UNIVERSAL FOREST PRODUCTS, INC.

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

o		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		(I.R.S. Employer
incorporation or organization)		Identification Number)
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

Indicate by check mark 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 þ No o

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 o No o

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

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

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 26, 2010
Common stock, no par value		19,329,922

 

 

UNIVERSAL FOREST PRODUCTS, INC.

TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at June 26, 2010, December 26, 2009 and June 27, 2009			3
Consolidated Condensed Statements of Earnings for the Three and Six Months Ended June 26, 2010 and June 27, 2009			4
Consolidated Condensed Statements of Equity for the Six Months Ended June 26, 2010 and June 27, 2009			5
Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 26, 2010 and June 27, 2009			6
Notes to Consolidated Condensed Financial Statements			7-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings — NONE
Item 1A. Risk Factors — NONE
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults Upon Senior Securities — NONE
Item 4. (Removed and Reserved)
Item 5. Other Information			29
Item 6. Exhibits			30
Exhibit 31A
Exhibit 31B
Exhibit 32A
Exhibit 32B

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

		June 26,				December 26,				June 27,
(in thousands, except share data)		2010				2009				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	21,246			$	82,219			$	32,633
Accounts receivable, net			229,199				107,383				197,901
Inventories:
Raw materials			111,670				89,956				95,288
Finished goods			79,899				72,192				70,202
			191,569				162,148				165,490
Assets held for sale			—				—				3,057
Refundable income taxes			—				10,391				—
Other current assets			18,110				21,208				19,728
TOTAL CURRENT ASSETS			460,124				383,349				418,809
OTHER ASSETS			5,300				4,478				3,456
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS			158,636				157,058				156,936
OTHER INTANGIBLE ASSETS, net			13,429				16,693				20,767
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment			518,816				510,774				506,519
Accumulated depreciation and amortization			(292,390	)			(280,675	)			(271,010	)
PROPERTY, PLANT AND EQUIPMENT, NET			226,426				230,099				235,509
TOTAL ASSETS		$	863,915			$	791,677			$	835,477
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	103,992			$	64,473			$	98,805
Accrued liabilities:
Compensation and benefits			48,252				48,340				50,580
Income taxes			6,736				—				7,699
Other			22,995				21,698				27,180
Current portion of long-term debt and capital lease obligations			692				673				396
TOTAL CURRENT LIABILITIES			182,667				135,184				184,660
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion			67,932				53,181				55,108
DEFERRED INCOME TAXES			21,539				21,707				17,746
OTHER LIABILITIES			11,929				12,659				14,766
TOTAL LIABILITIES			284,067				222,731				272,280
EQUITY:
Controlling interest shareholders’ equity:
Preferred stock, no par value; shares authorized 1,000,000; issued and outstanding, none
Common stock, no par value; shares authorized 40,000,000; issued and outstanding 19,329,922, 19,284,587 and 19,308,699		$	19,330			$	19,285			$	19,309
Additional paid-in capital			135,710				132,765				130,405
Retained earnings			416,562				409,278				407,035
Accumulated other comprehensive earnings			4,018				3,633				2,615
			575,620				564,961				559,364
Employee stock notes receivable			(1,721	)			(1,743	)			(1,797	)
			573,899				563,218				557,567
Noncontrolling interest			5,949				5,728				5,630
TOTAL EQUITY			579,848				568,946				563,197
TOTAL LIABILITIES AND EQUITY		$	863,915			$	791,677			$	835,477

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 26,				June 27,				June 26,				June 27,
(in thousands, except per share data)		2010				2009				2010				2009
NET SALES		$	638,635			$	514,945			$	1,031,593			$	876,667
COST OF GOODS SOLD			560,749				432,460				902,073				747,361
GROSS PROFIT			77,886				82,485				129,520				129,306
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			54,041				56,020				102,530				105,112
NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENT AND EXIT CHARGES			212				(716	)			384				(1,852	)
EARNINGS FROM OPERATIONS			23,633				27,181				26,606				26,046
INTEREST EXPENSE			903				1,429				1,789				2,503
INTEREST INCOME			(70	)			(96	)			(190	)			(179	)
			833				1,333				1,599				2,324
EARNINGS BEFORE INCOME TAXES			22,800				25,848				25,007				23,722
INCOME TAXES			8,332				9,393				8,819				8,430
NET EARNINGS			14,468				16,455				16,188				15,292
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST			(752	)			(367	)			(1,485	)			(411	)
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST		$	13,716			$	16,088			$	14,703			$	14,881
EARNINGS PER SHARE — BASIC		$	0.71			$	0.84			$	0.76			$	0.77
EARNINGS PER SHARE — DILUTED		$	0.70			$	0.83			$	0.75			$	0.77
WEIGHTED AVERAGE SHARES OUTSTANDING			19,259				19,241				19,258				19,213
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS			19,531				19,459				19,524				19,370

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)

		Controlling Interest Shareholders’ Equity
														Accumulated
														Other				Employees
						Additional				Retained				Comprehensive				Stock Notes				Noncontrolling
(in thousands, except share and per share data)		Common Stock				Paid-In Capital				Earnings				Earnings				Receivable				Interest				Total
Balance at December 27, 2008		$	19,089			$	128,830			$	393,312			$	2,353			$	(1,701	)		$	6,343			$	548,226
Comprehensive income:
Net earnings											14,881												411
Foreign currency translation adjustment															262								(37	)
Total comprehensive earnings																											15,517
Purchase of additional noncontrolling interest							(853	)															(917	)			(1,770	)
Distributions to noncontrolling interest																							(170	)			(170	)
Cash dividends — $0.060 per share											(1,158	)															(1,158	)
Issuance of 65,933 shares under employee stock plans			66				1,111																				1,177
Issuance of 78,706 shares under stock grant programs			79				10																				89
Issuance of 72,989 shares under deferred compensation plans			73				(73	)																			—
Received 1,530 shares for the exercise of stock options			(2	)			(30	)																			(32	)
Tax benefits from non-qualified stock options exercised							276																				276
Deferred income tax asset reversal for deferred compensation plans							(518	)																			(518	)
Expense associated with share-based compensation arrangements							1,089																				1,089
Accrued expense under deferred compensation plans							442																				442
Issuance of 3,721 shares in exchange for employee stock notes receivable			4				121												(125	)							—
Payments received on employee stock notes receivable																			29								29
Balance at June 27, 2009		$	19,309			$	130,405			$	407,035			$	2,615			$	(1,797	)		$	5,630			$	563,197
Balance at December 26, 2009		$	19,285			$	132,765			$	409,278			$	3,633			$	(1,743	)		$	5,728			$	568,946
Comprehensive income:
Net earnings											14,703												1,485
Foreign currency translation adjustment															385								140
Total comprehensive earnings																											16,713
Purchase of additional noncontrolling interest							(295	)															(932	)			(1,227	)
Distributions to noncontrolling interest																							(472	)			(472	)
Cash dividends — $0.200 per share											(3,871	)															(3,871	)
Issuance of 62,029 shares under employee stock plans			62				1,269																				1,331
Issuance of 76,143 shares under stock grant programs			76				41																				117
Issuance of 6,669 shares under deferred compensation plans			7				(7	)																			—
Repurchase of 100,300 shares			(100	)							(3,548	)															(3,648	)
Tax benefits from non-qualified stock options exercised							379																				379
Expense associated with share-based compensation arrangements							1,078																				1,078
Accrued expense under deferred compensation plans							473																				473
Issuance of 1,298 shares in exchange for employees’ stock notes receivable			1				49												(50	)							—
Notes receivable adjustment			(1	)			(42	)											(9	)							(52	)
Payments received on employee stock notes receivable																			81								81
Balance at June 26, 2010		$	19,330			$	135,710			$	416,562			$	4,018			$	(1,721	)		$	5,949			$	579,848

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months Ended
		June 26,				June 27,
(in thousands)		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings attributable to controlling interest		$	14,703			$	14,881
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
Depreciation			15,199				16,510
Amortization of intangibles			3,590				4,520
Expense associated with share-based compensation arrangements			1,078				1,089
Excess tax benefits from share-based compensation arrangements			(265	)			(211	)
Expense associated with stock grant plans			117				89
Deferred income taxes (credit)			(195	)			195
Net earnings attributable to noncontrolling interest			1,485				411
Net loss (gain) on sale or impairment of property, plant and equipment			118				(2,457	)
Changes in:
Accounts receivable			(120,961	)			(59,701	)
Inventories			(26,175	)			27,980
Accounts payable			39,466				35,576
Accrued liabilities and other			21,609				23,798
NET CASH FROM OPERATING ACTIVITIES			(50,231	)			62,680
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(11,551	)			(7,279	)
Acquisitions, net of cash received			(5,834	)			—
Proceeds from sale of property, plant and equipment			382				10,241
Advances on notes receivable			(1,000	)			(14	)
Collections of notes receivable			103				68
Insurance proceeds			—				1,023
Other, net			21				11
NET CASH FROM INVESTING ACTIVITIES			(17,879	)			4,050
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facilities			15,000				(30,257	)
Repayment of long-term debt			(255	)			(16,213	)
Borrowings of long-term debt			—				800
Proceeds from issuance of common stock			1,331				1,177
Purchase of additional noncontrolling interest			(1,227	)			(1,770	)
Distributions to noncontrolling interest			(472	)			(170	)
Dividends paid to shareholders			(3,871	)			(1,158	)
Repurchase of common stock			(3,648	)			—
Excess tax benefits from share-based compensation arrangements			265				211
Other, net			14				(54	)
NET CASH FROM FINANCING ACTIVITIES			7,137				(47,434	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(60,973	)			19,296
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			82,219				13,337
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	21,246			$	32,633
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest		$	1,777			$	2,790
Income taxes			(8,470	)			(6,050	)
NON-CASH INVESTING ACTIVITIES:
Stock acquired through employees’ stock notes receivable		$	50			$	125
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		$	178			$	2,392
Stock received for the exercise of stock options, net							32

See notes to unaudited consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

NOTES TO UNAUDITED

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 26, 2009.

B.

FAIR VALUE

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

		June 26, 2010												June 27, 2009
		Quoted				Prices with								Quoted				Prices with
		Prices in				Other								Prices in				Other
		Active				Observable								Active				Observable
		Markets				Inputs								Markets				Inputs
(in thousands)		(Level 1)				(Level 2)				Total				(Level 1)				(Level 2)				Total
Assets:
Money market funds		$	64							$	64
Mutual funds:														$	749							$	749
Domestic stock funds			436								436
International stock funds			395								395
Target funds			114								114
Bond funds			49								49
Total mutual funds			994								994				749								749
Property, plant and equipment						$	165				165							$	1,204				1,204
		$	1,058			$	165			$	1,223			$	749			$	1,204			$	1,953

Mutual funds are valued at prices quoted in an active exchange market.

UNIVERSAL FOREST PRODUCTS, INC.

Property, plant and equipment are valued based on active market prices and other relevant information for sales of similar assets.

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.

C.

REVENUE RECOGNITION

Earnings on construction contracts are reflected in operations using either percentage-of-completion accounting, which includes the cost to cost and units of delivery methods, or completed contract accounting, depending on the nature of the business at individual operations. Under percentage-of-completion 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 percentage-of-completion 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. Under the completed contract method, revenues and related earnings are recorded when the contracted work is complete and losses are charged to operations in their entirety when such losses become apparent.

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

		June 26, 2010				December 26, 2009				June 27, 2009
Cost and Earnings in Excess of Billings		$	5,333			$	9,998			$	7,086
Billings in Excess of Cost and Earnings			4,426				8,954				10,304

UNIVERSAL FOREST PRODUCTS, INC.

D.

EARNINGS PER SHARE

A reconciliation of the changes in the numerator and the denominator from the calculation of basic EPS to the calculation of diluted EPS follows (in thousands, except per share data):

		Three Months Ended June 26, 2010												Three Months Ended June 27, 2009
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings Attributable to Controlling Interest		$	13,716											$	16,088
EPS — Basic
Income available to common stockholders			13,716				19,259			$	0.71				16,088				19,241			$	0.84
Effect of dilutive securities
Options							272												218
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	13,716				19,531			$	0.70			$	16,088				19,459			$	0.83

		Six Months Ended June 26, 2010												Six Months Ended June 27, 2009
		Income				Shares				Per Share				Income				Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings Attributable to Controlling Interest		$	14,703											$	14,881
EPS — Basic
Income available to common stockholders			14,703				19,258			$	0.76				14,881				19,213			$	0.77
Effect of dilutive securities
Options							266												157
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	14,703				19,524			$	0.75			$	14,881				19,370			$	0.77

UNIVERSAL FOREST PRODUCTS, INC.

No outstanding options were excluded from the computation of diluted EPS for the quarter and six months ended June 26, 2010.

Options to purchase 10,000 shares of common stock were not included in the computation of diluted EPS for the quarter ended June 27, 2009 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

Options to purchase 120,000 shares of common stock were not included in the computation of diluted EPS for the six months ended June 27, 2009 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.

E.

ASSETS HELD FOR SALE AND NET LOSS (GAIN) ON DISPOSITION OF ASSETS AND OTHER IMPAIRMENTS AND EXIT CHARGES

Included in “Assets held for sale” on our Consolidated Condensed Balance Sheets are certain property, plant and equipment totaling $3.1 million on June 27, 2009. The assets held for sale consist of certain vacant land and several facilities we closed to better align manufacturing capacity with the current business environment. The fair values were determined based on appraisals or recent offers to acquire the assets. These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in certain impairment and other exit charges. “Net loss (gain) on disposition of assets and other impairment and exit charges” consists of the following amounts, separated by reporting segment, for the periods presented below (in millions):

Three Months Ended June 26, 2010

Three Months Ended June 27, 2009

Northern,

Northern,

Southern and

Southern and

Western

All

Western

All

Divisions

Other

Divisions

Other

Severances

$

0.1

Property, plant and equipment

$

0.2

0.3

Gain on sale of real estate

(1.1

)

Six Months Ended June 26, 2010

Six Months Ended June 27, 2009

Northern,

Northern,

Southern and

Southern and

Western

All

Western

All

Divisions

Other

Divisions

Other

Severances

$

0.3

$

0.6

Property, plant and equipment

0.1

1.0

Gain on sale of real estate

(3.5

)

UNIVERSAL FOREST PRODUCTS, INC.

F.

COMMITMENTS, CONTINGENCIES, AND GUARANTEES

We are self-insured for environmental impairment liability, including certain liabilities which are insured through a wholly owned subsidiary, UFP 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 our affiliates’ wood preservation facilities in Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Gordon, PA; Janesville, WI; Medley, FL; and Ponce, PR. In addition, a reserve was established for our affiliate’s 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 $4.2 million on June 26, 2010 and $4.3 million on June 27, 2009, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.

From time to time, various special interest environmental groups have petitioned certain states requesting restrictions on the use or disposal of CCA treated products. The wood preservation industry trade groups are working with the individual states and their regulatory agencies to provide an accurate, factual background which demonstrates that the present method of uses and disposal is scientifically supported. We market a modest amount of CCA treated products for permitted, non-residential applications.

We have not accrued for any potential loss related to the contingencies above. However, potential liabilities of this nature are not conducive to precise estimates and are subject to change.

In addition, on June 26, 2010, 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 26, 2010, we had outstanding purchase commitments on capital projects of approximately $2.5 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 affect on our consolidated financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

In certain cases 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 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 26, 2010, we had approximately $18.7 million in outstanding payment and performance bonds for projects in progress, which expire during the next two years. In addition, approximately $25.9 million in payment and performance bonds are outstanding for completed projects which are still under warranty.

We have entered into operating leases for certain personal property assets that include a guarantee of a portion of the residual value of the leased assets. If at the expiration of the initial lease term we do not exercise our option to purchase the leased assets and these assets are sold by the lessor for a price below a predetermined amount, we will reimburse the lessor for a certain portion of the shortfall. These operating leases will expire periodically over the next five years. The estimated maximum aggregate exposure of these guarantees is approximately $1.3 million.

On June 26, 2010, we had outstanding letters of credit totaling $32.3 million, primarily related to certain insurance contracts and industrial development revenue bonds as further described 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 $19.3 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.

We are required to provide irrevocable letters of credit in favor of the bond trustees for all of the industrial development revenue bonds that we have issued. These letters of credit guarantee principal and interest payments to the bondholders. We currently have irrevocable letters of credit outstanding totaling approximately $12.4 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.

UNIVERSAL FOREST PRODUCTS, INC.

Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 2002-A 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.

Many of our wood treating operations utilize “Subpart W” drip pads, defined as hazardous waste management units by the EPA. The rules regulating drip pads require that the 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 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 $0.3 million. As a result, this amount is recorded in other long-term liabilities on June 26, 2010.

We did not enter into any new guarantee arrangements during the second quarter of 2010 which would require us to recognize a liability on our balance sheet.

G.

BUSINESS COMBINATIONS

No business combinations were completed in fiscal 2009. We completed the following business combinations in fiscal 2010 which were accounted for using the purchase method (in millions):

Net

Company

Acquisition

Purchase

Intangible

Tangible

Reportable

Name

Date

Price

Assets

Assets

Segment

Business Description

Shepherd Distribution Co. (“Shepherd”)

April 29, 2010

$5.2 (asset purchase)

$

1.9

$

3.3

Northern Division

Distributes shingle underlayment, bottom board, house wrap, siding, poly film and other products to manufactured housing and RV customers. Headquartered in Elkhart, Indiana, it has distribution capabilities throughout the United States.

Service Supply Distribution, Inc. (“Service Supply”)

March 8, 2010

$0.6 (asset purchase)

$

0.0

$

0.6

Southern Division

Distributes certain plumbing, electrical, adhesives, flooring, paint and other products to manufactured housing and RV customers. Headquartered in Cordele, Georgia, it has distribution capabilities throughout the United States.

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

UNIVERSAL FOREST PRODUCTS, INC.

The purchase price allocation for D-Stake Mill and Manufacturing Company (“D-Stake”) was adjusted as follows (in millions) during the first quarter of fiscal 2010 as a result of a change in the valuation of the intangible assets acquired. The impact of the adjustment on earnings was negligible.

		Non-compete				Customer				Goodwill -				Goodwill - Tax
		agreements				Relationships				Total				Deductible
D-Stake initial purchase price allocation		$	2.6							$	2.5			$	2.5
Adjustments			(1.6	)			1.9				(0.3	)			(0.3	)
D-Stake final purchase price allocation			1.0				1.9				2.2				2.2

H.

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.

Beginning January 1, 2010, our Eastern Division was divided into two divisions: a Northern Division and a Southern Division. This change was primarily made in order to drive faster growth by allowing field leadership to concentrate on a smaller entity, thereby having a bigger impact on growth. The presentation of the reportable segment amounts was not impacted.

Under the definition of a segment, our Northern, Southern, Western and Consumer Products Divisions may be considered operating segments of our business. Under ASC 280, segments may be aggregated if the segments have similar economic characteristics and if the nature of the products, distribution methods, customers and regulatory environments are similar. Based on these criteria, we have aggregated our Northern, Southern and Western Divisions into one reporting segment, which have the same totals as our former Eastern and Western Divisions. Our Consumer Products Division is included in the “All Other” column in the table below. Our divisions operate manufacturing and treating facilities throughout North America. A summary of results for the six months of 2010 and 2009 are presented below (in thousands).

		Six Months Ended June 26, 2010												Six Months Ended June 27, 2009
		Northern,												Northern,
		Southern and												Southern and
		Western												Western
		Divisions				All Other				Total				Divisions				All Other				Total
Net sales to outside customers		$	947,977			$	83,616			$	1,031,593			$	812,108			$	64,559			$	876,667
Intersegment net sales			0				34,644				34,644				0				20,950				20,950
Segment operating profit (loss)			23,487				3,119				26,606				21,432				4,614				26,046

I.

SUBSEQUENT EVENT

On June 29, 2010, Universal Consumer Products, Inc. (“UCP”) contributed $5.8 million to EoTek LLC (“EoTek”) in exchange for a 98% membership interest. EoTek used these proceeds to purchase new product technology for $5.8 million from an unrelated third party. In addition, in July 2010, UCP and the minority investor contributed capital of $250,000 each to EoTek to fund operating expenses and working capital requirements.

On July 14, 2010, the compensation committee of the board of directors approved a retirement plan for officers whereby we will pay, upon retirement, benefits totaling 150% of the officer’s highest base salary in the three years immediately preceding separation from service plus health care benefits for a specified period of time if certain eligibility requirements are met. We currently anticipate recording approximately $1.8 million of expense in the last six months of 2010 for this plan.

UNIVERSAL FOREST PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains certain 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, assumptions or events 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 conditions in the markets we serve; government regulations, particularly involving environmental and safety regulations; and our ability to make successful business acquisitions. We also encourage you to read our Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission. That report includes “Risk Factors” that you should consider in connection with any decision to buy or sell our securities. We are pleased to present this overview of 2010.

OVERVIEW

Our results for the second quarter of 2010 were impacted by the following:

•

Our overall unit sales increased 9% primarily due to our manufactured housing , industrial, and site-built markets. We believe we have gained additional share of the industrial and manufactured housing markets we serve. Share gains in our industrial market have been achieved by adding many new customers while share gains in manufactured housing have been achieved by acquiring distribution operations. We believe we have maintained our share of the DIY/retail market. Finally, we recently closed several plants that supply the site-built housing market in order to achieve profitability and cash flow goals; consequently, we believe that these actions may temporarily cause us to lose some market share.

•

The Lumber Market was approximately 52% higher, on average, in the second quarter of 2010 compared to the same period of 2009, and was unusually volatile during the quarter. The unusual volatility had a significant adverse impact on our gross profits, particularly in the month of June. Specifically, lumber prices increased quickly to a peak at the end of April—so quickly that it was not possible to pass along the increased costs to customers. This negatively affected profits on products sold at a fixed price during the quarter. Then, from late April through late June, lumber prices fell quickly, negatively affecting profits on products we sell at a price that is indexed to the Lumber Market at the time it is shipped to the customer (such as high-volume treated lumber). Consequently, our gross margin decreased to 12.2% in the second quarter of 2010 from 16.0% in the same period of 2009. Since the end of June, lumber prices have stabilized.

UNIVERSAL FOREST PRODUCTS, INC.

•

The Leading Indicator for Remodeling Activity, released by Harvard’s Joint Center for Housing Studies, released its’ report for the second quarter of 2010 and indicated that spending on homeowner remodeling improvements declined 9.7% for the period, which impacts our DIY/retail market. Consumer spending for large repair/remodel projects has decreased due to general economic conditions, among other factors, including weak home prices and high unemployment levels. Consequently, the same store sales of our “big box” home improvement retailers have declined. The Consumer Confidence Index, which had been increasing since February, decreased in June causing concern about the level of consumer spending in future months.

•

National housing starts increased approximately 25% in the period from March through May of 2010 (our sales trail housing starts by about a month), compared to the same period of 2009. However, within these results, multi-family starts declined approximately 6% in April and May of 2010 compared to the same period of 2009.

•

Shipments of HUD code manufactured homes were up 14% in April and May of 2010, compared to the same period of 2009. Industry sales of modular homes were up 5% in the first quarter compared to 2009.

•

Housing starts and shipments of manufactured homes were positively impacted by certain tax credits that have now expired.

•

The industrial market has improved as the U.S. economy slowly recovers. More significantly, we gained additional share of this market due, in part, to adding many new customers and continuing to penetrate the concrete forming business.

•

Our cash flow used in operating activities was $50 million due to the seasonal working capital requirements of our business, which were higher than 2009. We currently anticipate achieving strong cash flows from operations for the year.

UNIVERSAL FOREST PRODUCTS, INC.

HISTORICAL LUMBER PRICES

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

		Random Lengths Composite
		Average $/MBF
		2010				2009
January		$	264			$	198
February			312				199
March			310				195
April			351				208
May			333				198
June			267				222
Second quarter average		$	317			$	209
Year-to-date average		$	306			$	203
Second quarter percentage change from 2009			51.7	%
Year-to-date percentage change from 2009			50.7	%

In addition, a Southern Yellow Pine (“SYP”) composite price, which we prepare and use, is presented below. Sales of products produced using this species, which primarily consists of our preservative-treated products, may comprise up to 50% of our sales volume.

		Random Lengths SYP
		Average $/MBF
		2010				2009
January		$	269			$	241
February			331				233
March			337				232
April			382				241
May			374				231
June			293				236
Second quarter average		$	350			$	236
Year-to-date average		$	331			$	236
Second quarter percentage change from 2009			48.3	%
Year-to-date percentage change from 2009			40.3	%

UNIVERSAL FOREST PRODUCTS, INC.

IMPACT OF THE LUMBER MARKET ON OUR OPERATING RESULTS

We experience significant fluctuations in the cost of commodity lumber products from primary producers (“Lumber Market”). We generally price our products to pass lumber costs through to our customers so that our profitability is based on the value-added manufacturing, distribution, engineering, and other services we provide. As a result, our sales levels (and working capital requirements) are impacted by the lumber costs of our products. Lumber costs are a significant percentage of our cost of goods sold.

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

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

•		Products with fixed selling prices. These products include value-added products such as decking and fencing sold to DIY/retail customers, as well as trusses, wall panels and other components sold to the site-built 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 for these sales commitments with our suppliers. Also, the time period and quantity limitations generally allow us to re-price our products for changes in lumber costs from our suppliers.
•		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 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. For these products, our margins are exposed to changes in the trend of lumber prices.

Changes in the trend of lumber prices have their greatest impact 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 17% 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.)

UNIVERSAL FOREST PRODUCTS, INC.

•

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.

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.

BUSINESS COMBINATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note G, “Business Combinations.”

UNIVERSAL FOREST PRODUCTS, INC.

RESULTS OF OPERATIONS

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

		For the Three Months Ended								For the Six Months Ended
		June 26, 2010				June 27, 2009				June 26, 2010				June 27, 2009
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			87.8				84.0				87.4				85.2
Gross profit			12.2				16.0				12.6				14.8
Selling, general, and administrative expenses			8.5				10.9				10.0				12.0
Net loss (gain) on disposition of assets and other impairment and exit charges			0.0				(0.1	)			0.0				(0.2	)
Earnings from operations			3.7				5.2				2.6				3.0
Interest, net			0.1				0.2				0.2				0.3
Earnings before income taxes			3.6				5.0				2.4				2.7
Income taxes			1.3				1.9				0.9				1.0
Net earnings			2.3				3.1				1.5				1.7
Less net earnings attributable to non-controlling interest			(0.1	)			(0.0	)			(0.1	)			(0.0	)
Net earnings attributable to controlling interest			2.2	%			3.1	%			1.4	%			1.7	%

GROSS SALES

We market, manufacture and engineer wood and wood-alternative products for the DIY/retail market, structural lumber products for the manufactured housing market, engineered wood components for the site-built construction market, and specialty wood packaging for various markets. We also provide framing services for the site-built construction market and various forms for concrete construction. Our strategic long-term sales objectives include:

•		Diversifying our end market sales mix by increasing sales of specialty wood packaging to industrial users, increasing our penetration of the concrete forms market, increasing our sales of engineered wood components for custom home, multi-family and light commercial construction, and expanding our product lines in each of the markets we serve.
•		Expanding geographically in our core businesses.
•		Increasing sales of “value-added” products and framing services. Value-added product sales primarily consist of fencing, decking, lattice, and other specialty products sold to the DIY/retail market, specialty wood packaging, engineered wood components, 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.

UNIVERSAL FOREST PRODUCTS, INC.

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

		For the Three Months Ended												For the Six Months Ended
		June 26,				June 27,				%				June 26,				June 27,				%
Market Classification		2010				2009				Change				2010				2009				Change
DIY/Retail		$	315,833			$	291,184				8.4			$	480,240			$	458,764				4.7
Site-Built Construction			72,223				60,642				19.1				133,112				120,963				10.0
Industrial			179,240				131,783				36.0				305,228				236,419				29.1
Manufactured Housing			81,616				44,710				82.5				129,978				81,281				59.9
Total Gross Sales			648,912				528,319				22.8				1,048,558				897,427				16.8
Sales Allowances			(10,277	)			(13,374	)							(16,965	)			(20,760	)
Total Net Sales		$	638,635			$	514,945				24.0			$	1,031,593			$	876,667				17.7