UFP INDUSTRIES, INC. FINANCIAL CONDITION AND RESULTS OF OPERATIONS
UFP Industries, Inc. (formerlyUniversal Forest Products, 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. The Company is headquartered inGrand Rapids, Mich . For more information aboutUFP Industries, Inc. , or its affiliated operations, go to www.ufpi.com.
On
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 2020. OVERVIEW Our results for the third quarter of 2020 include the following highlights:
Our net sales were up 28% compared to the third quarter of 2019, which was
comprised of a 20% increase in selling prices primarily due to the commodity
lumber market (see Historical Lumber Prices below) and an 8% increase in unit
sales. The unit sales of our retail segment increased 34% due to an increase in
? consumer demand and home improvement activities. We believe that this increase
is largely attributable to the impact of the pandemic on consumer behavior.
This increase was offset by our industrial and construction segments, which
declined 2% and 9%, respectively, as our customers in these segments continue
to recover from the government-imposed shutdowns resulting from the pandemic.
Our operating profits increased 51% compared to the third quarter of 2019. The
improvement in our profitability was driven by a number of factors, including
strong organic growth in our retail segment and effectively leveraging fixed
? costs and the impact of rising lumber prices on the selling prices of
commodity-based products such as our ProWood pressure-treated products. These
products are sold on a variable price formula tied to the Lumber Market. See
Historical Lumber Prices and Impact of the Lumber Market on Our Operating
Results below.
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UFP INDUSTRIES, INC. Our cash flow from operations for the first nine months of 2020 decreased to
by
? decreased by
increase in net working capital at the end of the third quarter of 2020 was due
to unusually high lumber prices and retail market demand, which continued to be
strong through the end of the quarter and drove an increase in our accounts
receivable.
? As a result of our strong operating cash flow, our cash surplus exceeded our
debt by approximately
Our available borrowing capacity under revolving credit facilities and cash
surplus resulted in total liquidity of approximately
?
finance our future growth. The average maturity of the notes is 13 years and
have an average fixed rate of interest at 3.09%.
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
2020 2019
January $ 377 $ 331
February 402 370
March 420 365
April 358 354
May 394 346
June 455 329
July 530 356
August 716 346
September 934 364
Third quarter average $ 727 $ 355
Year-to-date average $ 510 $ 351
Third quarter percentage change 104.8 %
Year-to-date percentage change 45.3 %
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UFP INDUSTRIES, INC.
In addition, a Southern
Random Lengths SYP
Average $/MBF
2020 2019
January $ 346 $ 370
February 345 403
March 360 408
April 333 401
May 412 383
June 494 344
July 552 359
August 729 348
September 886 355
Third quarter average $ 722 $ 354
Year-to-date average $ 495 $ 375
Third quarter percentage change 104.0 %
Year-to-date percentage change 32.0 %
The sequential increase in lumber prices above is due to a combination of mill
production curtailments and demand for lumber much higher than expectations. We
anticipate lumber prices will normalize to lower levels during the fourth
quarter, which will impact 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 48.7% and 42.6% of our sales in the first nine months of 2020
and 2019, respectively.
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 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 second
quarter, primarily due to pressure-treated lumber sold to the retail market.
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
comprises approximately 21% of our total sales. 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. (Please
refer to the "Risk Factors" section of our annual report on form 10-K, filed
with the
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 are
negatively impacted during periods of high lumber prices; conversely, we
experience margin improvement when lumber prices are relatively low. In order to
more effectively evaluate our profitability in such periods, we believe it is
useful to compare our change in units shipped with our changes in costs and
profits.
BUSINESS COMBINATIONS
We completed two business acquisitions during the first nine months of 2020 and
three during all of 2019. The annual historical sales attributable to
acquisitions completed in the first nine months of 2020 and all of 2019 were
approximately $38 million and $37 million , respectively. These business
combinations were not significant to our quarterly results individually or in
aggregate and thus pro forma results for 2020 and 2019 are not presented.
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UFP INDUSTRIES, INC. 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 26, September 28, September 26, September 28,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 83.8 83.9 83.7 84.5
Gross profit 16.2 16.1 16.3 15.5
Selling, general, and administrative
expenses 9.1 9.9 9.5 9.8
Other - 0.1 (0.1) -
Earnings from operations 7.2 6.1 6.9 5.7
Other expense, net 0.1 0.1 0.1 0.1
Earnings before income taxes 7.1 5.9 6.7 5.5
Income taxes 1.8 1.4 1.7 1.3
Net earnings 5.3 4.5 5.0 4.2
Less net earnings attributable to
noncontrolling interest (0.1) (0.1) (0.1) (0.1)
Net earnings attributable to
controlling interest 5.2 % 4.5 % 4.9 % 4.2 %
Note: Actual percentages are calculated and may not sum to total due to rounding.
The following table presents, for the periods indicated, the components of our
Consolidated Statements of Earnings as a percentage of net sales, adjusted to
restate 2020 net sales and cost of goods sold at prior year lumber prices. The
restated net sales amounts were calculated by adjusting 2020 sales for the
change in our selling prices resulting primarily from underlying movements in
commodity lumber prices in 2020 from 2019. By eliminating the "pass-through"
impact of higher or lower lumber prices on net sales and cost of goods sold from
year to year, we believe this provides an enhanced view of our change in
profitability and costs as a percentage of sales. The amount of the adjustment
to 2020 net sales was also applied to cost of goods sold so that gross profit
remains unchanged.
Adjusted for Lumber Market Change
Three Months Ended Nine Months Ended
September 26, September 26,
2020 2020
Net sales 100.0 % 100.0 %
Cost of goods sold 80.8 82.6
Gross profit 19.2 17.4Selling, general, and administrative expenses 10.7
10.2
Other - (0.1)
Earnings from operations 8.5 7.3
Other expense, net 0.1 0.1
Earnings before income taxes 8.4 7.2
Income taxes 2.1 1.8
Net earnings 6.3 5.4
Less net earnings attributable to noncontrolling interest (0.1) (0.2)
Net earnings attributable to controlling interest 6.2 % 5.2 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
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UFP INDUSTRIES, INC.
Operating Results by Segment:
EffectiveJanuary 1, 2020 , the Company re-organized around the markets it serves rather than geography. Our new business segments align with the following markets: UFP Retail Solutions,UFP Construction andUFP Industrial . Among other things, this change 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. 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. The exception to this market-centered reporting and management structure is the Company's International segment, which comprises ourMexico ,Canada , andAustralia 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 ofUFP Real Estate, Inc. , which owns and leases real estate, andUFP 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. Three Months EndedSeptember 26, 2020
(in thousands) Retail Industrial Construction All Other Corporate Total Net sales
$ 700,522 $ 282,124 $ 447,103 $ 56,700 $ (222) $ 1,486,227 Cost of goods sold 594,896 233,971 385,028 38,543 (7,285) 1,245,153 Gross profit 105,626 48,153 62,075 18,157 7,063 241,074 Selling, general, administrative expenses 43,515 26,080 45,411 10,499 9,144 134,649 Other (70) 36 151 209 (502) (176) Earnings from operations$ 62,181 $ 22,037 $ 16,513 $ 7,449 $ (1,579) $ 106,601 Three Months Ended September 28, 2019
(in thousands) Retail Industrial Construction All Other Corporate Total Net sales
$ 397,140 $ 271,667 $ 445,505 $ 48,066 $ 648 $ 1,163,026 Cost of goods sold 353,291 224,363 373,181 35,532 (10,611) 975,756 Gross profit 43,849 47,304 72,324 12,534 11,259 187,270 Selling, general, administrative expenses 29,534 26,522 49,897 9,359 646 115,958 Other 18 14 1,021 (386) 178 845 Earnings from operations$ 14,297 $ 20,768 $ 21,406 $ 3,561 $ 10,435 $ 70,467 23 Table of Contents UFP INDUSTRIES, INC. Nine Months Ended September 26, 2020 (in thousands) Retail Industrial Construction All Other Corporate Total Net sales$ 1,661,873 $ 763,046 $ 1,187,429 $ 148,503 $ (561) $ 3,760,290 Cost of goods sold 1,429,229 635,424 1,002,932 101,240 (21,776) 3,147,049 Gross profit 232,644 127,622 184,497 47,263 21,215 613,241 Selling, general, administrative expenses 110,596 73,662 134,098 28,228 11,186 357,770 Other (34) 123 (145) (1,538) (526) (2,120) Earnings from operations$ 122,082 $ 53,837 $ 50,544 $ 20,573 $ 10,555 $ 257,591 Nine Months Ended September 28, 2019 (in thousands) Retail Industrial Construction All Other Corporate Total Net sales$ 1,212,330 $ 837,671 $ 1,225,467 $ 142,845 $ (344) $ 3,417,969 Cost of goods sold 1,076,672 702,390 1,024,647 107,101 (21,104) 2,889,706 Gross profit 135,658 135,281 200,820 35,744 20,760 528,263 Selling, general, administrative expenses 88,123 75,083 143,497 26,259 1,203 334,165 Other (62) (10) 1,060 (5) (35) 948
Earnings from
operations
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 26, 2020
(in thousands) 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 84.9 82.9 86.1 68.0 - 83.8
Gross profit 15.1 17.1 13.9 32.0 - 16.2
Selling, general,
administrative
expenses 6.2 9.2 10.2 18.5 - 9.1
Other - - - 0.4 - -
Earnings from
operations 8.9 % 7.8 % 3.7 % 13.1 % - 7.2 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
Three Months Ended September 28, 2019
(in thousands) 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 89.0 82.6 83.8 73.9 - 83.9
Gross profit 11.0 17.4 16.2 26.1 - 16.1
Selling, general,
administrative
expenses 7.4 9.8 11.2 19.5 - 9.9
Other - - 0.2 (0.8) - 0.1
Earnings from
operations 3.6 % 7.6 % 4.7 % 7.5 % - 6.1 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
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UFP INDUSTRIES, INC.
Nine Months Ended September 26, 2020
(in thousands) 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 86.0 83.3 84.5 68.2 - 83.7
Gross profit 14.0 16.7 15.5 31.8 - 16.3
Selling, general,
administrative
expenses 6.7 9.7 11.3 19.0 - 9.5
Other - - - (1.0) - (0.1)
Earnings from
operations 7.3 % 7.1 % 4.3 % 13.9 % - 6.9 %
Note: Actual percentages are calculated and may not sum to total due to
rounding.
Nine Months Ended September 28, 2019
(in thousands) 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 88.8 83.9 83.6 75.0 - 84.5
Gross profit 11.2 16.1 16.4 25.0 - 15.5
Selling, general,
administrative
expenses 7.3 9.0 11.7 18.4 - 9.8
Other - - 0.1 - - -
Earnings from
operations 3.9 % 7.1 % 4.6 % 6.6 % - 5.7 %
Note: Actual percentages are calculated and may not sum to total due to rounding.
We design, manufacture and market wood and wood-alternative products 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 and commercial applications, and specialty wood packaging, components and packaging materials for various industries. Our strategic long-term sales objectives generally include:
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, specialty wood packaging, engineered wood components, customized
interior fixtures, and "wood alternative" products. Engineered wood components
? include roof trusses, wall panels, and floor systems. Wood alternative products
consist primarily of composite wood 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. Remanufactured lumber and panels that are components
of finished goods are also generally categorized as "commodity-based" products.
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UFP INDUSTRIES, INC. The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total net sales by our primary segments (Retail,Industrial, and Construction ). Value-added products are typically sold at fixed selling prices for a pre-determined time period and carry higher gross margins than our commodity-based products. The increase in our ratio of commodity-based product sales to total sales reflected in the tables below is primarily due to the impact of dramatically higher lumber prices in the third quarter of 2020 as the selling prices of these products are generally indexed to the currentLumber Market at the time they are shipped. For example, a majority of our commodity-based sales are sold through our ProWood business unit and selling prices were up 66% compared to the third quarter of 2019. Also, ourIndustrial and Construction segments primarily sell value-added products and their unit sales were down 2% and 9% from last year, respectively. Three Months EndedSeptember 26, 2020 Three
Months Ended
Value-Added Commodity-Based Value-Added Commodity-Based
Retail 49.6 % 50.4 % 57.5 % 42.5 %
Industrial 63.9 % 36.1 % 67.1 % 32.9 %
Construction 74.3 % 25.7 % 82.5 % 17.5 %
Total Sales 60.6 % 39.4 % 70.0 % 30.0 %
Nine Months Ended September 26, 2020 Nine
Months Ended
Value-Added Commodity-Based Value-Added Commodity-Based
Retail 54.4 % 45.6 % 58.4 % 41.6 %
Industrial 65.7 % 34.3 % 66.4 % 33.6 %
Construction 77.3 % 22.7 % 81.1 % 18.9 %
Total Sales 64.6 % 35.4 % 69.1 % 30.9 %
Developing new products. We define new products as those that will generate
sales of at least a
growing and gaining market penetration. New product sales and gross profits in
? the third quarter were up 41% and 27%, respectively. Approximately
and
2019, respectively, while still sold, were sunset in 2020 and excluded from the
table below because they no longer meet the definition above. Our goal is to
achieve annual new product sales of at least$475 million in 2020. New
Product Sales by Segment
New Product Sales by Segment
Three Months Ended Nine Months Ended
September 26, September 28, % September 26, September 28, %
Segment Classification 2020 2019 Change 2020 2019 Change
Retail $ 115,321 72,411 59.3 % $ 297,363 $ 229,642 29.5 %
Industrial 20,207 17,789 13.6 % 50,909 50,274 1.3 %
Construction 15,768 15,228 3.5 % 41,923 44,708 (6.2) %
All Other 2,394 3,235 (26.0) % 7,895 9,594 (17.7) %Total New Product Sales 153,690 108,663 41.4 % 398,090 334,218 19.1 %
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.
? Selling to new customers and markets.
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UFP INDUSTRIES, INC.
Retail Segment
Net sales in the third quarter of 2020 increased approximately 76% compared to the same period of 2019, due to a 34% increase in organic unit sales and a 42% increase in selling prices. Our organic unit growth was primarily driven by a 57% increase in our Dimensions Home & Décor products including project panels and short lumber, a 50% increase in Deckorators composite decking and railing, a 30% increase in our ProWood pressure-treated products, and a 28% increase in Outdoor Essentials Fence, Lawn & Garden products. Our new product sales contributed to these increases and were up 59% for the quarter. Finally, our sales to big box customers increased 80%, and sales to other independent retailers increased 71%. Our unit sales increases were primarily due to an increase in demand as consumers invested in home improvement activities over other alternatives. We believe that the pandemic and related disruptions in the lives of consumers contributed to this increase in demand. Gross profits increased by$61.8 million , or 140.9% to$105.6 million for the third quarter of 2020 compared to the same period last year as gross margins increased to 15.1% compared to 11.0% for the same period of 2019. We estimate the higher level of lumber prices (see "Impact of the Lumber Market on Our Operating Results") reduced gross margin by 470 basis points. Our increase in gross profits was due to the following factors:
Increased unit sales of value-added products within our Deckorators, Outdoor
? Essentials, and Dimensions business units contributed
increase.
Our ProWood business unit, which produces and sells pressure treated lumber,
? contributed
the impact of rising lumber prices as the selling prices of these products are
primarily determined on a variable price formula.
? The remaining
as a result of operating leverage and strong organic unit growth.
Selling, general and administrative ("SG&A") expenses increased by approximately
$14.0 million , or 47.3%, in the third quarter of 2020 compared to the same
period of 2019, while we reported a 34% increase in unit sales. Accrued bonus
expense, which varies with our overall profitability and return on investment,
increased approximately $10.7 million and totaled approximately $15.0 million
for the quarter. The remaining increase was primarily due to increases in
salaries and wages which were partially offset by decreases in advertisingand travel and related costs.
Earnings from operations for the Retail reportable segment increased in the
third quarter of 2020 compared to 2019 by
Net sales in the first nine months of 2020 increased 37% compared to the same period of 2019, due to a 22% increase in unit sales and a 15% increase in selling prices. Acquired operations contributed 1% to our unit sales growth, and organic unit sales growth was 21%. Our organic unit growth was primarily driven by a 53% increase in our Dimensions Home & Décor products including project panels and short lumber, a 25% increase in our ProWood pressure-treated products, a 21% increase in Outdoor Essentials Fence, Lawn & Garden products, and an 11% increase in Deckorators composite decking and railing. Our new product sales contributed to these increases and were up 29.5%. Sales to big box customers were up 42% and sales to other independent retailers increased 28%. Gross profits in the first nine months of 2020 increased 71.5% to$232.6 million compared to the same period of 2019 as gross margins increased to 14.0% compared to 11.2% for the same period of 2019. The impact of higher lumber prices contributed to a 170 basis point decline in our gross margin. Improvements in our profitability were primarily due to:
? The impact of effective inventory positioning, resulting in lower lumber costs
early in the year.
? Growth in our sales of value-added products.
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UFP INDUSTRIES, INC. ? Strong organic growth, which allowed us to leverage fixed costs.
The sequential rise in lumber prices in the second and third quarters, which
? favorably impacted our gross profit per unit of products sold on a variable
price such as ProWood pressure-treated lumber.
Selling, general and administrative ("SG&A") expenses increased by approximately
$22.5 million , or 25.5%, in the first nine months of 2020 compared to the same
period of 2019, while we reported a 22% increase in unit sales. Acquired
operations since the third quarter of 2019 contributed approximately $1.9
million to this increase. Accrued bonus expense increased approximately $14.9
million and totaled approximately $26.9 for the first nine months of 2020. The
remaining increase was due to increases in salaries and wages and in-store
merchandising costs, offset by a decline in advertising and travel and related
costs.
Earnings from operations for the Retail reportable segment increased in the first nine months of 2020 compared to 2019 by$74.5 million , or 156.5%, well in excess of our 22% increase in unit sales as a result of the factors mentioned above. Industrial Segment Net sales in the third quarter of 2020 increased 4% compared to the same period of 2019, due to a 6% increase in selling prices attributable to the Lumber Market, offset by a 2% decrease in unit sales due to the impact of the pandemic and government imposed shutdowns. Gross profits increased by 1.8% to$48.2 million for the third quarter of 2020 compared to the same period of 2019. We estimate the higher level of lumber prices (see "Impact of the Lumber Market on Our Operating Results") caused a decline in margin of 100 basis points as our gross margins dropped to 17.1% from 17.4% last year. We experienced a 70 basis point improvement in our profitability due to the impact of favorable changes in product mix and effectively passing along increases in commodity lumber costs to our customers. Selling, general and administrative ("SG&A") expenses decreased by approximately$.4 million , or 1.7%, in the third quarter of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately$0.9 million to our costs. Accrued bonus expense, which varies with our pre-bonus operating profit and return on investment, decreased approximately$.9 million , and totaled$6.1 million for the quarter. The remaining decrease was due to a variety of factors.
Earnings from operations for the Industrial reportable segment increased in the
third quarter of 2020 compared to 2019 by
Net sales in the first nine months of 2020 decreased 9% compared to the same period of 2019, due to a 10% decrease in unit sales, reflective of the impact of the pandemic on our Industrial business. Gross profits in the first nine months of 2020 declined 5.7% to$127.6 million compared to the same period of 2019, while gross margins increased to 16.7% compared to 16.1% for the same period of 2019. We estimate the higher level of lumber prices caused a decline in margin of 20 basis points. The improvement in our gross margin was primarily due to the impact of effective inventory positioning resulting in lower lumber costs early in the year, favorable changes in product mix, and effectively passing along increases in commodity lumber costs to our customers. Selling, general and administrative ("SG&A") expenses decreased by approximately$1.4 million , or 1.9%, in the first nine months of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately$2.0 million to total SG&A expenses. Accrued bonus expense decreased approximately$4.2 million compared to the same period of 2019 and totaled approximately$12.5 for the first nine months of 2020. This reduction was partially offset by increases in salaries and wages, sales compensation, and amortization expense. 28 Table of ContentsUFP INDUSTRIES, INC.
Earnings from operations for the Industrial reportable segment decreased in the first nine months of 2020 compared to 2019 by$6.4 million , or 10.6%, due to the factors mentioned above. Construction Segment Net sales in the third quarter of 2020 were flat compared to the same period of 2019, due to a 9% increase in selling prices attributable to the Lumber Market, offset by a 9% decrease in unit sales due to the impact of the pandemic. Unit changes within this segment consisted of declines of 2% in concrete forming, 8% in site-built construction, and 37% in commercial construction, offset by a 7% increase in factory-built housing. Gross profits decreased by$10.2 million , or 14.2% to$62.1 million for the third quarter of 2020 compared to the same period of 2019. Gross margin decreased to 13.9% from 16.2% for the same period last year. We estimate the higher level of the lumber prices (see "Impact of the Lumber Market on Our Operating Results") caused a 140 basis point decrease in our gross margin. The decrease in our gross profit was comprised of the following factors:
Gross profits in our site-built construction business unit decreased by
? million due to a combination of lower unit sales and higher commodity lumber
costs, which adversely impacted our profit per unit of products we sell on a
fixed price to our customers for a period of time.
A decline in unit sales in our commercial business unit, which has a more
? significant fixed cost structure, caused a decrease in gross profit of
million.
The impact of rising lumber prices on variable priced products contributed
? million in gross profit in our factory-built housing and concrete forming
business units.
? Favorable cost variances contributed
? Acquired businesses contributed
Selling, general and administrative ("SG&A") expenses decreased by approximately
$4.5 million , or 8.9%, in the third quarter of 2020 compared to the same period
of 2019, while we reported a 9% decrease in unit sales. Acquired operations
since the third quarter of 2019 contributed approximately $1.7 million to total
SG&A expenses for the quarter. Accrued bonus expense, which varies with our
overall profitability and return on investment, decreased approximately $2.2
million , and totaled $4.7 million for the quarter. Decreases in salaries and
wages, sales compensation, and travel expenses also contributed to the overall
decrease in SG&A.
Earnings from operations for the Construction reportable segment decreased in the third quarter of 2020 compared to 2019 by$4.9 million , or 22.9%, due to the factors mentioned above. Net sales in the first nine months of 2020 decreased 3% compared to the same period of 2019, due to an 8% decrease in unit sales due to the impact of the pandemic, offset by a 5% increase in selling prices primarily due to the Lumber Market. Unit changes within this segment consisted of declines of 1% in factory-built housing, 8% in site-built construction, and 20% in commercial construction. These declines were offset by unit increases of 2% in concrete forming. Gross profits in the first nine months of 2020 declined 8.1% to$184.5 million compared to the same period of 2019. Gross margins decreased to 15.5% from 16.4% for the same period of 2019. We estimate the higher level of lumber prices caused an 80 basis point decrease in our gross margin. The decrease in our gross profits was primarily due to the same factors discussed above. 29 Table of ContentsUFP INDUSTRIES, INC. Selling, general and administrative ("SG&A") expenses decreased by approximately$9.4 million , or 6.5%, in the first nine months of 2020 compared to the same period of 2019. Acquired operations since the third quarter of 2019 contributed approximately$2.7 million to total SG&A expenses. Accrued bonus expense decreased approximately$4.1 million compared to the same period of 2019 and totaled approximately$11.4 million for the first nine months of 2020. Decreases in salaries and wages, travel and medical expenses also contributed to the overall decrease in SG&A. Earnings from operations for the Construction reportable segment decreased in the first nine months of 2020 compared to 2019 by$5.7 million , or 10.2%, due to the factors mentioned above. All Other Segment
Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant.
Corporate
The corporate segment consists of over (under) allocated costs that are not significant.
INCOME TAXES
Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 25.4% in the third quarter of 2020 compared to 23.8% for same period in 2019 and was 25.2% in the first nine months of 2020 compared to 24.0% for the same period in 2019. The increase was primarily due to the foreign tax rate differential on foreign income as well as a variety of other discrete tax items none of which are individually significant.
OFF-BALANCE SHEET TRANSACTIONS
We have no significant off-balance sheet transactions.
LIQUIDITY AND CAPITAL RESOURCES
The table below presents, for the periods indicated, a summary of our cash flow
statement (in thousands):
Nine Months Ended
September 26 , September 28,
2020 2019Cash provided by operating activities$ 185,083 $ 198,080 Cash used in investing activities (100,927) (105,985) Cash used in financing activities 95,178 (55,223) Effect of exchange rate changes on cash (1,122) 157 Net change in all cash and cash equivalents 178,212 37,029 Cash, cash equivalents, and restricted cash, beginning of period 168,666 28,198
Cash, cash equivalents, and restricted cash, end of period
In general, we funded our growth in the past 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.
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UFP INDUSTRIES, INC.
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
attributable to our Retail segment, resulted in an increase in net working
capital this year.
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 improved to 43 days
from 52 days during the third quarter and to 49 days from 56 days during the
first nine months of 2020 compared to the prior periods.
Three Months Ended Nine Months Ended
September 26 ,September 28 ,
2020 2019 2020 2019
Days of sales outstanding 31 33 32 33
Days supply of inventory 31 40 37 44
Days payables outstanding (19) (21) (20) (21)
Days in cash cycle 43 52 49 56
The decrease in our days supply of inventory for the first nine months of 2020
was primarily due to opportunistic buying when lumber prices were low during the
fourth quarter of 2018 and early 2019 to improve gross profits and higher levels
of "safety stock" we carried to address transportation challenges and ensure
timely deliveries to our customers. We did not engage in this level of
opportunistic buying in late 2019 and early 2020. Strong demand in our retail
segment and shortages of supply contributed to higher inventory turns in the
third quarter of 2020.
In the first nine months of 2020, our cash provided by operating activities was
$185.1 million , which was comprised of net earnings of $189.1 million and $55.6
million of non-cash expenses, offset by a $59.7 million seasonal increase in
working capital since the end of December 2019 . Our operating cash flow this
year declined by $13.0 million compared to the same period of last year
primarily due to an increase in our net working capital since the end of 2019.
Conversely, our net working capital at the end of the third quarter of 2019
decreased compared to the end of 2018. Our net working capital at the end of the
third quarter of 2020 increased due to unusually high lumber prices as well the
strong sales growth of our retail segment, which resulted in an increase in our
accounts receivable.
Acquisitions and purchases of property, plant, and equipment comprised most of
our cash used in investing activities during the first nine months of 2020 and
totaled $34.8 million and $67.0 million , respectively. Outstanding purchase
commitments on existing capital projects totaled approximately $21.3 million on
September 26, 2020 . Notable areas of capital spending include projects to expand
capacity and enhance the productivity of our Deckorators product line, several
projects to expand manufacturing capacity to serve industrial customers and
achieve efficiencies through automation, improvements to a number of facilities,
and an 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 or cash
surplus for the balance of the year. The sales and purchases of investments
totaling $22.3 million and $24.3 million , respectively, are due to investment
activity in our captive insurance subsidiary.
Cash flows from financing activities primarily consisted of issuances of
long-term debt of $150 million , net repayments of debt of approximately $3.1
million , the payment of quarterly dividends totaling $23.0 million , or $0.125
per share, and repurchases of approximately 756,000 shares of our common stock
for $29.2 million resulting in an average price paid of $38.62 .
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UFP INDUSTRIES, INC.
OnSeptember 26, 2020 , we had$4.4 million outstanding on our$375 million revolving credit facility, and we had approximately$360.6 million in remaining availability after considering$9.8 million in outstanding letters of credit. There is no availability remaining under an existing "shelf agreement" for long term debt, after a$150 million note was issued inAugust 2020 . 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 26, 2020 . At the end of the third quarter of 2020 we have approximately$700 million in total liquidity, consisting of our cash surplus and remaining availability under our revolving credit facility. We plan to use a portion of this amount to fund our future growth.
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 28, 2019 . Under the recent re-organization of our reportable segments now centered on our primary markets (retail, industrial, and construction), there were no indicators of impairment for any of the new reporting units. We continue to monitor the results of our commercial business unit (a reporting unit under the Construction segment), which primarily includes idX, as it has performed below expectations through 2019. While idX has faced challenging end market conditions resulting in this under-performance, we believe our growth and operating improvement strategies and related long-term projections for idX are still reasonable and attainable. Consequently, while the risk of impairment exists, management does not believe an impairment is currently required. Should the Company's future analysis indicate a significant change in any of the triggering events for this reporting unit, it could result in impairment of the carrying value of goodwill to its implied fair value. There can be no assurance that the Company's future goodwill impairment testing will not result in a charge to earnings. The total value of goodwill and identifiable intangibles associated with the commercial reporting unit is$12.3 million and$4.5 million , respectively, at the end
ofSeptember 2020 . FORWARD OUTLOOK
Most recently, the Company's long-term goals have been to:
? Achieve long-term unit sales growth that exceeds positive
to 6 percent;
? Grow earnings from operations in excess of our unit sales growth; and
? Earn a return on invested capital in excess of our weighted average cost of
capital.
While we believe the effective execution of our strategies will allow us to continue to achieve these long-term goals in the future, our ability to achieve them over the next year may be adversely impacted by a variety of external factors such as continuing developments in the COVID-19 pandemic, trends in commodity lumber prices, the availability and cost of labor and materials, and general election results in theU.S. The following variables should be considered when evaluating our performance over the next year. 32 Table of ContentsUFP INDUSTRIES, INC.
Earlier this year we experienced a decrease in customer demand and unit sales
in our industrial and construction segments as a result of numerous stay at
home orders issued by states in which we operate as some of our customers did
not meet the requirements to be an "essential business" and were temporarily
shut down. For those customers who remained operating, demand declined for the
majority of them. As these orders were lifted and these customers resumed
operations demand trends for our products improved significantly throughout the
? quarter. However, there can be no assurance that another "wave" of COVID-19
will not occur and result in additional "stay at home" and similar orders that
would adversely impact the demand of our products. In addition, demand for our
products in the retail segment has been exceptionally strong as consumers have
increased their home improvement activities during the pandemic. There can be
no assurance demand will continue at these levels in the future. Market
indicators that should be considered when evaluating future demand for our
products include:
Same store sales growth of national home improvement retail customers, the
- leading indicator for remodeling activity and home improvement spending
forecasts. Sales of our Retail Solutions segment comprises approximately 44% of
our year-to-date total sales.
Housing starts in the northeast and mid-
- Sales of our Site Built business unit within our Construction segment comprises
approximately 13% of our year-to-date total sales.
- Production of manufactured housing. Sales of our Factory Built business unit
within our Construction segment comprises 11% of our year-to-date total sales.
Non-residential construction spending. Sales of our Commercial and Concrete
- Forming business units within our Construction segment comprises approximately
8% of our year-to-date total sales.
- Industrial production, Purchasing Managers Index, and
Industrial segment comprises approximately 20% of our total year-to-date sales.
We have over 150 geographically dispersed plant locations, many of which have
the ability to serve multiple market segments. These capabilities enhance our
ability to supply our customers from multiple locations in the event an
operation is idled due to the pandemic. To date, one of our operations remains
? temporarily idled and one has been permanently idled. Depending on the length
of any future "stay at home" orders and the severity of the impact on future
customer demand, we could temporarily or permanently idle additional locations
in the future. These actions could result in certain losses including asset
impairment charges to property, plant and equipment, right of use leased assets, inventory, other long-lived assets, and certain exit costs. As a result of the pandemic and an anticipated reduction in demand, our
suppliers significantly curtailed capacity through a variety of actions earlier
this year. As the economy re-opened this summer, demand has recovered
substantially and been much stronger than expected. Consequently, commodity
lumber prices reached historically high levels by the end of the third quarter
of 2020 (see Historical Lumber Prices). As our suppliers work through their
? backlog of orders and we reach the seasonally slower months of fall and winter
in many areas of the country we anticipate commodity lumber prices will
decrease to normalized levels. As lumber prices decline, we expect this may
adversely impact our profit per unit of products we sell on a variable price
formula. Conversely, this may benefit our profit per unit of products we sell
at a fixed price for a period of time. See Impact of the Lumber Market on Our
Operating Results. In addition, a decline in lumber prices will reduce our net
investment in working capital and contribute to our cash flows from operations.
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UFP INDUSTRIES, INC.
On a consolidated basis, and based on our 2019 results of operations andbusiness mix, we believe our decremental operating margin is in a range of 10%
to 15% 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). In addition to the variables above, factors that may cause our
actual results to vary significantly from this range include:
- Changes in our selling prices
- Changes in our sales mix by market segment and product
- The impact and level of the Lumber Market and trends in the commodity 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
As a result of our strong cash flow and liquidity position our capital
? expenditures budget is
opportunities to grow and achieve operational efficiencies through automation.
The CARES act allows us to defer certain payroll taxes from the end of March
? through the end of our 2020 fiscal year, which we estimate will total
approximately
installments on
? We believe our cash cycle will remain consistent with historical trends and
result in a reduction in working capital and increase in cash as sales decline.
As a result of the diversification of our business and execution of our people
we've achieved strong earnings and operating cash flows, which has contributed
to a strong balance sheet in which our cash surplus of
debt of
end of the third quarter of 2020. Additionally, we currently have approximately
has been to follow a return-based, balanced approach in which we maintain or
increase our dividends in line with our growth in earnings and operating cash
? flows, repurchase our common stock in an amount which offsets issuances under
our share-based compensation plans and at times when we believe it is
under-valued, and invest in capital expenditures and business acquisitions that
allow us to achieve our strategic objectives. We currently anticipate
investments in growing our business through capital expenditures and business
acquisitions will comprise the highest use of our capital availability.
Finally, we manage our capital structure conservatively by attempting to
maintain targeted ratios of debt to equity and debt to earnings before
interest, taxes, depreciation and amortization while reserving sufficient
levels of liquidity for unanticipated opportunities and events.
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