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Table of Contents

Exhibit 13

UFP INDUSTRIES, INC.

FINANCIAL INFORMATION

Table of Contents

Selected Financial Data

2

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

3

Report of Independent Registered Public Accounting Firm

25

Report of Independent Registered Public Accounting Firm

27

Consolidated Balance Sheets as of December 26, 2020 and December 28, 2019

29

Consolidated Statements of Earnings and Comprehensive Income for the Years Ended December 26, 2020, December 28, 2019, and December 29, 2018

30

Consolidated Statements of Shareholders’ Equity for the Years Ended December 26, 2020, December 28, 2019, and December 29, 2018

31

Consolidated Statements of Cash Flows for the Years Ended December 26, 2020, December 28, 2019, and December 29, 2018

32

Notes to Consolidated Financial Statements

33

Market Information for our Common Stock

58

Stock Performance Graph

58

Directors and Executive Officers

59

Shareholder Information

60

Table of Contents

SELECTED FINANCIAL DATA

(In thousands, except per share and statistics data)

    

2020

    

2019

    

2018

    

2017

    

2016

 

Consolidated Statement of Earnings Data

 

  

 

  

 

  

 

  

 

  

Net sales

$

5,153,998

$

4,416,009

$

4,489,180

$

3,941,182

$

3,240,493

Gross profit

 

800,296

 

685,518

 

592,894

 

542,826

 

474,590

Earnings before income taxes

 

340,983

 

240,674

 

197,853

 

176,007

 

160,671

Net earnings attributable to controlling interest

$

246,778

$

179,650

$

148,598

$

119,512

$

101,179

Diluted earnings per share

$

4.00

$

2.91

$

2.40

$

1.94

$

1.65

Dividends per share

$

0.50

$

0.40

$

0.36

$

0.32

$

0.29

Consolidated Balance Sheet Data

 

  

 

  

 

  

 

  

 

  

Working capital(1)

$

1,074,613

$

739,030

$

685,108

$

560,241

$

484,661

Total assets

 

2,404,891

 

1,889,477

 

1,647,548

 

1,464,677

 

1,292,058

Total debt

 

311,707

 

163,683

 

202,278

 

146,003

 

111,693

Shareholders’ equity

 

1,483,152

 

1,257,733

 

1,088,684

 

974,023

 

860,466

Statistics

 

  

 

  

 

  

 

  

 

  

Gross profit as a percentage of net sales

 

15.5

%  

 

15.5

%  

 

13.2

%  

 

13.8

%  

 

14.6

%

Net earnings attributable to controlling interest as a percentage of net sales

 

4.8

%  

 

4.1

%  

 

3.3

%  

 

3.0

%  

 

3.1

%

Return on beginning equity(2)

 

19.6

%  

 

16.5

%  

 

15.3

%  

 

13.9

%  

 

13.2

%

Current ratio(4)

 

3.32

 

3.09

 

3.21

 

2.85

 

2.78

Debt to equity ratio(5)

 

0.21

 

0.13

 

0.19

 

0.15

 

0.13

Book value per common share(3)

$

24.23

$

20.48

$

17.88

$

15.92

$

14.10

(1)

Current assets less current liabilities.

(2)

Net earnings attributable to controlling interest divided by beginning shareholders’ equity.

(3)

Shareholders’ equity divided by common stock outstanding.

(4)

Current assets divided by current liabilities.

(5)

Total debt divided by shareholders’ equity.

Acquisition growth is one of the primary contributing factors to material increases over the period from 2016 to 2020. Refer to Note C under the “Notes to the Consolidated Financial Statements” for further discussion on our business combinations and impact on our financial statements for the three years ended December 26, 2020.

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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 throughout North America, Europe, Asia, and Australia that supply manufactured 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 2020.

OVERVIEW

Our results for 2020 were impacted by the following:

Our net sales increased almost 17% in 2020 due to an 11% increase in our overall selling prices (see “Historical Lumber Prices”) and a 6% increase in our unit sales. The unit sales of our retail segment increased 25% due to an increase in consumer demand and home improvement activities. We believe that this increase is largely attributable to the impact of the pandemic on consumer behavior. This increase was offset by our industrial and construction segments, which both declined 6% as our customers in these segments were adversely impacted by the government-imposed shutdowns resulting from the pandemic. As of the end of the year, each of our industrial and construction segments (except for the commercial business unit within our construction segment) have experienced recent positive trends as the U.S. economy has recovered from the initial shutdowns due to the pandemic.
Earnings from operations increased 41% to $345.8 million. The improvement in our profitability was driven by a number of factors, including strong organic growth in our retail segment while effectively leveraging fixed costs, and the favorable impact of rising lumber prices on the selling prices of commodity-based products such as our ProWood pressure-treated products which are sold on a variable price formula tied to the Lumber Market. See Historical Lumber Prices and Impact of the Lumber Market on Our Operating Results below.
Our cash flow from operating activities decreased by $13 million and was attributable to an $80 million increase in our net earnings and non-cash expenses, offset by a $93 million increase in our investment in net working capital (see “Liquidity and Capital Resources”). The increase in net working capital was a result of unusually high lumber prices and retail market demand, which drove increases in our accounts receivable and inventory.
We invested $89.2 million in capital expenditures to support and grow our business and invested $65.3 million in acquired businesses.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We returned $30.7 million to our shareholders through dividends and $29.2 million through share repurchases.
Our cash surplus exceeded our debt by approximately $125 million.
Our available borrowing capacity under revolving credit facilities and cash surplus resulted in total liquidity of approximately $800 million at the end of December 2020. In August of 2020 we issued $150 million of long-term debt to finance our future growth. The notes have an average maturity of 13 years and have an average fixed rate of interest of 3.09%.

HISTORICAL LUMBER PRICES

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

Random Lengths Composite

Average $/MBF

    

2020

    

2019

    

January

$

377

$

331

February

 

402

 

370

March

 

420

 

365

April

 

358

 

354

May

 

394

 

346

June

 

455

 

329

July

 

530

 

356

August

 

716

 

346

September

 

934

 

364

October

826

360

November

571

373

December

643

371

Annual average

$

552

$

355

Annual percentage change

 

55.5

%  

 

(23.2)

%  

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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 62% and 58% of total lumber purchases, excluding plywood, for 2020 and 2019, respectively.

Random Lengths SYP

Average $/MBF

    

2020

    

2019

    

January

$

346

$

370

February

 

345

 

403

March

 

360

 

408

April

 

333

 

401

May

 

412

 

383

June

 

494

 

344

July

 

552

 

359

August

 

729

 

348

September

 

886

 

355

October

711

345

November

508

344

December

565

335

Annual average

$

520

$

366

Annual percentage change

42.1

%

(20.3)

%

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, were 51.0% and 43.4% of our net sales in 2020 and 2019, respectively.

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

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

Products with fixed selling prices. These products include value-added products such as decking and fencing sold to retail building materials customers, as well as trusses, wall panels and other components sold to the residential construction market, and most industrial packaging products. Prices for these products are generally fixed at the time of the sales quotation for a specified period of time or are based upon a specific quantity. In order to maintain margins and reduce any exposure to adverse trends in the price of component lumber products, we attempt to lock in costs with our suppliers for these sales commitments. Also, the time period and quantity limitations generally allow us to eventually re-price our products for changes in lumber prices from our suppliers.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Products with selling prices indexed to the reported Lumber Market with a fixed dollar "adder" to cover conversion costs and profits. These products primarily include treated lumber, remanufactured lumber, and trusses sold to the manufactured housing industry. For these products, we estimate the customers’ needs and we carry anticipated levels of inventory. Because lumber costs are incurred in advance of final sale prices, subsequent increases or decreases in the market price of lumber impact our profitability. In other words, for these products, our margins are exposed to changes in the trend of lumber prices.  We believe our sales of these products are at their highest relative level in our second quarter, primarily due to treated lumber sold to the retail market.

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

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 16% of our total sales. This exposure is less significant with remanufactured lumber, trusses sold to the manufactured housing market, and other similar products, due to our higher rate of inventory turnover of these products. We attempt to mitigate the risk associated with treated lumber through vendor consignment inventory 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 by locking in costs or including re-pricing triggers with customers if lumber prices change in excess of an agreed upon percentage.

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

    

Period 1

    

Period 2

 

Lumber cost

$

300

$

400

Conversion cost

 

50

 

50

= Product cost

 

350

 

450

Adder

 

50

 

50

= Sell price

$

400

$

500

Gross margin

 

12.5

%  

 

10.0

%

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

Annual Percentage Change

    

    

From 2019 to 2020

    

From 2018 to 2019

Units sold

 

6.0

%  

6.3

%  

Gross profit

16.7

15.6

Selling, general, and administrative expenses

1.3

11.9

Earnings from operations

41.2

18.2

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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 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. In 2020, we increased the amount of planned long-term share-based bonus awards that will be used to settle bonus obligations instead of cash, which resulted in a decrease in expense. This change was made to encourage employee retention and align their interests with shareholders. See discussion of share-based bonus awards in Note H — Common Stock.

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed five business acquisitions during 2020 and three during 2019. The annual historical sales attributable to acquisitions in 2020 and 2019 were approximately $101 million and $37 million, respectively. These business combinations were not significant to our operating results individually or in aggregate, and thus pro forma results for 2020 and 2019 are not presented.

On December 28, 2020, we closed on an agreement to purchase 100 percent of the equity of PalletOne, Inc., for approximately $232 million plus $21 million for certain investments in capital projects and $6 million for a purchase price adjustment based on the actual amount of net working capital at close compared to a pre-determined target. Based in Bartow, Florida, PalletOne is a leading manufacturer of new pallets in the U.S., with 17 pallet manufacturing facilities in the southern and eastern regions of the country. The company also supplies other specialized industrial packaging, including custom bins and crates, and its Sunbelt Forest Products subsidiary operates five pressure-treating facilities in the Southeastern U.S.

On February 28, 2021, we closed on an agreement to purchase 100 percent of the equity of J.C. Gilmore Pty Ltd located in Australia for approximately $2.4 million.  This transaction adds a wide portfolio of consumable packaging to certain industrial packaging products and expands the companies’ customer base throughout Australia.

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

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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”.  Due to the segment change as of January 1, 2020, 2018 and 2019 amounts have been retroactively adjusted and as such, we have included 2018 results by segment and the discussion of our 2019 results by segment compared to 2018. Please see our 2019 10-K for discussion of our 2019 consolidated results of operations compared to 2018.

Year Ended

December 26,

    

December 28,

    

2020

 

2019

 

Net sales

100.0

%  

100.0

%  

Cost of goods sold

84.5

 

84.5

 

Gross profit

15.5

 

15.5

 

Selling, general, and administrative expenses

8.6

 

9.9

 

Asset impairment charges and other costs, net

0.2

 

 

Earnings from operations

6.7

 

5.5

 

Other expense, net

0.1

 

0.1

 

Earnings before income taxes

6.6

 

5.5

 

Income taxes

1.7

 

1.3

 

Net earnings

4.9

 

4.1

 

Less net earnings attributable to noncontrolling interest

(0.1)

 

(0.1)

 

Net earnings attributable to controlling interest

4.8

%  

4.1

%  

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

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.

SG&A as a Percentage of Gross Profit

Year Ended

    

December 26,

    

December 28,

 

2020

 

2019

Gross profit

$

800,296

$

685,518

Selling, general, and administrative expenses

$

444,596

$

439,047

SG&A as percentage of gross profit

 

55.6%

 

64.0%

In 2020, we increased the amount of planned long-term share-based bonus awards that will be used to settle bonus obligations instead of cash, which resulted in a decrease in expense. This change was made to encourage employee retention and align their interests with shareholders. See discussion of share-based bonus awards in Note H — Common Stock.

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Table of Contents

UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OPERATING RESULTS BY SEGMENT

Effective January 1, 2020, we re-organized around the markets we serve rather than geography and the historical segment information has been recast for all periods presented. Our new business segments align with the following markets: UFP Retail Solutions, UFP Construction and UFP Industrial. Among other things, this change allows for a more specialized and consistent sales approach among Company operations, more efficient use of resources and capital, and quicker introduction of new products and services. 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, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) have been included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns and leases transportation equipment, are also included in the Corporate column. An inter-company lease charge is assessed to our operating segments for the use of these assets at fair market value rates.

The following tables present our operating results by segment for December 26, 2020, December 28, 2019 and December 29, 2018.

Year Ended December 26, 2020

(in thousands)

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

$

2,167,122

$

1,072,117

$

1,695,684

$

217,094

$

1,981

$

5,153,998

Cost of goods sold

 

1,874,114

 

895,466

 

1,433,469

147,117

3,536

4,353,702

Gross profit

293,008

176,651

262,215

69,977

(1,555)

800,296

Selling, general, administrative expenses

137,641

97,146

179,516

34,471

(4,178)

444,596

Asset impairment charges and other costs, net

56

(3,873)

13,690

775

(774)

9,874

Earnings from operations

$

155,311

$

83,378

$

69,009

$

34,731

$

3,397

$

345,826

Year Ended December 28, 2019

(in thousands)

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

$

1,498,710

$

1,085,635

$

1,637,156

$

193,785

$

723

$

4,416,009

Cost of goods sold

 

1,324,339

 

906,025

 

1,365,394

141,916

(7,183)

3,730,491

Gross profit

174,371

179,610

271,762

51,869

7,906

685,518

Selling, general, administrative expenses

112,422

96,157

188,339

33,173

8,956

439,047

Asset impairment charges and other costs, net

269

482

1,037

159

(382)

1,565

Earnings from operations

$

61,680

$

82,971

$

82,386

$

18,537

$

(668)

$

244,906

Note: Allocations of corporate expenses in 2019 were modified to align with the methodology used to allocate corporate expenses in the current year.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Year Ended December 29, 2018

(in thousands)

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

$

1,512,477

$

1,050,945

$

1,705,016

$

219,920

$

822

$

4,489,180

Cost of goods sold

 

1,363,118

 

916,512

 

1,451,460

170,913

(5,717)

3,896,286

Gross profit

149,359

134,433

253,556

49,007

6,539

592,894

Selling, general, administrative expenses

97,260

74,830

181,459

29,967

8,719

392,235

Asset impairment charges and other costs, net

(59)

85

720

1

(7,351)

(6,604)

Earnings from operations

$

52,158

$

59,518

$

71,377

$

19,039

$

5,171

$

207,263

Note: Allocations of corporate expenses in 2018 were modified to align with the methodology used to allocate corporate expenses in the current year.

The following tables present the components of our operating results as a percentage of net sales by segment for December 26, 2020, December 28, 2019 and December 29, 2018.

Year Ended December 26, 2020

    

    

    

    

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

86.5

83.5

84.5

67.8

84.5

Gross profit

13.5

16.5

15.5

32.2

15.5

Selling, general, administrative expenses

6.4

9.1

10.6

15.9

8.6

Asset impairment charges and other costs, net

(0.4)

0.8

0.4

0.2

Earnings from operations

7.2

%

7.8

%

4.1

%

16.0

%

6.7

%

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

Year Ended December 28, 2019

    

    

    

    

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

88.4

83.5

83.4

73.2

84.5

Gross profit

11.6

16.5

16.6

26.8

15.5

Selling, general, administrative expenses

7.5

8.9

11.5

17.1

9.9

Asset impairment charges and other costs, net

0.1

0.1

0.0

Earnings from operations

4.1

%

7.6

%

5.0

%

9.6

%

5.5

%

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

Year Ended December 29, 2018

    

    

    

    

Retail

Industrial

Construction

All Other

Corporate

Total

Net sales

100.0

%

100.0

%

100.0

%

100.0

%

N/A

100.0

%

Cost of goods sold

90.1

87.2

85.1

77.7

86.8

Gross profit

9.9

12.8

14.9

22.3

13.2

Selling, general, administrative expenses

6.4

7.1

10.6

13.6

8.7

Asset impairment charges and other costs, net

0.0

(0.1)

Earnings from operations

3.4

%

5.7

%

4.2

%

8.7

%

4.6

%

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

NET SALES

We primarily design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, customized interior fixtures used in a variety of retail stores, commercial and other structures, and specialty wood packaging, components and other packing materials for various industries. Our strategic long-term sales objectives include:

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

% Change

    

in Sales

    

in Selling Prices

    

in Units

    

Acquisition Unit Change

    

Organic Unit Change

    

2020 versus 2019

16.7

%  

10.7

%  

6.0

%  

1.0

%  

5.0

%  

2019 versus 2018

 

(1.6)

%  

(7.9)

%  

6.3

%  

1.5

%  

4.8

%  

Diversifying our end market sales mix by increasing sales of specialty wood and protective packaging to industrial users, increasing our penetration of the concrete forming market, increasing our sales of engineered wood components for custom home, multi-family, military and light commercial construction, increasing our market share with independent retailers, and increasing our sales of customized interior fixtures, casework and millwork used in a variety of commercial markets.
Expanding geographically in our core businesses, domestically and internationally.
Increasing our sales of "value-added" products and enhancing our product offering with new or improved products. Value-added products generally consist of fencing, decking, lattice, and other specialty products sold to the retail segment, specialty wood packaging, engineered wood components, customized interior fixtures, and "wood alternative" products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist of products manufactured with wood and non-wood composites, metals and plastics. Although we consider the treatment of dimensional lumber and panels with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals. Remanufactured lumber and panels that are components of finished goods are also generally categorized as “commodity-based” products.

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UFP INDUSTRIES, INC.

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). Value-added products are typically sold at fixed selling prices for a pre-determined time period and carry higher gross margins than our commodity-based products. The increase in our ratio of commodity-based product sales to total sales reflected in the tables below is primarily due to the impact of dramatically higher lumber prices in 2020 as the selling prices of these products are generally indexed to the current Lumber Market at the time they are shipped. For example, a majority of our commodity-based sales are sold through our ProWood business unit and selling prices were up 30% in 2020 compared to 2019. Also, our Industrial and Construction segments primarily sell value-added products and their unit sales were both down 6% compared to last year.

Year Ended December 26, 2020

Year Ended December 28, 2019

Year Ended December 29, 2018

    

    

Value-Added

    

Commodity-Based

    

Value-Added

    

Commodity-Based

    

Value-Added

    

Commodity-Based

Retail

 

53.8

%  

46.2

%  

57.8

%  

42.2

%

54.0

%  

46.0

%

Industrial

64.7

%  

35.3

%  

66.2

%  

33.8

%

60.5

%  

39.5

%

Construction

76.3

%  

23.7

%  

81.4

%  

18.6

%

76.5

%  

23.5

%

All Other and Corporate

75.6

%  

24.4

%  

75.8

%  

24.2

%

65.9

%  

34.1

%

Total Sales

64.3

%  

35.7

%  

69.3

%  

30.7

%

64.6

%  

35.4

%

Developing new products. We define new products as those that will generate sales of at least a $1 million per year within 4 years of launch and are still growing and gaining market penetration. New product sales and gross profits in 2020 were up 26% and 36%, respectively, from the prior year. Approximately $126 million of new product sales for 2019, while still sold, were sunset in 2020 and excluded from the table below because they no longer meet the definition above.

New Product Sales by Segment

Year Ended

    

December 26,

    

December 28,

    

%

December 29,

    

%

(in thousands)

2020

2019

Change

2018

Change

Retail

$

394,838

$

284,182

38.9

%

$

316,017

 

(10.1)

%

Industrial

 

78,142

 

68,672

13.8

%

 

88,063

 

(22.0)

%

Construction

54,307

60,177

(9.8)

%

75,174

(19.9)

%

All Other and Corporate

 

11,397

 

13,016

(12.4)

%

 

n/a

 

n/a

Total New Product Sales

 

538,684

 

426,047

26.4

%

 

479,254

 

(11.1)

%

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

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Segment:

2020 versus 2019

Net sales to the retail segment increased 45% in 2020 compared to 2019 due to a 25% increase in unit sales and a 20% increase in selling prices. Our unit growth was primarily driven by a 49% increase in our Dimensions Home & Décor products including project panels and short lumber, a 28% increase in Outdoor Essentials Fence, Lawn & Garden products, a 25% increase in our ProWood pressure-treated products, and a 20% increase in our Deckorators composite decking and railing. Acquisitions contributed 1% to the overall growth in unit sales, primarily in our UFP Edge siding and trim products. Our new product sales contributed to these increases and were up 39% for the year. Finally, our sales to big box customers increased 48%, and sales to other independent retailers increased 38%. Our unit sales increases were primarily due to an increase in demand as consumers invested in home improvement activities over other spending alternatives. We believe that the pandemic and related disruptions in the lives of consumers contributed to this increase in demand.

Gross profits increased by $118.6 million, or 68% to $293 million in 2020 compared to 2019, comparing favorably with our 25% increase in unit sales. Our increase in gross profits was due to the following factors:

Increased unit sales of value-added products within our Deckorators, Outdoor Essentials, and Dimensions business units contributed $53.1 million to the increase.
Our ProWood business unit, which produces and sells pressure treated lumber, contributed $48.9 million to the increase attributable to unit sales growth and the favorable trend of rising lumber prices as the selling prices of these products are primarily determined on a variable price formula.
The remaining $16.6 million increase is attributed to favorable cost variances as a result of operating leverage combined with strong organic unit growth.

Selling, general and administrative (“SG&A”) expenses increased by approximately $25.2 million, or 22.4%, in 2020 compared to 2019, lower than our 25% increase in unit sales. Acquired operations in 2020 contributed approximately $2.2 million to this increase. Accrued bonus expense increased approximately $18.7 million and totaled approximately $35.3 million for 2020. The remaining increase was due to increases in salaries and wages ($5.2 million), sales compensation ($1.4 million), and in-store merchandising costs ($1.6 million), offset by a decline in advertising ($2.5 million) and travel and related costs ($1.2 million).

Earnings from operations of the Retail reportable segment increased in 2020 compared to 2019 by $93.6 million, or 151.8%, well in excess of our 25% increase in unit sales as a result of the factors mentioned above.

2019 versus 2018

Net sales to the retail segment decreased 1% in 2019 compared to 2018 due to an 11% decrease in selling prices which was mostly offset by a 10% increase in unit sales. The decrease in selling prices was as a result of the decline in lumber prices in 2019. Our organic unit growth was primarily driven by a 40% increase in Deckorators composite decking and railing, an 18% increase in our UFP Edge siding and trim products. and a 6% increase in our ProWood pressure-treated products. Within this segment, sales to our big box customers increased 5% while our sales to other retailers decreased 10%.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Gross profits increased $25 million, or 17% to $174 million in 2019 compared to 2018 comparing favorably with our 10% increase in units sold due to strong organic sales growth and leveraging of fixed costs, lower lumber costs on sales of fixed price products, value-added sales mix improvements and a favorable lumber market trend in 2019 which resulted in an improvement in gross profit per unit on sales of variable priced products. Increased unit sales of value-added products within Deckorators, Outdoor Essentials, and UFP Edge contributed $20.8 million to the increase in gross profit. ProWood contributed $7.6 million to the increase and the remaining $3.4 million is due to unfavorable cost variances.

SG&A expenses increased $15.2 million, or 16%, in 2019 compared to 2018, while we reported a 10% increase in unit sales. Acquired operations in 2019 contributed approximately $1.2 million to the increase. Accrued bonus increased approximately $4 million and totaled approximately $16.6 million in 2019. The remaining increase was due to increases of $4.0 million in compensation and sales incentives, $3.1 million in advertising, and other insignificant increases spread over several accounts.

Earnings from operations increased $9.5 million, or 18%, due to the factors mentioned above, which was well in excess of our 10% increase in unit sales.

Industrial Segment:

2020 versus 2019

Net sales to the industrial segment decreased 1% in 2020 compared to 2019 due to a 5% increase in selling prices attributable to the Lumber Market, offset by a 6% decrease in unit sales due to the impact of the pandemic and government imposed shutdowns on certain of our customers.

Gross profits decreased by 1.6% to $176.7 million in 2020 compared to 2019, comparing favorably with our 6% decrease in our unit sales.  We believe we achieved these results by continuing to make favorable changes in our sales mix of value-added products and effectively passing along increases in commodity lumber costs to our customers.

SG&A expenses increased by approximately $1.0 million, or 1.0%, in 2020 compared to 2019. Acquired operations in 2020 contributed approximately $3.0 million to total SG&A expenses. Accrued bonus expense decreased $5.0 million compared to last year and totaled approximately $18.8 million for 2020. The remaining increase was primarily due to compensation and sales incentives.

Certain contingent liabilities related to earnout incentives associated with business acquisitions by our industrial segment were reduced in 2020 and the impact to earnings was an increase of $4.1 million.

Earnings from operations of the Industrial reportable segment in 2020 increased $0.4 million, or 0.5%, compared to 2019 due to the factors discussed above.

2019 versus 2018

Net sales to the industrial segment increased 3% in 2019 compared to 2018, resulting from a 4% increase in overall unit sales and a 1% decrease in selling prices. Businesses we acquired contributed 6% to our growth in unit sales.

Gross profits increased $45.2 million, or 34%, in the industrial segment, primarily driven by favorable changes in product mix and lower lumber costs in 2019 as most products sold to this market have fixed selling prices for a period of time.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SG&A expenses increased by approximately $21.3 million, or 29%, in 2020 compared to 2019. Acquired operations in 2019 contributed approximately $6.3 million to total SG&A expenses. Accrued bonus expense increased approximately $9.5 million and totaled approximately $23.7 million in 2019. The remaining increases were due to a $3.5 million increase in salaries and wages, a $1.1 million increase in sales compensation, and a $0.8 million increase in bad debt expense.

Earnings from operations for the Industrial reportable segment increased in 2019 compared to 2018 by $23.5 million, or 39%, which was well in excess of our 4% increase in unit sales, due to the factors above.

Construction Segment:

2020 versus 2019

Net sales to the construction segment increased 4% in 2020 compared to 2019 due to a 10% increase in selling prices, offset by a 6% decrease in unit sales due to the impact of the pandemic and government-imposed shutdowns on customer demand. Unit sales changes of our business units that comprise this segment consisted of declines of 2% in site-built construction, 8% in concrete forming, and 23% in commercial construction, offset by a 2% increase in factory-built housing.

Gross profits decreased by $9.5 million, or 3.5% to $262.2 million in 2020 compared to 2019 comparing favorably with our 6% decrease in unit sales. The decrease in our gross profit was comprised of the following factors:

Gross profits in our site-built construction business unit decreased by $15.2 million due to a combination of lower unit sales and higher commodity lumber costs, which adversely impacted our profit per unit of products we sell on a fixed price to our customers for a period of time.
A decline in unit sales in our commercial business unit, which has a more significant fixed cost structure, caused a decrease in gross profit of $27.4 million.
The impact of rising lumber prices on variable priced products contributed $11.7 million in gross profit in our factory-built housing and concrete forming business units.
Favorable cost variances contributed $14.7 million in gross profit.
Acquired businesses contributed $6.7 million.

SG&A expenses decreased by approximately $8.8 million, or 4.7%, in 2020 compared to 2019 due to decreases in salaries and wages of $2.2 million, travel expenses of $3.8 million and medical expenses of $2.1 million, primarily due to reductions in headcount in our commercial business unit as a result of efforts to re-align our capacity with lower customer demand. These decreases were offset by the SG&A expenses of acquired operations in 2020 which contributed approximately $4.6 million of additional SG&A expenses in 2020. Accrued bonus expense decreased $5.0 million compared to 2019 and totaled approximately $18.6 million for 2020.

Due to the underperformance of our commercial business unit, we recorded a charge against earnings of $11.5 million to impair the goodwill associated with that business unit. In addition, certain leases of our commercial business unit were impaired with a charge against earnings of $1.6 million as a result of our efforts to re-align our capacity with lower customer demand.

Earnings from operations of the Construction reportable segment decreased in 2020 compared to 2019 by $13.4 million, or 16.2%, 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

2019 versus 2018

Net sales to the construction segment decreased 4% in 2019 compared to 2018, due to a 6% increase in unit sales offset by a decrease of 10% in selling prices. Unit changes within this segment consisted of increases of 14% in commercial construction, 10% in concrete forming, and 2% in site-built construction, offset by a 2% decrease in factory-built housing.

Gross profits increased by $18.2 million, or 7.2% to $271.8 million in 2019 compared to 2018 , comparing favorably with our 6% increase in unit sales.

SG&A expenses increased by approximately $6.9 million, or 4%, in 2019 compared to 2020 and was primarily due to an increase in accrued bonus expense of $6.4 million.

Earnings from operations for the Construction reportable segment increased in 2019 compared to 2018 by $11.0 million, or 15%, 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 overall not significant.

Earnings from operations increased in 2020 compared to 2019 by $16.2 million, or 87.4%, primarily driven by increases in gross profit of our Mexican affiliate as well as our import/export trading business. Gross profit increases at our Mexican affiliate were driven by unit increases of approximately 15% as well as selling price increases due to the rising lumber market.

Earnings from operations decreased in 2019 compared to 2018 by $.5 million, or 2.6%.

Corporate:

The corporate segment consists of over (under) allocated costs that are not significant.

INTEREST EXPENSE

Interest expense increased in 2020 compared to 2019, due to the issuance of $150 million of long-term debt in August of 2020 to provide capital to support our future growth.  See “Note E 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 25.5% in 2020 compared to 24.2% in 2019. The increase was primarily due to recording non-deductible goodwill impairment expense in 2020, along with a valuation allowance against deferred tax assets associated with net operating loss carryforwards of foreign subsidiaries in our commercial business unit totaling approximately $3.6 million.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 26, 2020 (in thousands).

Payments Due by Period

    

Less than

    

1 – 3

    

3 – 5

    

After

    

Contractual Obligation

1 Year

Years

Years

5 Years

Total

Long-term debt and finance lease obligations

$

100

$

43,384

$

39,971

$

228,252

$

311,707

Estimated interest on long-term debt and finance lease obligations

 

10,873

 

20,352

 

17,260

 

48,949

 

97,434

Operating leases

 

18,671

 

27,345

 

17,696

 

25,961

 

89,673

Capital project purchase obligations

 

22,761

 

 

 

 

22,761

Total

$

52,405

$

91,081

$

74,927

$

303,162

$

521,575

As of December 26, 2020, we also had $41.0 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.

LIQUIDITY AND CAPITAL RESOURCES

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

December 26,

December 28,

    

2020

    

2019

    

Cash from operating activities

 

336,477

 

349,291

 

Cash used in investing activities

 

(154,718)

 

(142,037)

 

Cash from (used in) financing activities

 

85,221

 

(67,268)

 

Effect of exchange rate changes on cash

 

962

 

482

 

Net change in cash and cash equivalents

 

267,942

 

140,468

 

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

 

168,666

 

28,198

 

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

$

436,608

$

168,666

In general, we financed our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We 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 August. 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.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 decreased to 48 days in 2020 from 56 days in 2019.

Year Ended

December 26,

December 28,

2020

2019

Days of sales outstanding

    

32

    

33

Days supply of inventory

 

36

 

44

Days payables outstanding

 

(20)

 

(21)

Days in cash cycle

 

48

 

56

The decrease in our days supply of inventory in 2020 was primarily due to opportunistic buying when lumber prices were low in early 2019 to improve gross profits and higher levels of “safety stock” we carried to address transportation challenges and ensure timely deliveries to our customers. We did not engage in this level of opportunistic buying in late 2019 and early 2020. Additionally, strong demand in our retail segment and shortages of supply contributed to higher inventory turns in 2020.

Our cash flows from operating activities in 2020 was $336.5 million, 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. Comparatively, cash generated from operating activities was approximately $349.3 million in 2019, which was comprised of net earnings of $182.4 million, $77 million of non-cash expenses, and a $89.9 million decrease in working capital since the end of 2018.  Our net working capital increased during 2020 due to unusually high lumber prices as well as strong sales growth and demand in our retail segment, which resulted in an increase in our accounts receivable and inventory.

Our cash used in investing activities during 2020 was $154.7 million, which was comprised primarily of purchases of property, plant, and equipment totaling $89.2 million and business acquisitions totaling $65.3 million.  Our outstanding purchase commitments on existing capital projects totaled approximately $22.8 million on December 26, 2020.  Our capital expenditures primarily consist of “maintenance” capital expenditures totaling approximately $55 million, as well as “expansionary and efficiency” capital expenditures. Notable areas of capital spending include projects to expand capacity and enhance the productivity of our Deckorators product line, several projects to expand manufacturing capacity to serve industrial customers and achieve efficiencies through automation, improvements to a number of facilities, and an increase of our transportation capacity (tractors, trailers) in order to meet higher volumes and replace old rolling stock. The sale and purchase of investments totaling $24.8 million and $28.1 million, respectively, are due to investment activity in our captive insurance subsidiary.

In 2019, investments in business acquisitions and purchases of property, plant, and equipment were $39.1 million and $84.9 million, respectively. Outstanding purchase commitments on existing capital projects totaled approximately $33.8 million on December 28, 2019. Investments in life insurance contracts and net investment activity used an additional $15.2 million and $3.5 million of cash.

Cash flows from financing activities during 2020 primarily consisted of proceeds of $150.0 million from the issuance of Senior E, F and G Notes and $6.9 million of borrowings under the revolving credit facilities (See Notes to Consolidated Financial Statements “Debt”); offset by repayments under these facilities of approximately $6.5 million, $30.7 million in dividend payments, and $29.2 million in stock repurchases at an average price of $38.62. We paid quarterly dividends in March, June, September and December of 2020 at a quarterly rate of $0.125 per share. Comparatively in 2019, cash flows from financing activities primarily consisted of $422.1 million in borrowings under the revolving credit facilities, repayments under these facilities of $460.5 million, and $24.5 million in dividend payments at a semi-annual rate of $0.20 per share.

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Table of Contents

UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. This facility replaced our $295 million unsecured revolving credit facility. 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 have been used to fund working capital needs and the PalletOne, Inc. acquisition. Refer to Note O, “Subsequent Events” for additional information.

On December 26, 2020, we had $4.7 million outstanding on our $375 million revolving credit facility. The revolving credit facility also supports letters of credit totaling approximately $7.1 million on December 26, 2020. As a result, we have approximately $363 million in remaining availability on our revolver. 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 26, 2020.

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.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 26, 2020, we experienced significantly lower than expected operating results within our commercial reporting unit, which is within the Construction segment.  In conjunction with completing our annual planning activities, we noted an expectation for significantly lower customer demand for the foreseeable future.  As a result, we revised our future cash flow projections for this reporting unit and performed the goodwill impairment test by calculating the fair value of the reporting unit based on its discounted estimated future cash flows. 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, which represents the entire amount of the goodwill recorded within the reporting unit, as a result. All other reporting units had a fair value that was substantially in excess of the carrying value. We believe we have sufficient available information, both current and historical, to support our assumptions, judgments and estimates used in the goodwill impairment test.

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 goal is to achieve long-term unit sales growth that exceeds positive U.S. GDP growth by 4 percent to 6 percent, including business acquisitions.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our general long-term objectives also include:

Achieving sales growth primarily through new product introduction, international business expansion, and gaining additional market share, particularly in our core retail, industrial and construction segments;
Identifying new growth opportunities in businesses with adjacencies to our core businesses, primarily through strategic business acquisitions;
Increasing our profitability through cost reductions, productivity improvements as volume improves and through investments in automation, and a more favorable mix of value-added products resulting in growth in earnings from operations in excess of our unit sales growth; and
Earning a return on invested capital in excess of our weighted average cost of capital.

RETAIL SEGMENT

The Home Improvement Research Institute (“HIRI”) anticipates growth in home improvement spending and has forecasted a 4.3% 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 from 2020 will continue into 2021. The Home Depot has stated that if the demand environment during the last half of 2020 were to persist through the current year, it would imply flat to slightly positive comparable sales growth in 2021. Lowe’s has forecasted a 5% to 7% decline in demand in 2021. Sales of our Retail Solutions segment comprised approximately 42% of our annual sales in 2020 and 34% of our annual sales in 2019 and 2018.

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

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

Increasing our market share of value-added products, including our Deckorators product line.
Developing new products.
Acquiring competitors in core product categories when those opportunities exist.
Adding new products and customers through strategic business acquisitions or alliances.
Increasing our emphasis on product innovation and product differentiation in order to counter commoditization trends and influences.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 national 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 national 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 above, the recently implemented reorganization of our business is intended to promote revenue growth through the introduction of new products and services 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 .90% in 2021. The Purchasing Managers Index is projected to trend around 53.4 points in 2022 and 52.4 points in 2023. Sales in this segment comprised approximately 21% of our annual sales in 2020.

CONSTRUCTION SEGMENT

The National Association of Home Builders forecasts a 21% increase in manufactured home shipments in 2021 followed by a 5% increase in 2022. We currently supply approximately 40% 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% of our annual sales in 2020.

The Mortgage Bankers Association of America forecasts a 10% increase in national housing starts to an estimated 1.5 million starts in 2021. The National Association of Home Builders forecasts starts of 1.2 million, a 4% increase from 2020. 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 14% of our annual sales in 2020.

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 7% of our annual sales in 2020.

GROSS PROFIT

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

End market demand and our ability to grow and leverage fixed costs.
The effective implementation of our strategy to focus and manage our operations around the markets we serve.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our ability to maintain market share and gross margins on products sold to our largest customers. We believe our level of service, geographic diversity, and quality of products provides an added value to our customers. However, if our customers are unwilling to pay for these advantages, our sales and gross margins may be reduced.
Sales mix of value-added and commodity products.
Fluctuations in the relative level of the Lumber Market and trends in the market price of lumber. (See "Impact of the Lumber Market on our Operating Results.")
Fuel and transportation costs.
Rising labor and benefit costs.
Our ability to continue to achieve productivity improvements as our unit sales increase and planned cost reductions through continuous improvement activities, automation, and other initiatives.
Changes in corporate income tax rates and the cost of complying with new or increased government regulations.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES

In recent years, selling, general and administrative (SG&A) expenses have increased as we have added personnel needed 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 2021; 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:

Our growth in sales to the industrial and the construction segments.  Our sales to these segments require a higher ratio of SG&A costs due, in part, to product design and engineering requirements.
Sales of new products and value-added, branded products to the retail segment, which generally require higher product development, marketing, advertising, and other selling costs.
Our incentive compensation programs which are tied to gross profits, pre-bonus earnings from operations and return on investment.
Our growth and success in achieving continuous improvement objectives designed to improve our productivity and leverage our fixed costs as we grow.

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.

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UFP INDUSTRIES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Additionally, we expect to spend approximately $115.5 million on capital expenditures, incur depreciation of approximately $71 million, and incur amortization and other non-cash expenses of approximately $19 million in 2021.

On December 26, 2020, we had outstanding purchase commitments on capital projects of approximately $22.8 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.

In 2020, the frequency of our dividend payments increased from semi-annually to quarterly and the pro-rata rate increased by 25%.  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.

We have a share repurchase program approved by our Board of Directors, and as of December 26, 2020, we have remaining authorization to buy back approximately 1.1 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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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of UFP Industries, Inc. (formerly Universal Forest Products, Inc.)

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of UFP Industries, Inc. and subsidiaries (the “Company”) as of December 26, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 26, 2020, of the Company and our report dated March 3, 2021, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Material Weakness

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's assessment: Management identified a material weakness in the design and operation of their controls regarding the accounting for the Company’s share-based bonus awards.  The controls were not adequately designed to review the appropriate accounting conclusions with enough precision related to the determination of the appropriate period over which to recognize the expense associated with share-based bonus awards.  

This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 26, 2020, of the Company, and this report does not affect our report on such financial statements.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan   

March 3, 2021

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of UFP Industries, Inc. (formerly Universal Forest Products, Inc.)

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of UFP Industries, Inc. (formerly Universal Forest Products, Inc.) and subsidiaries (the "Company") as of December 26, 2020 and December 28, 2019, the related consolidated statements of earnings and comprehensive income, shareholders' equity, and cash flows, for each of the three years in the period ended December 26, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2021, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Share-Based Bonus Expense – Refer to Notes A and H to the financial statements

Critical Audit Matter Description

The Company recognizes share-based bonus expense over the associated service and vesting period of the awards in accordance with ASC Topic 718, Compensation - Stock Compensation.

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We identified share-based bonus expense as a critical audit matter because of the material weakness identified by the Company related to the design and operation of the Company’s control regarding the accounting for their share-based bonus awards. This made auditing share-based bonus expense more challenging and required an increased extent of audit effort, including the need to involve professionals in our firm having expertise in share-based compensation accounting and to modify the nature and extent of our audit procedures.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to share-based bonus expense included the following, among others:

We read the applicable agreements, recalculated the share-based bonus expense calculations and compared the key terms from the agreements to management’s analysis.
We assessed the appropriateness of judgments made by management in determining key assumptions related to the awards, such as service inception date.
We tested the accuracy and completeness of the data used in measuring the share-based bonus awards by agreeing the underlying inputs, such as grant date and vesting terms, among others, back to source documents, such as compensation committee meeting minutes or share-based bonus award letters.

With the assistance of professionals in our firm having expertise in accounting for share-based bonus awards, we evaluated the Company’s conclusions regarding the accounting model to record share-based bonus expense over the requisite service and vesting period of the awards in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Grand Rapids, Michigan  

March 3, 2021

We have served as the Company's auditor since 2014.

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UFP INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

December 26,

December 28,

    

2020

    

2019

ASSETS

  

  

CURRENT ASSETS:

  

  

Cash and cash equivalents

    

$

436,507

  

$

168,336

Restricted cash

 

101

  

 

330

Investments

 

24,308

  

 

18,527

Accounts receivable, net

 

470,504

  

 

364,027

Inventories:

  

  

Raw materials

 

316,481

  

 

236,283

Finished goods

 

250,813

  

 

250,591

Total inventories

 

567,294

  

 

486,874

Refundable income taxes

 

5,836

  

 

13,272

Other current assets

 

33,812

  

 

41,706

TOTAL CURRENT ASSETS

 

1,538,362

 

1,093,072

DEFERRED INCOME TAXES

 

2,413

  

 

2,763

RESTRICTED INVESTMENTS

17,565

16,214

RIGHT OF USE ASSETS

77,245

80,167

OTHER ASSETS

 

20,298

  

 

24,884

GOODWILL

 

252,193

  

 

229,536

INDEFINITE-LIVED INTANGIBLE ASSETS

 

7,401

  

 

7,354

OTHER INTANGIBLE ASSETS, NET

 

72,252

  

 

48,313

PROPERTY, PLANT AND EQUIPMENT:

  

  

Land and improvements

128,301

125,097

Building and improvements

272,864

253,589

Machinery and equipment

525,542

467,963

Furniture and fixtures

21,110

16,972

Construction in progress

26,680

21,342

PROPERTY, PLANT AND EQUIPMENT, GROSS

 

974,497

  

 

884,963

Less accumulated depreciation and amortization

 

(557,335)

  

 

(497,789)

PROPERTY, PLANT AND EQUIPMENT, NET

417,162

387,174

TOTAL ASSETS

$

2,404,891

$

1,889,477

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

  

CURRENT LIABILITIES:

  

  

Accounts payable

$

211,518

  

$

142,479

Accrued liabilities:

  

  

Compensation and benefits

 

166,478

  

 

141,892

Other

 

69,104

  

 

51,572

Current portion of lease liability

16,549

15,283

Current portion of long-term debt

 

100

  

 

2,816

TOTAL CURRENT LIABILITIES

 

463,749

  

 

354,042

LONG-TERM DEBT

 

311,607

  

 

160,867

LEASE LIABILITY

61,509

64,884

DEFERRED INCOME TAXES

 

25,266

  

 

22,880

OTHER LIABILITIES

 

59,608

  

 

29,071

TOTAL LIABILITIES

 

921,739

  

 

631,744

SHAREHOLDERS’ EQUITY:

  

  

Controlling interest shareholders’ equity:

  

  

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

$

  

$

Common stock, $1 par value; shares authorized 80,000,000; issued and outstanding, 61,205,780 and 61,408,589

 

61,206

  

 

61,409

Additional paid-in capital

 

218,224

  

 

192,173

Retained earnings

 

1,182,680

  

 

995,022

Accumulated other comprehensive loss

 

(1,794)

  

 

(4,889)

Total controlling interest shareholders’ equity

 

1,460,316

  

 

1,243,715

Noncontrolling interest

 

22,836

  

 

14,018

TOTAL SHAREHOLDERS’ EQUITY

 

1,483,152

  

 

1,257,733

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

2,404,891

  

$

1,889,477

See notes to consolidated financial statements.

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UFP INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

Year Ended

December 26,

December 28,

December 29,

    

2020

    

2019

    

2018

NET SALES

    

$

5,153,998

  

$

4,416,009

  

$

4,489,180

COST OF GOODS SOLD

 

4,353,702

  

 

3,730,491

  

 

3,896,286

GROSS PROFIT

 

800,296

  

 

685,518

  

 

592,894

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

444,596

  

 

439,047

  

 

392,235

ASSET IMPAIRMENT CHARGES AND OTHER COSTS, NET

9,874

1,565

(6,604)

EARNINGS FROM OPERATIONS

 

345,826

  

 

244,906

  

 

207,263

INTEREST EXPENSE

 

9,311

  

 

8,700

  

 

8,893

INTEREST INCOME

 

(2,392)

  

 

(1,945)

  

 

(1,371)

UNREALIZED (GAIN) LOSS ON INVESTMENTS AND OTHER

(2,076)

(2,523)

1,888

 

4,843

  

 

4,232

  

 

9,410

EARNINGS BEFORE INCOME TAXES

 

340,983

  

 

240,674

  

 

197,853

INCOME TAXES

 

87,101

  

 

58,270

  

 

45,441

NET EARNINGS

 

253,882

  

 

182,404

  

 

152,412

LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST

 

(7,104)

  

 

(2,754)

  

 

(3,814)

NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST

$

246,778

  

$

179,650

  

$

148,598

EARNINGS PER SHARE – BASIC

$

4.00

  

$

2.91

  

$

2.41

EARNINGS PER SHARE – DILUTED

$

4.00

  

$

2.91

  

$

2.40

OTHER COMPREHENSIVE INCOME:

NET EARNINGS

 

253,882

  

 

182,404

  

 

152,412

OTHER COMPREHENSIVE GAIN (LOSS)

 

5,967

  

 

1,513