form10q.htm


UNIVERSAL FOREST PRODUCTS, INC.
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 25, 2011

OR

 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 incorporation or organization)    (I.R.S. Employer Identification Number)
 
 2801 East Beltline NE, Grand Rapids, Michigan   49525   49525
 (Address of principal executive offices) (Zip Code)   (Zip Code)
     
   
Registrant's telephone number, including area code (616) 364-616
 
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 x  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). Yesx  Noo

Indicate by checkmark 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 x Accelerated Filer o Non-Accelerated Filer o
Smaller reporting company o
 
Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  Yes o No x

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 25, 2011
Common stock, no par value    19,525,590
 
 
 

 
 
TABLE OF CONTENTS
 
   
Page No.
PART I.
FINANCIAL INFORMATION.
 
   
 
Item 1.
Financial Statements.
 
     
 
3
     
 
4
     
 
5
     
    6
     
  7 - 15
     
Item 2.
16 - 28
     
Item 3.
  29
     
Item 4.
  29
     
PART II.
OTHER INFORMATION.
 
     
Item 1.
Legal Proceedings - NONE.
 
     
Item 1A.
Risk Factors - NONE.
 
     
Item 2.
  30
     
Item 3.
Defaults Upon Senior Securities - NONE.
 
     
Item 4.
(Removed and Reserved).
 
     
Item 5.
  30
     
 Item 6. Exhibits. 31
 
 
 

 
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
(in thousands, except share data)
 
   
June 25,
   
December 25,
   
June 26,
 
   
2011
   
2010
   
2010
 
ASSETS
                 
CURRENT ASSETS:
                 
Cash and cash equivalents
  $ -     $ 43,363     $ 695  
Accounts receivable, net
    204,220       126,780       229,199  
Inventories:
                       
Raw materials
    126,196       113,049       111,670  
Finished goods
    78,394       77,341       79,899  
      204,590       190,390       191,569  
Assets held for sale
    5,082       2,446       -  
Refundable income taxes
    2,114       -       -  
Other current assets
    18,219       19,020       18,110  
TOTAL CURRENT ASSETS
    434,225       381,999       439,573  
                         
OTHER ASSETS
    11,453       11,455       5,300  
GOODWILL
    154,702       154,702       156,296  
INDEFINITE-LIVED INTANGIBLE ASSETS
    2,340       2,340       2,340  
OTHER INTANGIBLE ASSETS, net
    13,136       15,933       13,429  
PROPERTY, PLANT AND EQUIPMENT:
                       
Property, plant and equipment
    525,197       517,793       518,816  
Accumulated depreciation and amortization
    (308,200 )     (295,642 )     (292,390 )
PROPERTY, PLANT AND EQUIPMENT, NET
    216,997       222,151       226,426  
TOTAL ASSETS
  $ 832,853     $ 788,580     $ 843,364  
                         
LIABILITIES AND EQUITY
                       
CURRENT LIABILITIES:
                       
Cash overdraft
  $ 8,671     $ -     $ -  
Accounts payable
    76,521       59,481       83,467  
Accrued liabilities:
                       
Compensation and benefits
    39,741       43,909       48,226  
Income taxes
    -       657       6,736  
Other
    15,573       15,135       22,995  
Current portion of long-term debt and capital lease obligations
    23,772       712       692  
TOTAL CURRENT LIABILITIES
    164,278       119,894       162,116  
                         
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, less current portion
    52,200       54,579       67,932  
DEFERRED INCOME TAXES
    20,478       20,631       21,539  
OTHER LIABILITIES
    15,040       12,300       11,929  
TOTAL LIABILITIES
    251,996       207,404       263,516  
                         
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 19,525,590, 19,333,122 and 19,329,922
  $ 19,526     $ 19,333     $ 19,330  
Additional paid-in capital
    140,636       138,573       135,710  
Retained earnings
    410,814       414,108       416,562  
Accumulated other comprehensive earnings
    4,839       4,165       4,018  
Employee stock notes receivable
    (1,493 )     (1,670 )     (1,721 )
      574,322       574,509       573,899  
Noncontrolling interest
    6,535       6,667       5,949  
TOTAL EQUITY
    580,857       581,176       579,848  
TOTAL LIABILITIES AND EQUITY
  $ 832,853     $ 788,580     $ 843,364  
 
See notes to unaudited 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 25,
   
June 26,
   
June 25,
   
June 26,
 
   
2011
   
2010
   
2011
   
2010
 
                         
NET SALES
  $ 544,139     $ 638,635     $ 931,372     $ 1,031,593  
                                 
COST OF GOODS SOLD
    487,552       560,749       833,371       902,073  
                                 
GROSS PROFIT
    56,587       77,886       98,001       129,520  
                                 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    45,328       54,041       91,816       102,530  
NET LOSS ON DISPOSITION OF ASSETS,EARLY RETIREMENT, AND OTHER IMPAIRMENT AND EXIT CHARGES
    3,482       212       3,489       384  
                                 
EARNINGS FROM OPERATIONS
    7,777       23,633       2,696       26,606  
                                 
INTEREST EXPENSE
    929       903       1,812       1,789  
INTEREST INCOME
    (132 )     (70 )     (380 )     (190 )
      797       833       1,432       1,599  
                                 
EARNINGS BEFORE INCOME TAXES
    6,980       22,800       1,264       25,007  
                                 
INCOME TAXES
    2,502       8,332       215       8,819  
                                 
NET EARNINGS
    4,478       14,468       1,049       16,188  
                                 
LESS NET EARNINGS ATTRIBUTABLE TO NONCONTROLLING INTEREST
    (201 )     (752 )     (442 )     (1,485 )
                                 
NET EARNINGS ATTRIBUTABLE TO CONTROLLING INTEREST
  $ 4,277     $ 13,716     $ 607     $ 14,703  
                                 
EARNINGS PER SHARE - BASIC
  $ 0.22     $ 0.71     $ 0.03     $ 0.76  
                                 
EARNINGS PER SHARE - DILUTED
  $ 0.22     $ 0.70     $ 0.03     $ 0.75  
                                 
                                 
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
    19,413       19,259       19,360       19,258  
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING WITH COMMON STOCK EQUIVALENTS
    19,546       19,531       19,513       19,524  
 
See notes to unaudited consolidated condensed financial statements.
 
 
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(Unaudited)
 
(in thousands, except share and per share data)

   
Controlling Interest Shareholders' Equity
           
   
Common Stock
   
Additional Paid-
In Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Earnings
   
Employees
Stock Notes
Receivable
   
Noncontrolling
Interest
   
Total
 
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  
                                                         
Balance at December 25, 2010
  $ 19,333     $ 138,573     $ 414,108     $ 4,165     $ (1,670 )   $ 6,667     $ 581,176  
Comprehensive income:
                                                       
Net earnings
                    607                       442          
Foreign currency translation adjustment
                            674               281          
Total comprehensive earnings
                                                    2,004  
Purchase of additional noncontrolling interest
                                            (100 )     (100 )
Capital contribution from noncontrolling interest
                                            80       80  
Distributions to noncontrolling interest
                                            (835 )     (835 )
Cash dividends - $0.200 per share
                    (3,905 )                             (3,905 )
Issuance of 30,108 shares under employee stock plans
    30       545                                       575  
Issuance of 158,436 shares under stock grant programs
    159       (13 )     4                               150  
Issuance of 4,245 shares under deferred compensation plans
    4       (4 )                                     -  
Tax benefits from non-qualified stock options exercised
            154                                       154  
Expense associated with share-based compensation arrangements
            1,013                                       1,013  
Accrued expense under deferred compensation plans
            380                                       380  
Notes receivable adjustment
            (12 )                     12               -  
Payments received on employee stock notes receivable
                                    165               165  
Balance at June 25, 2011
  $ 19,526     $ 140,636     $ 410,814     $ 4,839     $ (1,493 )   $ 6,535     $ 580,857  
 
See notes to unaudited consolidated condensed financial statements.
 
 
UNIVERSAL FOREST PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

   
Six Months Ended
 
   
June 25,
   
June 26,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net earnings attributable to controlling interest
  $ 607     $ 14,703  
Adjustments to reconcile net earnings attributable to controlling interest to net cash from operating activities:
               
Depreciation
    14,452       15,199  
Amortization of intangibles
    2,873       3,590  
Expense associated with share-based compensation arrangements
    1,163       1,195  
Excess tax benefits from share-based compensation arrangements
    (120 )     (265 )
Deferred income tax credit
    (87 )     (195 )
Net earnings attributable to noncontrolling interest
    442       1,485  
Net loss on sale or impairment of property, plant and equipment
    21       118  
Changes in:
               
Accounts receivable
    (77,166 )     (120,961 )
Inventories
    (13,865 )     (26,175 )
Accounts payable
    16,927       33,706  
Accrued liabilities and other
    (3,158 )     21,627  
NET CASH FROM OPERATING ACTIVITIES
    (57,911 )     (55,973 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of property, plant and equipment
    (12,159 )     (11,551 )
Acquisitions, net of cash received
    -       (5,834 )
Proceeds from sale of property, plant and equipment
    1,197       382  
Purchase of product technology
    (77 )     -  
Advances of notes receivable
    -       (1,000 )
Collections of notes receivable
    294       103  
Other, net
    19       21  
NET CASH FROM INVESTING ACTIVITIES
    (10,726 )     (17,879 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net borrowings under revolving credit facilities
    20,931       15,000  
Repayment of long-term debt
    (272 )     (255 )
Proceeds from issuance of common stock
    575       1,331  
Purchase of additional noncontrolling interest
    (100 )     (1,227 )
Distributions to noncontrolling interest
    (835 )     (472 )
Capital contribution from noncontrolling interest
    80       -  
Dividends paid to shareholders
    (3,905 )     (3,871 )
Repurchase of common stock
    -       (3,648 )
Excess tax benefits from share-based compensation arrangements
    120       265  
Other, net
    9       14  
NET CASH FROM FINANCING ACTIVITIES
    16,603       7,137  
                 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (52,034 )     (66,715 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    43,363       67,410  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ (8,671   $ 695  
                 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
               
Cash paid during the period for:
               
Interest
  $ 1,820     $ 1,777  
Income taxes
    2,964       (8,470 )
                 
NON-CASH FINANCING ACTIVITIES:
               
Common stock issued under deferred compensation plans
  $ 142     $ 178  

See notes to unaudited consolidated condensed financial statements
 
 
6

 
UNIVERSAL FOREST PRODUCTS, INC.
 
NOTES TO UNAUDITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 
A.
BASIS OF PRESENTATION
 
The accompanying unaudited interim consolidated condensed financial statements (the "Financial Statements") include our accounts and those of our wholly-owned and majority-owned subsidiaries and partnerships, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, the Financial Statements do not include all of the information and footnotes normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States.  All intercompany transactions and balances have been eliminated.
 
In our opinion, the Financial Statements contain all material adjustments necessary to present fairly our consolidated financial position, results of operations and cash flows for the interim periods presented.  All such adjustments are of a normal recurring nature.  These Financial Statements should be read in conjunction with the annual consolidated financial statements, and footnotes thereto, included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended December 25, 2010.
 
Certain prior year information has been reclassified to conform to the current year presentation.
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a continuous statement of comprehensive income or in two separate consecutive statements.  The amended guidance is effective for financial periods beginning after December 15, 2011.  ASU 2011-05 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
 
B.
FAIR VALUE
 
We apply the provisions of ASC 820, Fair Value Measurements and Disclosures, to assets and liabilities measured at fair value.  Assets measured at fair value are as follows:
 
 
7

 
UNIVERSAL FOREST PRODUCTS, INC.
 
   
June 25, 2011
   
June 26, 2010
 
(in thousands)
 
Quoted
Prices in
Active
Markets
(Level 1)
   
Prices with
Other
Observable
Inputs
(Level 2)
   
Total
   
Quoted
Prices in
Active
Markets
(Level 1)
   
Prices with
Other
Observable
Inputs
(Level 2)
   
Total
 
Recurring:
                                   
Money market funds
  $ 84             $ 84     $ 64             $ 64  
Mutual funds:
                                               
Domestic stock funds
    570               570       436               436  
International stock funds
    539               539       395               395  
Target funds
    153               153       114               114  
Bond funds
    105               105       49               49  
Total mutual funds
    1,367               1,367       994               994  
Non-Recurring:
                                               
Property, plant and equipment
                                  $ 165       165  
    $ 1,451             $ 1,451     $ 1,058     $ 165     $ 1,223  

Mutual funds are valued at prices quoted in an active exchange market and are held in “Other Assets”.  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.
 
We do not maintain any Level 3 assets or liabilities that would be based on significant unobservable inputs.

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.
 
 
8

 
UNIVERSAL FOREST PRODUCTS, INC.
 
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 25, 2011
   
December 25, 2010
   
June 26, 2010
 
                   
Cost and Earnings in Excess of Billings
  $ 5,716     $ 3,604     $ 5,333  
Billings in Excess of Cost and Earnings
    1,751       2,126       4,426  
 
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 25, 2011
   
Three Months Ended June 26, 2010
 
   
Income
(Numerator)
   
Shares
(Denominator)
   
Per Share Amount
   
Income
(Numerator)
   
Shares
(Denominator)
   
Per
Share
Amount
 
                                     
Net Earnings Attributable to Controlling Interest
  $ 4,277                 $ 13,716              
                                         
EPS – Basic
Income available to common stockholders
    4,277       19,413     $ 0.22       13,716       19,259     $ 0.71  
                                                 
Effect of dilutive securities
Options
            133                       272          
                                                 
EPS - Diluted
Income available to common  stockholders and assumed options exercised
  $ 4,277       19,546     $ 0.22     $ 13,716       19,531     $ 0.70  

 
9

 
UNIVERSAL FOREST PRODUCTS, INC.

   
Six Months Ended June 25, 2011
   
Six Months Ended June 26, 2010
 
   
Income
(Numerator)
   
Shares
(Denominator)
   
Per
Share
Amount
   
Income
(Numerator)
   
Shares
(Denominator)
   
Per
Share
Amount
 
                                     
Net Earnings Attributable to Controlling Interest
  $ 607                 $ 14,703              
                                         
EPS – Basic
Income available to common stockholders
    607       19,360     $ 0.03       14,703       19,258     $ 0.76  
                                                 
Effect of dilutive securities
Options
            153                       266          
                                                 
EPS - Diluted
Income available to common  stockholders and assumed options exercised
  $ 607       19,513     $ 0.03     $ 14,703       19,524     $ 0.75  

Options to purchase 30,000 shares were not included in the computation of diluted EPS for the quarter ended June 25, 2011 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 10,000 shares were not included in the computation of diluted EPS for the six months ended June 25, 2011 because the options’ exercise price was greater than the average market price of the common stock during the period and, therefore would be antidilutive.
 
No options were excluded from the computation of diluted EPS for the quarter and six months ended June 26, 2010.

E.
ASSETS HELD FOR SALE AND NET LOSS ON DISPOSITION OF ASSETS, EARLY RETIRMENT 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 $5.1 million on June 25, 2011. The assets held for sale consist of certain vacant land and facilities we previously closed to better align manufacturing capacity with the current business environment.  The fair values were determined based on appraisals or recent offers to acquire assets.  These and other idle assets were evaluated based on the requirements of ASC 360, which resulted in impairment and other exit charges included in “Net loss on disposition of assets, early retirement and other impairment and exit charges” for the periods presented below. These amounts include the following, separated by reporting segment (in thousands):

 
10

 
UNIVERSAL FOREST PRODUCTS, INC.
 
   
Three Months Ended June 25, 2011
   
Three Months Ended June 26, 2010
 
   
Eastern
and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All
Other
   
Eastern and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All
Other
 
Severances and early retirement
  $ 10             $ 3,309             $ 17     $ 8     $ 16     $ 13  
Property, plant and equipment
    (28 )             191               (127 )             285          
 
   
Six Months Ended June 25, 2011
   
Six Months Ended June 26, 2010
 
   
Eastern
and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All
Other
   
Eastern and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All
Other
 
Severances and early retirement
  $ 118     $ 16     $ 3,334           $ 136     $ 85     $ 21     $ 24  
Property, plant and equipment
    (106 )     (33 )     158     $ 2       (145 )     (11 )     278       (4 )

Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of June 2011. This amount is included in “severances and early retirement” expenses under Corporate in the table above.

The changes in assets held for sale are as follows (in thousands):

Description
 
Net Book
Value
 
Date of Sale
 
Net Sales
 Price
Assets held for sale as of December 25, 2010
  $ 2,446        
Additions
    5,082        
Transfers to held for use
    (1,619 )      
Sale of certain real estate in Indianapolis, Indiana
    (827 )
May 17, 2011
 
$0.7 million
Assets held for sale as of June 25, 2011
  $ 5,082        

 
11

 
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; and Medley, FL. 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.  During 2009, a subsidiary entered into a consent order with the State of Florida to conduct additional testing at the Auburndale, FL facility. We admitted no liability and the costs are not expected to be material.
 
On a consolidated basis, we have reserved approximately $3.3 million on June 25, 2011 and $4.2 million on June 26, 2010, 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.  Our affiliates 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 25, 2011, 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 25, 2011, we had outstanding purchase commitments on capital projects of approximately $4.9 million.
 
 
12

 
UNIVERSAL FOREST PRODUCTS, INC.
 
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.
 
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 25, 2011, we had approximately $26.8 million in outstanding payment and performance bonds, which expire during the next two years.  In addition, approximately $19.7 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 three years.  The estimated maximum aggregate exposure of these guarantees is approximately $0.6 million.
 
On June 25, 2011, we had outstanding letters of credit totaling $31.3 million, primarily related to certain insurance contracts and industrial development revenue bonds described further below.
 
In lieu of cash deposits, we provide irrevocable letters of credit in favor of our insurers to guarantee our performance under certain insurance contracts.  We currently have irrevocable letters of credit outstanding totaling approximately $18.9 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.
 
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.
 
 
13

 
UNIVERSAL FOREST PRODUCTS, INC.
 
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 $0.7 million.  As a result, this amount is recorded in other long-term liabilities on June 25, 2011.
 
We did not enter into any new guarantee arrangements during the second quarter of 2011 which would require us to recognize a liability on our balance sheet.

G.
BUSINESS COMBINATIONS

No business combinations were completed in fiscal 2011.  We completed the following business combinations in fiscal 2010 which were accounted for using the purchase method (in millions):

Company
 Name
Acquisition
Date
 
Purchase
Price
 
Intangible
Assets
   
Net
Tangible
Assets
 
Operating
Segment
Business Description
Shepherd Distribution Co.
(“Shepherd”)
April 29, 2010
 $
5.9 (asset purchase)
  $ 2.2     $ 3.7  
Distribution 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  
Distribution 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.
 
 
14

 
UNIVERSAL FOREST PRODUCTS, INC.

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.
 
Our operating segments consist of Eastern, Western, Atlantic, Consumer Products and Distribution divisions.  In accordance with ASC 280, due to similar economic characteristics, nature of products, distribution methods, and customers, we have aggregated our Eastern and Western operating segments into one reportable segment.  The Atlantic division is considered a separate reportable segment.  Our other divisions do not collectively form a reportable segment because their respective operations are dissimilar and they do not meet the applicable quantitative requirements.  These operations have been included in the “All Other” column of the table below.
 
   
Six Months Ended June 25, 2011
 
   
Eastern and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All Other
   
 
 
Total
 
Net sales to outside customers
  $ 634,267     $ 220,765     $ -     $ 76,340     $ 931,372  
Intersegment net sales
    35,010       21,281       -       20,847       77,138  
Segment operating profit (loss)
    7,193       (4,057 )     1,635       (2,075 )     2,696  
 
   
Six Months Ended June 26, 2010
 
   
Eastern and
Western
Divisions
   
Atlantic
Division
   
Corporate
   
All Other
   
 
 
Total
 
Net sales to outside customers
  $ 698,847     $ 254,280     $ -     $ 78,466     $ 1,031,593  
Intersegment net sales
    49,590       19,456       -       34,645       103,691  
Segment operating profit (loss)
    19,753       3,090       (1,530 )     5,293       26,606  

I.
INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.8% in the second quarter of 2011 and 36.5% for same period of 2010. Our effective tax rate was 17.0% in the first six months of 2011, which was well below our statutory rate, primarily due to the profits of our non-U.S. subsidiaries, which have a lower tax rate, and our non-wholly owned partnerships that we consolidate, which comprised a greater percentage of our year to date profits than in the prior year period.
 
 
15

 
UNIVERSAL FOREST PRODUCTS, INC.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Universal Forest Products, Inc. ("the Company") is a holding company that provides capital, management and administrative resources to subsidiaries that design, manufacture and market wood and wood-alternative products for DIY/retail home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for the site-built construction market, and specialty wood packaging and components and packing materials for various industries. The Company’s subsidiaries also provide framing services for the site-built market and forming products for concrete construction. The Company's consumer products subsidiary offers a large portfolio of outdoor living products, including wood composite decking, decorative balusters, post caps and plastic lattice. Its lawn and garden group offers an array of products, such as trellises and arches, to retailers nationwide. The Company is headquartered in Grand Rapids, Michigan, and its subsidiaries operate facilities throughout North America. For more about Universal Forest Products, Inc., go to www.ufpi.com.

Please be aware that: Any statements included in this report that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on the beliefs of the Company's management as well as on assumptions made by, and information currently available to, the Company at the time such statements were made. 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: adverse lumber market trends, competitive activity, negative economic trends, government regulations and weather. Certain of these risk factors and additional information are included in the Company's reports on Form 10-K and 10-Q on file with the Securities and Exchange Commission.  We are pleased to present this overview of 2011.
 
OVERVIEW

Our results for the second quarter of 2011 were impacted by the following:

·
Our overall unit sales decreased 4% compared to the second quarter of 2010 due to a decline in sales to our retail building materials, residential construction, and manufactured housing markets, offset by increases in unit sales to our commercial construction and concrete forming and industrial markets.  We believe we gained additional share of the commercial construction, concrete forming and industrial markets we serve.  Share gains in our industrial market were achieved by adding many new customers.  We believe we have maintained our share of the retail building materials market based on the number of stores we serve of our customers compared to last year.  Finally, within the last year we closed several plants that supply the site-built construction 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.

 
16

 
UNIVERSAL FOREST PRODUCTS, INC.
 
·
The Lumber Market was down 16.4% in the quarter compared to the same period of 2010.  We estimate that lower lumber prices reduced our overall selling prices by approximately 10% comparing the second quarter of 2011 and 2010.

·
National housing starts decreased approximately 11% in the period from March through May of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010, primarily due to the expiration of certain housing-related government tax credits in 2010.

·
Shipments of HUD code manufactured homes were down 14% in April and May of 2011, compared to the same period of 2010.  Shipments of manufactured homes were also positively impacted by certain housing-related tax credits in 2010 that have now expired.

·
Our gross profit percentage decreased to 10.4% from 12.2% comparing the second quarter of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 27% comparing the second quarter of 2011 with the same period of 2010, which compares unfavorably to our 4% decrease in unit sales.  The decline in our gross margin and profitability this quarter was due to several factors.
 
·
Most notably, gross margins on sales to the retail building materials market declined 230 basis points for the quarter resulting primarily from an increase in material costs as a percentage of sales to this market.  This was primarily due to the Lumber Market, which decreased 11 consecutive weeks from the end of March 2011 through the end of May 2011.  As a result, this adversely impacted our gross margins on products whose prices were indexed to the current Lumber Market at the time they are sold.
 
·
A decline in sales to our retail building materials, residential construction, and manufactured housing markets adversely impacted our margins due to fixed manufacturing costs.  In addition, as these markets have contracted, competitive pricing pressure has become greater and adversely impacted 2011 margins.
 
·
We recorded a $2 million loss during the second quarter of 2011 on a construction project, which represents the entire loss we believe we will incur on the project.
 
·
Finally, our freight costs increased as a percentage of sales this quarter primarily due to higher year over year fuel prices.

·
Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of June 2011.
 
 
17

 
UNIVERSAL FOREST PRODUCTS, INC.
 
HISTORICAL LUMBER PRICES

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

 
   
Random Lengths Composite
 
   
Average $/MBF
 
   
2011
   
2010
 
             
January
  $ 301     $ 264  
February
    296       312  
March
    294       310  
April
    275       351  
May
    259       333  
June
    262       267  
                 
Second quarter average
  $ 265     $ 317  
Year-to-date average
  $ 281     $ 306  
 
               
Second quarter percentagechange from 2010
    (16.4 %)        
Year-to-date percentagechange from 2010
    (8.2 %)        
 
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
 
   
2011
   
2010
 
             
January
  $ 282     $ 269  
February
    289       331  
March
    290       337  
April
    266       382  
May
    254       374  
June
    246       293  
                 
Second quarter average
  $ 255     $ 350  
Year-to-date average
  $ 271     $ 331  
                 
Second quarter percentage change from 2010
   
(27.1
 %)        
Year-to-date percentage change from 2010
   
(18.1
 %)        
 
 
18

 
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 try to 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.  As a result of the decline in the housing market and our sales to residential and commercial builders, a greater percentage of our sales fall into this general pricing category.  Consequently, we believe our profitability may be impacted to a much greater extent to changes in the trend of lumber prices.
 
 
19

 
UNIVERSAL FOREST PRODUCTS, INC.
 
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.)

·
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.
 
 
20

 
UNIVERSAL FOREST PRODUCTS, INC.

BUSINESS COMBINATIONS
 
See Notes to Unaudited Consolidated Condensed Financial Statements, Note G, "Business Combinations."
 
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 25, 2011
   
June 26, 2010
   
June 25, 2011
   
June 26, 2010
 
                         
Net sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of goods sold
    89.6       87.8       89.5       87.4  
Gross profit
    10.4       12.2       10.5       12.6  
Selling, general, and administrative expenses
    8.3       8.5       9.9       10.0  
Net loss on disposition of assets, early retirement, and other impairment and exit charges
    0.6       0.0       0.4       0.0  
Earnings from operations
    1.4       3.7       0.3       2.6  
Interest, net
    0.2       0.1       0.2       0.2  
Earnings before income taxes
    1.3       3.6       0.1       2.4  
Income taxes
    0.5       1.3       0.0       0.9  
Net earnings
    0.8       2.3       0.1       1.5  
Less net earnings attributable to noncontrolling interest
    (0.0 )     (0.1 )     (0.0 )     (0.1 )
Net earnings attributable to controlling interest
    0.8 %     2.2 %     0.1 %     1.4 %

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

GROSS SALES

We design, manufacture and market wood and wood-alternative products for national home centers and other retailers, structural lumber and other products for the manufactured housing industry, engineered wood components for residential and commercial construction, and specialty wood packaging, components and packing materials for various industries.  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, increasing our market share with independent retailers, and expanding our product lines in each of the markets we serve.
 
·
Expanding geographically in our core businesses.
 
 
21

 
UNIVERSAL FOREST PRODUCTS, INC.
 
·
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 retail building materials 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.
 
·
Developing new products and expanding our product offering for existing customers.
 
·
Maximizing unit sales growth while achieving return on investment goals.

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
 
Market Classification
 
June 25,
2011
   
June 26,
2010
   
%
Change
   
June 25,
2011
   
June 26,
2010
   
%
Change
 
Retail Building Materials
  $ 287,528     $ 353,060       (18.6 )   $ 462,809     $ 540,086       (14.3 )
Residential Construction
    56,655       67,035       (15.5 )     104,486       120,739       (13.5 )
Commercial Construction and Concrete Forming
    20,841       16,914       23.2       35,270       31,302       12.7  
Industrial
    126,541       129,073       (2.0 )     236,186       224,665       5.1  
Manufactured Housing and Recreational Vehicles
    64,597       82,831       (22.0 )     111,633       131,766       (15.3 )
Total Gross Sales
    556,162       648,913       (14.3 )     950,384       1,048,558       (9.4 )
Sales Allowances
    (12,023 )     (10,278 )             (19,012 )     (16,965 )        
Total Net Sales
  $ 544,139     $ 638,635       (14.8 )   $ 931,372     $ 1,031,593       (9.7 )

Note:
In the second quarter of 2011, we made changes to our customer market classifications to improve our reporting by better aligning our customer market designations with available industry reporting and end market research.  Prior year information has been restated to reflect these reclassifications. See also Exhibit 99(a).
 
Gross sales in the second quarter of 2011 decreased 14% compared to the same period of 2010, primarily due to an estimated 4% decrease in overall unit sales and an estimated 10% decrease in overall selling prices due to the Lumber Market.

Gross sales in the first six months of 2011 decreased 9% compared to the same period of 2010, primarily due to an estimated 3% decrease in overall unit sales and an estimated 6% decrease in overall selling prices due to the Lumber Market.

Changes in our sales by market are discussed below.
 
 
22

 
UNIVERSAL FOREST PRODUCTS, INC.
 
Retail Building Materials:

Gross sales to the retail building materials market decreased 19% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 8% decrease in our overall unit sales and an estimated 11% decrease in our overall selling prices.  Unit sales declined primarily due to a decrease in consumer spending for “big ticket” building materials products such as decking and fencing.  As unemployment remains high and housing prices have decreased, we believe many homeowners have delayed plans for these projects.  In the long-term, we believe this business will rebound as the economy improves and housing prices stabilize.  In addition, our sales of composite decking have decreased as we are preparing to launch a new product in 2012.

Gross sales to the retail building materials market decreased 14% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 7% decrease in our overall unit sales and an estimated 7% decrease in our overall selling prices.  Unit sales declined due to the same factors mentioned in the paragraph above.
 
Residential Construction:

Gross sales to the residential construction market decreased 15% in the second quarter of 2011 compared to the same period of 2010 due to a combination of a 15% decrease in unit sales as a result of operations we have recently closed and an estimated 8% decrease in selling prices, offset by an estimated 8% increase in unit sales out of existing plants as we have shifted our focus to the multi-family market.  National housing starts decreased approximately 11% in the period from March through May of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Gross sales to the residential construction market decreased 13% in the first six months of 2011 compared to the same period of 2010 due to a combination of a 14% decrease in unit sales as a result of operations we have recently closed and an estimated 4% decrease in selling prices, offset by an estimated 5% increase in unit sales out of existing plants.  National housing starts decreased approximately 9% in the period from December through May of 2011 (our sales trail housing starts by about a month), compared to the same period of 2010.  We have taken several recent plant closure actions in order to achieve profitability and cash flow objectives, which may temporarily result in a loss of market share.

Commercial Construction and Concrete Forming:

Gross sales to the commercial construction and concrete forming market increased 23% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 39% increase in our overall unit sales, offset by an estimated 16% decrease in our overall selling prices.  Volume has increased as a result of adding a few large accounts this quarter.
 
 
23

 
UNIVERSAL FOREST PRODUCTS, INC.
 
Gross sales to the commercial construction and concrete forming market increased 13% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 20% increase in our overall unit sales, offset by an estimated 7% decrease in our overall selling prices.
 
Industrial:

Gross sales to the industrial market decreased 2% in the second quarter of 2011 compared to the same period of 2010, primarily due to an estimated 7% increase in unit sales, offset by an estimated 9% decrease in overall selling prices.  Our rate of growth slowed this quarter primarily due to a decline in demand of existing customers, which we believe is a reflection of a slowdown in manufacturing output in the U.S. In addition, we had a decline in sales of our Mexican partnership as changes in exchange rates have made their pricing in the U.S. less competitive resulting in a loss of volume.  We added almost 300 new customers again this quarter which allowed us to continue to add market share and grow unit sales this quarter.

Gross sales to the industrial market increased 5% in the first six months of 2011 compared to the same period of 2010, primarily due to an estimated 10% increase in unit sales, offset by an estimated 5% decrease in overall selling prices.  Unit sales increased due to the same factors mentioned in the paragraph above.
 
Manufactured Housing and Recreation Vehicles:

Gross sales to the manufactured housing market decreased 22% in the second quarter of 2011 compared to 2010, primarily due to a combination of a 13% decrease in unit sales out of existing operations and an estimated 11% decrease in overall selling prices, offset by a 2% increase in unit sales of new operations we acquired in 2010.  Shipments of HUD code manufactured homes were down 14% in April and May of 2011, compared to the same period of 2010.

Gross sales to the manufactured housing market decreased 15% in the first six months of 2011 compared to 2010, primarily due to a combination of a 14% decrease in unit sales out of existing operations and an estimated 6% decrease in overall selling prices, offset by a 5% increase in unit sales of new operations we acquired in 2010.  Shipments of HUD code manufactured homes were down 14% in January through May of 2011, compared to the same period of 2010.

Value-Added and Commodity-Based Sales:

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

   
Three Months Ended
   
Six Months Ended
 
   
June 25,
2011
   
June 26,
2010
   
June 25,
2011
   
June 26,
2010
 
                         
Value-Added
    59.9 %     58.8 %     59.0 %     58.5 %
Commodity-Based
    40.1 %     41.2 %     41.0 %     41.5 %

 
24

 
UNIVERSAL FOREST PRODUCTS, INC.
 
COST OF GOODS SOLD AND GROSS PROFIT

Our gross profit percentage decreased to 10.4% from 12.2% comparing the second quarter of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 27% comparing the second quarter of 2011 with the same period of 2010, which compares unfavorably to our 4% decrease in unit sales.  The decline in our gross margin and profitability this quarter was due to several factors.

 
·
Most notably, gross margins on sales to the retail building materials market declined 230 basis points for the quarter resulting primarily from an increase in material costs as a percentage of sales to this market.  This was primarily due to the Lumber Market, which decreased 11 consecutive weeks from the end of March 2011 through the end of May 2011.  As a result, this adversely impacted our gross margins on products whose prices were indexed to the current Lumber Market at the time they are sold.
 
·
A decline in sales to our retail building materials, residential construction, and manufactured housing markets adversely impacted our margins due to fixed manufacturing costs.  In addition, as these markets have contracted, competitive pricing pressure has become greater and adversely impacted 2011 margins.
 
·
We recorded a $2 million loss during the second quarter of 2011 on a construction project, which represents the entire loss we believe we will incur on the project.
 
·
Finally, our freight costs increased as a percentage of sales this quarter primarily due to higher year over year fuel prices.
 
Our gross profit percentage decreased to 10.5% from 12.6% comparing the first six months of 2011 with the same period of 2010.  In addition, our gross profit dollars decreased by 24% comparing the first six months of 2011 with the same period of 2010, which compares unfavorably to our 3% decrease in unit sales.  The decline in our gross margin and profitability this quarter was primarily due to the same factors discussed above.  In addition, inclement weather in the first quarter resulted in many lost production days and adversely impacted our efficiencies and profitability.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative ("SG&A") expenses decreased by approximately $8.7 million, or 16.1%, in the second quarter of 2011 compared to the same period of 2010, while we reported a 4% decrease in unit sales.  The decline in SG&A was primarily due to a decrease in accrued bonus expense, compensation and related expenses, and bad debt expense.  At the end of the second quarter, we reduced our headcount and implemented certain other cost reductions.  We estimate the annual cost savings of these actions to total about $10 million.  Approximately $8 million was completed at the end of the second quarter which should favorably impact the third and fourth quarters.
 
 
25

 
UNIVERSAL FOREST PRODUCTS, INC.
 
Selling, general and administrative ("SG&A") expenses decreased by approximately $10.7 million, or 10.4%, in the first six of 2011 compared to the same period of 2010, while we reported a 3% decrease in unit sales.  The decline in SG&A was primarily due to a decrease in accrued bonus expense and compensation and related expenses.

NET LOSS ON DISPOSITION OF ASSETS, EARLY RETIREMENT AND OTHER IMPAIRMENT AND EXIT CHARGES

We incurred approximately $0.9 million of charges in the first six months of 2011 and $384,000 in the first six months of 2010 relating to asset impairments and other costs associated with idled facilities and down-sizing efforts combined with early retirement expenses. These costs were offset by gains on disposition of property, plant and equipment totaling approximately $47,000 in the first six months of 2011.

Our chief executive officer resigned on June 20, 2011; on that same date we entered into a consulting and non-competition agreement with him.  Therefore, we accrued for the present value of the future payments to him totaling $2.6 million at the end of June 2011.
 
We regularly review the performance of each our operations and make decisions to permanently or temporarily close operations based on a variety of factors including:

·
Current and projected earnings, cash flow and return on investment
·
Current and projected market demand
·
Market share
·
Competitive factors
·
Future growth opportunities
·
Personnel and management

We currently have 16 operations which are experiencing operating losses and negative cash flow for the first six months of 2011.  The net book value of the long-lived assets of these operations, which could be subject to an impairment charge in the future, was $16.5 million at the end of June of 2011.  In addition, these operations had future fixed operating lease payments totaling $1.3 million at the end of June of 2011.

INTEREST, NET

Net interest costs were comparable in the second quarter and first six months of 2011 compared to the same period of 2010 as there have been no significant changes in our debt structure or borrowing rates.
 
 
26

 
UNIVERSAL FOREST PRODUCTS, INC.
 
INCOME TAXES

Effective tax rates differ from statutory federal income tax rates, primarily due to provisions for state and local income taxes and permanent tax differences.  Our effective tax rate was 35.8% in the second quarter of 2011 and 36.5% for same period of 2010. Our effective tax rate was 17.0% in the first six months of 2011, which was well below our statutory rate, primarily due to the profits of our non-U.S. subsidiaries, which have a lower tax rate, and our non-wholly owned partnerships that we consolidate, which comprised a greater percentage of our year to date profits.

OFF-BALANCE SHEET TRANSACTIONS

We have no significant off-balance sheet transactions other than operating leases.
 
LIQUIDITY AND CAPITAL RESOURCES

The table below presents, for the periods indicated, a summary of our cash flow statement (in thousands):
   
Six Months Ended
 
   
June 25, 2011
   
June 26, 2010
 
Cash from operating activities
  $ (57,911 )   $ (55,973 )
Cash from investing activities
    (10,726 )     (17,879 )
Cash from financing activities
    16,603       7,137  
Net change in cash and cash equivalents
    (52,034 )     (66,715 )
Cash and cash equivalents, beginning of period
    43,363       67,410  
Cash and cash equivalents, end of period
  $ (8,671 )   $ 695  

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

Seasonality has a significant impact on our working capital from March to August which historically resulted in negative or modest cash flows from operations in our first and second quarters. Conversely, we experience a substantial decrease in working capital from September to February which typically results in significant cash flow from operations in our third and fourth quarters.  For comparative purposes, we have included the June 26, 2010 balances in the accompanying unaudited consolidated condensed balance sheets.
 
 
27

 
UNIVERSAL FOREST PRODUCTS, INC.
 
Due to the seasonality of our business and the effects of the Lumber Market, we believe our cash cycle (days of sales outstanding plus days supply of inventory less days payables outstanding) is a good indicator of our working capital management.  Our cash cycle increased to 53 days in the first six months of 2011 from 43 days in the first six months of 2010, due to a 1 day increase in our receivables cycle combined with a 9 day increase in our days supply of inventory, due to much higher inventory levels this year.  In preparation for the 2011 selling season, we changed our purchasing strategy to buy inventory earlier at opportune times in an attempt to protect margins and avoid buying as much inventory during the peak of the season when lumber prices tend to rise.

Cash used in operating activities was $57.9 million in the first six months of 2011, which was comprised of a $77.3 million increase in working capital since the end of 2010, offset by net earnings of $0.6 million and $18.8 million of non-cash expenses.  Working capital increased primarily due to the usual seasonality of our business combined with higher inventory levels than we expected at the end of June primarily due to weaker sales to the retail building materials market than we planned.  Based on the seasonality of our operations, we currently anticipate achieving strong cash flows from operations for the balance of the year as we move beyond our seasonal peak for working capital requirements and manage our inventories down to a level necessary to support current demand.

Capital expenditures were $12.2 million in the first six months of 2011.  We currently plan to spend up to $35 million in 2011, which includes outstanding purchase commitments on existing capital projects totaling approximately $4.9 million on June 25, 2011.  We intend to fund capital expenditures and purchase commitments through our operating cash flows for the balance of the year.

On June 25, 2011, we had $23.0 million outstanding on our $300 million revolving credit facility, which matures in February of 2012. The revolving credit facility also supports letters of credit totaling approximately $31.3 million on June 25, 2011.  Financial covenants on the unsecured revolving credit facility and unsecured notes include a minimum net worth requirement, minimum interest and fixed charge coverage tests, and a maximum leverage ratio. The agreements also restrict the amount of additional indebtedness we may incur and the amount of assets which may be sold.  We were within all of our lending requirements on June 25, 2011.
 
ENVIRONMENTAL CONSIDERATIONS AND REGULATIONS

See Notes to Unaudited Consolidated Condensed Financial Statements, Note F, "Commitments, Contingencies, and Guarantees."
 
CRITICAL ACCOUNTING POLICIES

In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States.  These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations. We continually review our accounting policies and financial information disclosures.  There have been no material changes in our policies or estimates since December 25, 2010.
 
 
28

 
UNIVERSAL FOREST PRODUCTS, INC.
 
Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

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

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

We are subject to fluctuations in the price of lumber.  We experience significant fluctuations in the cost of commodity lumber products from primary producers (the "Lumber Market").  A variety of factors over which we have no control, including government regulations, transportation, environmental regulations, weather conditions, economic conditions, and natural disasters, impact the cost of lumber products and our selling prices.  While we attempt to minimize our risk from severe price fluctuations, substantial, prolonged trends in lumber prices can affect our sales volume, our gross margins, and our profitability.  We anticipate that these fluctuations will continue in the future.  (See “Impact of the Lumber Market on Our Operating Results.”)
 
Item 4.  Controls and Procedures.

(a)
Evaluation of Disclosure Controls and Procedures.  With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15e and 15d – 15e) as of the quarter ended June 25, 2011 (the “Evaluation Date”), have concluded that, as of such date, our disclosure controls and procedures were effective.

(b)
Changes in Internal Controls.  During the quarter ended June 25, 2011, there were no changes in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
29

 
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

(a)    None.

(b)    None.

(c)    Issuer purchases of equity securities.
 
Fiscal Month
 
(a)
 
   (b)
 
   (c)
 
(d)
                 
March 27, 2011 – April 30, 2011(1)
             
2,988,229
May 1 – 28, 2011
             
2,988,229
May 29 – June 25, 2011
             
2,988,229
 
 
 
(a) 
Total number of shares purchased.
 
(b)
Average price paid per share.
 
(c)
Total number of shares purchased as part of publicly announced plans or programs.
 
(d)
Maximum number of shares that may yet be purchased under the plans or programs.
 
 
(1)
On November 14, 2001, the Board of Directors approved a share repurchase program (which succeeded a previous program) allowing us to repurchase up to 2.5 million shares of our common stock.  On October 14, 2010, our Board authorized an additional 2 million shares to be repurchased under our share repurchase program.  The total number of shares that may be repurchased under the program is almost 3 million shares.
 
Item 5.  Other Information.

None.

 
30

 
UNIVERSAL FOREST PRODUCTS, INC.

PART II.  OTHER INFORMATION


Item 6.  Exhibits.

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

31
Certifications.

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

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

32
Certifications.

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

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

99
Additional Exhibits.

 
(a)
Summary of historical quarterly sales based on our new market classifications.

101
Interactive Data File.

 
(INS)
XBRL Instance Document.

 
(SCH)
XBRL Schema Document.

 
(CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.

 
(LAB)
XBRL Taxonomy Extension Label Linkbase Document.

 
(PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.

 
(DEF)
XBRL Taxonomy Extension Definition Linkbase Document.

______________________________________

*  Indicates a compensatory arrangement.
 
 
31

 
UNIVERSAL FOREST PRODUCTS, INC.

 
SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
      UNIVERSAL FOREST PRODUCTS, INC.  
           
           
 Date:
August 1, 2011
 
By:
/s/ Matthew J. Missad  
      Matthew J. Missad  
      Chief Executive Officer and Principal Executive Officer  
 
           
 Date:  August 1, 2011
 
By:
/s/ Michael R. Cole  
      Michael R. Cole,  
      Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer
 
 
32

 
EXHIBIT INDEX


Exhibit No.
Description

31
Certifications.

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

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

32
Certifications.

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

 
Certificate of the Chief Financial Officer of Universal Forest Products, Inc., pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
 
99
 
Additional Exhibits.
 
 
Summary of historical quarterly sales based on our new market classifications.
 
101
 
Interactive Data File.
 
 
(INS)
XBRL Instance Document.

 
(SCH)
XBRL Schema Document.

 
(CAL)
XBRL Taxonomy Extension Calculation Linkbase Document.

 
(LAB)
XBRL Taxonomy Extension Label Linkbase Document.

 
(PRE)
XBRL Taxonomy Extension Presentation Linkbase Document.

 
(DEF)
XBRL Taxonomy Extension Definition Linkbase Document.
 
______________________________________
*  Indicates a compensatory arrangement.
 
 
33