Edgar Filing: UNIVERSAL FOREST PRODUCTS INC

ufpi_Current_Folio_10Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

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

For the quarterly period ended June 30, 2018

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

Commission File Number 0‑22684

UNIVERSAL FOREST PRODUCTS, INC.

(Exact name of registrant as specified in its charter)


	Michigan		38‑1465835
	(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification Number)
	organization)

	2801 East Beltline NE, Grand Rapids, Michigan		49525
	(Address of principal executive offices)		(Zip Code)

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


	NONE
	(Former name or former address, if changed since last report.)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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


Large Accelerated Filer ☒	Accelerated Filer ☐	Non-Accelerated Filer ☐	Smaller reporting company ☐
			Emerging Growth Company ☐

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

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

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


	Class		Outstanding as of June 30, 2018
	Common stock, $1 par value		61,632,401

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UNIVERSAL FOREST PRODUCTS, INC.

TABLE OF CONTENTS

PART I.		FINANCIAL INFORMATION.	Page No.

	Item 1.	Financial Statements

		Consolidated Condensed Balance Sheets at June 30, 2018, December 30, 2017 and July 1, 2017	3

		Consolidated Condensed Statements of Earnings and Comprehensive Income for the Three Months Ended and Six Months Ended June 30, 2018 and July 1, 2017	4

		Consolidated Condensed Statements of Shareholders’ Equity for the Three Months Ended and Six Months Ended June 30, 2018 and July 1, 2017	5

		Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2018 and July 1, 2017	6

		Notes to Unaudited Consolidated Condensed Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

	Item 4.	Controls and Procedures	30

PART II.		OTHER INFORMATION

	Item 1.	Legal Proceedings – NONE

	Item 1A.	Risk Factors	31

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

	Item 3.	Defaults upon Senior Securities – NONE

	Item 4.	Mine Safety Disclosures – NONE

	Item 5.	Other Information – NONE	31

	Item 6.	Exhibits	32

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)


(in thousands, except share data)
	June 30,		December 30,		July 1,
	2018		2017		2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	27,501	$	28,339	$	24,625
Restricted cash		16,758		477		905
Investments		14,493		11,269		10,401
Accounts receivable, net		489,145		327,751		398,529
Inventories:
Raw materials		272,765		234,354		218,356
Finished goods		259,109		225,954		220,079
Total inventories		531,874		460,308		438,435
Refundable income taxes		2,396		7,228		—
Other current assets		30,464		28,115		21,970
TOTAL CURRENT ASSETS		1,112,631		863,487		894,865
DEFERRED INCOME TAXES		2,235		1,865		1,981
RESTRICTED INVESTMENTS		10,950		8,359		7,911
OTHER ASSETS		7,081		7,368		7,842
GOODWILL		219,595		212,644		213,597
INDEFINITE-LIVED INTANGIBLE ASSETS		7,384		7,415		2,340
OTHER INTANGIBLE ASSETS, NET		36,045		34,910		37,547
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment		791,348		763,101		735,474
Less accumulated depreciation and amortization		(450,650)		(434,472)		(419,518)
PROPERTY, PLANT AND EQUIPMENT, NET		340,698		328,629		315,956
TOTAL ASSETS		1,736,619		1,464,677		1,482,039
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Cash overdraft	$	33,608	$	25,851	$	22,769
Accounts payable		197,408		140,106		160,250
Accrued liabilities:
Compensation and benefits		88,771		97,556		77,187
Income taxes		—		—		960
Other		50,038		38,404		48,063
Current portion of long-term debt		542		1,329		2,378
TOTAL CURRENT LIABILITIES		370,367		303,246		311,607
LONG-TERM DEBT		276,274		144,674		204,752
DEFERRED INCOME TAXES		13,856		14,079		20,360
OTHER LIABILITIES		28,399		28,655		28,959
TOTAL LIABILITIES		688,896		490,654		565,678
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, 61,632,401, 61,191,888 and 61,265,325		61,632		61,192		61,266
Additional paid-in capital		174,749		161,928		158,248
Retained earnings		800,237		736,212		684,808
Accumulated other comprehensive income		(4,077)		144		(2,590)
Total controlling interest shareholders’ equity		1,032,541		959,476		901,732
Noncontrolling interest		15,182		14,547		14,629
TOTAL SHAREHOLDERS’ EQUITY		1,047,723		974,023		916,361
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,736,619	$	1,464,677	$	1,482,039

See notes to consolidated condensed financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

AND COMPREHENSIVE INCOME

(Unaudited)


(in thousands, except per share data)
	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2018		2017		2018		2017
NET SALES	$	1,294,440	$	1,072,375	$	2,288,297	$	1,918,505
COST OF GOODS SOLD		1,128,751		924,135		1,991,719		1,649,526
GROSS PROFIT		165,689		148,240		296,578		268,979
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		104,595		94,605		197,800		181,587
NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND IMPAIRMENT OF ASSETS		477		(264)		(6,057)		(328)
EARNINGS FROM OPERATIONS		60,617		53,899		104,835		87,720
INTEREST EXPENSE		2,248		1,840		4,025		3,343
INTEREST AND INVESTMENT INCOME		(181)		(329)		(898)		(411)
EQUITY IN EARNINGS OF INVESTEE		—		(21)		—		(26)
		2,067		1,490		3,127		2,906
EARNINGS BEFORE INCOME TAXES		58,550		52,409		101,708		84,814
INCOME TAXES		13,420		17,835		22,994		28,605
NET EARNINGS		45,130		34,574		78,714		56,209
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST		(1,086)		(932)		(1,836)		(1,505)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST	$	44,044	$	33,642	$	76,878	$	54,704

EARNINGS PER SHARE - BASIC	$	0.71	$	0.55	$	1.24	$	0.89
EARNINGS PER SHARE - DILUTED	$	0.71	$	0.55	$	1.24	$	0.89

OTHER COMPREHENSIVE INCOME:
NET EARNINGS		45,130		34,574		78,714		56,209
OTHER COMPREHENSIVE GAIN (LOSS)		(3,905)		1,387		(4,344)		4,422
COMPREHENSIVE INCOME		41,225		35,961		74,370		60,631
LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST		(119)		(1,460)		(1,713)		(2,887)
COMPREHENSIVE INCOME ATTRIBUTABLE TO CONTROLLING INTEREST	$	41,106	$	34,501	$	72,657	$	57,744

See notes to consolidated condensed financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)


(in thousands, except share and per share data)
	Controlling Interest Shareholders’ Equity
							Accumulated
			Additional				Other
	Common		Paid-In		Retained		Comprehensive		Noncontrolling
	Stock		Capital		Earnings		Earnings		Interest		Total
Balance at December 31, 2016	$	61,026	$	144,649	$	649,135	$	(5,630)	$	11,286	$	860,466
Net earnings						54,704				1,505		56,209
Foreign currency translation adjustment								2,817		1,382		4,199
Unrealized gain (loss) on investment & foreign currency								223				223
Distributions to noncontrolling interest										(1,953)		(1,953)
Additional purchases of noncontrolling interest										2,409		2,409
Cash dividends - $0.150 per share						(9,208)						(9,208)
Issuance of 12,699 shares under employee stock plans		13		319								332
Issuance of 426,435 shares under stock grant programs		426		6,784								7,210
Issuance of 132,624 shares under deferred compensation plans		133		(133)								—
Repurchase of 332,640 shares		(332)		221		(9,823)						(9,934)
Tax benefits from non-qualified stock options exercised				—								—
Expense associated with share-based compensation arrangements				1,282								1,282
Accrued expense under deferred compensation plans				5,126								5,126
Balance at July 1, 2017	$	61,266	$	158,248	$	684,808	$	(2,590)	$	14,629	$	916,361
Balance at December 30, 2017		61,192		161,928		736,212		144		14,547		974,023
Net earnings						76,878				1,836		78,714
Foreign currency translation adjustment								(3,669)		(123)		(3,792)
Unrealized gain (loss) on investment & foreign currency								(552)				(552)
Distributions to noncontrolling interest										(1,078)		(1,078)
Cash dividends - $0.180 per share						(11,090)						(11,090)
Issuance of 16,917 shares under employee stock plans		17		483								500
Issuance of 346,777 shares under stock grant programs		347		4,990								5,337
Issuance of 132,603 shares under deferred compensation plans		132		(132)								—
Repurchase of 55,784 shares		(56)				(1,763)						(1,819)
Expense associated with share-based compensation arrangements				1,817								1,817
Accrued expense under deferred compensation plans				5,663								5,663
Balance at June 30, 2018	$	61,632	$	174,749	$	800,237	$	(4,077)	$	15,182	$	1,047,723

See notes to consolidated condensed financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


(in thousands)	Six Months Ended
	June 30,		July 1,
	2018		2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	78,714	$	56,209
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation		26,144		23,248
Amortization of intangibles		2,702		2,377
Expense associated with share-based and grant compensation arrangements		1,924		1,381
Deferred income taxes (credits)		(565)		355
Equity in earnings of investee		—		(26)
Net gain on disposition of assets		(6,057)		(328)
Changes in:
Accounts receivable		(155,666)		(101,239)
Inventories		(61,828)		(26,979)
Accounts payable and cash overdraft		62,665		38,146
Accrued liabilities and other		15,895		22,067
NET CASH USED IN OPERATING ACTIVITIES		(36,072)		15,211
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(54,313)		(34,549)
Proceeds from sale of property, plant and equipment		36,724		1,039
Acquisitions, net of cash received		(37,960)		(59,658)
Purchases of investments		(9,348)		(15,118)
Proceeds from sale of investments		3,180		7,247
Other		(1,352)		1,152
NET CASH FROM (USED IN) INVESTING ACTIVITIES		(63,069)		(99,887)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facilities		488,853		444,601
Repayments under revolving credit facilities		(431,657)		(349,311)
Borrowings of debt		1,639		—
Repayment of debt		(5,437)		—
Issuance of long-term debt		75,000		—
Proceeds from issuance of common stock		500		331
Dividends paid to shareholders		(11,090)		(9,207)
Distributions to noncontrolling interest		(1,078)		(1,953)
Repurchase of common stock		(1,819)		(9,934)
Other		(71)		(6)
NET CASH FROM FINANCING ACTIVITIES		114,840		74,521
Effect of exchange rate changes on cash		(256)		1,196
NET CHANGE IN CASH AND CASH EQUIVALENTS		15,443		(8,959)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF YEAR		28,816		34,489
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD	$	44,259	$	25,530

RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents, beginning of period	$	28,339	$	34,091
Restricted cash, beginning of period		477		398
Cash, cash equivalents, and restricted cash, beginning of period	$	28,816	$	34,489

Cash and cash equivalents, end of period	$	27,501	$	24,625
Restricted cash, end of period		16,758		905
Cash, cash equivalents, and restricted cash, end of period	$	44,259	$	25,530

SUPPLEMENTAL INFORMATION:
Interest paid	$	3,889	$	3,049
Income taxes paid		18,745		15,895
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		4,779		4,231

See notes to consolidated condensed financial statements.

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UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED

CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION

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

In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10‑K for the fiscal year ended December 30, 2017.

Seasonality has a significant impact on our working capital from March to August which historically results in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters. For comparative purposes, we have included the July 1, 2017 balances in the accompanying unaudited consolidated condensed balance sheets.

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UNIVERSAL FOREST PRODUCTS, INC.

B. FAIR VALUE

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


	June 30, 2018								July 1, 2017
	Quoted		Prices with						Quoted		Prices with
	Prices in		Other		Prices with				Prices in		Other
	Active		Observable		Unobservable				Active		Observable
	Markets		Inputs		Inputs				Markets		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		Total
Money market funds	$	56	$	1,513	$	—	$	1,569	$	64	$	891	$	955
Fixed income funds		2,879		7,968		—		10,847		1,495		6,451		7,946
Equity securities		7,892		—		—		7,892		9,822		—		9,822
Hedge funds		—		—		1,689		1,689
Mutual funds:
Domestic stock funds		413		—		—		413		330		—		330
International stock funds		3,951		—		—		3,951		84		—		84
Target funds		249		—		—		249		254		—		254
Bond funds		725		—		—		725		206		—		206
Total mutual funds		5,338		—		—		5,338		874		—		874
Total	$	16,165	$	9,481	$	1,689	$	27,335	$	12,255	$	7,342	$	19,597
Assets at fair value	$	16,165	$	9,481	$	1,689	$	27,335	$	12,255	$	7,342	$	19,597

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

During the second quarter of 2018, we purchased a private real estate income trust which will be valued as a Level 3 asset. We did not maintain any Level 3 assets or liabilities at July 1, 2017.

In 2017, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”) transferred $4.1 million in fixed income securities from its Investment Account and purchased an additional $3.8 million in fixed income securities which are held in a newly formed collateral trust account in line with regulatory requirements in the State of Michigan to allow Ardellis to act as an admitted carrier in the State. These funds are intended to safeguard the insureds of the Michigan Branch of Ardellis. The funds are classified as “Restricted Investments”.

In accordance with our investment policy, our wholly-owned captive, Ardellis Insurance Ltd. (“Ardellis”), maintains an investment portfolio, totaling $24.8 million as of June 30, 2018, consisting of domestic and international stocks, hedge funds, and fixed income bonds.

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UNIVERSAL FOREST PRODUCTS, INC.

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


	June 30,2018
			Unrealized
	Cost		Gain/(Loss)		Fair Value
Fixed Income	$	11,068	$	(221)	$	10,847
Equity		7,013		879		7,892
Mutual Funds		4,508		(123)		4,385
Hedge Funds		1,679		10		1,689
Total	$	24,268	$	545	$	24,813

Our fixed income investments consist of a blend of US Government and Agency bonds and investment grade corporate bonds with varying maturities. Our equity investments consist of small, mid, and large cap growth and value funds, as well as international equity. Our hedge funds consist of the private real estate income trust which is valued as a Level 3 asset. The net pre-tax effected unrealized gain was $0.5 million. Carrying amounts above are recorded in the investments and restricted investments line items within the balance sheet as of June 30, 2018. During the first six months of 2018, Ardellis’ investments reported a net realized gain of $514 thousand, which was recorded in interest income on the statement of earnings.

C. REVENUE RECOGNITION

On May 28, 2014, the FASB issued ASU No. 2014-09 (Accounting Standard Codification 606), Revenue from Contracts with Customers. Topic 606 supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and requires the recognition of revenue when promised goods or services are transferred to customers in an amount that reflects the considerations to which the entity expects to be entitled to in exchange for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The Company has adopted the requirements of the new standard as of January 1, 2018, and utilized the modified retrospective method of transition which was applied to all contracts.

The Company completed the new revenue recognition standard assessment and determined that there was no material impact to our consolidated financial statements, aside from additional required disclosures, thus no needed adjustment to the opening retained earnings for the annual reporting period.

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

Certain customer products that we provide require installation by the Company or a 3rd party. Installation revenue is recognized upon completion, which is typically 2-3 days after receipt. If it is determined to utilize a 3rd party for installation, the party will act as an agent to the Company until completion of the installation. Installation revenue represents an immaterial share of the Company’s total sales.

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UNIVERSAL FOREST PRODUCTS, INC.

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

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

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

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


	Three Months Ended					Six Months Ended
(in thousands)	June 30,		July 1,			June 30,		July 1,
Market Classification	2018		2017		% Change	2018		2017		% Change
FOB Shipping Point Revenue	$	1,281,557	$	1,058,777	21.04%	$	2,263,248	$	1,885,652	20.02%
Construction Contract Revenue		38,811		33,418	16.14%		68,787		65,400	5.18%
Total Sales		1,320,368		1,092,195	20.89%		2,332,035		1,951,052	19.53%

In the first six months of 2018, the North and West segments comprise the construction contract revenue above, $47.3 million and $21.5 million, respectively. Construction contract revenue is primarily made up of site-built and framing customers.

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


	June 30,		December 30,		July 1,
	2018		2017		2017
Cost and Earnings in Excess of Billings	$	5,501	$	5,005	$	3,521
Billings in Excess of Cost and Earnings		4,616		4,435		3,725

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UNIVERSAL FOREST PRODUCTS, INC.

D. EARNINGS PER SHARE

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


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2018		2017		2018		2017
Numerator:
Net earnings attributable to controlling interest	$	44,044	$	33,642	$	76,878	$	54,704
Adjustment for earnings allocated to non-vested restricted common stock		(1,018)		(663)		(1,728)		(994)
Net earnings for calculating EPS	$	43,026	$	32,979	$	75,150	$	53,710
Denominator:
Weighted average shares outstanding		61,895		61,632		61,770		61,482
Adjustment for non-vested restricted common stock		(1,431)		(1,215)		(1,389)		(1,119)
Shares for calculating basic EPS		60,464		60,417		60,381		60,363
Effect of dilutive restricted common stock		85		93		80		111
Shares for calculating diluted EPS		60,549		60,510		60,461		60,474
Net earnings per share:
Basic	$	0.71	$	0.55	$	1.24	$	0.89
Diluted	$	0.71	$	0.55	$	1.24	$	0.89

No options were excluded from the computation of diluted EPS for the quarters ended June 30, 2018, or July 1, 2017.

On October 17, 2017, our Board of Directors declared a three-for-one stock split effected in the form of a stock dividend. The record date of the stock split was on October 31, 2017, and the eventual stock distribution to shareholders occurred on November 14, 2017. As a result of the stock split, all historical per share data and number of shares outstanding presented in future financial statements are retroactively adjusted.

E. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

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

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

On a consolidated basis, we have reserved approximately $2.5 million and $3.6 million on June 30, 2018, and July 1, 2017, respectively, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

Many of our wood treating operations utilize “Subpart W” drip pads, defined as hazardous waste management units by the Environmental Protection Agency. The rules regulating drip pads require that a pad be “closed” at the point that it is no longer intended to be used for wood treating operations or to manage hazardous waste. Closure

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involves identification and disposal of contaminants which are required to be removed from the facility. The cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contaminants, cleanup standards that vary from state to state, and the time period over which the cleanup would be completed. Based on our present knowledge of existing circumstances, it is considered probable that these costs will approximate $0.2 million. As a result, this amount is recorded in other long-term liabilities on June 30, 2018.

In February 2014, one of our operations was served with a federal grand jury subpoena from the Southern District of New York. The subpoena was issued in connection with an investigation being conducted by the US Attorney’s Office for the Southern District of New York. The subpoena requested documents relating to a developer and construction projects for which our operation had provided materials and labor. Following receipt of the subpoena, the Audit Committee of the Company’s Board of Directors retained outside counsel to conduct an internal investigation and respond to the subpoena. The Company cooperated in all respects with the US Attorney’s Office, complied with this subpoena and voluntarily provided additional information. As a result of the internal investigation, in 2014, two Company employees were terminated for violating the Company’s Code of Business Conduct and Ethics. In May 2015, those ex-employees were indicted by the grand jury. In April 2016, one of the two former employees pled guilty to four of the charges included in the indictment. In May 2016, the other former employee was found guilty by a jury on four of the charges included in the indictment. The Company has not been named as a target and continues to cooperate with the US Attorney’s Office in this matter. Based upon prior communications with the US Attorney’s Office, we do not believe that the resolution of this matter will have a material adverse impact on our financial condition or the results of our operations.

In addition, on June 30, 2018, we were parties either as plaintiff or defendant to a number of lawsuits and claims arising through the normal course of our business. In the opinion of management, our consolidated financial statements will not be materially affected by the outcome of these contingencies and claims.

On June 30, 2018, we had outstanding purchase commitments on commenced capital projects of approximately $23.4 million.

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

As part of our operations, we supply building materials and labor to site-built construction projects or we jointly bid on contracts with framing companies for such projects. In some instances, we are required to post payment and performance bonds to insure the project owner that the products and installation services are completed in accordance with our contractual obligations. We have agreed to indemnify the surety for claims made against the bonds. As of June 30, 2018, we had approximately $15.8 million outstanding payment and performance bonds for open projects. We had approximately $1.7 million in payment and performance bonds outstanding for completed projects which are still under warranty.

On June 30, 2018, we had outstanding letters of credit totaling $30.4 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.

In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts. We currently have irrevocable letters of credit outstanding totaling approximately $20.6 million for these types of insurance arrangements. We have reserves recorded on our balance sheet, in accrued liabilities, that reflect our expected future liabilities under these insurance arrangements.

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

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

We did not enter into any new guarantee arrangements during the second quarter of 2018 which would require us to recognize a liability on our balance sheet.

F. BUSINESS COMBINATIONS

We completed the following acquisitions in six months ended 2018 and 2017 which were accounted for using the purchase method in thousands unless otherwise noted:


					Net
Company	Acquisition		Intangible		Tangible		Operating
Name	Date	Purchase Price	Assets		Assets		Segment
	June 1, 2018	$23,893 cash paid for 100% asset purchase	$	7,123	$	16,770	South
North American Container Corporation ("NACC")	A manufacturer of structural packaging products, including steel, corrugated and hardwood packaging. NACC had annual sales of approximately $71 million. The acquisition of NACC allowed us to expand our presence in this region, expand our product offering, and serve customers more cost effectively.
	April 9, 2018	$3,890 cash paid for 100% asset purchase	$	2,235	$	1,655	West
Fontana Wood Products ("Fontana")	A manufacturer and distributor lumber and trusses in the Southern California region. Fontana had annual sales of approximately $12 million. The acquisition of Fontana allows us to expand our manufactured housing business and creates operating leverage by consolidating with another regional operation.
	April 3, 2018	$1,404 cash paid for 100% asset purchase	$	1,344	$	60	All Other
Expert Packaging ("Expert")	A manufacturer and distributor of total packaging solutions in timber, crates, pallets, and skids. Expert had annual sales of approximately $3.6 million. The acquisition of Expert allows us to make progress on our goal of becoming a global provider of packaging solutions.
	January 23, 2018	$2,942 cash paid for 100% asset purchase	$	850	$	2,092	West
Spinner Wood Products, LLC ("Spinner")	A manufacturer and distributor of agricultural bin and various industrial packaging. Spinner had annual sales of approximately $8 million. The acquisition of Spinner allows us to expand our industrial packaging product offering and creates operating leverage by consolidating with other regional operations.

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					Net
Company	Acquisition		Intangible		Tangible		Operating
Name	Date	Purchase Price	Assets		Assets		Segment
	January 15, 2018	$5,845 cash paid for 100% asset purchase	$	50	$	5,795	North
Great Northern Lumber, LLC	A manufacturer of industrial products as well as serving the concrete forming market in the Chicago area. Great Northern Lumber had annual sales of approximately $25 million. The acquisition of Great Northern Lumber enables us to expand our concrete forming product offering and regional coverage.
	October 16, 2017	$931 cash paid for 100% asset purchase	$	909	$	22	All Other
Silverwater Box	A manufacturer and distributor of total packaging solutions in timber, plastic, steel, fiberglass, and cardboard. Silverwater Box had annual sales of approximately $2.8 million. The acquisition of Silverwater Box allows us to make progress on our goal of becoming a global provider of packaging solutions.
	May 26, 2017	$5,042 cash paid for 100% asset purchase	$	4,880	$	162	South
Go Boy Pallets, LLC ("Go Boy")	A manufacturer and distributor of industrial pallets and packaging in Georgia and North Carolina. Go Boy had annual sales of approximately $8 million. The acquisition of Go Boy enabled us to expand our industrial packaging product offering and lumber sourcing in this region.
	March 6, 2017	$31,818 cash paid for 100% asset purchase	$	7,653	$	24,165	South
Robbins Manufacturing Co. ("Robbins")	A manufacturer of treated wood products with facilities in Florida, Georgia, and North Carolina. Robbins had annual sales of approximately $86 million. The acquisition of Robbins allowed us to expand our presence in this region and serve customers more cost effectively.
	March 6, 2017	$22,789 cash paid for 100% asset purchase	$	14,341	$	8,448	North
Quality Hardwood Sales, LLC ("Quality")	A manufacturer and supplier of hardwood products, including components of cabinets used in homes and recreational vehicles. Quality had annual sales of approximately $30 million. The acquisition of Quality enabled us to expand our product offering to include hardwood-based products.

The intangible assets for each acquisition were finalized and allocated to their respective identifiable intangible asset and goodwill accounts during 2018, excluding the NACC aquisition. In aggregate, acquisitions completed since the end of June 2017 contributed approximately $14.2 million in revenue and $0.7 million in operating profit during the second quarter of 2018.

G. SEGMENT REPORTING

ASC 280, Segment Reporting (“ASC 280”), defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company operates manufacturing, treating and distribution facilities throughout North America, but primarily in the United States. The Company manages the operations of its individual locations primarily through a geographic reporting structure under which each location is included in a region and regions are included in our North, South, West, and International divisions. The exceptions to this geographic reporting and management structure are (a) the Company’s Alternative Materials Division, which offers a portfolio of non-wood products

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and distributes those products nation-wide (b) the Company’s distribution unit (referred to as UFPD) which distributes a variety of products to the manufactured housing industry nation-wide and is accounted for as a reporting unit within the North segment, and (c) the idX division, which designs, produces, and installs customized in-store environments, for customers world-wide.

With respect to the facilities in the north, south, and west segments, these facilities generally supply the three markets the Company serves nationally - Retail, Industrial, and Construction. Also, substantially all of our facilities support customers in the immediate geographical region surrounding the facility.

Our Alternative Materials, International and idX division have been included in the “All Other” column of the table below. The “Corporate” column includes unallocated administrative costs and certain incentive compensation expense.


	Three Months Ended June 30, 2018
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	390,821	$	291,320	$	456,825	$	155,474	$	—	$	1,294,440
Intersegment net sales		18,558		20,675		14,464		61,957		—		115,654
Segment operating profit		19,822		14,902		29,698		4,319		(8,124)		60,617


	Three Months Ended July 1, 2017
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	319,554	$	221,583	$	390,868	$	140,370	$	—	$	1,072,375
Intersegment net sales		16,790		19,378		22,249		49,197		—		107,614
Segment operating profit		16,246		10,229		24,704		5,798		(3,078)		53,899


	Six Months Ended June 30, 2018
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	661,007	$	533,340	$	819,293	$	274,657	$	—	$	2,288,297
Intersegment net sales		30,583		39,323		30,063		124,677		—		224,646
Segment operating profit (loss)		28,517		34,447		50,780		1,219		(10,128)		104,835


	Six Months Ended July 1, 2017
	North		South		West		All Other		Corporate		Total
Net sales to outside customers	$	547,475	$	410,326	$	710,030	$	250,674	$	—	$	1,918,505
Intersegment net sales		32,962		36,656		44,082		68,127		—		181,827
Segment operating profit		26,224		20,918		43,008		6,404		(8,834)		87,720

H. 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 22.9% in the second quarter of 2018 compared to 34.0% for same period in 2017. Our effective tax rate was 22.6% in the first six months of 2018 compared to 33.7% for the same period in 2017. This decrease was due primarily to changes resulting from the Tax Act, which reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent effective January 1, 2018, along with eliminating the domestic manufacturing deduction. Pursuant to SAB 118, the accounting for the Tax Act was incomplete at December 30, 2017 and is still incomplete as of June 30, 2018. As noted at year-end, however, we were able to reasonably estimate certain effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax, a provisional decrease for certain of our Deferred Tax Assets (DTAs) and Deferred Tax Liabilities (DTLs) related to the reduced corporate tax rate, and a provisional benefit related to our intent to fully expense all qualifying expenditures under the new cost recovery rules.

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We have not made any additional measurement-period adjustments related to these items during the quarter. However, we are continuing to gather additional information to complete our accounting for these items and expect to complete our accounting within the prescribed measurement period.

As noted at year-end, we were not yet able to reasonably estimate the effects for Global Intangible Low-Taxed Income (GILTI). Therefore, no provisional adjustment was recorded.

Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Act and the application of ASC 740. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy related to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on a number of different aspects or our estimated future results of global operations, we are not yet able to reasonably estimate the long-term effects of this provision of the Act. Therefore, we have not recorded any potential deferred tax effects related to GILTI in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method. We have however, included an estimate of the estimated 2018 current GILTI impact in our Annual Effective Tax Rate (AETR) for 2018. We expect to complete our accounting within the prescribed measurement period.

I. PROPERTY SALE

The Company completed a sale of a property in Medley, Florida, during the first quarter of 2018. The sale price for the property was approximately $36 million and created a $7 million pre-tax gain. The transaction is part of a strategy to create efficiencies and advantages not possible with the current facility by optimizing the capacity of its other three Florida operations, including two it acquired from Robbins Manufacturing in 2017, and adding a state-of-the-art facility in South Florida. The Company will lease back the Medley, Florida, facility for two years as it executes its long-term plan for Florida and the Southeast region. Since only a minor portion of the property sold was leased back the entire gain is included in income.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. is a holding company with subsidiaries throughout North America, Europe, Asia, and in Australia that supply wood, wood composite and other products to three robust markets: retail, industrial, and construction. The Company is headquartered in Grand Rapids, Mich. For more information about Universal Forest Products, 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. The Company does not undertake to update forward-looking statements to reflect facts, circumstances, events, or assumptions that occur after the date the forward-looking statements are made. Actual results could differ materially from those included in such forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainty. Among the factors that could cause actual results to differ materially from forward-looking statements are the following: fluctuations in the price of lumber; adverse or unusual weather conditions; adverse economic conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. Certain of these risk factors as well as other risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission. We are pleased to present this overview of 2018.

OVERVIEW

Our results for the second quarter of 2018 were impacted by the following:

Our gross sales increased by 21% compared to the second quarter of 2017, which was comprised of an 8% increase in unit sales and a 13% increase in selling prices primarily due to the commodity lumber market (see Historical Lumber Prices below). Organic growth contributed 7% of our unit sales increase, while acquisitions contributed 1%. We experienced favorable organic growth to each of the markets we serve.

Our operating profits increased by 12.5% compared to the second quarter of 2017, which compares favorably with our 8% increase in unit sales. The improvement in our profit per unit was primarily due to rising lumber prices for most of the quarter which favorably impacted the gross profit of products we sell with variable selling prices. Conversely, lumber prices fell for most of the second quarter of 2017.

Our effective tax rate was approximately 23% due to the change in tax law. We currently anticipate an overall rate of 23.5% for the year.

Cash flow used in operating activities was $36 million due to peak lumber prices and seasonal working capital requirements totaling approximately $139 million since year end. We currently anticipate that this seasonal investment and the amount outstanding on the revolving credit facility will be reduced accordingly by October.

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HISTORICAL LUMBER PRICES

We experience significant fluctuations in the cost of commodity lumber products from primary producers (“Lumber Market”). The following table presents the Random Lengths framing lumber composite price:


	Random Lengths Composite
	Average $/MBF
	2018			2017
January	$	449		$	356
February		496			393
March		505			401
April		496			424
May		554			416
June		572			399

Second quarter average	$	541		$	413
Year-to-date average	$	512		$	398

Second quarter percentage change		31.0	%
Year-to-date percentage change		28.6	%

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Our purchases of this species comprised approximately 45% and 46% of total lumber purchases through the first six months of 2018 and 2017, respectively.


	Random Lengths SYP
	Average $/MBF
	2018			2017
January	$	418		$	397
February		459			420
March		480			433
April		483			438
May		535			416
June		562			399

Second quarter average	$	527		$	418
Year-to-date average	$	490		$	417

Second quarter percentage change		26.1	%
Year-to-date percentage change		17.5	%

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IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs were 52.8% and 49.3% of our sales in the first six months of 2018 and 2017, 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 deck components and fencing sold to retail customers, as well as trusses, wall panels and other components sold to the 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 eventually allow us to re-price our products for changes in lumber costs from our suppliers. We believe our sales of these products are at their highest relative level in our third and fourth quarter.

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 gross margins. 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.

For each of the product pricing categories above, our margins are exposed to changes in the trend of lumber prices.

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

Products with significant inventory levels with low turnover rates, whose selling prices are indexed to the Lumber Market. In other words, the longer the period of time these products remain in inventory, the greater the exposure to changes in the price of lumber. This would include treated lumber, which comprises approximately 19% 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 the higher rate of inventory turnover. 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.

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


	Period 1			Period 2
Lumber cost	$	300		$	400
Conversion cost		50			50
= Product cost		350			450
Adder		50			50
= Sell price	$	400		$	500
Gross margin		12.5	%		10.0	%

As is apparent from the preceding example, the level of lumber prices does not impact our overall profits, but does impact our margins. Gross margins are negatively impacted during periods of high lumber prices; conversely, we experience margin improvement when lumber prices are relatively low. In order to more effectively evaluate our profitability in such periods, we believe it is useful to compare our change in units shipped with our changes in costs and profits.

BUSINESS COMBINATIONS

We completed five business acquisitions during the first six months of 2018 and four during all of 2017. The annual historical sales attributable to acquisitions completed in the first six months 2018 and all of 2017 were approximately $120 million and $127 million, respectively. These business combinations were not significant to our quarterly or year-to-date operating results individually or in aggregate and thus pro forma results for 2018 or 2017 are not presented.

See Notes to the Unaudited Condensed Consolidated Financial Statements, Note F, “Business Combinations” for additional information.

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the components of our Unaudited Condensed Consolidated Statements of Earnings as a percentage of net sales.


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2018		2017		2018		2017
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	87.2		86.2		87.0		86.0
Gross profit	12.8		13.8		13.0		14.0
Selling, general, and administrative expenses	8.1		8.8		8.7		9.4
Net loss (gain) on disposition and impairment of assets	—		—		(0.3)		—
Earnings from operations	4.7		5.0		4.6		4.6
Other expense, net	0.2		0.1		0.1		0.2
Earnings before income taxes	4.5		4.9		4.4		4.4
Income taxes	1.0		1.7		1.0		1.5
Net earnings	3.5		3.2		3.4		2.9
Less net earnings attributable to noncontrolling interest	(0.1)		(0.1)		(0.1)		(0.1)
Net earnings attributable to controlling interest	3.4	%	3.1	%	3.4	%	2.9	%

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

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GROSS SALES

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

Diversifying our end market sales mix by increasing sales of specialty wood and non-wood 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 used in a variety of markets.

Expanding geographically in our core businesses, domestically and internationally.

Increasing sales of "value-added" products, which primarily consist of fencing, decking, lattice, and other specialty products sold to the retail market, specialty wood packaging, engineered wood components, customized interior fixtures, and "wood alternative" products. Engineered wood components include roof trusses, wall panels, and floor systems. Wood alternative products consist primarily of composite wood and plastics. Although we consider the treatment of dimensional lumber with certain chemical preservatives a value-added process, treated lumber is not presently included in the value-added sales totals.

Maximizing unit sales growth while achieving return on investment goals.

Developing new products and expanding our product offering for existing customers. New product sales were $153.1 million in the second quarter of 2018 compared to $122.8 million during the second quarter of 2017. New products sales year-to-date for 2018 and 2017 were $262.2 million and $211.1 million, respectively.


	New Product Sales by Market					New Product Sales by Market
	Three Months Ended					Six Months Ended
(in thousands)	June 30,		July 1,			June 30,		July 1,
Market Classification	2018		2017		% Change	2018		2017		% Change
Retail	$	95,409		77,227	23.5	$	153,514	$	126,275	21.6
Industrial		36,127		29,048	24.4		67,135		53,705	25.0
Construction		21,533		16,556	30.1		41,509		31,164	33.2
Total New Product Sales		153,069		122,831	24.6	$	262,158	$	211,144	24.2

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.

Value-Added and Commodity-Based Sales:

The following table presents, for the periods indicated, our percentage of value-added and commodity-based sales to total sales. Value-added products generally carry higher gross margins than our commodity-based products.


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2018		2017		2018		2017
Value-Added	60.1	%	62.0	%	60.8	%	62.3	%
Commodity-Based	39.9	%	38.0	%	39.2	%	37.7	%

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UNIVERSAL FOREST PRODUCTS, INC.

The following table presents, for the periods indicated, our gross sales and percentage change in gross sales by market classification.


	Three Months Ended						Six Months Ended
(in thousands)	June 30,		July 1,				June 30,		July 1,
Market Classification	2018		2017		% Change		2018		2017		% Change
Retail	$	545,492	$	458,267	19.0	%	$	916,453	$	770,619	18.9	%
Industrial		404,090		340,463	18.7	%		737,056		621,062	18.7	%
Construction		370,786		293,465	26.3	%		678,526		559,371	21.3	%
Total Gross Sales		1,320,368		1,092,195	20.9	%		2,332,035		1,951,052	19.5	%
Sales Allowances		(25,928)		(19,820)	30.8	%		(43,738)		(32,547)	34.4	%
Total Net Sales	$	1,294,440	$	1,072,375	20.7	%	$	2,288,297	$	1,918,505	19.3	%

Note: During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Gross sales in the second quarter of 2018 increased 21% compared to the same period of 2017, due to an 8% increase in unit sales and a 13% increase in selling prices primarily due to the Lumber Market. Acquired operations contributed 1% to our unit sales growth, and our organic unit sales growth was 7%.

Gross sales in the first six months of 2018 increased 20% compared to the same period of 2017, due to an 8% increase in unit sales and a 12% increase in selling prices primarily due to the Lumber Market. Acquired operations contributed 3% to our unit sales growth, and our organic unit sales growth was 5%.

Changes in our gross sales by market are discussed below.

Retail:

Gross sales to the retail market increased 19% in the second quarter of 2018 compared to the same period of 2017, due to a 6% increase in unit sales and a 13% increase in selling prices. Within this market, sales to our big box customers increased almost 16%, and sales to other independent retailers increased almost 25%. Our organic unit growth was 6% for the quarter primarily due to increased sales to our independent retail customers, as demand improved following inclement weather in the first quarter.

Gross sales to the retail market increased almost 19% in the first six months of 2018 compared to the same period of 2017, due to an 8% increase in unit sales and a 11% increase in selling prices. Within this market, sales to our big box customers increased over 15%, while sales to other independent retailers increased over 24%. Businesses we acquired contributed 3% to our growth in unit sales, primarily to independent retail customers, while organic unit sales growth increased 5% in the first six months of 2018.

Industrial:

Gross sales to the industrial market increased almost 19% in the second quarter of 2018 compared to the same period of 2017, resulting from an 8% increase in unit sales and an 11% increase in selling prices. Businesses we acquired contributed 3% to our growth in unit sales. Our organic growth in unit sales of 5% was due to adding over 400 new customers, 122 new locations of existing customers, and $7 million of new sales growth as our efforts to improve market share continue to gain traction.

Gross sales to the industrial market increased almost 19% in the first six months of 2018 compared to the same period of 2017, resulting from a 9% increase in unit sales and a 10% increase in selling prices. Businesses we acquired contributed 4% to our growth in unit sales. Our organic growth in unit sales of 5% was primarily due to the same factors discussed above.

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UNIVERSAL FOREST PRODUCTS, INC.

Construction:

Gross sales to the construction market increased over 26% in the second quarter of 2018 compared to 2017. The increase was due to a 10% increase in unit sales and a 16% increase in our selling prices. Our increase in unit sales was driven by a 9% increase to manufactured housing customers, a 10% increase to residential construction customers, and a 13% increase to commercial construction customers. Acquired businesses contributed 1% to our growth in unit sales to the overall construction market and 4% to the commercial market.

By comparison (and based upon various industry publications):

Production of HUD-code manufactured homes in April and May 2018, the most recent period reported, was up 6.5% compared to the same period of 2017.

Non-residential construction activity in April and May increased approximately 6.0% compared to the same period of 2017.

National housing starts increased approximately 13.4% in the period from March through May 2018 (our sales trail housing starts by about a month) compared to the same period of 2017.

Gross sales to the construction market increased over 21% in the first six months of 2018 compared to 2017. The increase was due to an 8% increase in unit sales and a 13% increase in our selling prices. Our increase in unit sales was driven by a 9% increase to manufactured housing customers, a 10% increase to concrete forming and commercial construction customers, and a 6% increase to residential construction customers due to the same factors discussed above.

COST OF GOODS SOLD AND GROSS PROFIT

Our gross margin decreased to 12.8% from 13.8% comparing the second quarter of 2018 to the same period of 2017 due to the higher level of lumber prices (See “Impact of the Lumber Market on Our Operating Results”). More importantly, our 11.8% increase in gross profit dollars compares favorably to our 8% increase in unit sales during the same period. Acquired operations contributed $1.9 million of gross profit in the second quarter of 2018. Excluding acquisitions, our gross profits increased by $15.6 million, or 10.5%, over the same period last year due to the following:

Our gross profit on sales to the retail market increased by approximately $8 million, primarily due to the favorable impact of the rising lumber market on products we sell with variable selling prices as well as new product sales growth.

Our gross profit on sales to the industrial market increased by approximately $4 million, due to a combination of growth and more effectively passing on lumber cost increases in our selling prices.

Our gross profit on sales to the construction market increased by approximately $4 million, primarily due to organic growth.

Our gross margin decreased to 13.0% from 14.0% comparing the first six months of 2018 to the same period of 2017 due to the higher level of lumber prices (See “Impact of the Lumber Market on Our Operating Results”). Our 10.3% increase in gross profit dollars compares favorably to our 8% increase in unit sales during the same period. Acquired operations contributed $5.4 million of gross profit in the first six months of 2018. Excluding acquisitions, our gross profits increased by $22.2 million, or 8.3%, over the same period last year due to the following:

Our gross profit on sales to the retail market increased by approximately $8.5 million.

Our gross profit on sales to the industrial market increased by approximately $8.9 million.

Our gross profit on sales to the construction market increased by over $6.4 million.

Gross profit on sales to each of our markets improved due to the same factors discussed above.

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UNIVERSAL FOREST PRODUCTS, INC.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (“SG&A”) expenses increased by approximately $10.0 million, or 10.6%, in the second quarter of 2018 compared to the same period of 2017, while we reported an 8% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled $14.5 million in the second quarter of 2018 compared to $12.1 million in 2017. Acquired operations contributed approximately $1.0 million to our year over year increase. The remaining increase was primarily due to an increase in base wages and benefits ($2.7 million), sales incentive expenses ($2.5 million), idX’s lease termination ($1.5 million), and employee benefits including healthcare ($1.5 million), which were offset by decreases in other areas.

Selling, general and administrative (“SG&A”) expenses increased by approximately $16.2 million, or 8.9%, in the first six months of 2018 compared to the same period of 2017, while we reported an 8% increase in unit sales. Accrued bonus expense, which varies with our overall profitability and return on investment, totaled $23.6 million in the first six months of 2018 compared to $20.2 million in 2017. Acquired operations contributed approximately $3.2 million to our year over year increase. The remaining increase was primarily due to an increase in base wages and benefits ($5.8 million), sales incentive expenses ($4.3 million), employee benefits ($1.9 million), and idX’s lease termination ($1.5 million).

INTEREST, NET

Net interest costs were higher in the second quarter of 2018 compared to the same period of 2017 primarily due to an increase in working capital resulting from growth and peak lumber prices as well as increases in short-term borrowing rates.

INCOME TAXES

SEGMENT REPORTING


	Net Sales								Earnings from Operations
	Three Months Ended								Three Months Ended
	June 30,		July 1,		$		%		June 30,		July 1,		$		%
(in thousands)	2018		2017		Change		Change		2018		2017		Change		Change
North	$	390,821	$	319,554	$	71,267	22.3	%	$	19,822	$	16,246	$	3,576	22.0	%
South		291,320		221,583		69,737	31.5	%		14,902		10,229		4,673	45.7	%
West		456,825		390,868		65,957	16.9	%		29,698		24,704		4,994	20.2	%
All Other		155,474		140,370		15,104	10.8	%		4,319		5,798		(1,479)	(25.5)	%
Corporate		—		—		—	—			(8,124)		(3,078)		(5,046)	163.9	%
Total	$	1,294,440	$	1,072,375	$	222,065	20.7	%	$	60,617	$	53,899	$	6,718	12.5	%

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UNIVERSAL FOREST PRODUCTS, INC.


	Net Sales								Earnings from Operations
	Six Months Ended								Six Months Ended
	June 30,		July 1,		$		%		June 30,		July 1,		$		%
(in thousands)	2018		2017		Change		Change		2018		2017		Change		Change
North	$	661,007	$	547,475	$	113,532	20.7	%	$	28,517	$	26,224	$	2,293	8.7	%
South		533,340		410,326		123,014	30.0	%		34,447		20,918		13,529	64.7	%
West		819,293		710,030		109,263	15.4	%		50,780		43,008		7,772	18.1	%
All Other		274,657		250,674		23,983	9.6	%		1,219		6,404		(5,185)	(81.0)	%
Corporate		—		—		—	—			(10,128)		(8,834)		(1,294)	(14.6)	%
Total	$	2,288,297	$	1,918,505	$	369,792	19.3	%	$	104,835	$	87,720	$	17,115	19.5	%

(1)

Corporate primarily represents over (under) allocated administrative costs and accrued bonus expense.

North


	Net Sales						Net Sales
	North Segment by Market						North Segment by Market
	Three Months Ended						Six Months Ended
(in thousands)	June 30,		July 1,				June 30,		July 1,
Market Classification	2018		2017		% Change		2018		2017		% Change
Retail	$	191,391	$	161,640	18.4	%	$	287,200	$	249,085	15.3	%
Industrial		55,822		42,048	32.8	%		107,442		74,537	44.1	%
Construction		152,615		123,391	23.7	%		280,064		235,581	18.9	%
Total Gross Sales		399,828		327,079	22.2	%		674,706		559,203	20.7	%
Sales Allowances		(9,007)		(7,525)	19.7	%		(13,699)		(11,728)	16.8	%
Total Net Sales	$	390,821	$	319,554	22.3	%	$	661,007	$	547,475	20.7	%

Note: During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the North reportable segment increased in the second quarter of 2018 compared to 2017 as a result of increased sales to each of our markets, primarily due to the same factors previously discussed. Acquired operations contributed $6.2 million to our industrial sales increase.

Earnings from operations for the North reportable segment increased in the second quarter of 2018 by $3.6 million, or 22.0%, due to an increase in gross profit of $4.5 million, offset by a $0.9 million increase in SG&A expenses compared to last year due to the same factors previously discussed. Acquired operations contributed $0.5 million to our operating profits in the second quarter.

Net sales attributable to the North reportable segment increased in the first six months of 2018 compared to 2017 as a result of increased sales to each of our markets, primarily due to the same factors previously discussed. Acquired operations contributed $20.1 million to our industrial sales increase in the first six months of 2018.

Earnings from operations for the North reportable segment increased in the first six months of 2018 by $2.3 million, or 8.7%, due to an increase in gross profit of $4.3 million offset by a $1.7 million increase in SG&A expenses compared to last year. Acquired operations contributed $1.1 million to our operating profits in the first six months.

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UNIVERSAL FOREST PRODUCTS, INC.

South


	Net Sales						Net Sales
	South Segment by Market						South Segment by Market
	Three Months Ended						Six Months Ended
(in thousands)	June 30,		July 1,				June 30,		July 1,
Market Classification	2018		2017		% Change		2018		2017		% Change
Retail	$	130,930	$	106,294	23.2	%	$	246,128	$	190,554	29.2	%
Industrial		103,384		72,678	42.2	%		184,392		135,388	36.2	%
Construction		62,872		47,736	31.7	%		113,942		93,592	21.7	%
Total Gross Sales		297,186		226,708	31.1	%		544,462		419,534	29.8	%
Sales Allowances		(5,866)		(5,125)	14.5	%		(11,122)		(9,208)	20.8	%
Total Net Sales	$	291,320	$	221,583	31.5	%	$	533,340	$	410,326	30.0	%

Note: During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Net sales attributable to the South reportable segment increased in the second quarter of 2018 compared to 2017 due to increased sales to all markets, primarily due to the same factors previously discussed. Acquired operations contributed $7.3 million to our growth in sales to the industrial market.

Earnings from operations for the South reportable segment increased in the second quarter of 2018 by $4.7 million, or 45.7%, due to an increase in gross profit dollars of $7.2 million, offset by an increase in SG&A expenses of $2.5 million compared to the same period of 2017, due to the same factors previously discussed. Acquired operations contributed $0.1 million to operating profits in the second quarter.

Net sales attributable to the South reportable segment increased in the first six months of 2018 compared to 2017 due to increased sales to all markets, primarily due to the same factors previously discussed. Acquired operations contributed $41.7 million to our growth in sales primarily to the retail market.

Earnings from operations for the South reportable segment increased in the first six months of 2018 by $13.5 million, or 64.7%, compared to the same period in 2017. Excluding the impact of our Medley plant sale, earnings from operations increased during the first six months of 2018 by $6.4 million due to an increase in gross profit dollars of $11.1 million, offset by an increase in SG&A expenses of $4.7 million compared to the same period of 2017. Acquired operations contributed $3.1 million to gross profits, $2.0 million to SG&A, and $1.1 million to operating profits in the first six months of the year.

West


	Net Sales						Net Sales
	West Segment by Market						West Segment by Market
	Three Months Ended						Six Months Ended
(in thousands)	June 30,		July 1,				June 30,		July 1,
Market Classification	2018		2017		% Change		2018		2017		% Change
Retail	$	156,228	$	132,583	17.8	%	$	267,252	$	231,594	15.4	%
Industrial		152,591		141,273	8.0	%		280,180		257,542	8.8	%
Construction		154,959		122,251	26.8	%		284,129		229,995	23.5	%
Total Gross Sales		463,778		396,107	17.1	%		831,561		719,131	15.6	%
Sales Allowances		(6,953)		(5,239)	32.7	%		(12,268)		(9,101)	34.8	%
Total Net Sales	$	456,825	$	390,868	16.9	%	$	819,293	$	710,030	15.4	%

Note: During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

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UNIVERSAL FOREST PRODUCTS, INC.

Net sales attributable to the West reportable segment increased in the second quarter of 2018 compared to 2017 due to increases in sales to all markets primarily due to factors previously discussed.

Earnings from operations for the West reportable segment increased in the second quarter of 2018 by $5.0 million, or 20.2%, compared to the same period in 2017 due to a $8.2 million increase in gross profit, offset by a $3.2 million increase in SG&A expenses due to the same factors previously discussed.

Net sales attributable to the West reportable segment increased in the first six months of 2018 compared to 2017 due to increases in sales to all markets primarily due to factors previously discussed.

Earnings from operations for the West reportable segment increased in the first six months of 2018 by $7.8 million, or 18.1%, compared to the same period in 2017 due to a $12.3 million increase in gross profit, offset by a $4.5 million increase in SG&A expenses due to the same factors previously discussed.

All Other


	Net Sales						Net Sales
	All Other Segment by Market						All Other Segment by Market
	Three Months Ended						Six Months Ended
(in thousands)	June 30,		July 1,				June 30,		July 1,
Market Classification	2018		2017		% Change		2018		2017		% Change
Retail	$	66,943	$	57,750	15.9	%	$	115,874	$	99,386	16.6	%
Industrial		92,293		84,464	9.3	%		165,042		153,595	7.5	%
Construction		340		70	385.7	%		390		202	93.1	%
Total Gross Sales		159,576		142,284	12.2	%		281,306		253,183	11.1	%
Sales Allowances & Other		(4,102)		(1,914)	114.3	%		(6,649)		(2,509)	165.0	%
Total Net Sales	$	155,474	$	140,370	10.8	%	$	274,657	$	250,674	9.6	%

Note: During 2018, certain customers were reclassified to a different market. Prior year information has been restated to reflect these changes.

Our All Other reportable segment consists of our Alternative Materials, International, idX, and certain other segments which are not significant.

Net sales attributable to All Other reportable segments increased in the second quarter of 2018 compared to 2017 due to increases in sales to the retail and industrial markets. Our increase in sales to the retail market was primarily due to a $10.2 million and $3.3 million increase in sales within our International and Alternative Products segments, respectively.

Earnings from operations for All Other reportable segments decreased during the second quarter of 2018 by $1.5 million primarily due to the idX segment.

Net sales attributable to All Other reportable segments increased in the first six months of 2018 compared to 2017 due to increases in sales to the retail and industrial markets. Our increase in sales to the retail market was primarily due to a $21.1 million and $3.9 million increase in sales within our International and Alternative Products segments, respectively.

Earnings from operations for All Other reportable segments decreased during the first six months of 2018 by $5.2 million due to the idX segment.

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UNIVERSAL FOREST PRODUCTS, INC.

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.

LIQUIDITY AND CAPITAL RESOURCES

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


	Six Months Ended
	June 30,		July 1,
	2018		2017
Cash (used in) from operating activities	$	(36,072)	$	15,211
Cash used in investing activities		(63,069)		(99,887)
Cash from financing activities		114,840		74,521
Effect of exchange rate changes on cash		(256)		1,196
Net change in all cash and cash equivalents		15,443		(8,959)
Cash, cash equivalents, and restricted cash, beginning of period		28,816		34,489
Cash, cash equivalents, and restricted cash, end of period	$	44,259	$	25,530

In general, we funded our growth in the past through a combination of operating cash flows, our revolving credit facility, industrial development bonds (when circumstances permit), and issuance of long-term notes payable at times when interest rates are favorable. We have not issued equity to finance growth except in the case of a large acquisition. We manage our capital structure by attempting to maintain a targeted ratio of debt to equity and debt to earnings before interest, taxes, depreciation and amortization. We believe this is one of many important factors to maintaining a strong credit profile, which in turn helps ensure timely access to capital when needed.

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.

Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management. As indicated in the table below, our cash cycle decreased to 49 days from 50 days during the second quarter of 2018 compared to the prior periods.


	Three Months Ended				Six Months Ended
	June 30,		July 1,		June 30,		July 1,
	2018		2017		2018		2017
Days of sales outstanding		31		31		32		31
Days supply of inventory		38		39		42		43
Days payables outstanding		(20)		(20)		(21)		(20)
Days in cash cycle		49		50		53		54

In the first six months of 2018, our cash used in operating activities was $36.1 million, which was comprised of net earnings of $78.7 million and $24.1 million of non-cash expenses, offset by a $138.9 million seasonal increase in working capital since the end of December 2017. Comparatively in the first six months of 2017, our cash provided by operating activities was $15.2 million, which was comprised of net earnings of $56.2 million, and $27.0 million of non-cash expenses, offset by a $68.0 million seasonal increase in working capital since the end of December 2016. The

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UNIVERSAL FOREST PRODUCTS, INC.

increase in working capital compared to the same period last year was primarily due to growth in our business and higher lumber prices.

Acquisitions and purchases of property, plant, and equipment comprised most of our cash used in investing activities during the first six months of 2018 and totaled $38.0 million and $54.3 million, respectively. Proceeds from the sale of our Medley, FL, plant provided approximately $36 million in net cash proceeds. Outstanding purchase commitments on existing capital projects totaled approximately $23.4 million on June 30, 2018. We currently plan to spend up to $100 million for the year on capital expenditures. We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year. Comparatively, capital expenditures were $34.5 million during the first six months of 2017. The increase in our capital expenditures in 2018 is primarily due to the additional requirements of recently acquired operations and certain real estate purchases as we continue to grow our business and utilize the proceeds for the sale of our Medley plant to achieve a favorable tax treatment. The sale and purchase of investments totaling $9.3 million and $3.2 million, respectively, are due to investment activity in our captive insurance subsidiary.

Cash flows from financing activities primarily consisted of net borrowings under our revolving credit facility of approximately $57.2 million and $75 million in Senior Notes issued under our shelf facility. Additionally, we paid a semi-annual dividend totaling $11.1 million or $0.18 per share.

On June 30, 2018, we had $116.2 million outstanding on our $295 million revolving credit facility. The outstanding revolving credit facility also includes letters of credit totaling approximately $9.8 million on June 30, 2018; as a result, we have approximately $168.9 million in remaining availability on our revolver after considering letters of credit. Additionally, we have $150 million in availability under an amended “shelf agreement” for long term debt with a current lender after considering the second quarter issuance of long-term Senior Notes. 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 June 30, 2018.

ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

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

CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures. There have been no material changes in our policies or estimates since December 30, 2017.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

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

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UNIVERSAL FOREST PRODUCTS, INC.

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

Our international operations have exposure to foreign currency rate risks, primarily due to fluctuations in their local currency, which is their functional currency, compared to the U.S. dollar. Additionally, certain of our operations enter into transactions that will be settled in a currency other than the U.S. Dollar. We entered into forward foreign exchange rate contracts in 2017 and may enter into further forward contracts in the future associated with mitigating the foreign currency exchange risk. Historically, our hedge contracts are deemed immaterial to the financial statements, however any material hedge contract in the future will be disclosed.

Item 4. Controls and Procedures.

(a)

Evaluation of Disclosure Controls and Procedures. With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended June 30, 2018 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)

Changes in Internal Controls. During the quarter ended June 30, 2018, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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UNIVERSAL FOREST PRODUCTS, INC.

PART II. OTHER INFORMATION

Item 1A. Risk Factors.

We may be impacted by new tariffs and duties on U.S. imports and foreign export sales. Instability of established free trade agreements may lead to raw material and finished goods price volatility. An increase in foreign tariffs on U.S. goods could curtail our export sales to other countries which was approximately $110.8 million in 2017. Increased tariffs and duties on U.S. imports will increase pricing by adding duty cost, where the duty is sustainable in light of overall unit price, or otherwise constrain supply by eliminating historical production sources by country or commodity type with unsustainable duties. UFP’s consolidated U.S. imports were approximately $132.6 million in 2017. In addition, there is a risk that U.S. tariffs on imports and countering tariffs on U.S. exports could trigger broader international trade conflicts that could adversely impact our business.

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

(a)

None.

(b)

None.

(c)

Issuer purchases of equity securities.


Fiscal Month	(a)	(b)	(c)	(d)
April 1 - May 5, 2018	23,172	$ 32.38	—	2,672,039
May 6 - June 2, 2018	6,800	$ 32.33	—	2,665,239
June 3 - June 30, 2018	—	—	—	2,665,239

(a)

Total number of shares purchased.

(b)

Average price paid per share.

(c)

Total number of shares purchased as part of publicly announced plans or programs.

(d)

Maximum number of shares that may yet be purchased under the plans or programs.

On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock. On October 14, 2011, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program. The total number of remaining shares that may be repurchased under the program is approximately 2.7 million.

Item 5. Other Information.

None.

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UNIVERSAL FOREST PRODUCTS, INC.

PART II. OTHER INFORMATION

Item 6. Exhibits.

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


31	Certifications.

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

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

32	Certifications.

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

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

101	Interactive Data File.

	(INS)	XBRL Instance Document.

	(SCH)	XBRL Schema Document.

	(CAL)	XBRL Taxonomy Extension Calculation Linkbase Document.

	(LAB)	XBRL Taxonomy Extension Label Linkbase Document.

	(PRE)	XBRL Taxonomy Extension Presentation Linkbase Document.

	(DEF)	XBRL Taxonomy Extension Definition Linkbase Document.

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UNIVERSAL FOREST PRODUCTS, INC.

SIGNATURES

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

	UNIVERSAL FOREST PRODUCTS, INC.

Date: August 1, 2018	By:	/s/ Matthew J. Missad
	Matthew J. Missad,
	Chief Executive Officer and Principal Executive Officer


Date: August 1, 2018	By:	/s/ Michael R. Cole
	Michael R. Cole,
	Chief Financial Officer,
	Principal Financial Officer and
	Principal Accounting Officer