of 2022. Bonus expense was also impacted by previously discussed modifications in our plan. The remaining increase was primarily due to increases in sales incentive compensation of$18.0 million , bad debt expense of$4.0 million , salaries and wages of$3.0 million , professional fees of$2.2 million , travel related expenses of$1.9 million , and medical benefits of$1.2 million . Earnings from operations for the Construction reportable segment increased in the first nine months of 2022 compared to 2021 by$137.7 million , or 74.7%, due to the factors mentioned above.
All Other Segment
Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant.
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UFP INDUSTRIES, INC.
Corporate
The corporate segment consists of over (under) allocated costs that are not significant, and in the prior year it also consisted of gains on the sale of certain real estate.
INCOME TAXES Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 25.4% in the third quarter of 2022 compared to 23.0% in the third quarter of 2021 and was 24.8% in the first nine months of 2022 compared to 24.0% for the same period in 2021. The increase was primarily due to one-time tax credits recorded as discrete items in 2021 that are not available in 2022.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
Nine Months Ended
September 24 , September 25,
2022 2021Cash from operating activities$ 533,046 $ 281,763 Cash used in investing activities (222,612) (528,257) Cash used in financing activities (151,654) (33,593) Effect of exchange rate changes on cash (139) (292) Net change in all cash and cash equivalents 158,641 (280,379) Cash, cash equivalents, and restricted cash, beginning of period 291,223 436,608
Cash, cash equivalents, and restricted cash, end of period
In general, we fund our growth through a combination of operating cash flows,
our revolving credit facility, industrial development bonds (when circumstances
permit), and issuance of long-term notes payable at times when interest rates
are favorable. We have not issued equity to finance growth except in the case of
a large acquisition. We manage our capital structure by attempting to maintain a
targeted ratio of debt to equity and debt to earnings before interest, taxes,
depreciation and amortization. We believe this is one of many important factors
to maintaining a strong credit profile, which in turn helps ensure timely access
to capital when needed.
Seasonality has a significant impact on our working capital due to our primary
selling season which occurs during the period from March to September.
Consequently, our working capital increases during our first and second quarters
which typically results in negative or modest cash flows from operations during
those periods. Conversely, we typically experience a substantial decrease in
working capital once we move beyond our peak selling season which typically
results in significant cash flows from operations in our third and fourth
quarters.
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UFP INDUSTRIES, INC.
Due to the seasonality of our business and the effects of the Lumber Market, we
believe our cash cycle (days of sales outstanding plus days supply of inventory
less days payables outstanding) is a good indicator of our working capital
management. As indicated in the table below, our cash cycle decreased to 55 days
from 57 days during the third quarter of 2022 compared to the prior year period.
Three Months Ended Nine Months Ended
September 24 , September 25 ,
2022 2021 2022 2021
Days of sales outstanding 35 35 34 34
Days supply of inventory 40 43 39 38
Days payables outstanding (20) (21) (20) (20)
Days in cash cycle 55 57 53 52
The decrease in our cash cycle in the third quarter of 2022 compared to the same period of 2021 was primarily due to a three day decrease in our days supply of inventory partially offset by a one day decrease in our payables cycle. The decrease in our days supply of inventory in the third quarter was due to more typical seasonal demand trends in the current year which allowed us to improve our inventory turns. Our cash flows from operations for the first nine months of 2022 increased to$533 million compared to$282 million of cash from operations during the first nine months of 2021. This improvement in operational cash flows is due to net earnings and non-cash expenses totaling$687 million , compared to$475 million last year, offset by a$154 million increase in net working capital since the end of last year, compared to a$193 million increase in the prior year. This year, customer demand, particularly in our retail segment, followed more typical seasonal trends which allowed us to improve our inventory turns. Purchases of property, plant, and equipment and acquisitions (refer to Note F for Business Combinations) comprised most of our cash used in investing activities during the first nine months of 2022 and totaled$113.7 million and$105.2 million , respectively. Net purchases of investments totaled$6.9 million . Total proceeds from the sales of property, plant, and equipment were$2.3 million . Outstanding purchase commitments on existing capital projects totaled approximately$65.4 million onSeptember 24, 2022 . Capital spending primarily consists of several projects to expand capacity to manufacture new and value-added products, achieve efficiencies through automation, make improvements to a number of facilities, and increase our transportation capacity (tractors, trailers) in order to meet higher volumes and replace older rolling stock. We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. We currently plan to spend approximately$175 million on capital projects for the year subject to significant variability due to extended supplier lead times. Notable areas of capital spending include projects to increase the capacity and efficiency of our plants that produce ourDeckorators mineral-based composite and wood-plastic composite decking and our UFP Edge siding, pattern and trim products, expand our capacity to produce machine-built pallets and engineered wood components, and take advantage of automation opportunities. Cash flows from financing activities consisted of cash paid for repurchases of common stock of$93.2 million . We repurchased approximately 1.21 million shares of our common stock for$93.2 million for the year at an average share price of$77.06 . The total number of remaining shares that may be repurchased under the program is approximately 1.4 million. Dividends paid during the first nine months of 2022 include first quarter dividends of$12.5 million ($0.20 per share) and second and third quarter dividends of$30.9 million ($0.25 per share). OnOctober 19, 2022 , the Board approved a quarterly dividend payment of$0.25 per share, payable onDecember 15, 2022 , to shareholders of record onDecember 1, 2022 . Net repayments of debt were approximately$2.3 million and distributions to noncontrolling interests were$12.0 million . We have debt maturities of$38.7 million due in December of this year which we intend to repay through operating cash flows and available cash balances. 33 Table of ContentsUFP INDUSTRIES, INC.
OnSeptember 24, 2022 , we had$6.9 million outstanding on our$550 million revolving credit facility, and we had approximately$536.0 million in remaining availability after considering$7.1 million in outstanding letters of credit. Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements onSeptember 24, 2022 . At the end of the third quarter of 2022, we have approximately$1.5 billion in total liquidity, consisting of our net cash surplus and remaining availability under our revolving credit facility and a shelf agreement with certain lenders providing up to$500 million in borrowing capacity.
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS
See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, "Commitments, Contingencies, and Guarantees."
CRITICAL ACCOUNTING POLICIES
In preparing our consolidated financial statements, we follow accounting principles generally accepted inthe 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 sinceDecember 25, 2021 . FORWARD OUTLOOK
Most recently, our long-term goals have been to:
? Grow our annual unit sales by 5-7%. We anticipate smaller tuck in acquisitions
will continue to contribute toward this goal.
? Achieve and sustain a 10% EBITDA margin by continuing to enhance our
capabilities and grow our portfolio of value-added products.
? Earn an incremental return on new investment over our cost of capital.
? Maintain a conservative capital structure.
We believe the effective execution of our strategies will allow us to achieve these long-term goals in the future. However, current economic conditions indicate theU.S. economy is either in or headed towards a recession, which will impact our results and vary depending on its severity and duration. The following factors should be considered when evaluating our future results:
Retail sales accounted for 38% of our net sales for the first nine months of
? 2022. When evaluating future demand for the segment, we analyze data such as
the same-store sales growth of national home improvement retailers and forecasts of home remodeling activity.
Industrial sales accounted for 24% of our net sales for the first nine months
? of 2022. When evaluating future demand, we consider a number of metrics,
including the Purchasing Managers Index (PMI), durable goods manufacturing, andU.S. real GDP. 34 Table of ContentsUFP INDUSTRIES, INC.
? Construction sales accounted for 31% of our net sales for the first nine months
of 2022.
The site-built business unit accounted for approximately 14% of our net sales
for the first nine months of 2022. Approximately one-third of site-built
customers are multifamily builders. More than 75% of our site-built residential
- housing sales are in areas such as
Mountain West regions, which have experienced significant population growth
through migration from other states and are forecasted to continue to grow in
the long term. When evaluating future demand, we analyze data from housing
starts in those regions.
The factory-built business unit accounted for 13% of our net sales for the
first nine months of 2022. This business, along with our multifamily business,
- could benefit from higher interest rates as buyers seek more affordable housing
alternatives. As a result of these factors, we believe these customers are
better insulated from downturns in the housing market. When evaluating future
demand, we analyze data from production of manufactured housing.
The commercial and concrete forming business units accounted for approximately
- 6% of our net sales for the first nine months of 2022. When evaluating future
demand, we analyze data from non-residential construction spending.
On a consolidated basis, and based on our 2022 forecasted results of operations
and business mix, we believe our decremental operating margin is in a range of
15% to 20% of net sales. In other words, we believe for every dollar decrease
? in sales, relative to the prior year, our earnings from operations may decline
by
operating margin during the Great Recession was approximately 13.5% (2006 peak
to 2011 trough). We estimate that our decremental margins by segment are as
follows:
- Retail is in a range of 5% to 10%
- Industrial is in a range of 20% to 25%
- Construction is in a range of 20% to 25%
? Key factors that may impact the ranges provided above include estimates of:
- Changes in our selling prices
- Changes in our sales mix by segment, business unit, and product
- The impact and level of the Lumber Market and trends in the commodity and other
material costs of our products
- Changes in labor rates
Our ability to reduce variable manufacturing, freight, selling, general, and
- administrative costs, particularly certain personnel costs, in line with net
sales
The results of our salaried bonus plan, which is based on pre-bonus profits and
- achieving minimum levels of pre-bonus return on investment over a required
hurdle rate
- Inflation and other changes in costs
Capital Allocation:
We believe the strength of our cash flow generation and conservative capital structure will provide us with sufficient resources to grow our business and also return to shareholders. We plan to continue to pursue a balanced and return driven approach to capital allocation across dividends, share buybacks, capital investments and acquisitions. Specifically:
Our board just approved another quarterly dividend of
? representing an increase of 67% from the prior year. We continue to consider
our payout ratios and yield when determining the appropriate rate.
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UFP INDUSTRIES, INC. For the first nine months of 2022, we repurchased 1.2 million shares of our
stock at an average price of
? repurchase up to an additional 1.4 million shares through the balance of the
year and will continue to do so at times when the price hits our pre-established target.
Capital expenditures in 2022 are likely to be at or below the low end of our
targeted capital expenditures range of
? lead times required for most equipment and rolling stock. Priority continues to
be given to projects that enhance the working environments of our plants, take
advantage of automation opportunities, and drive strategies that have strong
long-term growth potential of new and value-added products.
We continue to pursue a healthy pipeline of acquisition opportunities of
? companies that are a strong strategic fit and enhance our capabilities while
providing higher margin, return, and growth potential.
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