UFP INDUSTRIES INC (UFPI) FY 2022 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, packaging, 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 currency and inflation; fluctuations in the price of lumber; adverse economic conditions in the markets we serve; concentration of sales to customers; vertical integration strategies; excess capacity or supply chain challenges; our ability to make successful business acquisitions; government regulations, particularly involving environmental and safety regulations; adverse or unusual weather conditions;  inbound and outbound transportation costs; alternatives to replace treated wood products; Cybersecurity breaches; tariffs on import and export sales; and the COVID-19 pandemic (“pandemic”). 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 2022.

OVERVIEW

Our results for 2022 were impacted by the following:

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HISTORICAL LUMBER PRICES

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

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In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprised approximately 60% and 57% of total lumber purchases, excluding plywood and other panel products, in 2022 and 2021, 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 49.6% and 47.7% of our net sales in 2022 and 2021, 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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For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices. As a result of the balance in our net sales of each category we believe our gross profits are more stable than those of our competitors who are less diversified.

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

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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It is our long-term 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, increase our profit 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 would result in a rate of growth of these expenses which is less than our unit sales growth resulting in a lower cost per unit.

BUSINESS COMBINATIONS AND ASSET PURCHASES

We completed four business acquisitions during 2022 and nine during 2021. The annual historical sales attributable to acquisitions in 2022 and 2021 were approximately $177.8 million and $1.3 billion, respectively. These business combinations were not significant to our operating results individually or in aggregate; consequently pro forma results for 2022 and 2021 are not presented.

See Notes to Consolidated Financial Statements, Note C, "Business Combinations" 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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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 (“Retail”), UFP Packaging (“Packaging” and formerly known as UFP Industrial) and UFP Construction (“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, Packaging, and Construction segments. The exception to this market-centered reporting and management structure is our International segment, which comprises our Mexico, Canada, Europe, Asia, and Australia operations and sales and buying offices in other parts of the world. Our International segment and Ardellis (our insurance captive) are included in the “All Other” column of the table below. The “Corporate” column includes purchasing, transportation and administrative functions that serve our operating segments. Operating results of Corporate primarily consists of over (under) allocated costs. The operating results of UFP Real Estate, Inc., which owns and leases real estate, and UFP Transportation Ltd., which owns, leases, and operates transportation equipment, are also included in the Corporate column. Inter-company lease and services charges are assessed to our operating segments for the use of these assets and services at fair market value rates.

The following tables present our operating results by segment for December 31, 2022 and December 25, 2021.

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The following tables present the components of our operating results as a percentage of net sales by segment for December 31, 2022 and December 25, 2021.

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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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, engineered wood components, structural lumber, and other products for factory-built and site-built residential and commercial construction, customized interior fixtures used in a variety of retail stores, commercial, and other structures, and structural wood packaging, components and packing materials for various industries. Our strategic long-term sales objectives include:

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

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Our overall unit sales of value-added products increased approximately 3% in 2022 compared to 2021, due primarily to acquisitions completed in 2022. Our unit sales of commodity-based products were flat compared to 2021.

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Retail Segment:

Net sales from the Retail segment increased 7% in 2022 compared to 2021 due to a 7% increase in selling prices and unit growth from acquisitions of 5%, offset by a 2% decrease due to the transfer of certain product sales to the Construction segment this year and an organic unit decline of 3%. Our change in organic unit sales was comprised of:

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In addition, new product sales increased approximately 35.6% to $307 million in 2022 compared to 2021 and our sales to big box customers increased 9%.

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Gross profits increased 15.7% to $344.5 million in 2022 compared to 2021. Our change in gross profits was attributable to the following:

Selling, general and administrative (“SG&A”) expenses increased by approximately $24.4 million, or 14.4%, in 2022 compared to 2021. The SG&A of recently acquired businesses contributed approximately $8.4 million to this increase. Accrued bonus expense, which varies with our overall profitability and return on investment, increased approximately $2.0 million and totaled approximately $37.0 million in 2022. The remaining increase was primarily due to increases in sales incentive compensation of $8.6 million, travel related expenses of $2.5 million, advertising expenses of $2.0 million, and bad debt expenses of $1.4 million.

Earnings from operations of the Retail reportable segment increased in 2022 compared to 2021 by $21.6 million, or 16.8%, as a result of the factors mentioned above.

Packaging Segment:

Net sales from the Packaging segment increased 11% in 2022 compared to 2021 due to a 12% increase in selling prices attributable to favorable sales mix changes, as well as selective and value-based selling strategies. Unit sales declined 1% as the favorable impact of recent acquisitions was offset by a 2% decrease in organic unit sales.

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Gross profits increased by $121.6 million, or 26%, to $586.2 million in 2022 compared to 2021. Acquisitions contributed $7.0 million to the increase in gross profit. The remaining increase is primarily a result of the pricing increases discussed above as well as favorable changes in our value-added sales mix. Excluding acquisitions, we estimate that value-added products contributed $117.7 million to the increase in gross profit, offset by a decrease of $3.1 million in the gross profit of commodity-based products. Value-added sales increased to 71.7% of total net sales in 2022 compared to 67.9% in 2021. The increase in value-added sales and gross profits is due in part to new products which contributed $78.7 million to gross profits this year ($6.2 million from the acquisition of Advantage Label at the end of 2021).

Selling, general and administrative (“SG&A”) expenses increased by approximately $50.7 million, or 25.3%, in 2022 compared to 2021. Acquired operations in 2022 contributed approximately $4.5 million to total SG&A expenses. Accrued bonus expense increased approximately $11.1 million compared to last year and totaled approximately $82.2 million for 2022. The remaining increase was primarily due to increases in bad debt expenses of $10.1 million, salaries and wages of $6.0 million, sales incentive compensation of $3.3 million, and travel related expenses of $2.2 million.

Earnings from operations of the Packaging reportable segment in 2022 increased by $70.3 million, or 26.5%, compared to 2021 due to the factors discussed above.

Construction Segment:

Net sales from the Construction segment increased 17% in 2022 compared to 2021 due to an 11% increase in selling prices, 2% due to the transfer of certain product sales from the Retail segment, and organic unit sales growth of 4%. Organic unit changes within this segment consisted of increases of 28% in concrete forming, 30% in commercial construction, and 8% in factory-built housing. The organic unit sales of our site-built business unit decreased by 8% due to a combination of capacity and supply constraints and being more selective in the business we pursued.

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Gross profits increased by $195.6 million, or 36.8% to $726.7 million in 2022 compared to 2021. The increase in our gross profit was comprised of the following factors:

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SG&A expenses increased by approximately $60.8 million, or 22.8%, in 2022 compared to 2021. Acquired operations in 2022 contributed approximately $1.2 million to total SG&A expenses. Accrued bonus expense increased approximately $25.1 million compared to last year and totaled approximately $95.9 million for 2022. The remaining increase was primarily due to increases in sales incentives of $8.1 million, bad debt expense of $6.2 million, salaries, wages, and benefits of $6.3 million, and travel related expenses of $2.6 million.

Earnings from operations of the Construction reportable segment increased in 2022 compared to 2021 by $133.2 million, or 50.4%, due to the factors mentioned above.

All Other Segment:

Our All Other reportable segment consists of our International and Ardellis (our insurance captive) segments that are not significant to our overall results. The decrease in earnings from operations is primarily due to a 4% decrease in gross margin in the International segment and a 16% decrease in gross margin in our Ardellis segment, as well as a 3% increase in SG&A as a percentage of net sales in our Ardellis segment, and $4.3 million of impairments of goodwill and other intangible assets in our Italian reporting unit.

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 by only $0.1 million in 2022 compared to 2021 due to consistent debt balances year over year and interest on our outstanding debt during each period was primarily charged at fixed rates.  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 24.6% in 2022 compared to 23.9% in 2021. The increase was primarily due to an increase in non-deductible compensation, as well as prior year one time credits which decreased the 2021 tax expense.

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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 31, 2022 (in thousands).

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As of December 31, 2022, we also had $59.0 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):

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In general, we fund our growth through a combination of operating cash flows, our revolving credit facility, and issuance of long-term notes payable at times when interest rates are favorable. We have not issued equity to finance growth except in the case of a large acquisition that occurred many years ago. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe 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.

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Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables are outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle decreased slightly to 56 days in 2022 from 57 days in 2021.

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The increase in our days of sales outstanding was primarily due to increases in our packaging and construction segments. The decrease in our days supply of inventory was due to better inventory positioning relative to demand and increased usage of vendor managed inventories in 2022.

Our cash flows from operating activities in 2022 was $831.6 million, which was comprised of net earnings of $705.0 million and $138.9 million of non-cash expenses, offset by a $12.3 million increase in working capital since the end of December 2021. Comparatively, cash generated from operating activities was approximately $512.5 million in 2021, 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 the sale of certain assets and $142.7 million increase in working capital since the end of December 2020. Our investment in working capital at the end of 2022 was impacted by a softening of demand and a decline in lumber prices near the end of the year.

Our cash used in investing activities during 2022 was $353.9 million, primarily reflecting purchases of property, plant, and equipment totaling $174.1 million and business acquisitions totaling $180.2 million. See “Note C of Notes to the Consolidated Financial Statements”. Our outstanding purchase commitments on existing capital projects totaled approximately $63.2 million on December 31, 2022. 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:

In addition, we sold property, plants, and equipment for proceeds of $3.8 million. Finally, the sale and purchase of investments totaling $12.9 million and $19.9 million, respectively, are due to investment activity in our captive insurance subsidiary. Comparatively, cash used in investing activities during 2021 was $611.2 million, reflecting purchases of property, plant, and equipment totaling $151.2 million, business acquisitions totaling $476.0 million, proceeds from the sale of property, plant, and equipment of $30.0 million, and the sale and purchase of investments totaling $14.9 million and $23.8 million, respectively, due to investment activity in our captive insurance subsidiary.

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Cash flows used in financing activities during 2022 primarily consisted of the payment of quarterly dividends totaling $58.9 million, distributions to noncontrolling interests of $12.0 million, $95.8 million in repurchases of our common stock at an average price of $76.83 per share, and net debt repayments of $41.2 million. Comparatively in 2021, cash flows used in financing activities consisted of $40.2 million in dividend payments, $6.8 million in distributions to noncontrolling interests, and net borrowings under  our revolving credit facility of  $3.4 million. 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. banks.  On February 28, 2021, this credit agreement was amended to increase the availability from $375 million to $550 million by exercising the accordion feature in the original agreement. On December 6, 2022,  a second amendment was filed increasing the availability from $550 million to $750 million.  The facilities now include up to $60 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, Sterling, Euros and such other foreign currencies as may subsequently be agreed upon among the parties. Cash borrowings are charged interest based upon an index selected by the Company, plus a margin that is determined based upon the index selected and upon the financial performance of the Company and certain of its subsidiaries. We are charged a facility fee on the entire amount of the lending commitment, at a per annum rate ranging from 15.0 to 30.0 basis points, also determined based upon our performance. The facility fee is payable quarterly in arrears.

On December 31, 2022, we had $5.5 million outstanding on our $750 million revolving credit facility, and we had approximately $741.2 million in remaining availability after considering $3.3 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 31, 2022.

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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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 24, 2022, we experienced significantly lower than expected operating results within our italian reporting unit, which is within the All Other segment.  It was determined that the carrying value of the Italian reporting unit exceeded its fair value and we recorded a non-cash goodwill impairment charge of $2.5 million as of  December 31, 2022, which represented the entire amount of the goodwill recorded within the reporting unit, as a result. For the remaining reporting units, the fair values exceed the carrying values and there were no indicators for impairment. 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.

SHORT-TERM OUTLOOK

We believe current economic conditions indicate the U.S. economy is either in or headed towards a recession, which will impact our results and vary depending on its severity and duration. The following factors should be considered when evaluating our future results:

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LONG-TERM 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 3.9% compounded annual growth rate through 2025. Sales of our Retail Solutions segment comprised approximately 38% of our annual sales in 2022.

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:

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PACKAGING SEGMENT

Our goal is to increase our sales of wood, wood alternative, and protective packaging products to a wide variety of packaging customers and manufactured wood components for OEM users. We believe the vast amount of hardwood and softwood lumber consumed for packaging 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. The recently implemented reorganization of our business to market-based segments is intended to promote higher rates of sales 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 packaging segment include industrial production, the Purchasing Managers Index, and U.S. GDP. Sales in this segment comprised approximately 25% of our annual sales in 2022.

CONSTRUCTION SEGMENT

The National Association of Home Builders forecasts a 6% decrease in manufactured home shipments from 2023 to 2024. 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% of our annual sales in 2022.

The Mortgage Bankers Association of America forecasts national housing starts of 1.54 million in 2024 and the National Association of Home Builders forecasts starts of 1.3 million in 2024. The consensus estimate of all housing starts is 1.36 million, a 7% increase from 2023. As a result of 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 2022.

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 4% and 3%, respectively, of our annual sales in 2022.

GROSS PROFIT

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

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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; 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 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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LIQUIDITY AND CAPITAL RESOURCES

Our cash cycle will continue to be impacted in the future by our mix of sales by segment. Sales from our Construction and Packaging segments require a greater investment in receivables than sales to our Retail segment, while our Retail segment generally requires a greater investment in inventory. Also, 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 approximately  $200 million to $225 million on capital expenditures, incur depreciation of approximately $120 million, and incur amortization and other non-cash expenses of approximately $35 million in 2023.

On December 31, 2022, we had outstanding purchase commitments on capital projects of approximately $63.2 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 February, 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 March 1, 2023 we have remaining authorization to buy back approximately 2 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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