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UFP INDUSTRIES INC - Quarter Report: 2020 September (Form 10-Q)

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 26, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-22684

UFP INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Michigan

    

38-1465835

(State or other jurisdiction of incorporation or

(I.R.S. Employer Identification Number)

organization)

2801 East Beltline NE, Grand Rapids, Michigan

49525

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code (616) 364-6161

NONE

(Former name or former address, if changed since last report.)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with a new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes    No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class

    

Outstanding as of September 26, 2020

Common stock, $1 par value

61,186,636

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol

Name of Each Exchange On Which Registered

Common Stock, no par value

UFPI

The Nasdaq Stock Market, LLC

Table of Contents

UFP INDUSTRIES, INC.

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION.

Page No.

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets at September 26, 2020, December 28, 2019 and September 28, 2019

3

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Nine Months Ended September 26, 2020 and September 28, 2019

4

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine Months Ended September 26, 2020 and September 28, 2019

5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2020 and September 28, 2019

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

35

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings – NONE

Item 1A.

Risk Factors 

36

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults upon Senior Securities – NONE

Item 4.

Mine Safety Disclosures – NONE

Item 5.

Other Information – NONE

36

Item 6.

Exhibits

37

2

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

September 26,

December 28,

September 28,

    

2020

    

2019

    

2019

ASSETS

  

  

CURRENT ASSETS:

  

  

Cash and cash equivalents

$

346,154

    

$

168,336

  

$

64,498

Restricted cash

 

724

 

330

  

 

729

Investments

 

20,530

 

18,527

  

 

17,028

Accounts receivable, net

 

583,079

 

364,027

  

 

474,648

Inventories:

  

  

Raw materials

 

286,418

 

236,283

  

 

239,585

Finished goods

 

242,316

 

250,591

  

 

239,771

Total inventories

 

528,734

 

486,874

  

 

479,356

Refundable income taxes

 

 

13,272

  

 

1,550

Other current assets

 

32,888

 

41,706

  

 

54,295

TOTAL CURRENT ASSETS

 

1,512,109

 

1,093,072

 

1,092,104

DEFERRED INCOME TAXES

 

2,070

 

2,763

  

 

2,284

RESTRICTED INVESTMENTS

17,327

 

16,214

  

 

16,082

RIGHT OF USE ASSETS

77,412

80,167

75,436

OTHER ASSETS

 

24,216

 

24,884

  

 

23,085

GOODWILL

 

245,925

 

229,536

  

 

232,411

INDEFINITE-LIVED INTANGIBLE ASSETS

 

7,361

 

7,354

  

 

7,339

OTHER INTANGIBLE ASSETS, NET

 

58,205

 

48,313

  

 

46,877

PROPERTY, PLANT AND EQUIPMENT:

  

  

Property, plant and equipment

935,639

884,963

880,274

Less accumulated depreciation and amortization

 

(529,644)

 

(497,789)

  

 

(495,267)

PROPERTY, PLANT AND EQUIPMENT, NET

405,995

387,174

385,007

TOTAL ASSETS

2,350,620

1,889,477

1,880,625

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

  

CURRENT LIABILITIES:

  

  

Accounts payable

$

231,111

$

142,479

  

$

180,767

Accrued liabilities:

  

  

Compensation and benefits

 

171,472

 

141,892

  

 

127,500

Income taxes

3,024

Other

 

69,888

 

51,572

  

 

61,463

Current portion of lease liability

15,349

15,283

15,566

Current portion of long-term debt

 

2,760

 

2,816

  

 

152

TOTAL CURRENT LIABILITIES

 

493,604

 

354,042

  

 

385,448

LONG-TERM DEBT

 

311,267

 

160,867

  

 

162,853

LEASE LIABILITY

62,100

64,884

59,870

DEFERRED INCOME TAXES

 

22,478

 

22,880

  

 

14,897

OTHER LIABILITIES

 

47,367

 

29,071

  

 

28,454

TOTAL LIABILITIES

 

936,816

 

631,744

  

 

651,522

SHAREHOLDERS’ EQUITY:

  

  

Controlling interest shareholders’ equity:

  

  

Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none

$

$

  

$

Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,186,636, 61,408,589 and 61,390,216

 

61,187

 

61,409

  

 

61,390

Additional paid-in capital

 

216,002

 

192,173

  

 

189,820

Retained earnings

 

1,127,375

 

995,022

  

 

969,564

Accumulated other comprehensive income

 

(6,974)

 

(4,889)

  

 

(5,315)

Total controlling interest shareholders’ equity

 

1,397,590

 

1,243,715

  

 

1,215,459

Noncontrolling interest

 

16,214

 

14,018

  

 

13,644

TOTAL SHAREHOLDERS’ EQUITY

 

1,413,804

 

1,257,733

  

 

1,229,103

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

2,350,620

$

1,889,477

  

$

1,880,625

See notes to consolidated condensed financial statements.

3

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME

(Unaudited)

(in thousands, except per share data)

Three Months Ended

Nine Months Ended

September 26,

September 28,

September 26,

September 28,

    

2020

    

2019

    

2020

    

2019

    

NET SALES

$

1,486,227

    

$

1,163,026

  

$

3,760,290

    

$

3,417,969

    

COST OF GOODS SOLD

 

1,245,153

 

975,756

  

 

3,147,049

 

2,889,706

GROSS PROFIT

 

241,074

 

187,270

  

 

613,241

 

528,263

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

134,649

 

115,958

  

 

357,770

 

334,165

OTHER

(176)

845

(2,120)

948

EARNINGS FROM OPERATIONS

 

106,601

 

70,467

  

 

257,591

 

193,150

INTEREST EXPENSE

 

2,486

 

1,900

  

 

6,291

 

6,767

INTEREST INCOME

 

(1,011)

 

(317)

  

 

(1,541)

 

(1,074)

UNREALIZED GAIN ON INVESTMENTS AND OTHER

(554)

(93)

(82)

(1,611)

 

921

 

1,490

  

 

4,668

 

4,082

EARNINGS BEFORE INCOME TAXES

 

105,680

 

68,977

  

 

252,923

 

189,068

INCOME TAXES

 

26,819

 

16,396

  

 

63,798

 

45,340

NET EARNINGS

 

78,861

 

52,581

  

 

189,125

 

143,728

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(1,657)

 

(722)

  

 

(5,299)

 

(1,814)

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

77,204

$

51,859

  

$

183,826

$

141,914

EARNINGS PER SHARE - BASIC

$

1.25

$

0.84

  

$

2.98

$

2.30

EARNINGS PER SHARE - DILUTED

$

1.25

$

0.84

  

$

2.98

$

2.30

OTHER COMPREHENSIVE INCOME:

NET EARNINGS

 

78,861

 

52,581

  

 

189,125

 

143,728

OTHER COMPREHENSIVE GAIN (LOSS)

 

1,687

 

(1,200)

  

 

(4,030)

 

644

COMPREHENSIVE INCOME

 

80,548

 

51,381

  

 

185,095

 

144,372

LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(1,922)

 

(358)

  

 

(3,354)

 

(1,835)

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST

$

78,626

$

51,023

  

$

181,741

$

142,537

See notes to consolidated condensed financial statements.

4

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share and per share data)

Controlling Interest Shareholders’ Equity

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Noncontrolling

    

Stock

    

Capital

    

Earnings

    

Earnings

    

Interest

    

Total

Balance at December 28, 2019

$

61,409

$

192,173

  

$

995,022

$

(4,889)

  

$

14,018

  

$

1,257,733

Net earnings

  

  

 

40,159

 

  

 

411

  

 

40,570

Foreign currency translation adjustment

  

  

  

 

(5,951)

 

(2,335)

  

 

(8,286)

Unrealized loss on debt securities

  

  

  

 

(270)

 

  

 

(270)

Distributions to noncontrolling interest

  

  

  

  

 

(299)

 

(299)

Additional purchase of noncontrolling interest

130

(225)

(95)

Cash dividends - $0.125 per share - quarterly

  

  

 

(7,730)

 

  

 

  

 

(7,730)

Issuance of 10,549 shares under employee stock plans

 

10

 

309

  

  

  

  

 

319

Net issuance of 350,124 shares under stock grant programs

 

350

 

12,454

  

1

  

  

  

 

12,805

Issuance of 89,616 shares under deferred compensation plans

 

89

 

(89)

  

  

  

  

 

Repurchase of 756,397 shares

 

(756)

 

 

(28,456)

  

  

 

  

 

(29,212)

Expense associated with share-based compensation arrangements

  

 

1,404

 

  

 

  

 

  

 

1,404

Accrued expense under deferred compensation plans

  

 

5,343

  

  

  

  

  

  

  

5,343

Balance at March 28, 2020

$

61,102

$

211,724

  

$

998,996

$

(11,110)

  

$

11,570

  

$

1,272,282

Net earnings

  

  

 

66,463

 

  

 

3,231

  

 

69,694

Foreign currency translation adjustment

  

  

  

 

2,026

 

125

  

 

2,151

Unrealized loss on debt securities

  

  

  

 

688

 

  

 

688

Cash dividends - $0.125 per share - quarterly

  

  

 

(7,644)

 

  

 

  

 

(7,644)

Issuance of 9,714 shares under employee stock plans

 

10

 

367

  

  

  

  

 

377

Net issuance of 42,880 shares under stock grant programs

 

43

 

(174)

  

2

  

  

  

 

(129)

Issuance of 14,106 shares under deferred compensation plans

 

14

 

(14)

  

  

  

  

 

Expense associated with share-based compensation arrangements

  

 

824

 

  

 

  

 

  

 

824

Accrued expense under deferred compensation plans

  

 

1,082

 

  

 

  

 

  

 

1,082

Balance at June 27, 2020

$

61,169

$

213,809

  

$

1,057,817

$

(8,396)

  

$

14,926

  

$

1,339,325

Net earnings

77,204

1,657

78,861

Foreign currency translation adjustment

1,319

265

1,584

Unrealized loss on debt securities

103

103

Distributions to noncontrolling interest

(634)

(634)

Cash dividends - $0.125 per share - quarterly

(7,646)

(7,646)

Issuance of 7,511 shares under employee stock plans

7

338

345

Net forfeiture of 1,382 shares under stock grant programs

(1)

(56)

(57)

Issuance of 11,326 shares under deferred compensation plans

12

(12)

Expense associated with share-based compensation arrangements

826

826

Accrued expense under deferred compensation plans

1,097

1,097

Balance at September 26, 2020

$

61,187

$

216,002

$

1,127,375

$

(6,974)

$

16,214

$

1,413,804

See notes to condensed consolidated financial statements.

5

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY, CONTINUED

(Unaudited)

(in thousands, except share and per share data)

Controlling Interest Shareholders’ Equity

Accumulated

Additional

Other

Common

Paid-In

Retained

Comprehensive

Noncontrolling

    

Stock

    

Capital

    

Earnings

    

Earnings

    

Interest

    

Total

Balance at December 29, 2018

$

60,884

$

178,540

  

$

839,917

$

(5,938)

  

$

15,281

  

$

1,088,684

Net earnings

  

  

 

35,540

 

  

 

462

  

 

36,002

Foreign currency translation adjustment

  

  

  

 

982

 

224

  

 

1,206

Unrealized gain (loss) on investment & foreign currency

  

  

  

 

167

 

  

 

167

Distributions to noncontrolling interest

  

  

  

  

 

(500)

 

(500)

Issuance of 10,259 shares under employee stock plans

 

10

 

251

  

  

  

  

 

261

Net issuance of 320,069 shares under stock grant programs

 

320

 

6,101

  

  

  

  

 

6,421

Issuance of 138,295 shares under deferred compensation plans

 

138

 

(138)

  

  

  

  

 

Expense associated with share-based compensation arrangements

  

 

1,226

 

  

 

  

 

  

 

1,226

Accrued expense under deferred compensation plans

  

 

4,899

 

  

 

  

 

  

 

4,899

Balance at March 30, 2019

$

61,352

$

190,879

  

$

875,457

$

(4,789)

  

$

15,467

  

$

1,138,366

Net earnings

  

  

 

54,515

 

  

 

630

  

 

55,145

Foreign currency translation adjustment

  

  

  

 

151

 

161

  

 

312

Unrealized gain (loss) on investment & foreign currency

  

  

  

 

159

 

  

 

159

Distributions to noncontrolling interest

  

  

  

  

 

(400)

 

(400)

Cash dividends - $0.200 per share - semiannually

  

  

 

(12,271)

 

  

 

  

 

(12,271)

Issuance of 8,694 shares under employee stock plans

 

9

 

272

  

  

  

  

 

281

Net forfeiture of 10,819 shares under stock grant programs

 

(11)

 

(262)

  

3

  

  

  

 

(270)

Issuance of 16,433 shares under deferred compensation plans

 

17

 

(17)

  

  

  

  

 

Expense associated with share-based compensation arrangements

  

 

885

 

  

 

  

 

  

 

885

Accrued expense under deferred compensation plans

  

 

1,026

 

  

 

  

 

  

 

1,026

Balance at June 29, 2019

$

61,367

$

192,783

  

$

917,704

$

(4,479)

  

$

15,858

  

$

1,183,233

Net earnings

51,859

722

52,581

Foreign currency translation adjustment

(963)

(364)

(1,327)

Unrealized gain (loss) on investment & foreign currency

127

127

Distributions to noncontrolling interest

(734)

(734)

Additional purchase of noncontrolling interest

(5,015)

(1,838)

(6,853)

Cash dividends - $0.200 per share - semiannually

1

1

Issuance of 7,916 shares under employee stock plans

8

262

270

Net issuance of 1,070 shares under stock grant programs

1

(73)

(72)

Issuance of 14,550 shares under deferred compensation plans

14

(14)

Expense associated with share-based compensation arrangements

857

857

Accrued expense under deferred compensation plans

1,020

1,020

Balance at September 28, 2019

$

61,390

$

189,820

  

$

969,564

$

(5,315)

  

$

13,644

  

$

1,229,103

See notes to consolidated condensed financial statements.

6

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Nine Months Ended

September 26,

September 28,

    

2020

    

2019

    

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net earnings

$

189,125

    

$

143,728

Adjustments to reconcile net earnings to net cash from operating activities:

  

Depreciation

 

47,226

 

44,652

Amortization of intangibles

 

5,863

 

4,690

Expense associated with share-based and grant compensation arrangements

 

3,152

 

3,105

Deferred income taxes (credit)

 

110

 

(367)

Unrealized loss (gain) on investments

 

(81)

 

(1,611)

Net (gain) loss on disposition of assets and impairment of assets

 

(662)

 

830

Changes in:

  

Accounts receivable

 

(211,238)

 

(127,841)

Inventories

 

(39,167)

 

80,178

Accounts payable and cash overdraft

 

85,354

 

14,293

Accrued liabilities and other

 

105,401

 

36,423

NET CASH FROM OPERATING ACTIVITIES

 

185,083

 

198,080

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Purchases of property, plant and equipment

 

(67,024)

 

(66,338)

Proceeds from sale of property, plant and equipment

 

2,588

 

1,180

Acquisitions and purchases of non-controlling interest, net of cash received

 

(34,820)

 

(38,710)

Purchases of investments

 

(24,266)

 

(6,475)

Proceeds from sale of investments

 

22,281

 

4,159

Other

 

314

 

199

NET CASH USED IN INVESTING ACTIVITIES

 

(100,927)

 

(105,985)

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Borrowings under revolving credit facilities

 

6,862

 

421,464

Repayments under revolving credit facilities

 

(6,498)

 

(460,537)

Contingent consideration payment and other

(3,087)

(3,099)

Issuance of long-term debt

150,000

Proceeds from issuance of common stock

 

1,042

 

812

Dividends paid to shareholders

 

(23,020)

 

(12,270)

Distributions to noncontrolling interest

(932)

(1,634)

Repurchase of common stock

 

(29,212)

 

Other

 

23

 

41

NET CASH FROM (USED IN) FINANCING ACTIVITIES

 

95,178

 

(55,223)

Effect of exchange rate changes on cash

 

(1,122)

 

157

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

178,212

 

37,029

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR

 

168,666

 

28,198

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD

$

346,878

$

65,227

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:

Cash and cash equivalents, beginning of period

$

168,336

$

27,316

Restricted cash, beginning of period

330

882

Cash, cash equivalents, and restricted cash, beginning of period

$

168,666

$

28,198

Cash and cash equivalents, end of period

$

346,154

$

64,498

Restricted cash, end of period

724

729

Cash, cash equivalents, and restricted cash, end of period

$

346,878

$

65,227

SUPPLEMENTAL INFORMATION:

  

Interest paid

$

4,112

$

5,287

Income taxes paid

 

47,301

 

33,106

NON-CASH FINANCING ACTIVITIES:

Common stock issued under deferred compensation plans

 

6,195

 

5,620

See notes to consolidated condensed financial statements.

7

Table of Contents

UFP INDUSTRIES, INC.

NOTES TO UNAUDITED

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.       BASIS OF PRESENTATION

The accompanying unaudited interim consolidated condensed financial statements (the “Financial Statements”) include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, the Financial Statements do not include all the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. All intercompany transactions and balances have been eliminated.

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 28, 2019.

On April 22, 2020, our shareholders approved changing the name of the Company from Universal Forest Products, Inc., to UFP Industries, Inc.

Seasonality has a significant impact on our working capital from March to August, which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the September 28, 2019 balances in the accompanying unaudited condensed consolidated balance sheets.

On March 11, 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. We cannot reasonably estimate the length or severity of this pandemic and government restrictions on business activity, or the extent to which these restrictions may materially impact our consolidated financial position, consolidated results of operations, and consolidated cash flows in fiscal 2020.

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B.       FAIR VALUE

We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value. Assets measured at fair value are as follows:

September 26, 2020

September 28, 2019

Quoted

Prices with

Quoted

Prices with

Prices in

Other

Prices with

Prices in

Other

Prices with

Active

Observable

Unobservable

Active

Observable

Unobservable

Markets

Inputs

Inputs

Markets

Inputs

Inputs

(in thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Money market funds

$

64

    

$

3,133

$

    

$

3,197

    

$

56,781

    

$

843

$

    

$

57,624

Fixed income funds

 

248

 

16,522

 

 

16,770

 

733

 

14,566

 

 

15,299

Equity securities

 

10,524

 

 

 

10,524

 

8,840

 

 

 

8,840

Alternative investments

1,926

1,926

1,895

1,895

Mutual funds:

  

 

  

  

 

Domestic stock funds

 

6,826

 

 

 

6,826

 

2,630

 

 

 

2,630

International stock funds

 

1,243

 

 

 

1,243

 

2,054

 

 

 

2,054

Target funds

 

260

 

 

 

260

 

268

 

 

 

268

Bond funds

 

208

 

 

 

208

 

825

 

 

 

825

Alternative funds

433

433

1,531

1,531

Total mutual funds

 

8,970

 

 

 

8,970

 

7,308

 

 

 

7,308

Total

$

19,806

$

19,655

$

1,926

$

41,387

$

73,662

$

15,409

$

1,895

$

90,966

Assets at fair value

$

19,806

$

19,655

$

1,926

 

$

41,387

$

73,662

$

15,409

$

1,895

 

$

90,966

From the assets measured at fair value as of September 26, 2020, listed in the table above, $20.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $0.9 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $16.8 million of fixed income funds and $3.2 million of money markets funds are held in Restricted Investments.

We maintain money market, mutual funds, bonds, and/or stocks in our non-qualified deferred compensation plan, our wholly owned licensed captive insurance company, and assets held in financial institutions. These funds are valued at prices quoted in an active exchange market and are included in “Cash and Cash Equivalents”, “Investments”, “Other Assets”, and “Restricted Investments”. We have elected not to apply the fair value option under ASC 825, Financial Instruments, to any of our financial instruments except for those expressly required by U.S. GAAP.

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $37.3 million as of September 26, 2020, which has been included in the aforementioned table of total investments. This portfolio consists of domestic and international stocks, alternative investments, and fixed income bonds.

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Ardellis’ available for sale investment portfolio, including funds held with the State of Michigan, consists of the following (in thousands):

September 26, 2020

September 28, 2019

Unrealized

Unrealized

    

Cost

    

Gain/(Loss)

    

Fair Value

    

Cost

    

Gain/(Loss)

    

Fair Value

Fixed Income

$

15,750

    

$

1,020

  

$

16,770

$

14,969

    

$

330

  

$

15,299

Equity

 

9,121

 

1,403

  

 

10,524

 

7,584

 

1,256

  

 

8,840

Mutual Funds

7,228

852

  

8,080

6,391

(98)

  

6,293

Alternative Investments

1,881

45

  

1,926

1,790

105

  

1,895

Total

$

33,980

$

3,320

  

$

37,300

$

30,734

$

1,593

  

$

32,327

Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our mutual fund investments consist of domestic and international stock. Our alternative investments consist of the private real estate income trust which is valued as a Level 3 asset. The net unrealized gain was $3.3 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of September 26, 2020 and September 28, 2019.

C.       REVENUE RECOGNITION

Within the three primary segments (Retail, Industrial, and Construction) that the Company operates, there are a variety of written agreements governing the sale of our products and services. The transaction price is stated at the purchase order level, which includes shipping and/or freight costs and any applicable governmental authority taxes. The majority of our contracts have a single performance obligation concentrated around the delivery of goods to the carrier, Free On Board (FOB) shipping point. Therefore, revenue is recognized when this performance obligation is satisfied. Generally, title and control passes at the time of shipment. In certain circumstances, the customer takes title when the shipment arrives at the destination. However, our shipping process is typically completed the same day.

Certain customer products that we provide require installation by the Company or a 3rd party. Installation revenue is recognized upon completion. If the Company uses a 3rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.

The Company utilizes rebates, credits, discounts and/or cash-based incentives with certain customers which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and reduce revenues recognized. We believe that there will not be significant changes to our estimates of variable consideration. The allocation of these costs are applied at the invoice level and recognized in conjunction with revenue. Additionally, returns and refunds are estimated on a historical and expected basis which is a reduction of revenue recognized.

Earnings on construction contracts are reflected in operations using over time accounting, under either cost to cost or units of delivery methods, depending on the nature of the business at individual operations, which is in accordance with ASC 606 as revenue is recognized when certain performance obligations are performed. Under over time accounting using the cost to cost method, revenues and related earnings on construction contracts are measured by the relationships of actual costs incurred related to the total estimated costs. Under over time accounting using the units of delivery method, revenues and related earnings on construction contracts are measured by the relationships of actual units produced related to the total number of units. Revisions in earnings estimates on the construction contracts are recorded in the accounting period in which the basis for such revisions becomes known. Projected losses on individual contracts are charged to operations in their entirety when such losses become apparent.

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UFP INDUSTRIES, INC.

Our construction contracts are generally entered into with a fixed price and completion of the projects can range from 6 to 18 months in duration. Therefore, our operating results are impacted by, among many other things, labor rates and commodity costs. During the year, we update our estimated costs to complete our projects using current labor and commodity costs and recognize losses to the extent that they exist.

The following table presents our gross revenues disaggregated by revenue source:

Three Months Ended

Nine Months Ended

(in thousands)

    

September 26,

    

September 28,

    

September 26,

    

September 28,

    

Market Classification

2020

2019

% Change

2020

2019

% Change

FOB Shipping Point Revenue

$

1,490,050

$

1,140,853

 

30.6%

$

3,749,122

$

3,358,520

 

11.6%

Construction Contract Revenue

 

32,007

43,177

 

-25.9%

 

97,150

121,622

 

-20.1%

Total Gross Sales

 

1,522,057

1,184,030

 

28.5%

 

3,846,272

3,480,142

 

10.5%

Sales Allowances

(35,830)

(21,004)

70.6%

(85,982)

(62,173)

38.3%

Total Net Sales

$

1,486,227

$

1,163,026

27.8%

$

3,760,290

$

3,417,969

10.0%

The Construction segment comprises the construction contract revenue shown above. Construction contract revenue is primarily made up of site-built and framing customers.

The following table presents the balances of over time accounting accounts which are included in “Other current assets” and “Accrued liabilities: Other”, respectively (in thousands):

September 26,

December 28,

September 28,

    

2020

    

2019

    

2019

    

Cost and Earnings in Excess of Billings

$

4,130

    

$

4,690

    

$

6,815

    

Billings in Excess of Cost and Earnings

 

11,264

 

6,622

 

 

6,666

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UFP INDUSTRIES, INC.

D.       EARNINGS PER SHARE

The computation of earnings per share (“EPS”) is as follows (in thousands):

Three Months Ended

Nine Months Ended

    

September 26,

    

September 28,

    

September 26,

    

September 28,

    

2020

2019

2020

2019

Numerator:

 

  

 

  

 

  

 

  

 

Net earnings attributable to controlling interest

$

77,204

$

51,859

$

183,826

$

141,914

Adjustment for earnings allocated to non-vested restricted common stock

 

(2,195)

 

(1,299)

 

(5,110)

 

(3,547)

Net earnings for calculating EPS

$

75,009

$

50,560

$

178,716

$

138,367

Denominator:

 

  

 

  

 

  

 

  

Weighted average shares outstanding

 

61,548

 

61,717

 

61,642

 

61,609

Adjustment for non-vested restricted common stock

 

(1,750)

 

(1,546)

 

(1,713)

 

(1,540)

Shares for calculating basic EPS

 

59,798

 

60,171

 

59,929

 

60,069

Effect of dilutive restricted common stock

 

20

 

24

 

19

 

22

Shares for calculating diluted EPS

 

59,818

 

60,195

 

59,948

 

60,091

Net earnings per share:

 

  

 

  

 

  

 

  

Basic

$

1.25

$

0.84

$

2.98

$

2.30

Diluted

$

1.25

$

0.84

$

2.98

$

2.30

E.       COMMITMENTS, CONTINGENCIES, AND GUARANTEES

We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, Ardellis Insurance Ltd., a licensed captive insurance company.

We own and operate a number of facilities throughout the United States that chemically treat lumber products. In connection with the ownership and operation of these and other real properties, and the disposal or treatment of hazardous or toxic substances, we may, under various federal, state, and local environmental laws, ordinances, and regulations, be potentially liable for removal and remediation costs, as well as other potential costs, damages, and expenses. Environmental reserves, calculated with no discount rate, have been established to cover remediation activities at wood preservation facilities in Stockertown, PA; Elizabeth City, NC; and Auburndale, FL. In addition, a reserve was established for our facility in Thornton, CA to remove certain lead containing materials which existed on the property at the time of purchase.

On a consolidated basis, we have reserved approximately $1.9 million on September 26, 2020 and $2.0 million on September 28, 2019, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

In addition, on September 26, 2020, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On September 26, 2020, we had outstanding purchase commitments on commenced capital projects of approximately $21.3 million.

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UFP INDUSTRIES, INC.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also distribute products manufactured by other companies, some of which are no longer in business. While we do not warrant these products, we have received claims as a distributor of these products when the manufacturer no longer exists or has the ability to pay. Historically, these costs have not had a material effect on our consolidated financial statements.

As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances, we are required to post payment and performance bonds to ensure the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims properly made against these bonds. As of September 26, 2020, we had approximately $7.0 million outstanding payment and performance bonds for open projects. We had approximately $7.6 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On September 26, 2020, we had outstanding letters of credit totaling $43.8 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. As of September 26, 2020, we have irrevocable letters of credit outstanding totaling approximately $33.8 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.

We are required to provide irrevocable letters of credit in favor of the bond trustees for all industrial development revenue bonds that have been issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $9.8 million related to our outstanding industrial development revenue bonds. These letters of credit have varying terms but may be renewed at the option of the issuing banks.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of UFP Industries, Inc. in certain debt agreements, including the Series 2012, 2018 and 2020 Senior Notes and our revolving credit facility. The maximum exposure of these guarantees is limited to the indebtedness outstanding under these debt arrangements and this exposure will expire concurrent with the expiration of the debt agreements.

We did not enter into any new guarantee arrangements during the third quarter of 2020 which would require us to recognize a liability on our balance sheet.

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UFP INDUSTRIES, INC.

F.       BUSINESS COMBINATIONS

We completed the following acquisitions in 2020 and since the end of September 2019, which were accounted for using the purchase method in thousands unless otherwise noted:

Net 

Company

Acquisition 

Intangible 

Tangible 

Operating

Name

Date

Purchase Price

Assets

Assets

Segment

July 14, 2020

$19,173
cash paid for 100% asset purchase and estimated contingent consideration

$

13,098

$

6,075

Industrial

T&R Lumber Company ("T&R")

A manufacturer and distributor of a range of products used primarily by nurseries, including plastic growing containers, pots and trays; wooden stakes; trellises; tree boxes; shipping racks; and other nursery supplies based in Rancho Cucamonga, California. T&R had annual sales of approximately $31 million. The acquisition of T&R will allow us to leverage their expertise using our national manufacturing capacity to grow our agricultural product offerings and customer base across the country.

March 13, 2020

$21,787
cash paid for 100% asset purchase and estimated contingent consideration

$

19,098

$

2,689

Construction

Quest Design & Fabrication and Quest Architectural Millwork ("Quest")

A designer, fabricator, and installer of premium millwork and case goods for a variety of commercial uses. Quest had annual sales of approximately $22 million. The acquisition of Quest expands our architectural millwork capabilities and expertise in our commercial construction business unit, and will allow us to use our national manufacturing capacity to grow and diversify our sales to this end market

The intangible assets for the T&R and Quest acquisitions have not been finalized and allocated to their respective identifiable asset and goodwill accounts. In aggregate, acquisitions completed since the end of September 2019 and not consolidated with other operations contributed approximately $10.8 million in net sales and $0.2 million in operating profits during the third quarter of 2020 and $17.8 million in net sales and $1.5 million in operating profits in the first nine months of 2020.

G.       SEGMENT REPORTING

The Company operates manufacturing, treating and distribution facilities internationally, but primarily in the United States. Effective January 1, 2020, the Company re-organized around the markets it serves rather than geography. The prior periods have been recast to reflect the new segment structure. The business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. 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 our Mexico, Canada, and Australia operations and sales and buying offices in other parts of the world.

Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below.

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UFP INDUSTRIES, INC.

The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates. Total assets of the Corporate column include unallocated cash and cash equivalents, certain prepaid assets, certain property, equipment and other assets pertaining to the centralized activities of Corporate, UFP Real Estate, Inc., and UFP Transportation Ltd.

Three Months Ended September 26, 2020

(in thousands)

    

Retail

    

Industrial

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

700,522

 

$

282,124

$

447,103

$

56,700

$

(222)

$

1,486,227

Intersegment net sales

 

45,416

11,773

17,909

76,029

(151,127)

 

Segment operating profit

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 to outside customers

$

397,140

 

$

271,667

$

445,505

$

48,066

$

648

$

1,163,026

Intersegment net sales

 

32,400

9,748

16,057

45,918

(104,123)

 

Segment operating profit

14,297

20,768

21,406

3,561

10,435

70,467

Nine Months Ended September 26, 2020

    

Retail

    

Industrial

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

1,661,873

 

$

763,046

$

1,187,429

$

148,503

$

(561)

$

3,760,290

Intersegment net sales

 

109,378

32,788

49,685

196,908

(388,759)

 

Segment operating profit

122,082

53,837

50,544

20,573

10,555

257,591

Nine Months Ended September 28, 2019

    

Retail

    

Industrial

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

1,212,330

 

$

837,671

$

1,225,467

$

142,845

$

(344)

$

3,417,969

Intersegment net sales

 

101,203

34,406

42,393

155,637

(333,639)

 

Segment operating profit

47,597

60,208

56,263

9,490

19,592

193,150

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UFP INDUSTRIES, INC.

Identifiable intangibles have been transferred and goodwill was re-allocated, based on their relative fair values, to our new segments and reporting units. The following table presents goodwill by segment as of September 26, 2020, and December 28, 2019 (in thousands):

    

Retail

    

Industrial

    

Construction

    

All Other

    

Corporate

    

Total

Balance as of December 28, 2019

 

$

58,098

 

$

81,276

 

$

82,911

 

$

7,251

$

 

$

229,536

2020 Acquisitions

 

6,549

9,953

 

16,502

2020 Purchase Accounting Adjustments

202

2

204

Foreign Exchange, Net

 

229

(546)

 

(317)

Balance as of September 26, 2020

$

58,300

 

$

87,827

$

93,093

$

6,705

$

$

245,925

The following table presents total assets by segment as of September 26, 2020, and December 28, 2019.

Total Assets by Segment

(in thousands)

September 26,

    

December 28,

    

Segment Classification

2020

2019

% Change

Retail

$

631,238

$

402,221

 

56.9

%

Industrial

 

389,806

 

377,329

 

3.3

Construction

 

525,596

 

522,638

 

0.6

All Other

161,945

136,990

18.2

Corporate

642,035

450,299

42.6

Total Assets

$

2,350,620

$

1,889,477

 

24.4

%

Note:  During 2020, certain assets were reclassified to a different segment. Prior year information in this table has been restated to reflect these changes

H.       INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 25.4% 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.

I.       COMMON STOCK

Below is a summary of common stock issuances for the first nine months of 2020 and 2019 (in thousands, except average share price):

    

September 26, 2020

Share Issuance Activity

 

Common Stock

Average Share Price

Shares issued under the employee stock purchase plan

28

$

44.14

Shares issued under the employee stock gift program

2

45.93

Shares issued under the director retainer stock program

46

24.80

Shares issued under the long-term stock incentive plan

271

47.51

Shares issued under the executive stock match grants

79

47.60

Forfeitures

(7)

Total shares issued under stock grant programs

391

$

44.92

Shares issued under the deferred compensation plans

115

$

53.85

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UFP INDUSTRIES, INC.

During the first nine months of 2020, we repurchased approximately 756,000 shares of our common stock at an average share price of $38.62.

    

September 28, 2019

Share Issuance Activity

 

Common Stock

Average Share Price

Shares issued under the employee stock purchase plan

27

$

35.52

Shares issued under the employee stock gift program

3

33.91

Shares issued under the director retainer stock program

4

35.44

Shares issued under the long-term stock incentive plan

211

30.83

Shares issued under the executive stock match grants

109

31.57

Forfeitures

(17)

Total shares issued under stock grant programs

310

$

31.17

Shares issued under the deferred compensation plans

169

$

33.20

During the first nine months of 2019, we did not repurchase any of our common stock.

J.       SUBSEQUENT EVENTS

On September 30, 2020, we entered into a joint venture with Atlante S.p.A. to create Enwrap Logistic & Packaging S.r.l. (Enwrap) and acquired a 50% ownership interest in Enwrap for $5.3 million. Enwrap is headquartered in Milan, Italy and is an industrial packaging business, which provides high-value, mixed material industrial packaging and logistics services through 14 facilities in Italy.

On October 1, 2020, we acquired the equity of Fire Retardant Chemical Technologies, LLC (FRCT), for $5.9 million. Founded in 2014 and based in Matthews, North Carolina, FRCT’s business includes a research and development laboratory specializing in developing and testing a wide range of high-performance chemicals, including fire retardants and water repellants.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UFP Industries, Inc. (formerly Universal Forest Products, Inc.) is a holding company with subsidiaries throughout North America, Europe, Asia, and Australia that supply wood, wood composite and other products to three markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Mich. For more information about UFP Industries, Inc., or its affiliated operations, go to www.ufpi.com.

On April 22, 2020, our shareholders approved changing the name of the Company from Universal Forest Products, Inc., to UFP Industries, Inc.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations, government imposed “stay at home” orders and directives to cease or curtail operations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of the third quarter of 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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Our cash flow from operations for the first nine months of 2020 decreased to $185 million from $198 million last year as our net working capital increased by $60 million since the end of 2019. Conversely, our net working capital decreased by $3 million by the end of the first nine months last year. The 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 $32 million at the end of the September 2020.
Our available borrowing capacity under revolving credit facilities and cash surplus resulted in total liquidity of approximately $700 million at the end of September 2020. In August of 2020 we issued $150 million of long-term debt to 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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In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprise almost two-thirds of our total lumber purchases.

Random Lengths SYP

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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Products with selling prices indexed to the reported Lumber Market with a fixed 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 United States Securities and Exchange Commission.)
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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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

 

17.4

 

Selling, 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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Operating Results by Segment:

Effective January 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 and UFP 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 our Mexico, Canada, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates.

The following tables present our operating results, for the periods indicated, by segment.

Three Months Ended September 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

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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

$

47,597

$

60,208

$

56,263

$

9,490

$

19,592

$

193,150

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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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.

NET SALES

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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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 current Lumber 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, our Industrial and Construction segments primarily sell value-added products and their unit sales were down 2% and 9% from last year, respectively.

Three Months Ended September 26, 2020

Three Months Ended September 28, 2019

    

    

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 September 28, 2019

    

    

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 $1 million per year within 4 years of launch and are still growing and gaining market penetration. New product sales and gross profits in the third quarter were up 41% and 27%, respectively. Approximately $37 million and $103 million of new product sales for the first three and nine months of 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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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 $25 million to the increase.
Our ProWood business unit, which produces and sells pressure treated lumber, contributed $31.4 million to the increase attributable to unit sales growth and the impact of rising lumber prices as the selling prices of these products are primarily determined on a variable price formula.
The remaining $5.4 million increase is attributed to favorable cost variances 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 advertising and travel and related costs.

Earnings from operations for the Retail reportable segment increased in the third quarter of 2020 compared to 2019 by $47.9 million, or 335%, well in excess of our 34% increase in unit sales as a result of the factors above.

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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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 $1.3 million, or 6.1%, due to the factors discussed above.

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.

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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 $10.6 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 $6.8 million.
The impact of rising lumber prices on variable priced products contributed $4.3 million in gross profit in our factory-built housing and concrete forming business units.
Favorable cost variances contributed $1.2 million in gross profit.
Acquired businesses contributed $1.7 million.

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.

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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

2019

Cash 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

$

346,878

$

65,227

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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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,

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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On September 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 in August 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 on September 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 in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. There have been no material changes in our policies or estimates since December 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 of September 2020.

FORWARD OUTLOOK

Most recently, the Company’s long-term goals have been to:

Achieve long-term unit sales growth that exceeds positive U.S. GDP by 4 percent 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 the U.S. The following variables should be considered when evaluating our performance over the next year.

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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-Atlantic states, Colorado, and Texas. 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 U.S. GDP. Sales of our 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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On a consolidated basis, and based on our 2019 results of operations and business 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 10 cents to 15 cents. As a point of reference, our peak to trough decremental 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 $100 million for 2020 as we plan to capitalize on 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 $20 million. This liability must be paid in equal annual installments on December 31, 2021 and December 31, 2022.
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 $346 million exceeds our debt of $314 million and our shareholders’ equity is over $1.4 billion at the end of the third quarter of 2020. Additionally, we currently have approximately $700 million of liquidity. Our historical methodology for capital allocation 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists of a revolving credit facility and industrial development revenue bonds. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.

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For fixed rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. We do not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until we would be required to refinance it.

We are subject to fluctuations in the price of lumber. We experience significant fluctuations in the cost of commodity lumber products from primary producers (the “Lumber Market”). A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices. While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability. We anticipate that these fluctuations will continue in the future. (See “Impact of the Lumber Market on Our Operating Results.”)

Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. Dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We entered into forward foreign exchange rate contracts in 2018, which have since expired, and may enter into further forward contracts in the future associated with mitigating the foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.

Item 4. Controls and Procedures.

(a)Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended September 26, 2020 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.
(b)Changes in Internal Controls. During the quarter ended September 26, 2020, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors.

We may be adversely affected by the impact of COVID-19 (Coronavirus) pandemic. Disease outbreaks, such as the COVID-19 pandemic, could have an adverse impact on the Company's operations and financial results. These outbreaks may adversely impact our business, consolidated results of operations and financial condition, such as the current COVID-19 pandemic. COVID-19, as well as measures taken by governmental authorities and businesses to limit the spread of this virus, may result in an adverse change in customer demand and our sales, interfere with the ability of our employees and suppliers to perform and function in a manner consistent with targeted objectives and otherwise adversely impact the efficiency of our operations. This has caused, and may continue to cause, us to materially curtail certain segments, and could have a material adverse effect on the results of our operations and cash flow.

Adverse economic conditions and our customers’ ability to operate may impact their ability to pay. This may result in higher write-offs of receivables than we normally experience. We continue to monitor our customers’ business activities, payment patterns, and credit profiles carefully and make changes in our terms when necessary in response to this risk. As a result, our accounts receivable aging at the end of September was approximately 95% current. Most recently our bad debt expense as a percentage of sales was 0.09%, 0.03%, and 0.03%, in 2019, 2018, and 2017, respectively. During the most difficult collection period of the Great Recession, from 2008 through 2010, our bad debt expense as a percentage of sales averaged 0.25%.

There could be limited future availability of materials from our suppliers. Many of our suppliers reduced their manufacturing capacity in response to the anticipated reduction in demand from the pandemic, which in turn impacted our ability to fulfill all of our customers’ orders. Our suppliers are currently taking actions to increase capacity to meet expectations of future demand.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a)None.
(b)None.
(c)Issuer purchases of equity securities.

Fiscal Month

    

(a)

    

(b)

    

(c)

    

(d)

June 28 – August 1, 2020

 

 

 

 

1,103,957

August 2 – 29, 2020

 

 

 

1,103,957

August 30 – September 26, 2020

 

 

 

1,103,957

(a)Total number of shares purchased.
(b)Average price paid per share.
(c)Total number of shares purchased as part of publicly announced plans or programs.
(d)Maximum number of shares that may yet be purchased under the plans or programs.

On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 1.1 million.

Item 5. Other Information.

None.

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PART II. OTHER INFORMATION

Item 6. Exhibits.

The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:

31

Certifications.

(a)

Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(b)

Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

32

Certifications.

(a)

Certificate of the Chief Executive Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

(b)

Certificate of the Chief Financial Officer of UFP Industries, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

101

Interactive Data File formatted in iXBRL (Inline eXtensible Business Reporting Language).

(INS)

iXBRL Instance Document.

(SCH)

iXBRL Schema Document.

(CAL)

iXBRL Taxonomy Extension Calculation Linkbase Document.

(LAB)

iXBRL Taxonomy Extension Label Linkbase Document.

(PRE)

iXBRL Taxonomy Extension Presentation Linkbase Document.

(DEF)

iXBRL Taxonomy Extension Definition Linkbase Document.

104

Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

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UFP INDUSTRIES, INC.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

UFP INDUSTRIES, INC.

Date: October 28, 2020

By:

/s/ Matthew J. Missad

Matthew J. Missad,

Chief Executive Officer and Principal Executive Officer

Date: October 28, 2020

By:

/s/ Michael R. Cole

Michael R. Cole,

Chief Financial Officer,

Principal Financial Officer and

Principal Accounting Officer

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