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UFP INDUSTRIES INC - Quarter Report: 2023 July (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 July 1, 2023

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 July 1, 2023

Common stock, $1 par value

61,865,006

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

3

Condensed Consolidated Balance Sheets at July 1, 2023, December 31, 2022 and June 25, 2022

3

Condensed Consolidated Statements of Earnings and Comprehensive Income for the Three and Six Months Ended July 1, 2023 and June 25, 2022

4

Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended July 1, 2023 and June 25, 2022

5

Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2023 and June 25, 2022

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

36

Item 4.

Controls and Procedures

37

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings – NONE

Item 1A.

Risk Factors - NONE

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults upon Senior Securities – NONE

Item 4.

Mine Safety Disclosures – NONE

Item 5.

Other Information

37

Item 6.

Exhibits

38

2

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

July 1,

December 31,

June 25,

    

2023

    

2022

    

2022

ASSETS

  

  

CURRENT ASSETS:

  

  

Cash and cash equivalents

$

702,148

    

$

559,397

  

$

138,071

Restricted cash

 

761

 

226

  

 

729

Investments

 

38,459

 

36,013

  

 

35,475

Accounts receivable, net

 

802,300

 

617,604

  

 

1,046,543

Inventories:

  

  

Raw materials

 

334,300

 

398,798

  

 

490,923

Finished goods

 

486,887

 

574,429

  

 

615,379

Total inventories

 

821,187

 

973,227

  

 

1,106,302

Refundable income taxes

 

13,717

 

33,126

  

 

13,083

Other current assets

 

36,486

 

42,520

  

 

36,241

TOTAL CURRENT ASSETS

 

2,415,058

 

2,262,113

 

2,376,444

DEFERRED INCOME TAXES

 

4,187

 

3,750

  

 

3,568

RESTRICTED INVESTMENTS

22,756

 

19,898

  

 

19,885

RIGHT OF USE ASSETS

105,907

107,517

107,825

OTHER ASSETS

 

96,079

 

101,262

  

 

32,186

GOODWILL

 

336,495

 

337,320

  

 

320,532

INDEFINITE-LIVED INTANGIBLE ASSETS

 

7,330

 

7,339

  

 

7,350

OTHER INTANGIBLE ASSETS, NET

 

138,117

 

143,892

  

 

117,869

PROPERTY, PLANT AND EQUIPMENT:

  

  

Property, plant and equipment

1,447,482

1,379,968

1,286,037

Less accumulated depreciation and amortization

 

(729,468)

 

(690,986)

  

 

(660,873)

PROPERTY, PLANT AND EQUIPMENT, NET

718,014

688,982

625,164

TOTAL ASSETS

3,843,943

3,672,073

3,610,823

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

  

CURRENT LIABILITIES:

  

  

Cash overdraft

$

$

  

$

11,926

Accounts payable

264,408

206,941

  

386,833

Accrued liabilities:

  

  

Compensation and benefits

 

183,910

 

296,120

  

 

252,723

Other

 

79,414

 

80,255

  

 

107,112

Current portion of lease liability

25,887

25,577

24,903

Current portion of long-term debt

 

2,385

 

2,942

  

 

40,496

TOTAL CURRENT LIABILITIES

 

556,004

 

611,835

  

 

823,993

LONG-TERM DEBT

 

274,821

 

275,154

  

 

276,315

LEASE LIABILITY

84,194

85,419

86,464

DEFERRED INCOME TAXES

 

51,018

 

51,265

  

 

63,389

OTHER LIABILITIES

 

36,137

 

44,697

  

 

35,594

TOTAL LIABILITIES

 

1,002,174

 

1,068,370

  

 

1,285,755

TEMPORARY EQUITY:

Redeemable noncontrolling interest

$

6,772

$

6,880

$

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 160,000,000; issued and outstanding, 61,865,006, 61,618,193 and 61,622,527

 

61,865

 

61,618

  

 

61,623

Additional paid-in capital

 

335,494

 

294,029

  

 

275,061

Retained earnings

 

2,408,314

 

2,217,410

  

 

1,950,922

Accumulated other comprehensive loss

 

(2,290)

 

(9,075)

  

 

(7,458)

Total controlling interest shareholders’ equity

 

2,803,383

 

2,563,982

  

 

2,280,148

Noncontrolling interest

 

31,614

 

32,841

  

 

44,920

TOTAL SHAREHOLDERS’ EQUITY

 

2,834,997

 

2,596,823

  

 

2,325,068

TOTAL LIABILITIES, TEMPORARY EQUITY AND SHAREHOLDERS’ EQUITY

$

3,843,943

$

3,672,073

  

$

3,610,823

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

Six Months Ended

July 1,

June 25,

July 1,

June 25,

    

2023

    

2022

    

2023

    

2022

    

NET SALES

$

2,043,918

    

$

2,900,874

  

$

3,866,394

    

$

5,390,187

    

COST OF GOODS SOLD

 

1,643,851

 

2,397,422

  

 

3,107,998

 

4,408,372

GROSS PROFIT

 

400,067

 

503,452

  

 

758,396

 

981,815

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

204,703

 

214,538

  

 

399,386

 

434,688

OTHER LOSSES (GAINS), NET

1,867

3,348

3,805

2,536

EARNINGS FROM OPERATIONS

 

193,497

 

285,566

  

 

355,205

 

544,591

INTEREST EXPENSE

 

3,275

 

3,395

  

 

6,393

 

6,697

INTEREST AND INVESTMENT (INCOME) LOSS

 

(7,717)

 

4,154

  

 

(14,264)

 

5,247

EQUITY IN LOSS OF INVESTEE

417

1,017

1,005

1,532

 

(4,025)

 

8,566

  

 

(6,866)

 

13,476

EARNINGS BEFORE INCOME TAXES

 

197,522

 

277,000

  

 

362,071

 

531,115

INCOME TAXES

 

46,734

 

69,147

  

 

85,705

 

130,131

NET EARNINGS

 

150,788

 

207,853

  

 

276,366

 

400,984

NET (EARNINGS) LOSS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(27)

 

(4,735)

  

 

464

 

(8,163)

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

150,761

$

203,118

  

$

276,830

$

392,821

EARNINGS PER SHARE – BASIC

$

2.40

$

3.24

  

$

4.41

$

6.25

EARNINGS PER SHARE – DILUTED

$

2.36

$

3.23

  

$

4.35

$

6.22

OTHER COMPREHENSIVE INCOME:

NET EARNINGS

 

150,788

 

207,853

  

 

276,366

 

400,984

OTHER COMPREHENSIVE INCOME (LOSS)

 

4,478

 

(4,383)

  

 

10,730

 

(1,199)

COMPREHENSIVE INCOME

 

155,266

 

203,470

  

 

287,096

 

399,785

COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(1,721)

 

(4,640)

  

 

(3,481)

 

(9,017)

COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST

$

153,545

$

198,830

  

$

283,615

$

390,768

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

Temporary

 

Stock

  

Capital

  

Earnings

  

Earnings

  

Interest (NCI)

  

Total

 

Equity

Balance on December 31, 2022

$

61,618

$

294,029

$

2,217,410

$

(9,075)

$

32,841

  

$

2,596,823

$

6,880

Net earnings (loss)

126,069

(313)

125,756

 

(178)

Foreign currency translation adjustment

3,850

2,195

6,045

 

56

Unrealized gain on debt securities

151

151

 

Distributions to NCI

(4,859)

(4,859)

 

Other

43

Cash dividends - $0.25 per share - quarterly

(15,642)

(15,642)

 

Issuance of 10,140 shares under employee stock purchase plan

 

10

675

685

 

Issuance of 824,669 shares under stock grant programs

 

825

14,356

6

15,187

 

Issuance of 93,165 shares under deferred compensation plans

 

93

(93)

 

Repurchase of 450,597 shares

 

(450)

(34,818)

(35,268)

 

Expense associated with share-based compensation arrangements

9,598

9,598

 

Accrued expense under deferred compensation plans

7,165

7,165

  

Balance on April 1, 2023

$

62,096

$

325,730

  

$

2,293,025

$

(5,074)

  

$

29,864

  

$

2,705,641

$

6,801

Net earnings (loss)

150,761

56

 

150,817

 

(29)

Foreign currency translation adjustment

2,983

1,694

 

4,677

 

Unrealized gain on debt securities

(199)

 

(199)

 

Other

(427)

(427)

Cash dividends - $0.25 per share - quarterly

(15,507)

 

(15,507)

 

Issuance of 9,253 shares under employee stock purchase plan

 

9

754

 

763

 

Net forfeitures of 1,503 shares under stock grant programs

 

(1)

35

 

34

 

Issuance of 11,686 shares under deferred compensation plans

 

12

(12)

 

 

Repurchase of 250,000 shares

(251)

(19,965)

(20,216)

Expense associated with share-based compensation arrangements

8,201

 

8,201

 

Accrued expense under deferred compensation plans

1,213

 

1,213

 

Balance on July 1, 2023

$

61,865

$

335,494

  

$

2,408,314

$

(2,290)

  

$

31,614

  

$

2,834,997

$

6,772

See notes to consolidated condensed financial statements.

5

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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

Temporary

  

Stock

  

Capital

  

Earnings

  

Earnings

  

Interest (NCI)

  

Total

  

Equity

Balance on December 25, 2021

$

61,902

$

243,995

$

1,678,121

$

(5,405)

$

37,956

  

$

2,016,569

$

Net earnings

  

  

 

189,703

 

  

 

3,428

  

 

193,131

Foreign currency translation adjustment

  

  

  

 

2,930

 

949

  

 

3,879

Unrealized loss on debt securities

  

  

  

 

(695)

 

  

 

(695)

Distributions to NCI

  

  

  

  

 

(2,053)

 

(2,053)

Cash dividends - $0.20 per share - quarterly

(12,541)

 

  

 

  

  

 

(12,541)

Issuance of 9,734 shares under employee stock purchase plan

 

10

653

  

  

  

 

663

Issuance of 787,045 shares under stock grant programs

 

787

8,959

  

  

  

 

9,746

Issuance of 79,973 shares under deferred compensation plans

 

80

(80)

  

  

Repurchase of 44,442 shares

 

(45)

(3,499)

  

  

 

  

 

(3,544)

Expense associated with share-based compensation arrangements

6,883

 

  

 

  

6,883

Accrued expense under deferred compensation plans

6,134

  

  

  

  

 

6,134

Balance on March 26, 2022

$

62,734

$

266,544

  

$

1,851,784

$

(3,170)

  

$

40,280

  

$

2,218,172

$

Net earnings

203,118

4,735

  

 

207,853

Foreign currency translation adjustment

(3,660)

(95)

  

 

(3,755)

Unrealized loss on debt securities

(628)

 

(628)

Cash dividends - $0.25 per share - quarterly

(15,474)

(15,474)

Issuance of 13,875 shares under employee stock purchase plan

 

14

781

795

Issuance of 28,154 shares under stock grant programs

 

28

1,092

1,120

Issuance of 11,605 shares under deferred compensation plans

 

12

(12)

  

 

Repurchase of 1,165,268 shares

(1,165)

(88,506)

  

 

(89,671)

Expense associated with share-based compensation arrangements

5,556

  

 

5,556

Accrued expense under deferred compensation plans

1,100

 

1,100

Balance on June 25, 2022

$

61,623

$

275,061

  

$

1,950,922

$

(7,458)

  

$

44,920

  

$

2,325,068

$

See notes to consolidated condensed financial statements.

6

Table of Contents

UFP INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Six Months Ended

July 1,

June 25,

    

2023

    

2022

    

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net earnings

$

276,366

    

$

400,984

Adjustments to reconcile net earnings to net cash used in operating activities:

  

Depreciation

 

52,786

44,034

Amortization of intangibles

 

10,371

8,740

Expense associated with share-based and grant compensation arrangements

 

17,875

12,542

Deferred income taxes

 

(319)

179

Unrealized (gain) loss on investments and other

 

(1,291)

6,181

Equity in loss of investee

1,005

1,532

Net (gain) loss on sale and disposition of assets

 

(182)

766

Changes in:

Accounts receivable

 

(183,717)

(304,715)

Inventories

 

154,413

(134,653)

Accounts payable and cash overdraft

 

56,899

56,120

Accrued liabilities and other

 

(63,142)

(1,313)

NET CASH FROM OPERATING ACTIVITIES

 

321,064

 

90,397

CASH FLOWS USED IN INVESTING ACTIVITIES:

  

Purchases of property, plant and equipment

 

(84,981)

(71,675)

Proceeds from sale of property, plant and equipment

 

789

2,029

Acquisitions, net of cash received and purchase of equity method investment

 

67

(39,343)

Purchases of investments

 

(14,747)

(15,166)

Proceeds from sale of investments

 

11,486

8,221

Other

 

2,076

(2,829)

NET CASH USED IN INVESTING ACTIVITIES

 

(85,310)

 

(118,763)

CASH FLOWS USED IN FINANCING ACTIVITIES:

  

Borrowings under revolving credit facilities

 

11,026

570,700

Repayments under revolving credit facilities

 

(11,869)

(571,075)

Repayments of debt

(29)

(2,485)

Contingent consideration payments and other

(6,179)

(2,553)

Proceeds from issuance of common stock

 

1,448

1,457

Dividends paid to shareholders

 

(31,149)

(28,015)

Distributions to noncontrolling interest

(4,859)

(2,053)

Repurchase of common stock

 

(55,484)

(90,805)

Other

 

48

(184)

NET CASH USED IN FINANCING ACTIVITIES

 

(97,047)

 

(125,013)

Effect of exchange rate changes on cash

 

4,579

956

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

143,286

 

(152,423)

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

 

559,623

 

291,223

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

$

702,909

$

138,800

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:

Cash and cash equivalents, beginning of period

$

559,397

$

286,662

Restricted cash, beginning of period

226

4,561

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

$

559,623

$

291,223

Cash and cash equivalents, end of period

$

702,148

$

138,071

Restricted cash, end of period

761

729

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

$

702,909

$

138,800

SUPPLEMENTAL INFORMATION:

  

Interest paid

$

6,345

$

7,008

Income taxes paid

 

66,329

 

138,420

NON-CASH INVESTING ACTIVITIES

  

Capital expenditures included in accounts payable

$

1,915

$

2,856

NON-CASH FINANCING ACTIVITIES:

Common stock issued under deferred compensation plans

$

8,929

$

7,563

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 of America. All significant intercompany balances and transactions have been eliminated in consolidation.

We consolidate entities in which we have a controlling financial interest. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, authority to make decisions, and contractual and substantive participating rights of the partners/members as well as whether the entity is a variable interest entity (“VIE”) and whether we are the primary beneficiary. The primary beneficiary of a VIE is the entity that has (i) the power to direct the activities that most significantly impact the entity's economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. The primary beneficiary is required to consolidate the VIE. We account for unconsolidated VIEs using the equity method of accounting.

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 31, 2022.

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 June 25, 2022 balances in the accompanying unaudited condensed consolidated balance sheets.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires that an acquirer recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and is being applied prospectively to all business combinations occurring after this date.

8

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UFP INDUSTRIES, INC.

B.       FAIR VALUE

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

July 1, 2023

June 25, 2022

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

    

(Level 1)

    

(Level 2)

    

(Level 3)

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

Money market funds

$

431,829

    

$

4,434

$

    

$

436,263

    

$

19

    

$

4,170

$

    

$

4,189

Fixed income funds

 

3,791

 

18,195

 

 

21,986

 

2,684

 

16,654

 

 

19,338

Treasury securities

343

343

342

342

Equity securities

 

17,224

 

 

 

17,224

 

17,249

 

 

 

17,249

Alternative investments

4,076

4,076

4,079

4,079

Mutual funds:

  

 

  

  

 

Domestic stock funds

 

10,781

 

 

 

10,781

 

12,723

 

 

 

12,723

International stock funds

 

1,135

 

 

 

1,135

 

1,378

 

 

 

1,378

Target funds

 

8

 

 

 

8

 

21

 

 

 

21

Bond funds

 

5,288

 

 

 

5,288

 

134

 

 

 

134

Alternative funds

474

474

510

510

Total mutual funds

 

17,686

 

 

 

17,686

 

14,766

 

 

 

14,766

Total

$

470,873

$

22,629

$

4,076

$

497,578

$

35,060

$

20,824

$

4,079

$

59,963

From the assets measured at fair value as of July 1, 2023, listed in the table above, $435.8 million of money market funds are held in Cash and Cash Equivalents, $38.5 million of mutual funds, equity securities, and alternative investments are held in Investments, $0.5 million of money market and mutual funds are held in Other Assets for our deferred compensation plan, and $22.3 million of fixed income funds and $0.5 million of money market funds are held in Restricted Investments. As of June 25, 2022, $35.5 million of mutual funds, equity securities, and alternative investments were held in Investments, $4.0 million of money market funds were held in Cash and Cash Equivalents, $0.6 million of money market and mutual funds were held in Other Assets for our deferred compensation plan, and $19.7 million of fixed income funds and $0.2 million of money market funds were held in Restricted Investments.

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

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $60.8 million and $55.2 million as of July 1, 2023 and June 25, 2022, respectively, which has been included in the aforementioned table of total investments. This portfolio consists of domestic and international equity securities, alternative investments, and fixed income bonds.

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

July 1, 2023

June 25, 2022

Unrealized

Unrealized

   

Cost

  

Gain (Loss)

   

Fair Value

   

Cost

   

Gain (Loss)

  

Fair Value

Fixed income

$

24,080

 

$

(2,094)

  

$

21,986

$

20,875

$

(1,537)

 

$

19,338

Treasury securities

343

343

342

342

Equity

 

14,834

 

2,390

  

 

17,224

 

15,668

 

1,581

 

17,249

Mutual funds

15,563

1,596

  

17,159

13,405

742

 

14,147

Alternative investments

3,158

918

  

4,076

3,053

1,026

 

4,079

Total

$

57,978

$

2,810

  

$

60,788

$

53,343

$

1,812

 

$

55,155

Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our mutual fund investments consist of domestic and international stock. Our alternative investments consist of a private real estate income trust which is valued as a Level 3 asset. The net pre-tax unrealized gain of the portfolio was $2.8 million and $1.8 million as of July 1, 2023 and June 25, 2022, respectively. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of July 1, 2023 and June 25, 2022.

C.       REVENUE RECOGNITION

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

Certain customer products that we provide require installation by the Company or a third party. Installation revenue is recognized upon completion. If we use a third party for installation, the party will act as an agent to us until completion of the installation. Installation revenue represents an immaterial share of our total net sales.

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

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

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

The following table presents our net sales disaggregated by revenue source (in thousands):

Three Months Ended

Six Months Ended

    

July 1,

    

June 25,

    

July 1,

    

June 25,

    

2023

2022

% Change

2023

2022

% Change

Point in Time Revenue

$

2,006,319

$

2,850,409

 

(29.6)%

$

3,790,775

$

5,300,690

 

(28.5)%

Over Time Revenue

 

37,599

50,465

 

(25.5)%

 

75,619

89,497

 

(15.5)%

Total Net Sales

 

2,043,918

2,900,874

 

(29.5)%

$

3,866,394

$

5,390,187

 

(28.3)%

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):

July 1,

December 31,

June 25,

    

2023

    

2022

    

2022

    

Cost and Earnings in Excess of Billings

$

3,266

    

$

6,798

    

$

6,413

    

Billings in Excess of Cost and Earnings

 

12,914

 

10,184

 

 

10,046

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D.       EARNINGS PER SHARE

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

Three Months Ended

Six Months Ended

    

July 1,

    

June 25,

    

July 1,

    

June 25,

    

2023

2022

2023

2022

Numerator:

 

  

 

  

 

  

 

  

 

Net earnings attributable to controlling interest

$

150,761

$

203,118

$

276,830

$

392,821

Adjustment for earnings allocated to non-vested restricted common stock equivalents

 

(7,588)

 

(8,270)

 

(13,096)

 

(15,045)

Net earnings for calculating EPS

$

143,173

$

194,848

$

263,734

$

377,776

Denominator:

 

  

 

  

 

  

 

  

Weighted average shares outstanding

 

62,786

 

62,766

 

62,756

 

62,889

Adjustment for non-vested restricted common stock equivalents

 

(3,160)

 

(2,555)

 

(2,969)

 

(2,409)

Shares for calculating basic EPS

 

59,626

 

60,211

 

59,787

 

60,480

Effect of dilutive restricted common stock equivalents

 

918

 

205

 

885

 

220

Shares for calculating diluted EPS

 

60,544

 

60,416

 

60,672

 

60,700

Net earnings per share:

 

  

 

  

 

  

 

  

Basic

$

2.40

$

3.24

$

4.41

$

6.25

Diluted

$

2.36

$

3.23

$

4.35

$

6.22

E.       COMMITMENTS, CONTINGENCIES, AND GUARANTEES

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

In addition, on July 1, 2023, 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 July 1, 2023, we had outstanding purchase commitments on commenced capital projects of approximately $66.4 million.

We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material. We also distribute products manufactured by other companies. 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 July 1, 2023, we had approximately $13.2 million in outstanding payment and performance bonds for open projects. We had approximately $13.0 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On July 1, 2023, we had outstanding letters of credit totaling $54.1 million, primarily related to certain insurance contracts, industrial development revenue bonds, and other debt agreements described further below.

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In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers and other third parties to guarantee our performance under certain insurance contracts and other legal agreements. As of July 1, 2023, we have irrevocable letters of credit outstanding totaling approximately $50.8 million for these types of arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under those 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 $3.3 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 second quarter of 2023 which would require us to recognize a liability on our balance sheet.

F.       BUSINESS COMBINATIONS AND EQUITY METHOD INVESTMENTS

We completed the following acquisitions since the end of the second quarter of 2022, which were accounted for using the purchase or equity method. Dollars below are in thousands unless otherwise noted:

Net 

Company

Acquisition 

Intangible 

Tangible 

Operating

Name

Date

Purchase Price

Assets

Assets

Segment

December 6, 2022

$70,942 cash paid for 100% asset purchase

$

48,745

$

22,197

Packaging

Titan Corrugated, Inc. (Titan) and All Boxed Up, LLC

Located in Flower Mound, TX and founded in 2003, Titan’s primary products include boxes used in moving and storage, jumbo boxes for industrial products, corrugated shipping containers, and point-of-purchase displays. All Boxed Up distributes common box sizes manufactured by Titan throughout the United States. The combined companies had trailing 12-month sales through October 2022 of approximately $46.5 million.

June 27, 2022

$69,791 cash paid for equity method investment

$

34,552

$

35,239

Packaging

Dempsey Wood Products, Inc. (Dempsey)

Located in Orangeburg, South Carolina and founded in 1988, Dempsey is a sawmill which produces products such as kiln dried finished lumber, industrial lumber, green cut stock lumber, pine chips and shavings, landscaping mulch, and sawdust. The Company had sales of approximately $69 million in 2021.

The intangible assets for the above investments have not been finalized and allocated to their respective identifiable asset and goodwill accounts. In aggregate, investments completed since the end of the second quarter of 2022 and not consolidated with other operations contributed approximately $23.8 million in net sales and $1.0 million in operating profits during the first six months of 2023.

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As a result of the investment in Dempsey on June 27, 2022, we own 50% of the issued equity of that entity, and the remaining 50% of the issued equity is owned by the previous owners (“Sellers”). The investment in Dempsey is an unconsolidated variable interest entity and we have accounted for it using the equity method of accounting because we do not have a controlling financial interest in the entity. Per the contracts, the Sellers have a put right to sell their equity interest to us for $50 million and we have a call right to purchase the Seller’s equity interest for $70 million, which are both first exercisable in June 2025 and expire in June 2030. As of July 1, 2023, the carrying value of our investment in Dempsey is $64.3 million and is recorded in Other Assets. Our maximum exposure to loss consists of our investment amount and any contingent loss that may occur in the future as a result of a change in the fair value of Dempsey relative to the strike price of the put option.

The business combinations mentioned above were not significant to our operating results individually or in aggregate, and thus pro forma results for 2023 and 2022 are not presented.

G.       SEGMENT REPORTING

We operate manufacturing, treating and distribution facilities internationally, but primarily in the United States. Our business segments consist of UFP Retail Solutions, UFP Packaging (formerly known as UFP Industrial) and UFP Construction and align with the end markets we serve. This segment structure allows for a specialized and consistent sales approach among Company operations, efficient use of resources and capital, and quicker introduction of new products and services. We manage the operations of our individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail, Packaging, and Construction segments. In the case of locations that serve multiple segments, results are allocated and accounted for by segment.

The exception to this market-centered reporting and management structure is our International segment, which comprises our Mexico, Canada, Europe, India, and Australia operations and sales and buying offices in other parts of the world and our Ardellis segment, which represents our wholly owned fully licensed captive insurance company based in Bermuda. Our International and Ardellis segments do not meet the quantitative thresholds in order to be separately reported and accordingly, the International and Ardellis segments have been aggregated in the “All Other” segment for reporting purposes.

“Corporate” includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consist of net sales to external customers initiated by UFP Purchasing and UFP Transportation and over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns, leases and operates transportation equipment, are also included in the Corporate column. Inter-company lease and service charges are assessed to our operating segments for the use of these assets and services at fair market value rates. Total assets in the Corporate column include unallocated cash and cash equivalents, certain prepaid assets, certain property, equipment and other assets pertaining to the centralized activities of Corporate, UFP Real Estate, Inc., UFP Transportation, Inc., UFP Purchasing, Inc., and UFP RMS, LLC. The tables below are presented in thousands:

Three Months Ended July 1, 2023

    

Retail

    

Packaging

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

919,998

 

$

488,100

$

550,464

$

86,224

$

(868)

$

2,043,918

Intersegment net sales

 

198,518

20,976

23,554

75,480

(318,528)

 

Earnings from operations

60,180

56,864

61,959

6,817

7,677

193,497

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UFP INDUSTRIES, INC.

Three Months Ended June 25, 2022

    

Retail

    

Packaging

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

1,121,440

 

$

676,333

$

975,376

$

124,416

$

3,309

$

2,900,874

Intersegment net sales

 

67,612

21,487

31,866

125,893

(246,858)

 

Earnings from operations

24,527

94,210

132,832

22,748

11,249

285,566

Six Months Ended July 1, 2023

    

Retail

    

Packaging

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

1,669,575

 

$

974,661

$

1,066,057

$

153,736

$

2,365

$

3,866,394

Intersegment net sales

 

421,843

41,026

49,390

152,967

(665,226)

 

Earnings from operations

101,236

111,596

116,207

10,851

15,315

355,205

Six Months Ended June 25, 2022

    

Retail

    

Packaging

    

Construction

    

  All Other  

    

  Corporate  

    

      Total      

Net sales to outside customers

$

2,114,672

 

$

1,287,702

$

1,761,847

$

219,983

$

5,983

$

5,390,187

Intersegment net sales

 

133,560

43,660

57,218

235,665

(470,103)

 

Earnings from operations

95,924

176,601

211,650

37,563

22,853

544,591

The following table presents goodwill by segment as of July 1, 2023, and December 31, 2022 (in thousands):

    

Retail

    

Packaging

    

Construction

    

All Other

    

Corporate

    

Total

Balance as of December 31, 2022

 

$

84,640

 

$

148,909

 

$

87,670

 

$

16,101

$

 

$

337,320

2023 Purchase Accounting Adjustments

(979)

(67)

(1,046)

Foreign Exchange, Net

 

126

95

 

221

Balance as of July 1, 2023

$

83,661

 

$

148,842

$

87,796

$

16,196

$

$

336,495

The following table presents total assets by segment as of July 1, 2023, and December 31, 2022 (in thousands).

Total Assets by Segment

July 1,

    

December 31,

    

Segment Classification

2023

2022

% Change

Retail

$

992,463

$

889,417

 

11.6

%

Packaging

 

838,495

 

885,878

 

(5.3)

Construction

 

698,632

 

712,837

 

(2.0)

All Other

295,865

308,688

(4.2)

Corporate

1,018,488

875,253

16.4

Total Assets

$

3,843,943

$

3,672,073

 

4.7

%

H.       INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for foreign, state and local income taxes and permanent tax differences. Our effective tax rate was 23.7% in the second quarter of 2023 compared to 25.0% in the same period of 2022 and was 23.7% in the first six months of 2023 compared to 24.5% for the same period in 2022. The decrease in our overall effective tax rate was primarily due to an increase in our tax deduction from stock based compensation accounted for as a permanent difference.

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I.       COMMON STOCK

Below is a summary of common stock issuances for the first six months of 2023 and 2022 (in thousands, except average share price):

    

July 1, 2023

Share Issuance Activity

 

Common Stock

Average Share Price

Shares issued under the employee stock purchase plan

19

$

87.86

Shares issued under the employee stock gift program

1

86.88

Shares issued under the director retainer stock program

2

87.02

Shares issued under the bonus plan

756

86.14

Shares issued under the executive stock match plan

75

85.89

Forfeitures

(10)

Total shares issued under stock grant programs

824

$

86.12

Shares issued under the deferred compensation plans

105

$

85.16

During the first six months of 2023, we repurchased 700,597 shares of our common stock at an average share price of $79.20.

    

June 25, 2022

Share Issuance Activity

 

Common Stock

Average Share Price

Shares issued under the employee stock purchase plan

24

$

72.58

Shares issued under the employee stock gift program

2

78.57

Shares issued under the director retainer stock program

2

79.46

Shares issued under the bonus plan

755

82.73

Shares issued under the executive stock grants plan

62

82.87

Forfeitures

(6)

Total shares issued under stock grant programs

815

$

82.72

Shares issued under the deferred compensation plans

92

$

82.59

During the first six months of 2022, we repurchased approximately 1,210,000 shares of our common stock at an average share price of $77.06.

J.       INVENTORIES

Inventories are stated at the lower of cost or net realizable value. The cost of inventories includes raw materials, direct labor, and manufacturing overhead and is determined using the weighted average cost method. Raw materials consist primarily of unfinished wood products and other materials expected to be manufactured or treated prior to sale, while finished goods represent various manufactured and treated wood products ready for sale.

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We write down the value of inventory, the impact of which is reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income, if the cost of specific inventory items on hand exceeds the amount we expect to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future demand and market conditions and analysis of historical experience. The lower of cost or net realizable value adjustment to inventory as of July 1, 2023 and June 25, 2022 was $0.8 million and $9.3 million, respectively.

K.       SUBSEQUENT EVENTS

On July 26, 2023, our board authorized the repurchase of up to $200 million worth of shares of outstanding stock through July 31, 2024. This share authorization supersedes and replaces our prior share repurchase authorizations.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UFP Industries, Inc. is a holding company with subsidiaries in North America, Europe, Asia, and Australia that design, manufacture, and supply products made from wood, wood and non-wood composites, and other materials to three segments: retail, packaging, and construction. Our business segments are functionally interdependent and are supported by common corporate services, such as accounting and finance, information technology, human resources, marketing, purchasing, transportation, legal and compliance, among others. We regularly invest in automation and implement best practices to improve the efficiency of our manufacturing facilities across each of the segments. The results and improvements from these investments are shared among the segments. This exchange of ideas drives faster innovation for new products, processes, and product improvements. While the majority of our facilities serve only one business segment, many of our larger facilities serve two or more segments.

We believe that our operating structure allows us to better evaluate market conditions and opportunities and more effectively allocate capital and resources to the appropriate segments and business units. Also, we believe our diversification and manner in which we operate our business provide an inherent hedge against the business cycles our end markets experience and over which we have limited control. Accordingly, we have the ability to provide more stable earnings and cash flows to our shareholders. Our diversification and operating practices also mitigate the impact that more volatile lumber market conditions have on traditional lumber companies. We are headquartered in Grand Rapids, Mich. For more information about UFP Industries, Inc., or its affiliated operations, go to www.ufpi.com.

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act, as amended, that are based on management’s beliefs, assumptions, current expectations, estimates and projections about the markets we serve, the economy and the Company itself. Words like “anticipates,” “believes,” “confident,” “estimates,” “expects,” “forecasts,” “likely,” “plans,” “projects,” “should,” variations of such words, and similar expressions identify such forward-looking statements. These statements do not guarantee future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. We do 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 currency and inflation; fluctuations in the price of lumber; adverse economic conditions in the markets we serve; concentration of sales to customers; vertical integration strategies; excess capacity or supply chain challenges; our ability to make successful business acquisitions; government regulations, particularly involving environmental and safety regulations; adverse or unusual weather conditions;  inbound and outbound transportation costs; alternatives to replace treated wood products; Cybersecurity breaches; tariffs on import and export sales; and potential pandemics. Certain of these risk factors as well as other risk factors and additional information are included in our 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 second quarter of 2023.

OVERVIEW

Our results for the second quarter of 2023 include the following highlights:

Our net sales decreased 30% compared to the second quarter of 2022, which was comprised of a 20% decrease in selling prices and a 10% decrease in organic unit sales. The overall decrease in our selling prices is primarily due to lower lumber prices. Organic unit declines consisted of 4% in our retail segment, 9% in our packaging segment, 18% in our construction segment, and 22% in our international segment.

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UFP INDUSTRIES, INC.

Our gross profits decreased by $103.4 million, or 20.5%, compared to the same period of the prior year, exceeding our 10% decline in unit sales, due to competitive price pressure and negative operating leverage on the drop in volume.   The gross profit of Retail increased $48 million and was offset by declines in gross profit of $90 million in Construction, $44 million in Packaging, and $19 million in International. The overall decline in gross profits is primarily due to the decline in unit sales, unfavorable cost variances as a result of fixed manufacturing costs, and more competitive pricing in certain business units.  These unfavorable factors were partially offset by more favorable lumber price trends in 2023 on products sold in our Retail segment that are based on variable selling price.
Our operating profits decreased $92 million, or 32.2%, compared to the second quarter of 2022. The overall decrease is a result of the decline in gross profits mentioned above offset by a $10 million decrease in selling, general, and administrative (“SG&A”) expenses. Our SG&A declined primarly due to our incentive compensation plans which are tied to profitability and return on investment. Our decremental operating margin comparing our decrease in operating profits relative to decrease in net sales was 10.7%, which was lower than the estimated range of 15% to 20% we previously disclosed.
Our cash flows from operations was $321 million in the first six months of 2023 compared to $90 million during the first six months of 2022. The $231 million improvement resulted from a seasonal increase in net working capital that was $349 million lower in the first six months of 2023 than it was in 2022, offset by a $118 million decrease in net earnings and non-cash expenses compared to the prior year.
Our net cash surplus at the end of June 2023 was $425 million compared to net debt (debt and cash overdraft less cash) of $191 million at the end of June 2022. Our unused borrowing capacity under revolving credit facilities and a shelf agreement with certain lenders along with our cash surplus resulted in total liquidity of approximately $2.0 billion at the end of the second quarter of 2023.

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

 

    

2023

    

2022

 

January

$

386

$

1,112

February

 

437

 

1,225

March

 

411

 

1,321

April

 

420

 

1,051

May

 

400

 

948

June

 

398

 

670

Second quarter average

$

406

$

890

Year-to-date average

$

409

$

1,055

Second quarter percentage change

 

(54.4)

%  

 

Year-to-date percentage change

 

(61.2)

%

 

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UFP INDUSTRIES, INC.

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprise almost two-thirds of our total lumber purchases.

Southern Yellow Pine

 

Average $/MBF

 

    

2023

    

2022

 

January

$

406

$

1,010

February

 

452

 

1,115

March

 

464

 

1,198

April

 

474

 

902

May

 

437

 

732

June

 

427

 

574

Second quarter average

$

446

$

736

Year-to-date average

$

443

$

922

Second quarter percentage change

(39.4)

%  

Year-to-date percentage change

(52.0)

%

Lower overall lumber prices in 2023 compared to 2022 is primarily due to increased capacity and the supply of lumber in North America combined with an increase in imports from other countries while demand for lumber has declined. A change in lumber prices impacts our profitability of products sold with fixed and variable prices, as discussed below.

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our dollar sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 39.0% and 54.8% of our sales in the first six months of 2023 and 2022, respectively. The decrease from the prior year ratio reflects the significant decrease in the Lumber Market as well as an improvement in our sales mix of value-added products and our value-based selling practices.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Additionally, as explained below, product categories can be priced differently. Some of our products have fixed selling prices, while our variably priced products have pricing 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.

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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 customers’ needs and carry appropriate 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. Sales of these products are highest in the second quarter, primarily due to seasonal demand for pressure-treated lumber sold in our retail segment.

For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices. As a result of the balance in our net sales to each of our end markets we believe our gross profits are more stable than those of our competitors who are less diversified.

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 includes treated lumber, which comprised approximately 21% of our total net sales in the first six months of 2023. 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 managed inventory programs with our vendors. We estimate that 19% of our total purchases for the first six months of 2023 were transacted under these programs. (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 Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

    

Period 1

Period 2

 

Lumber cost

$

300

$

400

Conversion cost

 

50

 

50

= Product cost

 

350

 

450

Adder

 

50

 

50

= Sell price

$

400

$

500

Gross margin

 

12.5

%  

 

10.0

%

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits but does impact our margins. Gross margins and operating margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low.

BUSINESS COMBINATIONS

We completed no business acquisitions during the first six months of fiscal 2023. We completed four in fiscal 2022. The annual historical sales attributable to acquisitions completed during the last six months of 2022 was approximately $116 million. These business combinations were not significant to our quarterly results individually or in aggregate and thus pro forma results for 2023 and 2022 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

Six Months Ended

July 1,

    

June 25,

    

July 1,

    

June 25,

    

2023

 

2022

 

2023

 

2022

 

Net sales

100.0

%  

100.0

%  

100.0

%  

100.0

%  

Cost of goods sold

80.4

 

82.6

 

80.4

 

81.8

 

Gross profit

19.6

 

17.4

 

19.6

 

18.2

 

Selling, general, and administrative expenses

10.0

 

7.4

 

10.3

 

8.1

 

Other losses (gains), net

0.1

 

0.1

 

0.1

 

 

Earnings from operations

9.5

 

9.8

 

9.2

 

10.1

 

Other (income) expense, net

(0.2)

 

0.3

 

(0.2)

 

0.3

 

Earnings before income taxes

9.7

 

9.5

 

9.4

 

9.9

 

Income taxes

2.3

 

2.4

 

2.2

 

2.4

 

Net earnings

7.4

 

7.2

 

7.1

 

7.4

 

Less net earnings attributable to noncontrolling interest

 

(0.2)

 

 

(0.2)

 

Net earnings attributable to controlling interest

7.4

%  

7.0

%  

7.2

%  

7.3

%  

Note: Actual percentages are calculated and may not sum to total due to rounding.

As a result of the impact of the level of lumber prices on the percentages displayed in the table above (see Impact of the Lumber Market on Our Operating Results), we believe it is useful to compare our change in units sold with our change in gross profits, selling, general, and administrative expenses, and operating profits as presented in the following table. The percentages displayed below represent the percentage change from the prior year comparable period.

Percentage Change

Three Months Ended

Six Months Ended

    

July 1,

June 25,

July 1,

June 25,

    

2023

    

2022

    

2023

    

2022

Units sold

 

(8.0)

%  

3.0

%  

(9.0)

%  

6.0

%  

Gross profit

(20.5)

19.5

(22.8)

38.7

Selling, general, and administrative expenses

(4.6)

16.3

(8.1)

29.9

Earnings from operations

(32.2)

20.5

(34.8)

45.4

The following table presents, for the periods indicated, our selling, general, and administrative (SG&A) costs as a percentage of gross profit. Given our strategies to enhance our capabilities and improve our value-added product offering, and recognizing the higher relative level of SG&A these strategies require, we believe this ratio provides an enhanced view of our effectiveness in managing these costs and mitigates the impact of changing lumber prices.

Three Months Ended

Six Months Ended

    

July 1,

    

June 25,

    

July 1,

    

June 25,

 

2023

 

2022

 

2023

 

2022

Gross profit

$

400,067

$

503,452

$

758,396

$

981,815

Selling, general, and administrative expenses

$

204,703

$

214,538

$

399,386

$

434,688

SG&A as percentage of gross profit

 

51.2%

 

42.6%

 

52.7%

 

44.3%

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UFP INDUSTRIES, INC.

Operating Results by Segment:

Our business segments consist of UFP Retail Solutions (“Retail”), UFP Packaging (“Packaging” and formerly known as UFP Industrial) and UFP Construction (“Construction”), and align with the end markets we serve. Among other advantages, this structure allows for a more specialized and consistent sales approach, more efficient use of resources and capital, and quicker introduction of new products and services. We manage the operations of our individual locations primarily through a market-centered reporting structure under which each location is included in a business unit. Business units are allocated among our Retail, Packaging, and Construction segments. The exception to this market-centered reporting and management structure is our International segment, which comprises our Mexico, Canada, Europe, Asia, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) are included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns, leases, and operates transportation equipment, are also included in the Corporate column. Inter-company lease and services charges are assessed to our operating segments for the use of these assets and services at fair market value rates.

The following tables present our operating results, for the periods indicated, by segment (in thousands).

Three Months Ended July 1, 2023

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

$

919,998

 

$

488,100

$

550,464

$

86,224

$

(868)

$

2,043,918

Cost of goods sold

 

799,017

 

369,865

 

413,260

 

64,128

(2,419)

1,643,851

Gross profit

120,981

118,235

137,204

22,096

1,551

400,067

Selling, general, administrative expenses

60,855

61,377

74,083

13,943

(5,555)

204,703

Other

 

(54)

(6)

1,162

1,336

(571)

1,867

Earnings from operations

$

60,180

$

56,864

$

61,959

$

6,817

$

7,677

$

193,497

Three Months Ended June 25, 2022

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

$

1,121,440

676,333

$

975,376

$

124,416

$

3,309

$

2,900,874

Cost of goods sold

 

1,048,260

 

514,216

 

748,060

83,336

3,549

2,397,421

Gross profit

73,180

162,117

227,316

41,080

(240)

503,453

Selling, general, administrative expenses

48,387

67,235

94,638

16,356

(12,078)

214,538

Other

 

266

672

(154)

1,976

589

3,349

Earnings from operations

$

24,527

$

94,210

$

132,832

$

22,748

$

11,249

$

285,566

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UFP INDUSTRIES, INC.

Six Months Ended July 1, 2023

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

$

1,669,575

$

974,661

$

1,066,057

$

153,736

$

2,365

$

3,866,394

Cost of goods sold

 

1,454,156

 

735,528

 

807,194

112,004

(884)

3,107,998

Gross profit

215,419

239,133

258,863

41,732

3,249

758,396

Selling, general, administrative expenses

114,210

127,629

141,421

27,465

(11,339)

399,386

Foreign currency exchange loss

(27)

(92)

1,235

3,416

(727)

3,805

Other

Earnings from operations

$

101,236

$

111,596

$

116,207

$

10,851

$

15,315

$

355,205

Six Months Ended June 25, 2022

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

$

2,114,672

$

1,287,702

$

1,761,847

$

219,983

$

5,983

$

5,390,187

Cost of goods sold

 

1,907,155

 

976,031

 

1,373,119

147,360

4,707

4,408,372

Gross profit

207,517

311,671

388,728

72,623

1,276

981,815

Selling, general, administrative expenses

111,055

134,466

176,975

32,981

(20,789)

434,688

Other

538

604

103

2,079

(788)

2,536

Earnings from operations

$

95,924

$

176,601

$

211,650

$

37,563

$

22,853

$

544,591

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 July 1, 2023

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

86.8

75.8

75.1

74.4

80.4

Gross profit

13.2

24.2

24.9

25.6

19.6

Selling, general, administrative expenses

6.6

12.6

13.5

16.2

10.0

Other

1.5

0.1

Earnings from operations

6.5

%

11.7

%

11.3

%

7.9

%

9.5

%

Note: Actual percentages are calculated and may not sum to total due to rounding.

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UFP INDUSTRIES, INC.

Three Months Ended June 25, 2022

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

93.5

76.0

76.7

67.0

82.6

Gross profit

6.5

24.0

23.3

33.0

17.4

Selling, general, administrative expenses

4.3

9.9

9.7

13.1

7.4

Other

1.6

Earnings from operations

2.2

%

13.9

%

13.6

%

18.3

%

9.8

%

Note: Actual percentages are calculated and may not sum to total due to rounding.

Six Months Ended July 1, 2023

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

87.1

75.5

75.7

72.9

80.4

Gross profit

12.9

24.5

24.3

27.1

19.6

Selling, general, administrative expenses

6.8

13.1

13.3

17.9

10.3

Other

2.2

0.1

Earnings from operations

6.1

%

11.4

%

10.9

%

7.1

%

9.2

%

Note: Actual percentages are calculated and may not sum to total due to rounding.

Six Months Ended June 25, 2022

    

    

    

    

Retail

Packaging

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

90.2

75.8

77.9

67.0

81.8

Gross profit

9.8

24.2

22.1

33.0

18.2

Selling, general, administrative expenses

5.3

10.4

10.0

15.0

8.1

Other

0.3

0.9

Earnings from operations

4.5

%

13.7

%

12.0

%

17.1

%

10.1

%

Note: Actual percentages are calculated and may not sum to total due to rounding.

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UFP INDUSTRIES, INC.

NET SALES

We design, manufacture and market wood and wood-alternative products, primarily used to enhance outdoor living environments; for national home centers and other retailers; for engineered wood components, structural lumber, and other products for factory-built and site-built residential and commercial construction; for customized interior fixtures used in a variety of retail stores, commercial, and other structures; and structural wood packaging, components and packing materials for various industries. Our strategic long-term sales objectives include:

Maximizing unit sales growth while achieving return on investment goals. The following table presents estimates, for the periods indicated, of our percentage change in net sales attributable to changes in overall selling prices versus changes in units shipped.

% Change

    

in Sales

    

in Selling 
Prices

    

in Units

    

Acquisition Unit Change

    

Organic Unit Change

    

Second quarter 2023 versus Second quarter 2022

(29.5)

%  

(21.5)

%  

(8.0)

%  

%  

(8.0)

%  

Year-to-date 2023 versus Year-to-date 2022

(28.3)

%  

(19.3)

%  

(9.0)

%  

%  

(9.0)

%  

Diversifying our end market sales mix by increasing sales of structural wood and protective packaging to industrial users, increasing our penetration of the concrete forming market, and increasing our market share with independent retailers.
Expanding geographically in our core businesses domestically and in our core packaging business internationally.
Increasing our sales of “value-added” products and enhancing our product offering with new or improved products. Value-added products generally consist of fencing, decking, lattice, and other specialty products sold in the Retail segment; structural and protective packaging and machine-built pallets sold in the Packaging segment; engineered wood components, customized interior fixtures, manufactured and assembled concrete forms sold in the Construction segment; and “wood alternative” products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist of products manufactured with wood and non-wood composites, metals and plastics sold in each of our segments. 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.

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales by our segments:

Three Months Ended July 1, 2023

Three Months Ended June 25, 2022

    

Value-Added

    

Commodity-Based

Value-Added

    

Commodity-Based

Retail

 

51.4

%

48.6

%

45.3

%

54.7

%

Packaging

77.6

%

22.4

%

70.5

%

29.5

%

Construction

83.8

%

16.2

%

74.7

%

25.3

%

All Other

81.3

%

18.7

%

75.4

%

24.6

%

Corporate

100.0

%

%

76.0

%

24.0

%

Total Sales

67.4

%

32.6

%

62.2

%

37.8

%

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UFP INDUSTRIES, INC.

Six Months Ended July 1, 2023

Six Months Ended June 25, 2022

    

Value-Added

    

Commodity-Based

Value-Added

    

Commodity-Based

    

Retail

 

50.8

%

49.2

%

43.2

%

56.8

%

Packaging

77.3

%

22.7

%

69.2

%

30.8

%

Construction

83.5

%

16.5

%

73.7

%

26.3

%

All Other

79.6

%

20.4

%

73.9

%

26.1

%

Corporate

24.5

%

75.5

%

74.7

%

25.3

%

Total Sales

67.5

%

32.5

%

60.5

%

39.5

%

Note: Certain prior year product reclassifications and the change in designation of certain products as “value-added” resulted in a change in prior year’s sales.

Our overall unit sales of value-added products decreased approximately 11% in the second quarter and first six months of 2023 compared to 2022. Our overall unit sales of commodity-based products decreased approximately 10% in the second quarter and approximately 7% in the first six months of 2023 compared to the same period last year.

Developing new products. We define new products as those that will generate sales of at least $1 million per year within 4 years of launch and are still growing and gaining market penetration and meet our internal definition of value-added products. New product sales in the second quarter and first six months of 2023 decreased 9% and 8%, respectively, due to a decline in lumber prices which were passed to customers in our selling prices. Approximately $9.6 million of new product sales for the first six months of 2022, while still sold, were sunset in 2023 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 $795 million in 2023.

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The table below presents new product sales in thousands:

New Product Sales by Segment

Three Months Ended

    

July 1,

% of Segment

    

June 25,

% of Segment

    

% Change

    

2023

Net Sales

2022

Net Sales

in Sales

Retail

$

84,515

9.2

%

89,349

8.0

%

 

(5.4)

%

Packaging

 

72,844

14.9

%

71,414

10.6

%

 

2.0

%

Construction

26,698

4.9

%

40,777

4.2

%

(34.5)

%

All Other and Corporate

 

169

0.2

%

625

0.5

%

 

(73.0)

%

Total New Product Sales

 

184,226

9.0

%

202,165

7.0

%

 

(8.9)

%

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.

New Product Sales by Segment

Six Months Ended

    

July 1,

% of Segment

    

June 25,

% of Segment

    

% Change

2023

Net Sales

2022

Net Sales

in Sales

Retail

$

152,699

9.1

%

167,997

7.9

%

 

(9.1)

%

Packaging

 

144,789

14.9

%

137,989

10.7

%

 

4.9

%

Construction

54,626

5.1

%

77,274

4.4

%

(29.3)

%

All Other and Corporate

 

603

0.4

%

1,392

0.6

%

 

(56.7)

%

Total New Product Sales

 

352,717

9.1

%

384,652

7.1

%

 

(8.3)

%

Note: Certain prior year product reclassifications and the change in designation of certain products as "new" resulted in a change in prior year's sales.

Retail Segment

Net sales in the second quarter of 2023 decreased by 18% compared to the same period of 2022 due to a decline in selling prices. Our selling prices of variable-priced products declined due to lower lumber prices. The selling prices of these products are indexed to the lumber market at the time they are shipped. Additionally, our unit sales to big box customers, which we believe are more closely correlated with repair and remodel activity, increased approximately 5%, while unit sales to independent retailers, which we believe are more closely correlated to new housing starts, decreased approximately 20%.

Gross profits increased by $47.8 million, or 65.3% to $121.0 million for the second quarter of 2023 compared to the same period last year. The increase in gross profit was attributable to the following:

The gross profits of our Sunbelt and ProWood business units increased by a total of $41.7 million.  The products sold by these units consist primarily of pressure treated lumber sold at a variable price indexed to the lumber market at the time they are shipped. The improvement in profitability is primarily due to an increase in unit sales, Sunbelt’s greater utilization of our managed inventory programs, and the unfavorable impact declining lumber prices had on our pricing and profitability throughout the second quarter of 2022.
The gross profit of our Deckorators business unit increased by $6.8 million due to an increase in unit sales, an increase in new products, and operational improvements.

SG&A increased by approximately $12.5 million, or 25.8%, in the second quarter of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, increased approximately $11.7 million from the second quarter of 2022 and totaled approximately $15.5 million for the quarter. Advertising expenses increased $1.7 million and were partially offset by a decrease in bad debt expense of $1.2 million.

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UFP INDUSTRIES, INC.

Earnings from operations for the Retail reportable segment increased in the second quarter of 2023 compared to 2022 by $35.7 million, or 145.4%, as a result of the factors mentioned above.

Net sales in the first six months of 2023 decreased by 21% compared to the same period of 2022, due to a 20% decrease in selling prices and a 1% organic unit decline. Our selling prices of variable-priced products declined due to lower lumber prices. The selling prices of these products are indexed to the lumber market at the time they are shipped.  Additionally, unit sales to big box customers increased approximately 5%, while unit sales to independent retailers decreased approximately 19%.

Gross profits increased by $7.9 million, or 3.8% to $215.4 million for the first six months of 2023 compared to the same period last year. Our increase in gross profit was attributable to the following:

The gross profits of our Sunbelt and ProWood business units increased $5.6 million, primarily due to less volatile lumber prices during the first six months of 2023 compared to severe volatility in the same period of 2022. The products sold by these units consist primarily of pressure treated lumber sold at a variable price indexed to the lumber market at the time they are shipped.
The gross profit of our UFP Edge business unit decreased by $7.0 million due to decreases in unit sales.
The gross profit of our Deckorators business unit increased by $9.3 million due to an increase in unit sales.

SG&A increased by approximately $3.2 million, or 2.8%, in the first six months of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, increased approximately $2.5 million and totaled approximately $26.9 million for the first six months of 2023. Increases in salaries and wages of $1.5 million and advertising expenses of $2.2 million were offset by decreases in sales incentive compensation of $2.7 million and bad debt expenses of $1.4 million.

Earnings from operations for the Retail reportable segment increased in the first six months of 2023 compared to 2022 by $5.3 million, or 5.5%, as a result of the factors mentioned above.

Packaging Segment

Net sales in the second quarter of 2023 decreased 28% compared to the same period of 2022, due to a 21% decrease in selling prices and a 9% decrease in organic unit sales, offset by acquisition unit growth of 2%. The decrease in unit sales is primarily due to a decline in demand of existing customer accounts, which was partially offset by market share gains associated with new product sales and shipping to new locations of existing accounts.  The decline in prices is due to competitive price pressure and lower lumber costs passed to customers.

Gross profits decreased by $43.9 million, or 27.1%, for the second quarter of 2023 compared to the same period last year. The decrease in gross profits is primarily due to competitive price pressure due to lower demand as well as lower unit sales and unfavorable cost variances as a result of fixed manufacturing costs. Acquisitions contributed $3.0 million to gross profit.

SG&A decreased by approximately $5.9 million, or 8.7%, in the second quarter of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, decreased approximately $3.6 million relative to the second quarter of 2022, and totaled $16.1 million for the quarter. Additionally, sales incentive compensation and bad debt expense decreased by $1.1 million and $6.7 million, respectively, from the prior year. These decreases were offset by increases in salaries and wages of $3.4 million and travel related expenses of $1.1 million. Acquired operations since the second quarter of 2022 contributed approximately $2.4 million to our SG&A costs.

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Earnings from operations for the Packaging reportable segment decreased in the second quarter of 2023 compared to 2022 by $37.3 million, or 39.6%, due to the factors discussed above.

Net sales in the first six months of 2023 decreased 24% compared to the same period of 2022, due to a 19% decrease in selling prices and a 7% decrease in organic unit sales, partially offset by acquisition unit growth of 2%. The decrease in unit sales is primarily due to a decline in demand of existing customer accounts, which was partially offset by market share gains associated with new product sales and shipping to new locations of existing accounts.  The decline in prices is due to competitive price pressure and lower lumber costs passed to customers.

Gross profits decreased by $72.5 million, or 23.3%, for the first six months of 2023 compared to the same period last year. The decrease in gross profits is primarily due to competitive price pressure due to lower demand as well as lower unit sales and unfavorable cost variances as a result of fixed manufacturing costs. Acquisitions contributed $5.4 million to gross profit.

SG&A decreased by approximately $6.8 million, or 5.1%, in the first six months of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, decreased approximately $11.5 million, and totaled $31.9 million for the six months of 2023. Additionally, our bad debt expense decreased by $7.7 million and sales incentive compensation decreased by $3.7 million. These decreases  were partially offset by increases in salaries and wages of $5.9 million, travel related expenses of $2.0 million, and several small increases in several different accounts. Finally, acquired operations since the first six months of 2022 contributed approximately $4.0 million to our increase in costs.

Earnings from operations for the Packaging reportable segment decreased in the first six months of 2023 compared to 2022 by $65.0 million, or 36.8%, due to the factors discussed above.

Construction Segment

Net sales in the second quarter of 2023 decreased 44% compared to the same period of 2022, due to a 26% decrease in selling prices and an organic unit decline of 18%. Organic unit changes within this segment consist of decreases of 20% in factory-built housing, 14% in site-built construction, and 39% in commercial construction. Organic unit changes in our concrete forming business unit were flat compared to the same period of 2022. The organic unit declines in our factory-built housing and site-built construction business units are due to the impact of higher interest rates on the demand for housing which has resulted in an 8% year over year decline in national housing starts and a 25% year over year decline in manufactured housing production in the second quarter of 2023. The organic unit decline in commercial construction is primarily due to a large customer delaying shipments until the third quarter of 2023. As of July 1, 2023 and June 25, 2022, we estimate that our backlog of orders in our site-built construction business unit were $113 million and $161 million, respectively. The decline in pricing was due to competitive price pressure and the decline in lumber prices which were passed to our customers.

Gross profits decreased by $90.1 million, or 39.6%, in the second quarter of 2023 compared to the same period of 2022. The decrease in our gross profit was comprised of the following:

Gross profits in our factory-built housing and site-built construction business units decreased by $29.6 million and $51.6 million, respectively, due to competitive price pressure as well as lower sales volumes and unfavorable cost variances due to fixed manufacturing costs.
The gross profit of our concrete forming business unit decreased by $3.7 million due to lower inventory turnover on products whose unit selling prices declined due to the lower lumber market.
The gross profit of our commercial construction business unit decreased $4.3 million as a result of decreased unit sales.

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SG&A decreased by approximately $20.6 million, or 21.7%, in the second quarter of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, decreased approximately $11.8 million, and totaled $16.9 million for the quarter. The remaining decrease was primarily due to decreases in sales incentive compensation of $6.9 million and bad debt expense of $1.0 million.

Earnings from operations for the Construction reportable segment decreased in the second quarter of 2023 compared to 2022 by $70.9 million, or 53.4%, due to the factors mentioned above.

Net sales in the first six months of 2023 decreased 39% compared to the same period of 2022, due to a 22% decrease in selling prices and a decline in organic unit sales of 17%. Organic unit changes within this segment consisted of decreases of 18% in site-built housing, 20% in factory-built housing, and 20% in commercial construction. These declines were partially offset by 2% organic unit growth in concrete forming. The decline in pricing was due to competitive price pressure and the decline in lumber prices which were passed to our customers.

Gross profits decreased by $129.9 million, or 33.4%, for the first six months of 2023 compared to the same period of 2022. The decrease in our gross profit was comprised of the following:

Gross profits in our factory-built housing and site-built construction business units decreased by $58.6 million and $65.1 million, respectively, due to competitive price pressure as well as lower sales volumes and unfavorable cost variances due to fixed manufacturing costs
The gross profit of our concrete forming business unit decreased by $9.1 million due to lower inventory turnover on products whose unit selling prices declined due to the lower lumber market.

SG&A decreased by approximately $35.6 million, or 20.1%, in the first six months of 2023 compared to the same period of 2022. Accrued bonus expense, which varies with the overall profitability of the segment and return on investment, decreased approximately $19.7 million, and totaled $31.6 million for the first six months of 2023. The remaining decrease was primarily due to decreases in sales incentive compensation of $12.8 million, bad debt expense of $3.0 million, and professional fees of $1.8 million. These decreases were offset by small increases in several SG&A accounts.

Earnings from operations for the Construction reportable segment decreased in the first six months of 2023 compared to 2022 by $95.4 million, or 45.1%, due to the factors mentioned above.

All Other Segment

Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant. The decline in sales and earnings from operations is primarily due to our operation in Mexico that exports moulding and millwork products to the U.S.

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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 23.7% in the second quarter of 2023 compared to 25.0% in the same period of 2022 and was 23.7% in the first six months of 2023 compared to 24.5% for the same period in 2022. The decrease in our overall effective tax rate was primarily due to an increase in our tax deduction from stock based compensation accounted for as a permanent difference.

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):

Six Months Ended

    

July 1,

    

June 25,

2023

2022

Cash from operating activities

$

321,064

$

90,397

Cash used in investing activities

 

(85,310)

 

(118,763)

Cash used in financing activities

 

(97,047)

 

(125,013)

Effect of exchange rate changes on cash

 

4,579

 

956

Net change in all cash and cash equivalents

 

143,286

 

(152,423)

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

 

559,623

 

291,223

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

$

702,909

$

138,800

In general, we fund our growth through a combination of operating cash flows, our revolving credit facility, 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 that occurred many years ago. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.

Seasonality has a significant impact on our working capital due to our primary selling season which occurs during the period from March to September. Consequently, our working capital increases during our first and second quarters resulting in negative or modest cash flows from operations during those periods. Conversely, we tend to experience a substantial decrease in working capital once we move beyond our peak selling season which typically results in significant cash flows from operations in our third and fourth quarters.

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Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle increased to 63 days from 58 days during the second quarter of 2023 compared to the prior year period.

Three Months Ended

Six Months Ended

July 1,

June 25,

July 1,

June 25,

2023

2022

2023

2022

Days of sales outstanding

    

36

    

34

    

36

    

33

Days supply of inventory

 

38

 

35

 

38

 

38

Days payables outstanding1

 

(11)

 

(11)

 

(12)

 

(13)

Days in cash cycle

 

63

 

58

 

62

 

58

1 We’ve modified our calculation of days payables outstanding to be based on the cost of goods sold and accounts payable balances in our monthly financial statements.  In prior periods, our calculation was based on invoice data. We’ve made this change to simplify the calculation and more easily integrate acquired operations into our financial metrics. The three months and six months prior year metrics have been restated for the new method which reduced days payables from a previously reported 18 days to 11 days and 19 to 13 days, respectively.

The increase in our cash cycle in the second quarter of 2023 compared to the same period of 2022 was primarily due to a three day increase in our days supply of inventory and a two day increase in our days of sales outstanding. The increase in our days supply of inventory is due to carrying higher levels of safety stock and a drop in demand, primarily in our factory-built housing business unit. The increase in our days of sales outstanding is due to receiving slightly less timely payments from our customers, primarily in our site-built construction business unit. We continue to focus on past due account balances with customers, and the percentage of our accounts receivable that are current is 94% at the end of the second quarter for both 2023 and 2022.

In the first six months of 2023, our cash flows from operations were $321 million and were comprised of net earnings of $276 million and $80 million of non-cash expenses, offset by a $35 million increase in working capital since the end of December 2022. Our cash flows from operations increased by $231 million compared to the same period of last year primarily due to a $349 million decrease in our seasonal investment in net working capital compared to the prior year period, offset by a decrease in our net earnings and non-cash expenses of $118 million. The seasonal increase in our net working capital was lower this year due to the drop in lumber prices and the softening of demand.

Purchases of property, plant, and equipment of $85 million comprised most of our cash used in investing activities during the first six months of 2023. Outstanding purchase commitments on existing capital projects totaled approximately $66 million on July 1, 2023. Capital spending primarily consists of several projects to expand capacity to manufacture new and value-added products, primarily in our Packaging segment and Deckorators and ProWood business units, achieve efficiencies through automation in all segments, make improvements to a number of facilities, and increase our transportation capacity (tractors, trailers). We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. While we maintain an active pipeline of targets, we completed no acquisitions during the first six months of 2023. Cash used for acquisitions in the same period of the prior year amounted to $39 million.

Cash flows used in financing activities consisted of:

Cash paid for repurchases of common stock of $55 million. We repurchased 700,597 shares of our common stock for the year at an average share price of $79.20.
Dividends paid during the first six months of 2023 include first quarter dividends of $16 million and second quarter dividends of $15 million ($0.25 per share).
Contingent consideration payments of $6 million.

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Distributions to noncontrolling interests were $5 million.

On July 1, 2023, we had $5 million outstanding on our $750 million revolving credit facility, and we had approximately $718 million in remaining availability after considering $27 million in outstanding letters of credit. Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements on July 1, 2023.

At the end of the second quarter of 2023, we have approximately $2.0 billion in total liquidity, consisting of our cash surplus, remaining availability under our revolving credit facility, and a shelf agreement with certain lenders providing up to $535 million in remaining borrowing capacity.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note E, “Commitments, Contingencies, and Guarantees.”

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted 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 31, 2022.

FORWARD OUTLOOK

Most recently, our long-term goals have been to:

Grow our annual unit sales by 5-7%. We anticipate smaller tuck in acquisitions will continue to contribute toward this goal;
Achieve and sustain a minimum 10% adjusted EBITDA margin by continuing to enhance our capabilities and grow our portfolio and sales of value-added products;
Earn an incremental return on new investment over our cost of capital;
Maintain a conservative capital structure.

We believe effectively executing our strategies will allow us to achieve these long-term goals in the future. However, demand in the markets we serve has contracted and overall economic conditions indicate the U.S. economy may enter a recession, which may impact our results, depending on its severity and duration. The following factors should be considered when evaluating our future results:

Lumber prices, which impact our cost of goods sold and selling prices, have normalized due to additional capacity added by sawmills and demand falling from peak levels due to inflation and an increase in interest rates. We anticipate lumber prices will follow more typical seasonal patterns consistent with historical trends and demand, and remain at lower levels in 2023 relative to 2022.
Retail sales accounted for 43% of our net sales for the first six months of 2023. When evaluating future demand for the segment, we analyze data such as the same-store sales growth of national home improvement retailers and forecasts of home remodeling activity. Based on this data, we anticipate market demand to be flat to slightly down for the balance of 2023.

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Packaging sales accounted for 25% of our net sales for the first six months of 2023. When evaluating future demand, we consider several metrics, including the Purchasing Managers Index (PMI), durable goods manufacturing, and U.S. real GDP. We estimate industrial production to be slightly down for the balance of 2023.
Construction sales accounted for 28% of our net sales for the first six months of 2023.
-The site-built business unit accounted for approximately 12% of our net sales for the first six months of 2023. Approximately 30% of site-built sales are to multifamily builders. More than 75% of our site-built residential housing sales are in areas such as Texas and the Mid-Atlantic, Southeast, and Mountain West regions, which have experienced significant population growth through migration from other states and are forecasted to continue to grow over the long term. When evaluating future demand, we analyze data from housing starts in those regions. The consensus estimates of all housing starts is for a 12% to 15% decline in 2023.
-The factory-built housing business unit accounted for 9% of our net sales for the first six months of 2023. This business, along with our multifamily business, could benefit from higher interest rates as buyers seek more affordable housing alternatives over time. When evaluating future demand, we analyze manufactured housing production data. The National Association of Home Builders forecasts a 24% decrease in manufactured home shipments in 2023.
-The commercial construction and concrete forming business units accounted for approximately 6% of our net sales for the first six months of 2023. When evaluating future demand, we analyze data from non-residential construction spending.
On a consolidated basis, and based on our 2023 forecasted results of operations and business mix, we currently believe our annual decremental operating margin is in a range of 10% to 15% of net sales (revised from original estimate of 15% to 20%). In other words, we believe for every dollar decrease in sales, relative to the prior year, our earnings from operations may decline by $0.10 to $0.15. Our decremental operating margin for the first six months of 2023 was 12.4%. 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). We currently estimate our annual decremental operating margins by segment as follows:
-Packaging in a range of 20% to 25% (which was our original estimate). Our decremental operating margin for the first six months of 2023 was 20.8%.
-Construction in a range of 14% to 19% (revised from original estimate of 20% to 25%). Our decremental operating margin for the first six months of 2023 was 13.7%.
-We currently anticipate improvement in operating profits in our Retail segment in 2023, primarily due to an expectation of less volatile lumber prices in 2023 and other operational improvements. The severe volatility of lumber prices in 2022 and 2021 adversely impacted the results of this segment.
Key factors that may impact the ranges provided above include estimates of:
-The impact and level of the Lumber Market and trends in the commodity and other material costs of our products
-Changes in our selling prices
-Changes in our sales mix by segment, business unit, and product
-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

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UFP INDUSTRIES, INC.

-Inflation and other changes in costs

Capital Allocation:

We believe the strength of our cash flow generation and conservative capital structure provides us with sufficient resources to grow our business and also fund returns to our shareholders. We plan to continue to pursue a balanced and return-driven approach to capital allocation across dividends, share buybacks, capital investments and acquisitions. Specifically:

On July 26, 2023, our board approved a quarterly cash dividend of $0.30 per share, which represents a 20% increase from the prior year. This dividend will be payable on September 15, 2023, to shareholders of record on September 1, 2023. We continue to consider our payout ratio and yield when determining the appropriate dividend rate.
For the first six months of 2023, we repurchased 700,597 shares of our common stock at an average price of $79.20 per share. On July 26, 2023, our board authorized the repurchase of up to $200 million worth of shares of outstanding stock through July 31, 2024. This share authorization supersedes and replaces our prior share repurchase authorizations.
We’ve lowered our targeted range for capital expenditures to $175-$200 million, which will continue to be impacted by extended lead times required for most equipment and rolling stock. Priority continues to be given to projects that enhance the working environments of our plants, take advantage of automation opportunities, and drive strategies that have strong long-term growth potential of new and value-added products.
We continue to pursue a healthy pipeline of acquisition opportunities of companies that are a strong strategic fit and enhance our capabilities while providing higher margin, return, and growth potential.

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 enter into any material interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments to mitigate this risk.

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

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

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

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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 July 1, 2023 (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 July 1, 2023, 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.

PART II. OTHER INFORMATION

Item 1A. Risk Factors.

None

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

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

Fiscal Month

    

(1)

    

(2)

    

(3)

    

(4)

April 2 – May 6, 2023

 

125,000

79.21

 

125,000

 

1,424,403

May 7 – June 3, 2023

 

100,000

82.27

 

100,000

 

1,324,403

June 4 – July 1, 2023

 

25,000

83.50

 

25,000

 

1,299,403

(1)Total number of shares purchased.
(2)Average price paid per share.
(3)Total number of shares purchased as part of publicly announced plans or programs.
(4)Maximum number of shares that may yet be purchased under the plans or programs.

On February 15, 2022, our Board authorized an additional 1.5 million shares to be repurchased under our existing share repurchase program. Upon expiration of this authorization on February 3, 2023, the Board gave management authorization to repurchase up to 2 million shares by February 5, 2024. As of July 1, 2023, the total number of remaining shares for repurchase under the program was approximately 1.3 million. On and effective as of July 26, 2023, our board authorized the repurchase of up to $200 million worth of shares of our common stock through the period ending July 31, 2024, which supercedes and replaces the prior authorization.

Item 5. Other Information.

During the quarter ended July 1, 2023, no director or officer adopted or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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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: August 9, 2023

By:

/s/ Matthew J. Missad

Matthew J. Missad,

Chairman of the Board, Chief Executive Officer and

Principal Executive Officer

Date: August 9, 2023

By:

/s/ Michael R. Cole

Michael R. Cole,

Chief Financial Officer,

Principal Financial Officer and

Principal Accounting Officer

39