UFP INDUSTRIES INC (UFPI) FY 2021 MD&A

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

UFP Industries, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and Australia that design, manufacture, and supply products made from wood, wood and non-wood composites, and other materials to three markets: retail, industrial, and construction. 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 the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations, the COVID-19 pandemic (“pandemic”); and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in 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 2021.

OVERVIEW

Our results for 2021 were impacted by the following:

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

HISTORICAL LUMBER PRICES

The following table presents the Random Lengths framing lumber composite price.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprise approximately 57% and 62% of total lumber purchases, excluding plywood and other panel products, for 2021 and 2020, respectively.

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IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We experience significant fluctuations in the cost of commodity lumber products from primary producers ("Lumber Market"). We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs, including plywood and other panel products, were 47.7% and 51.0% of our net sales in 2021 and 2020, respectively.

Our gross margins are impacted by (1) the relative level of the Lumber Market (i.e. whether prices are higher or lower from comparative periods), and (2) the trend in the market price of lumber (i.e. whether the price of lumber is increasing or decreasing within a period or from period to period). Moreover, as explained below, our products are priced differently. Some of our products have fixed selling prices, while the selling prices of other products are indexed to the reported Lumber Market with a fixed dollar adder to cover conversion costs and profits. Consequently, the level and trend of the Lumber Market impact our products differently.

Below is a general description of the primary ways in which our products are priced.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The greatest risk associated with changes in the trend of lumber prices is on the following products:

In addition to the impact of the Lumber Market trends on gross margins, changes in the level of the market cause fluctuations in gross margins when comparing operating results from period to period. This is explained in the following example, which assumes the price of lumber has increased from period one to period two, with no changes in the trend within each period.

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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. As a result of this factor, 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.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

It is our goal to increase our gross profits and earnings from operations at a rate of growth that exceeds our unit sales growth, or in other words, increasing our profitability per unit sold.  We also have a long-term goal of improving our efficiencies and leveraging the fixed costs in our selling, general, and administrative expenses as we grow, which will result in a rate of growth of these expenses which is less than our unit sales growth and a lower cost per unit.

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed nine business acquisitions during 2021 and five during 2020. The annual historical sales attributable to acquisitions in 2021 and 2020 were approximately $1.3 billion and $101 million, respectively. These business combinations were not significant to our operating results individually or in aggregate; consequently pro forma results for 2021 and 2020 are not presented.

On December 27, 2021, we closed on an agreement to purchase 100 percent of the equity of Ultra Aluminum Manufacturing, Inc. (Ultra) located in Howell, Michigan for approximately $26.8 million. Ultra designs and produces an extensive selection of ornamental aluminum fence and railing products for contractors, landscapers, fence dealers and wholesalers.

See Notes to Consolidated Financial Statements, Note C, "Business Combinations" and Note O, “Subsequent Events” for additional information.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the components of our Consolidated Statements of Earnings as a percentage of net sales. See “Impact of the Lumber Market on our Operating Results”.

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

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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OPERATING RESULTS BY SEGMENT

Our business segments consist of UFP Retail Solutions, UFP Industrial and UFP Construction, and align with the end markets we serve. Among other things, this structure allows for a more specialized and consistent sales approach among Company operations, more efficient use of resources and capital, and quicker introduction of new products and services. We manage the operations of our individual locations primarily through a market-centered reporting structure under which each location is included in a business unit and business units are included in our Retail, Industrial, and Construction segments. The exception to this market-centered reporting and management structure is our International segment, which comprises 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 by segment for December 25, 2021 and December 26, 2020.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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The following tables present the components of our operating results as a percentage of net sales by segment for December 25, 2021 and December 26, 2020.

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

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

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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; roof trusses, structural lumber and panels, and other products for the manufactured housing industry; engineered wood components for residential and commercial construction, customized interior fixtures, millwork, and casework used in a variety of retail, commercial and other structures; and structural wood packaging, other packing materials, and OEM components for various industries. Our strategic long-term sales objectives include:

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales by our segments (Retail, Industrial, Construction, and All Other and Corporate).

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The increase in our ratio of commodity-based product sales to total sales reflected in the table above is primarily due to the impact of higher average lumber prices in 2021 on sales of commodity-based products and the product mix of recently acquired businesses. Selling prices of commodity-based products are generally indexed to the current Lumber Market at the time they are shipped, and lumber costs comprise a higher percentage of the selling price than they do for value-added products. The acquisition of Sunbelt and Spartanburg also contributed to the increase in commodity-based sales of treated lumber in our retail segment, while PalletOne contributed to the increase in value-added sales in the industrial segment. Our overall unit sales of value-added products increased approximately 23% in 2021 compared to 2020, including a 16% contribution from acquisitions and 7% organic growth. Our unit sales of commodity-based products increased approximately 37%, due primarily from the acquisition of Sunbelt and Spartanburg.

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Segment:

Net sales to the retail segment increased 58% in 2021 compared to 2020 due to a 27% increase in selling prices and a 35% increase in unit sales from acquired operations, offset by a 4% decrease in organic unit sales. Organic unit increases of 17% of UFP Edge, 9% of Deckorators, and 5% of Outdoor Essentials, were offset by organic unit declines of 15% of ProWood and 12% of Handprint. The organic increases mentioned above were primarily due to capacity expansion and initiatives to gain market share in these product categories, while the decline in unit sales of ProWood and Handprint are attributed to a shift in consumer spending as a result of the end of pandemic-related restrictions on certain activities. In addition, new product sales increased approximately 27.1% to $510 million in 2021 compared to 2020, and the transfer of approximately $48 million in sales to the retail segment from the construction segment contributed to unit growth in retail. Finally, our sales to big box customers increased 53%, and sales to other independent retailers increased 67%.

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Gross profits increased 1.6% to $298 million in 2021 compared to 2020. Our change in gross profits was attributable to the following:

Selling, general and administrative (“SG&A”) expenses increased by approximately $31.4 million, or 22.8%, in 2021 compared to 2020. The SG&A of recently acquired businesses contributed approximately $19.2 million to this increase. Accrued bonus expense, which varies with our overall profitability and return on investment, decreased approximately $0.6 million and totaled approximately $34.7 million in 2021. The remaining increase was primarily due to increases in salaries and wages, sales compensation, and travel related expenses, which were partially offset by a decline in merchandising costs.

Earnings from operations of the Retail reportable segment decreased in 2021 compared to 2020 by $26.5 million, or 17.1%, as a result of the factors mentioned above.

Industrial Segment:

Net sales to the industrial segment increased 100% in 2021 compared to 2020 due to a 60% increase in selling prices attributable to the Lumber Market and favorable sales mix changes, a 5% increase in organic unit sales and a 35% increase in unit sales from recent acquisitions.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross profits increased by $288.0 million, or 163%, to $464.7 million in 2021 compared to 2020.  Acquisitions contributed $81.0 million to the increase in gross profit. The remaining increase was primarily due to organic unit sales growth and leveraging fixed costs, value-based pricing initiatives resulting in an increase in our selling prices, and favorable changes in our sales mix of value-added products. Additionally, in 2021, strong demand and unusually high lumber market volatility has allowed us to re-price our products more frequently to protect margins.

Selling, general and administrative (“SG&A”) expenses increased by approximately $103.0 million, or 106.1%, in 2021 compared to 2020. Acquired operations in 2021 contributed approximately $23.0 million to total SG&A expenses. Accrued bonus expense increased approximately $52.3 million compared to last year and totaled approximately $71.1 million for 2021. The remaining increase was primarily due to increases in salaries and wages and sales incentive compensation.

Earnings from operations of the Industrial reportable segment in 2021 increased by $181.6 million, or 217.8%, compared to 2020 due to the factors discussed above.

Construction Segment:

Net sales to the construction segment increased 59% in 2021 compared to 2020 due to a 42% increase in selling prices, organic unit sales growth of 14%, and 3% growth from acquisitions. The organic unit increase was comprised of a 25% increase in factory-built housing, a 15% in site-built housing, and a 15% in commercial construction. These increases were offset by a unit decline of 30% in concrete forming. As discussed above, the transfer of $48 million in sales to the retail segment contributed to the unit decline in the concrete forming business unit.

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Gross profits increased by $268.8 million, or 102.5% to $531.0 million in 2021 compared to 2020. The increase in our gross profit was comprised of the following factors:

SG&A expenses increased by approximately $87.8 million, or 48.9%, in 2021 compared to 2020. Acquired operations in 2021 contributed approximately $5.8 million to total SG&A expenses. Accrued bonus expense increased approximately $52.2 million compared to last year and totaled approximately $70.8 million for 2021. The remaining increase was primarily due to the $11.5 million Goodwill impairment in the prior year and increases in salaries and wages, sales incentive compensation, and travel related expenses in the current year.

Earnings from operations of the Construction reportable segment increased in 2021 compared to 2020 by $195.2 million, or 282.9%, due to the factors mentioned above.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All Other Segment:

Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant to our overall results.

Corporate:

The corporate segment primarily consists of net sales and gross profits on sales to external customers initiated by UFP Purchasing and UFP Transportation and over (under) allocated costs that are not significant

INTEREST EXPENSE

Interest expense increased in 2021 compared to 2020, due primarily to an increase in borrowings to fund current year acquisitions and increases in net working capital.  See “Note C of Notes to the Consolidated Financial Statements”.

INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes, and permanent tax differences. Our effective tax rate was 23.9% in 2021 compared to 25.5% in 2020. The decrease was primarily due to a reduction in certain permanent tax differences compared to the prior year, none of which are individually significant, non-deductible goodwill impairment expense recorded in 2020, and a valuation allowance recorded in 2020 against deferred tax assets related to net operating loss carryforwards of foreign subsidiaries in our commercial business unit totaling approximately $3.6 million.

OFF-BALANCE SHEET COMMITMENTS AND CONTRACTUAL OBLIGATIONS

We have no significant off-balance sheet commitments. The following table summarizes our contractual obligations as of December 25, 2021 (in thousands).

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As of December 25, 2021, we also had $54.2 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.

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LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):

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In general, we fund our growth through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We have not issued equity to finance growth except in the case of a large acquisition. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe these financial ratios are among many other 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 experience a substantial decrease in working capital once we move beyond our peak selling season which typically results in significant cash flows from operations in our third and fourth quarters. As explained in more detail below, the unusually large increase in lumber prices this year, as well as the significant increase in sales, resulted in a more significant increase in net working capital this year relative to prior years.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days sales are outstanding plus days supply of inventory less days payables are outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle increased to 57 days in 2021 from 48 days in 2020.

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The increase in our days of sales outstanding and days supply of inventory in 2021 was primarily due to PalletOne and other acquisitions. Lower retail demand than our customers anticipated from our inventory planning also contributed to our days supply of inventory.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our cash flows from operating activities in 2021 was $512.5 million, which was comprised of net earnings of $552.4 million and $114.8 million of non-cash expenses, offset by a $12.0 million gain on sale of assets and $142.7 million increase in working capital since the end of December 2020. The increase in our working capital was due to higher year over year lumber prices and increased demand in our industrial and construction segments. Comparatively, cash generated from operating activities was approximately $336.5 million in 2020, which was comprised of net earnings of $253.9 million, $85.3 million of non-cash expenses (including $11.5 million of goodwill impairment charges), and a $2.7 million increase in working capital since the end of December 2019.

Our cash used in investing activities during 2021 was $611.2 million, reflecting purchases of property, plant, and equipment totaling $151.2 million and business acquisitions totaling $476.0 million. See “Note C of Notes to the Consolidated Financial Statements”. Our outstanding purchase commitments on existing capital projects totaled approximately $52.7 million on December 25, 2021. Capital spending primarily consists of several projects to expand capacity to manufacture new and value-added products, achieve efficiencies through automation, make improvements to a number of facilities, and increase our transportation capacity (tractors, trailers) in order to meet higher volumes and replace old rolling stock. Notable areas of capital spending include projects to:

Finally, we sold property, plants, and equipment for proceeds of $30.0 million, consisting of $21 million from the sale of real estate and $9 million from the sale of equipment. The sale and purchase of investments totaling $14.9 million and $23.8 million, respectively, are due to investment activity in our captive insurance subsidiary.

Cash flows used in financing activities during 2021 primarily consisted of the payment of quarterly dividends totaling $40.2 million and distributions to noncontrolling interests of $6.8 million. Comparatively in 2020, cash flows from financing activities primarily consisted of proceeds of $150.0 million from the issuance of Senior E, F and G Notes in order to take advantage of lower interest rates, $30.7 million in dividend payments, and $29.2 million in share repurchases when our stock price declined as a result of the pandemic. The increase in our dividends is primarily due to an increase in the rates our board approved as a result of our growth in earnings and operating cash flow.

On November 1, 2018, we entered into a five-year, $375 million unsecured revolving credit facility with a syndicate of U.S. and Canadian banks led by JPMorgan Chase Bank, N.A., as administrative agent and Wells Fargo Bank, N.A., as syndication agent.  The facilities include up to $40 million which may be advanced in the form of letters of credit, and up to $100 million (U.S. dollar equivalent) which may be advanced in Canadian dollars, Australian dollars, pounds Sterling, Euros and such other foreign currencies as may subsequently be agreed upon among the parties. On February 19, 2021, the credit agreement was amended to increase the availability from $375 million to $550 million by exercising the accordion feature in the original agreement.

On August 10, 2020, we entered into an unsecured Note Purchase Agreement (the "Agreement") under which we issued our 3.04% Series 2020 E Senior Notes, due August 10, 2032, in the aggregate principal amount of $50 million, our 3.08% Series 2020 F Senior Notes, due August 10, 2033, in the aggregate principal amount of $50 million, and our 3.15% Series 2020 G Senior Notes, due August 10, 2035, in the aggregate principal amount of $50 million. Proceeds from the sale of the Series E, F and G Senior Notes were used to fund the acquisition of PalletOne.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On December 25, 2021, we had $7.8 million outstanding on our $550 million revolving credit facility, and we had approximately $535.1 million in remaining availability after considering $7.1 million in outstanding letters of credit.  Financial covenants on the unsecured revolving credit facility and unsecured notes include minimum interest tests and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold. We were in compliance with all our covenant requirements on December 25, 2021.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Consolidated Financial Statements, Note L, “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. Following is a summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements.

GOODWILL

We evaluate goodwill for indicators of impairment when events or circumstances indicate that this risk may be present. Our judgments regarding the existence of impairment are based on market conditions, operational performance and estimated future cash flows. Determining whether an impairment has occurred requires the valuation of the respective reporting unit, which we have consistently estimated using primarily a weighted average between income and market valuation approaches. We believe this approach is the most appropriate and accurate method to measure the fair value of our intangible assets. We use discounted cash flow analysis with the following assumption:  a business is worth today what it can generate in future cash flows; cash received today is worth more than an equal amount of cash received in the future; and future cash flows can be reasonably estimated. The discounted cash flow analysis is based on the present value of projected cash flows and residual values.

If the carrying value of goodwill is considered impaired, an impairment charge is recorded to adjust it to its fair value. Changes in forecasted operations and changes in discount rates can materially affect these estimates. In addition, we test goodwill annually for impairment or more frequently if changes in circumstances or the occurrence of other events suggest impairments exist. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows and market valuation multiples. Changes in these estimates may result in the recognition of an impairment loss.

On our annual testing date of September 25, 2021, the fair values exceed the carrying values for each of the Company’s reporting units. There were no indicators for impairment for any of the reporting units. We believe we have sufficient available information, both current and historical, to support our assumptions, judgments and estimates used in the goodwill impairment test.

In the prior year, we experienced significantly lower than expected operating results within our commercial reporting unit, which is within the Construction segment.  It was determined that the carrying value of the reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $11.5 million as of  December 26, 2020, which represented the entire amount of the goodwill recorded within the reporting unit, as a result.

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REVENUE RECOGNITION

Revenue for product sales is recognized at the time the performance obligation is satisfied, which is primarily when the goods are delivered to the carrier, Free On Board (FOB) shipping point.  Generally, title 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.

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

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.

FORWARD OUTLOOK

GOALS

Our long-term objectives include:

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RETAIL SEGMENT

The Home Improvement Research Institute (“HIRI”) anticipates growth in home improvement spending and has forecasted a 3.1% compounded annual growth rate through 2024. Most recently, large “big box” customers like The Home Depot and Lowes have cautioned that they cannot predict if pandemic driven demand trends will continue. The Home Depot has stated that if the demand environment during the last half of 2021 were to persist through the current year, it would imply slightly positive sales growth in 2022. Lowe’s has forecasted a decline of 1% to an increase of 1% in comparable sales in 2022. Sales of our Retail Solutions segment comprised approximately 39.6% of our annual sales in 2021.

We continue to compete for market share for certain retail customers and face intense pricing pressure from other suppliers to this market.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our long-term goal is to achieve sales growth by:

INDUSTRIAL SEGMENT

Our goal is to increase our sales of wood, wood alternative, and protective packaging products to a wide variety of industrial customers and manufactured wood components for OEM users. We believe the vast amount of hardwood and softwood lumber consumed for industrial applications, combined with the highly fragmented nature of this market, provides us with market share growth opportunities as a result of our competitive advantages in manufacturing, purchasing, and material utilization. In addition, purchasers of packaging products with a wide geographic footprint increasingly desire to reduce the number of suppliers they buy from, which provides an opportunity to gain market share due to our international presence.  We plan to continue to obtain market share by expanding our manufacturing capacity, enhancing our capabilities and product offerings to enhance the solutions we offer our customers, and improving our ability to serve large regional and international customers in targeted markets. We plan to continue to pursue acquisition opportunities that meet our strategic criteria and help us meet these objectives. As discussed previously, the recently implemented reorganization of our business is intended to promote revenue growth through the introduction of new products, including protective and other packaging materials, and enhanced expertise in this market as well as improved earnings through more efficient use of our people, resources and capital.

Market indicators that should be considered when evaluating future demand for our products in the industrial segment include industrial production and the Purchasing Managers Index. Industrial Production in the United States is estimated to stand at 0.9% in 2022. The Purchasing Managers Index is projected to trend around 56 points in 2023 and 52.4 points in 2024. Sales in this segment comprised approximately 24.9% of our annual sales in 2021.

CONSTRUCTION SEGMENT

The National Association of Home Builders forecasts a 3.0% increase in manufactured home shipments in 2022 followed by a 1.0% increase in 2023. We currently supply approximately 45.0% of the trusses used in manufactured housing and we will strive to maintain our market share of trusses produced for this market. Sales of our Factory Built business unit within our Construction segment comprised approximately 12.7% of our annual sales in 2021.

The Mortgage Bankers Association of America forecasts a 5.0% increase in national housing starts to an estimated 1.7 million starts in 2022. The National Association of Home Builders forecasts starts of $1.6 million, a 3.0% increase from 2021. We believe we are well-positioned to capture our share of any increase that may occur in housing starts in the regions we operate, which is primarily Texas, Colorado, the mid-Atlantic states, and the Northeast. However, due to our conservative approach to adding capacity to serve this market and focus on managing potential channel conflicts with certain customers, our growth may trail the market in future years. Sales of our Site Built business unit within our Construction segment comprised approximately 13.8% of our annual sales in 2021.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Non-residential construction spending is a market indicator that should be considered when evaluating future demand for our products in our Commercial and Concrete Forming business units within our Construction segment. Sales in these business units comprised approximately 3.0% and 1.7%, respectively, of our annual sales in 2021.

GROSS PROFIT

We believe the following factors may impact our gross profits and margins in the future:

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

In recent years, selling, general and administrative (SG&A) expenses have increased due to acquisitions and added personnel hired to take advantage of growth opportunities and execute our initiatives intended to increase our sales of new products and improve our sales mix of value-added products. We anticipate our trend of increases in these costs will continue in 2022; however, our objective is to reduce these costs on a per unit basis and as a percentage of gross profits as we grow through the improved productivity of our people and as a result of fixed costs. In addition, bonus and other incentive expenses for all salaried and sales employees is based on our profitability and the effective management of our assets and will continue to fluctuate based on our results. See Note H — Common Stock for discussion of future compensation costs related to long-term share-based bonus awards.

On a long-term basis, we expect that our SG&A expenses will primarily be impacted by:

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

Our cash cycle will continue to be impacted in the future by our mix of sales by market. Sales to our construction and industrial segments require a greater investment in working capital than sales to our retail segment. Additionally, our net investment in trade receivables, inventory, and accounts payable will continue to be impacted by the level of lumber prices.

Additionally, we expect to spend between $175 million to $225 million on capital expenditures, incur depreciation of approximately $98 million, and incur amortization and other non-cash expenses of approximately $20 million in 2022.

On December 25, 2021, we had outstanding purchase commitments on capital projects of approximately $52.7 million. We intend to fund capital expenditures and purchase commitments through our operating cash flows and availability under our revolving credit facility which is considered sufficient to meet these commitments and working capital needs.

Our dividend rates are reviewed and approved at each of our January, April, July, and October board meetings and payments are made in March, June, September, and December of each year. Our board considers our dividend yield, payout ratios relative to earnings and operating cash flow, and potential variability of future results, among other factors, as part of its decision-making process.

We have a share repurchase program approved by our Board of Directors, and as of February 15, 2022, we have remaining authorization to buy back approximately 2.6 million shares. In the past, we have repurchased shares in order to offset the effect of issuances resulting from our employee benefit plans and at opportune times when our stock price falls to predetermined levels.

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