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

For the quarterly period ended June 30, 2007

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

UNIVERSAL FOREST PRODUCTS, INC.

(Exact name of registrant as specified in its charter)

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

(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 þ No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer þ            Accelerated Filer o            Non-Accelerated Filer o

Indicate by checkmark 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 of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding as of June 30, 2007
Common stock, no par value		19,024,641

 

 

TABLE OF CONTENTS

				Page No.
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Condensed Balance Sheets at June 30, 2007, December 30, 2006, and July 1, 2006			3
		Consolidated Condensed Statements of Earnings for the Three and Six Months Ended June 30, 2007 and July 1, 2006			4
		Consolidated Statements of Shareholders’ Equity for the Six Months Ended June 30, 2007 and July 1, 2006			5
		Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2007 and July 1, 2006			6-7
		Notes to Consolidated Condensed Financial Statements			8-17
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			18-31
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
Item 4.		Controls and Procedures			33
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			34
Item 3.		Defaults Upon Senior Securities — NONE
Item 4.		Submission of Matters to a Vote of Security Holders			35-36
Item 5.		Other Information			36
Item 6.		Exhibits			37
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)

		June 30,				December 30,				July 1,
(in thousands, except share data)		2007				2006				2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	42,697			$	51,108			$	43,309
Accounts receivable, net			233,067				148,242				242,829
Inventories:
Raw materials			153,924				128,621				139,250
Finished goods			120,471				116,497				107,560
			274,395				245,118				246,810
Other current assets			22,339				30,667				22,495
TOTAL CURRENT ASSETS			572,498				475,135				555,443
OTHER ASSETS			7,691				7,404				8,003
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS			152,170				155,177				134,928
OTHER INTANGIBLE ASSETS, net			33,132				25,390				12,973
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment			518,407				466,021				430,933
Land held for sale			17,115
Accumulated depreciation and amortization			(231,969	)			(215,686	)			(202,938	)
PROPERTY, PLANT AND EQUIPMENT, NET			303,553				250,335				227,995
TOTAL ASSETS		$	1,069,044			$	913,441			$	939,342
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	147,614			$	94,441			$	146,409
Accrued liabilities:
Compensation and benefits			56,553				71,990				66,750
Other			25,879				25,111				34,365
Current portion of long-term debt and capital lease obligations			3,611				680				902
TOTAL CURRENT LIABILITIES			233,657				192,222				248,426
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion			243,833				169,417				170,192
DEFERRED INCOME TAXES			24,196				12,697				13,067
MINORITY INTEREST			10,218				10,819				8,908
OTHER LIABILITIES			15,795				13,544				11,075
TOTAL LIABILITIES			527,699				398,699				451,668
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, 19,024,641 18,858,892 and 18,836,034		$	19,025			$	18,859			$	18,836
Additional paid-in capital			121,785				113,754				112,488
Retained earnings			398,509				380,931				355,023
Accumulated other comprehensive earnings			3,654				2,451				2,593
			542,973				515,995				488,940
Employee stock notes receivable			(1,628	)			(1,253	)			(1,266	)
TOTAL SHAREHOLDERS’ EQUITY			541,345				514,742				487,674
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,069,044			$	913,441			$	939,342

See notes to consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)

(in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
NET SALES		$	773,105			$	826,847			$	1,322,143			$	1,492,456
COST OF GOODS SOLD			671,400				706,429				1,146,918				1,277,727
GROSS PROFIT			101,705				120,418				175,225				214,729
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES			70,382				70,773				133,840				135,302
EARNINGS FROM OPERATIONS			31,323				49,645				41,385				79,427
OTHER EXPENSE (INCOME):
Interest expense			4,766				3,744				9,090				7,543
Interest income			(558	)			(352	)			(1,140	)			(781	)
Net (gain) loss on sale of real estate			(333	)			(63	)			(333	)			(63	)
			3,875				3,329				7,617				6,699
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST			27,448				46,316				33,768				72,728
INCOME TAXES			10,182				17,885				12,250				27,641
EARNINGS BEFORE MINORITY INTEREST			17,266				28,431				21,518				45,087
MINORITY INTEREST			(466	)			(1,117	)			(832	)			(1,907	)
NET EARNINGS		$	16,800			$	27,314			$	20,686			$	43,180
EARNINGS PER SHARE — BASIC		$	0.88			$	1.45			$	1.09			$	2.31
EARNINGS PER SHARE — DILUTED		$	0.86			$	1.41			$	1.06			$	2.23
WEIGHTED AVERAGE SHARES OUTSTANDING			19,127				18,851				19,056				18,729
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS			19,487				19,432				19,448				19,355

See notes to consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

(in thousands, except share and per share data)

																						Accumulat-
										Deferred				Deferred								ed Other
						Additional				Stock				Compensa-								Comprehen-				Employees
		Common				Paid-In				Compensa-				tion Rabbi				Retained				sive				Stock Notes
		Stock				Capital				tion				Trust				Earnings				Earnings				Receivable				Total
Balance at December 31, 2005		$	18,403			$	97,372			$	4,212			$	(2,117	)		$	312,878			$	2,408			$	(1,304	)		$	431,852
Comprehensive earnings:
Net earnings																			43,180
Foreign currency translation adjustment																							185
Total comprehensive earnings																															43,365
Cash dividends — $.055 per share																			(1,035	)											(1,035	)
Reversal of deferred compensation upon adoption of SFAS 123(R)							2,095				(4,212	)			2,117																—
Issuance of 327,195 shares under employee stock plans			327				5,151																								5,478
Issuance of 3,058 shares under stock grant programs			3				173																								176
Issuance of 101,278 shares under deferred compensation plans			101				(101	)																							—
Received 1,367 shares for the exercise of stock options			(1	)			(89	)																							(90	)
Tax benefits from non-qualified stock options exercised							4,247																								4,247
Expense associated with share-based compensation arrangements							522																								522
Accrued expense under deferred compensation plans							2,917																								2,917
Issuance of 3,222 shares in exchange for employee stock notes receivable			3				201																				(204	)			—
Payments received on employee stock notes receivable																											242				242
Balance at July 1, 2006		$	18,836			$	112,488			$	—			$	—			$	355,023			$	2,593			$	(1,266	)		$	487,674
Balance at December 30, 2006		$	18,859			$	113,754			$	—			$	—			$	380,931			$	2,451			$	(1,253	)		$	514,742
Comprehensive earnings:
Net earnings																			20,686
Foreign currency translation adjustment																							1,203
Total comprehensive earnings																															21,889
Cash dividends — $.055 per share																			(1,047	)											(1,047	)
Issuance of 187,870 shares under employee stock plans			188				3,038																								3,226
Issuance of 3,130 shares under stock grant programs			3				143																								146
Issuance of 25,583 shares under deferred compensation plans			26				(26	)																							—
Repurchase of 45,100 shares			(45	)															(2,061	)											(2,106	)
Received 15,866 shares for the exercise of stock options			(16	)			(766	)																							(782	)
Tax benefits from non-qualified stock options exercised							1,453																								1,453
Expense associated with share-based compensation arrangements							258																								258
Accrued expense under deferred compensation plans							3,439																								3,439
Issuance of 10,132 shares in exchange for employee stock notes receivable			10				492																				(502	)			—
Payments received on employee stock notes receivable																											127				127
Balance at June 30, 2007		$	19,025			$	121,785			$	—			$	—			$	398,509			$	3,654			$	(1,628	)		$	541,345

See notes to consolidated condensed financial statements.

UNIVERSAL FOREST PRODUCTS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

(in thousands)

		Six Months Ended
		June 30,				July 1,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings		$	20,686			$	43,180
Adjustments to reconcile net earnings to net cash from operating activities:
Depreciation			19,013				16,730
Amortization of intangibles			4,633				2,151
Expense associated with share-based compensation arrangements			258				522
Expense associated with stock grant plans			146				177
Deferred income taxes			(89	)			(867	)
Minority interest			832				1,907
Gain on sale of interest in subsidiary			(140	)
Net gain on sale or impairment of property, plant and equipment			(131	)			(183	)
Changes in:
Accounts receivable			(72,549	)			(57,246	)
Inventories			(11,354	)			7,768
Accounts payable			54,581				39,426
Accrued liabilities and other			(158	)			8,237
Excess tax benefits from share-based compensation arrangements			(679	)			(3,866	)
NET CASH FROM OPERATING ACTIVITIES			15,049				57,936
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment			(18,653	)			(16,234	)
Acquisitions, net of cash received			(56,209	)			(11,298	)
Proceeds from sale of interest in subsidiary			400
Proceeds from sale of property, plant and equipment			2,686				565
Collections of notes receivable			137				1,600
Advances on notes receivable							(2,473	)
Other, net			(16	)			38
NET CASH FROM INVESTING ACTIVITIES			(71,655	)			(27,802	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit facilities			74,318				(40,000	)
Repayment of long-term debt			(25,417	)			(325	)
Proceeds from issuance of common stock			2,862				5,389
Distributions to minority shareholders			(825	)			(930	)
Dividends paid to shareholders			(1,047	)			(1,035	)
Repurchase of common stock			(2,106	)
Excess tax benefits from share-based compensation arrangements			679				3,866
Other, net			(269	)			(5	)
NET CASH FROM FINANCING ACTIVITIES			48,195				(33,040	)
NET CHANGE IN CASH AND CASH EQUIVALENTS			(8,411	)			(2,906	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			51,108				46,215
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	42,697			$	43,309
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid (refunded) during the period for:
Interest		$	9,014			$	8,292
Income taxes			(2,261	)			24,824

UNIVERSAL FOREST PRODUCTS, INC.

		Six Months Ended
		June 30,				July 1,
		2007				2006
NON-CASH OPERATING ACTIVITIES:
Accounts receivable exchanged for note receivable						$	431
Deferred purchase price of acquisition exchanged for current payable							53
Deferred purchase price of acquisition exchanged for long-term liability							721
NON-CASH INVESTING ACTIVITIES:
Property, plant and equipment exchanged for debt						$	1,303
Stock acquired through employees’ stock notes receivable		$	502				204
NON-CASH FINANCING ACTIVITIES:
Common stock issued under deferred compensation plans		$	3,439			$	2,917
Stock received for the exercise of stock options, net			418
See notes to consolidated condensed financial statements

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO 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 significant 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, 2006.
		Certain reclassifications have been made to the Financial Statements for 2006 to conform to the classifications used in 2007.
B.		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.

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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 30,				July 1,
		2007				2006
Cost and Earnings in Excess of Billings		$	4,249			$	7,454
Billings in Excess of Cost and Earnings			3,857				8,412

C.		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 06/30/07												Three Months Ended 07/01/06
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	16,800											$	27,314
EPS — Basic
Income available to common stockholders			16,800				19,127			$	0.88				27,314				18,851			$	1.45
Effect of dilutive securities
Options							360												581
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	16,800				19,487			$	0.86			$	27,314				19,432			$	1.41

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		Six Months Ended 06/30/07												Six Months Ended 07/01/06
										Per												Per
		Income				Shares				Share				Income				Shares				Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net Earnings		$	20,686											$	43,180
EPS — Basic
Income available to common stockholders			20,686				19,056			$	1.09				43,180				18,729			$	2.31
Effect of dilutive securities
Options							392												626
EPS — Diluted
Income available to common stockholders and assumed options exercised		$	20,686				19,448			$	1.06			$	43,180				19,355			$	2.23

		No outstanding options were excluded from the computation of diluted EPS for the quarters and six months ended June 30, 2007 or July 1, 2006.
D.		SALE OF ACCOUNTS RECEIVABLE
		On March 8, 2006 we entered into a new accounts receivable sale agreement with a bank. Under the terms of this agreement:

	Ÿ		We sell specific receivables to the bank at an agreed-upon price at terms ranging from one month to one year.
	Ÿ		We service the receivables sold and outstanding on behalf of the bank at a rate of 0.50% per annum.
	Ÿ		We receive an incentive servicing fee, which we account for as a retained interest in the receivables sold. Our retained interest is determined based on the fair market value of anticipated collections in excess of the Agreed Base Value of the receivables sold. Appropriate valuation allowances are recorded against the retained interest.
	Ÿ		The maximum amount of receivables, net of retained interest, which may be sold and outstanding at any point in time under this arrangement is $50 million.

On June 30, 2007 $54.1 million of receivables were sold and outstanding, and we recorded $4.1 million of retained interest in other current assets. On July 1, 2006, $54.1 million of receivables were sold and outstanding, and we recorded $4.1 million of retained interest in other current assets. A summary of the transactions we completed for the first six months of 2007 and 2006 are presented below (in thousands).

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		Six Months Ended				Six Months Ended
		June 30, 2007				July 1, 2006
Accounts receivable sold		$	306,738			$	270,474
Retained interest in receivables			(1,982	)			(4,054	)
Expense from sale			(1,389	)			(1,190	)
Servicing fee received			111				99
Net cash received from sale		$	303,478			$	265,329

E.		GOODWILL AND OTHER INTANGIBLE ASSETS
		The following amounts were included in other intangible assets, net (in thousands):

		June 30, 2007								July 1, 2006
						Accumulated								Accumulated
		Assets				Amortization				Assets				Amortization
Non-compete agreements		$	36,648				($10,863	)		$	15,511				($7,401	)
Licensing agreements											2,510				(2,223	)
Customer relationships			10,950				(3,603	)			5,927				(1,380	)
Backlog			49				(49	)			644				(615	)
Total		$	47,647				($14,515	)		$	24,592				($11,619	)

The estimated amortization expense for intangible assets as of June 30, 2007 for each of the five succeeding fiscal years is as follows (in thousands):

2007		$	4,732
2008			9,131
2009			7,244
2010			6,261
2011			4,426
Thereafter			1,338

The changes in the net carrying amount of goodwill and indefinite-lived intangible assets for the six months ended June 30, 2007 and July 1, 2006 are as follows (in thousands):

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

						Indefinite-
						Lived
						Intangible
		Goodwill				Assets
Balance as of December 30, 2006		$	152,837			$	2,340
Acquisitions			1,517
Preliminary purchase price allocations			(5,000	)
Other, net			476
Balance as of June 30, 2007		$	149,830			$	2,340
Balance as of December 31, 2005		$	131,556			$	0
Acquisitions			6,701				2,340
Final purchase price allocation of DecKorators			(5,925	)
Other, net			256
Balance as of July 1, 2006		$	132,588			$	2,340

F.		EMPLOYEE STOCK NOTES RECEIVABLE
		Employee stock notes receivable represents notes issued to us by certain employees and officers to finance the purchase of our common stock. Directors and executive officers do not, and are not allowed to, participate in this program.
G.		STOCK-BASED COMPENSATION
		We provide compensation benefits to employees and non-employee directors under several share-based payment arrangements including various employee stock option plans, the Employee Stock Purchase Plan, the Directors’ Retainer Stock Plan, the Directors’ Stock Grant Plan, and the 1999 Long Term Stock Incentive Plan.
		We account for share-based compensation using the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, (“SFAS 123(R)”), which we adopted using the modified-prospective-transition method effective January 1, 2006.
H.		COMMITMENTS, CONTINGENCIES, AND GUARANTEES
		We are self-insured for environmental impairment liability 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. Insurance reserves, calculated with no discount rate, have been established to cover remediation activities at our

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		Stockertown, PA; Elizabeth City, NC; Auburndale, FL; Janesville, WI; Medley, FL; and Ponce, PR wood preservation facilities. In addition, a reserve was established for our Thornton, CA property to remove asbestos and certain lead containing materials which existed on the property at the time of purchase.
		Including amounts from our wholly owned captive insurance company, we have reserved approximately $4.1 million on June 30, 2007 and $1.7 million on July 1, 2006, representing the estimated costs to complete future remediation efforts. These amounts have not been reduced by an insurance receivable.
		The manufacturers of CCA preservative voluntarily discontinued the registration of CCA for certain residential applications as of December 31, 2003. Our wood preservation facilities have been converted to alternate preservatives, either ACQ, borates or ProWood® Micro. In March 2005, one facility began using CCA to treat certain marine products and panel goods for which the alternative preservatives are not suitable.
		In November 2003, the EPA published its report on the risks associated with the use of CCA in children’s playsets. While the study observed that the range of potential exposure to CCA increased by the continuous use of playsets, the EPA concluded that the risks were not sufficient to require removal or replacement of any CCA treated structures. The results of the EPA study are consistent with a prior Consumer Products Safety Commission (CPSC) study which reached a similar conclusion. The EPA did refer a question on the use of sealants to a scientific advisory panel. The panel issued a report which provides guidance to the EPA on the use of various sealants but does not mandate their use. The EPA is expected to issue a final report at the end of 2007.
		In addition, 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 have been requested by a customer to defend it from purported class action lawsuits. To date, none of these cases have been certified as class action. One such purported class action lawsuit pending in Illinois seeks unspecified damages from this customer, based on generalized claims under a purported theory of violation of individual state Consumer Protection Act statutes. The Illinois case was previously dismissed without prejudice. The claim was then restated and filed with no allegations of personal injury or property damage. The judge in the case denied class certification for this case in December 2005, and the appellate court denied the plaintiff’s appeal in June of 2007. As previously stated, our vendors believe and scientific studies support the fact that CCA treated lumber poses no unreasonable risks, and we intend to vigorously defend this position. While our customer has charged us for certain costs incurred in the defense of these claims and we have expensed them accordingly, we have not formally

UNIVERSAL FOREST PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		accepted liability of these costs.
		We believe that based on current facts, laws, and existing scientific evidence, as well as the favorable disposition of the above referenced lawsuits, that the likelihood of a material adverse financial impact from the remaining claims is remote. Therefore, 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. To the extent we are required to defend these actions, we intend to do so vigorously and will monitor these facts on an ongoing basis.
		In addition, on June 30, 2007, we were parties either as plaintiff or a 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, 2007, we had outstanding purchase commitments on capital projects of approximately $3.9 million.
		We provide a variety of warranties for products we manufacture. Historically, warranty claims have not been material.
		In certain cases we jointly bid on contracts with framing companies to supply building materials to site-built construction projects. In some of these 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. Historically, we have not had any claims for indemnity from our sureties. As of June 30, 2007, we had approximately $27.9 million in outstanding payment and performance bonds, which expire during the next two years. In addition, approximately $15.4 million in payment and performance bonds are outstanding for completed projects which are still under warranty.
		We have entered into operating leases for certain 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 $2.5 million.
		Under our sale of accounts receivable agreement, we guarantee that a subsidiary, as accounts servicer, will remit collections on receivables sold to the bank. (See Note D, “Sale of Accounts Receivable.”)

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		On June 30, 2007, we had outstanding letters of credit totaling $41.2 million, primarily related to certain insurance contracts, industrial development revenue bonds and commercial trade, 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 $20.4 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 $18.5 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.
		We are required to provide irrevocable commercial letters of credit in favor of certain import vendors to guarantee our payment upon their performance under certain import purchase orders. We currently have irrevocable commercial letters of credit outstanding totaling approximately $2.1 million related to pending import purchase orders.
		Certain wholly owned domestic subsidiaries have guaranteed the indebtedness of Universal Forest Products, Inc. in certain debt agreements, including the Series 1998-A Senior Notes, 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.
		Our 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 used to manage hazardous waste. Closure involves identification and disposal of contamination which requires removal from the wood treating operations. The ultimate cost of closure is dependent upon a number of factors including, but not limited to, identification and removal of contamination, 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 $465,000. As a result, this amount is recorded in other long-term liabilities on June 30, 2007.
		We did not enter into any new guarantee arrangements during the second quarter of 2007 which would require us to recognize a liability on our balance sheet.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

I.		ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
		In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, and disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, we adopted FIN 48 beginning December 31, 2006. The implementation of FIN 48 did not have a significant impact on our financial position or results of operations.
		As of the beginning of fiscal year 2007, we had unrecognized tax benefits of $6.5 million including accrued interest and penalties. There has been no significant change in the unrecognized tax benefits during the second quarter and six months ending June 30, 2007. If recognized, the effective tax rate would be affected by the unrecognized tax benefits.
		We recognize interest and penalties related to unrecognized tax benefits, which are included in Income Taxes. Interest and penalties accrued as of June 30, 2007 are insignificant. Interest and penalties recorded during the quarter ended June 30, 2007 were not considered significant.
		We are subject to periodic audits by domestic and foreign tax authorities. Currently, we are undergoing routine periodic audits in domestic jurisdictions. It is reasonably possible that the amounts of unrecognized tax benefits could change in the next 12 months as a result of the audits. Based on the current audits in process, the payment of taxes as a result of audit settlements could be from $0.1 to $2.8 million.
		For the majority of tax jurisdictions, we are no longer subject to income tax examinations by tax authorities for years before 2003.
J.		SEGMENT REPORTING
		SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”) 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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

		Under the definition of a segment, our Eastern, Western and Consumer Products Divisions may be considered an operating segment of our business. Under SFAS 131, 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 this criteria, we have aggregated our Eastern and Western divisions into one reporting segment. Our Consumer Products Division, which was formed in 2006, 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 first six months of 2007 and 2006 are presented below (in thousands).

		Six Months Ended 6/30/07												Six Months Ended 7/1/06
		Eastern												Eastern
		and												and
		Western				All								Western				All
		Divisions				Other				Total				Divisions				Other				Total
Net sales to outside customers		$	1,253,147			$	68,996			$	1,322,143			$	1,446,800			$	45,656			$	1,492,456
Intersegment net sales			0				15,169				15,169				0				11,045				11,045
Segment operating profit			35,573				5,812				41,385				72,613				6,814				79,427

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

Included in this report are certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are based on the beliefs and assumptions of management, together with information available to us when the statements were made. Future results could differ materially from those included in such forward-looking statements as a result of, among other things, the factors set forth below and certain economic and business factors which may be beyond our control. Investors are cautioned that all forward-looking statements involve risks and uncertainty.

OVERVIEW

Our results for the second quarter of 2007 were impacted by the following:

•		Our overall unit sales increased 1%, as sales out of existing facilities and operations we closed decreased by 9% this quarter and we experienced a 10% increase in unit sales as a result of acquisitions and new operations.
•		Lumber prices were 15% lower compared to the same period of 2006, impacting our overall selling prices (see “Impact of the Lumber Market on Our Operating Results” below) and sales dollars.
•		We faced challenging industry conditions in our site-built construction, manufactured housing and DIY/retail markets, which impacted our unit sales. We were able to partially mitigate the impact of these adverse conditions by the market share we believe we gained in each of our four markets, highlighted by acquisition and organic growth in sales to our “big box” retail and industrial customers.
•		Single-family housing starts fell approximately 24% in second quarter 2007 compared to 2006 as a result of an excess supply of homes and an increase in foreclosures associated with sub-prime lending practices.
•		We believe consumer spending for large repair/remodel projects has decreased due to a combination of an increase in home equity loans, concerns over home values due to housing market conditions, and a greater use of adjustable rate mortgages in recent years that are beginning to reset at higher rates resulting in higher monthly payments.
•		Production of HUD code manufactured homes and modular homes has continued to decline due, in part, to an excess supply of site-built homes in certain key regions and continued tight credit conditions.

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

•		Our gross profits decreased almost 16% compared to the same period of 2006 due to a combination of lower unit sales out of existing facilities and fixed manufacturing costs and greater pricing pressure in the site-built market.
•		Our cash flows from operating activities decreased $42.9 million in the first six months of 2007 compared to the same period of 2006 due to a 52% decrease in our year- to-date net earnings, a 5 day increase in our days supply of inventory, and the impact of our sale of receivables program (see “Liquidity and Capital Resources” below).
•		An increase in interest-bearing debt to $247.4 million from $171.1 million last year primarily due to business acquisitions.

Outlook

Our initial targets for 2007 were based, in part, on assumptions that haven’t materialized. Therefore, we are revising our targets to annual net sales of $2.375 billion to $2.425 billion and annual net earnings of $40.0 million to $42.0 million in 2007. This implies the following six-month targets for the remainder of 2007: net sales of $1.053 billion to $1.103 billion and net earnings of $19.3 million to $21.3 million. By comparison, net sales and net earnings (excluding certain non-recurring tax adjustments) were $1.172 billion and $23.5 million, respectively, for the last six months of 2006. The revised targets are based on the following assumptions:

	•		Continued challenging conditions in the DIY/retail, site-built construction, and manufactured housing markets. Housing starts are expected to show little, if any, improvement for the remainder of 2007 and will not begin a recovery until mid to late 2008; DIY/retail sales will continue to be adversely impacted by the reluctance of homeowners to undertake large home improvement projects.
	•		The Company will continue to achieve market share gains in the DIY/retail, industrial, and site-built markets;
	•		Plant consolidation or closures will be temporary in nature, resulting in no asset impairment charges;
	•		The lumber market will continue to be depressed for the balance of the year; and
	•		The Company will incur incentive compensation expense as a percentage of operating profits consistent with historical experience.

(In addition, please refer to the “Risk Factors” section of our annual report on form 10-K, filed with the United States Securities and Exchange Commission.)

HISTORICAL LUMBER PRICES

The following table presents the Random Lengths framing lumber composite price for the six months ended June 30, 2007 and July 1, 2006:

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

		Random Lengths Composite
		Average $/MBF
		2007				2006
January		$	292			$	382
February			289				377
March			280				368
April			286				369
May			288				341
June			306				326
Second quarter average		$	293			$	345
Year-to-date average		$	290			$	361
Second quarter percentage change from 2006			(15.1	%)
Year-to-date percentage change from 2006			(19.7	%)

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
		2007				2006
January		$	414			$	496
February			405				503
March			396				514
April			397				510
May			390				488
June			410				444
Second quarter average		$	399			$	481
Year-to-date average		$	402			$	493
Second quarter percentage change from 2006			(17.0	%)
Year-to-date percentage Change from 2006			(18.5	%)

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

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:

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

•		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 12% 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.

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

We completed the following business combinations in fiscal 2007 and fiscal 2006, which were accounted for using the purchase method.

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

Company Name		Acquisition Date		Business Description
Shawnlee Construction, LLC (“Shawnlee”) 2007 Purchase price: $1.4 million 2006 Purchase price: $0.8 million		April 2, 2007 April 3, 2006		Provides framing services for multi-family construction in the northeast. Located in Plainville, MA. Purchased an additional 5% membership interest each in 2007 & 2006. We currently own an 85% membership interest.
Perfection Trusses, Inc. (“Perfection”)		March 5, 2007		Manufacture and distribute roof and floor trusses to the Eastern Florida market. The company is located in Vero Beach, FL.
Purchase price: $1.3 million 2006 sales: $3.9 million
Aljoma Lumber Company (“Aljoma”) Purchase price: $53.5 million 2006 sales: $225 million		February 12, 2007		Manufacture, treat and distribute various wood products, building materials and specialty hardwoods. The company is located in Medley, FL. They serve Florida, the Eastern United States and the Caribbean islands. Aljoma has one of the largest treating facilities in the country.
Banks Lumber (“Banks”) Purchase price: $46.7 million 2006 sales: $147.0 million		November 17, 2006		Manufactures roof trusses and cut-to-size structural lumber for manufactured housing and recreational vehicle (RV) manufacturers nationwide. The company currently has continuing operations in Elkhart, IN, Edwardsburg, MI, Morristown, TN, Auburndale, FL and Hillsboro, TX.
GeoMatrix, Inc. (“GeoMatrix”) Purchase price: $11.5 million 2005 sales: $19.0 million		August 18, 2006		A developer and distributor of plastic lattice products and other proprietary plastic products located in Troy, MI.
United Lumber & Reman, LLC (“United”) Purchase price: $4.9 million 2005 sales: $26.0 million		July 10, 2006		An industrial wood manufacturing plant located in Muscle Shoals, AL. Acquired a 50% membership interest.

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

Company Name		Acquisition Date		Business Description
Dura-Bilt Mfg. Co. (“Dura-Bilt”) Purchase price: $9.2 million 2005 sales: $16.0 million		June 5, 2006		Designs and manufactures roof and floor trusses for site-built construction. The company is located in Riverbank, CA.
Classic Truss Company, Inc. (“Classic”) Purchase price: $2.1 million 2005 sales: $6.0 million		January 9, 2006		Manufactures and distributes engineered wood components for site-built construction. The company is located in Fort Pierce, FL.

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 30,				July 1,				June 30,				July 1,
		2007				2006				2007				2006
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of goods sold			86.8				85.4				86.7				85.6
Gross profit			13.2				14.6				13.3				14.4
Selling, general, and administrative expenses			9.1				8.6				10.1				9.1
Earnings from operations			4.1				6.0				3.2				5.3
Interest, net			0.6				0.4				0.6				0.4
Net gain on sale of real estate			(0.0	)			(0.0	)			(0.0	)			(0.0	)
			0.6				0.4				0.6				0.4
Earnings before income taxes and minority interest			3.5				5.6				2.6				4.9
Income taxes			1.3				2.2				0.9				1.9
Earnings before minority interest			2.2				3.4				1.7				3.0
Minority interest			(0.1	)			(0.1	)			(0.1	)			(0.1	)
Net earnings			2.2	%			3.3	%			1.6	%			2.9	%